ELRNF Elron Ventures Ltd (PK)

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Elron Electronic Industries Ltd.

("Elron" or the "Company")

English Translation of Quarterly Report

for the Second Quarter of 2017

 

The rest of the terms in this report shall have the meaning ascribed to them in the 20-F Annual Report, unless stated explicitly otherwise.

 

In accordance with reporting requirements in Israel, Elron filed an annual report for 2016 in Hebrew with the Israeli Securities Authority ("ISA Annual Report"), simultaneously with its 20-F Annual Report. For the convenience of the Company's U.S. based shareholders, in translating Part I of this report from Hebrew to English, changes and updates are given in reference to the 20-F Annual Report, rather than the ISA Annual Report filed in Hebrew.

 

The matters described below are in addition to the developments and changes that occurred in the second quarter of 2017 that were already previously described in Part I of the Company's Quarterly Report for the First Quarter of 2017.

 

 

1.

Item 3D – Risk Factors: Risks Affecting Us and the Companies in Our Group

 

1.1.

We voluntarily delisted from the Nasdaq Global Select Market and may in the future seek to terminate our Exchange Act registration

 

Pursuant to the decision taken by the Company's Board of Directors on November 12, 2009, Elron voluntarily delisted its shares from the Nasdaq Global Select Market on January 6, 2010, with the intent to terminate the registration of its ordinary shares under U.S. securities laws, and to release the Company from its reporting obligations pursuant to U.S. securities laws ("Deregistration"). Deregistration is possible if certain conditions are met pertaining either to the number of U.S. holders of records, or to the relative trading volume of the Company's shares in the U.S. out of the worldwide trading volume. During the second quarter of 2017 and for the first time, the conditions pertaining to the relative trading volume in the U.S. out of the worldwide trading volume have been met. Therefore, the Company's Board of Directors resolved on August 27, 2017, subsequent to the reporting date, to effect a Deregistration, and the Company intends to act to complete the process.

 

The Company's estimates in connection with the Deregistration are forward-looking statements as defined in the Israeli Securities Law, 1968, based on the Company's estimations as of the date of this report. These estimates, in whole or in part, may not materialize, or may materialize in a manner materially different than expected. The principal factors that may affect this are, among others, the SEC's discretion and changes in the Company's business environment, which may lead to a scenario that prior to the completion of the Deregistration, the board shall determine not to carry it out.

 

 

Item 4A – Information on the Company: History and Development of the Company

 

1.2.

See Section 1.2 of the Board of Directors Report for details regarding developments in Elron and group companies during the period of this report and subsequent thereto.

 

1.3.

Investments

 

In the first half of 2017, Elron (directly and indirectly) invested approximately $14.1 million in group companies. For further details, see Section 1.4 of the Board of Directors Report and Note 3 to the Financial Statements .

 

1.4.

Cloudyn

 

Further to Section 1.3 of Part I of the Company's Quarterly Report for the First Quarter of 2017, in July 2017, subsequent to the reporting date, the sale of the entire outstanding share capital of Cloudyn to Microsoft Israel Research And Development (2002) Ltd. was completed. RDC's share in the consideration from the sale amounted to approximately $17.3 million. Pursuant to the sale, Elron expects to record a net gain attributable to its shareholders estimated at this stage at approximately $6.6 million (a consolidated net gain of approximately $13.2 million) in the third quarter of 2017. For further details, see Note 3.B to the Financial Statements .

 

 

August 27, 2017, Tel Aviv, Israel

 

		For the six months ended June 30,								For the three months ended June 30,								For the year ended December 31, 2016
		2017				2016				2017				2016
		Unaudited																Audited
		$ thousands
Loss attributable to Elron's shareholders			(15,375	)			(9,201	)			(9,312	)			(4,290	)			(26,814	)
Loss per share attributable to Elron's shareholders (in $)			(0.52	)			(0.31	)			(0.31	)			(0.14	)			(0.90	)

		For the six months ended June 30,								For the three months ended June 30,								For the year ended December 31, 2016
		2017				2016				2017				2016
		$ thousands
Losses in respect of Group Companies:
Elron's share in losses of Group Companies, net			(11,948	)			(8,326	)			(6,513	)			(3,730	)			(17,598	)
Excess cost amortization			(60	)			(53	)			(28	)			(10	)			(120	)
Total			(12,008	)			(8,379	)			(6,541	)			(3,740	)			(17,718	)
Gain (loss) from disposal and revaluation of investee companies and changes in holdings, net			(1,868	)			656				(1,889	)			355				(2,285	)
Corporate operating expenses			(2,001	)			(1,682	)			(940	)			(826	)			(4,245	)
Tax benefit (taxes on income)			22				(143	)			35				(82	)			(1,109	)
Other			480				347				23				3				(1,457	)
Loss attributable to shareholders			(15,375	)			(9,201	)			(9,312	)			(4,290	)			(26,814	)

Elron Electronic Industries Ltd. Part II English Translation of Board of Directors Report for the Second Quarter of 2017

 

1.3.2. Analysis of the consolidated statements of profit and loss

 

		For the six months ended June 30,						For the three months ended June 30,
		2017			2016			2017			2016
		Unaudited
		$ thousands											Explanation

 

Gain (loss) from disposal and revaluation of group companies, and changes in holdings, net			(1,854	)			1,205				(1,887	)			648		In the first half and second quarter of 2017, this item mainly included a $1,894 thousand loss recorded as a result of a decrease in the fair value of the investment in Notal Vision.   In the first half and the second quarter of 2016, this item mainly included a $1,078 thousand and $562 thousand gain, respectively, recorded due to an increase in the value of the contingent consideration asset in respect of the sale of Kyma Medical Technologies Ltd. ("Kyma") that took place in 2015.
Financial income			2,259				1,348				662				547		Financial income in the first half and second quarter of 2017 resulted mainly from USD-NIS exchange rate fluctuations in NIS bank deposits held by RDC, interest income on deposits, and an increase in the value of marketable investments measured at fair value.   Financial income in the first half of 2016 resulted mainly from interest income on deposits and USD-NIS exchange rate fluctuations, primarily in NIS bank deposits held by RDC.   Financial income in the second quarter of 2016 resulted mainly from interest income on deposits and an increase in the value of marketable investments measured at fair value.
Total income			405				2,553				(1,225	)			1,195
Research and development expenses			4,615				3,612				2,685				1,367		See analysis of Elron's and consolidated companies' operating expenses below.
Selling and marketing expenses			333				224				298				147

Elron Electronic Industries Ltd.

Part II

English Translation of Board of Directors Report

for the Second Quarter of 2017

 

		For the six months ended June 30,						For the three months ended June 30,
		2017			2016			2017			2016
		Unaudited
		$ thousands											Explanation

 

General and administrative expenses			3,980				2,915				2,004				1,542		See analysis of Elron's and consolidated companies' operating expenses below.
Equity in losses of associates, net			9,971				5,103				5,394				2,097		Elron's share in the net losses of its associates results from its holdings in certain investments that are accounted for under the equity method.   As most of the Group Companies are companies whose operations have not yet generated significant revenues, if at all, and invest considerable resources in research and development and in marketing activities, Elron expects to continue to record losses in respect of these companies' ongoing operations in accordance with the accounting method applied to them in Elron's financial statements. In addition, see the analysis of the results of operations of main associates below.   The increase in the first half and second quarter of 2017 as compared with the first half and second quarter of 2016 resulted mainly from the losses recorded in 2017 in respect of new companies in which Elron and RDC initially invested during 2016.
Financial expenses			130				266				74				564		Financial expenses in the second quarter of 2016 resulted mainly from USD-NIS exchange rate fluctuations, primarily in NIS bank deposits held by RDC.
Other expenses, net			71				20				10				3
Total expenses			19,100				12,140				10,465				5,720
Loss before taxes on income			(18,695	)			(9,587	)			(11,690	)			(4,525	)
Tax benefit (taxes on income)			4				(340	)			47				(198	)	Taxes on income in the first half and second quarter of 2016 resulted mainly from tax expenses recorded by RDC due to the sale of Kyma .
Loss			(18,691	)			(9,927	)			(11,643	)			(4,723	)

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Elron Electronic Industries Ltd.

Part II

English Translation of Board of Directors Report

for the Second Quarter of 2017

 

		For the six months ended June 30,						For the three months ended June 30,
		2017			2016			2017			2016
		Unaudited
		$ thousands											Explanation

 

Loss attributable to the Company's shareholders			(15,375	)			(9,201	)			(9,312	)			(4,290	)
Loss attributable to non-controlling interests			(3,316	)			(726	)			(2,331	)			(433	)	The loss attributable to non-controlling interests results mainly from the share of the non-controlling interest in the loss recorded by RDC.   In the first half and second quarter of 2017, the loss attributable to non-controlling interests resulted mainly from the share of non-controlling interests in the gain or loss recorded by RDC from investments in its affiliated companies.   The increase in the first half and second quarter of 2017 as compared with the first quarter of 2016 resulted mainly from the losses recorded in 2017 in respect of new companies in which Elron and RDC initially invested during 2016.   In the first half and second quarter of 2016, most of the loss was offset by a gain from a change in the value of the contingent consideration asset recorded by RDC in respect of the sale of Kyma.
Basic and diluted loss per share attributable to the Company's shareholders (in $)			(0.52	)			(0.31	)			(0.31	)			(0.14	)

 

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Elron Electronic Industries Ltd.

Part II

English Translation of Board of Directors Report

for the Second Quarter of 2017

 

Operating Expenses

 

Operating expenses in the second quarter and first half of 2017 amounted to $4,987 and $8,928 thousand, respectively, compared with $3,056 and $6,751 thousand, respectively, in the second quarter and first half of 2016, and comprised mainly of research and development expenses and general and administrative expenses of Elron's and consolidated companies' corporate operations, as detailed below:

 

		For the six months ended June 30,								For the three months ended June 30,
		2017				2016				2017				2016
		$ thousands															Explanation
Corporate			2,001				1,682				940				825		The increase in the first half and second quarter of 2017 compared with the first half and second quarter of 2016 mainly resulted from an increase in salary expenses due to the termination of the Services Agreement with DIC, according to which Elron bears the employment costs of its employees from the beginning of 2017 (see section 1.2.5 above) , and from USD-NIS exchange rate fluctuations.
RDC			976				593				461				274		The increase in the first half and second quarter of 2017 compared with the first half and second quarter of 2016 mainly resulted from directors' fees which RDC commenced paying its shareholders (including Elron) in respect of their representatives serving in RDC's board of directors.
Pocared			5,951				4,476				3,586				1,957		The increase in the first half and second quarter of 2017 compared with the first half and second quarter of 2016 was mainly due to the investment in production capabilities and inventories towards the upcoming FDA trial. Pocared is preparing to conduct the new trial during 2017 (see item 4.B of Elron's 2016 Annual Report).
Total			8,928				6,751				4,987				3,056

 

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Elron Electronic Industries Ltd.

Part II

English Translation of Board of Directors Report

for the Second Quarter of 2017

 

1.3.3. Analysis of the results of operations of main associate

 

BrainsGate

 

		For the six months ended June 30,								For the three months ended June 30,
		2017				2016				2017				2016
		Unaudited
		$ thousands															Explanation
Loss			3,268				2,560				1,605				1,168		BrainsGate is in the development stage and has not yet commenced sales. BrainsGate's losses mainly results from research and development expenses. The increase in loss in the first half and second quarter of 2017 compared with the first half and second quarter of 2016 resulted mainly from the increase in the number of patients recruited for its FDA trial.

 

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Elron Electronic Industries Ltd. Part II English Translation of Board of Directors Report for the Second Quarter of 2017

 

1.4. Financial Position, Liquidity and Capital Resources

 

Financial position

 

		June 30, 2017				December 31, 2016
		Unaudited				Audited
		$ thousands
Total assets in the consolidated statement of financial position			153,826				170,684
Current assets (not including assets classified as held for sale)			84,297				102,370
Investments in associates and other companies (including assets classified as held for sale)			36,875				43,204
Long-term receivables			6,336				6,531
Intangible assets			17,438				17,438
Current liabilities			8,922				8,399
Long-term liabilities			863				694
Total liabilities			9,785				9,093
Equity including non-controlling interests			144,041				161,591

 

Total equity at June 30, 2017 was $144,041 thousand, representing approximately 94% of the total assets in the statement of financial position, compared with $161,591 thousand at December 31, 2016, representing approximately 95% of the total assets in the statement of financial position. The decrease in equity resulted mainly from the loss recorded in the first half of 2017 .

 

Consolidated working capital at June 30, 2017 amounted to $78,182 thousand (including assets classified as held for sale), compared with $93,971 thousand at December 31, 2016. The decrease in working capital resulted from the decrease in liquid resources due to investments in subsidiaries and associates (as detailed below) and due to Elron's and its subsidiaries' operating expenses during the first half of 2017 .

 

With respect to the claim against Elron and others in connection with the sale of the shares of Elscint in 1999, as well as the supplementary settlement agreement submitted to the Court for approval and the provision in Elron's financial statements in order to cover the financial resources that may be required of the Company in order to expunge the claim, see Note 4 to the Financial Statements. The costs in connection with litigating the claim are unknown and there is no certainty as to the amount of financial resources which would be required in order to expunge the claim.

 

Elron's and RDC's primary cash flows (1)

 

		For the six months ended June 30,								For the three months ended June 30,
		2017				2016				2017				2016
		Unaudited
		$ thousands
Investments in Elron's and RDC's group companies (1)			(14,125	)			(17,051	)			(11,425	)			(10,654	)
Proceeds from disposal of Elron's and RDC's non-current investments, net of tax			2,483				35				2,434				35

 

(1) The amounts presented include RDC's cash flows in full (100%) in addition to Elron's cash flows, but exclude the cash flows of their subsidiaries .

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Elron Electronic Industries Ltd.

Part II

English Translation of Board of Directors Report

for the Second Quarter of 2017

 

Liquid resources balance

 

Consolidated liquid resources at June 30, 2017 amounted to $88,083 thousand (including bank deposits and other investments in securities in the total amount of approximately $63,927 thousand), compared with $96,380 thousand at December 31, 2016 (including short term bank deposits in the amount of approximately $69,204 thousand).

 

Elron's and RDC's non-consolidated liquid resources at June 30, 2017 amounted to $26,979 and $39,760 thousand, respectively (Elron's and RDC's liquid resources as of June 30, 2017 included other short term investments in securities, bank deposit of Elron in the total amount of $23,733 thousand, and bank deposits of RDC in the total amount of $29,157 thousand). Elron's and RDC's non-consolidated liquid resources at December 31, 2016 amounted to $34,032 and $52,255 thousand, respectively (as mentioned above Elron's and RDC's liquid resources as of December 31, 2016 included other short term investments in securities of Elron in the amount of approximately $25,284 thousand and bank deposits of RDC in the amount of approximately $37,348 thousand).

 

Uses of cash

 

The main uses of cash in the second quarter and first half of 2017 were investments in Group Companies in the amount of $4,359 and $7,059 thousand, respectively, by Elron and in the amount of $7,066 thousand invested in the second quarter by RDC. Furthermore, cash was used to pay corporate and RDC's operating expenses, as detailed above in section 1.3.2.

 

The main uses of cash in the second quarter and first half of 2016 were investments in Group Companies in the amount of $8,454 and $14,151 thousand, respectively, by Elron, and $2,200 and $2,900 thousand, respectively, by RDC. Furthermore, cash was used to pay corporate and RDC's operating expenses, as detailed above in section 1.3.2.

 

Investments in Group Companies during the first half of 2017 and 2016 are summarized in the following table (see also Note 3 to the Financial Statements for additional details regarding investments in Group Companies):

 

		Elron								RDC
		For the six months ended June 30,
		2017				2016				2017				2016
		Unaudited
		$ thousands
Consolidated Companies
Pocared			2,000				6,453				6,766				-
			2,000				6,453				6,766				-
Associates and Other Investments
CartiHeal			1,733				-				-				-
Coramaze*			921				1,963				-				-
Notal Vision			894				1,535				-				-
Open Legacy			-				-				-				700
SixGill			-				2,500				-				-
SecuredTouch			-				-				300				2,200
Alcide			750				1,500				-				-
Nitinotes			761				-				-				-
Other			-				200				-				-
			5,059				7,698				300				2,900
Total investments			7,059				14,151				7,066				2,900

 

*) Subsequent to the reporting date, Elron invested $971 thousand in Coramaze.

 

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Elron Electronic Industries Ltd.

Part II

English Translation of Board of Directors Report

for the Second Quarter of 2017

 

Proceeds from the disposal of Elron's and RDC's non-current investments

 

Proceeds Elron and RDC received from the disposal of non-current investments in the first half of 2017 mainly included: proceeds Elron received in the second quarter in the amount of approximately $2,408 thousand from the sale of Jordan Valley Semiconductors Ltd. completed in 2015, and from the partial release of the deposit held in escrow in connection with this sale (for further details, see Note 6 to the Financial Statements).

 

In the first half of 2016, Elron and RDC did not receive cash in material amounts from the disposal of investments.

 

Main Group Companies' cash flows

		Cash flows used in operating activities																Liquid resources balance
		For the six months ended June 30,								For the three months ended June 30,								As of June 30,				As of December 31,
		2017				2016				2017				2016				2017				2016
		Unaudited																				Audited
		$ thousands
BrainsGate			(3,447	)			(2,712	)			(1,953	)			(1,285	)			14,999				18,152
Pocared			(5,428	)			(4,936	)			(2,576	)			(2,496	)			13,829				9,727

 

 

Eduardo Elsztain Chairman of the Board of Directors

Ari Bronshtein CEO

 

August 27, 2017, Tel Aviv

 

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