Overview
We
have developed the Pure-Vu System, a medical device that has been cleared by the U.S. Food and Drug Administration (the
“FDA”) to help facilitate the cleansing of a poorly prepared gastrointestinal tract during colonoscopy and to help
facilitate upper gastrointestinal (“GI”) endoscopy procedures. The Pure-Vu System is also CE marked in the European
Economic Area (EEA) for use in colonoscopy. The Pure-Vu System integrates with standard and slim colonoscopes, as well as
gastroscopes, to improve visualization during colonoscopy and upper GI procedures while preserving established procedural workflow
and techniques. Through irrigation and evacuation of debris, the Pure-Vu System is designed to provide better-quality exams.
Challenges exist for inpatient colonoscopy and endoscopy, particularly for patients who are elderly, with comorbidities, or active
bleeds, where the ability to visualize, diagnose and treat is often compromised due to debris, including fecal matter, blood, or
blood clots. We believe this is especially true in high acuity patients, like GI bleeding where the existence of blood and blood
clots can impair a physician’s view and removing them can be critical in allowing a physician the ability to identify and
treat the source of bleeding on a timely basis. We believe use of the Pure-Vu System may lead to positive outcomes and lower costs
for hospitals by safely and quickly improving visualization of the colon and upper GI tract, potentially enabling effective
diagnosis and treatment without delay. In multiple clinical studies to date, involving the treatment of challenging inpatient and
outpatient cases, the Pure-Vu System has consistently helped achieve adequate bowel cleanliness rates greater than 95% following a
reduced prep regimen. We also believe that the technology may be useful in the future as a tool to help reduce user dependency on
conventional pre-procedural bowel prep regimens. Based on our review and analysis of 2019 market data and 2021 projections for the
U.S. and Europe, as obtained from iData Research Inc., we believe that during 2022 approximately 1.5 million inpatient colonoscopy
procedures were performed in the U.S. and approximately 4.8 million worldwide. Upper GI bleeds occurred in the U.S. at a rate of
approximately 400,000 cases per year in 2019, according to iData Research Inc. The Pure-Vu System has been assigned an ICD-10 code
in the US. The system does not currently have unique codes with any private or governmental third-party payors in any other country
or for any other use; however, we may pursue reimbursement activities in the future, particularly in the outpatient colonoscopy
market. We received 510(k) clearance in February 2022 from the FDA for our Pure-Vu EVS System and have commenced initial
commercialization of this product.
Strategic
Review and Restructuring
As
previously announced in January 2023, we have initiated a process to explore a range of strategic and financing alternatives focused
on maximizing stockholder value and accelerating the commercialization of the Pure-Vu System. We have engaged Lake Street Capital Markets
LLC (“Lake Street Capital”) to advise us in this process. Potential strategic alternatives that we may consider are expected
to include an acquisition, merger, reverse merger, other business combination, sale of assets, licensing and other strategic transactions.
To
support these objectives, we commenced a strategic restructuring program
aimed at capital preservation. We have reduced our quarterly cash expenditures by approximately 35% by eliminating approximately
45% of our workforce during the first quarter of 2023. In connection with the restructuring, we expect to incur a non-recurring charge
of approximately $1.0 to $2.0 million in the first quarter of 2023. In addition, the non-management members of the Board agreed to defer
their Board fees until a future date.
The
restructuring is intended to position us to continue to explore all strategic alternatives, continue supporting our existing
customers utilizing Pure-Vu EVS for colonoscopies, as well as targeting pipeline opportunities with contracted health systems. In
addition, we intend to continue to advance our Pure-Vu EVS Gastro development program, which is designed for use during an Upper GI
endoscopy to improve visualization by clearing debris and may help improve procedure times and outcomes especially in high acuity
situations like an upper GI bleed. We intend to seek U.S. regulatory approval for the Pure-Vu EVS Gastro device in the second half
of 2023.
We intend to continue to evaluate and
identify other areas of our business to enhance efficiencies and improve processes, with a goal to further lower our operating expenses
and capital needs. There can be no assurance that this strategic review process will result in any changes to our current business
plans or lead to any specific action or transaction. We do not intend to discuss or disclose further developments during this strategic
review process unless and until the Board has approved a specific action or we otherwise determine that further disclosure is appropriate.
Market
Overview
Colonoscopies
are one of the most frequently performed medical procedures with over 20 million colonoscopies performed in the United States each year
and more than 54 million worldwide, per 2019 iData Research Inc. Based on our review and analysis of this market data as well as 2021
projections for the U.S. and Europe, as obtained from iData Research Inc., we estimate that during 2023 approximately 1.5 million inpatient
colonoscopy procedures in a hospital setting will be performed in the U.S. Hospital based colonoscopies are typically performed to help
diagnose and treat lower gastrointestinal (GI) bleeding, irritable bowel syndrome (IBS), inflammatory bowel disease (IBD), anemia or
infection. A majority of total colonoscopies in the U.S. and worldwide are performed as outpatient procedures at an ambulatory endoscopy
center and/or hospital outpatient departments, with the bulk of procedures performed to detect and prevent colorectal cancer (CRC). According
to the CDC (2018), approximately 31% of eligible patients are still not current with their CRC screening in the U.S. Over the past few
decades, CRC has been demonstrated to be one of the most preventable cancers if detected early through the use of colonoscopy screening.
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Despite
the pervasiveness and effectiveness of colonoscopy, a key ongoing clinical challenge of the procedure is that patients are required to
undergo a potent pre-procedure bowel preparation regimen to try to ensure that the colon is fully cleansed to enable clear visualization
of the tissue. Successful bowel preparation is one of the most important factors in delivering a thorough, high quality exam and is well
documented to have a direct impact on the adenoma detection rate (ADR), the rate of detecting pre-cancer anomalies in the colon tissue,
which in turn predicts a decrease in CRC risk. An inadequately prepared colon can impact the diagnostic accuracy of the procedure and
can lead to procedures having to be repeated earlier than the medical guidelines advise or can lead to failed procedures especially in
the inpatient setting. Rescheduling the procedure is inconvenient to the patient (and many patients fail to come for their follow-up),
creates inefficiencies in the provider’s workflow, and increases the length of hospital stay, each of which results in increased
healthcare costs. The preparation regimen typically requires patients to be on a liquid diet for over 24 hours, drink up to four liters
of a purgative, spend up to 12 hours prior to the exam periodically going to the bathroom to empty their bowels, and disrupting their
daily activities, which could include missing work or other activities. The regimens can be highly disruptive and uncomfortable for many
patients. In fact, approximately 57% of patients cite not wanting to take the bowel preparation as the number one deterrent for the procedure,
as noted by Harewood et al., American Journal of Gastroenterology (2002). Further, it is estimated by HRA Healthcare Research & Analytics
(2015) that approximately 23% of outpatients present with inadequately prepped colons, resulting in a number of colonoscopies that yield
poor diagnostic accuracy or failed colonoscopies that must be repeated. For inpatients, this figure jumps to approximately 51% according
to a recently published study by the Cleveland Clinic. It has also been reported that patients requiring frequent colonoscopies, such
as CRC survivors and other surveillance patients, account for approximately 21% of the outpatient colonoscopies performed annually in
the U.S., per Lieberman D.A. et.al., American Society for Gastrointestinal Endoscopy (2005).
Inpatient
Opportunity: improving efficiencies and shortening time to complete a successful colonoscopy
Inpatient
colonoscopy is usually performed to diagnose the source of various gastrointestinal conditions such as lower GI bleeding or bowel pain.
For an inpatient hospital stay, the Centers for Medicare & Medicaid Services, or CMS, uses a prospective payment system, or PPS, based
upon the MS-DRG payment groupings, to pay for hospital services with the goal of encouraging efforts to minimize their costs. The DRG
assignment is influenced by a combination of factors such as a patient’s sex, diagnosis at the time of discharge and procedures
performed. Based on patient specific information, all hospital expenses for their care during an inpatient stay are packaged and assigned
to one of over 700 MS-DRGs (“Medicare Severity – Diagnostics Related Groups”). According to Decision Driver Analytics,
a reimbursement consulting agency, when a colonoscopy is performed as the primary procedure (no other procedures or complicating diagnosis),
MSDRGs 395, 394 or 393 would apply which pay between $3,861 (without complications or major comorbidities) and $9,421 (with major complications
and comorbidities), which are average figures subject to adjustment. The National Inpatient Sample (“NIS”) and other literature
sources note that the cost for a standard hospital bed averages $2,298 and the cost for an intensive care unit (“ICU”) bed
averages $6,546 per day in the U.S, so reducing the length of stay can save the hospital significant expense.
An inpatient colonoscopy is generally more problematic than an outpatient
procedure due primarily to the acuity of the patient who often struggles to complete a satisfactory pre-procedural bowel prep, which
can lead to lower rates of successful completion of the procedure and a higher frequency of repeat procedures. Inpatients are difficult
to prep as shown by inadequate bowel prep rates. Published studies have found that the inpatient population experiences rates of insufficiently
prepped colons at the time of colonoscopy as high as 55%. This has been shown to lead directly to significantly longer hospital stays
and other additional costs due to the need for repeated preps, repeated colonoscopies, and additional diagnostic procedures. This is
exemplified in a recently published study by the Cleveland Clinic that showed an inadequate preparation rate of 51% in the study population
of 8,819 inpatients. The study noted that the 51% of the study population that were inadequately prepped stayed one day extra in the
hospital compared to patients with adequate preparation. Another study, from Northwestern University Hospital System, showed an average
hospital stay extension of two days and cost increase of as much as $8,000 per patient as a result of challenges associated with bowel
preparation. We believe the Pure-Vu System may improve outcomes and lower costs for hospitals by potentially reducing the time to a successful
colonoscopy, minimizing delayed and incomplete procedures, and improving the quality of an exam.
Our
Pure-Vu Solution
Our system consists of a workstation controller and a single-use, disposable
sleeve that fits over most standard and slim colonoscopes. Together with the colonoscope, the Pure-Vu System performs rapid, effective,
and efficient intra-procedural cleaning without compromising procedural workflow and techniques. The over-sleeve has an umbilical section
that connects the disposable to the workstation. The workstation, through a series of peristaltic pumps activated by foot pedals, delivers
an irrigation medium of air and water that creates a pulsed vortex inside the colon to break up fecal matter while simultaneously evacuating
the colon content into waste receptacles already used in a standard colonoscopy procedure. The proprietary smart sense suction (evacuation)
system in the device has sensors built in that can detect the formation of a blockage and automatically clear it allowing the physician
to remove significant debris from the patient. The Pure-Vu System has been clinically demonstrated to be capable of cleaning poorly prepared
colons in minutes. We have built and continue to extend our intellectual property portfolio designed to protect key aspects of the system,
including the pulsed vortex irrigation and auto-purge functions.
In
June 2019, the 510(k) premarket notification for the second-generation (“Gen 2”) of the Pure-Vu System was reviewed and cleared
by the FDA. We received the initial CE Certificate of Conformity, allowing us to affix the CE Mark to the Gen 2 Pure-Vu System in March
2020. We received a supplement to the initial CE Certificate of Conformity in January 2021.
On February 14, 2022, we announced the 510(k) clearance
by the FDA of our Pure-Vu EVS System. The Pure-Vu EVS offers usability advancements over the previous versions, including enhanced physician
navigation and control, on-demand bedside loading, expanded cleansing capacity, and a smaller workstation footprint.
We also implemented an improved manufacturing cost
structure in 2022 that we believe better positions the Company to increase margins, and establish strategic relationships in the US and
other more cost sensitive global markets over time.
Pre-Clinical
and Clinical Data & Safety
The
Pure-Vu System has been studied in multiple clinical studies in study subjects receiving a reduced prep regime as well as a study focused
on the inpatient population. The Pure-Vu System was used in two multi-center clinical studies in the EU and Israel, and also a single
center study in the US. The first study involved 49 subjects and was completed in the second quarter of 2016. The second study was completed
in June 2017 and involved 46 subjects. The subjects in these studies had a restricted diet for 18-24 hours and received a split dose
of 20mg of over-the-counter Dulcolax® (bisocodyl). They did not take any liquid purgative traditionally prescribed for bowel preparation.
The clinical data showing performance of the Pure-Vu System in these studies using the BBPS, is shown below. The clinical results from
the 2016 study were presented at the United European Gastroenterology Week (“UEGW”) in October 2016 and the second study
was published in the peer review journal Endoscopy in 2018. The clinical results from the 2017 study were presented at the UEGW
in October 2017, showing similar results, as shown below. This study has been published in Endoscopy, one of the top peer reviewed
journals in the EU.
The
third clinical study in the outpatient setting was presented at the American College of Gastroenterology (“ACG”) Annual Meeting
in October 2018. This study was performed in the United States and showed that the Pure-Vu System demonstrated safe and effective colonic
cleaning in the per protocol analysis of 46 subjects receiving a reduced prep regimen. The study was initially designed to compare two
different minimal bowel preparation regimens. Initially subjects were randomized to receive one of two minimal bowel preparations: three
doses of 17 gr. MiraLAX each mixed in 8.5 oz. of clear liquids or two doses of 7.5 oz. magnesium citrate (MgC) each taken with 19.5 oz.
of clear liquid. A study amendment early on replaced the MiraLAX arm, due to obvious inferior Boston Bowel Preparation Scale (“BBPS”),
a validated assessment instrument, scoring from the outset. The replacement arm consisted of two doses of 5 oz. MgC taken with 16 oz.
of clear liquid. All subjects were allowed to eat a low residue diet on the day prior and were asked to avoid seeds and nuts for five
days prior to their procedure. Study objectives evaluated for each study arm included: (1) improvement of colon cleansing from presentation
baseline to completion of the procedure (as assessed by the BBPS) through the use of the Pure-Vu System, (2) time required to reach the
cecum, (3) total procedure time, and (4) safety. No significant differences were found between the three groups with regard to demographics
or indication for colonoscopy. No serious adverse events related to the device were reported. The use of the Pure-Vu System enabled successful
intraprocedural cleansing of the colon and ensured successful completion of all colonoscopies performed (100% success rate). Although
there were only 46 subjects in the study, there was a highly significant difference in the study population (p value <0.0001) between
the baseline preparation and that seen post cleansing with the Pure-Vu System. The use of the Pure-Vu System added some time to the procedure,
but the total procedure time was approximately 25 minutes in this study.
REDUCE
Study
The
Reduce study (“Reliable Endoscopic Diagnosis Utilizing Cleansing Enhancement”), was first presented at Digestive Disease
Week (DDW) conference in May of 2019 and a full manuscript, titled “A multi-center, prospective, inpatient feasibility study to
evaluate the use of an intra-colonoscopy cleansing device to optimize colon preparation in hospitalized subjects: the REDUCE study”,
was published in the peer review journal BMC Gastroenterology in Q2 of 2021. The REDUCE study was a multi-center inpatient prospective
trial designed to evaluate Pure-Vu System’s ability to consistently and reliably improve bowel preparation to facilitate a successful
colonoscopy in a timely manner in patients who were indicated for a diagnostic colonoscopy. The study enrolled 95 hospitalized subjects
on schedule regardless of their level of pre-procedural bowel preparation. The primary endpoint for the study was improvement of bowel
preparation from baseline to post procedure as assessed by the Boston Bowel Preparation Scale (“BBPS”), which assesses the
cleanliness of the each of the three segments of the colon on a 0 to 3 scale and requires a minimum score of 2 or better per segment
to be considered adequately prepped.
For
inpatients that received the Pure-Vu System, adequate bowel preparation improved from a baseline of 38% to 96% in segments evaluated.
The analysis from the REDUCE study showed statistically significant improvement in every segment of the colon after Pure-Vu System use.
The per segment BBPS improved from an average baseline of 1.74, 1.74 and 1.5 to 2.89, 2.91 and 2.86 respectively with a statistically
significant p value of .001 for all three segments of the colon. The primary indication for patients enrolled in the study (68%) was
a GI bleed. Acute GI bleeds can lead to hemodynamic instability and is a critical population to treat in an urgent fashion. Physicians
were able to achieve a successful clinical outcome in 97% of subjects in the study.
The
chart below shows the outcome of the primary endpoint using the BBPS both pre and post use of the Pure-Vu System in a side-by-side fashion.
It can be seen from the data that the high cleansing level achieved with the Pure-Vu System is consistent across the various studies:
Current
Additional Clinical Studies
In Q2 2022, we completed the EU study of subjects who
have had a history of poor bowel preparation and were scheduled for either screening, diagnostic, or surveillance colonoscopy across two
sites, including the Radboud University Medical Center (Netherlands) and GastroZentrum Lippe (Germany). The subjects underwent a low volume
bowel preparation, with just 2x150ml picoprep. The subjects were also allowed to eat a low fiber diet for two days prior to the colonoscopy
as opposed to the typical clear liquid diet the day before a colonoscopy. The subjects then received intra-procedural bowel cleansing
with the Pure-Vu System. The primary endpoint for the study is improvement of the bowel preparation from baseline to post procedure as
assessed by the Boston Bowel Preparation Scale (BBPS), which assesses the cleanliness of each of the three segments of the colon on a
zero to three scale and requires a minimum score of two or better per segment to be considered adequately prepped. The results of the
study were presented at the Digestive Disease Week meeting in May 2022 and showed a statistically significant improvement of subjects
who were adequality prepped from a baseline of 31.8% to 97.7% after the use of Pure-Vu with a p-value of <0.0001.
Cost Effectiveness Analysis and Independent Studies
In 2021, we announced the publication of a sponsored
Pure-Vu System® Cost Effectiveness Analysis in the Journal of Cost Effectiveness and Resource Allocation, which is titled, “Colonoscopy
in poorly prepped colons. A cost effectiveness analysis comparing standard of care to a new cleansing technology.” This study
suggests that, assuming a national average compliance rate for colonoscopy in the U.S. at 60%, as reported by the American Cancer Society
in 2017, the use of Pure Vu has the potential to provide the US healthcare system lifetime savings of $833-$922 per patient depending
on the insurer when compared to the standard of care. Sponsorship of analysis and development of the manuscript was provided by us.
In 2021, we also announced the presentation of results
from an independent single-center study of the Pure-Vu System as an adjunct to colon cleansing in subjects with inadequate bowel preparation
(IBP) in a poster presentation at the 2021 American College of Gastroenterology (ACG) Annual Scientific Meeting.
In
the independent study, the Pure-Vu System was used in 40 subjects (14 inpatient procedures (35%) and 26 outpatient procedures (65%))
with IBP to complete the colonoscopy. The indication for colonoscopy was either diagnostic or colorectal cancer (CRC) screening/surveillance.
Pure-Vu was used as an adjunct to IBP to allow completion of procedure in 37 subjects. In subjects with IBP, the mean BBPS score improved
from 3.1 (range: 0-6) to 8.5 (range 5-9) after intra-procedural cleansing. Three subjects had active lower gastrointestinal bleeding
(LGIB), and the Pure-Vu System was used without bowel preparation to promptly detect the etiology and possibly treat. When used in emergency
colonoscopy without bowel preparation, procedures could be completed in all three subjects detecting and treating diverticular and post-polypectomy
bleeding in one subject each and diagnosing severe right sided ischemic colitis in another. The study authors concluded the utility of
the Pure-Vu System without prior bowel preparation in LGIB needs further study. Use of Pure-Vu System did not interfere with the performance
of endoscopic interventions including biopsy, cold/hot snare polypectomy, or EMR. Besides minor mucosal trauma in two cases, no major
complications were observed with the Pure-Vu System.
Further,
at the ACG meeting in October 2022, results from an independent single center in the VA system were presented on the use of Pure-Vu EVS
on 45 subjects over a 6-month period as either a rescue method for those with endoscopically visualized inadequate preparation or used
initially with those subjects with high suspicion for being poorly prepped. The study showed an improvement from an average of 4.8 on
the BBPS at baseline to 8.7 after the use of Pure-Vu EVS (below 6 is considered inadequate with 9 being the top of the range). The conclusion
from the investigator stated, “Use of this intraprocedural cleansing device increases examination quality, extends surveillance
intervals, improves resource utilization”.
Intellectual
Property
Our IP position comprises a portfolio covering highly innovative technologies rooted in systems and methods for cleaning body cavities
with or without the use of an endoscope. Currently we have eighteen granted or allowed patents in the U.S., nineteen patents in Asia (Japan,
China and Hong Kong), and ten patents in the EU, with patent protection until at least 2040. In addition, we have eleven pending patent
applications in various regions of the world with a focus on the U.S., EU and Japan. We have registered trademarks for Motus GI and for
the Pure-Vu System in the U.S., EU and other international jurisdictions. We also have a pending trademark application in the U.S. to
MICRO-PREP.
Our
portfolio of patents and patent applications focuses on cleaning body cavities in a safe and efficient manner, insertion, movement and
steering of an endoscopic device within the body cavity in a predetermined direction; coordinated positioning of an endoscope with a
suction device and cleaning systems with automatic self-purging features. Coverage includes critical aspects of our system that we believe
are key to cleaning the colon or other body cavities effectively and efficiently. These aspects include cleansing jet methodologies,
sensing and control of evacuation to avoid clogging, designs for easy attachment to endoscopes and cleaning segments under water.
Our
commercial success depends in part on our ability to obtain and maintain patent and other proprietary protection for Pure-Vu and to operate
without infringing the proprietary right of others and to prevent others from infringing our proprietary rights. We strive to protect
our intellectual property through a combination of patents and trademarks, as well as through confidentiality provisions in our contracts.
With respect to the Pure-Vu System, we endeavor to obtain and maintain patent protection in the United States and internationally on
identified and potentially patentable aspects of the system. We cannot be sure that the patents will be granted with respect to any patent
applications we may own or license in the future, nor can we be sure that our existing patents or any patents we may own or license in
the future will be useful in protecting our technology.
In
addition to patents, we rely on trade secrets and know-how to develop and maintain our competitive position. For example, significant
aspects of our proprietary technology platform are based on unpatented trade secrets and know-how. Trade secrets and know-how can be
difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements and invention
assignment agreements with our employees, consultants, scientific advisors, contractors and commercial partners. These agreements are
designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies
that are developed through a relationship with a third-party. We also seek to preserve the integrity and confidentiality of our data
and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology
systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and
we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered
by competitors. To the extent that our contractors use intellectual property owned by others in their work for us, disputes may arise
as to the rights in related or resulting know-how and inventions.
We
also plan to continue to seek trademark protection in the United States and outside of the United States where available and when appropriate.
We intend to use these registered marks in connection with our research and development as well as our product candidates.
Competition
We
do not believe that there are currently any direct competitors in the market, nor any known competing medical device under development,
using similar technology to our technology. Currently the major colonoscope manufacturers (i.e., Olympus Corp, Pentax Medical, Fujifilm
Medical) as well as some smaller equipment manufacturers (i.e., Medivators, Erbe) sell a lesser powered irrigation pump that can pump
fluid through the auxiliary water jet or working channel of a colonoscope. Potentially competitive is an intra-procedural device under
development by Medjet Ltd. MedJet’s device goes through the working channel of a scope, is used mostly for spot cleaning a small
amount of debris and does not have the capability to fully clean the colon of large amounts of fecal matter. The MedJet product also
requires the physician to remove it from the working channel during the procedure if they need to remove significant debris, polyps or
take a biopsy, impacting the workflow of the procedure. There is also a device under development by a company named OTTek Ltd. The device
is called the FIOT (Flow in Over Tube). The tube is noted as being able to create a channel between the endoscope and the inside of the
over tube to facilitate the removal of debris. The competitive products mentioned are not currently separately reimbursed by private
or government payors. There are over ten different preparation regimens used prior to colonoscopy today. Some are prescription medications
and others are over-the-counter. Typically, the over-the-counter regimens are not indicated for colonoscopy prep but for issues of motility,
such as constipation, but are still widely prescribed by physicians for colonoscopy prep. Depending on the insurance a patient has, the
prescription prep may be covered in part but many of them require the patient to pay out-of-pocket.
The
medical device and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We
have indirect competitors in a number of sectors, many of which have substantially greater name recognition, commercial infrastructures
and financial, technical and personnel resources than Motus GI. Currently, the colonoscopy market is dominated by Olympus Corp, who controls
a majority of the market, with Pentax Medical and FujiFilm Medical taking most of the rest of the U.S. colonoscope market. Boston Scientific,
Medtronic GI Solutions, Conmed Corporation, Steris, Ambu A/S, and other smaller players sell ancillary devices and accessories into the
marketplace as well. These established competitors may invest heavily to quickly discover and develop novel devices that could make our
Pure-Vu System obsolete or uneconomical. These include but are not limited to capsule endoscopy, virtual colonoscopy using CT scans,
etc. These technologies may require the same level of prep as conventional colonoscopies and if a polyp or abnormality is detected, the
patient may still need to undergo a colonoscopy. Other screening tests for colon cancer specifically include fecal occult blood tests
and DNA stool tests such as the Cologuard test from Exact Sciences. However, Cologuard is not a replacement for diagnostic colonoscopies
or surveillance colonoscopies in high-risk individuals and has a lower specificity than standard colonoscopies. While none of these testing
alternatives may ever fully replace the colonoscopy, over time, they may take market share away from conventional colonoscopies for specific
purposes and may lower the potential market opportunity for us.
Any
new product that competes with an approved product may need to demonstrate compelling advantages in efficacy, cost, convenience, tolerability
and safety to be commercially successful. Other competitive factors, including new competitive entrants, could force us to lower prices
or could result in reduced sales. In addition, new products developed by others could emerge as competitors to the Pure-Vu System. If
we are not able to compete effectively against our current and future competitors, our business will not grow and our financial condition
and operations will suffer.
Research
and Development
We
have research and development capabilities in electrical and mechanical engineering with laboratories in our facility in Israel for development
and prototyping, and electronics design and testing. We also use consultants and third-party design houses to complement our internal
capabilities.
We
have received, and may receive in the future, grants from the Government of the State of Israel through the Israeli National Authority
for Technological Innovation (the “IIA”) (formerly known as the Office of the Chief Scientist of the Ministry of Economy
and Industry (the “OCS”)), for the financing of a portion of our research and development expenditures pursuant to the Israeli
Law for the Encouragement of Research, Development and Technological Innovation in Industry 5744-1984 (the “Research Law”),
and the regulations previously promulgated thereunder, as well as the IIA’s rules and benefit tracks which apply to companies receiving
IIA funding (collectively, including the Research Law, the “IIA Regulations”).
As
of December 31, 2022, we had received grants from the IIA in the aggregate amount of $1.3 million and had a contingent obligation to
the IIA up to an aggregate amount of approximately $1.4 million (assuming no increase, per the IIA Regulations, as described below).
As of December 31, 2022, we paid a minimal amount to the IIA. We may apply for additional IIA grants in the future. However, as the funds
available for IIA grants out of the annual budget of the State of Israel are subject to the pre-approval of the IIA and have been reduced
in the past and may be further reduced in the future, we cannot predict whether we will be entitled to – or approved for –
any future grants, or the amounts of any such grants (if approved).
In
exchange for these grants, we are required to pay royalties to the IIA of 4% (which may be increased under certain circumstances) from
our revenues generated (in any fashion) from know-how developed using IIA grants(and any derivatives of such IIA funded know-how), up
to an aggregate of 100% (which may be increased under certain circumstances) of the U.S. dollar-linked value of the grant, plus interest
at the rate of 12-month LIBOR.
The
IIA Regulations also require that products developed with IIA grants be manufactured in Israel at a rate (scope) which will not be less
than the rate of manufacturing and added value in Israel that were set forth in the relevant grant applications submitted to the IIA.
Furthermore, the IIA Regulations require that the know-how resulting from research and development according to an IIA-approved plan,
not being the product developed within the framework of such approved plan, and any right deriving therefrom may not be transferred outside
of Israel (including by way of certain licenses), unless prior approval is received from the IIA. We received a general approval for
such transfer. The transfer outside of Israel of manufacturing which is connected with the IIA-funded knowhow at a greater scope than
the scope set forth in the general approval will result in a higher royalty repayment rate and may further result in increased royalties
(up to three times the aggregate amount of the IIA grants plus interest thereon). In addition, the transfer outside of Israel of IIA-funded
knowhow may trigger additional payments to the IIA (up to six times the aggregate amount of the IIA grants plus interest thereon). Even
following the full repayment of any IIA grants, we must nevertheless continue to comply with the requirements of the IIA Regulations.
The foregoing restrictions and requirements for payment may impair our ability to transfer or sell our technology assets outside of Israel
or to outsource or transfer development or manufacturing activities with respect to any IIA-funded know-how outside of Israel.
Furthermore,
companies that receive IIA funding are generally required to ensure that all rights in the IIA-backed product are retained by them. This
means that, generally, all know-how which is derived from the research and development conducted pursuant to an IIA approved plan, and
every right derived from it, must be owned by the recipient of the IIA funding from the date such know-how is generated. Companies that
receive IIA funding are further subject to reporting requirements and other technical requirements, which are intended to allow the IIA
to ensure that the IIA Regulations are being complied with.
If
we fail to comply with any of the conditions and restrictions imposed by the IIA Regulations, or by the specific terms under which we
received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain
circumstances, may be subject to criminal charges.
For
additional information, see “Part I—Item 1A—Risk Factors—Risks Related to Our Operations in Israel.”
Manufacturing
and Supply
We have established relationships with research facilities,
contract manufacturing organizations, or CMOs, and our collaborators to manufacture and supply our product for our initial U.S. market
launch targeting early adopter hospitals and for our broader commercialization. Currently, the workstation and loading fixture component
of our Pure-Vu System is manufactured by Sanmina Corporation at their facilities in Israel. We may enter into formal supply agreements
for the manufacture of the workstation component and loading fixture of our Pure-Vu System with Sanmina Corporation as we continue to
establish higher volume capabilities and our commercialization efforts grow. The disposable portion of the Pure-Vu EVS is manufactured
by Sterling Industries in their Michigan, U.S. facility. We entered into a supply agreement with Sterling Industries in Q2 of 2021. The
disposable portion of our Gen 2 Pure-Vu System is manufactured by Polyzen, Inc., at their facilities in North Carolina, U.S., pursuant
to a supply agreement we entered into with Polyzen, Inc. in September 2017. Both Sterling Industries and Polyzen use Medacys in Shenzhen,
China as key sub-supplier for the injection molded parts in the Pure Vu disposables. These manufacturing suppliers have extensive experience
in medical devices and in dealing with regulatory bodies and other competent entities. These suppliers have ISO 13485 certified quality
systems. We have an agreement in place with a third-party logistics provider in the U.S. who is ISO 13485 certified and specializes in
medical devices and equipment. They provide warehousing, shipping and back office support to meet our commercial needs.
For additional information, see “Part I—Item
1—Business—Research and Development” above, and “Part I—Item 1A—Risk Factors—Risks Related to
Our Operations in Israel.”
U.S.
Market Entry Strategy
Our initial launch strategy in the United States is
focused on the acute care hospital market. We have been building clinical champions amongst key Gastroenterologists, and other GI and
nursing floor leadership and staff. Additionally, we articulate the clinical and economic value of the Pure-Vu System technology to key
members of hospital administration. After a pre-defined product evaluation period, we seek to work within the Value Analysis Committee
approval process, currently utilized within most U.S. hospitals and integrated delivery networks (IDNs). Following successful implementation
at the flagship location within an IDN, we then seek to gain further expansion of the Pure-Vu System within other network hospital locations.
On September 29, 2022, the Company announced that it has officially been recognized as a sole source provider and small business by the
Veterans Health Administration (VHA). The VHA is the largest integrated health care system in the U.S., and provides care to over nine
million veterans. The special designation will provide the Company with direct access to the VHA’s procurement arm, thereby streamlining
the purchasing and contracting process. As we continue to grow our network expansion, we continue to support our customers with robust
training on the effective use of our Pure-Vu System technology through our training and in-servicing programs.
In addition to working with a third-party logistics
provider specializing in medical devices to provide front and back office support to successfully fulfill customer orders, our commercial
organization has implemented a robust customer relationship management tool to track account progress and help provide accurate forecasting
for operations. We anticipate the sales cycle to be in the range of approximately six months. Timing of hospital capital budget availability
may impact this anticipated cycle. Our primary focus is on gaining system placements in the acute care hospital market, driving utilization
of our Pure-Vu System disposable sleeve, growing top line revenues and appropriately scaling the commercial organization.
Market
Expansion Opportunities
While
our time, effort and attention are primarily focused on driving adoption in the U.S. hospital market, we have identified several follow-on
market expansion opportunities that are currently being evaluated, including the upper GI endoscopy and targeted outpatient markets,
as described below.
Upper
GI Endoscopy Market
In 2021, we announced that
we received 510(k) clearance from the FDA for a version of the Pure-Vu System that is compatible with gastroscopes used during upper gastrointestinal
(GI) endoscopy procedures to remove blood, blood clots and debris in order to provide a clear field-of-view for the endoscopist. The device
is designed to integrate with therapeutic gastroscopes to enable safe and rapid cleansing during the procedure, while preserving established
procedural workflow and techniques.
Upper GI bleeds occurred in the U.S. at a rate of
approximately 400,000 cases per year in 2019, according to iData Research Inc. Approximately 50% of these patients have blood and blood
clots that impair a physician’s view during the procedure, thereby making it difficult to rapidly identify the bleeding source.
We believe removing adherent blood clots from the field of view is a significant need in allowing a physician the ability to identify
and treat the bleed source. The mortality rate of this condition can reach up to approximately 13%, as noted in Thad Wilkins, MD, et al.,
American Family Physician (2012).
The Company has conducted a controlled series of Upper
GI initial pilot procedures in the US market, which is intended to inform the development of a Pure-Vu EVS version of the Upper GI solution
for eventual submission to FDA for marketing approval in the US. The Company successfully completed multiple pre-clinical tests in both
porcine and cadaver models to evaluate Pure-Vu EVS platform for use in upper GI bleeding with multiple U.S. physicians. The results of
these tests show that the Gastro version of Pure-Vu EVS can effectively break up and suction blood and blood clots, as well as frees up
a gastroscope’s working channel for other therapeutic tools. By eliminating the need to utilize existing irrigation and suction
through the working channel of the gastroscope, physicians can use tools in tandem with Pure-Vu EVS. For example, the use of snares to
break up large clots and then immediately suction out the smaller pieces using the large Pure-Vu EVS smart sense suction channel. In addition,
during cases with significant bleeding, Pure-Vu EVS allows the physician to clean the area of interest and immediately apply therapy to
achieve hemostasis, since the physician can have their therapeutic device prepositioned in the gastroscope’s working channel and
deliver it before the blood flow covers the area of interest after cleansing.
The Company plans on conducting additional pre-clinical
and clinical tests for Pure-Vu EVS Gastro device in the first half of 2023. The results of these tests are expected to support submission
of a 510(K) application to the U.S. Food and Drug Administration (FDA) in the second half of 2023.
High
Medical Need Outpatient Market
Our
targeted Outpatient market focused on those patients at risk for inadequate prep presents a large potential commercial market opportunity
for the Pure-Vu System. Based on our review and analysis of 2019 market data and 2021 projections for the U.S. and Europe, as obtained
from iData Research Inc., and estimates from HRA Healthcare Research & Analytics - Market Research, May 2015, we believe there are
~4.7M targeted outpatient colonoscopies performed in the U.S. each year and ~11.7M worldwide. These colonoscopy patients can often times
have an inadequate preparation, which may lead to repeat procedures earlier than the medical guidelines suggest. We believe use of the
Pure-Vu System has the potential to reduce the need for such repeat procedures if used for patients at risk for inadequate prep in the
outpatient colonoscopy market. We may seek to obtain reimbursement coverage for this market through exploration of programs with both
private and public payers focused on new technology platforms.
Additionally,
if we choose to explore either market, we may be able to leverage our existing hospital and physician relationships developed through
our inpatient colonoscopy sales force to facilitate such expansion.
In 2021, the Center for Medicare and Medicaid
Services (“CMS”) granted the Pure-Vu System a permanent ICD-10 code for inpatient uses. This coding effort is part of a broader strategy
to potentially obtain reimbursement for certain inpatient and outpatient procedures where the Pure-Vu System can help facilitate
visualization of inadequately prepared colons in high medical need patients.
Employees
As
of December 31, 2022, we had 43 full time employees and 6 part time employees. All of our employees are engaged in administration, finance, clinical,
research and development, engineering, regulatory or sales and marketing functions. We believe our relations with our employees are
good. In addition, we utilize and will continue to utilize consultants, clinical research organizations and third parties to perform
our pre-clinical studies, clinical studies, manufacturing and regulatory functions.
Under
Israeli law, we and our employees in Israel are subject to Israeli protective labor provisions governing certain matters such as the
length of the workday, minimum wages for employees, annual leave, sick pay, determination of severance pay and advance notice of termination
of employment, as well as the procedures for hiring and dismissing employees and equal opportunity and anti-discrimination laws. While
none of our employees in Israel is party to any collective bargaining agreements, expansion orders issued by the Israeli Ministry of
Economy and Industry may make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters
such as the length of the workday and week, recuperation pay, travel expenses and pension rights. We have never experienced labor-related
work stoppages and believe that our good and positive relationships with our employees are a significant part of our operations.
Israeli
law generally requires the payment of severance pay by employers upon the retirement, death or dismissal of an employee. We fund our
ongoing Israeli severance obligations by making monthly payments to the employees’ respective insurance policies. All of our current
employees in Israel have agreed, as part of their employment agreements, that, upon termination of their employment, they will be entitled
to receive only the amounts accrued in the insurance policies with respect to severance pay.
Furthermore,
Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the U.S.
Social Security Administration. These amounts also include payments for national health insurance.
Regulatory
Matters
Government
Regulation
Our
business is subject to extensive federal, state, local and foreign laws and regulations, including those relating to the protection of
the environment, health and safety. Some of the pertinent laws have not been definitively interpreted by the regulatory authorities or
the courts, and their provisions are open to a variety of subjective interpretations. In addition, these laws and their interpretations
are subject to change, or new laws may be enacted.
Both
federal and state governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened
civil and criminal enforcement efforts. We believe that we have structured our business operations and relationships with our customers
to comply with all applicable legal requirements. However, it is possible that governmental entities or other third parties could interpret
these laws differently and assert otherwise. We discuss below the statutes and regulations that are most relevant to our business.
U.S.
Food and Drug Administration regulation of medical devices.
The
FDCA and FDA regulations establish a comprehensive system for the regulation of medical devices intended for human use. Our products
include medical devices that are subject to these, as well as other federal, state, local and foreign, laws and regulations. The FDA
is responsible for enforcing the laws and regulations governing medical devices in the United States.
The
FDA classifies medical devices into one of three classes (Class I, Class II, or Class III) depending on their level of risk and the types
of controls that are necessary to ensure device safety and effectiveness. The class assignment is a factor in determining the type of
premarketing submission or application, if any, that will be required before marketing in the United States.
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Class
I devices present a low risk and are not life-sustaining or life-supporting. The majority of Class I devices are subject only to
“general controls” (e.g., prohibition against adulteration and misbranding, registration and listing, good manufacturing
practices, labeling, and adverse event reporting. General controls are baseline requirements that apply to all classes of medical
devices.) |
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Class
II devices present a moderate risk and are devices for which general controls alone are not sufficient to provide a reasonable assurance
of safety and effectiveness. Devices in Class II are subject to both general controls and “special controls” (e.g., special
labeling, compliance with performance standards, and post market surveillance. Unless exempted, Class II devices typically require
FDA clearance before marketing, through the premarket notification (510(k)) process.) |
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Class
III devices present the highest risk. These devices generally are life-sustaining, life-supporting, or for a use that is of substantial
importance in preventing impairment of human health or present a potential unreasonable risk of illness or injury. Class III devices
are devices for which general controls, by themselves, are insufficient and for which there is insufficient information to determine
that application of special controls would provide a reasonable assurance of safety and effectiveness. Class III devices are subject
to general controls and typically require FDA approval of a premarket approval (“PMA”) application before marketing. |
Unless
it is exempt from premarket review requirements, a medical device must receive marketing authorization from the FDA prior to being commercially
marketed, distributed or sold in the United States. The most common pathways for obtaining marketing authorization are 510(k) clearance
and PMA.
510(k)
pathway
The
510(k) review process compares a new device to a legally marketed device. Through the 510(k) process, the FDA determines whether a new
medical device is “substantially equivalent” to a legally marketed device (i.e., predicate device) that is not subject to
PMA requirements. “Substantial equivalence” means that the proposed device has the same intended use as the predicate device,
and the same or similar technological characteristics, or if there are differences in technological characteristics, the differences
do not raise different questions of safety and effectiveness as compared to the predicate, and the information submitted in the 510(k)
demonstrates that the proposed device is as safe and effective as the predicate device.
To
obtain 510(k) clearance, a company must submit a 510(k) application containing sufficient information and data to demonstrate that its
proposed device is substantially equivalent to a legally marketed predicate device. These data generally include non-clinical performance
testing (e.g., software validation, animal testing electrical safety testing), but may also include clinical data. Typically, it takes
three to twelve months for the FDA to complete its review of a 510(k) submission; however, it can take significantly longer and clearance
is never assured. During its review of a 510(k), the FDA may request additional information, including clinical data, which may significantly
prolong the review process. After completing its review of a 510(k), the FDA may issue an order, in the form of a letter, that finds
the device to be either (i) substantially equivalent and states that the device can be marketed in the United States, or (ii) not substantially
equivalent and states that device cannot be marketed in the United States. Depending upon the reasons for the not substantially equivalent
finding, the device may need to be approved through the PMA pathway (discussed below) prior to commercialization.
After
a device receives 510(k) clearance, any modification that could significantly affect the safety or effectiveness of the device, or that
would constitute a major change in its intended use, including significant modifications to any of our products or procedures, requires
submission and clearance of a new 510(k) or approval of a PMA. The FDA relies on each manufacturer to make and document this determination
initially, but the FDA can review any such decision and can disagree with a manufacturer’s determination. Modifications meeting
certain conditions may be candidates for a streamlined FDA review known as Special 510(k) review, which the FDA intends to process within
30 days of receipt. If a device modification requires the submission of a 510(k), but the modification does not affect the intended use
of the device or alter the fundamental technology of the device, then summary information that results from the design control process
associated with the cleared device can serve as the basis for clearing the application. A Special 510(k) allows a manufacturer to declare
conformance to design controls without providing new data. When a modification involves a change in material, the nature of the “new”
material will determine whether a traditional or Special 510(k) is necessary. An Abbreviated 510(k) is another type of 510(k) that is
intended to streamline the review of data through the reliance on one or more FDA-recognized consensus standards, special controls established
by regulation, or FDA guidance documents. In most cases, an Abbreviated 510(k) includes one or more declarations of conformity to an
FDA-recognized consensus standard. We may also make minor product enhancements that we believe do not require new 510(k) clearances.
If the FDA disagrees with our determination regarding whether a new 510(k) clearance was required for these modifications, we may need
to cease marketing and/or recall the modified device. The FDA may also subject us to other enforcement actions, including, but not limited
to, issuing a warning letter or untitled letter to us, seizing our products, imposing civil penalties, or initiating criminal prosecution.
Premarket
approval pathway
Unlike
the comparative standard of the 510(k) pathway, the PMA approval process requires an independent demonstration of the safety and effectiveness
of a device. PMA is the most stringent type of device marketing application required by the FDA. PMA approval is based on a determination
by the FDA that the PMA contains sufficient valid scientific evidence to ensure that the device is safe and effective for its intended
use(s). A PMA application generally includes extensive information about the device including the results of clinical testing conducted
on the device and a detailed description of the manufacturing process.
After
a PMA application is accepted for review, the FDA begins an in-depth review of the submitted information. FDA regulations provide 180
days to review the PMA and make a determination; however, in reality, the review time is normally longer (e.g., 1-3 years). During this
review period, the FDA may request additional information or clarification of information already provided. Also during the review period,
an advisory panel of experts from outside the FDA may be convened to review and evaluate the data supporting the application and provide
recommendations to the FDA as to whether the data provide a reasonable assurance that the device is safe and effective for its intended
use. In addition, the FDA generally will conduct a preapproval inspection of the manufacturing facility to ensure compliance with QSR,
which imposes comprehensive development, testing, control, documentation and other quality assurance requirements for the design and
manufacturing of a medical device.
Based
on its review, the FDA may (i) issue an order approving the PMA, (ii) issue a letter stating the PMA is “approvable” (e.g.,
minor additional information is needed), (iii) issue a letter stating the PMA is “not approvable,” or (iv) issue an order
denying PMA. A company may not market a device subject to PMA review until the FDA issues an order approving the PMA. As part of a PMA
approval, the FDA may impose post-approval conditions intended to ensure the continued safety and effectiveness of the device including,
among other things, restrictions on labeling, promotion, sale and distribution, and requiring the collection of additional clinical data.
Failure to comply with the conditions of approval can result in materially adverse enforcement action, including withdrawal of the approval.
Most
modifications to a PMA approved device, including changes to the design, labeling, or manufacturing process, require prior approval before
being implemented. Prior approval is obtained through submission of a PMA supplement. The type of information required to support a PMA
supplement and the FDA’s time for review of a PMA supplement vary depending on the nature of the modification.
Clinical
trials
Clinical
trials of medical devices in the United States, including clinical studies that assess new or modified uses for already
marketed medical devices, are governed by the FDA’s Investigational Device Exemption (“IDE”) regulation.
This regulation places significant responsibility on the sponsor of the clinical study including, but not limited to, choosing qualified
investigators, monitoring the trial, submitting required reports, maintaining required records, and assuring investigators obtain informed
consent, comply with the study protocol, control the disposition of the investigational device, submit required reports, etc.
Clinical
trials of significant risk devices (e.g., implants, devices used in supporting or sustaining human life, devices of substantial importance
in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health) require FDA and Institutional
Review Board (“IRB”) approval prior to starting the trial. FDA approval is obtained through submission of an IDE application.
Clinical trials of non-significant risk (“NSR”), devices (i.e., devices that do not meet the regulatory definition of a significant
risk device) only require IRB approval before starting. The clinical trial sponsor is responsible for making the initial determination
of whether a clinical study is significant risk or NSR; however, a reviewing IRB and/or FDA may review this decision and disagree with
the determination.
An
IDE application must be supported by appropriate data, such as performance data, animal and laboratory testing results, showing that
it is safe to evaluate the device in humans and that the clinical study protocol is scientifically sound. There is no assurance that
submission of an IDE will result in the ability to commence clinical trials. Additionally, after a trial begins, the FDA may place it
on hold or terminate it if, among other reasons, it concludes that the clinical subjects are exposed to an unacceptable health risk.
As
noted above, the FDA may require a company to collect clinical data on a device in the post-market setting.
The
collection of such data may be required as a condition of PMA approval. The FDA also has the authority to order, via a letter, a post-market
surveillance study for certain devices at any time after they have been cleared or approved.
Similar
requirements may be applicable in other countries and jurisdictions, including in the European Economic Area or EEA (which includes the
27 EU Member States as well as Iceland, Liechtenstein and Norway) and in the United Kingdom.
Pervasive
and continuing FDA regulation
After
a device is placed on the market, regardless of its classification or premarket pathway, numerous additional FDA requirements generally
apply. These include, but are not limited to:
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Establishment
registration and device listing requirements; |
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Quality
System Regulation (“QSR”), which governs the methods used in, and the facilities and controls used for, the design, manufacture,
packaging, labeling, storage, installation, and servicing of finished devices; |
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Labeling
requirements, which mandate the inclusion of certain content in device labels and labeling, and generally require the label and package
of medical devices to include a unique device identifier (“UDI”), and which also prohibit the promotion of products for
uncleared or unapproved, i.e., “off-label,” uses; |
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Medical
Device Reporting (“MDR”) regulation, which requires that manufacturers and importers report to the FDA if their device
may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a
death or serious injury if it were to recur; and |
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Reports
of Corrections and Removals regulation, which requires that manufacturers and importers report to the FDA recalls (i.e., corrections
or removals) if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a
risk to health; manufacturers and importers must keep records of recalls that they determine to be not reportable. |
The
FDA enforces these requirements by inspection and market surveillance. Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, which may include, but is not limited to, the following sanctions:
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Untitled
letters or warning letters; |
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Fines,
injunctions and civil penalties; |
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Recall
or seizure of our products; |
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Operating
restrictions, partial suspension or total shutdown of production; |
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Refusing
our request for 510(k) clearance or premarket approval of new products; |
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Withdrawing
510(k) clearance or premarket approvals that are already granted; and |
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Criminal
prosecution. |
We
are subject to either announced or unannounced device inspections by the FDA, as well as other regulatory agencies overseeing the implementation
of and compliance with applicable state public health regulations. These inspections may include our suppliers’ facilities.
International
International
sales of medical devices are subject to foreign government regulations, which vary substantially from country to country. In order to
market our products in other countries, we must obtain regulatory approvals or certifications and comply with extensive safety and quality
regulations in those countries. The time required to obtain approval or certification to market our products in a foreign country may
be longer or shorter than that required for FDA clearance or approval, and the requirements may differ. Medical device manufacturers
intending to market medical devices in the European Economic Area (the “EEA”), are required to affix the CE Mark to their
medical devices, often after the intervention of a Notified Body and the issuing of a CE Certificate of Conformity. Many other countries,
such as Australia, India, New Zealand, Pakistan and Sri Lanka, accept CE Certificates of Conformity or FDA clearance or approval, although
others, such as Brazil, Canada and Japan require separate regulatory filings.
The
EU Medical Devices Regulation (Regulation 2017/745 of the European Parliament and of the Council of April 5, 2017 on medical devices),
or “EU MDR”, sets out the basic regulatory framework currently applicable to medical devices in the EEA. The EU MDR became
applicable on May 26, 2021, repealing the prior Council Directive 93/42/EEC, or the “EU MDD”, which had been regulating medical
devices in the EEA for the past over 20 years. This represented a major change in the regulatory landscape of medical devices in the
EEA. The EU MDR sets out certain transitional provisions that allow for medical devices covered by the repealed EU MDD (called “legacy
devices”) to still be marketed in the EEA for a certain period of time.
In
the EEA, medical devices are currently required to comply with the General Safety and Performance Requirements (or “GSPR”)
in Annex I of the EU MDR (for legacy devices, this corresponds to the Essential Requirements of Annex I of the EU MDD). Compliance with
GSPR is a prerequisite for us to be able to affix the CE Mark to our medical devices, without which they cannot be commercialized in
the EEA. To demonstrate compliance with the GSPR and obtain the right to affix the CE Mark, we must undergo a conformity assessment procedure,
which varies according to the type of medical device and its classification. In the EEA medical devices are classified into four different
risk classes: Class I (which is further divided into (i) devices that are placed on the market in sterile condition, (ii) have a measuring
function, (iii) are reusable surgical instruments, and (iv) all others), IIa, IIb and III.
Apart
from low risk medical devices (Class I if they have no measuring function, are not sterile, and are not reusable surgical instruments),
where the manufacturer can issue an EU Declaration of Conformity based on a self-assessment of the conformity of the devices with the
GSPR, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization accredited by the competent
authority of an EEA Member State to conduct conformity assessments. The Notified Body would typically audit and examine the products’
technical documentation and the quality management system for the manufacture, design and final inspection of our medical devices before
issuing a CE Certificate of Conformity. After receiving the CE Certificate of Conformity from the Notified Body upon successful completion
of the conformity assessment, we can draw up an EU Declaration of Conformity which allows us to affix the CE Mark to our products.
Under
the EU MDR, confirmation of conformity with relevant GSPR under the normal conditions of intended use of the device, and the evaluation
of the undesirable side-effects and of the acceptability of the benefit-risk-ratio, shall be based on clinical data providing sufficient
clinical evidence, including where applicable post-market data. Manufacturers are required to specify and justify the level of clinical
evidence necessary to demonstrate conformity with the relevant GSPR. This level of clinical evidence must be appropriate in view of the
characteristics of the device and its intended purpose.
Besides
its involvement in the initial conformity assessment procedure, the Notified Body is required to carry out an annual audit (surveillance
audit) and is also required to randomly perform unannounced audits at least once every five years. The quality management system and
technical documentation of manufacturers will be required to be recertified periodically, as CE Certificates of Conformity issued by
a Notified Body remain valid only for the period indicated in them, in no case exceeding five years.
The
conduct of clinical studies in the EEA is governed by detailed regulatory obligations. These include the requirement of prior authorization
by the Competent Authorities of the country in which the study takes place and the requirement to obtain a positive opinion from the
relevant competent Ethics Committee. The conduct of clinical studies (called “clinical investigations” under the EU MDR)
is now mandatory for implantable devices and Class III medical devices (with certain exemptions).
The
EU MDR also provides various requirements relating to post-market surveillance and vigilance, including the obligation for manufacturers
to implement a post-market surveillance system, in a manner that is proportionate to the risk class and appropriate for the type of device.
Once a device is on the EEA market, manufacturers must comply with certain vigilance requirements, such as the reporting serious incidents
and field safety corrective actions (even those occurring outside the EEA) to the relevant competent authorities.
Further,
the advertising and promotion of our products in the EEA is subject to the EU MDR, to the national laws of individual EEA Member States,
Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as
well as other EEA Member State laws and industry codes governing the advertising and promotion of medical devices. These laws may limit
or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities
with healthcare professionals.
The
EU MDR, when compared with the EU MDD, imposes increased compliance obligations for us to access and then remain on the EEA market. Our
current CE Certificate of Conformity is valid until May 27, 2024 in accordance with Article 120 of the EU MDR. This means that, if we
want to keep selling our product in the EEA without interruption, we need to obtain a new CE Certificate of Conformity under the EU MDR
before such expiry date. There are currently a relatively small number of Notified Bodies that have been accredited to conduct conformity
assessments under the EU MDR. This may significantly delay our conformity assessment procedures in the future.
On
February 16, 2023, the European Parliament adopted a legislative proposal for the amendment of the EU MDR, which is expected to
modify the current transitional provisions of Article 120 of the EU MDR allowing an extension in the validity of certain CE
Certificates of Conformity until 26 May 2026, 31 December 2027 and 31 December 2028 (depending on the risk classification of the
devices and subject to certain conditions). The Council of the European Union still needs to formally accept the Parliament’s
position, after which the amendment will be published in the Official Journal of the European Union following the signature of the
act. This amendment to the EU MDR may have an impact in our current CE Certificate of Conformity, by extending its validity beyond
May 27, 2024.
Brexit
The
UK withdrew from the EU on January 31, 2020 (the withdrawal is commonly referred to as “Brexit”). Brexit has created significant
uncertainty concerning the future relationship between the UK and the EU. On December 24, 2020, the EU and UK reached an agreement in
principle on the framework for their future relationship, the “EU-UK Trade and Cooperation Agreement”. The Agreement primarily
focuses on ensuring free trade between the EU and the UK in relation to goods, but does not specifically address medical devices. After
the UK’s withdrawal from the EU, Great Britain (England, Scotland and Wales) is treated by the EU as a third country. Northern
Ireland continues, with regard to EU regulations, to follow the EU regulatory rules. In light of the fact that the CE marking process
is set out in EU law, which no longer applies in the UK, the UK has devised a new route to market culminating in a UK Conformity Assessed
(UKCA) mark to replace the CE Mark. The route to market and the UKCA marking requirements are based on the requirements of the EU MDD.
Northern Ireland continues to be covered by the regulations governing CE Marks. As part of the Agreement, the EU and the UK have agreed
to continue to recognize declarations of conformity based on a self-assessment in the other territory.
Since
January 1, 2021, the Medical Devices (EU Exit) Regulations 2020 introduced a number of changes to how medical devices are placed on the
Great Britain’s market. The CE marking will continue to be recognized in Great Britain until July 2024, and certificates issued
by Notified Bodies designated in the EEA will continue to be valid for the Great Britain market until July 2024. From July 2024, when
the future UK Medical Device Regulations are expected to become applicable, manufacturers will have to obtain the UKCA mark to place
a medical device on the Great Britain market. There are certain transition periods for existing CE and UKCA marked devices.
Other
Regulatory Matters
Manufacturing,
sales, promotion and other activities following product approval are also subject to regulation by numerous regulatory authorities in
addition to the FDA, including, in the United States, the Centers for Medicare & Medicaid Services (“CMS”), other divisions
of the Department of Health and Human Services, the Department of Justice, the Consumer Product Safety Commission, the Federal Trade
Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency, and state and local governments.
If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional
laws and requirements apply. Manufacturing, sales, promotion and other activities are also potentially subject to federal and state consumer
protection and unfair competition laws.
The
distribution of medical device products is subject to additional requirements and regulations, including extensive record-keeping, licensing,
storage and security requirements intended to prevent the unauthorized sale of medical device products.
Third-Party
Payor Coverage and Reimbursement
Our
Pure-Vu System and the procedure to cleanse the colon in preparation for colonoscopy are not currently separately reimbursable through
private or governmental third-party payors in any country. Significant uncertainty exists as to whether coverage and separate reimbursement
of the Pure-Vu System will develop; but we sought new technology payments from Medicare under the hospital Inpatient and Outpatient Prospective
Payment Systems and were denied in 2021. We intend to seek separate reimbursement for future versions of the system through private or
governmental third-party payors in the future. In both the United States and foreign markets, our ability to commercialize the Pure-Vu
System successfully, and to attract commercialization partners for the Pure-Vu System, depends in part on the availability of adequate
coverage and reimbursement from third-party payors, including, in the United States, governmental payors such as the Medicare and Medicaid
programs, managed care organizations, and private health insurers. Medicare is a federally funded program managed by the CMS, through
local contractors that administer coverage and reimbursement for certain healthcare items and services furnished to the elderly and disabled.
Medicaid is an insurance program for certain categories of patients whose income and assets fall below state defined levels and who are
otherwise uninsured, and it is both federally and state funded and managed by each state. The federal government sets general guidelines
for Medicaid and each state creates specific regulations or other guidelines that govern its individual program. Each payor, whether
governmental or private, has its own process and standards for determining whether it will cover and reimburse a procedure or particular
product. Private payors often rely on the lead of the governmental payors in rendering coverage and reimbursement determinations. Therefore,
achieving favorable Medicare coverage and reimbursement is usually a significant gating issue for successful introduction of a new product.
The competitive position of the Pure-Vu System will depend, in part, upon the extent of coverage and adequate reimbursement for such
product and for the procedures in which such product is used. Prices at which we or our customers seek reimbursement for the Pure-Vu
System can be subject to challenge, reduction or denial by the government and other payors.
In
the event we do receive approval for third-party or government reimbursement for our product, the marketability of such product may suffer
if the government and commercial third-party payors fail to provide adequate coverage and reimbursement. An emphasis on cost containment
measures in the United States has increased and we expect it will continue. Coverage policies and third-party reimbursement rates may
change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which we receive regulatory
approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
State
and federal healthcare reform measures may be adopted in the future, any of which may result in additional reductions in Medicare and
other healthcare funding and otherwise affect the prices we may obtain for any of our product candidates for which we may obtain regulatory
approval or the frequency with which any such product candidate is prescribed or used.
In
addition, in some foreign countries, the proposed pricing for a medical device must be approved before it may be lawfully marketed.
The requirements governing medical device pricing vary widely from country to country. For example, the EEA provides options for its
Member States to restrict the range of medical devices for which their national health insurance systems provide reimbursement and
to control the prices of medical devices. In some countries, we may be required to conduct a clinical study or other studies that
compare the cost-effectiveness of any of our medical devices to other therapies in order to obtain or maintain reimbursement or
pricing approval. Other EEA countries allow companies to fix their own prices for medical devices, but monitor and control company
profits. The downward pressure on health care costs has become very intense. As a result, increasingly high barriers are being
erected to the entry of new devices. In addition, in some countries, cross-border imports from low-priced markets exert a commercial
pressure on pricing within a country.
In
recent years, a number of EEA countries have introduced so-called health technology assessments (HTA). HTA measures the added value of
a new health technology, in our case a medical device, compared to existing ones. HTA’s assessment include cost implications for
the patient and its impact on the organization of healthcare systems in the administration of treatment. An EU Regulation on HTA entered
into force in January 2022 and will be applied three years later (January 2025). It offers the possibility for EEA countries’ HTA
bodies to conduct Joint Clinical Assessments of new high-risk medical devices.
Historically,
products launched in the European Union do not follow price structures of the United States and generally tend to be priced significantly
lower. Publication of discounts by third-party payors or authorities may lead to further pressure on the prices or reimbursement levels
within the country of publication and other countries. If pricing is set at unsatisfactory levels or if reimbursement of our medical
devices is unavailable or limited in scope or amount, our revenues from sales by us or our strategic partners and the potential profitability
of any of our medical devices in those countries would be negatively affected.
Other
Healthcare Laws and Compliance Requirements
Healthcare
providers, physicians, and third-party payors play a primary role in the recommendation and use of our current products and any future
products for which we may obtain marketing approval for which payment is or may become available under any federal health care program.
Arrangements with third party payors, healthcare providers and physicians will expose us to broadly applicable fraud and abuse and other
healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we market,
sell and distribute products. In the United States, restrictions under applicable federal and state healthcare laws and regulations include,
but are not limited to, the following:
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The
federal Anti-Kickback Statute (“AKS”) makes it illegal for any person, including a device manufacturer (or a party acting
on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration, directly or indirectly, in cash or in kind,
that is intended to induce or reward, or in return for, the purchase, lease, recommendation, order, or arranging for the purchase, lease,
or order, of any health care product or service for which payment may be made under a federal healthcare program, such as Medicare or
Medicaid. The term “remuneration” has been broadly interpreted to include anything of value, including cash, improper discounts,
and free or reduced-price items and services. Violations of this law are punishable by up to ten years in prison, criminal fines, administrative
civil money penalties and exclusion from participation in federal healthcare programs. In addition, a person or entity does not need
to have actual knowledge of the statute or specific intent to violate it. There are a number of statutory exceptions and regulatory safe
harbors protecting from prosecution some common activities like discounts, or engaging health care professionals to provide services
to the company ; however, those exceptions and safe harbors are drawn narrowly, and there is no exception or safe harbor for many
common business activities like educational grants or reimbursement support programs. Failure to meet all of the requirements of a particular
statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute, but the legality
of the arrangement will be evaluated on a case by case basis based on the totality of the facts and circumstances. |
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The
federal civil False Claims Act imposes liability, including through civil whistleblower or qui tam actions, against individuals or
entities (including manufacturers) for, among other things, knowingly presenting, or causing to be presented, false or fraudulent
claims for payment of government funds, knowingly making, using, or causing to be made or used a false statement or record material
to an obligation to pay money to the government, or knowingly concealing or knowingly and improperly avoiding, decreasing or concealing
an obligation to pay money to the federal government. Penalties for a False Claims Act violation include three times the actual damages
sustained by the government, plus significant mandatory penalties per false claim or statement for violations for each separate false
claim, and the potential for exclusion from participation in federal healthcare programs. Conduct that violates the False Claims
Act also may implicate various federal criminal statutes. The government may deem manufacturers to have “caused” the
submission of false or fraudulent claims by, for example, providing inaccurate billing or coding- information to customers or promoting
a product off-label. Claims which include items or services resulting from a violation of the federal Anti-Kickback Statute also
are deemed false or fraudulent claims for purposes of the False Claims Act. Our marketing and activities relating to the reporting
of wholesaler or estimated retail prices for our products and other information affecting federal, state and third-party reimbursement
for our products, and the sale and marketing of our product and any future product candidates, are subject to scrutiny under this
law. |
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The
Health Insurance Portability and Accountability Act of 1996, and its implementing regulations (collectively, “HIPAA”)
imposes criminal liability for knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit
program, including private third-party payers; knowingly and willfully embezzling or stealing from a healthcare benefit program;
willfully obstructing a criminal investigation of a healthcare offense; and knowingly and willfully falsifying, concealing, or covering
up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment
for healthcare benefits, items or services. HIPAA also imposes certain obligations, including contractual terms and technical safeguards,
with respect to safeguarding the privacy, security and transmission of individually identifiable health information. |
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The
federal Physician Payments Sunshine Act and its implementing regulations, which requires that certain manufacturers of devices and
medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain
exceptions) to report information related to certain payments or other transfers of value made or distributed, directly or indirectly,
to physicians, physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified
nurse midwives, and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family
members. |
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Analogous
state and foreign fraud and abuse laws and regulations, such as anti-kickback and false claims laws, which may apply to sales and
marketing arrangements and claims involving healthcare items or services reimbursed by any third-party payor, including commercial
insurers, and state and local laws that require manufacturers to report information related to payments and other transfers of value
to health care providers and state and local laws that require manufacturers to implement compliance programs or marketing codes.
State laws governing the privacy and security of health information in certain circumstances, many of which differ from each other
in significant ways and often are not preempted by federal laws, thus complicating compliance efforts. Such laws are generally broad
and are enforced by various state agencies and private actions. |
Interactions
between medical devices manufacturers and physicians are also governed by strict laws, regulations, industry self-regulation codes of
conduct and physicians’ codes of professional conduct developed at both EEA level and in the individual EEA Member States. The
provision of benefits or advantages to physicians to induce or encourage the recommendation, endorsement, purchase, supply, order or
use of medical devices is generally prohibited in the EEA. Breach of these laws could result in substantial fines and imprisonment. Payments
made to physicians in certain EEA Member States also must be publicly disclosed. Moreover, agreements with physicians must often be the
subject of prior notification and approval by the physician’s employer, their competent professional organization, and/or the competent
authorities of the individual EEA Member States. Failure to comply with these requirements could result in reputational risk, public
reprimands, administrative penalties, fines or imprisonment.
In
addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct
our business. HIPAA imposes certain requirements relating to the privacy, security and transmission of individually identifiable health
information, which are applicable to “business associates”—certain persons or entities that create, receive, maintain
or transmit protected health information in connection with providing a specified service or performing a function on behalf of a covered
entity.
Further,
the legislative and regulatory landscape for privacy and data security continues to evolve, and there has been an increasing amount of
focus on privacy and data security issues with the potential to affect our business. Congress and state legislatures also have been considering
and enacting new legislation relating to privacy and data protection. For example, in California, the California Consumer Privacy Act
(“CCPA”) created new transparency requirements and granted California residents several new rights with regard their personal
information. In addition, in November 2020, California voters approved the California Privacy Rights Act (“CPRA”) ballot
initiative which introduced significant amendments to the CCPA and established and funded a dedicated California privacy regulator, the
California Privacy Protection Agency (“CPPA”). The amendments introduced by the CPRA go into effect on January 1, 2023, and
new implementing regulations are expected to be introduced by the CPPA. Failure to comply with the CCPA may result in, among other things,
significant civil penalties and injunctive relief, or potential statutory or actual damages. In addition, California residents have the
right to bring a private right of action in connection with certain types of incidents. These claims may result in significant liability
and potential damages. We implemented processes to manage compliance with the CCPA and continue to assess the impact of the CPRA, and
other state legislation, on our business as additional information and guidance becomes available.
The
Federal Trade Commission (“FTC”) also sets expectations for failing to take appropriate steps to keep consumers’ personal
information secure, or failing to provide a level of security commensurate to promises made to individual about the security of their
personal information (such as in a privacy notice) may constitute unfair or deceptive acts or practices in violation of Section 5(a)
of the Federal Trade Commission Act (“FTC Act”). The FTC expects a company’s data security measures to be reasonable
and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and
the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered
sensitive data that merits stronger safeguards. With respect to privacy, the FTC also sets expectations that companies honor the privacy
promises made to individuals about how the company handles consumers’ personal information; any failure to honor promises, such
as the statements made in a privacy policy or on a website, may also constitute unfair or deceptive acts or practices in violation of
the FTC Act. While we do not intend to engage in unfair or deceptive acts or practices, the FTC has the power to enforce promises as
it interprets them, and events that we cannot fully control, such as data breaches, may be result in FTC enforcement. Enforcement by
the FTC under the FTC Act can result in civil penalties or enforcement actions.
EEA
Member States and other jurisdictions where we operate have adopted data protection laws and regulations, which impose significant compliance
obligations. For example, the General Data Protection Regulation (or “GDPR”) imposes strict obligations and restrictions
on the ability to collect, analyze and transfer personal data, especially in the case of sensitive personal data (such as health data
from clinical investigations) and safety reporting. The GDPR also imposes strict rules on the transfer of personal data out of the EEA,
including to the U.S., and fines and penalties for failure to comply with the requirements of the GDPR and the related national data
protection laws of the EEA countries, which can go to up to €20 million or up to 4% of the total worldwide annual turnover of the
preceding financial year, whichever is higher. The obligations under the GDPR may therefore be onerous and adversely affect our business,
financial condition, results of operations and prospects.
Switzerland
has adopted similar restrictions. These obligations and restrictions concern, in particular, the consent of the individuals to whom the
personal data relate, the information provided to the individuals, the transfer of personal data out of the EEA or Switzerland, security
breach notifications, security and confidentiality of the personal data, as well as substantial potential fines for breaches of the data
protection obligations.
Data
protection authorities from the different EU Member States may interpret the GDPR and applicable related national laws differently and
impose requirements additional to those provided in the GDPR. In addition, guidance on implementation and compliance practices may be
updated or otherwise revised, which adds to the complexity of processing personal data in the EU. When processing personal data of subjects
in the EU, we must comply with the applicable data protection laws. In particular, when we rely on third party service providers processing
personal data of subjects in the EU, we must enter into suitable agreements with these providers and receive sufficient assurances that
the providers meet the requirements of the applicable data protection laws, particularly the GDPR which imposes specific and relevant
obligations.
Although
there are legal mechanisms to allow for the transfer of personal data from the EEA to the US, decisions of the European Court of Justice
have increased uncertainty around compliance with EU privacy law requirements. As a result of the decision in the Schrems case (Case
C-362/14 Maximillian Schrems v. Data Protection Commissioner), it was no longer possible to rely on the safe harbor certification as
a legal basis for the transfer of personal data from the EU to entities in the US.
However,
in March 2022, the European Commission and the U.S. announced that they have agreed in principle on a new Trans-Atlantic Data Privacy
Framework, as a successor arrangement to the EU-U.S. Privacy Shield. On December, 13 2022, the European Commission adopted a draft adequacy
decision for the EU-U.S. Data Privacy Framework. This draft decision follows the signature of a US Executive Order by President Biden
on October, 7 2022, along with the regulations issued by the U.S. Attorney General Merrick Garland. These two instruments implemented
into U.S. law the agreement in principle announced by President von der Leyen and President Biden in March 2022. The draft adequacy decision,
which reflects the assessment by the European Commission of the U.S. legal framework has now been published and transmitted to the EDPB
for its opinion. The draft decision concludes that the U.S. ensures an adequate level of protection for personal data transferred from
the EU to U.S. companies. The two sides are now expected to finalize the details of this agreement in principle and translate it into
legal texts that will form the basis of a draft adequacy decision to be proposed by the European Commission.
Furthermore, following the UK’s exit from
the EU, the UK became a third country to the EEA in terms of personal data transfers. The EC has adopted an Adequacy Decision concerning
the level of personal data protection. However, personal data transfers from the EEA to the UK may nevertheless be at a greater risk
than before because an Adequacy Decision may be suspended.
Following
the Schrems II decision, the Swiss Federal Data Protection and Information Commissioner, or the FDPIC, also announced that the Swiss-U.S.
Privacy Shield does not provide adequate safeguards for the purposes of personal data transfers from Switzerland to the U.S. While the
FDPIC does not have authority to invalidate the Swiss-U.S. Privacy Shield regime, the FDPIC’s announcement casts doubt on the viability
of the Swiss-U.S. Privacy Shield as a future compliance mechanism for Swiss-U.S. data transfers.
Compliance
with data transfer obligations involves documenting detailed analyses of data access and protection laws in the countries in which data
importers are located, which can be costly and time-consuming. Data importers must also expend resources in analyzing their ability to
comply with transfer obligations, including implementing new safeguards and controls to further protect personal data. If we or our vendors
fail to comply with applicable data privacy laws, or if the legal mechanisms we or our vendors rely upon to allow for the transfer of
personal data from the EEA, the UK, or Switzerland to other countries not considered by the European Commission to provide
an adequate level of data protection are not considered adequate, we could be subject to government enforcement actions and significant
penalties against us, and our business could be adversely impacted if our ability to transfer personal data outside of the EEA, UK, or
Switzerland is restricted, which could adversely impact our operating results.
The
landscape of laws regulating personal data is constantly evolving, and compliance with these laws requires a flexible privacy framework
and substantial resources, and compliance efforts will likely be an increasing and substantial cost in the future.
Current
and future legislation
In
the United States and foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding
the healthcare system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities
and affect our ability to profitably sell any product candidates for which we obtain marketing approval. We expect that current laws,
as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and in additional
downward pressure on the price that we, or any collaborators, may receive for any approved products.
In
the EEA and as mentioned above, the EU MDR imposes increased compliance obligations for us to access and then remain on the EEA market.
It introduced substantial changes to the obligations applicable to medical device manufacturers and Notified Bodies in the EEA. As a
result, there are less Notified Bodies available to conduct conformity assessments under the EU MDR, which has significantly increased
the time needed for companies to access the EEA market. Moreover, as the EU MDR only started to apply from May 2021, a number of guidance
documents is still not available to guide manufacturers and Notified Bodies. The EU Regulation on health technology assessments (HTA)
that entered into force in January 2022 and that will be applied three years later (January 2025) may also impact in the future the pricing
and reimbursement of our product.
Additional
laws and regulations governing international operations
If
we further expand our operations outside of the United States, we must dedicate additional resources to comply with numerous laws and
regulations in each jurisdiction in which we plan to operate. The Foreign Corrupt Practices Act, or FCPA, prohibits any U.S. individual
or business from paying, offering, authorizing payment or offering of anything of value, directly or indirectly, to any foreign official,
political party or candidate, or to any employee of a public international organization, for the purpose of influencing any act or decision
of the foreign entity in order to assist the individual or business in obtaining or retaining business. The FCPA also obligates companies
whose securities are listed in the United States to comply with certain accounting provisions requiring the company to maintain books
and records that accurately and fairly reflect all transactions of the corporation, including international subsidiaries, and to devise
and maintain an adequate system of internal accounting controls.
Compliance
with the FCPA is expensive and resource-intensive, particularly in countries in which corruption is a recognized problem. In addition,
the FCPA presents particular challenges in the medical device and pharmaceutical industries, because, in many countries, hospitals are
operated by the government, and doctors and other hospital employees are considered foreign officials. Certain payments to hospitals
in connection with clinical trials and other work have been deemed to be improper payments to government officials and have led to FCPA
enforcement actions. In recent years, there has been a trend of increasing government investigations and litigations against companies
operating in our industry, both in the United States and around the world. We may become involved in government investigations that arise
in the ordinary course of our business.
Various
laws, regulations and executive orders also restrict the use and dissemination outside of the United States, or the sharing with certain
non-U.S. nationals, of information classified for national security purposes, as well as certain products and technical data relating
to those products. If we expand our presence outside of the United States, it will require us to dedicate additional resources to comply
with these laws, and these laws may preclude us from developing, manufacturing, or selling certain products and product candidates outside
of the United States, which could limit our growth potential and increase our development costs.
The
failure to comply with laws governing international business practices may result in substantial civil and criminal penalties and suspension
or debarment from government contracting. The Securities and Exchange Commission, or SEC, also may suspend or bar issuers from trading
securities on U.S. exchanges for violations of the FCPA’s accounting provisions.
Our
business activities outside of the U.S. are also subject to anti-bribery or anti-corruption laws, regulations, industry self-regulation
codes of conduct and physicians’ codes of professional conduct or rules of other countries in which we operate, including the U.K.
Bribery Act of 2010.
Post-Marketing
Regulations
Following
clearance or approval of a new product, a company and the product are subject to continuing regulation by the FDA and other foreign,
federal and state regulatory authorities, including, among other things, monitoring and recordkeeping activities, reporting to applicable
regulatory authorities of adverse experiences with the product, providing the regulatory authorities with updated safety and efficacy
information, product sampling and distribution requirements, and complying with promotion and advertising requirements, which include,
among others, standards for direct-to-consumer advertising, restrictions on promoting for uses or in patient populations not described
in the product’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and educational
activities, and requirements for promotional activities involving the internet. Although physicians may prescribe legally available products
for off-label uses, manufacturers may not market or promote such off-label uses. Modifications or enhancements to the products or labeling
or changes of site of manufacture are often subject to the approval of the FDA and other regulators or subject of review by a Notified
Body in the EU, which may or may not be received or may result in a lengthy review process.
Implications
of Being an Emerging Growth Company
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS
Act”), and, for as long as we continue to be an “emerging growth company,” we may choose to take advantage of
exemptions from various reporting requirements applicable to other public companies but not to “emerging growth
companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section
404 of the Sarbanes-Oxley Act of 2002, as amended, (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding
advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We
could be an “emerging growth company” for up to five years from the date of our initial public offering in February
2018, which would be at the end of the current fiscal year, ending December 31, 2023, or
until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the
date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if
the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of the last business day of our most
recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt
during the preceding three-year period. We intend to take advantage of these reporting exemptions described above until we are no
longer an “emerging growth company.” Under the JOBS Act, “emerging growth companies” can also delay adopting
new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not
to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or
revised accounting standards as other public companies that are not “emerging growth companies.”
Corporate
and Available Information
We
are a Delaware corporation formed in September 2016 under the name Eight-Ten Merger Corp. In November 2016, we changed our name to Motus
GI Holdings, Inc. We are the parent company of Motus GI Medical Technologies Ltd., an Israeli corporation, and Motus GI, LLC (formerly
Motus GI, Inc.), a Delaware limited liability company. Motus GI, Inc. was converted from a Corporation into a Limited Liability Company
effective January 1, 2021.
Our
principal executive offices are located at 1301 East Broward Boulevard, 3rd Floor, Ft. Lauderdale, FL 33301. Our phone number is (954)
541-8000 and our web address is www.motusgi.com. Our website and the information contained on, or that can be accessed through, our website
will not be deemed to be incorporated by reference into this Annual Report on Form 10-K or any other report we file with or furnish to
the SEC.
We
make available free of charge on or through the Investor Relations link on our website, www.motusgi.com, access to press releases and
investor presentations, as well as all materials that we file electronically with the SEC, including our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a)
or 15(d) of the Exchange Act as soon as reasonably practicable after electronically filing such materials with, or furnishing them to,
the SEC. During the period covered by this Form 10-K, we made all such materials available through our website as soon as reasonably
practicable after filing such materials with the SEC. The SEC maintains an Internet website, www.sec.gov, that contains reports, proxy
and information statements and other information that we file electronically with the SEC.
“Motus
GI,” “Pure-Vu,” and our other registered or common law trademarks, service marks or trade names appearing herein are
the property of Motus GI Holdings, Inc. Some trademarks referred to in this report are referred to without the ® and ™ symbols,
but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under
applicable law, their rights thereto. We do not intend the use or display of other companies’ trademarks and trade names to imply
a relationship with, or endorsement or sponsorship of us by, any other companies.
An
investment in our Common Stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below,
together with all other information in this Annual Report on Form 10-K and our other reports filed with the Securities and Exchange Commission.
The risks set forth below are not the only ones facing us. Additional risks and uncertainties may exist that could adversely impact our
business, operations and financial conditions. If any one or more of the following risks actually materialize, our business, financial
condition, reputation, operations and/or future prospects suffer. In such event, the value of our Common Stock could decline, and you
could lose all or a substantial portion of the money that you pay for our Common Stock.
SUMMARY
The
following summarizes key risks and uncertainties that could materially adversely affect us. You should read this summary together with
the more detailed description of each risk factor contained below.
Risks
relating to our strategic alternative process, including risks related to:
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the inability to identify and implement any strategic business combination or other transaction. |
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the negative consequences of any strategic transaction that we may consummate. |
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the operational and financial risks related to the negotiation and completion of a strategic transaction. |
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if we fail to complete a strategic transaction we may need to pursue
bankruptcy, dissolution or liquidation. |
Risks
relating to our financial position and need for capital, including risks relating to:
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the
sustainability of our operations and ability to continue as a going concern. |
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the
recurring losses from operations since inception and possibility of never becoming profitable. |
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our
indebtedness to Kreos Capital VI (Expert Fund) LP and related restrictions under the Loan Agreement. |
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the
need for substantial additional capital to fund our operations, and if we fail to obtain such financing, we may not be able to complete
the development and commercialization of any of our product candidates. |
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the
potential dilutive impact of issuing additional equity securities in connection with necessary capital raises. |
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our
ability to use net operating loss carryforward and other tax attributes may be limited. |
Risks
related to government regulation and third-party reimbursement, including risks related to:
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the
impact of costly and complex current and future regulation. |
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our
ability to successfully obtain or maintain the necessary government approvals or third party certifications to market our Pure-Vu
System both domestically and throughout the EEA. |
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the
need to obtain new 510(k) clearance or a new CE Certificate of Conformity in the event of new modifications which may require us
to cease marketing or initiate recalls pending approval. |
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the
potential for product malfunctions causing death or serious injury, subjecting us to enforcement actions. |
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the
potential for recalls of our Pure-Vu System or the discovery of a serious safety issue with the product. |
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our
Pure-Vu System is not currently separately reimbursable through private or government third-party payors. |
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the
difficulty and increased costs of marketing approval and commercialization of our products due to recent and future legislation. |
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the
potential liability if we fail to comply with fraud and abuse laws. |
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the
potential liability and commercialization consequences if we engage in inappropriate promotion of our Pure-Vu System. |
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the
potential for civil and/or criminal sanctions related to potential non-compliance with anti-corruption laws. |
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the
laws and regulations governing international business operations and potential for adverse impacts on our business. |
Risks
related to our business operations, including risks related to:
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having
only one product, and the lack of assurance that we will develop any additional products. |
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being
a medical technology company with a limited operating history. |
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potential
non-acceptance of the Pure-Vu System by physicians and patients. |
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our
ability to successfully commercialize our Pure-Vu System. |
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our
limited sales and marketing organization and related difficulties for commercializing our Pure-Vu System. |
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the
impact of any potential adverse side effects caused by our Pure-Vu System. |
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the
impact of any security breaches, computer malware, computer hacking and other security incidents. |
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the
breadth of data privacy laws and regulations. |
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the
difficulties associated with achieving commercialization. |
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the
difficulties related to training medical professionals on the safe and appropriate use of our products. |
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competition
in the marketplace. |
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the
potential for technological obsolescence. |
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the
potential reputational damage and unforeseen costs if defects were identified in our products. |
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our
ability to penetrate international markets. |
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our
dependence on third party manufacturers to manufacture our Pure-Vu System. |
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the
impact of Israeli regulations on outsourcing and development for our Pure-Vu System. |
Risks
related to our intellectual property rights, including risks related to:
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● |
our
ability to properly safeguard our intellectual property rights. |
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● |
the
impact of potential intellectual property disputes. |
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● |
the
impact of employment and confidentiality disputes. |
General
risks, including risks related to:
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● |
the
difficulties related to predicting and managing growth. |
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● |
our
ability to attract and retain key personnel. |
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the
impact of product liability lawsuits. |
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the
uncertainties related to exchange rate fluctuations. |
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● |
the
costs related to acquisition and investment activities. |
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● |
the
outbreaks of communicable diseases, including COVID-19, which may materially affect our business, financial condition and results
of operation. |
Risks
related to our capital stock, including risks related to:
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● |
significant
fluctuations in our quarterly operating results. |
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● |
the
unpredictability of the trading market. |
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a
decrease in stock price related to a large sell-off. |
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our
ability to remain compliant with the requirements of The Nasdaq Capital Market for continued listing, including regaining compliance
with the $2.5 million minimum stockholders’ equity requirement. |
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the
potential adverse effect on the liquidity of our Common Stock if we implement a reverse stock split. |
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the
frequency, nature and content of equity analyst report. |
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the
volatility of our share price. |
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royalty
payments due under the terms of the Royalty Payments Rights Certificates. |
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reduced
disclosure requirements as an “emerging growth company.” |
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costs
and management time devoted to operations after we are no longer an “emerging growth company.” |
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our
ability to manage internal controls to prevent fraud or errors. |
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our
failure to maintain internal control over financial reporting. |
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our
expectations that we will not pay dividends in the foreseeable future. |
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the
likelihood that upon dissolution, stockholder will lose some or all portions of their investment. |
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the
dilutive effect of additional issuances of preferred stock. |
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our
choice of forum in the state of Delaware may discourage stockholder suits against us. |
Risks
related to our operations in Israel, including risks related to:
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the
impact of Israel’s political, economic and military instability on our research and development facilities and suppliers in
the region. |
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royalty
and other payments to the Israeli government as required by certain research and development grant terms. |
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the
difficulties associated with enforcing a foreign court’s judgment and serving process in a foreign jurisdiction. |
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the
impact of potential patent litigation. |
Risks
Related to our Strategic Alternative Process
We
may not be successful in identifying and implementing any strategic business combination or other transaction.
We
have engaged Lake Street to assist us in seeking a strategic transaction to benefit our shareholders. We continue to evaluate various
potential strategic options for us, including a merger, reverse merger, sale or other strategic transaction. However, there can be no
assurance that we will be able to identify a counterparty willing to move forward with us or, if we do, successfully consummate any particular
strategic transaction. The biotech industry is a competitive industry and thus there are numerous competitors of ours for strategic transactions
with a limited number of parties seeking a transaction on terms that would be beneficial to our shareholders. The process of evaluating
these strategic options may be very costly, time-consuming and complex and we have incurred, and may in the future incur, significant
costs related to this continued evaluation, such as legal and accounting fees and expenses and other related charges. We may also incur
additional unanticipated expenses in connection with this process. A considerable portion of these costs will be incurred regardless
of whether any such course of action is implemented or transaction is completed. Any such expenses will decrease the remaining cash available
for use in our business and may diminish or delay any future distributions to our stockholders. Any delays in identifying a potential
counterparty will cause our cash balance to continue to deplete, which could make us less attractive as a strategic counterparty. Our
existing outstanding indebtedness with Kreos may also impact the interest of potential third parties and may negatively impact our ability
to consummate a strategic transaction. The continued review of our strategic options may also create continued uncertainty for our employees
and this uncertainty may adversely affect our ability to retain key employees necessary to maintain our ongoing operations or to execute
any potential strategic options, which could have a material adverse effect on our business. Further, the market capitalization of our
company is below the value of our cash and cash equivalents. Potential counterparties in a strategic transaction involving our company
may place minimal or no value on our remaining assets. As a result, we may not be able to execute on a strategic transaction before our
cash position gets reduced, as a result of running a public company, to the point that we will need to pursue the winding down and dissolution
of the company.
Any
strategic transactions that we may consummate in the future could have negative consequences.
Any
strategic business combination or other transactions that we may consummate in the future could have a variety of negative consequences
and we may implement a course of action or consummate a transaction that yields unexpected results that adversely affect our business
and decrease the value of our company. There can be no assurances that any particular course of action, business arrangement or transaction,
or series of transactions, will be pursued, be successfully consummated, lead to increased stockholder value, or achieve the results
hoped for. Any failure of such potential transaction to achieve the anticipated results could significantly impair the ability of a shareholder
to realize any benefit from any future strategic transaction.
If
we are successful in completing any strategic transaction, we may be exposed to other operational and financial risks.
The
negotiation and consummation of any strategic transaction may also require more time or greater cash resources than we anticipate and
expose us to other operational and financial risks, including:
●
increased near-term and long-term expenditures;
●
our ability to service our outstanding indebtedness;
●
exposure to unknown liabilities;
●
higher than expected acquisition or integration costs;
●
incurrence of substantial additional debt or dilutive issuances of equity securities to fund future operations;
●
write-downs of assets or goodwill or incurrence of non-recurring, impairment or other charges;
●
increased amortization expenses;
●
difficulty and cost in combining the operations and personnel of any acquired business with our operations and personnel;
●
impairment of relationships with key suppliers or customers of any acquired business due to changes in management and ownership;
●
inability to retain key employees of our company or any acquired business; and
●
possibility of future litigation.
Any
of the foregoing risks could have a material adverse effect on our business, financial condition and prospects.
If
a strategic transaction is not consummated, our Board may decide to file for bankruptcy protection or pursue a dissolution and liquidation
of our remaining assets. In such an event, as a result of our outstanding indebtedness, the amount of cash available for distribution
to our stockholders, if any, will depend heavily on the timing of such bankruptcy or liquidation as well as the amount of cash that will
need to be reserved for our current debts, including repayment of amounts under our Loan Agreement (as defined below), and commitments
and contingent liabilities and there may not be any cash or other assets to distribute to our stockholders.
There
can be no assurance that a strategic transaction will be completed. If a strategic transaction is not completed, our Board may decide
to file for bankruptcy protection or pursue a dissolution of the company and liquidation of all of our remaining assets. In such an event,
the amount of cash available for distribution to our stockholders, if any, will depend heavily on the timing of such decision, as with
the passage of time the amount of cash available for distribution will be reduced as we continue to fund our operations and service our
outstanding indebtedness. The process of bankruptcy or liquidation may be lengthy and we cannot make any assurances regarding the timing
of completing such a process. If our Board were to approve and recommend, and our stockholders were to approve, a dissolution and liquidation,
we would be required under Delaware corporate law to pay our outstanding obligations, as well as to make reasonable provision for contingent
and unknown obligations, including repayment of the indebtedness under our Loan Agreement, which debt is secured by our assets, prior
to making any distributions in liquidation to our stockholders. There can be no assurance as to the amount of available cash that will
be available to distribute to stockholders, if any, after paying our debts and other obligations and setting aside funds for reserves,
nor as to the timing of any such distribution. Our financial commitments and contingent liabilities would include: (i) repayment of our
outstanding indebtedness under our Loan Agreement; (ii) personnel costs, including severance; (iii) contractual obligations to vendors
and clinical study sites; (iv) non-cancelable lease obligations; and (v) potential litigation against us.
As
a result of the requirement to reserve for contingencies, a portion of our assets may need to be reserved pending the resolution of such
obligations and the timing of any such resolution is uncertain. In addition, we may be subject to litigation or other claims related
to a bankruptcy or dissolution and liquidation. If a dissolution and liquidation were pursued, our Board, in consultation with our advisors,
would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, holders of our common
stock could lose all or a significant portion of their investment in the event of a bankruptcy, liquidation, dissolution or winding up.
We
may become involved in securities class action litigation that could divert management’s attention and harm the company’s
business, and insurance coverage may not be sufficient to cover all costs and damages.
In
the past, securities class action litigation has often followed certain significant business transactions, such as the sale of a company
or announcement of any other strategic transaction, or the announcement of negative events, such as discontinuations of clinical programs.
These events may also result in investigations by the SEC. We may be exposed to such litigation or investigation even if no wrongdoing
occurred. Litigation and investigations are usually expensive and divert management’s attention and resources, which could adversely
affect our business and cash resources and our ability to consummate a potential strategic transaction or the ultimate value our stockholders
receive in any such transaction.
Risks
Related to Our Financial Position and Need for Capital
There
is substantial doubt about our ability to continue as a going concern, which will affect our ability to obtain future financing and may
require us to curtail our operations.
Our
financial statements as of December 31, 2022 were prepared under the assumption that we will continue as a going concern. The independent
registered public accounting firm that audited our 2022 financial statements, in their report, included an explanatory paragraph referring
to our recurring losses since inception and expressing management’s assessment and conclusion that there is substantial doubt in
our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome
of this uncertainty. Our ability to continue as a going concern depends on our ability to obtain additional equity or debt financing,
attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. We cannot assure you, however, that
we will be able to achieve any of the foregoing. See Note 2 to our Consolidated Financial Statements for further details.
We
have incurred substantial operating losses in each year since our inception and expect to continue to incur substantial losses for the
foreseeable future. We may never become profitable or, if achieved, be able to sustain profitability.
We
expect to incur substantial expenses without corresponding revenues unless and until we expand our commercialization efforts. To date,
as part of our initial U.S. market launch targeting early adopter hospitals, we have generated limited revenue from our Pure-Vu System,
but we do not expect to generate significant revenue from product sales until we expand our commercialization efforts for the Pure-Vu
System, which is subject to significant uncertainty. We expect to incur significant marketing expenses in the United States, Europe and
elsewhere, and there can be no assurance that we will generate significant revenues or ever achieve profitability. Our net loss for the
years ended December 31, 2022 and December 31, 2021 was approximately $18.6 million and $19.0 million, respectively. As of December 31,
2022, we had an accumulated deficit of approximately $141.4 million.
Our
indebtedness to Kreos Capital VI (Expert Fund) LP may limit our flexibility in operating our business and adversely affect our financial
health and competitive position. Our obligations to Kreos Capital VI (Expert Fund) LP are secured by substantially all of our assets.
If we default on these obligations, Kreos Capital VI (Expert Fund) LP could foreclose on our assets, which could have a materially adverse
effect on our business.
In
July 2021, we entered into an Agreement for the Provision of a Loan Facility with Kreos Capital VI (Expert Fund) LP (the “Loan
Agreement”). All obligations under the Loan Agreement are secured by a first priority security interest on substantially all of
our personal property assets, including our material intellectual property and equity interests in our subsidiaries. As a result, if
we default on any of our obligations under the Loan Agreement, Kreos Capital VI (Expert Fund) LP could foreclose on its security interest
and liquidate some or all of the collateral, which would harm our business, financial condition and results of operations and could require
us to reduce or cease operations.
In
order to service this indebtedness and any additional indebtedness we may incur in the future, we will need to generate cash from our
operating activities. Our ability to generate cash is subject, in part, to our ability to successfully execute our business strategy,
as well as general economic, financial, competitive, regulatory and other factors beyond our control. If we are unable to generate sufficient
cash to repay our debt obligations when they become due and payable, either when they mature, or in the event of a default, we may not
be able to obtain additional debt or equity financing on favorable terms, if at all, which may negatively impact our business operations
and financial condition and we may need to file for bankruptcy protection.
The
Loan Agreement restricts our ability, among other things, in each case subject to certain exceptions, to:
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sell,
transfer or otherwise dispose of any of our business assets or property; |
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enter
into transactions resulting in significant changes to the voting control of our stock; |
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consolidate
or merge with other entities or acquire other entities; |
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incur
additional indebtedness or create encumbrances on our assets; |
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pay
dividends, or make distributions on and, in certain cases, repurchase our capital stock; |
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enter
into certain transactions with our affiliates; |
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repay
subordinated indebtedness; or |
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make
certain investments. |
In
addition, we are required under the Loan Agreement to comply with various undertakings. The undertakings and restrictions and obligations
in the Loan Agreement, as well as any future financing agreements that we may enter into, may restrict our ability to finance our operations,
engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these undertakings may be
affected by events beyond our control, and we may not be able to meet those undertakings.
If
we breach any of the undertakings or default on any of our obligations under the Loan Agreement all of the outstanding indebtedness under
the Loan Agreement could become immediately due and payable, and/or Kreos Capital VI (Expert Fund) LP could foreclose on its security
interest and liquidate some or all of the collateral, which would harm our business, financial condition and results of operations and
could require us to reduce or cease operations.
If
our indebtedness under the Loan Agreement were to be accelerated, there can be no assurance that our assets would be sufficient to repay
in full that indebtedness. In addition, upon any distribution of assets pursuant to any liquidation, insolvency, dissolution, reorganization
or similar proceeding, Kreos Capital VI (Expert Fund) LP will be entitled to receive payment in full from the proceeds of the collateral
which secures our indebtedness before the holders of other indebtedness or holders of our Common Stock receive any distribution with
respect thereto.
Our
cash and cash equivalents will only fund our operations for a limited time and we will need to raise additional capital in order to support
our development and commercialization efforts.
We
are currently operating at a loss and expect our operating costs will increase significantly as we incur costs associated with commercialization
activities related to our Pure-Vu System. The independent registered public accounting firm that audited our 2022 financial statements,
in their report, included an explanatory paragraph referring to our recurring losses since inception and expressing management’s
assessment and conclusion that there is substantial doubt in our ability to continue as a going concern. At December 31, 2022, we had
cash and cash equivalents of approximately $14.0 million.
We
will need to raise additional capital or generate substantial revenue in order to support our development and commercialization efforts.
If
our available cash balances are insufficient to satisfy our liquidity requirements, including due to risks described herein, we may seek
to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements. We will need to raise
additional capital, and we may also consider raising additional capital in the future to expand our business, to pursue strategic investments,
to take advantage of financing opportunities, or for other reasons, including to:
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fund
development and efforts of any future products; |
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● |
acquire,
license or invest in technologies; |
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● |
acquire
or invest in complementary businesses or assets; and |
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finance
capital expenditures and general and administrative expenses. |
Our
present and future funding requirements will depend on many factors, including:
| |
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our
revenue growth rate and ability to generate cash flows from operating activities; |
| |
● |
our
sales and marketing and research and development activities; |
| |
● |
costs
of and potential delays in product development; |
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● |
changes
in regulatory oversight applicable to our products; and |
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● |
costs
related to international expansion. |
Except
for our Loan Agreement with Kreos Capital VI (Expert Fund) LP and our Equity Distribution Agreement (as defined below) with Oppenheimer
& Co. Inc. (“Oppenheimer”), we have no arrangements or credit facilities in place as a source of funds, and there can
be no assurance that we will be able to raise sufficient additional capital on acceptable terms, or at all, and if we are not successful
in raising additional capital, we may not be able to continue as a going concern. We may seek additional capital through a combination
of private and public equity offerings (which, in limited circumstances, may require the prior written consent of Oppenheimer pursuant
to our Equity Distribution Agreement), debt financings (which, except for limited circumstances, would require the prior written consent
of Kreos Capital VI (Expert Fund) LP pursuant to our Loan Agreement), and strategic collaborations. Debt financing, if obtained, may
involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional
debt, that could increase our expenses and require that our assets secure such debt. Equity financing, if obtained, could result in dilution
to our then existing stockholders and/or require such stockholders to waive certain rights and preferences. If such financing is not
available on satisfactory terms, or is not available at all, we may be required to delay, scale back or eliminate the development of
business opportunities and our operations and financial condition may be materially adversely affected. We can provide no assurances
that any additional sources of financing will be available to us on favorable terms, if at all. In addition, if we are unable to secure
sufficient capital to fund our operations, we might have to enter into strategic collaborations that could require us to share commercial
rights to the Pure-Vu System with third parties in ways that we currently do not intend or on terms that may not be favorable to us.
If we choose to pursue additional indications and/or geographies for the Pure-Vu System or otherwise expand more rapidly than we presently
anticipate, we may also need to raise additional capital sooner than expected.
Future
capital raises may dilute our existing stockholders’ ownership and/or have other adverse effects on our operations.
If
we raise additional capital by issuing equity securities, our existing stockholders’ percentage ownership will be reduced and these
stockholders may experience substantial dilution. If we raise additional funds by issuing debt securities, these debt securities would
have rights senior to those of our Common Stock and the terms of the debt securities issued could impose significant restrictions on
our operations, including liens on our assets. If we raise additional funds through collaborations and licensing arrangements, we may
be required to relinquish some rights to our technologies or products, or to grant licenses on terms that are not favorable to us.
Our
ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Effective
on December 1, 2016, Motus GI Medical Technologies LTD, and the holders of all issued and outstanding shares of capital stock of Motus
GI Medical Technologies LTD (the “LTD Stockholders”), entered into a share exchange agreement (the “Share Exchange
Agreement”) with us. Pursuant to the terms of the Share Exchange Agreement, as a condition of and contemporaneously with the initial
closing (the “Initial Closing”) of the 2017 Private Placement, the LTD Stockholders sold to us, and we acquired, all of the
issued and outstanding shares of capital stock of Motus GI Medical Technologies LTD (the “Share Exchange Transaction”) and
Motus GI Medical Technologies LTD became our direct wholly-owned subsidiary. As a result of the Share Exchange Transaction, our ability
to utilize our federal net operating loss carryforwards and federal tax credits may be limited under Sections 382 of the Internal Revenue
Code of 1986, as amended (the “Code”). The limitations apply if an “ownership change,” as defined by Code Section
382, occurs. Generally, an ownership change occurs if the percentage of the value of the stock that is owned by one or more direct or
indirect “five percent shareholders” increases by more than 50 percentage points over their lowest ownership percentage at
any time during the applicable testing period (typically three years). In addition, future changes in our stock ownership, which may
be outside of our control, may trigger an “ownership change” and, consequently, Code Section 382 limitations. As a result,
if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards and other tax attributes to offset
United States federal taxable income may be subject to limitations, which could potentially result in increased future tax liability
to us.
Risks
Related to Government Regulation and Third-Party Reimbursement
We
are subject to complex and costly regulation.
Our
product, and any products we may develop in the future, are subject to regulation by the FDA and other national, supranational,
federal and state governmental authorities (both domestic and foreign). It can be costly and time-consuming to obtain regulatory clearance, approval, or
certification to market a new or modified medical device or other product. Clearance and/or approval might not be granted on a
timely basis, if at all. Regulations are subject to change as a result of legislative, administrative or judicial action, which may
further increase our costs or reduce sales. Unless an exception applies, the FDA requires that the manufacturer of a new medical
device or a new indication for use of, or other significant change in, an existing medical device obtain either FDA 510(k)
pre-market clearance or pre-market approval before that product can be marketed or sold in the United States. Modifications or
enhancements to a product that could significantly affect its safety or effectiveness, or that would constitute a major change in
the intended use of the device, technology, materials, labeling, packaging, or manufacturing process may also require a new 510(k)
clearance or possibly premarket approval. The FDA has indicated that it intends to continue to enhance its pre-market requirements
for medical devices. Although we cannot predict with certainty the future impact of these initiatives, it appears that the time and
cost to get medical devices to market could increase significantly.
In
addition, we are subject to regulations that govern manufacturing practices, product labeling and advertising, and adverse-event reporting
that apply after we have obtained clearance or approval to sell a product, and we also must take into account newly emerging risks associated
with medical devices such as cybersecurity vulnerabilities. Our failure to maintain clearance for our Pure-Vu System, to obtain clearance
or approval for new or modified products, or to adhere to regulations for manufacturing, labeling, advertising or adverse event reporting
could adversely affect our results of operations and financial condition. Further, if we determine a product manufactured or marketed
by us does not meet our specifications, published standards or regulatory requirements, we may seek to correct the product or withdraw
the product from the market, which could have an adverse effect on our business. Many of our facilities and procedures, and those of
our suppliers are subject to ongoing oversight, including periodic inspection by governmental authorities. Compliance with production,
safety, quality control and quality assurance regulations can be costly and time-consuming.
The
sales and marketing of medical devices is under increased scrutiny by the FDA and other enforcement bodies, as well as by the
competent authorities in foreign jurisdictions, such as EEA Member States. If our sales and marketing activities fail to comply with
FDA or foreign regulations or guidelines, or other applicable laws, we may be subject to regulatory inquiries, warning letters, or
enforcement actions from the FDA, or other enforcement bodies and foreign competent authorities.
We
may be unable to obtain or maintain governmental approvals or certifications to market our Pure-Vu System outside the United States and
the European Economic Area countries.
To
be able to market and sell our Pure-Vu System in other countries, we must obtain regulatory approvals or certifications and comply with
the regulations of those countries. These regulations, including the requirements for approvals or certifications and the time required
for regulatory review, vary from country to country. Many non-European markets, including major markets in South America and Asia Pacific,
have allowed for expedited regulatory review and approval based on an existing CE Certificate of Conformity. The first-generation and
second-generation of our Pure-Vu System have received CE Certificate of Conformity, allowing us to affix the CE Mark and market it in
the EEA. We intend to target countries with a regulatory approval process with similar requirements to the EEA. However, obtaining and
maintaining foreign regulatory approvals or certifications is complex and expensive and subject to delays, and management cannot be certain
that we will receive and be able to maintain regulatory approvals or certifications in any foreign country in which we plan to market
our Pure-Vu System or in the time frame in which we expect.
Modifications
to our product may require new 510(k) clearance or may require us to cease marketing or recall the modified products until approvals
are obtained.
After
a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute
a major change in its intended use, will require a new clearance or possibly premarket approval. Changes that do not rise to this level
of significance, including certain manufacturing changes, may be made without FDA clearance upon documentation in the manufacturer’s
files of the determination of the significance of the change. The FDA requires each manufacturer to make this determination initially,
but the FDA can review any such decision and can disagree with the manufacturer’s determination. If the FDA disagrees with any
determination that we may make in the future and requires us to seek new 510(k) clearance for modifications to any previously approved
or cleared products for which we have concluded that new approvals are unnecessary, we may be required to cease marketing or distribution
of our products or to recall the modified product until we obtain approval, and we may be subject to significant regulatory fines or
penalties. In the future we may seek to expand the indication for which the Pure-Vu System is cleared or approved to allow us to actively
promote the product and a less-prep regimen to patients. This would require us to perform one or more clinical trials to facilitate the
approval of such expanded labeling, however, if such trials are unsuccessful or the FDA denies our expanded labeling, our revenues may
be adversely affected.
In
the EEA, we will be required to inform the Notified Body that carried out the conformity assessment of the medical devices we market
or sell in the EEA of any planned changes to our quality management system or changes to our devices which could affect compliance with
the GSPR set forth in the EU MDR, the safety and performance of the device or its conditions prescribed for use. The Notified Body will
assess the changes and, if the assessment is favorable, issue a supplement to the CE Certificate of Conformity. The Notified Body may
also determine that the planned changes require a new conformity assessment. For devices covered by CE Certificates of Conformity issued
under the EU MDD (“legacy devices”), no significant changes in design or intended purpose are allowed after the date of application
of the EU MDR (May 25, 2021). Any proposed changes to our products may oblige us to undertake future clinical and technical procedures
and provide information in addition to that provided to support the initial conformity assessment.
If
our product malfunctions, or causes or contributes to a death or a serious injury, we will be subject to medical device reporting regulations,
which can result in voluntary corrective actions or agency enforcement actions.
Under
the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device
has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute
to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report these events
to the FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving
our product also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such
as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit,
will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and
financial results. Similar strict regulatory requirements concerning safety reporting and post-market surveillance obligations apply
in the EEA.
Our
Pure-Vu System may in the future be subject to product recalls. A recall of our products, either voluntarily or at the direction of the
FDA or another governmental authority, including a third-country authority, or the discovery of serious safety issues with our products,
could have a significant adverse impact on us.
The
FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of
material deficiencies or defects in design or manufacture. In the case of the FDA, the authority to require a recall must be based on
an FDA finding that there is reasonable probability that the device would cause serious injury or death. In addition, foreign governmental
bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture.
Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that
certain classifications of recalls be reported to the FDA within ten working days after the recall is initiated. A government-mandated
or voluntary recall by us or a distributor could occur as a result of an unacceptable risk to health, component failures, malfunctions,
manufacturing errors, design or labeling defects or other deficiencies and issues. A recall of our products would divert managerial and
financial resources and have an adverse effect on our reputation, results of operations and financial condition, which could impair our
ability to produce our product in a cost-effective and timely manner in order to meet our customers’ demands. We may also be subject
to liability claims, be required to bear other costs, or take other actions that may have a negative impact on our future sales and our
ability to generate profits. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA
or another third-country competent authority. We may initiate voluntary recalls that we determine do not require notification of the
FDA or another third-country competent authority. If the FDA disagrees with our determinations, they could require us to report those
actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition,
the FDA could take enforcement action for failing to report the recalls.
We
are also required to follow detailed recordkeeping requirements for all firm-initiated medical device corrections and removals. In addition,
in October 2014, the FDA issued guidance intended to assist the FDA and industry in distinguishing medical device recalls from product
enhancements. Per the guidance, if any change or group of changes to a device addresses a violation of the Federal Food, Drug and Cosmetic
Act (the “FDCA”), that change would generally constitute a medical device recall and require submission of a recall report
to the FDA. Similar strict regulatory requirements concerning medical device recall and related reporting obligations apply in the EEA.
Our
Pure-Vu System is not currently separately reimbursable through private or governmental third-party payors, which could limit market
acceptance.
Our
Pure-Vu System and the procedure to cleanse the colon in preparation for colonoscopy are not currently separately reimbursable through
private or governmental third-party payors in any country. We sought new technology payments from Medicare under the hospital Inpatient
and Outpatient Prospective Payment Systems and were denied in 2021. We intend to seek separate reimbursement through private or governmental
third-party payors for future versions of the system, however coverage and reimbursement may not be available for any product that we
commercialize and, even if available, the level of reimbursement may not be satisfactory. The commercialization of our Pure-Vu System
depends on prospective patients’ ability to cover the costs of the procedure, and/or physician/hospital willingness to subsidize
all or some of the costs of the procedure. We believe that a substantial portion of individuals who are candidates for the use of the
Pure-Vu System worldwide do not have the financial means to cover its cost. Moreover, healthcare providers may be reluctant to make the
initial investment in the system. A general regional or worldwide economic downturn could negatively impact demand for our Pure-Vu System.
In the event that medically eligible patients deem the costs of our procedure to be prohibitively high or consider alternative treatment
options to be more affordable, or healthcare providers deem the cost of the system to be too high, our business, results of operations
and financial condition would be negatively impacted.
Recently
enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product
candidates and affect the prices we may obtain.
There
have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay
marketing approval of our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell
any product candidates for which we obtain marketing approval. We expect that current laws, as well as other healthcare reform measures
that may be adopted in the future, may result in more rigorous coverage criteria and in additional downward pressure on the price that
we, or any collaborators, may receive for any approved products.
For
example, in March 2010, the Affordable Care Act was enacted. The Affordable Care Act has substantially changed the way healthcare is
financed by both governmental and private insurers and has significantly affected the health care industry. Certain provisions of the
Affordable Care Act have been subject to judicial challenges as well as efforts to modify or invalidate them or to alter their interpretation
and implementation. For example, the Tax Cuts and Jobs Act (TCJA) enacted on December 22, 2017, included a provision that eliminated
the tax-based shared responsibility payment for individuals who fail to maintain minimum essential coverage under Section 5000A of the
Internal Revenue Code of 1986, commonly referred to as the “individual mandate,” effective January 1, 2019. Additional legislative
changes, regulatory changes, and judicial challenges related to the Affordable Care Act remain possible, but the nature and extent of
such potential changes or challenges are uncertain at this time. The implications of the Affordable Care Act, and efforts to modify or
invalidate the Affordable Care Act or its implementing regulations, or portions thereof, and the uncertainty surrounding any other modification
related to the Affordable Care Act or any other health care reform measure for our business and financial condition, if any, are not
yet clear. It is possible that the Affordable Care Act as well as its possible modification or invalidation, in whole or in part or another
health care reform measure could negatively impact our business.
If
we or our sales personnel or distributors do not comply with fraud and abuse laws, including anti-kickback laws for any products approved
in the U.S., or with similar foreign laws where we market our products, we could face significant liability.
There
are numerous federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws, false claims, and physician
transparency laws. Our relationships with physicians and surgeons, hospitals and our independent distributors are subject to scrutiny
under these laws. If our operations are found to be in violation of any of these laws or any other governmental regulations that apply
to us, we may be subject to penalties, including civil and criminal penalties, exclusion from participation in government healthcare
programs, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or restructuring
of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in
violation of these laws is increased by the fact that their provisions are open to a variety of evolving interpretations and enforcement
discretion. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant
legal expenses and divert our management’s attention from the operation of our business. For a fuller discussion of the applicable
anti-kickback, fraud and abuse, transparency and other healthcare laws and regulations applicable to our business, see Item 1 “Description
of Business - Other Healthcare Laws and Compliance Requirements.”
Many
foreign countries have enacted similar laws addressing fraud and abuse in the healthcare sector. The shifting commercial compliance environment
and the need to build and maintain robust and expandable systems to comply with different compliance requirements in multiple jurisdictions
increases the possibility that a healthcare company may run afoul of one or more of the requirements.
We
may become liable for significant damages or be restricted from selling our products if we engage in inappropriate promotion of our Pure-Vu
System.
Our
promotional materials and training methods for our Pure-Vu System must comply with FDA and other foreign applicable laws and regulations,
including the prohibition of the promotion of the “off-label” use of our Pure-Vu System, including by using our Pure-Vu System
in a way not approved by the FDA or not consistent with the intended purpose for which Pure-Vu System is CE marked in the EEA. The Pure-Vu
System is currently indicated to connect to standard colonoscopes to facilitate intra-procedural cleaning of a poorly prepared colon
by irrigating or cleaning the colon and evacuating the irrigated fluid, feces and other bodily fluids and matter. We do not currently
promote a particular prep regimen as this is left up to the discretion of the physician since our current indication does not reference
any preparation protocol. Healthcare providers may use our products off-label, as the FDA or the competent authorities in the EEA Member
States do not restrict or regulate a physician’s choice of treatment within the practice of medicine. However, if the FDA or a
competent authority in an EEA Member State determines that our promotional materials, training or marketing efforts constitute promotion
of an off-label use, it could request that we modify our training or promotional materials or marketing efforts or subject us to regulatory
or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine and criminal
penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our promotional
or training materials to constitute promotion of an unapproved use, which could result in significant fines or penalties. Although we
do not intend to engage in any activities that may be considered off-label promotion of our products, the FDA or another regulatory agency
could disagree and conclude that we have engaged, directly or indirectly, in off-label promotion. In addition, the off-label use of our
products may increase the risk of product liability claims. Product liability claims are expensive to defend and could result in substantial
damage awards against us and harm our reputation.
The
failure to comply with anti-corruption laws could materially adversely affect our business and result in civil and/or criminal sanctions.
The
U.S. Foreign Corrupt Practices Act (FCPA) and similar anti-corruption laws in other jurisdictions generally prohibit companies and their
intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Because of the
predominance of government-administered healthcare systems in many jurisdictions around the world, many of our customer relationships
outside of the U.S. are with governmental entities and are therefore potentially subject to such laws.
Global
enforcement of anti-corruption laws has increased in recent years, including investigations and enforcement proceedings leading to assessment
of significant fines and penalties against companies and individuals. Our international operations create a risk of unauthorized payments
or offers of payments by one of our employees, consultants, sales agents, or distributors. We maintain policies and programs to implement
safeguards to educate our employees and agents on these legal requirements, and to prevent and prohibit improper practices. However,
existing safeguards and any future improvements may not always be effective, and our employees, consultants, sales agents or distributors
may engage in conduct for which we could be held responsible. In addition, regulators could seek to hold us liable for conduct committed
by companies in which we invest or that we acquire. Any alleged or actual violations of these regulations may subject us to government
scrutiny, criminal or civil sanctions and other liabilities, including exclusion from government contracting, and could disrupt our business,
adversely affect our reputation and result in a material adverse effect on our business, results of operations, financial condition and
cash flows.
Laws
and regulations governing international business operations could adversely impact our business.
The
U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), and the Bureau of Industry and Security at the U.S.
Department of Commerce (BIS), administer certain laws and regulations that restrict U.S. persons and, in some instances, non-U.S. persons,
in conducting activities, transacting business with or making investments in certain countries, governments, entities and individuals
subject to U.S. economic sanctions. Our international operations subject us to these laws and regulations, which are complex, restrict
our business dealings with certain countries, governments, entities, and individuals, and are constantly changing. Further restrictions
may be enacted, amended, enforced or interpreted in a manner that materially impacts our operations. Violations of these regulations
are punishable by civil penalties, including fines, denial of export privileges, injunctions, asset seizures, debarment from government
contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. We have established policies and procedures
designed to assist with our compliance with such laws and regulations. However, there can be no assurance that our policies and procedures
will prevent us from violating these regulations in every transaction in which we may engage, and such a violation could adversely affect
our reputation, business, financial condition, results of operations and cash flows.
Risks
Related to Our Business Operations
Our
Pure-Vu System is currently our sole product and we are completely dependent on the successful marketing and sale of this product. There
is no assurance that we will be able to develop any additional products.
Our
Pure-Vu System is currently our sole product and we are completely dependent on the success of this product. We may fail to successfully
commercialize our product. Successfully commercializing medical devices such as ours is a complex and uncertain process, dependent on
the efforts of management, distributors, outside consultants, physicians and general economic conditions, among other factors. Any factors
that adversely impact the commercialization of our Pure-Vu System, including, but not limited to, competition or acceptance in the marketplace,
will have a negative impact on our business, results of operations and financial condition. We cannot assure you that we will be successful
in developing or commercializing any potential enhancements to our Pure-Vu System or any other products. Our inability to successfully
commercialize our Pure-Vu System and/or successfully develop and commercialize additional products or any enhancements to our Pure-Vu
System which we may develop would have a material adverse effect on our business, results of operations and financial condition.
We
are a medical technology company with a limited operating history.
We
are a medical technology company with a limited operating history. We received clearance from the FDA, and a Certificate of Conformity
which allows us to affix the CE Mark in the EEA, for our first generation and second generation Pure-Vu System and began commercialization
in fourth quarter of 2019, with the first commercial placements of our second generation Pure-Vu System as part of our initial U.S. market
launch targeting early adopter hospitals. We expect that sales of our Pure-Vu System will account for substantially all of our revenue
for the foreseeable future. However, we have limited experience in selling our products and we may be unable to successfully commercialize
our Pure-Vu System for a number of reasons, including:
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market
acceptance of our Pure-Vu System by physicians and patients will largely depend on our ability to demonstrate its relative safety,
efficacy, cost-effectiveness and ease of use; |
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our
inexperience in marketing, selling and distributing our products; |
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we
may not have adequate financial or other resources to successfully commercialize our Pure-Vu System; |
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we
may not be able to manufacture our Pure-Vu System in commercial quantities or at an acceptable cost; |
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the
uncertainties associated with establishing and qualifying a manufacturing facility; |
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patients
will not generally receive separate reimbursement from third-party payors for the use of our Pure-Vu System for colon cleansing,
which may reduce widespread use of our Pure-Vu System; |
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the
introduction and market acceptance of competing products and technologies; |
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rapid
technological change may make our Pure-Vu System obsolete; |
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our
inability to project in the short term the hospital medical device environment considering the global pandemic and strains on hospital
systems; and |
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our inability to predict the financial impact of inflation on costs such
as labor, freight and materials |
Potential
investors should carefully consider the risks and uncertainties that a company with a limited operating history will face. In particular,
potential investors should consider that we cannot assure you that we will be able to:
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successfully
execute our current business plan for the commercialization of our Pure-Vu System, or that our business plan is sound; |
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successfully
contract for and establish a commercial supply of our product; |
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achieve
market acceptance of our Pure-Vu System; and |
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attract
and retain an experienced management and advisory team. |
If
we cannot successfully execute any one of the foregoing, our business may not succeed and your investment will be adversely affected.
The
Pure-Vu System may not be accepted by physicians and patients.
Our
Pure-Vu System for use during colonoscopy screenings to clean the colon through irrigation and evacuation of bowel contents is a new
technology and may be perceived as more invasive than current colonoscopy screening procedures, and patients may be unwilling to undergo
the procedure. Moreover, patients may be unwilling to depart from the current standard of care. In addition, physicians tend to be slow
to change their medical treatment practices because of perceived liability risks arising from the use of new products. Physicians may
not recommend or prescribe our Pure-Vu System until there is long-term clinical evidence to convince them to alter their existing treatment
methods, there are recommendations from prominent physicians that our Pure-Vu System is safe and efficient and separate reimbursement
or insurance coverage is available. We cannot predict when, if ever, physicians and patients may adopt the use of our Pure-Vu System.
If our Pure-Vu System does not achieve an adequate level of acceptance by patients, physicians and healthcare payors, we may not generate
significant product revenue and we may not become profitable.
If
we are not able to successfully commercialize our Pure-Vu System, the revenue that we generate from its sales, if any, may be limited.
The
commercial success of our Pure-Vu System will depend upon its acceptance by the medical community, including physicians, patients and
health care payors. The degree of market acceptance of our Pure-Vu System will depend on a number of factors, including:
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demonstration
of clinical safety and efficacy; |
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relative
convenience, burden and ease of administration; |
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the
prevalence and severity of any adverse effects; |
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the
willingness of physicians to prescribe the Pure-Vu System and of the target patient population to try new procedures; |
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efficacy
of our Pure-Vu System compared to competing procedures; |
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the
introduction of any new products and procedures that may in the future become available for colonoscopy preparation may be approved; |
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pricing
and cost-effectiveness; |
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the
inclusion or omission of our Pure-Vu System in applicable treatment guidelines; |
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the
effectiveness of our or any future collaborators’ sales and marketing strategies; |
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limitations
or warnings contained in FDA or Notified Body-approved labeling; |
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our
ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare
and Medicaid, private health insurers and other third-party payors; and |
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the
willingness of patients to pay out-of-pocket in the absence of third-party coverage or separate reimbursement. |
If
our Pure-Vu System does not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate
sufficient revenue and we may not be able to achieve or sustain profitability. Our efforts to educate the medical community and third-party
payors on the benefits of our Pure-Vu System may require significant resources and may never be successful.
We
currently have a limited sales and marketing organization. If we are unable to secure a sales and marketing partner and/or establish
satisfactory sales and marketing capabilities, we may not successfully commercialize our Pure-Vu System.
At
present, we have limited sales or marketing personnel. In order to commercialize devices that are approved for commercial sales, we must
either collaborate with third parties that have such commercial infrastructure and/or continue to develop our own sales and marketing
infrastructure. If we are not successful entering into appropriate collaboration arrangements, recruiting sales and marketing personnel
or in building a sales and marketing infrastructure, we will have difficulty successfully commercializing our Pure-Vu System, which would
adversely affect our business, operating results and financial condition.
We
may not be able to enter into collaboration agreements on terms acceptable to us or at all. In addition, even if we enter into such relationships,
we may have limited or no control over the sales, marketing and distribution activities of these third parties. Our future revenues may
depend heavily on the success of the efforts of these third parties. If we elect to establish a sales and marketing infrastructure we
may not realize a positive return on this investment. In addition, we will have to compete with established and well-funded medical device
companies to recruit, hire, train and retain sales and marketing personnel. Factors that may inhibit our efforts to commercialize our
Pure-Vu System without strategic partners or licensees include:
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our
inability to recruit and retain adequate numbers of effective sales and marketing personnel; |
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the
inability of sales personnel to obtain access to or persuade adequate numbers of physicians to use our Pure-Vu System; |
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the
lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies
with more extensive product lines; and |
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unforeseen
costs and expenses associated with creating an independent sales and marketing organization. |
Our
Pure-Vu System may cause adverse side effects that prevent its widespread adoption or that may necessitate its withdrawal from the market.
Our
Pure-Vu System is currently believed to have the same side effects as a standard colonoscopy, such as inducing trauma to the colon’s
mucosa or, in rare cases, perforation of the colon. With more extensive use, the Pure-Vu System may be found to cause additional undesirable
and unintended side effects or show a higher rate of side effects than a standard colonoscopy that may prevent or limit its commercial
adoption and use. Even upon receiving clearance from the FDA, CE Certificates of Conformity by a Notified Body in the EEA and approvals
from other regulatory authorities, our products may later exhibit adverse side effects that prevent widespread use or necessitate withdrawal
from the market. The manifestation of such side effects could cause our business to suffer.
We
rely on the proper function, availability and security of our information technology systems to operate our business and a cyber-attack
or other breach or disruption of these systems could have a material adverse effect on our business and results of operations.
We
rely on information technology systems to process, transmit and store electronic information in our day-to-day operations. The form and
function of such systems may change over time as our business needs change. The nature of our business involves the receipt and storage
of personal and financial information regarding our customers. We use our information technology systems to manage or support a variety
of business processes and activities, including sales, shipping, billing, customer service, procurement and supply chain, manufacturing
and accounts payable. In addition, we use enterprise information technology systems to record, process, and summarize transactions and
other financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting,
legal, and tax requirements. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to computer
viruses, attacks by computer hackers, failures during the process of upgrading or replacing software, databases or components thereof,
power outages, hardware failures, telecommunication failures, user errors or catastrophic events. Any failure by us to maintain or protect
our information technology systems and data integrity, including from cyber-attacks, intrusions, disruptions or shutdowns, could result
in the unauthorized access to customer data, theft of intellectual property or other misappropriation of assets or the loss of key data
and information, or otherwise compromise our confidential or proprietary information and disrupt our operations. If our information technology
systems are breached or suffer severe damage, disruption or shutdown and we are unable to effectively resolve the issues in a timely
manner, our business and operating results may be materially and adversely affected. With the ever-changing threat landscape, and while
we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that
such measures will prevent service interruptions or security breaches that could adversely affect our business.
If
our efforts to maintain the privacy and security of our customer, employee, supplier or Company information are not successful, we could
incur substantial additional costs and become subject to litigation, enforcement actions and reputational damage.
Our
business, like that of most medical device companies, involves the receipt, storage and transmission of customer information and payment
and reimbursement information, our employees, our suppliers and our Company. Our information systems are vulnerable to an increasing
threat of continually evolving cybersecurity risks. Unauthorized parties may attempt to gain access to our systems or information through
fraud or other means of deceiving our employees, business acquisitions, or third-party service providers. Hardware, software or applications
we develop or obtain from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise
information and device security. Hardware or software applications developed by our business acquisitions may face risks associated with
defects and vulnerabilities in their systems, or difficulties with the integration of the acquisitions into our information systems.
The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are also constantly changing and evolving,
and may be difficult to anticipate or detect for long periods of time. The ever-evolving threats mean we must continually evaluate and
adapt our systems and processes, and our efforts may not be adequate to safeguard against all data security breaches, misuse of data
or sabotage of our systems. Any future significant compromise or breach of our data security, whether external or internal, or misuse
of customer, employee, supplier or Company data, could result in additional significant costs, lost sales, fines, lawsuits and damage
to our reputation. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes
increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could
also result in additional costs. Further, many of our employees are working remotely in response to the COVID-19 pandemic and related
government actions, which could expose us to greater risks related to cybersecurity and our information systems.
If
we do not convince gastroenterologists that our products are attractive alternatives to the currently marketed medical devices and suitable
for use in addressing bowel preparation or cleansing, we will not be commercially successful.
If
we are not successful in convincing gastroenterologists of the merits of our products or educating them on the use of our products, they
may not use our products and we will be unable to fully commercialize our products or reach profitability. Gastroenterologists may be
hesitant to change their medical treatment practices for the following reasons, among others:
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lack
of experience with our products and concerns regarding potential side effects; |
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lack
of clinical data currently available to support the safety and effectiveness of our products; |
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lack
or perceived lack of evidence supporting additional patient benefits; |
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perceived
liability risks generally associated with the use of new products and procedures; and |
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the
time commitment that may be required for training. |
In
addition, we believe recommendations and support of our products by influential gastroenterologists are important for market acceptance
and adoption. If we do not receive support from such gastroenterologists or long term data does not show the benefits of using our products,
gastroenterologists may not use our products. In such circumstances, we may not be able to grow our revenues or achieve profitability.
If
we are unable to train gastroenterologists and their clinical staff on the safe and appropriate use of our products, we may be unable
to achieve revenue growth or profitability.
An
important part of our sales process includes the ability to train gastroenterologists and their clinical staff on the safe and appropriate
use of our products. We have very limited experience in training and retaining qualified independent gastroenterologists to perform the
colon cleansing procedure using our Pure-Vu System. If we are unable to attract gastroenterologists to our training programs, it may
lead to a higher rate of injury, negative publicity and an increased risk of product liability, which would adversely affect our growth
or profitability.
There
is a learning process involved in gastroenterologists and their clinical staff becoming proficient in the use of our products. It is
critical to the success of our commercialization efforts to train a sufficient number of gastroenterologists and to provide them with
adequate instruction in the use of our Pure-Vu System. This training process may take longer than expected and may therefore affect our
ability to increase sales. Following completion of training, we expect to rely on the trained gastroenterologists to advocate the benefits
of our products in the broader marketplace. Convincing gastroenterologists to dedicate the time and energy necessary for adequate training
is challenging, and we cannot assure you we will be successful in these efforts. If gastroenterologists and their clinical staff are
not properly trained, they may misuse or ineffectively use our products. Such uses may result in unsatisfactory patient outcomes, patient
injury, negative publicity or lawsuits against us, any of which would have a material adverse effect on our business, results of operations
and financial condition.
We
may face competition from other medical device companies in the future and our operating results will suffer if we fail to compete effectively.
The
medical device industries are intensely competitive and subject to rapidly evolving technology and intense research and development efforts.
We have competitors in a number of jurisdictions that have substantially greater name recognition, commercial infrastructures and financial,
technical and personnel resources than we have. Established competitors may invest heavily to quickly discover and develop novel devices
or procedures that could make our Pure-Vu System obsolete or uneconomical. Any new product that competes with a cleared medical device
may need to demonstrate compelling advantages in efficacy, cost, convenience, tolerability and safety to be commercially successful.
Other competitive factors could force us to lower prices or could result in reduced sales, including increased use of alternatives to
colonoscopies such as capsule endoscopy systems, virtual colonoscopies using a CT scan, and other similar screening tests for colon cancer.
While none of these testing alternatives may ever fully replace the colonoscopy, over time, they may take market share away from conventional
colonoscopies for specific purposes and may lower the potential market opportunity for us. In addition, new devices developed by others
could emerge as competitors to our Pure-Vu System. If we are not able to compete effectively against our current and future competitors,
our business will not grow and our financial condition and operations will suffer.
Our
products face the risk of technological obsolescence, which, if realized, could have a material adverse effect on our business.
The
medical device industry is characterized by rapid and significant technological change. There can be no assurance that third parties
will not succeed in developing or marketing technologies and products that are more effective than ours or that would render our technology
and products obsolete or noncompetitive. Additionally, new, less invasive surgical procedures and medications could be developed that
replace or reduce the importance of current procedures that use or could use our products. Accordingly, our success will depend in part
upon our ability to respond quickly to medical and technological changes through the development of new products. Product development
involves a high degree of risk, and we cannot assure you that our new product development efforts will result in any commercially successful
products.
If
defects are discovered in our products, we may incur additional unforeseen costs, hospitals may not purchase our products and our reputation
may suffer.
Our
products incorporate mechanical parts, any of which can contain errors or failures, especially when first introduced. In addition, new
products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after commercial
shipment. Because our products are designed to be used to perform medical procedures, we expect that our customers will have an increased
sensitivity to such defects. We cannot provide any assurances that our products will not experience component aging, errors or performance
problems in the future. If we experience flaws or performance problems, any of the following could occur:
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delays
in product shipments; |
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loss
of revenue; |
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delay
in market acceptance; |
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diversion
of our resources; |
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damage
to our reputation; |
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product
recalls; |
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regulatory
actions; |
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increased
service or warranty costs; or |
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product
liability claims. |
Our
future growth depends, in part, on our ability to penetrate foreign markets, where we would be subject to additional regulatory burdens
and other risks and uncertainties.
Our
future profitability will depend, in part, on our ability to commercialize our Pure-Vu System in foreign markets for which we intend
to rely on collaborations with third parties. If we commercialize our Pure-Vu System in foreign markets, we would be subject to additional
risks and uncertainties, including:
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our
customers’ ability to obtain reimbursement for our Pure-Vu System in foreign markets; |
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our
inability to directly control commercial activities because we are relying on third parties; |
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the
burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements; |
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different
medical practices and customs in foreign countries affecting acceptance in the marketplace; |
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import
or export licensing requirements; |
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longer
accounts receivable collection times; |
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longer
lead times for shipping; |
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language
barriers for technical training; |
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reduced
protection of intellectual property rights in some foreign countries; |
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foreign
currency exchange rate fluctuations; and |
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the
interpretation of contractual provisions governed by foreign laws in the event of a contract dispute. |
Foreign
sales of our Pure-Vu System could also be adversely affected by the imposition of governmental controls, political and economic instability,
trade restrictions and changes in tariffs, any of which may adversely affect our results of operations.
We
are, and will be, completely dependent on third parties to manufacture our Pure-Vu System, and our commercialization of our Pure-Vu System
could be halted, delayed or made less profitable if those third parties fail to obtain or maintain manufacturing approval from the FDA
or comparable foreign regulatory authorities, fail to provide us with sufficient quantities of our Pure-Vu System device components or
fail to do so at acceptable quality levels or prices.
We
do not currently have, nor do we plan to acquire, the capability or infrastructure to manufacture our Pure-Vu System, as well as the
other related device components for high volume commercial purposes. We do have capability to produce limited units for use in our clinical
studies, if required. As a result, we are obligated to rely on contract manufacturers for the commercial supply of our product. We currently
rely on several manufacturing partners to manufacture and produce the components of our Pure-Vu System, and the loss of the services
of these manufacturers or an adverse change in the manufacturer’s business or our relationship could have a material adverse effect
on our business. Our primary reliance on these manufacturers for all or substantially all of our manufacturing needs involves several
risks, including the potential inability to obtain an adequate supply of components and limited control over pricing, quality and timely
delivery of the components. In addition, replacing these manufacturers may be difficult and could result in an inability or delay in
obtaining the components for our Pure-Vu System. As a result, if such a disruption were to occur we may be unable to fulfill customer
orders or orders for trials, and our operating results may fluctuate from period to period, particularly if a disruption occurs near
the end of a fiscal period. However, we anticipate engaging additional manufacturers for the production of the components of our Pure-Vu
System as we expand our commercialization efforts.
The
facilities used by our contract manufacturers to manufacture the Pure-Vu System must be compliant with FDA Quality System Regulation
requirements and registered with the FDA. We do not control the manufacturing process of, and are completely dependent on, our contract
manufacturing partners for compliance with current Good Manufacturing Practices (“cGMPs”) for manufacture of medical devices,
as issued in the Quality System Regulation (21 CFR Part 820). These cGMPs regulations cover all aspects of the manufacturing, testing,
quality control and record keeping relating to the Pure-Vu System. If our contract manufacturers cannot successfully manufacture products
that conform to our specifications and the strict regulatory requirements of the FDA or others, they will not be able to secure and/or
maintain regulatory approval for their manufacturing facilities. If the FDA or a comparable foreign regulatory authority does not approve
these facilities for the manufacture of our products or if it withdraws any such approval in the future, we may need to find alternative
manufacturing facilities, which would significantly impact our ability to maintain regulatory approval for or market the Pure-Vu System.
Our
contract manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and foreign agencies
for compliance with cGMPs and similar regulatory requirements. We will not have control over our contract manufacturers’ compliance
with these regulations and standards. Failure by any of our contract manufacturers to comply with applicable regulations could result
in sanctions being imposed on us, including fines, injunctions, civil penalties, failure to market the Pure-Vu System, delays, suspensions
or withdrawals of approvals, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect
our business. In addition, we will not have control over the ability of our contract manufacturers to maintain adequate quality control,
quality assurance and qualified personnel. Failure by our contract manufacturers to comply with or maintain any of these standards could
adversely affect our ability to maintain regulatory approval for or market our Pure-Vu System.
If,
for any reason, these third parties are unable or unwilling to perform, we may not be able to terminate our agreements with them, and
we may not be able to locate alternative manufacturers or enter into favorable agreements with them and we cannot be certain that any
such third parties will have the manufacturing capacity to meet future requirements. If these manufacturers, or any alternate manufacturers,
experience any significant difficulties in their respective manufacturing processes for our product or should cease doing business with
us, we could experience significant interruptions in supply or may not be able to create or maintain a commercial supply. Were we to
encounter manufacturing issues, our ability to produce sufficient commercial supply might be negatively affected. Our inability to coordinate
the efforts of our third party manufacturing partners or the lack of capacity available at our third party manufacturing partners, could
impair our ability to supply our Pure-Vu System at required levels. If we face these or other difficulties with our manufacturing partners
we could experience significant interruptions in the supply of our products if we decided to transfer the manufacture to one or more
alternative manufacturers in an effort to deal with the difficulties.
Any
manufacturing problem or the loss of a contract manufacturer could be disruptive to our operations and result in lost sales. Any reliance
on suppliers may involve several risks, including a potential inability to obtain critical components and reduced control over production
costs, delivery schedules, reliability and quality. Any unanticipated disruption to a future contract manufacturer caused by problems
at suppliers could delay shipment of our Pure-Vu System, increase our cost of goods sold and result in lost sales.
The
manufacture of our Pure-Vu System, and the technology developed thereunder, is subject to certain Israeli government regulations which
may impair our ability to outsource or transfer development or manufacturing activities with respect to any product or technology outside
of Israel.
We
have received, and may receive in the future, grants from the Government of the State of Israel through the IIA for the financing of
a portion of our research and development expenditures pursuant to the IIA Regulations.
The
IIA Regulations also require that products developed with IIA grants be manufactured in Israel at a rate (scope) which will not be
less than the rate of manufacturing and added value in Israel that were set forth in the relevant grant applications submitted to
the IIA. Furthermore, the IIA Regulations require that the know how resulting from research and development according to an
IIA-approved plan, not being the product developed within the framework of such approved plan, and any right deriving therefrom may
not be transferred outside of Israel (including by way of certain licenses), unless prior approval is received from the IIA. We
received approval for the transfer of manufacturing of the sleeves outside of Israel. The transfer outside of Israel of
manufacturing which is connected with the IIA-funded knowhow will result in a higher royalty repayment rate and may further result
in increased royalties (up to three times the aggregate amount of the IIA grants plus interest thereon). In addition, the
transfer outside of Israel of IIA-funded knowhow may trigger additional payments to the IIA (up to six times the aggregate amount of
the IIA grants plus interest thereon). Even following the full repayment of any IIA grants, we must nevertheless continue to comply
with the requirements of the IIA Regulations. The foregoing restrictions and requirements for payment may impair our ability to
transfer or sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with
respect to any IIA-funded know how outside of Israel.
Furthermore,
companies that receive IIA funding are, generally required to ensure that all rights in the IIA-backed product are retained by them.
This means that, generally, all knowhow which is derived from the research and development conducted pursuant to an IIA approved plan,
and every right derived from it, must be owned by the recipient of the IIA funding from the date such knowhow is generated. Companies
that receive IIA funding are further subject to reporting requirements and other technical requirements, which are intended to allow
the IIA to ensure that the IIA Regulations are being complied with.
If
we fail to comply with any of the conditions and restrictions imposed by the IIA Regulations, or by the specific terms under which we
received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain
circumstances, may be subject to criminal charges.
For
additional information, see “Part I—Item 1A—Risk Factors—Risks Related to Our Operations in Israel.”
Risks
Relating to Our Intellectual Property Rights
We
may be unable to protect our intellectual property rights or may infringe on the intellectual property rights of others.
We
rely on a combination of patents, trademarks, copyrights, trade secrets and nondisclosure agreements to protect our proprietary intellectual
property. Our efforts to protect our intellectual property and proprietary rights may not be sufficient. We cannot be sure that our pending
patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past or in the future
will not be challenged or circumvented by competitors or that these patents will remain valid or sufficiently broad to preclude our competitors
from introducing technologies similar to those covered by our patents and patent applications. In addition, our ability to enforce and
protect our intellectual property rights may be limited in certain countries outside the United States, which could make it easier for
competitors to capture market position in such countries by utilizing technologies that are similar to those developed or licensed by
us.
Competitors
also may harm our sales by designing products that mirror the capabilities of our products or technology without infringing our intellectual
property rights. If we do not obtain sufficient protection for our intellectual property, or if we are unable to effectively enforce
our intellectual property rights, our competitiveness could be impaired, which would limit our growth and future revenue.
We
may in the future be a party to patent litigation and administrative proceedings that could be costly and could interfere with our ability
to sell our Pure-Vu System.
Litigation
related to infringement and other intellectual property claims, with or without merit, is unpredictable, can be expensive and time consuming
and can divert management’s attention from our core business. If we lose this kind of litigation, a court could require us to pay
substantial damages, and prohibit us from using technologies essential to our Pure-Vu System, any of which would have a material adverse
effect on our business, results of operations and financial condition. If relevant patents are upheld as valid and enforceable and we
are found to infringe, we could be prevented from selling our Pure-Vu System unless we can obtain a license to use technology or ideas
covered by such patents or are able to redesign our Pure-Vu System to avoid infringement. We do not know whether any necessary licenses
would be available to us on satisfactory terms, if at all, or whether we could redesign our Pure-Vu System or processes to avoid infringement.
Competing
products may also appear in other countries in which our patent coverage might not exist or be as strong. If we lose a foreign patent
lawsuit, we could be prevented from marketing our Pure-Vu System in one or more foreign countries.
We
may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used
or disclosed alleged confidential information or trade secrets of their former employers.
As
is commonplace in our industry, we employ and plan to employ individuals who were previously employed at other medical device companies,
including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject in the future
to claims that our employees or prospective employees are subject to a continuing obligation to their former employers (such as non-competition
or non-solicitation obligations) or claims that our employees or we have inadvertently or otherwise used or disclosed trade secrets or
other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful
in defending against these claims, litigation could result in substantial costs and be a distraction to management.
General
Company-Related Risks
We
will need to grow the size of our organization, and we may experience difficulties in managing this growth.
As
of December 31, 2022, we had 43 full time employees and 6 part time employees. As our marketing and commercialization plans and strategies develop, we will
need to expand the size of our employee and consultant base for managerial, operational, sales, marketing, financial and other
resources. Future growth would impose significant added responsibilities on members of management, including the need to identify,
recruit, maintain, motivate and integrate additional employees. In addition, our management may have to divert a disproportionate
amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth
activities. Our future financial performance and our ability to commercialize the Pure-Vu System and any other future product
candidates and our ability to compete effectively will depend, in part, on our ability to effectively manage our future
growth.
Our
success will depend in part on our ability to manage our operations as we advance our products through clinical studies and to expand
our development, regulatory and commercial capabilities or contract with third parties to provide these capabilities for us. Failure
to achieve any of these goals could have a material adverse effect on our business, financial condition or results of operations.
If
we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business
strategy. In addition, the loss of the services of certain key employees would adversely impact our business prospects.
We
depend on key members of our management team. The loss of the services of Tim Moran, our Chief Executive Officer, Mark Pomeranz, our
President and Chief Operating Officer, Andrew Taylor, our Chief Financial Officer or any member of our senior management team, could
harm our ability to execute our commercial strategy for our Pure-Vu System and the strategic objectives for our company. We entered into
employment agreements with our Chief Executive Officer, President and Chief Operating Officer, and Chief Financial Officer, but these
agreements are terminable by the employees on short or no notice at any time without or with limited penalty. In addition, we do not
maintain, and have no current intention of obtaining, “key man” life insurance on any member of our management team.
Recruiting
and retaining qualified scientific and commercial personnel, including sales and marketing executives and field personnel, is also critical
to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous medical
device and pharmaceutical companies for similar personnel and based on our company profile. We also experience competition for the hiring
of scientific personnel from universities and research institutions. If we fail to recruit and then retain these personnel, we may not
be able to effectively execute our commercial strategy for the Pure-Vu System.
If
product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization
of the Pure-Vu System.
We
are, and may be in the future, subject to product liability claims and lawsuits, including potential class actions, alleging that our
products have resulted or could result in an unsafe condition or injury. Any product liability claim brought against us, with or without
merit, could be costly to defend and could result in settlement payments and adjustments not covered by or in excess of insurance. In
addition, we may not be able to obtain insurance on terms acceptable to us or at all because insurance varies in cost and can be difficult
to obtain. Our failure to successfully defend against product liability claims or maintain adequate insurance coverage could have an
adverse effect on our results of operations and financial condition.
Exchange
rate fluctuations between the U.S. dollar and the Israeli New Shekel (the “NIS”) and inflation may negatively affect our
earnings and we may not be able to hedge our currency exchange risks successfully.
The
U.S. dollar is our functional and reporting currency. However, a portion of our operating expenses, including personnel and facilities
related expenses, are incurred in NIS. As a result, we are exposed to the risks that the NIS may appreciate relative to the U.S. dollar,
or, if the NIS instead devalues relative to the U.S. dollar, that the inflation rate in Israel may exceed such rate of devaluation of
the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the dollar cost of our operations
in Israel would increase and our dollar-denominated results of operations would be adversely affected. Given our general lack of currency
hedging arrangements to protect us from fluctuations in the exchange rates of the NIS and other foreign currencies in relation to the
U.S. dollar (and/or from inflation of such foreign currencies), we may be exposed to material adverse effects from such movements. We
cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the U.S. dollar.
We
may acquire other businesses or form joint ventures or make investments in other companies or technologies that could negatively affect
our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
We
may pursue acquisitions of businesses and assets. We also may pursue strategic alliances and joint ventures that leverage our intellectual
property and industry experience to expand our offerings or distribution. We have no history of acquiring other companies or with forming
strategic partnerships. We may not be able to find suitable partners or acquisition candidates, and we may not be able to complete such
transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully
into our existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in the issuance
of equity securities, incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which
could have a material adverse effect on our financial condition, results of operations, and cash flows. Integration of an acquired company
also may disrupt ongoing operations and require management resources that we would otherwise focus on developing our existing business.
We may experience losses related to investments in other companies, which could have a material negative effect on our results of operations
and financial condition. We may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, or joint
venture.
To
finance any acquisitions or joint ventures, we may choose to issue shares of our Common Stock as consideration, which would dilute the
ownership of our stockholders. Additional funds may not be available on terms that are favorable to us, or at all. If the price of our
Common Stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration.
Global
or regional pandemics, including outbreaks of communicable diseases, may materially and adversely affect our business, financial condition,
revenues, and results of operations.
We
may face risks related to health epidemics or outbreaks of communicable diseases. For example, the recent outbreak around the world of
the highly transmissible and pathogenic coronavirus COVID-19. The outbreak of such communicable diseases could result in a widespread
health crisis that could adversely affect general commercial activity and the economies and financial markets of many countries.
The
continued impact resulting from the COVID-19 outbreak where we and our business partners have operations, or the perception that such
an outbreak could occur, and the measures taken by our business partners, including restrictions with respect to business or hospital
procedures, restrictions with respect to our access to our business partners, and/or restrictions imposed by the regulatory bodies or
governments of countries or regions affected, could adversely affect our business, financial condition, revenues, and results of operations.
For
example, the COVID-19 outbreak, or other similar outbreaks, could have an adverse effect on the overall productivity of our workforce
and we may be required to take extraordinary measures to ensure the safety of our employees and those of our business partners. These
measures could require that our employees refrain from traveling to their normal workplace for extended periods of time, which we have
already experienced in certain locations as a result of the COVID-19 outbreak, which in turn could result in a decrease in our commercial
activities, or result in higher costs or other inefficiencies.
Any
serious disruption with our suppliers or customers due to such outbreaks could impair our ability to meet and/or generate demand for
our product, which may negatively impact our revenue, financial condition and commercial operations. Such outbreaks could also result
in delays in or the suspension of our business partners manufacturing operations.
Additionally,
our business may be harmed if, in connection with an outbreak, our customers seek to limit or prevent access by our sales and clinical
support teams to their facilities, which we have already experienced in certain locations as a result of the COVID-19 outbreak, or if
our customers postpone elective procedures while their resources are diverted to addressing such an outbreak, or if capital spending
by hospitals is curtailed or delayed in connection with such an outbreak, which we have already experienced as a result of the COVID-19
outbreak. An outbreak may also result in restrictions on domestic and international travel, which could have a negative impact on our
customer engagement efforts, including through the cancellation or postponement of third-party conferences, trade shows and similar events,
each of which we have already experienced as a result of the COVID-19 outbreak.
In
addition to the risks identified above, we may face the risk of a resurgence of an outbreak, including a resurgence of the ongoing COVID-19
outbreak, in locations where we and our business partners have operations that were initially showing signs of improvement from such
outbreak. Such resurgence may result in the recurrence of each of the risks and restrictions identified above, as well as new or unforeseen
risks or restrictions imposed by our business partners, including with respect to our business partners operations or procedures and/or
our access to such business partners, or imposed by the regulatory bodies and/or governments of countries or regions affected, all of
which could adversely affect our business, financial condition, revenues, and results of operations.
Further,
in our operations as a public company, prolonged government disruptions, global pandemics and other natural disasters or geopolitical
actions could affect our ability to access the public markets and obtain necessary capital in order to properly capitalize and continue
our operations.
Risks
Related to our Capital Stock
Our
quarterly operating results may be subject to significant fluctuations.
To
date, as part of our initial U.S. market launch, we have generated limited revenue from our Pure-Vu
System, but we do not expect to generate significant revenue from product sales until we expand our commercialization efforts for the
Pure-Vu System, which is subject to significant uncertainty, and accordingly we may experience significant fluctuations in our quarterly
operating results in the future. The rate of market acceptance of our Pure-Vu System could contribute to this quarterly variability.
Our limited operating history complicates our ability to project quarterly revenue and any future revenue generated from sales of our
Pure-Vu System may fluctuate from time to time. In addition, our expense levels are based, in part, on expectation of future revenue
levels. A shortfall in expected revenue, if any, could, therefore, result in a disproportionate decrease in our net income. As a result,
our quarterly operating results may be subject to significant fluctuations.
An
active trading market for our Common Stock may not be sustained.
Prior
to the closing of our IPO on February 16, 2018, there had been no public market for our Common Stock. Although our Common Stock is listed
on the NASDAQ Capital Market, the market for our shares has demonstrated varying levels of trading activity. Furthermore, the current
level of trading may not be sustained in the future. The lack of an active market for our Common Stock may impair investors’ ability
to sell their shares at the time they wish to sell them or at a price that they consider reasonable, may reduce the fair market value
of their shares and may impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability
to acquire additional intellectual property assets by using our shares as consideration.
A
sale of a substantial number of shares of our Common Stock in the public market could cause the market price of our Common Stock to drop
significantly, even if our business is doing well.
Our
stock price could decline as a result of sales of a large number of shares of our Common Stock or the perception that these sales could
occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem appropriate.
In
addition, in the future, we may issue additional shares of Common Stock or other equity or debt securities convertible into Common Stock
in connection with a financing, acquisition, litigation settlement, employee arrangements or otherwise. Any such issuance could result
in substantial dilution to our existing stockholders and could cause our stock price to decline.
If we fail to regain compliance with the requirements
for continued listing on Nasdaq, our common stock could be delisted from trading, which would adversely affect the liquidity of our common
stock and our ability to raise additional capital.
The Nasdaq Capital Market’s rules for listed
companies requires us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue
the listing of our Common Stock. In order to maintain our listing on Nasdaq, we must satisfy the continued listing requirements of Nasdaq
for inclusion in the Nasdaq Capital Market, including among other things, a minimum stockholders’ equity of $2.5 million and a minimum
bid price for our Common Stock of $1.00 per share.
On January 4, 2023, we received a letter from the
Nasdaq Stock Market notifying us that we were no longer in compliance with the minimum stockholders’ equity requirement for continued
listing under Nasdaq Listing Rule 5550(b)(1), which requires us to maintain stockholders’ equity of at least
$2,500,000. On February 21, 2023, we submitted a plan to regain compliance and on March 9, 2023, the Staff notified the Company (the “Letter”)
that it would be granted an extension until July 3, 2023, to demonstrate compliance with Listing Rule 5550(b)(1) to meet the continued
listing requirements of The Nasdaq Capital Market, conditioned upon achievement of certain milestones included in a plan of compliance
previously submitted to Nasdaq, including a plan to raise additional capital.
We intend to regain compliance with the applicable
continued listing requirements of The Nasdaq Capital Market prior to the end of the compliance period set forth in the abovementioned
letter. However, until Nasdaq has reached a final determination that we have regained compliance with all of the applicable continued
listing requirements, there can be no assurances regarding the continued listing of our common stock on Nasdaq. In the event we fail to
regain compliance within the compliance period, we would have the right to a hearing before an independent panel. The hearing request
would halt any suspension or delisting action pending the conclusion of the hearing process and the expiration of any additional extension
period granted by the panel following the hearing. The delisting of our common stock from Nasdaq would have a material adverse effect
on our access to capital markets, and any limitation on market liquidity or reduction in the price of our common stock as a result of
that delisting would adversely affect our ability to raise capital on terms acceptable to us, if at all.
If
equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our
Common Stock, the price of our Common Stock could decline.
The
trading market for our Common Stock relies in part on the research and reports that equity research analysts publish about us and our
business. We do not control these analysts. The price of our Common Stock could decline if one or more equity analysts downgrade our
Common Stock or if analysts issue other unfavorable commentary or cease publishing reports about us or our business.
Our
share price may be volatile, which could subject us to securities class action litigation and our stockholders could incur substantial
losses.
The
market price for our Common Stock may be volatile and subject to wide fluctuations in response to factors including the following:
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actual
or anticipated fluctuations in our quarterly or annual operating results; |
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actual
or anticipated changes in our growth rate relative to our competitors; |
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failure
to meet or exceed financial estimates and projections of the investment community or that we provide to the public; |
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issuance
of new or updated research or reports by securities analysts; |
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share
price and volume fluctuations attributable to inconsistent trading volume levels of our shares; additions or departures of key management
or other personnel; |
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disputes
or other developments related to proprietary rights, including patents, litigation matters, and our ability to obtain patent protection
for our technologies; |
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announcement
or expectation of additional debt or equity financing efforts; |
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sales
of our Common Stock by us, our insiders or our other stockholders; and |
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general
economic, market or political conditions in the United States or elsewhere. |
In
particular, the market prices of early commercial-stage companies like ours have been highly volatile due to factors, including, but
not limited to:
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any
delay or failure to conduct a clinical trial for our product or receive approval from the FDA and other regulatory agents; |
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developments
or disputes concerning our product’s intellectual property rights; |
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our
or our competitors’ technological innovations; |
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fluctuations
in the valuation of companies perceived by investors to be comparable to us; |
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announcements
by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures, capital commitments, new
technologies or patents; |
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failure
to complete significant transactions or collaborate with vendors in manufacturing our product; and |
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proposals
for legislation that would place restrictions on the price of medical therapies. |
These
and other market and industry factors may cause the market price and demand for our Common Stock to fluctuate substantially, regardless
of our actual operating performance, which may limit or prevent investors from readily selling their shares of Common Stock and may otherwise
negatively affect the liquidity of our Common Stock. In addition, the stock market in general, and NASDAQ Capital Markets and emerging
growth companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock
have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit
against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.
Pursuant
to the terms of our outstanding Royalty Payment Rights Certificates and our outstanding Placement Agent Royalty Payment Rights Certificates,
we may be obligated to pay significant royalties.
Pursuant
to the terms of the Royalty Payment Rights Certificates (as defined in “Part III—Item 13—Certain Relationships and
Related Transactions, and Director Independence— Royalty Payment Rights Certificates - Related Party Participation”) which
were issued in connection with the conversion of all of our outstanding shares of Series A Convertible Preferred Stock upon the consummation
of our IPO, we may be required to make certain royalty payments. After we generate sales of the current and potential future versions
of the Pure-Vu System, including disposables, parts, and services, in excess of $20 million since our inception, then we will be required
to pay to the holders of our Royalty Payment Rights Certificates a royalty equal to (i) three percent (3%) of our net sales, if any,
in any calendar year, subject to a royalty cap amount per calendar year of $30 million. Additionally, after we receive any proceeds from
the licensing of the current and potential future versions of the Pure-Vu System in excess of $3.5 million since our inception, then
we will be required to pay to the holders of the Royalty Payment Rights Certificates a royalty equal to 5% of our licensing proceeds,
if any, in any calendar year, subject to a royalty cap amount per calendar year of $30 million. The royalties will be payable up to the
later of (i) the latest expiration date for our current patents (which is currently March 2038), or (ii) the latest expiration date of
any pending patents as of the date of the initial closing of the 2017 Private Placement that may be issued in the future.
Pursuant
to the terms of our Placement Agent Royalty Payment Rights Certificates issued in connection with the 2017 Private Placement, we will
be required to pay the holders of the Placement Agent Royalty Payment Rights Certificates, in the aggregate, 10% of the amount of payments
paid to the holders of the Royalty Payment Rights Certificates.
We
are an “emerging growth company,” and will be able take advantage of reduced disclosure requirements applicable to “emerging
growth companies,” which could make our Common Stock less attractive to investors.
We
are an “emerging growth company,” as defined in the JOBS Act and, for as long as we continue to be an “emerging growth
company,” we intend to take advantage of certain exemptions from various reporting requirements applicable to other public companies
but not to “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
stockholder approval of any golden parachute payments not previously approved. We could be an “emerging growth company” for up to five years from the date of our initial public offering
in February 2018, which would be at the end of the current fiscal year, ending December 31, 2023, or until the earliest of (i) the last day of the first
fiscal year in which our annual gross revenues exceed $1.07 billion, (ii) the date that we become a “large accelerated filer”
as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Common Stock that is held by non-affiliates
exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we
have issued more than $1 billion in non-convertible debt during the preceding three year period.
We
intend to take advantage of these reporting exemptions described above until we are no longer an “emerging growth company.”
Under the JOBS Act, “emerging growth companies” can also delay adopting new or revised accounting standards until such time
as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised
accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that
are not “emerging growth companies.”
We
cannot predict if investors will find our Common Stock less attractive if we choose to rely on these exemptions. If some investors find
our Common Stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for
our Common Stock and our stock price may be more volatile.
We
will incur significantly increased costs and devote substantial management time as a result of operating as a public company particularly
after we are no longer an “emerging growth company.”
As
a newly public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. For
example, we are required to comply with certain of the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and
Consumer Protection Act, as amended, as well as rules and regulations subsequently implemented by the SEC, including the establishment
and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance
with these requirements will increase our legal and financial compliance costs and will make some activities more time consuming and
costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business
matters to devote substantial time to these public company requirements. In particular, we expect to incur significant expenses and devote
substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act. In addition,
after we no longer qualify as an “emerging growth company,” as defined under the JOBS ACT we expect to incur additional management
time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers or
large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We
have not yet completed the process of compiling the system and processing documentation needed to comply with such requirements. We may
not be able to complete our evaluation, testing and any required remediation in a timely fashion. In that regard, we currently do not
have an internal audit function, and we will need to hire or contract for additional accounting and financial staff with appropriate
public company experience and technical accounting knowledge.
We
cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such
costs.
There
may be limitations on the effectiveness of our internal controls, and a failure of our control systems to prevent error or fraud may
materially harm our company.
Proper
systems of internal controls over financial accounting and disclosure controls and procedures are critical to the operation of a public
company. As we have a limited operating history, we only have 4 employees, and 2 contractors in our finance and accounting functions,
which may result in a lack of segregation of duties and are at the very early stages of establishing, and we may be unable to effectively
establish such systems, especially in light of the fact that we expect to operate as a publicly reporting company. This would leave us
without the ability to reliably assimilate and compile financial information about our company and significantly impair our ability to
prevent error and detect fraud, all of which would have a negative impact on our company from many perspectives.
Moreover,
we do not expect that disclosure controls or internal control over financial reporting, even if established, will prevent all error and
all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Failure of our control systems to prevent error or fraud could materially adversely impact us.
If
we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial
statements could be impaired, investors may lose confidence in our financial reporting and the trading price of our Common Stock may
decline. In addition, because of our status as an emerging growth company, our independent registered public accountants are not required
to provide an attestation report as to our internal control over financial reporting for the foreseeable future.
We
are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by our management on, among other things, the effectiveness
of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management
in our internal control over financial reporting. We will also be required to disclose changes made in our internal control and procedures
on a quarterly basis.
A
material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting such that
there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected
and corrected on a timely basis.
We
may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing
process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert
that our internal controls are effective.
We
are an “emerging growth company” as defined in the JOBS Act. For as long as we remain an emerging growth company, we are
permitted and intend to take advantage of the exemptions contained in the JOBS Act, including that our independent registered public
accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting
pursuant to Section 404 of the Sarbanes Oxley Act. We will remain an “emerging growth company” for up to five years from
the date of our initial public offering in February 2018, which would be at the end of the current fiscal year, ending December 31,
2023, although if the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of any June 30th
before that time, we would cease to be an “emerging growth company” as of the following December 31st. At such time, our
independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at
which our controls are documented, designed or operating. In the past, we have identified material weaknesses in our controls which
we subsequently remediated. We cannot assure investors that we will not have other material weaknesses in our internal control over
financial reporting in the future.
If
we identify material weaknesses in our internal control over financial reporting in the future or if we are unable to successfully remediate
the identified material weaknesses or, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that
our internal control over financial reporting is effective, or, if applicable, our independent registered public accounting firm is unable
to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness
of our financial reports, which would cause the price of our Common Stock to decline, and we may be subject to investigation or sanctions
by the SEC, or other regulatory authorities, which could require additional financial and management resources.
We
do not currently intend to pay dividends on our Common Stock in the foreseeable future, and consequently, any gains from an investment
in our Common Stock will likely depend on appreciation in the price of our Common Stock.
We
have never declared or paid cash dividends on our Common Stock and do not anticipate paying any cash dividends to holders of our Common
Stock in the foreseeable future. Consequently, investors must rely on sales of their Common Stock after price appreciation, which may
never occur, as the only way to realize any future gains on their investments. There is no guarantee that shares of our Common Stock
will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Upon
dissolution of our company, our stockholders may not recoup all or any portion of their investment.
In
the event of a liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, the proceeds and/or assets of
our company remaining after giving effect to such transaction, and the payment of all of our debts and liabilities and distributions
required to be made to holders of any outstanding preferred stock will then be distributed to the stockholders of our Common Stock on
a pro rata basis. There can be no assurance that we will have available assets to pay to the holders of our Common Stock, or any amounts,
upon such a liquidation, dissolution or winding-up of our company.
Our
certificate of incorporation, as amended, allows for our board to create new series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the holders of our Common Stock.
Our
board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors
has the authority to issue up to 10 million shares of our preferred stock without further stockholder approval. As a result, our board
of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets
upon liquidation and the right to receive dividend payments before dividends are distributed to the holders of our Common Stock. In addition,
our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our Common Stock
or that is convertible into our Common Stock, which could decrease the relative voting power of our Common Stock or result in dilution
to our existing stockholders.
Our
certificate of incorporation, as amended, designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for
certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us, and our
directors and officers.
Our
certificate of incorporation, as amended, provides that unless we consent in writing to the selection of an alternative forum, the Court
of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our
behalf; (ii) any action asserting a claim of breach of a fiduciary duty; (iii) any action asserting a claim against us, or any of our
officers or directors, arising pursuant to, or a claim against us, or any of our officers or directors, with respect to the interpretation
or application of any provision of the Delaware General Corporation Law, our certificate of incorporation, as amended, or our bylaws;
or (iv) any action asserting a claim governed by the internal affairs doctrine. However, if the Court of Chancery of the State of Delaware
dismisses any such action for lack of subject matter jurisdiction, the action may be brought in another state court sitting in the State
of Delaware.
Risks
Related to Our Operations in Israel
Our
research and development facilities and some of our suppliers are located in Israel and, therefore, our business, financial condition
and results of operation may be adversely affected by political, economic and military instability in Israel.
Our
research and development facilities are located in northern Israel. In addition, most of our employees are residents of Israel. Accordingly,
political, economic and military conditions in Israel may directly affect our business. Since the State of Israel was established in
1948, the State of Israel and its economy has experienced significant growth and expansion, coupled with an increase in the standard
of living, and has developed one of the most advanced high-tech industries in the world. However, it continues to face many geo-political
and other challenges that may affect companies located in Israel, such as ours. For example, a number of armed conflicts have occurred
between Israel and its Arab neighbors. Although Israel has entered into peace agreements with Egypt and Jordan, comprehensive agreements
with the Palestinian Authority, and other agreements with neighboring Arab countries regarding public normalization of relations, there
continues to be unrest and terrorist activity in Israel with varying levels of severity, as well as ongoing hostilities and armed conflicts
between Israel and the Palestinian Authority, and other groups in the West Bank and Gaza Strip, recent unrest was due to the United States’
relocation of its embassy from Tel Aviv to Jerusalem. The effects of these hostilities and violence on the Israeli economy and our operations
are unclear, and we cannot predict the effect on us of a further increase in these hostilities or any future armed conflict, political
instability or violence in the region. We could be harmed by any major hostilities involving Israel, the interruption or curtailment
of trade between Israel and its trading partners, boycotts or a significant downturn in the economic or financial condition of Israel.
The impact of Israel’s relations with its Arab neighbors in general, or on our operations in the region in particular, remains
uncertain. The establishment of new fundamentalist Islamic regimes or governments more hostile to Israel could have serious consequences
for the stability in the region, place additional political, economic and military confines upon Israel, materially adversely affect
our operations and limit our ability to sell our products to countries in the region.
Additionally,
several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries
and groups have imposed or may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political
instability in the region continues or increases. These restrictions may limit our ability to sell our products to companies in these
countries. Furthermore, the Boycott, Divestment and Sanctions Movement, a global campaign attempting to increase economic and political
pressure on Israel to comply with the stated goals of the movement, may gain increased traction and result in a boycott of Israeli products
and services. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners,
or significant downturn in the economic or financial condition of Israel, could adversely affect our business, results of operations
and financial condition.
Our
commercial insurance policy does not cover losses associated with armed conflicts and terrorist attacks. Although the Israeli government
in the past covered the reinstatement value of certain damages that were caused by terrorist attacks or acts of war, we cannot assure
you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred.
Any losses or damages incurred by us could have a material adverse effect on our business.
Our
operations could also be disrupted by the obligations of some of our employees to perform military service. Some of our employees in
Israel may be called upon to perform up to 54 days in each three year period (and in the case of military officers, up to 84 days in
each three year period) of military reserve duty until they reach the age of 40 (and in some cases, depending on their specific military
profession and rank up to 45 or even 49 years of age) and, in certain emergency circumstances, may be called to immediate and unlimited
active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists and
it is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted
by the absence of a significant number of employees related to military service, which could materially adversely affect our business
and results of operations.
Pursuant
to the terms of the Israeli government grants we received for research and development expenditures, we are obligated to pay certain
royalties on our revenues to the Israeli government. The terms of the grants require us to satisfy specified conditions and to make additional
payments in addition to repayment of the grants upon certain events.
We
have received, and may receive in the future, grants from the IIA for the financing of a portion of our research and development expenditures
pursuant to the IIA Regulations.
As
of December 31, 2022, we had received grants from the IIA in the aggregate amount of $1.3 million, and had a contingent obligation to
the IIA up to an aggregate amount of approximately $1.4 million (assuming no increase, per the IIA Regulations, as described below). As
of December 31, 2022, we paid a minimal amount to the IIA. We may apply for additional IIA grants in the future. However, as the funds
available for IIA grants out of the annual budget of the State of Israel are subject to the pre-approval of the IIA and have been reduced
in the past and may be further reduced in the future, we cannot predict whether we will be entitled to – or approved for –
any future grants, or the amounts of any such grants (if approved).
In
exchange for these grants, we are required to pay royalties to the IIA of 4% (which may be increased under certain circumstances) from
our revenues generated (in any fashion) from knowhow developed using IIA grants, up to an aggregate of 100% (which may be increased under
certain circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate of 12-month LIBOR.
The
IIA Regulations also require that products developed with IIA grants be manufactured in Israel at a rate (scope) which will not be
less than the rate of manufacturing and added value in Israel that were included in the relevant grant applications submitted to the
IIA. Furthermore, the IIA Regulations require that the know-how resulting from research and development according to an IIA-approved
plan, not being the product developed within the framework of such approved plan, and any right deriving therefrom may not be
transferred outside of Israel (including by way of certain licenses), unless prior approval is received from the IIA. We received
approval for the transfer of manufacturing of the sleeves outside of Israel. The transfer outside of Israel of manufacturing which
is connected with the IIA-funded knowhow will result in a higher royalty repayment rate and may further result in increased
royalties (up to three times the aggregate amount of the IIA grants plus interest thereon). Even following the full repayment
of any IIA grants, we must nevertheless continue to comply with the requirements of the IIA Regulations. The foregoing restrictions
and requirements for payment may impair our ability to transfer or sell our technology assets outside of Israel or to outsource or
transfer development or manufacturing activities with respect to any IIA-funded know-how outside of Israel.
Furthermore,
companies that receive IIA funding are generally required to ensure that all rights in the IIA-backed product are retained by them. This
means that, generally, all know-how which is derived from the research and development conducted pursuant to an IIA approved plan, and
every right derived from it, must be owned by the recipient of the IIA funding from the date such know-how is generated. Companies that
receive IIA funding are further subject to reporting requirements and other technical requirements, which are intended to allow the IIA
to ensure that the IIA Regulations are being complied with.
If
we fail to comply with any of the conditions and restrictions imposed by the IIA Regulations, or by the specific terms under which we
received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain
circumstances, may be subject to criminal charges.
It
may be difficult to enforce a judgment of a U.S. court against us in Israel or the United States to assert U.S. securities laws claims
in Israel or to serve process on these experts.
Motus
GI Medical Technologies Ltd., our wholly owned subsidiary, is incorporated in Israel. Our Israeli experts reside in Israel, and substantially
all of our technology and intellectual property assets are located in Israel. Therefore, a judgment obtained against us, or any of such
persons, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to
affect service of process on such persons in the United States or to assert U.S. securities law claims in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds that Israel
is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may
determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable
U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure
would also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result
of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either
a U.S. or foreign court.
We
may become subject to claims for payment of compensation for assigned service inventions by our current or former employees, which could
result in litigation and adversely affect our business.
Under
the Israeli Patents Law, 5727-1967, or the Patents Law, inventions conceived by an employee during the scope of his or her employment
are regarded as “service inventions” and are owned by the employer, absent a specific agreement between the employee and
employer giving the employee service invention rights. The Patents Law also provides that if no such agreement between an employer and
an employee exists, which prescribes whether, to what extent, and on what conditions the employee is entitled to remuneration for his
or her service inventions, then such matters may, upon application by the employee, be decided by a government-appointed compensation
and royalties committee established under the Patents Law. A significant portion of our intellectual property has been developed by our
employees in Israel in the course of their employment. Such employees have agreed to waive and assign to us all rights to any intellectual
property created in the scope of their employment with us, and most of our current employees, including all those involved in the development
of our intellectual property, have agreed to waive economic rights they may have with respect to service inventions.
However,
despite such contractual obligations, we cannot assure you that claims will not be brought against us by current or former employees
demanding remuneration in consideration for assigned alleged service inventions or any other intellectual property rights. If any such
claims were filed, we could potentially be required to pay remuneration to our current or former employees for such assigned service
inventions or any other intellectual property rights, or be forced to litigate such claims, which could negatively affect our business.
