Item
1. Business
Overview
We
are engaged in the development, production and marketing of innovative visual solutions composed of imaging equipment, cloud and software
based image processing (artificial intelligence (AI), machine learning (ML), and additional algorithm methodologies). Some of our products
that utilize our micro ScoutCam™ technology are used in medical procedures as well as various applications in other industries.
Our current business model is a business-to-business (B2B) approach in which we seek to identify target businesses interested in integrating
our micro ScoutCam™ technology, or commissioning individual projects using our technology. We derive a substantial portion of our
revenue from applications of our micro ScoutCam™ technology within the medical, defense and aerospace fields. We have recently
begun examining additional applications for our visual solutions portfolio (composed of image acquisition, data collection and storage
and image processing), including Predictive Maintenance (PdM) and Condition Based Monitoring (CBM), as well as additional industry sectors
such as aviation, automotive, industrial non-destructing-testing industries energy and maritime (we refer to these applications and sectors
as I4.0) We plan to further expand our activity in these non-medical spaces.
Pictured
above (from left to right) are the Company’s micro ScoutCamTM 1.0 Lum and micro ScoutCam™ 1.2.
The
Company’s eye-endoscope, which includes a camera at the distal tip, integrated illumination and embedded irrigation, which is only
1.2 mm in outer diameter.
Our
Corporate History and Background
We
were incorporated as a corporation under the laws of the State of Nevada on March 22, 2013 under the name Intellisense Solutions Inc.
We were initially engaged in the business of developing web portals to allow companies and individuals to engage in the purchase and
sale of vegetarian food products over the Internet. However, we were unable to execute our original business plan, develop significant
operations or achieve commercial sales.
We
received initial funding in March 2014 in the aggregate amount of $19,980 through the sale of common stock to two of our former officers
and directors, who purchased in the aggregate 1,998,000 shares of our common stock at $0.01 per share.
On
January 10, 2019, we formed Canna Patch Ltd., or Canna Patch, an Israeli corporation, of which 90% was initially owned by our Company,
and the remaining 10% owned by Rafael Ezra, Canna Patch’s Chief Technology Officer. Canna Patch did not have any operations and
on December 4, 2019, we sold 100% of our holdings in Canna Patch.
On
September 16, 2019, Intellisense and Medigus Ltd., an Israeli company traded on the Nasdaq Capital Market, entered into an Exchange Agreement
(as defined herein). For additional information about the Exchange Agreement, refer to – “ CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE” below.
On
December 30, 2019, we acquired ScoutCam Ltd. As a result of our acquisition of ScoutCam Ltd., we now own all of ScoutCam Ltd.’s
issued and outstanding share capital and have integrated and adopted ScoutCam Ltd.’s business into our Company as our primary business
activity.
ScoutCam
Ltd. was formed in the State of Israel on January 3, 2019 as a wholly-owned subsidiary of Medigus and commenced operations on March 1,
2019. ScoutCam Ltd. was incorporated as part of a reorganization of Medigus, which was designed to distinguish ScoutCam Ltd.’s
miniaturized imaging business, or the micro ScoutCam™ portfolio, from Medigus’ other operations and to enable Medigus to
form a separate business unit with dedicated resources focused on the promotion of such technology. On December 1, 2019, Medigus and
ScoutCam Ltd. consummated a certain Amended and Restated Asset Transfer Agreement, which transferred and assigned certain assets and
intellectual property rights related to its miniaturized imaging business. For additional information about the Amended and Restated
Asset Transfer Agreement, refer to – “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE” below.
On May 18, 2020, in connection with the Arkin Transaction (as defined below), the Company and Medigus entered into a certain Side Letter
Agreement (the “Letter Agreement”), whereby the parties agreed to amend certain terms of the Amended and Restated Asset Transfer
Agreement and the License Agreement. For additional information about the Letter Agreement, refer to – “CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE” below.
On
April 20, 2020, ScoutCam Ltd. entered into an Amended and Restated Intercompany Services Agreement with Medigus (the “Intercompany
Services Agreement”), which effectively amended and restated an intercompany services agreement dated May 30, 2019. For additional
information about the Intercompany Services Agreement, refer to – “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE” below.
Sales
and Marketing
Our
vision is to improve the performance of organizations by offering prestigious tools that enhance the visual technological capabilities
and maximize AI analysis capabilities for companies across a variety of industries. Our mission is to become a global leader providing
innovative, off-the-shelf and custom-tailored visualization and analysis solutions to organizations across a variety of industries based
on highly resistant cameras and supplementary technologies. We are currently focused on custom-tailored solutions, and as a result have
a very limited offering of off-the-shelf products, which are used mainly as models for new uses of our technology and capabilities rather
than as a major source of revenue. Moreover, as we focus only on the visualization apparatus and supporting components, including for
example a small camera (that consists of a miniature Complementary Metal Oxide Semiconductor or CMOS video sensor, optics, filters, electronics,
housing and cables), illumination, cleaning methods (e.g., irrigation), and/or a mechanical structure based on the customer’s needs,
in most cases our products are components of the customer’s end-user products rather than independent end-user products.
Certain
illustrative examples of our component parts that have been previously integrated into our clients’ end-user products include:
The
Company’s micro ScoutCam™ 6.5 Lum, pictured above, was integrated into a NASA-commissioned project, and as a result it became
the first micro camera utilized in orbit when it was successfully operated outside the International Space Station in May 2015.
Pictured
above is a single-use visualization solution that was developed and sold to A.M. Surgical, which was designed to replace expensive and
bulky reusable endoscopes used in carpal tunnel surgery by their Stratos surgical device. We prepared both wired and wireless versions.
Our wireless device was cleared for marketing by the US Food and Drug Administration (FDA) and is compliant with FCC regulations.
Our
business model in the medical domain includes engaging companies seeking to add video visualization to their existing or new product(s)
or considering the development of new products that include micro video visualization. Accordingly, our customer base is exclusively
comprised of businesses, and therefore we are entirely removed from marketing, manufacturing, selling and distributing end-user products
to consumers. Our engagement with businesses is ordinarily conducted in two phases. During the first phase, we conduct the research and
development that is required in order to specify, design, develop, and produce the designated visualization apparatus, all for an agreed-upon
compensation amount (e.g., a non-recurrent engineering fee). During the second phase, we manufacture the apparatus and sell it to the
customer for an agreed-upon transfer price. In some cases, by customer request, we offer complete ‘turn-key’ contracts in
which we are responsible for most or all product phases, from the specifications phase to the provision of completed components or products
that are packaged and ready for sale. In such cases, we may conduct necessary regulatory tests and handle required regulatory approvals.
In addition, we may also be responsible, as necessary, for packaging, sterilization, labeling, and shipment.
In
the I4.0 domain, which target PdM and CBM applications, we intend to engage with companies who wish to increase the monitoring capabilities
of different elements of a device using our visual monitoring solutions (these include build of image acquisition, data collection and
storage, and image processing capabilities based on AI, ML and additional algorithm concepts). Based on our product portfolio with customized
solutions as needed, this will allow our customers to receive alerts on anomalies and failures as they are occur on the monitored component,
analyze and track trends and development of the anomaly and predict any impending failure of the component as a result of such anomaly
over time and usage.
As
a result, we expect customers to benefit from a reduction in downtime of their monitored equipment, using the prediction capabilities
of the platform to efficiently plan maintenance work on future faulty components. Another outcome we expect is more cost effective management
of resources, since components will only need to be replaced as a result of their actual condition rather than a strict maintenance schedule.
The
use of an image based platform in the fields of PdM and CBM provides richer and more informative data and insights not available with
traditional sensing methods. Together with the AI and ML models customized for the relevant use cases, we expect this will provide customers
with a clearer view of the status of their equipment, increasing revenues by saving on direct expenses and increasing the uptime of their
equipment.
Our
customers include technology-based companies and organizations, which are mainly large, well-established, international corporations.
Larger corporations provide financial stability, large purchased quantities, recurring revenue, and valid forecasts for extended durations.
In addition, we engage customers from various industries, such as biomedical, aerospace, energy, transportation, certain sensitive or
classified industries, security and defense, and research.
In
order to locate and secure new customers we employ both active and passive marketing strategies. As part of our active approach, we employ
three business development managers, in addition to other consultants, who analyze target industries and assess whether visualization
solutions may add value to companies operating in those industries. Once we have identified a potentially relevant industry, we approach
a variety of target companies and market the benefits of integrating our visualization solutions into their products. In addition, in
order to assist us in identifying such industries and target companies, we consult with subject matter experts from various industries.
In
addition to the active marketing strategy described above, we also employ a multitude of other marketing channels in order to increase
the exposure of our services to relevant industries. These marketing channels include advertising, participating in relevant tradeshows
and conferences, web-marketing, which includes a well maintained Company website, Search Engine Optimization (SEO), social media presence,
distribution of press-releases in target countries, as well as conventional marketing means, including brochures and presentations. Additionally,
we issue industry-specific marketing materials that are tailored to highlight the relevant features of our technology to a specific target
industry.
Our
marketing measures may include, but are not limited to, the following:
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engaging
third party companies as territorial representatives in key markets; |
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initiating
business engagements based on leads received through our website, through active web based tools for lead generation, or via other
methods or means; |
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conducting
initial technical scopes and discussions together with such prospects in order to evaluate the feasibility of their contemplated
projects; |
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maintaining
an updated and detailed website presenting our core competency, solutions, use cases and proven track record; |
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promoting
our website in different search engines and other digital forums through SEO campaigning as well as other proactive digital marketing
measures; |
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employing
certain social media platforms for campaigning and advertising; |
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reconnecting
with our large database, which includes a multitude of past prospects; |
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developing
and refining marketing communications materials, including digital and printed brochures; and |
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participating
in major vision technology exhibitions as well as industry specific events. |
In
addition to our business development efforts that are mainly based on currently existing or future customer needs, we aim to identify
new market opportunities. These efforts include systematical analysis of industrial fields as well as medical fields and procedures in
order to identify where visualization solutions, including image analysis, might benefit and attract value. When a potential opportunity
is identified, we protect our rights by establishing relevant intellectual property safeguards, develop various prototypes that may be
relevant for the specific application and engage key opinion leaders in that field to validate the feasibility of our solutions. In the
medical domain, given that we are not a business-to-consumer, or B2C, company, our business model does not include commercialization
of end-user products; nevertheless, we seek to partner with relevant companies to convert our innovative prototypes into market-ready
products, complete the required regulatory clearances, and commercialize them based on revenue share models. Regarding the I4.0 domain,
we are in the process of transforming our products and projects into market ready solutions, aiming to commercialize our platform as
part of a SaaS model offering with multi-year contracts which include required hardware, software, cloud service and ongoing support
and maintenance.
Regarding
project based solutions, we have certain internal procedures in place once a potential customer is identified which help provide a roadmap
for the ensuing working relationship. Prior to any formal engagement with a potential customer, two of our departments – business
development and R&D – work in parallel to define an understanding with the customer that will ordinarily incorporate two phases:
(a) an R&D phase, during which the R&D team develops a custom-tailored visualization component that synthesizes our technology
and skill with the customer’s stated requirements, specifications, and business constraints, and which phase generally includes
a formal agreement with respect to a Non-Recurrent Engineering (NRE) fee that is typically payable according to a pre-defined set of
milestones; and (b) a production phase, during which we manufacture and supply the component parts for an agreed upon transfer price.
Over
the years, we have offered and implemented tailor-made pricing schemes that allows us to separately price services rendered during the
previously described first phase. Pricing of this first phase is typically prepared by the engineering team, which provides an assessment
of the anticipated costs associated with the R&D of the project, which price will depend on a given customer’s specifications
and project vision. Such costs may include, inter alia, engineering labor, any contracts with sub-contractors, tooling, off-the-shelf
and newly designed components, materials, prototypes production, testing, management overhead, and travel costs. Once we have completed
our cost estimation for the R&D phase, we issue a quote for such services to the customer.
In
order to develop a transfer price in connection with the aforementioned second phase, the expected Bill-Of Material (BOM) and Cost-Of-Good
Sold (COGS) are established and we develop a quotation accordingly. Often times there are certain modifications to the original project
outlined and agreed upon in the R&D phase, which might necessitate an increase or decrease to the pricing of the overall project.
For that reason, we tend to include a certain margin of flexibility in the final target transfer price. In addition, we usually link
the end transfer price with both annual and per-order Minimum Order Quantities (MOQ), in order to reflect the actual production quantity
of the COGS as well as to commercially incentivize the customer to order larger quantities.
Both
the negotiation process and the contract drafting are usually done in collaboration with the customer, such that both sides can verify
throughout the process that the final agreement meets their technological and business expectations. Furthermore, we seek to maintain
close contact with the customer throughout the two phases of our engagement, including for example, by way of teleconferences, virtual
and actual meetings, document exchanges, on-site visits, and reporting of any completion of predefined milestones.
Regarding
our off the shelf products, the NRE phase in project based commercial interactions is not relevant, and the pricing model is set up front
based on the cost, margin and value that the product creates.
Our
Customers
Currently,
we have one major customer that is expected to generate most of our forecasted revenue in the near term: a large international bio-med
company that is developing a visualization component for its minimally-invasive surgical device. In addition to the foregoing
material customer, we are engaged in initial negotiations with multiple potential customers operating in a variety of sectors, including
biomedical, aerospace, aviation, automotive, energy, military and security, and others. In the I4.0 segment, aviation industries (both
manned and unmanned) are currently the source of our greatest level of interest, with recent growing interest coming from the transportation
(specifically railway) and energy (specifically wind turbine) sectors. We are pursuing these potential engagements with the goal of securing
proof of concepts and launching commercial pilots that may then materialize into multi-year production contracts. We are in various stages
of engagement with a variety of customers in all the above mentioned industries.
In
the biomedical space, for example, we generally seek to partner with medical device and pharmaceutical companies that develop endoscopes
with or without additional functionality. This variation allows the endoscope to be introduced into anatomical parts that were previously
(prior to adopting ScoutCam’s visualization solution) not accessible within the video-endoscope space either because of outer diameter
limitations and/or price. To this end, we focus on single-use products that accommodate the global trend to transition from expensive,
multi-use products that require a thorough cleaning protocol, but which cannot be sterilized, to single-use products.
Lastly,
we have recently mobilized efforts to market the possibility of employing our visualization technology and solutions for the purposes
of monitoring sensitive mechanical structures and elements in the aviation sector, engaging on a pilot basis with the Israeli Air Force
regarding their helicopters and unmanned aerial vehicles and with several defense companies. Such an application complements global market
trends associated with Industry 4.0 and Internet of Things, in which machines are programmed to test themselves and their production
output, which then automatically alerts the processor of any potential problems at the outset of an endeavor.
Competition
There
are currently several companies that offer small cameras, including, but not limited to, Opcom, Fujikura-Picoramedic, Awaiba, Fisba,
and Misumi. Unlike these competitors, we offer customized solutions, which include additional components as needed. Other companies,
such as IntraVu, Medit, and SPI Engineering, offer complete, small diameter, off-the shelf endoscopes/borescopes. Our focus, however,
is on customizing and integrating our solutions into a given customer’s device. Certain companies, such as Enable, Myriad Fiber
Imaging Tech., Inc., and Precision Optics, act as our direct competitors, since they offer similar services to those that we offer.
In
addition, there are currently many companies that develop and provide monitoring solutions for PdM and CBM. These monitoring solutions
can be the sensor itself, data collection and storage, AI processing, or a combination of these capabilities. The CBM and PdM solutions
are usually based on traditional sensing solutions such as vibration, temperature, and acoustic sensors. Based on our research and discussions
with customers, we believe these traditional sensing methods are limited in their ability to provide an in depth view of the condition
of the monitored components and usually alert on the occurrence of an anomaly when component failure has already occurred, which is too
late in some cases. From the AI perspective, there are several vendors providing off-the-shelf AI capabilities which then require customization
per market, use case, and/or data source. Our more holistic approach and reliance on image based solutions creates richer and more informative
data, leveraged by AI and ML algorithms, enabling our customers to deploy predictive maintenance programs.
Proprietary
Rights and Technology
As
we develop customized components and/or products per market needs or per specific customer requirements, our various projects are constantly
in different stages of development, including: planning, early R&D for a proof of concept, R&D for a prototype, final product/component
development, engineering necessary for a production-ready version, and production of initial batches.
We
currently own a total of six patent families which we consider material to our business and operating success. Our intellectual property
rights include patents and patent applications that were transferred to us by Medigus as part of the Addendum No. 1 to Amended and Restated
Asset Transfer Agreement (the “Addendum”), the License Agreement and the Letter Agreement, additional patent assets developed
by ScoutCam and an asset assigned to us from a third party. For additional information about the License Agreement refer to – “CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE” below. Under the Addendum, and subject to certain limitations
as further set forth therein, Medigus transferred to us the following material patent families in exchange for a license in connection
with the marketing and sale of the Medigus Ultrasonic Surgical Endostapler:
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Patent family related to Integrated Endoscope Irrigation: this patent family relates to our ability to develop visualization components
and endoscopes, which include irrigation with a smaller outer diameter by saving the space of the tube that is required to lead the fluids
in a conventional manner. This patent has been granted in Canada, Europe (validated in Germany, Spain, France, Great Britain and Italy),
Israel, Japan (original and divisional), and the United States, and has an allowed continuation patent application and an additional
pending continuation in the United States. The expiration date for this patent in the United States is December 3, 2033, and in each
of the other aforementioned jurisdictions is February 28, 2033;
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Patent family related to Small Diameter Video Camera Heads and Medical Devices and Visualization Probes containing them: this patent
family relates to our ability to develop cameras, visualization components, and medical devices with a small diameter, thus enabling
the insertion of the camera into smaller cavities or leaving more space in the device for the use and application of other functions,
such as a working channel. This patent has been granted in Japan, Korea, Israel, the United States (2 patents, original and continuation
in part), and Europe (3 patents, original and 2 divisionals, currently under opposition proceedings, validated in Germany, France, Great
Britain, and Italy) and also has patent assets pending an opposition appeal in Europe. The expiration dates for these patents in the
United States are April 5, 2032 and March 10, 2031, and in each of the other aforementioned jurisdictions September 16, 2030.
As
a result of oppositional proceedings initiated by a third party in 2018, the Opposition Division of the EU Patent Office decided in 2019
to revoke two of the three European patents (EP 2.478.693 and EP 2.621.159) and in 2021 to maintain the third patent (EP 2.621.158).
Following appeals by Company and the third party of the 2019 and 2021 decisions, respectively, the Opposition Division of the EU Patent
Office is expected to hear and decide these matters in late 2022 or early 2023; and
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Patent family related to Camera Head: this patent family relates to our ability to develop cameras, visualization components,
and endoscopes with a smaller total outer diameter, by reducing the outer diameter of the electronic board on which the sensor is mounted,
thus enabling the insertion of the camera into smaller cavities or leaving more space in the device for the use and application of other
functions, such as a working channel. This patent has been granted in Israel and the United States, and is pending approval in Canada,
Europe, Japan (original and divisional applications), and a continuation in part patent application in the United States. The expiration
date for this patent in Israel is June 11, 2035, and in each of the other aforementioned jurisdictions is June 9, 2036.
In
addition, our intellectual property rights further include the following material patent applications filed by ScoutCam:
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Patent family related to Miniature Precision Medical Device: these pending patent applications relate to our ability to develop a
miniature precision medical device comprising an endoscope with at least one camera, where at least one sensor of one camera is
distally located at a tip of a shaft of the endoscope. Surrounding or next to the sensor, such shaft has sufficient space to
accommodate at least one accessory such as, for example, illumination source, irrigation tool, or suctioning tool. This patent
family has pending patent application in the United States and its expected expiry dates, if issued, will be in
2039-2040.
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Patent family related to Medical Ophthalmic Device: this patent family is related to a tool comprising a hand piece
having a flattened cannulated tip that is adapted to receive flow from a pumping unit, in order to generate a jet of fluid suitable for
procedures such as “hydro-dissecting” cells in the eye. According to a representation of the invention, the tool comprises
a visualization probe with at least one camera, wherein the sensor of the camera is distally located at the tip of the tool to be inserted
into the eye for imaging from within the eye. This patent family is pending in China, Europe, Japan, Korea, and the United States. The
patent application’s expected expiry dates, if issued, will be in 2039-2040.
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Patent family related to AI-Based and/or Electronic-Controlled Miniature Camera Sensor and Detector System this patent family
relates to sensor and detector systems for the development of very small size and resilient visualization capabilities. Such
systems can be used in extreme conditions and/or in conjunction with diagnostic software/hardware tools to display and analyze
changes in critical images that could not have been displayed or analyzed using existing systems. This patent family includes a
pending Patent Cooperation Treaty patent application. If ultimately issued by the United States Patent and Trademark Office, such
patent would be expected to expire in early 2042.
Employment
We
currently have approximately 35 full-time (or near full-time) employees. This number is expected to grow. We may recruit additional employees
to the R&D team.
Research
and Development
Our
R&D organization is responsible for the design, development, testing, and delivery of new technologies, features, products, and integrations
of our component parts. Research and development employees are located primarily in our principal corporate office on Omer, Israel. We
currently have approximately 14 employees in our research and development organization. We intend to continue to invest in our research
and development capabilities.
Regulation
Our
approach to regulation is generally determined based on a given project. In our engagements with customers operating in the biomedical
sector, we comply with the medical device standards in that corresponding territory, such as the FDA or International Organization for
Standardization (ISO), among others. Compliance with these regulations is achieved through our QA department and the support we receive
from highly experienced quality assurance and regulatory affairs consultants. In addition, we are being audited annually by MEDCERT GmbH,
a German Notified Body.
For
instance, ISO 13485:2016 is a regulatory benchmark that we comply with while working on our medical device projects. ISO 13845:2016 is
similar to ISO 9001 in terms of its quality management system (QMS) requirements, however, ISO 13485:2016 is generally considered more
rigorous and comprehensive.
Given
that we do not manufacture or distribute end-user products to the medical sector, and instead service businesses pursuant to a B2B model,
we are subject to far fewer regulatory standards commonly associated with medical device manufacturers or distributors. We develop and
manufacture components for other companies, and therefore our involvement in the regulatory submission demands comparatively less responsibility
This notwithstanding, we are careful to communicate with the business customer in order to identify certain regulatory dimensions inherent
to the project, to which we should pay additional attention. For example, when a component of ours is integrated into a business’s
end-user product, such as for the purpose of touching human tissue, we develop and manufacture our parts and components while taking
into account certain applicable regulatory standards. These standards might include, inter alia, relevant FDA regulations (e.g. CFR 21
part 820, the medical device reporting requirements (MDR), among others) as well as ISO regulations (e.g. ISO 14644-1, specifically in
connection with cleanrooms and associated controlled environments, among other items, or ISO 10993, in connection with the biological
evaluation of medical devices). Furthermore, we prioritize our team’s compliance with the Restriction of Hazardous Substances Directives
(RoHS) and REACH (EC 1907/2006).
Similarly,
if a component part of ours is incorporated into an electronic device for the purpose of being used inside a human body, we ensure compliance
with certain FDA requirements as well as IEC 60601 for safety and Electrostatic discharge, including the heating of parts at more than
42 degrees Celsius, as well as a variety of additional technical standards designed for the safety and essential performance of medical
electrical equipment. Moreover, we perform risk management assessments in accordance with EN ISO 14971:2019 and ISO/TR 24971:2020.
In
certain instances, our customers prefer that we conduct the testing of its products in internationally certified labs in order to further
guarantee our component parts satisfy the applicable regulatory standards. In this scenario, we perform the required tests as a service
to the customer and provide the customer with the official test results, specifically in accordance with ISO/IEC 17025:2017, which the
customer can later use in order to apply for the required marketing clearance of its end-user product.
Since
we are targeting to sell our products to customers in the aviation sector, we are in the process of implementing the AS9100D Standard
to comply with aerospace industry requirements. Once achieved, this standard will allow us to operate with an aerospace compatible quality
management system.
Israeli
Government Programs
As
a result of certain agreements between Medigus and ScoutCam Ltd. (for additional information about these agreements refer to –
“CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE” below) the Israel Innovation Authority, or the
IIA, approved a transfer of IIA know-how developed by Medigus in the framework of the Bio Medical Photonic Consortium, or the Medigus
Consortium, to ScoutCam Ltd.
Accordingly,
all rights and obligations with regard to the IIA under the Encouragement of Research, Development
and Technological Innovation in the Industry Law, 5744-1984, or the Innovation Law, in connection with such know-how now apply
to ScoutCam Ltd.
The
following are details regarding the rights and obligations within the framework of ScoutCam Ltd.’s activity in the Medigus Consortium,
which continue to apply to ScoutCam Ltd. notwithstanding the termination of the Medigus Consortium:
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The
property rights to information which has been developed belongs to the Medigus Consortium member that developed it. However, the
developing entity is obligated to provide the other members in the Medigus Consortium a license for the use of the new information,
without consideration, provided that the other members do not transfer such information to any entity which is not a member of the
Medigus Consortium. The provision of a license or of the right to use the new information to a third party is subject to approval
by the administration of the MAGNET Program at the IIA; |
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The
Medigus Consortium member is entitled to register a patent for the new information which has been developed by it within the framework
of its activity in the Medigus Consortium. The foregoing registration does not require approval from the administration of the MAGNET
Program at the IIA; and |
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The
know-how and technology developed under the program is subject to the restrictions set forth under the Innovation Law, including
restrictions on the transfer of such know-how and any manufacturing rights with respect thereto, without first obtaining the approval
of the IIA. Such approval may entail additional payments to the IIA, as determined under the Innovation Law and regulations. |
Obligations
relevant to us under the Innovation Law include the following:
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Local
Manufacturing Obligation. The terms of the grants under the Innovation Law require that we
manufacture the products developed with these grants in Israel. Under the regulations promulgated
under the Innovation Law, the products may be manufactured outside Israel by us or by another
entity only if prior approval is received from the IIA (such approval is not required for
the transfer of less than 10% of the manufacturing capacity in the aggregate, in which case
a notice should be provided to the IIA). In general, due to manufacturing outside
Israel, with respect to royalties bearing grants we would be required to pay royalties at
an increased rate, usually 1% in addition to the standard rate and increased royalties cap
(between 120% and 300% of the grants, depending on the manufacturing volume that is performed
outside Israel).
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Know-How
Transfer Limitation. The Innovation Law restricts the ability to transfer, in any manner, know-how funded directly or indirectly by the
IIA (sale of products is not prohibited), unless the IIA approves doing so and subject to the terms of the Innovation Law and of the
IIA’s approval.
Among other things, transfer
of IIA funded know-how outside of Israel requires prior approval of IIA and in certain circumstances is subject to certain payments
to the IIA, calculated according to a formula provided under the Innovation Law. If we wish to transfer IIA funded know-how
outside of Israel, the terms for approval will be determined according to the character of the transaction and the consideration
paid to us for such transfer. The IIA approval to transfer know-how created, in whole or in part, in connection with a IIA-funded project
to third party outside Israel where the transferring company remains an operating Israeli entity is subject to payment of a redemption
fee to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the
aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the
transaction consideration, considering statutory depreciation and less royalties already paid to the IIA. The transfer of such
know-how to a party outside Israel where the transferring company ceases to exist as an Israeli entity is subject to a redemption fee
formula that is based, in general, on the ratio between aggregate IIA grants received by the company and the company’s aggregate
research and development expenses, multiplied by the transaction consideration considering statutory depreciation and less royalties
already paid to the IIA. The regulations promulgated under the Innovation Law establish a maximum payment of the redemption fee paid
to the IIA under the above mentioned formulas and differentiates between two situations: (i) in the event that the company transfers
its IIA funded know-how, in whole or in part, or is sold as part of an M&A transaction, and subsequently ceases to conduct business
in Israel, the maximum redemption fee under the above mentioned formulas will be no more than six times the amount received (plus annual
interest) for the applicable know-how being transferred, or the entire amount received from the IIA, as applicable; (ii) in the event
that following the transactions described above (e.g. asset sale of IIA funded know-how or transfer as part of an M&A transaction)
the company continues to conduct its research and development activity in Israel (for at least three years following such transfer and
maintain staff of at least 75% of the number of research and development employees it had for the six months before the know-how was
transferred and keeps the same scope of employment for such research and development staff), then the company is eligible for a reduced
cap of the redemption fee of no more than three times the amounts received (plus annual interest) for the applicable know-how being transferred.
In addition, special rules and payment formulas apply for certain kinds of transfers of know-how outside of Israel, such as R&D
licenses. Transfer of IIA-funded know-how outside of Israel not according to the R&D Law may give rise to financial exposure as well
as criminal liability.
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Approval
of the transfer of IIA funded technology to another Israeli company may be granted only if the recipient assumes and abides
by the provisions of the Innovation Law and related regulations, including the restrictions on the transfer of know-how and
manufacturing rights outside of Israel (in addition, there will be an obligation to pay royalties to the IIA from the income of such
sale transaction as part of the royalty payment obligation). |
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Approval
to manufacture products outside of Israel or consent to the transfer of technology, if requested, might not be granted. Furthermore,
the IIA may impose certain conditions on any arrangement under which it permits ScoutCam Ltd. to transfer technology or development
out of Israel. |
Properties
We
do not own property and currently lease our principal corporate office, which is located at Suites 7A and 3B, Industrial Park, P.O. Box
3030, Omer, Israel 8496500. We believe our leased office sufficiently meets our current needs.
item
1a. risk factors
Risk
Factor Summary
Below
is a summary of the principal factors that make an investment in the Company speculative or risky. This summary does not address all
of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can
be found below, after this summary, and should be carefully considered.
Risks
Related to Our Business, Operations and Financial Condition
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● |
We
have had a limited operating history and may not be able to successfully operate our business or execute our business plan. |
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If
we are unable to establish sales, marketing and distribution capabilities or enter into successful relationships with business targets
and third parties to perform these services, we may not be successful in commercializing our products and technology. |
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We
may require substantial additional funding, which may not be available to us on acceptable terms, or at all. |
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Our
failure to effectively manage growth could impair our business. |
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Our
commercial success depends upon the degree of market acceptance by the medical community as well as by other prospective markets
and industries. |
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The
COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition, liquidity and
results of operations. |
Risk
Related to Third Parties
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Our
reliance on third-party suppliers for most of the components of our products, including miniature video sensors which are suitable
for our CMOS technology products mainly in the medical domain, could harm our ability to meet demand for our products in a timely
and cost-effective manner. |
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We
may not be able to manage our strategic partners effectively. |
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We
may not have sufficient manufacturing capabilities to satisfy any growing demand for our commissioned products. We may be unable
to control the availability or cost of producing such products. |
Risks
Related to Competition
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We
expect to face significant competition. If we cannot successfully compete with new or existing technologies or future developed products,
our marketing and sales will suffer and we may never be profitable. |
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Our
customers may develop the capabilities of our solution in-house, which would significantly reduce the demand for our products. |
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Failure
to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences. |
Risks
Related to Intellectual Property
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We
may not be able to obtain patents or other intellectual property rights necessary to protect our proprietary technology and business. |
General
Risk Factors Related to Our Business
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Our
business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our cyber-security. |
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We
may be subject to product liability claims, product actions, including product recalls, and other field or regulatory actions that
could be expensive, divert management’s attention, and harm our business. |
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Testing
of our technologies potential applications for our products will be required and there is no assurance of regulatory approval. |
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We
rely on highly skilled personnel, and, if we are unable to attract, retain, or motivate qualified personnel, we may not be able to
operate our business effectively. |
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We
may be unable to keep pace with changes in technology as our business and market strategy evolves. |
Risks
Related to this Offering and Our Common Stock
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Although
we have filed an application to list our securities on Nasdaq, there can be no assurance that our securities will be so listed or,
if listed, that we will be able to comply with the continued listing standards. |
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Trading
on the OTC Markets is volatile, sporadic and often thin, which could depress the market price of our common stock and make it difficult
for our stockholders to resell their common stock. |
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Nevada
law and provisions in our amended and restated articles of incorporation and amended and restated bylaws could make a merger, tender
offer or proxy contest difficult, thereby depressing the market price of our common stock. |
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The
market price of our common stock may be highly volatile and such volatility could cause you to lose some or all of your investment. |
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Because
our common stock may be deemed a “penny stock,” it may be more difficult for investors to sell shares of our common stock,
and the market price of our common stock may be adversely affected. |
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Compliance
with the reporting requirements of federal securities laws can be expensive. |
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Our
investors’ ownership in the Company may be diluted in the future. |
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Directors,
executive officers, principal stockholders, and affiliated entities own a significant percentage of our capital stock, and they may
make decisions that our stockholders do not consider to be in their best interests. |
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We
do not anticipate paying any cash dividends in the foreseeable future. |
Risks
Related to our Operations in Israel
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Political,
economic and military instability in Israel may impede our ability to operate and harm our financial results. |
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It
may be difficult for investors in the United States to enforce any judgments obtained against us or some of our directors or officers. |
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Exchange
rate fluctuations between foreign currencies and the U.S. Dollar may negatively affect our earnings. |
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Certain
technology developed and used by us received Israeli government grants for certain research and development activities. The terms
of those grants require us to satisfy specified conditions in addition to repayment of the grants upon certain events. |
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We
may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result
in litigation and adversely affect our business. |
Certain
factors may have a material adverse effect on our business, financial condition, and results of operations. You should carefully consider
the following risks, together with all of the other information contained in this Annual Report on Form 10-K, including the sections
titled “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and our financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. Any of
the following risks could materially and adversely affect our business, strategies, prospects, financial condition, results of operations,
and cash flows. In such case, the market price of our common stock could decline. Our business, prospects, financial condition, or results
of operations could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.
Risks
Related to Our Business, Operations and Financial Condition
We
have had a limited operating history and may not be able to successfully operate our business or execute our business plan.
Given
our limited operating history, it is hard to evaluate our proposed business and prospects. Our proposed business operations will be subject
to numerous risks, uncertainties, expenses and difficulties associated with early-stage enterprises. Such risks include, but are not
limited to, the following:
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the
absence of a lengthy operating history; |
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expected
continual losses for the foreseeable future; |
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operating
in multiple currencies; |
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our
ability to anticipate and adapt to a developing market(s); |
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acceptance
of our products by the medical and industrial (I4.0) markets (and the non-medical community) and consumers; |
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limited
marketing experience; |
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limited
experience in developing and implementing full platform solutions including AI and cloud; |
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insufficient
capital to fully realize our operating plan; |
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a
competitive environment characterized by well-established and well-capitalized competitors; |
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the
ability to identify, attract and retain qualified personnel; and |
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operating
in an environment that is highly regulated by a number of agencies. |
Because
we are subject to these risks, evaluating our business may be difficult, our business strategy may be unsuccessful and we may be unable
to address such risks in a cost-effective manner, if at all. If we are unable to successfully address these risks our business could
be harmed.
If
we are unable to establish sales, marketing and distribution capabilities or enter into successful relationships with business targets
and third parties to perform these services, we may not be successful in commercializing our products and technology.
Given
that we are currently as a B2B company, our business is reliant on our ability to successfully attract potential business targets. Furthermore,
we have a limited sales and marketing infrastructure and have limited experience in the sale, marketing, or distribution of our technologies
beyond the B2B model. To achieve commercial success for our technologies or any future developed product, we will need to establish a
sales and marketing infrastructure or to out-license such future products.
In
the future, we may consider building a focused sales and marketing infrastructure to market any future developed products and potentially
other products in the United States or elsewhere in the world. There are risks involved with establishing our own sales, marketing, and
distribution capabilities. For example, recruiting and training a sales force could be expensive and time consuming and could delay any
product launch. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.
Factors
that may inhibit our efforts to commercialize any future products on our own include:
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our
inability to recruit, train, and retain adequate numbers of effective sales and marketing personnel; |
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the
inability of sales personnel to obtain access to potential customers; |
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the
lack of complementary products to be offered by sales personnel or lack of product-market fit, which may put us at a competitive
disadvantage relative to companies with more extensive product lines; and |
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unforeseen
costs and expenses associated with creating an independent sales and marketing organization. |
If
we are unable to establish our own sales, marketing, and distribution capabilities or enter into successful arrangements with third parties
to perform these services, our revenues and our profitability may be materially adversely affected.
In
addition, we may not be successful in entering into arrangements with third parties to sell, market, and distribute our products inside
or outside of the United States or may be unable to do so on terms that are favorable to us. We likely will have little control over
such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our products effectively.
If we do not establish sales, marketing, and distribution capabilities successfully, either on our own or in collaboration with third
parties, we will not be successful in commercializing our technologies or any future products we may develop.
We
may require substantial additional funding, which may not be available to us on acceptable terms, or at all.
Our
cash and short-term deposit balance as of December 31, 2021 was $19.6 million. We may require additional funding to fund and grow our
operations and to develop certain products. There can be no assurance that financing will be available in amounts or on terms acceptable
to us, if at all. In the event we required additional capital, the inability to obtain such capital will restrict our ability to grow
and may reduce our ability to continue to conduct business operations. If we require and are unable to obtain additional financing, we
will likely be required to curtail our development plans. In that event, current stockholders would likely experience a loss of most
or all of their investment. Additional funding that we do obtain may be dilutive to the interests of existing stockholders.
Our
failure to effectively manage growth could impair our business.
Our
business strategy contemplates a period of rapid growth which may put a strain on our administrative and operational resources, and our
funding requirements. Our ability to effectively manage growth will require us to successfully expand the capabilities of our operational
and management systems, and to attract, train, manage, and retain qualified personnel. There can be no assurance that we will be able
to do so, particularly if losses continue and we are unable to obtain sufficient financing. If we are unable to appropriately manage
growth, our business, prospects, financial condition, and results of operations could be adversely affected.
Our
commercial success depends upon the degree of market acceptance by the medical community as well as by other prospective markets and
industries.
Our
current business model is that of a B2B approach in which we seek to identify target businesses interested in integrating our technology,
or commissioning individual projects using our technology. Any product that we commission or that is brought to the market may or may
not gain market acceptance by prospective customers. The commercial success of our technologies, commissioned products, and any future
product that we may develop depends in part on the medical community as well as other industries for various use cases, depending on
the acceptance by such industries of our commissioned products as a useful and cost-effective solution compared to current technologies.
During 2021, we commenced proactive market penetration into industries other than the biomedical sector. If our technology or any future
product that we may develop does not achieve an adequate level of acceptance, or does not garner significant commercial appeal, we may
not generate significant revenue and may not become profitable. The degree of market acceptance will depend on a number of factors, including:
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the
cost, safety, efficacy/performance, perceived value and convenience of our technology and any commissioned product and any future
product that we may develop in relation to alternative products; |
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the
ability of third parties to enter into relationships with us without violating their existing agreements; |
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the
effectiveness of our sales and marketing efforts; |
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the
strength of marketing and distribution support for, and timing of market introduction of, competing technology and products; and |
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publicity
concerning our technology or commissioned products or competing technology and products. |
Our
efforts to penetrate industries and educate the marketplace on the benefits of our technology, and reasons to seek the commissioning
of products based on our technology, may require significant resources and may never be successful. Such efforts to educate the marketplace
may require more resources than are required by conventional technologies.
The
COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition, liquidity and results
of operations.
To
date, the COVID-19 pandemic has not had a material effect on our operations. However, the measures adopted to contain and mitigate the
effects of the COVID-19 pandemic, including stay-at-home, business closure, social distancing, capsuled labor, and other restrictive
orders, and the resulting changes in consumer behaviors, have disrupted our normal operations and impacted our employees and suppliers.
We expect these disruptions and impacts to continue. In addition, certain of our suppliers experienced delays and shut-downs due to the
COVID-19 pandemic and we have experienced supply chain disruptions due to multiple factors, such as fulfillment center disruption and
limited shipping capacity. This has led to abnormally high transportation delays and shipping costs, which has increased our cost of
goods sold. Further, the continuation of the COVID-19 pandemic has led to increased operational and cybersecurity risks, including those
related to a number of our employees working remotely. These risks include, among others, increased demand on our information technology
resources and systems, the increased risk of phishing, and other cybersecurity attacks as cybercriminals try to exploit an increased
number of points of possible attack, such as laptops and mobile devices, both of which are now being used in increased numbers. Any failure
to effectively manage these increased operational and cybersecurity demands and risks, including to timely identify, appropriately respond
to, and remediate cybersecurity attacks and other security incidents, may materially adversely affect our results of operations and the
ability to conduct our business.
Given
the continued spread of COVID-19, including the emergence of COVID-19 variants, such as the recent Delta and Omicron variants, and the
resultant personal, economic and governmental reactions, we may have to take additional actions in the future that could adversely affect
our business, financial condition, and results of operations, including a return to a fully remote workforce.
These
changes could negatively impact our operations, sales, and marketing in particular, which could have longer-term effects on our sales
pipeline, or create operational or other challenges as our workforce remains predominantly remote, any of which could adversely affect
our business, financial condition, and results of operations. In addition, our management team has spent, and will likely continue to
spend, significant time, attention, and resources monitoring the COVID-19 pandemic and associated global economic uncertainty and seeking
to manage its effects on our business and workforce. The degree to which COVID-19 will affect our business, financial condition, and
results of operations will depend on future developments that are highly uncertain and cannot currently be predicted. These developments
include, but are not limited to, the duration, extent, impact and severity of the COVID-19 pandemic in different geographies, the effectiveness
of our transition from work-from-home arrangements to a gradual return to our offices, actions taken to contain the COVID-19 pandemic,
the long-term efficacy, global availability and acceptance of vaccines, related restrictions on economic activity and domestic and international
trade, and the extent of the impact of these and other factors on our employees, suppliers, and customers. The COVID-19 pandemic and
related restrictions could limit supplier and distributors’ ability to continue to operate (limiting their abilities to obtain
inventory, generate sales, ship and dispatch orders, or make timely payments to us). It could disrupt or delay the ability of employees
to work because they become sick or are required to care for those who become sick or for dependents for whom external care is not available.
In addition, the COVID-19 pandemic may also result in reduced consumer spending and adverse or uncertain economic conditions globally,
which in turn may impact our revenue.
Risk
Related to Third Parties
Our
reliance on third-party suppliers for most of the components of our products, including miniature video sensors which are suitable for
our CMOS technology products mainly in the medical domain, could harm our ability to meet demand for our products in a timely and cost-effective
manner.
We
rely on our third-party suppliers to obtain an adequate supply of quality components on a timely basis with favorable terms to manufacture
our commissioned products. Some of those components that we sell are provided to us by a limited number of suppliers. We will be subject
to disruptions in our operations if our sole or limited supply contract manufacturers decrease or stop production of components or do
not produce components and products of sufficient quantity or quality. Alternative sources for our components will not always be available.
Though
we attempt to ensure the availability of more than one supplier for each important component in any product that we commission, the number
of suppliers engaged in the provision of miniature video sensors which are suitable for our CMOS technology mainly in the medical domain
is very limited, and therefore in some cases we engage with a single supplier, which may result in our dependency on such supplier. This
is the case regarding sensors for the CMOS type technology that are produced by a single supplier in the United States. As we do not
have a contract in place with this supplier, there is no contractual commitment on the part of such supplier for any set quantity of
such sensors. The loss of our sole supplier in providing us with miniature sensors for our CMOS technology products mainly in the medical
domain, and our inability or delay in finding a suitable replacement supplier, could negatively affect our business, financial condition,
results of operations, and reputation.
We
are also subject to other risks inherent in the manufacturing of our products and their supply chain, including industrial accidents,
natural disasters (including as a result of climate change), environmental events, strikes, and other labor disputes, capacity constraints,
disruptions in material or packaging supplies, as well as global shortages, disruptions in supply chain or information technology, loss
or impairment of key manufacturing sites or suppliers, product quality control, safety, increase in commodity prices and energy costs,
licensing requirements and other regulatory issues, as well as other external factors over which we have no control. If such an event
were to occur, it could have an adverse effect on our business, financial condition, and results of operations. In addition, we may experience
interruptions with our suppliers and other supply chain disruptions as a result of the COVID-19 pandemic, or any other international
disorder. In recent months, global supply chain disruptions have slowed receipt of some of our supplies and delayed some of our deliveries,
although as yet not materially, and increased some of our product costs. Although such cost increases have been fully covered by our
customers to date, there is no assurance that this will continue in the future.
In
addition, if we cannot supply commissioned products or future potentially developed products due to a lack of components, or are unable
to utilize other components in a timely manner, our business will be significantly harmed. If inventory shortages occur, they could be
expected to have a material and adverse effect on our future revenues and ability to effectively project future sales and operating results.
We
may not be able to manage our strategic partners effectively.
We
have entered into, and we may continue to enter into, strategic alliances with third parties to gain access to new and innovative technologies
and markets. These parties are often large, established companies. Negotiating and performing under these arrangements involves significant
time and expense, and we may not have sufficient resources to devote to our strategic alliances, particularly those with companies that
have significantly greater financial and other resources than we do. The anticipated benefits of these arrangements may never materialize,
and performing under these arrangements may adversely affect our results of operations.
Failure
to manage our current partners effectively or enter into new strategic alliances may affect our success in executing our business plan
and may adversely affect our business, financial condition, and results of operation. We may not realize the anticipated benefits of
any or all partnerships, or may not realize them in the time frame expected.
We
may not have sufficient manufacturing capabilities to satisfy any growing demand for our commissioned products. We may be unable to control
the availability or cost of producing such products.
Our
current manufacturing capabilities may not reach the required production levels necessary in order to meet growing demands for any products
we may commission or future products we may develop. There can be no assurance that our commissioned products can be manufactured at
our desired commercial quantities, in compliance with our requirements, and at an acceptable cost. Any such failure could delay or prevent
us from shipping said products and marketing our technologies in accordance with our target growth strategies.
Risks
Related to Competition
We
expect to face significant competition. If we cannot successfully compete with new or existing technologies or future developed products,
our marketing and sales will suffer and we may never be profitable.
We
expect to compete against existing technologies and proven products in different industries. In addition, some of these competitors,
either alone or together with their collaborative partners, operate larger research and development programs than we do, and may have
substantially greater financial resources than we do, as well as significantly greater experience in obtaining regulatory approvals applicable
to the commercialization of relevant competitive technologies and future products.
Our
customers may develop the capabilities of our solution in-house, which would significantly reduce the demand for our products.
Our
customers may develop the capabilities to manufacture solutions in-house that are currently satisfied by our solutions. In the event
our customers, or future customers, develop such capacities, our potential for profitability may be significantly reduced.
Failure
to comply with anti-bribery, anti-corruption and anti-money laundering laws could subject us to penalties and other adverse consequences.
We
are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, Chapter 9 (sub-chapter 5) of the Israeli Penal Law, 5737-1977, and
the Israeli Prohibition on Money Laundering Law, 5760-2000, collectively, the Israeli Anti-Corruption Laws, and the UK Bribery Act 2010,
or UK Bribery Act, and other anticorruption, anti-bribery and anti-money laundering laws in the jurisdictions in which we do business,
both domestic and abroad. These laws generally prohibit us and our employees from improperly influencing government officials or commercial
parties in order to obtain or retain business, direct business to any person or gain any advantage. The FCPA, the Israeli Anti-Corruption
Laws, the UK Bribery Act, and other applicable anti-bribery and anti-corruption laws also may hold us liable for acts of corruption and
bribery committed by our third-party business partners, representatives and agents. In addition, we leverage third parties to sell our
products and conduct our business abroad. We and our third-party business partners, representatives and agents may have direct or indirect
interactions with officials and employees of government agencies or state-owned or affiliated entities and we may be held liable for
the corrupt or other illegal activities of these third-party business partners and intermediaries, our employees, representatives, contractors,
channel partners and agents, even if we do not explicitly authorize such activities. These laws also require that we keep accurate books
and records and maintain internal controls and compliance procedures designed to prevent any such actions. While we have policies and
procedures to address compliance with such laws, we cannot assure you that our employees and agents will not take actions in violation
of our policies or applicable law, for which we may be ultimately held responsible and our exposure for violating these laws increases
as our international presence is established and as we increase sales and operations in foreign jurisdictions. Any violation of the FCPA,
the Israeli Anti-Corruption Laws, the UK Bribery Act, or other applicable anti-bribery, anti-corruption laws and anti-money laundering
laws could result in whistleblower complaints, adverse media coverage, investigations, imposition of significant legal fees, loss of
export privileges, severe criminal or civil sanctions or suspension or debarment from U.S. government contracts, substantial diversion
of management’s attention, a decline in the market price of our common stock or overall adverse consequences to our reputation
and business, all of which may have an adverse effect on our results of operations and financial condition.
Risks
Related to Intellectual Property
We
may not be able to obtain patents or other intellectual property rights necessary to protect our proprietary technology and business.
We
may seek to patent concepts, components, processes, designs and methods, and other inventions and technologies that we consider to have
commercial value or that will likely give us a technological advantage. Despite devoting resources to the research and development of
proprietary technology, we may not be able to develop technology that is patentable or protectable. Patents may not be issued in connection
with pending patent applications, and claims allowed may not be sufficient to allow them to use the inventions that they create exclusively.
Furthermore, any patents issued could be challenged, re-examined, held invalid or unenforceable, or circumvented and may not provide
sufficient protection or a competitive advantage. In addition, despite efforts to protect and maintain patents, competitors and other
third parties may be able to design around their patents or develop products similar to our work products that are not within the scope
of their patents. Finally, patents provide certain statutory protection only for a limited period of time that varies depending on the
jurisdiction and type of patent.
Prosecution
and protection of the rights sought in patent applications and patents can be costly, lengthy, and uncertain, often involve complex legal
and factual issues, and consume significant time and resources. In addition, the breadth of claims allowed in our patents, their enforceability,
and our ability to protect and maintain them cannot be predicted with any certainty. The laws of certain countries may not protect intellectual
property rights to the same extent as the laws of the United States. Even if our patents are held to be valid and enforceable in a certain
jurisdiction, any legal proceedings that we may initiate against third parties to enforce such patents will likely be expensive, take
significant time, and divert management’s attention from other business matters. We cannot assure that any of our issued patents
or pending patent applications provide any protectable, maintainable, or enforceable rights or competitive advantages to us.
In
addition to patents, we will rely on a combination of copyrights, trademarks, trade secrets, and other related laws and confidentiality
procedures and contractual provisions to protect, maintain, and enforce our proprietary technology and intellectual property rights in
the United States and other countries. However, our ability to protect our brands by registering certain trademarks may be limited. In
addition, while we will generally enter into confidentiality and nondisclosure agreements with our employees, consultants, contract manufacturers,
distributors and resellers, and with others to attempt to limit access to and distribution of our proprietary and confidential information,
it is possible that:
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misappropriation
of our proprietary and confidential information, including technology, will nevertheless occur; |
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our
confidentiality agreements will not be honored or may be rendered unenforceable; |
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third
parties will independently develop equivalent, superior, or competitive technology or products; |
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disputes
will arise with our current or future strategic licensees, customers, or others concerning the ownership, validity, enforceability,
use, patentability, or registrability of intellectual property; or |
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unauthorized
disclosure of our know-how, trade secrets, or other proprietary or confidential information will occur. |
We
cannot assure that we will be successful in protecting, maintaining, or enforcing our intellectual property rights. If we are unsuccessful
in protecting, maintaining, or enforcing our intellectual property rights, then our business, operating results, and financial condition
could be materially adversely affected, which could:
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adversely
affect our reputation with customers; |
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be
time-consuming and expensive to evaluate and defend; |
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cause
product shipment delays or stoppages; |
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divert
management’s attention and resources; |
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subject
us to significant liabilities and damages; |
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require
us to enter into royalty or licensing agreements; or |
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require
us to cease certain activities, including the sale of products. |
If
it is determined that we have infringed, violated or are infringing or violating a patent or other intellectual property right of any
other person or if we are found liable in respect of any other related claim, then, in addition to being liable for potentially substantial
damages, we may be prohibited from developing, using, distributing, selling, or commercializing certain of our technologies unless we
obtain a license from the holder of the patent or other intellectual property right. We cannot assure that we will be able to obtain
any such license on a timely basis or on commercially favorable terms, or that any such licenses will be available, or that workarounds
will be feasible and cost-efficient. If we do not obtain such a license or find a cost-efficient workaround, our business, operating
results, and financial condition could be materially adversely affected.
General
Risk Factors Related to Our Business
Our
business and operations would suffer in the event of computer system failures, cyber-attacks, or deficiencies in our cyber-security.
Security
incidents involving our information technology systems and those of third parties on which we rely have occurred in the past, such as
phishing attacks, although none of these incidents have been material to our business. Such security incidents may occur in the future.
Despite the implementation of security measures, our internal computer systems, and those of third parties on which we rely, are vulnerable
to damage from computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, cyber-attacks
or cyber-intrusions over the Internet, attachments to emails, persons inside our organization, or persons with access to systems inside
our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer
hackers, foreign governments, and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted
attacks and intrusions from around the world have increased. If such an event were to occur and cause interruptions in our operations,
it could result in a material disruption of our product development programs. To the extent that any disruption or security breach was
to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary information,
we could incur material legal claims and liability, and damage to our reputation, and the further development of our product candidates
could be delayed.
We
may be subject to product liability claims, product actions, including product recalls, and other field or regulatory actions that could
be expensive, divert management’s attention, and harm our business.
Our
business exposes us to potential liability risks, product actions, and other field or regulatory actions that are inherent in the manufacturing,
marketing and sale of medical device, or any other products that we may have commissioned for a target business. We may be held liable
if such products cause injury or death or are found otherwise unsuitable or defective during usage. Our products incorporate mechanical
and electrical parts, complex computer software, and other sophisticated components, any of which can contain errors or failures. Complex
computer software is particularly vulnerable to errors and failures, especially when first introduced. In addition, new products or enhancements
to our existing products may contain undetected errors or performance problems that, despite testing, are discovered only after installation.
If
any of our commissioned products are defective, whether due to design or manufacturing defects, improper use of the product, or other
reasons, we may voluntarily or involuntarily undertake an action to remove, repair, or replace the product at our expense. In some circumstances
we will be required to notify regulatory authorities of an action pursuant to a product failure.
Testing
of our technologies potential applications for our products will be required and there is no assurance of regulatory approval.
The
effect of government regulation and the need for compliance may delay marketing of our technologies and future potentially developed
products for a considerable period of time, impose costly procedures upon our activities, and provide an advantage to larger companies
that compete with us. There can be no assurance that we will be able to achieve regulatory compliance for any of our products. Any such
delay in achieving such regulatory compliance would materially and adversely affect the marketing of any contemplated products and the
ability to earn product revenue. Further, regulation of manufacturing facilities by state, local, and other authorities is subject to
change. Any additional regulation could result in limitations or restrictions on our ability to utilize any of our technologies, thereby
adversely affecting our operations. Various federal and foreign statutes and regulations also govern or influence the manufacturing,
safety, labeling, storage, record keeping, and marketing of our products. The process of compliance with relevant U.S. and foreign statutes
and regulations are time-consuming and require the expenditure of substantial resources. In addition, these requirements and processes
vary widely from country to country.
We
rely on highly skilled personnel, and, if we are unable to attract, retain, or motivate qualified personnel, we may not be able to operate
our business effectively.
Our
success depends in large part on continued employment of senior management and key personnel who can effectively operate our business,
as well as our ability to attract and retain skilled employees. Competition for highly skilled management, technical, research and development,
and other employees is intense and we may not be able to attract or retain highly qualified personnel in the future. In making employment
decisions, job candidates often consider the value of the equity awards they would receive in connection with their employment. Our long-term
incentive programs may not be attractive enough or perform sufficiently to attract or retain qualified personnel.
If
any of our employees leaves us, and we fail to effectively manage a transition to new personnel, or if we fail to attract and retain
qualified and experienced professionals on acceptable terms, our business, financial condition, and results of operations could be adversely
affected.
Our
success also depends on our having highly trained financial, technical, R&D, sales, and marketing personnel. We will need to continue
to hire additional personnel as our business grows. A shortage in the number of people with these skills or our failure to attract them
to our company could impede our ability to increase revenues from our existing technology and services, ensure full compliance with international
and federal regulations, or launch new product offerings and would have an adverse effect on our business and financial results.
We
may be unable to keep pace with changes in technology as our business and market strategy evolves.
We
will need to respond to technological advances in a cost-effective and timely manner in order to remain competitive. The need to respond
to technological changes may require us to make substantial, unanticipated expenditures. There can be no assurance that we will be able
to respond successfully to technological change.
Risks
Related to this Offering and Our Common Stock
Although
we have filed an application to list our securities on Nasdaq, there can be no assurance that our securities will be so listed or, if
listed, that we will be able to comply with the continued listing standards.
In
June 2021 we filed a comprehensive listing application package with The Nasdaq Stock Market, or Nasdaq, to request an uplisting of the
Company’s common stock. Nasdaq has not approved our application, and there can be no assurance that Nasdaq will approve us for
listing on The Nasdaq Capital Market and, even if our securities are listed, we cannot assure you that we will be able to maintain such
listing. In addition, if after listing, Nasdaq delists our securities from trading on its exchange for failure to meet the continued
listing standards, we and our shareholders could face significant material adverse consequences including a limited availability of market
quotations for our common stock, confirmation that our stock is “penny stock” and subject to increased regulations, and a
decreased ability to issue additional securities or obtain additional financing in the future.
Trading
on the OTC Markets is volatile, sporadic and often thin, which could depress the market price of our common stock and make it difficult
for our stockholders to resell their common stock.
Our
common stock is currently quoted on the OTCQB tier of the OTC Markets. Trading in securities quoted on the OTC Markets is often thin
and characterized by wide fluctuations in trading prices due to many factors, some of which may have little to do with our operations
or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance.
Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the trading
of securities listed on a stock exchange like NASDAQ or the NYSE. Our common stock has a history of thin trading. During the 52-week
period ended December 31, 2021, trades were only reported on 134 trading days. These factors may result in investors having difficulty
reselling any shares of our common stock.
Nevada
law and provisions in our amended and restated articles of incorporation and amended and restated bylaws could make a merger, tender
offer or proxy contest difficult, thereby depressing the market price of our common stock.
Some
provisions of Nevada law may prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage
attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above
the prevailing market price. In addition, our amended and restated articles of incorporation and amended and restated bylaws contain
provisions that may make the acquisition of the Company more difficult, including the following:
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our
board of directors is classified into three classes of directors with staggered three-year terms; |
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a
special meeting of our stockholders may only be called by either our chairman of the board or a majority of our board of directors;
and |
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advance
notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting
of stockholders. |
These
provisions, alone or together, could discourage, delay or prevent a transaction involving a change in control of the Company. These provisions
could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us
to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders
to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for
our common stock.
The
market price of our common stock may be highly volatile and such volatility could cause you to lose some or all of your investment.
The
market price of our common stock may fluctuate significantly in response to numerous factors, some of which are beyond our control, such
as:
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the
announcement of new products or product enhancements by us or our competitors; |
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developments
concerning intellectual property rights; |
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changes
in legal, regulatory, and enforcement frameworks impacting our technology or the application of our technology; |
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variations
in our and our competitors’ results of operations; |
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fluctuations
in earnings estimates or recommendations by securities analysts, if our common stock is covered by analysts; |
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the
results of product liability or intellectual property lawsuits; |
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future
issuances of common stock or other securities;
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the
addition or departure of key personnel; |
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announcements
by us or our competitors of acquisitions, investments or strategic alliances; |
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current
or anticipated impact of military conflict, including the conflict between Russia and Ukraine, terrorism or other geopolitical events; |
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sanctions
imposed by the United States and other countries in response to such conflicts, including the one in Ukraine, may also adversely
impact the financial markets and the global economy, and any economic countermeasures by affected countries and others could exacerbate
market and economic instability; and |
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general
market conditions and other events or factors, many of which are beyond our control. |
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In
addition, the stock market has experienced significant volatility, particularly with respect to pharmaceutical, biotechnology and other
life sciences company stocks. The volatility of pharmaceutical, biotechnology and other life sciences company stocks often does not relate
to the operating performance of the companies represented by the stock. In the past, securities class action litigation has often been
initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial
costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments
or to settle litigation.
Because
our common stock may be deemed a “penny stock,” it may be more difficult for investors to sell shares of our common stock,
and the market price of our common stock may be adversely affected.
Our
common stock may be a “penny stock” if, among other things, the stock price is below $5.00 per share, it is not listed on
a national securities exchange, or it has not met certain net tangible asset or average revenue requirements. Broker-dealers who sell
penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. This risk-disclosure
document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market. A
broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation,
make a written determination that the penny stock is a suitable investment for the purchaser and obtain the purchaser’s written
agreement to the purchase. Broker-dealers must also provide customers that hold penny stock in their accounts with such broker-dealer
a monthly statement containing price and market information relating to the penny stock. If a penny stock is sold to an investor in violation
of the penny stock rules, the investor may be able to cancel its purchase and get their money back.
If
applicable, the penny stock rules may make it difficult for stockholders to sell their shares of our common stock. Because of the rules
and restrictions applicable to a penny stock, there is less trading in penny stocks and the market price of our common stock may be adversely
affected. Also, many brokers choose not to participate in penny stock transactions. Accordingly, stockholders may not always be able
to resell their shares of our common stock publicly at times and prices that they feel are appropriate.
Compliance
with the reporting requirements of federal securities laws can be expensive.
We
are a public reporting company in the United States, and accordingly, subject to the information and reporting requirements of the Exchange
Act and other federal securities laws. The costs of preparing and filing annual and quarterly reports and other information with the
SEC and furnishing audited reports to stockholders are substantial. Failure to comply with the applicable securities laws could result
in private or governmental legal action against us or our officers and directors, which could have a detrimental impact on our business
and financials, the value of our stock, and the ability of stockholders to resell their stock.
Our
investors’ ownership in the Company may be diluted in the future.
In
the future, we may issue additional authorized but previously unissued equity securities, resulting in the dilution of ownership interests
of our present stockholders. For instance, pursuant to the Securities Exchange Agreement by and between Intellisense and Medigus, dated
September 16, 2019, if ScoutCam achieves $33.0 million in sales in the aggregate within the first three years following December 30,
2019, the consummation date of such agreement, we will issue shares of common stock to Medigus representing 10% of our issued and outstanding
share capital as of December 30, 2019. Similarly, we may issue a substantial number of shares of common stock or other securities convertible
into or exercisable for common stock in connection with capital raising activity, hiring or retaining employees, future acquisitions,
raising additional capital in the future to fund our operations, and other business purposes. We expect to authorize in the future a
substantial number of shares of our common stock for issuance under a stock option or similar plan, and may issue equity awards to management,
employees and other eligible persons. Additional shares of common stock issued by us in the future will dilute an investor’s investment
in the Company. In addition, we may seek stockholder approval to increase the amount of the Company’s authorized stock, which would
create the potential for further dilution of current investors.
Directors,
executive officers, principal stockholders, and affiliated entities own a significant percentage of our capital stock, and they may make
decisions that our stockholders do not consider to be in their best interests.
As
of March 28, 2022, our directors, executive officers, principal stockholders, and affiliated entities may be deemed to beneficially own,
in the aggregate, approximately 76.43% of our outstanding voting securities. As a result, if some or all of such parties
acted together, they would have the ability to exert substantial influence over the election of our board of directors and the outcome
of issues requiring approval by our stockholders. This concentration of ownership may also have the effect of delaying or preventing
a change in control of the Company that may be favored by other stockholders. This could prevent transactions in which stockholders might
otherwise recover a premium for their shares over current market prices. This concentration of ownership and influence in management
and board decision-making could also harm the price of our capital stock by, among other things, discouraging a potential acquirer from
seeking to acquire shares of our capital stock (whether by making a tender offer or otherwise) or otherwise attempting to obtain control
of our Company.
We
do not anticipate paying any cash dividends in the foreseeable future.
We
have never declared or paid cash dividends, and we do not anticipate paying cash dividends in the foreseeable future. Therefore, you
should not rely on an investment in our common stock as a source for any future dividend income. Our board of directors has complete
discretion as to whether to distribute dividends. Even if our board of directors decides to declare and pay dividends, the timing, amount,
and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus,
the amount of distributions, if any, received by us from our subsidiary, our financial condition, contractual restrictions, and other
factors deemed relevant by our board of directors.
Risks
Related to our Operations in Israel
Political,
economic and military instability in Israel may impede our ability to operate and harm our financial results.
Our
offices and management team are located in Israel. Accordingly, political, economic, and military conditions in Israel and the surrounding
region may directly affect our business and operations. In recent years, Israel has been engaged in sporadic armed conflicts with Hamas,
an Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large portions of
southern Lebanon, and with Iranian-backed military forces in Syria. In addition, Iran has threatened to attack Israel and may be developing
nuclear weapons. Some of these hostilities were accompanied by missiles being fired from the Gaza Strip against civilian targets in various
parts of Israel, including areas in which our employees and some of our consultants are located, and negatively affected business conditions
in Israel. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could
adversely affect our operations and results of operations.
Our
commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli
government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot
assure you that this government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages
incurred by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would
likely negatively affect business conditions and could harm our results of operations.
Further,
in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries still restrict business
with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating
results, financial condition, or the expansion of our business. A campaign of boycotts, divestment, and sanctions has been undertaken
against Israel, which could also adversely impact our business.
In
addition, many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year
until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event
of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant
call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could
be disrupted by such call-ups, which may include the call-up of members of our management. Such disruption could materially adversely
affect our business, prospects, financial condition, and results of operations.
It
may be difficult for investors in the United States to enforce any judgments obtained against us or some of our directors or officers.
It
may be difficult to acquire jurisdiction and enforce liabilities against any of our officers and directors who are based in Israel. It
may not be possible for United States investors to enforce their legal rights, to effect service of process upon our directors or officers
or to enforce judgments of United States courts predicated upon civil liabilities and criminal penalties of our directors and officers
under federal securities laws. Moreover, we have been advised that Israel does not have treaties providing for the reciprocal recognition
and enforcement of judgments of courts with the United States. Further, it is unclear if extradition treaties now in effect between the
United States and Israel would permit effective enforcement of criminal penalties of the federal securities laws. Even if an Israeli
court agrees to hear a claim, it may determine that the Israeli law, and not U.S. law, is applicable to the claim. Further, if U.S. law
is found to be applicable, certain content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly
process, and certain matters of procedure would still be governed by the Israeli law. Consequently, you may be effectively prevented
from pursuing remedies under U.S. federal and state securities laws against us or any of our non-U.S. directors or officers.
Exchange
rate fluctuations between foreign currencies and the U.S. Dollar may negatively affect our earnings.
Our
reporting and functional currency is the U.S. dollar. Our revenues are currently primarily payable in U.S. dollars and we expect our
future revenues to be denominated primarily in U.S. dollars. However, some of our expenses are in NIS and as a result, we are exposed
to the currency fluctuation risks relating to the recording of our expenses in U.S. dollars. We may, in the future, decide to enter into
currency hedging transactions. These measures, however, may not adequately protect us from material adverse effects.
Certain
technology developed and used by us received Israeli government grants for certain research and development activities. The terms of
those grants require us to satisfy specified conditions in addition to repayment of the grants upon certain events.
The
research and development efforts that contributed to certain technology used by us was financed in part through grants from the IIA to
Medigus, which was subsequently transferred to ScoutCam Ltd. (for more information about such agreements, refer to – “CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE” below”). The terms of such grants require ScoutCam Ltd.
to comply with the requirements of the Innovation Law. When a company develops know-how, technology or products using IIA grants, the
terms of these grants and the Innovation Law restrict the transfer outside of Israel of such know-how, and the manufacturing or manufacturing
rights of such products, technologies or know-how, without the prior approval of the IIA. Therefore, if aspects of our technologies are
deemed to have been developed with IIA funding, the discretionary approval of an IIA committee would be required for any transfer to
third parties outside of Israel of know-how or manufacturing or manufacturing rights related to those aspects of such technologies. We
may not receive those approvals. Furthermore, the IIA may impose certain conditions on any arrangement under which it permits us to transfer
technology or development out of Israel.
The
transfer of IIA-supported technology or know-how or manufacturing or manufacturing rights related to aspects of such technologies outside
of Israel may involve the payment of significant penalties and other amounts, depending upon the value of the transferred technology
or know-how, the amount of IIA support, the time of completion of the IIA-supported research project and other factors. These restrictions
and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development
or manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to
our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with IIA funding (such
as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA.
We
may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result
in litigation and adversely affect our business.
A
significant portion of ScoutCam’s intellectual property has been developed by ScoutCam’s employees in the course of their
employment for us. Under the Israeli Patent Law, 5727-1967, or the Patent Law, inventions conceived by an employee in the course and
as a result of or arising from his or her employment with a company are regarded as “service inventions,” which belong to
the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent
Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee,
or the Committee, a body constituted under the Patent Law, will determine whether the employee is entitled to remuneration for his inventions.
Recent case law clarifies that the right to receive consideration for “service inventions” can be waived by the employee
and that in certain circumstances, such waiver does not necessarily have to be explicit. The Committee will examine, on a case-by-case
basis, the general contractual framework between the parties, using interpretation rules of the general Israeli contract laws. Further,
the Committee has not yet determined one specific formula for calculating this remuneration (but rather uses the criteria specified in
the Patent Law). Although we generally enter into assignment-of-invention agreements with our employees pursuant to which such individuals
assign to us all rights to any inventions created in the scope of their employment or engagement with us, we may face claims demanding
remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration
or royalties to our current and/or former employees, or be forced to litigate such claims, which could negatively affect our business.