Company Quick10K Filing
Quick10K
Check-Cap
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$2.00 5 $11
20-F 2018-12-31 Annual: 2018-12-31
20-F 2017-12-31 Annual: 2017-12-31
20-F 2016-12-31 Annual: 2016-12-31
20-F 2015-12-31 Annual: 2015-12-31
HOLX Hologic 12,987
CYTK Cytokinetics 821
TXMD TherapeuticsMD 666
URGN Urogen Pharma 647
REPH Recro Pharma 259
CLDX Celldex Therapeutics 32
ISR Isoray 24
GEMP Gemphire Therapeutics 7
ABIO Arca Biopharma 6
NURO Neurometrix 3
CHEK 2018-12-31
Part I
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on Our Company
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosure About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16. [Reserved]
Item 16A. Audit Committee Financial Expert.
Item 16B. Code of Ethics.
Item 16C. Principal Accountant Fees and Services.
Item 16D. Exemptions From The Listing Standards for Audit Committees.
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers.
Item 16F. Change in Registrant's Certifying Accountant.
Item 16G. Corporate Governance.
Item 16H. Mine Safety Disclosure.
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 1 - General Information
Note 2 - Summary of Significant Accounting Policies
Note 3 - Prepaid Expenses and Other Current Assets
Note 4 - Property and Equipment, Net
Note 5 - Employee Benefits and Payroll Accruals
Note 6 - Income Taxes
Note 7 - Commitments and Contingent Liabilities
Note 8 - Fair Value Measurements
Note 9 - Shareholders' Equity
Note 10 - Share-Based Compensation
Note 11 - Research and Development Expenses, Net
Note 12 - General and Administrative Expenses
Note 13 - Finance Income (Expenses), Net
Note 14 - Loss per Share
Note 15 - Related Parties
Note 16 - Subsequent Events
EX-12.1 exhibit_12-1.htm
EX-12.2 exhibit_12-2.htm
EX-13.1 exhibit_13-1.htm
EX-15.1 exhibit_15-1.htm

Check-Cap Earnings 2018-12-31

CHEK 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 zk1922847.htm 20-F

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 20-F
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2018
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
for the transition period from __________ to ___________
 
Commission file number 001-36848
 
Check-Cap Ltd.
 
 
 
 
(Exact name of the Registrant as specified in its charter)
 
Israel
 
 
 
 
(Jurisdiction of incorporation or organization)
 
Check-Cap Building
29 Abba Hushi Avenue
P.O. Box 1271
Isfiya, 3009000, Israel
 
 
 
 
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Ordinary Shares, par value NIS 2.40
 
Name of each exchange on which registered
 
Nasdaq Capital Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None 
 
As of December 31, 2018, the registrant had 5,328,700 ordinary shares outstanding, NIS 2.40 par value per share.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes           No 
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes           No 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes           No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes           No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.

   Large Accelerated filer
   Accelerated filer
  Non-accelerated filer
   Emerging growth company

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
   US GAAP
   International Financial Reporting
Standards as issued by the International Accounting Standards Board
   Other
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
   Item 17             Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes           No
 
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court.
 
Yes           No 
 
ii
 
TABLE OF CONTENTS

 
 
Page
       
 
 3
       
 
 3
       
 
 3
A.
 
Selected financial data
3
B.
 
Capitalization and indebtedness
4
C.
 
Reasons for the offer and use of proceeds
4
D.
 
Risk factors
4
 
 
 
 
 
 33
A.
 
History and Development of the Company
33
B.
 
Business Overview
33
C.
 
Organizational Structure
54
D.
 
Property, Plants and Equipment
54
 
 
 
 
 
54
 
55
A.
 
Operating Results
56
B.
 
Liquidity and Capital Resources
60
C.
 
Research and development, patents and licenses, etc.
64
D.
 
Trend Information
65
E.
 
Off-balance Sheet Arrangements
65
F.
 
Tabular Disclosure of Contractual Obligations.
65
 
 
 
 
 
65
A.
 
Directors and senior management
65
B.
 
Compensation
68
C.
 
Board Practices
71
D.
 
Employees
81
E.
 
Share Ownership
81
 
 
 
 
 
85
A.
 
Major shareholders
85
B.
 
Related party transactions
86
C.
 
Interests of experts and counsel
88
 
 
 
 
 
88
A.
 
Statements and Other Financial Information
88
B.
 
Significant Changes
89
 
 
 
 
 
89
A.
 
Offer and listing details
89
B.
 
Plan of distribution
89
C.
 
Markets
89
D.
 
Selling shareholders
89
E.
 
Dilution
89
F.
 
Expenses of the issue
90
 
 
 
 
 
90
A.
 
Share capital
90
B.
 
Memorandum and articles of association
90
C.
 
Material contracts
94
D.
 
Exchange controls
94
E.
 
Taxation
94
F.
 
Dividends and paying agents
 105
G.
 
Statement by experts
 105
H.
 
Documents on display
 105
I.
 
Subsidiary Information
 106
 
iii
 
 
106
 
106
       
 
 
 
 
 
106
 
106
 
107
 
107
 
 
 
 
 
107
 
 
 
 
 
107
 
 
 
 
 
107
 
 
 
 
 
108
 
 
 
 
 
108
 
 
 
 
 
108
 
 
 
 
 
108
 
 
 
 
 
109
       
 
 
 
 
 
109
 
 
 
 
 
109
 
 
 
 
 
110
 
 
 
 
112
 
iv
CERTAIN INFORMATION
 
Beginning with the fourth quarter of 2015, we have prepared our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. We recast the comparative amounts included in our 2015 financial statements to U.S. GAAP. Prior to the fourth quarter of 2015, we prepared our financial reports in accordance with International Financial Reporting Standards as issued by International Accounting Standard Board, or IFRS. We elected to use U.S. GAAP to increase the transparency and comparability of our financial reports and facilitate research and analysis by shareholders, analysts and other participants in the U.S. capital markets.
  
In this Annual Report on Form 20-F, or the Annual Report, unless the context indicates otherwise, references to “NIS” are to the legal currency of Israel, “U.S. dollars,” “$” or “dollars” are to United States dollars, and the terms “we,” “us,” “our company,” “our,” and “Check-Cap” refer to Check-Cap Ltd. Unless otherwise indicated, U.S. dollar translation of NIS amounts presented in this Annual Report are translated using the rate of $1.00 = NIS 3.748, the exchange rate published by the Bank of Israel on December 31, 2018, and U.S. dollar translation of Euro amounts presented in this Annual Report are translated using the rate of $1.00 = Euro 1.1469, the exchange rates published by the Wall Street Journal on December 31, 2018.
 
We effected a 1-for-12 reverse stock split of our ordinary shares effective as of April 4, 2018, in accordance with the approval of our shareholders at a meeting held on April 2, 2018.  All share numbers in this Annual Report are reflected on a post-reverse stock split basis.
 
USE OF TRADE NAMES AND TRADEMARKS
 
Throughout this Annual Report, we refer to various trademarks, service marks and trade names that we use in our business.  The “CHECK-CAP” and “C-Scan” trademarks and design logos are the property of Check-Cap Ltd.  Other trademarks and service marks appearing in this Annual Report are the property of their respective holders.  We do not intend our use or display of other companies’ tradenames, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by these other companies.  Solely for convenience, trademarks and trade names referred to in this Annual Report appear without the ® or TM   symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.
 
FORWARD-LOOKING STATEMENTS
 
This Annual Report contains forward-looking statements, about our expectations, beliefs or intentions regarding, among other things, our ongoing and planned product development and clinical trials; the timing of, and our ability to make, regulatory filings and obtain and maintain regulatory approvals for our product candidates; our intellectual property position; the degree of clinical utility of our products, particularly in specific patient populations; our ability to develop commercial functions; expectations regarding product launch and revenue; our results of operations, cash needs; financial condition, liquidity, prospects, growth and strategies; the industry in which we operate; and the trends that may affect the industry or us. In addition, from time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Forward-looking statements can be identified by the use of forward-looking words such as “believe,” “expect,” “intend,” “plan,” “may,” “should” or “anticipate” or their negatives or other variations of these words or other comparable words or by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements may be included in, but are not limited to, various filings made by us with the U.S. Securities and Exchange Commission, or the SEC, press releases or oral statements made by or with the approval of one of our authorized executive officers. Forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements, including, but not limited to, the factors summarized below.

This Annual Report identifies important factors which could cause our actual results to differ materially from those indicated by the forward-looking statements, particularly those set forth under the heading “Risk Factors.” The risk factors included in this Annual Report are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:

our history of losses and our ability to continue as a going concern;

our needs for additional capital to fund our operations and our inability to obtain additional capital on acceptable terms, or at all;

the initiation, timing, progress and results of our clinical trials and other product development efforts;

our reliance on one product or product line;


the clinical development, commercialization and market acceptance of our C-Scan system;

our ability to receive de novo classification and other regulatory approvals for our C-Scan system;

our ability to successfully complete clinical trials;

our reliance on single-source suppliers;
 
our reliance on third parties, such as for purposes of our clinical trials and clinical development and the marketing and distribution of our C-Scan system;
 
          our ability to establish and maintain strategic partnerships and other corporate collaborations;

our ability to achieve reimbursement and coverage from government and private third-party payors;

 ●
the implementation of our business model and strategic plans for our business;

 ●
the scope of protection we are able to establish and maintain for intellectual property rights covering our C-Scan system and our ability to operate our business without infringing the intellectual property rights of others;

 ●
competitive companies, technologies and our industry;

 ●
statements as to the impact of the political and security situation in Israel on our business; and

those factors referred to in “Item 3. Key Information – D. Risk Factors,” “Item 4. Information on the Company,” and “Item 5. Operating and Financial Review and Prospects”, as well as in this Annual Report generally.

All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this Annual Report and are expressly qualified in their entirety by the cautionary statements included in this Annual Report. We undertake no obligations to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties.

EXPLANATORY NOTE

Market data and certain industry data and forecasts used throughout this Annual Report were obtained from internal company surveys, market research, consultant surveys commissioned by the Company, publicly available information, reports of governmental agencies and industry publications and surveys. Industry surveys, publications, consultant surveys commissioned by the Company and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. However, this information may prove to be inaccurate because of the method by which some of the data for the estimates is obtained or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, the market and industry data and forecasts included or incorporated by reference in this Annual Report, and estimates and beliefs based on that data, may not be reliable. We have relied on certain data from third-party sources, including internal surveys, industry forecasts and market research, which we believe to be reliable based on our management’s knowledge of the industry. However, we have not ascertained the underlying economic assumptions relied upon therein. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not necessarily know what assumptions regarding general economic growth were used in preparing the forecasts we cite. Statements as to our market position are based to the best of our knowledge on the most currently available data. While we are not aware of any misstatements regarding the industry data presented in this Annual Report, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this Annual Report. 
 
2

PART I
 
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
A.
Directors and Senior Management
 
Not required.
 
B.
Advisers
 
Not required.
 
C.
Auditors
 
Not required.
 
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not required.
 
ITEM 3. KEY INFORMATION
 
A.
Selected financial data
 
The following selected consolidated financial data should be read in conjunction with Item 5 “Operating and Financial Review and Prospects” and the consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report.
 
The following table summarizes our historical consolidated financial data. We have derived the selected consolidated statements of operations data for the years ended December 31, 2018, 2017 and 2016 and the selected consolidated balance sheet data as of December 31, 2018 and 2017 from our audited consolidated financial statements included elsewhere in this Annual Report. We have derived the selected consolidated statements of operations data for the years ended December 31, 2015 and 2014 and the selected consolidated financial data as of December 31, 2016, 2015 and 2014 from our audited consolidated financial statements not included in this Annual Report. Our Consolidated Financial Statements have been prepared in accordance with U.S. GAAP.
 
Certain factors that affect the comparability of the information set forth in the following table are described in Item 5 “Operating and Financial Review and Prospects” and the Consolidated Financial Statements and related notes thereto included elsewhere in this Annual Report.
 
Consolidated Statements of Operations Data
 
 
 
Year Ended December 31,
 
 
 
2018
   
2017
   
2016
   
2015
   
2014
 
 
 
(US$ in thousands, except per share data)
 
Operating expenses(1)          
                             
Research and development expenses, net(2)
 
$
7,618
   
$
6,837
   
$
5,491
   
$
5,837
   
$
2,832
 
General and administrative expenses
   
3,445
     
3,164
     
3,571
     
6,626
     
1,703
 
Operating loss          
   
11,063
     
10,001
     
9,062
     
12,463
     
4,535
 
Finance income, net          
   
473
     
236
     
244
     
173
     
3,925
 
Loss before income tax          
   
10,590
     
9,765
     
8,818
     
12,290
     
610
 
Taxes on income          
   
(1
)
   
6
     
8
     
-
     
-
 
Net loss          
 
$
10,589
   
$
9,771
   
$
8,826
   
$
12,290
   
$
610
 
Comprehensive loss:
                                       
 Net loss
   
10,589
     
9,771
     
8,826
     
12,290
     
610
 
 Change in fair value of cash flow hedge
   
13
     
-
     
-
     
-
     
-
 
Comprehensive loss
   
10,602
     
9,771
     
8,826
     
12,290
     
610
 
Net loss per ordinary share of NIS 2.40 par value, basic and diluted  (3)
 
$
2.61
   
$
6.72
   
$
7.31
   
$
12.67
   
$
14.12
 
Weighted average number of ordinary shares outstanding – basic and diluted (in thousands)  (3)
   
4,058
     
1,455
     
1,208
     
993
     
182
 
  
3

Consolidated Balance Sheet Data
 
 
 
As of December 31,
 
 
 
2018
   
2017
   
2016
   
2015
   
2014
 
 
 
(US$ in thousands, except per share data)
 
Cash and cash equivalents          
 
$
8,572
   
$
6,997
   
$
11,639
   
$
9,392
   
$
1,075
 
Working capital(4)          
 
$
12,763
   
$
5,841
   
$
10,514
   
$
12,856
   
$
(1,622
)
Total assets          
   
15,436
     
7,906
     
12,295
     
15,298
     
2,985
 
Capital stock          
   
76,344
     
58,617
     
53,348
     
46,763
     
20,999
 
Total shareholders’ equity (deficiency)
 
$
13,030
   
$
5,905
   
$
10,407
   
$
12,648
   
$
(826
)
______________________________
 
(1)
Operating expenses include share-based compensation expense in the total amount of $0.7 million, $1.2 million, $3.7 million and $0.3 million for the years ended December 31, 2017, 2016, 2015 and 2014, respectively and a negative share-based compensation expense of $65,000 as a result of forfeitures of awards for the year ended December 31, 2018. For additional information, see Item 5B “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Application of Critical Accounting Policies and Estimates-Share-based compensation.”
 
 (2)
Research and development expenses, net is presented net of the amount of grants received from the Israel Innovation Authority, or IIA, of the Ministry of Economy and Industry (formerly the Office of the Chief Scientist, or OCS, of the Ministry of Economy and Industry), and the Israel-United States Binational Industrial Research and Development Foundation, or the BIRD Foundation.  The effect of the participation by the IIA and the BIRD Foundation totaled $0.2 million, $1.1 million, $0.3 million and $0.6 million for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively. See Item 5A “Operating and Financial Review and Prospects—Operating Results - Financial Operations Overview—Research and Development, Expenses, Net” for more information.
 
(3)
Basic and diluted loss per ordinary share is computed based on the basic and diluted weighted average number of ordinary shares outstanding during each period.  For purposes of these calculations, the following ordinary shares were deemed to be outstanding: (i) 8,315 ordinary shares that were issuable to Guy Neev upon exercise of options, referred to as the Neev Options, which options were exercised immediately prior to the consummation of our initial public offering on February 24, 2015; (ii) 32,174 ordinary shares that were issuable under warrants that were subject to automatic exercise, for no consideration (unless the holder thereof objected to such exercise), upon the exercise by Guy Neev of the Neev Options, of which warrants to purchase 7,724, 56 and 17,149 ordinary shares were exercised during the years ended December 31, 2018, 2016 and 2015, respectively.  No such warrants were exercised during the year ended December 31, 2017; (iii) since October 14, 2014, 221,556 ordinary shares issuable upon the exercise of outstanding warrants with an exercise price of NIS 2.40 per share, of which warrants to purchase 22,501, 9,912, 43,739 and 129,797 ordinary shares were exercised during the years ended December 31, 2018, 2017, 2016 and 2015, respectively, and warrants to purchase 5,192, 243, 761 and 2,022 ordinary shares expired during the years ended December 31, 2018, 2017, 2016 and 2015, respectively; (iv) since August 11, 2016, 209,524 ordinary shares issuable upon the exercise of outstanding pre-funded warrants with an exercise price of NIS 2.40 per share, of which pre-funded warrants to purchase 24,167 and 185,357 ordinary shares were exercised during the years ended December 31, 2017 and 2016, respectively; and (v) since May 8, 2018, 450,909 ordinary shares issuable upon the exercise of outstanding pre-funded warrants with an exercise price of $0.01 per share; these pre-funded warrants were fully exercised between May 8, 2018 and May 17, 2018.  For additional information, see Note 9 to our Consolidated Financial Statements for the year ended December 31, 2018 included elsewhere in this Annual Report.
(4)
Working capital is defined as total current assets minus total current liabilities.

B.
Capitalization and Indebtedness
 
Not required.
 
C.
Reasons for the Offer and Use of Proceeds
 
Not required. 
 
D.
Risk factors
 
In conducting our business, we face many risks that may interfere with our business objectives. Some of these risks could materially and adversely affect our business, financial condition and results of operations. In particular, we are subject to various risks resulting from changing economic, political, industry, business and financial conditions. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business operations.
 
You should carefully consider the following factors and other information in this Annual Report before you decide to invest in our ordinary shares. If any of the risks referred to below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of our ordinary shares could decline, and you may lose all or part of your investment.
 
4

Risks Related to Our Financial Position
 
We have a history of losses, may incur future losses and may not achieve profitability.
 
We are a clinical and development-stage medical diagnostics company with a limited operating history. We have incurred net losses in each fiscal year since we commenced operations in 2009.  We incurred net losses of $10.6 million in 2018, $9.8 million in 2017 and $8.8 million in 2016.  As of December 31, 2018, our accumulated deficit was $63.3 million.  Our losses could continue for the foreseeable future as we continue our investment in research and development and clinical trials to complete the development of our technology and to attain regulatory approvals, begin the commercialization efforts for our C-Scan system, increase our marketing and selling expenses, and incur additional costs as a result of being a public company in the United States. Successful completion of our development program and, ultimately, the attainment of profitable operations is dependent upon future events, including obtaining adequate financing to fulfill our development activities and our ability to successfully commercialize our C-Scan system and achieve a level of sales adequate to support our cost structure. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may never achieve or sustain profitability.

Our recurring operating losses have raised substantial doubt regarding our ability to continue as a going concern.

As of December 31, 2018, we had an accumulated deficit of $63.3 million. Our recurring operating losses raise substantial doubt about our ability to continue as a going concern. Our financial statements include a note describing the conditions which raise this substantial doubt. As a result, our independent registered public accounting firm included a “going concern” explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2018 with respect to this uncertainty. Our ability to continue as a going concern will require us to obtain additional financing to fund our operations. The perception of our ability to continue as a going concern may make it more difficult for us to obtain financing or obtain financing on favorable terms for the continuation of our operations and could result in the loss of confidence by investors, suppliers and employees. If we are not successful in raising capital through equity offerings, debt financings, collaborations, licensing arrangements or any other means or are not successful in reducing our expenses, we may exhaust our cash resources and will be unable to continue our operations. If we cannot continue as a viable entity, our shareholders would likely lose most or all of their investment in us. 
 
We will require additional funding in order to complete the development and commercialization of our C-Scan system, which may cause dilution to our existing shareholders, restrict our operations or require us to relinquish rights to our C-Scan system or intellectual property. If additional capital is not available, we may have to delay, reduce or cease the development or commercialization of our C-Scan system.
 
Our operations have consumed substantial amounts of cash. We expect that we will need to continue to raise and spend substantial amounts in order to complete the clinical development, regulatory approval and commercialization of our C-Scan system. We intend to use the remaining proceeds of our May 2018 and February 2019 public offerings to finance these efforts and believe that we have sufficient capital to fund our operations into February 2020, and we will therefore need to raise additional funds to obtain the required capital prior to completing the development and commercialization of our C-Scan system (see Item 5B “Operating and Financial Review and Prospects — Liquidity and Capital Resources — Sources of Liquidity”). We may seek additional funding through equity offerings, debt financings, collaborations, licensing arrangements or any other means to conduct clinical trials and develop and market our C-Scan system or for our general corporate purposes. Securing additional financing may divert our management’s attention from its day-to-day activities, which may adversely affect our ability to develop and commercialize our C-Scan system. Additional financing may not be available to us on a timely basis on terms acceptable to us, or at all.  In addition, if we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our ordinary shares. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our ordinary shares to decline.  Alternatively, if we raise funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants, may require us to grant a lender a security interest in our assets or may include other restrictions on our business that could impair our operational flexibility, and could also result in interest expense. If we raise additional funds through collaborations, licensing arrangements or other structured financing transactions, we may relinquish rights to certain of our technologies or products, grant security interests in our assets or grant licenses to third parties on terms that are unfavorable to us. If adequate additional financing on acceptable terms is not available, we may not be able to develop our C-Scan system at the rate or to the stage we desire and we may have to delay or abandon the commercialization of our C-Scan system. Any of these factors could materially adversely affect our business, financial condition and results of operations. 
  
5

Risks Related to Our Business
 
We may not succeed in completing the development of our product, commercializing our product and generating significant revenues.
 
Since commencing our operations, we have focused on the research and development and limited clinical trials of our C-Scan system. Although we have received CE Mark approval for the marketing and sale of our C-Scan system in the European Union, we have not commenced marketing and sales in the European Union and may require additional regulatory approval in each of the local jurisdictions in the European Union before we can commence marketing and sale of our C-Scan system, such as from the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra) and the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS). In Israel we received approval from the Medical Devices and Accessories Division of the Israeli Ministry of Health, or AMAR, for the marketing and sale of the C-Scan system in Israel, which was valid until February 28, 2019. We have submitted a request to the Israeli Ministry of Health for the extension of the AMAR approval, which is currently pending. We have not received approvals in other jurisdictions, including the United States, and there can be no assurance that we will be able to receive regulatory approvals to commence marketing and sales for our C-Scan system in the foreseeable future or ever. Our ability to generate revenues and achieve profitability depends on our ability to successfully complete the development of our product, demonstrate sufficient clinical evidence, obtain required regulatory approvals and commercial licenses, generate significant revenues and manufacture commercial quantities of our C-Scan system at an acceptable cost. The future success of our business cannot be determined at this time, and we do not anticipate generating revenues from product sales for the foreseeable future. In addition, we have no experience in commercializing our C-Scan system and face a number of challenges with respect to our commercialization efforts, including, among others, that:
 
 
 •
we may not have adequate financial or other resources to complete the development of our product, demonstrate adequate clinical results, attain required regulatory approvals and licensures, and begin the commercialization efforts for our C-Scan system;
 
 
 •
we may fail to obtain or maintain required regulatory approvals and licensures for our C-Scan system in our target markets or may face adverse regulatory or legal actions relating to our system even if regulatory approval is obtained;
 
 
 •
we may not demonstrate adequate clinical safety and clinical effectiveness results to support regulatory body approval or market acceptance and adoption;
 
 
 •
we may not be able to scale up the manufacture of our C-Scan system to commercial quantities at an adequate quality or at an acceptable cost;
 
 
 •
we may not be able to establish adequate sales, marketing and distribution channels;
 
 
 •
healthcare professionals and patients may not accept our C-Scan system;
 
 
 •
we may not be aware of possible complications from the continued use of our C-Scan system because we have limited clinical experience with respect to the actual use of our C-Scan system;
 
 
 •
other technological breakthroughs in CRC screening, treatment and prevention may reduce the demand for our C-Scan system;

 
 •
changes in the market for CRC screening, new alliances between existing market participants and the entrance of new market participants may interfere with our market penetration efforts;
 
 
 •
government and private third-party payors may not agree to provide coding, coverage and payment adequate to reimburse healthcare providers and patients for any or all of the purchase price of our C-Scan system, which may adversely affect healthcare providers’ and patients’ willingness to purchase our C-Scan system;
 
 
 •
uncertainty as to market demand may result in inefficient pricing of our C-Scan system;
 
 
 •
we may not be able to adequately protect our intellectual property or may face third-party claims of intellectual property infringement; and
 
 
 •
we are dependent upon the results of ongoing clinical studies relating to our C-Scan system and the products of our competitors.
 
If we are unable to meet any one or more of these challenges successfully, our ability to effectively commercialize our C-Scan system could be limited, which in turn could have a material adverse effect on our business, financial condition and results of operations.
 
Clinical failure can occur at any stage of clinical development. Our clinical experience to date does not necessarily predict future results and may not have revealed certain potential limitations of the technology and potential complications from our C-Scan system and may require further clinical validation. Any product version we advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.
 
Clinical failure can occur at any stage of clinical development. To date, we have performed clinical studies with iterative versions of both scanning and non-scanning capsules, in conjunction with iterative versions of the C-Scan Track tracking and recording systems and the C-Scan View application and we are continuing to develop further iterative versions of our C-Scan capsule. Our clinical trials have been conducted under differing protocols and using specific inclusion criteria and limited groups of patients. Therefore, we have a limited ability to identify potential problems and/or inefficiencies concerning current and future versions of our C-Scan system in advance of its use in general and expanded groups of patients and we cannot assure you that its actual clinical performances will be satisfactory to support proposed indications and regulatory approvals and clinical acceptance and adoption, or that its use will not result in unanticipated complications. For example, we have experienced technical failures of the C-Scan capsule in the current version of the C-Scan system and are currently engaged in implementing a plan to ensure greater reliability in the future. However, there can be no assurance that the implementation of our plan will be successful. Furthermore, the results from laboratory, pre-clinical, and completed clinical studies, as well as preliminary analyses or interim results of the currently ongoing clinical studies, may not be indicative of final clinical results obtained from our current C-Scan system or future versions of our C-Scan system on expanded screening populations. In addition, the results of our clinical trials are subject to human analyses and interpretation of the data accumulated, which could be affected by various errors due to, among others, lack of sufficient clinical experience with our C-Scan system, interpretation errors in the analysis of the clinical trials results, including the reconstructed images by our C-Scan system, or due to uncertainty in the actual efficacy of our C-Scan system in its current clinical stage. Therefore, the safety and efficacy of our C-Scan system and the clinical results to date will require further independent professional validation and require further clinical study. If our C-Scan system does not function as expected over time, we may not be able to develop our C-Scan system at the rate or to the stage we desire, we could be subject to liability claims, our reputation may be harmed, our C-Scan system may not achieve regulatory clearances, and our C-Scan system may not be widely adopted by healthcare providers and patients.
 
6

We expect to derive most of our revenues from sales of one product or product line.  Our inability to successfully commercialize this product, or any subsequent decline in demand for this product, could severely harm our ability to generate revenues.
 
We are currently dependent on the successful commercialization of our C-Scan system to generate revenues. As a result, factors adversely affecting our ability to successfully commercialize, or the pricing of or demand for, this product could have a material adverse effect on our financial condition and results of operations. If we are unable to successfully commercialize or create market demand for our C-Scan system, we will have limited ability to generate revenues.
 
Furthermore, we may be vulnerable to fluctuations in demand for our C-Scan system. Such fluctuations in demand may be due to many factors, many of which are beyond our control, including, among others:
 
 
 •
market acceptance of a new product, including healthcare professionals’ and patients’ preferences;
 
 
 •
market acceptance of the clinical safety and performance of our C-Scan system;
 
 
 •
development of similarly cost-effective products by our competitors;
 
 
 •
development delays of our C-Scan system;
 
 
 •
technological innovations in CRC screening, treatment and prevention;
 
 
 •
adverse medical side effects suffered by patients using our C-Scan system, whether actually resulting from the use of our C-Scan system or not;
 
 
 •
changes in regulatory policies toward CRC screening or imaging technologies;
 
 
 •
changes in regulatory approval, clearance requirements and licensure for our product;
 
 
 •
third-party claims of intellectual property infringement;
 
 
 •
budget constraints and the availability of reimbursement or insurance coverage from third-party payors for our C-Scan system;
 
 
 •
increases in market acceptance of other technologies;
 
 
 •
adverse responses from certain of our competitors to the offering of our C-Scan system;
  
 
 •
licensure and perceived risk of manufacturing and using a product containing a radioactive source; and
 
 
 •
the shelf life of our C-Scan Cap.
 
If healthcare professionals do not recommend our product to their patients, our C-Scan system may not achieve market acceptance and we may not become profitable.
 
CRC screening candidates are generally referred by their healthcare professional to approved tests and screening technology options. If healthcare professionals, including physicians, do not recommend or prescribe our product to their patients, our C-Scan system may not achieve market acceptance and we may not become profitable. In addition, physicians have historically been slow to change their medical diagnostic and treatment practices because of perceived liability risks arising from the use of new products. Delayed adoption of our C-Scan system by healthcare professionals could lead to a delayed adoption by patients and government and private third-party payors. Healthcare professionals may not recommend or prescribe our C-Scan system until certain conditions have been satisfied including, among others:
 
 
 •
there is sufficient long-term clinical and health-economic evidence to convince them to alter their existing screening methods and device recommendations;
 
 
 •
there are recommendations from other prominent physicians, educators and/or associations that our C-Scan system is safe and effective;
 
7

 
 •
we obtain favorable data from clinical and health-economic studies for our C-Scan system;
 
 
 •
reimbursement or insurance coverage from government and private third-party payors is available;
 
 
 •
healthcare professionals obtain required approvals and licensures for the handling, storage, dispensing, and disposal of  our C-Scan system; and
 
 
 •
healthcare professionals become familiar with the complexities of our C-Scan system.
 
We cannot predict when, if ever, healthcare professionals and patients may adopt the use of our C-Scan system. Even if favorable data is obtained from clinical and health-economic studies for the regulatory approval of our C-Scan system, there can be no assurance that prominent physicians would endorse it or that future clinical studies will continue to produce favorable data regarding our C-Scan system. In addition, prolonged market exposure may also be a pre-requisite to reimbursement or insurance coverage from government and private third-party payors. If our C-Scan system does not achieve an adequate level of acceptance by patients, healthcare professionals and government and private third-party payors, we may not generate significant product revenues and we may not become profitable.
 
We expect to face competition from large, well-established manufacturers of traditional technologies for CRC screening and detection of gastrointestinal disorders, as well as from new competitive technologies.
 
Competition for our C-Scan system comes from traditional well-entrenched manufacturers of tests and equipment for CRC screening, such as colonoscopy, sigmoidoscopy, CTC, optical capsule endoscopy, fecal occult blood tests, or FOBTs, and fecal immunochemical tests, or FITs. The principal manufacturers of equipment for optical colonoscopy and sigmoidoscopy include Olympus, Pentax, Hoya and Fuji Film. The principal manufacturers of equipment for CTC include General Electric Healthcare Systems, Siemens Medical Solutions, Philips Medical Systems Ltd. and Toshiba Corporation.  The principal manufacturer of equipment for optical capsule endoscopy includes Medtronic plc. All of these companies have substantially greater   financial resources than we do, and they have established reputations as well as worldwide distribution channels for providing medical instruments to physicians.
 
Several companies have developed or are developing non-invasive technologies based on stool, serum, or molecular diagnostics (from blood and other bodily fluids), or MDx, tests that are used to indicate the presence of CRC and polyps in the colon. These companies include Polymedco, Exact Sciences, Epigenomics AG, Gene News, EDP Biotech Corporation, Illumina, Inc., Quest Diagnostics and VolitionRx Nu.Q diagnostic. In August 2018, Exact Sciences announced that it entered into a U.S. promotion agreement with Pfizer for the promotion of Cologuard®, a non-invasive stool DNA screening test for colorectal cancer.
 
Procedures for bowel cleansing that are less onerous are constantly being developed, which could make our entry into the market more difficult.  For instance, bowel cleansing initiated by the ingestion of pills or food-substitute diet regimes rather than through drinking large amounts of distasteful liquids may be viewed as an improvement to the cleansing process, but other screening methods may be even more palatable to patients.
  
If we are unable to convince patients and physicians to adopt our C-Scan system over the current technologies marketed by our competitors, our business and results of operations may suffer.
 
We are planning to rely on local distributors and/or strategic partners to market and distribute our C-Scan system in those countries where we intend to market and distribute our C-Scan system.
 
We are planning to rely on local distributors and/or strategic partners for the marketing and distribution of our C-Scan system. Our success in generating sales in countries or regions where we will engage local distributors and/or strategic partners will depend in large part on the efforts of these third parties over whom we have limited control. If we are unable to identify and engage with suitable local distributors and/or strategic partners in the countries where we intend to market and distribute our C-Scan system, our business, financial condition and results of operations could be negatively affected.
 
We have limited manufacturing capabilities and if we are unable to scale our manufacturing operations to meet anticipated market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.
 
We currently have limited resources, facilities and experience in commercially manufacturing sufficient quantities of our C-Scan system to meet the demand we may expect from commercialization efforts. We expect to face certain technical challenges as we increase manufacturing capacity, including, among others, logistics associated with the handling of radioactive materials, equipment design and automation, material procurement, lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and  assurance standards and manufacturing commercial quantities of C-Scan capsules at an acceptable cost. Despite our continuing cost-cutting efforts to scale-up our manufacturing capabilities of our C-Scan capsule in commercial quantities, we may not be able to achieve adequate quality at an acceptable cost. Our C-Scan system includes several components that are based on new technologies    and are difficult to manufacture and some are being supplied to us by single source suppliers (see “Risk Factors – Risks Related to Our Business – Our reliance on single source suppliers could harm our ability to conduct clinical trials and meet demand for our product in a timely manner or within budget.”). Furthermore, we may encounter similar or unforeseen challenges initiating and later expanding production of any new products. If we are unable to scale our manufacturing capabilities to meet market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.
 
In addition, we have received and may receive in the future grants from the Government of the State of Israel through the IIA (formerly the OCS) for the financing of a portion of our research and development expenditures pursuant to the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Encouragement of Industrial Research and Development Law 5744-1984), or the Innovation Law.  The terms of the IIA grants subject us to certain restrictions relating to (among other things) the transfer of the manufacturing of IIA-funded products outside Israel. See “Risk Factors – Risks Related to Our Operations in IsraelPursuant 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.” Such restrictions may impair our ability to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel.
 

8


Our reliance on single source suppliers could harm our ability to conduct clinical trials and meet demand for our product in a timely manner or within budget.
 
We currently depend on single source suppliers for some of the components necessary for the production of our C-Scan system. For example, for the current version of the C-Scan system used in clinical trials, we currently have a single supplier for the motor used to rotate the collimated X-ray source in our C-Scan system and for each of the customized X-ray detectors, X-ray source and batteries used in our C-Scan system. There are a limited number of manufacturers worldwide who are capable of manufacturing the motor and the customized X-ray detectors and X-ray source that we currently use in our C-Scan system. In addition, the application-specific integrated circuit, or ASIC, residing in our C-Scan system is currently manufactured for us by a single semiconductor fabrication plant, or FAB.  Furthermore, we do not currently have written contracts with all of such suppliers.  While our current suppliers have been able to supply the required quantities of such components to date, if the supply of these components is disrupted or terminated or if our current suppliers are unable to supply required quantities of components, we may not be able to find alternative sources for these key components in a timely manner.  Although we are planning to maintain strategic inventory of key components, the inventory may not be sufficient to satisfy the demand for our C-Scan system if such supply is interrupted, or may be subject to risk of loss due do catastrophic events, such as a fire at our storage facility. In addition, to partially mitigate the risks of reliance on single source suppliers, we are seeking alternate manufacturers for some of our components which requires us to dedicate significant resources and investment. There can be no assurance that we will be successful in seeking alternate suppliers. As a result of the foregoing, we may be unable to meet the demand for our C-Scan system, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation.  If we are required to change the supplier of any of these key components, there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with FDA and other applicable quality standards and with all applicable regulations and guidelines. For example, our agreement with the supplier of the X-ray source used in our C-Scan system terminated on December 31, 2018 and while we and the X-ray source supplier have continued to perform the contract on the same terms and are currently negotiating the extension of the contract, we cannot assure you that we will be able to negotiate a new agreement on commercially acceptable terms or at all. We have been informed that the supplier of the batteries used in our C-Scan system shall cease to manufacture the batteries by mid-2019 and may cease to accept new orders at any time and, therefore, although we have acquired sufficient batteries for the foreseeable future, we will be required to find an alternative source for the X-ray source and batteries, which we may not be able to do in a timely manner.   The delays associated with the identification of a new manufacturer could delay our ability to manufacture our C-Scan system in a timely manner or within budget. Furthermore, in the event that the manufacturer of a key component of our C-Scan system ceases operations or otherwise ceases to do business with us, we may not have access to the information necessary to enable another supplier to manufacture the component. The occurrence of any of these events could harm our ability to meet demand for our C-Scan system in a timely manner or within budget.
  
The use of any of our C-Scan Cap, C-Scan Track or C-Scan View could result in product liability or similar claims that could be expensive, damage our reputation and harm our business.
 
Our business exposes us to an inherent risk of potential product liability or similar claims related to the manufacturing, marketing and sale of medical devices. The medical device industry has historically been litigious, and we face financial exposure to product liability or similar claims if the use of any of our C-Scan Cap, C-Scan Track or C-Scan View were to cause or contribute to injury or death, including, without limitation, harm to the body caused by the procedure or inaccurate diagnoses from the procedure that could affect treatment options. There is also the possibility that defects in the design or manufacture of any of these products might necessitate a product recall. Although we plan to maintain product liability insurance, the coverage limits of these policies may not be adequate to cover future claims. In the future, we may be unable to maintain product liability insurance on acceptable terms or at reasonable costs and such insurance may not provide us with adequate coverage against potential liabilities. A product liability claim, regardless of merit or ultimate outcome, or any product recall could result in substantial costs to us, damage to our reputation, customer dissatisfaction and frustration, and a substantial diversion of management attention. A successful claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on our business, financial condition and results of operations.
 
Our C-Scan system is a complex medical device that requires training for qualified personal and care for data analysis.
 
Our C-Scan system is a complex medical device that requires training for qualified personal, including physicians, and care for data analysis. Although our distributors will be required to ensure that our C-Scan system is prescribed only by trained clinicians, the potential for misuse of our C-Scan system still exists due to its complexity. Such misuse could result in adverse medical consequences for patients that could damage our reputation, subject us to costly product liability litigation and otherwise have a material adverse effect on our business, financial condition and results of operations.
 
9

We depend on third parties to manage our clinical studies and trials, perform related data collection and analysis, and to enroll patients for our clinical trials, and, as a result, we may face costs and delays that are beyond our control.
 
We rely on third parties, such as third-party clinical research organizations, or CROs, clinical investigators and clinical sites, to manage our clinical trials and perform data collection and analysis, and to enroll patients for our clinical trials. Although we have and expect to continue to have contractual arrangements with these third parties, we control only certain aspects of their activities.  Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on such third parties does not relieve us of our regulatory responsibilities.  If such third parties fail to comply with applicable regulatory requirements, the clinical data generated in our clinical trials may be deemed unreliable and regulatory authorities may require us to perform additional clinical trials before approving our marketing applications, which would delay the regulatory approval process.  Furthermore, we may not be able to control the amount and timing of resources that these parties devote to our studies and trials or the quality of these resources. If these third parties fail to properly manage our studies and trials or enroll patients for our clinical trials, we will be unable to complete them at all or in a satisfactory or timely manner, which could delay or prevent us from obtaining regulatory approvals for, or achieving market acceptance of, our product.
 
In addition, termination of relationships with third parties may result in delays, inability to enter into arrangements with alternative third parties or do so on commercially reasonable terms. Switching or adding additional clinical sites involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new clinical site commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.
  
We currently intend to sell our products in the United States, Europe and Japan and, if we are unable to manage our operations in these territories, our business, financial condition and results of operations could be materially adversely affected.
 
Our headquarters and substantially all of our operations and employees are presently located in Israel, but we currently intend to market our products in the United States, Europe and Japan. Accordingly, we are subject to risks associated with international operations, and our international sales and operations will require significant management attention and financial resources. In addition, our international sales and operations will subject us to risks inherent in international business activities, many of which are beyond our control and include, among others:
 
 
 •
foreign certification, registration and other regulatory requirements;
 
 
customs clearance and shipping delays;
 
 
 •
import and export controls;
 
 
 •
trade restrictions;
 
 
 •
multiple and possibly overlapping tax structures;
 
 
 •
difficulty forecasting the results of our international operations and managing our inventory due to our reliance on third-party distributors;
 
 
 •
differing laws and regulations, business and clinical practices, licensures, government and private third-party payor reimbursement policies and patient preferences;
 
 
 •
differing standards of intellectual property protection among countries;
 
 
 •
difficulties in staffing and managing our international operations;
 
 
 •
difficulties in penetrating markets in which our competitors’ products are more established and achieving a competitive sale price for our product;
 
 
 •
currency exchange rate fluctuations and foreign currency exchange controls and tax rates; and
 
 
 •
political and economic instability, war or acts of terrorism.
 
If we are unable to manage our international operations effectively, our business, financial condition and results of operations could be materially adversely affected.
 
10

We may not be successful in establishing and maintaining strategic partnerships, which could adversely affect our ability to develop and commercialize our C-Scan system.

A part of our strategy is to evaluate and, as deemed appropriate, enter into partnerships in the future when strategically attractive, including potentially with major medical device companies. We face significant competition in seeking appropriate partners for our C-Scan system, and the negotiation process is time-consuming and complex. In order for us to successfully partner our C-Scan system, potential partners must view our C-Scan system as economically valuable in markets they determine to be attractive in light of the terms that we are seeking and other available products for licensing by other companies. Even if we are successful in our efforts to establish strategic partnerships, the terms that we agree upon may not be favorable to us, and we may not be able to maintain such strategic partnerships if, for example, development or approval of a product is delayed or sales of an approved product are disappointing. Any delay in entering into strategic partnership agreements related to our C-Scan system could delay the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market.

In addition, our strategic partners may breach any future agreement with us, and we may not be able to adequately protect our rights under these agreements. Furthermore, our strategic partners will likely negotiate for certain rights to control decisions regarding the development and commercialization of our C-Scan system, if approved, and may not conduct those activities in the same manner as we would do so.

If we fail to establish and maintain strategic partnerships related to our C-Scan system, we will bear all of the risk and costs related to the development and commercialization of our C-Scan system, and we will need to seek additional financing, hire additional employees and otherwise develop expertise which we do not have and for which we have not budgeted.

If we lose our key personnel or are unable to attract and retain additional personnel, our business and ability to compete will be harmed.
 
Our success relies upon the continued service and performance of the principal members of our management and research and development team, including Alex Ovadia and Yoav Kimchy. In order to implement our business strategy, we will need to retain our key personnel with expertise in the areas of research and development, clinical testing, government regulation, manufacturing, finance, marketing and sales. Our product development plans depend in part on our ability to retain engineers with expertise in a variety of technical fields. The loss of a number of these persons or our inability to attract and retain qualified personnel could harm our business and our ability to compete. We do not maintain key man insurance for Alex Ovadia or Yoav Kimchy.
 
Substantially all of our operations are currently conducted at a single location near Haifa, Israel, and any disruption at our facility could materially adversely affect our business, financial condition and results of operations.
 
Substantially all of our operations are currently conducted at a single location near Haifa, Israel. We take precautions to safeguard our facility, including obtaining insurance coverage and implementing health and safety protocols. However, a natural or other disaster, such as a fire, flood, an armed conflict involving Israel (as detailed further under “Risks Related to Our Operations in Israel”) or a terrorist attack, could damage or destroy our facility and our manufacturing equipment or inventory, cause substantial delays in our operations and otherwise cause us to incur additional unanticipated expenses. In addition, the insurance we maintain against fires, floods and other natural disasters and the war and terrorism insurance we maintain may not be adequate to cover our losses in any particular case. Damage to our facility or our other property or to any of our suppliers’ facilities and properties, whether located in Israel or elsewhere, due to fire, a natural disaster or casualty event or an armed conflict or terrorist attack, could materially adversely affect our business, financial condition and results of operations.
  
A security breach or disruption or failure in a computer or communications systems could adversely affect us.
 
Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters, fire, terrorism, war, and telecommunication and electrical failures.  If such an event were to occur and interrupt our operations, it could result in a material disruption of our clinical program.  For example, the loss of clinical trial data from ongoing or planned clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.  To the extent that any disruption or security breach results in a loss of or damage to our data or applications, loss of trade secrets or inappropriate disclosure of confidential or proprietary information, including protected health information or personal data of clinical trial participants or employees or former employees, access to our clinical data, or disruption of the manufacturing process, we could incur liability and the further development of our C-Scan system could be delayed.  We may also be vulnerable to cyber-attacks by hackers or other malfeasance.  This type of breach of our cybersecurity may compromise our confidential information and/or our financial information and adversely affect our business or result in legal proceedings.  Further, these cybersecurity breaches may inflict reputational harm upon us that may result in decreased market value and erode public trust.

11

Risks Related to Regulations
 
If we are unable to obtain, or experience significant delays in obtaining, FDA clearances or approvals, or equivalent third country approvals for our C-Scan system or future products or product enhancements, our ability to commercially distribute and market our products could suffer.
 
Our products are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities and notified bodies. The process of obtaining regulatory clearances or approvals, or equivalent third-country approvals to market a medical device can be costly and time consuming, and we may not be able to obtain these clearances or approvals, or equivalent third-country approvals on a timely basis, if at all. In particular, we expect to eventually generate a portion of our revenues from sales of our C-Scan system and future products in the United States, the European Union, or third countries. Before a new medical device, or a new use of, or claim for, an existing product can be marketed in the United States, it must first receive clearance under Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDA approval of a premarket approval application, or PMA, unless an exemption applies. The FDA will clear marketing of a low or moderate risk medical device through the 510(k) process if sufficiently similar predicate devices have previously been cleared via this pathway. In the 510(k) clearance process, the FDA must only determine that the proposed device is “substantially equivalent” to a device legally on the market, known as a “predicate” device, with respect to intended use/indications for use, technological characteristics and principles of operation in order to clear the proposed device for marketing. Clinical data is sometimes required to support substantial equivalence.
 
High risk devices deemed to pose the greatest risk, such as life-sustaining, life-supporting, or implantable devices, or devices not deemed substantially equivalent to a previously cleared device, require approval of a PMA. The PMA process is more costly, lengthy and uncertain than the 510(k) clearance process. The PMA pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on the data obtained in clinical trials. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use.
 
In instances where a device is novel and there is no suitable predicate device, but that device is deemed to be of low or moderate risk, the FDA can reclassify the device to class I or class II via de novo reclassification. This process involves the submission of a reclassification petition, and the FDA accepting that “special controls” are adequate to ensure the product’s performance and safety. The FDA now allows “direct” de novo reclassification petitions, a mechanism by which a sponsor can directly submit a detailed de novo reclassification petition as the device’s initial submission without having to first receive a not substantially equivalent, or NSE, decision on a 510(k) submission.
 
These processes can be expensive and lengthy. FDA’s 510(k) clearance process may take 6 to 9 months, but it can last longer. Direct de novo reclassification typically takes at least 9 to 12 months from filing to clearance. The PMA pathway is much more costly and uncertain than the 510(k) clearance process or de novo reclassification, and generally takes at least 12 to 18 months, or even longer, from the time the application is filed with FDA to ultimate approval.
 
We are not aware of any legally marketed predicate device upon which FDA could base a determination of substantial equivalence under a 510(k) clearance process. Our proposed strategy, therefore, is to submit a direct de novo reclassification petition for our C-Scan system. To support this petition, our objective is to demonstrate that the device poses a low or moderate risk to patients. We cannot assure you that FDA will not demand that we obtain PMA approval of our C-Scan system.
 
FDA can delay, limit or deny clearance or approval of an application for many reasons, including, among others:
 
 
we may not be able to demonstrate to FDA’s satisfaction that our products are safe and effective for their intended use;
 
 
the data from our pre-clinical studies and clinical trials may be insufficient to support clearance or approval;
 
 
in the case of a PMA submission, that the manufacturing process or facilities we use may not meet applicable requirements; and
 
 
changes in FDA’s 510(k) clearance, de novo reclassification, or PMA approval processes and policies, or the adoption of new regulations may require additional data.
  
We may not obtain the necessary regulatory clearances, approvals or equivalent third country approvals to market our C-Scan system or future products in the United States or elsewhere. Any delay in, or failure to receive or maintain, clearance, approval for our C-Scan system or other products under development could prevent us from generating revenue from these products or achieving profitability.
 
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There is no guarantee that the FDA will grant de novo reclassification or PMA approval of our C-Scan system and failure to obtain necessary 510(k) clearances or approvals for our future products would adversely affect our ability to grow our business.
 
Our C-Scan system and some of our future products will require FDA clearance of a 510(k), de novo reclassification, or may require FDA approval of a PMA. The FDA may not approve or clear our C-Scan system or our future products for the indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance, de novo reclassification or PMA for our C-Scan system or any other future product, new intended uses or modifications to these products once they are cleared or approved for marketing.
 
Our strategy is to submit a direct de novo reclassification petition for our C-Scan system following completion of a U.S. pivotal study. A de novo reclassification generally applies where there is no predicate device and the FDA believes the device poses a low to moderate risk. De novo reclassifications can either be submitted in lieu of a 510(k) notice, such as in our case, or after a 510(k) notice has been filed and found NSE. If a 510(k) notice is found NSE, a de novo petition must be submitted within 30 days from the receipt of the NSE determination.
 
To support our direct de novo reclassification petition, our objective is to demonstrate that the device poses a low to moderate risk to patients. If the FDA determines that our C-Scan system is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. A PMA application must be supported by extensive data, including, but not limited to, technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and efficacy of the device for its intended use. By statute, the FDA has 180 days to review the “accepted application,” although, generally, review of the application can take between one and three years. During this review period, the FDA may request additional information or clarification of information already provided or even request new data that may require us to conduct additional tests. Also during the review period, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. The FDA’s review of a PMA could significantly delay our plans to get to market. There is also no guarantee that the FDA would approve a PMA. Failure to receive clearance or approval for our C-Scan system or future products would have an adverse effect on our ability to expand our business.

Even if the FDA ultimately accepts our de novo reclassification petition, to support our petition, we may be still may be required to conduct additional clinical trials before a petition can be filed. For example, we may be required to conduct a pre-pivotal study in the U.S. prior to commencing a pivotal study in the U.S. We are currently evaluating whether such pre-pivotal study is required. Such studies or trials can be costly and the results uncertain. If we are unable to successfully complete required clinical studies or trials, we will not receive FDA clearance or approval. 
 
If we or our future distributors do not obtain and maintain the necessary regulatory clearances or approvals, or equivalent third country approvals in a specific country or region, we will not be able to market and sell our C-Scan system or future products in that country or region.
 
We intend to market our C-Scan system in a number of international markets. To be able to market and sell our C-Scan system in a specific country or region, we and/or our distributors must comply with the regulations of that country or region. While the regulations of some countries do not impose barriers to marketing and selling part or all of our products or only require notification, others require that we and/or our distributors obtain the approval of a specified regulatory authorities such as the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra) and the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS), in addition to the CE mark that is required for medical devices throughout the EU. We are engaged with Dekra Certification as our Notified Body for such purposes. These regulations, and the time required for regulatory review, vary from country to country. Obtaining regulatory approvals is expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals for our C-Scan system or any future products in each country or region in which we plan to market such products. If we modify our C-Scan system or any future products, we or our distributors may need to apply for new regulatory approvals or our Notified Body may need to review the planned changes before we are permitted to sell them. We may not meet the quality and safety standards required to maintain the authorizations that we or our distributors have received. If we or our distributors are unable to maintain our authorizations or CE Certificates in a particular country or region, we will no longer be able to sell our C-Scan system or any future products in that country or region, and our ability to generate revenues will be materially and adversely affected.
  
Our C-Scan system may be considered a drug-device combination product because of the preparatory use of iodinated oral contrast medium to provide a coating for colonic imaging. We cannot be sure how the FDA or the competent regulatory authorities of foreign countries will regulate this product. The review of combination products is often more complex and more time consuming than the review of products under the jurisdiction of only one center within the FDA.
 
Our C-Scan system may be considered a combination product because of the preparatory use of iodinated oral contrast medium to provide a coating for colonic imaging. A combination product is the combination of two or more regulated components, i.e., drug/device, biologic/device, drug/biologic, or drug/device/biologic, that are combined or mixed and produced as a single entity; packaged together in a single package or as a unit; or a drug, device, or biological product packaged separately that according to its investigational plan or proposed labeling is intended for use only with an approved individually specified drug, device, or biological product where both are required to achieve the intended use, indication or effect. For a combination product, the FDA must determine which center or centers within the FDA will review the product and under what legal authority the product candidate will be reviewed. The combination product’s primary mode of action is used to determine which center within the FDA has primary regulatory jurisdiction over the product. The other centers within the agency also may provide consulting or collaborative reviews of the product as necessary. We believe that we will put forth a reasonable argument to the FDA that our C-Scan system should be regulated as a device and/or a combination product with a device primary mode of action. However, we cannot be sure as to whether the FDA will treat our C-Scan system as a device or a combination product. The review of combination products is often more complex and more time consuming than the review of a product under the jurisdiction of only one center within the FDA. In the case of the system, should the FDA determine that the iodinated oral contrast medium is not being used in accordance with its approved labeling, the Center for Drug Evaluation and Research may take a prominent role it its regulation. If the FDA does not approve or clear our C-Scan system, or any future products, in a timely fashion, or at all, our business and financial condition will be adversely affected.
 
Similar obstacles may be encountered in foreign countries should our C-Scan system be considered as a combination product.
 
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If the indications for use or instructions for use for which the iodinated oral contrast medium is approved are not sufficiently broad to support its use prior to the ingestion of our capsules, the FDA or the competent regulatory authorities in the EU Member States and other foreign countries may consider that contrast agent is being used off-label.
 
Ingestion of our C-Scan system requires the preparatory use of iodinated oral contrast medium to provide a coating for colonic imaging. We cannot be sure that the indications for which iodinated oral contrast medium are approved in the United States, or in other countries is sufficiently broad to cover such use. If the FDA or the competent regulatory authorities in other countries consider that iodinated oral contrast medium is not approved for the purpose for which it is used with the system, we may be considered to promote the off-label use of the iodinated oral contrast medium. Because the promotion of off-label use of drugs or medicinal products is prohibited in the United States, and in other countries, we could face both related issues with the FDA and/or the competent authorities of and/or other countries. In these circumstances, the FDA and/or the competent regulatory authorities and/or other countries may require us to obtain appropriate regulatory approvals for the iodinated oral contrast medium prior to marketing our C-Scan system with such substances. Under such circumstances, should we fail to obtain approval of the contrast agent for use with our C-Scan system, in a timely fashion, or at all, our business and financial condition will be adversely affected.
 
If we are unable to successfully complete clinical trials with respect to our C-Scan system, we may be unable to receive regulatory approvals or clearances for our C-Scan system and/or our ability to achieve market acceptance of our C-Scan system will be harmed.
 
The development of medical devices typically includes pre-clinical studies. Certain other devices require the submission of data generated from clinical trials, which can be long, expensive and uncertain processes, subject to delays and failure at any stage. The data obtained from the studies and trials may be inadequate to support regulatory clearances or approvals, or equivalent third-country approval, or to allow market acceptance of the products being studied. Our C-Scan system technology is currently undergoing clinical development and clinical trials. To date, we have performed clinical studies with several versions of our C-Scan system and with several versions of our non-scanning capsules.
 
The development of sufficient and appropriate clinical protocols to demonstrate safety, clinical performance and clinical effectiveness are required, and we may not adequately develop such protocols to support clearance, approval, or equivalent third country approval. The clinical trials that were conducted using prior versions of our C-Scan system, were conducted under differing protocols and used groups of patients different and/or smaller in size from those we intend to study in future clinical trials. Further, the FDA, the competent regulatory authorities of other countries, or our Notified Body in the EU may require us to submit data on a greater number of patients than we originally anticipated and/or for a longer follow-up period or they may change the data collection requirements or data analysis applicable to our clinical trials.
 
The commencement or completion of any of our clinical studies or trials may be delayed or halted, or be inadequate to support regulatory clearance, approval or product acceptance, or equivalent third country approval, for numerous reasons, including, among others:
 
 
 •
patients do not enroll in the clinical trial at the rate we expect;
 
 
 •
patients do not comply with trial protocols;
 
 
 •
patient follow-up is not at the rate we expect;
 
 
 •
undetected capsule retention in patients;
 
 
patients experience adverse side effects, including related to excessive radiation exposure as a result of capsule malfunction or break down;
 
 
 •
patient death during a clinical trial, even though their death may be unrelated to our product;
 
 
 •
FDA, institutional review boards, or IRBs, or other regulatory authorities do not approve a clinical trial protocol or a clinical trial, or place a clinical trial on hold;
 
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 •
IRBs, Ethics Committees and third-party clinical investigators may delay or reject our trial protocol and Informed Consent Form;
 
 
 •
third-party clinical investigators decline to participate in a study or trial or do not perform a study or trial on our anticipated schedule or consistent with the investigator agreements, study or trial protocol, good clinical practices or other FDA or IRBs, Ethics Committees, or any other applicable requirements;
 
 
 •
third-party organizations do not perform data collection, monitoring and analysis in a timely or accurate manner or consistent with the study or trial protocol or investigational or statistical plans;
 
 
 •
regulatory inspections of our studies, trials or manufacturing facilities may require us to, among other things, undertake corrective action or suspend or terminate our studies or clinical trials;
 
 
 •
changes in governmental regulations or administrative actions;
 
 
 •
we may not be able to develop our C-Scan system at the rate or to the stage we desire:
 
 
 •
the interim or final results of the study or clinical trial are inconclusive or unfavorable as to safety or efficacy; and
 
 
 •
a regulatory agency or our Notified Body concludes that our trial design is or was inadequate to demonstrate safety and efficacy.
 
The results of pre-clinical and clinical studies do not necessarily predict future clinical trial results, and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally, the FDA, other third country regulatory entities may disagree with our interpretation of the data from our pre-clinical studies and clinical trials, or may find the clinical trial design, conduct or results inadequate to demonstrate safety or efficacy, and may require us to pursue additional pre-clinical studies or clinical trials, which could further delay the clearance, approval of our products. The data we collect from our non-clinical testing, our pre-clinical studies and other clinical trials may not be sufficient to support regulatory clearance and approval.
 
If the third parties on which we rely to conduct our clinical trials and clinical development do not perform as contractually required or expected, we may not be able to obtain regulatory clearance or approval, or equivalent third country approval for, or commercialize, our C-Scan system or future products.
 
We do not have the ability to independently conduct our clinical trials for our C-Scan system and we must rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct such trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory clearance, approval for, or successfully commercialize, our C-Scan system or future products on a timely basis, if at all, and our business, operating results and prospects may be adversely affected. Furthermore, our third-party clinical trial investigators may be delayed in conducting our clinical trials for reasons outside of their control.
  
The results of our current or future clinical trials may not support our product candidate requirements or intended use claims or may result in the discovery of adverse side effects.
 
Even if our current or future clinical trials are completed as planned, we cannot be certain that their results will support our product requirements or intended use claims, which could inhibit our marketing strategies, or that the FDA, foreign authorities or our Notified Body will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that clinical trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our C-Scan system, or any future products, are safe and effective for the desired or proposed indicated uses, which could cause us to abandon a product and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our C-Scan system, or any future products, and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.
 
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Even if our C-Scan system or future products are cleared or approved by regulatory authorities or after obtaining CE Certificates from our Notified Body, modifications to our C-Scan system or future products may require new regulatory clearances or approvals, new CE Certificates, or may require us to recall or cease marketing it until the necessary clearances, approvals or CE Certificates are obtained.
 
Once cleared, approved or marketed, modifications to our C-Scan system or future products may require new regulatory approvals, clearances, including CE Certificates from our Notified Body, 510(k) clearances or premarket approvals, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. Any modification to a 510(k)-cleared device that could significantly affect its safety or efficacy, or that would constitute a major change in its intended use, requires a new 510(k) clearance or, possibly, a PMA. The FDA requires device manufacturers to initially make and document a determination of whether or not a modification requires a new approval, supplement or clearance. A manufacturer may determine that a modification could not significantly affect safety or efficacy and does not represent a major change in its intended use, so that no new 510(k) clearance is necessary. However, the FDA can review a manufacturer’s decision and may disagree. The FDA may also on its own initiative determine that a new clearance or approval is required. We may make modifications to our C-Scan system in the future that we believe do not or will not require additional clearances or approvals. Further, our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or effective. Any recall or FDA requirement that we seek additional approvals or clearances could result in significant delays, fines, increased costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.
 
If a manufacturer determines that a modification to an FDA-cleared device could significantly affect its safety or efficacy, or would constitute a major change in its intended use, then the manufacturer must file for a new 510(k) clearance or possibly a premarket approval application. Where we determine that modifications to our products require a new 510(k) clearance or premarket approval application, we may not be able to obtain those additional clearances or approvals for the modifications or additional indications in a timely manner, or at all. 
 
Any modification to a PMA-approved device must either be approved in a PMA Supplement, or if the modification does not impact the device’s safety or effectiveness, described in a 30-Day Notice or in the device’s Annual Report. The FDA may not approve a modification described in a PMA Supplement, in which case the modified device cannot be marketed. The FDA can also disagree that a change described in a 30-Day Notice or Annual Report is appropriately described in either filing, and request that the company file a PMA Supplement and/or request that the company cease marketing the modified device until the PMA Supplement is approved. 
 
Similar rules also apply in foreign jurisdictions. In the European Union, or the EU, we must inform the Notified Body that was involved in the conformity assessment of the medical devices we market or sell in the EU of any planned substantial changes to our quality C-Scan system or changes to our devices which could affect compliance with the Essential Requirements laid down in the Annexes to the Council Directive 93/42/EC concerning medical devices, or Medical Devices Directive, or the devices’ intended purpose. The Notified Body will then assess the changes and verify whether they affect the products’ conformity with the Essential Requirements laid down in the Annexes to the Medical Devices Directive. If the assessment is favorable, the Notified Body will issue a new CE Certificate or an addendum to the existing CE Certificate attesting compliance with the Essential Requirements laid down in Annexes to the Medical Devices Directive. 
 
If the Notified Body or relevant regulatory authorities disagree with our assessments and require modifications to an existing CE Certificate, the preparation of a new CE Certificate or other new regulatory clearances or approvals for modifications, we may be required to recall and to stop marketing the modified devices.
 
Obtaining clearances and approvals, or new or amended CE Certificates for device modifications can be a time-consuming process, and delays in obtaining required future clearances, approvals, or CE Certificates could adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn could harm our future growth.
  
Even if our C-Scan system and future products are cleared or approved by regulatory authorities or after obtaining CE Certificates from our Notified Body, if we or our suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, our products could be subject to restrictions or withdrawal from the market.
 
The manufacturing processes, reporting requirements, post-approval clinical data and promotional activities associated with any product for which we obtain clearance or approval CE Certificates, or equivalent third country approval will be subject to continuous regulatory review, oversight and periodic inspections by the FDA other domestic and foreign regulatory authorities and our Notified Body. In particular, we and certain of our suppliers are required to comply with the FDA’s Quality System Regulations, or QSR, as well as current good manufacturing practices, or cGMP. In the EU, we will also be subject to the quality system requirements laid down in the Annexes to the Medical Devices Directive. Such compliance can be facilitated by, among other things, a certificate of compliance with ISO 13485:2016. Through compliance with the ISO 13485:2016 standard, we will benefit from a presumption of conformity with the relevant quality system requirements laid down in the Annexes to the Medical Devices Directive. These regulations and standards govern the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, storage and shipping of any product for which we obtain clearance or approval, CE Certificates, or equivalent third country approval. Regulatory authorities, such as the FDA, and our Notified Body enforce the QSR and other regulations through periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes and regulations falling within the competence of the FDA and other regulatory authorities or our Notified Body, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in, among other things, any of the following enforcement actions:
 
 
 •
untitled letters, warning letters, fines, injunctions, corporate integrity agreements, consent decrees and civil penalties;
     
 
 •
unanticipated expenditures to address or defend such actions;
 
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 •
customer notifications for repair, replacement or refunds;
 
 
 •
recall, detention or seizure of our products;
 
 
 •
operating restrictions or partial suspension or total shutdown of production;
 
 
 •
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
     
 
 •
operating restrictions;
 
 
 •
withdrawing 510(k) clearances on PMA approvals that have already been granted;
 
 
 •
suspension or withdrawal of our CE Certificates;
 
 
 •
refusal to grant export approval for our products; or
 
 
 •
criminal prosecution.
 
If any of these actions were to occur, our reputation would be harmed, our product sales and profitability would suffer and we may not be able to generate revenue. Furthermore, our key suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
 
Even if regulatory clearance or approval of a product is granted, or after obtaining CE Certificates, such clearance or approval, or CE Certificates may be subject to limitations on the intended uses for which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the product. If FDA or the competent regulatory authorities of foreign countries determines that our promotional materials, labeling, training or other marketing or educational activities constitute the promotion of an unapproved use or the promotion of an intended purpose not covered by our CE mark, they could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement actions. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. 
 
In addition, we may be required to conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products. Later discovery of previously unknown problems with our products, including unanticipated adverse side effects or adverse side effects of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension or withdrawal of regulatory approvals or CE Certificates of Conformity, product seizures, injunctions or the imposition of civil or criminal penalties, all of which would adversely affect our business, financial condition and operating results and prospects.
 
If we fail to maintain necessary regulatory clearances or CE Certificates for our C-Scan system and indications in our target foreign markets, if clearances or approvals, or CE Certificates for future products and indications are delayed or not issued, or if there are regulatory changes in our existing or future target markets, our commercial operations could be harmed
 
Our C-Scan system is a medical device that is subject to extensive regulations that are intended to assure its safety, effectiveness and compliance with applicable consumer laws. If we fail to obtain and maintain these regulatory approvals or clearances, our ability to sell our C-Scan system and generate revenues will be materially harmed. 
 
These laws and regulations relate to the design, development, testing, manufacturing, storage, labeling, packaging, content and language of the instructions for use of the device, sale, promotion, distribution, importing and exporting, shipping, post-sale surveillance and recall from our C-Scan system’s markets, and all countries in which we intend to sell our C-Scan system apply some form of regulations of this kind. Most notably, we must comply with the Medical Devices Directive and EU Member States’ laws implementing it, and we are subject to extensive regulation in the United States by the FDA and other federal, state and local authorities.

We will be subject to audits by a Notified Body under the Medical Devices Directive. During this audit, the third-party assessor or Notified Body will examine the maintenance and implementation of our quality control system, device post-marketing vigilance system and any changes or modifications made to our products.
 
On May 27, 2020, the new Regulation Reg. EU No. 745/2017 on Medical Devices (Medical Devices Regulation) will become applicable and replace the existing regulatory framework for medical devices in the EU. The Medical Devices Regulation strengthens the medical devices rules in the EU. In particular, the Medical Devices Regulation will result in several medical devices being classified in higher risk classes and therefore face elevated regulatory requirements. In addition, the Medical Devices Regulation will generally elevate regulatory requirements to medical devices. As a result, it is likely that it will become more difficult to market medical devices and costs incurred for clinical evaluation, conformity assessment and post marketing surveillance will increase and such regulatory changes may adversely affect our business, financial condition and results of operations or restrict our operations.
 
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Our failure to comply with radiation safety or radio frequency regulations in a specific country or region could impair our ability to commercially distribute and market our C-Scan   system in that country or region.

Our C-Scan system includes a small X-ray source and wireless radio frequency transmitter and receiver, and is therefore subject to equipment authorization requirements in a number of countries and regions. In the United States, the EU and Japan, authorities often require advance clearance of all radiation and radio frequency devices before they can be sold or marketed in these jurisdictions, subject to limited exceptions. Competent authorities for such additional approval requirements include the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra) and the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS).  Modifications to the approved C-Scan system design and specifications may require new or further regulatory clearances or approvals before we are permitted to market and sell a modified C-Scan system. If we are unable to obtain any required clearances or approvals from the authorities responsible for the radiation as well as the radio frequency regulations in these and other jurisdictions, the sale or use of our C-Scan system could be prevented in these countries. Any such action could negatively affect our business, financial condition and results of operations.
 
Our C-Scan system may in the future be subject to product recalls that could harm our reputation, business and financial results.
 
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or a public health/safety issue. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Once marketed, recalls of any of our products, including our C-Scan system, would divert managerial and financial resources and have an adverse effect on our business, financial condition and results of operations. FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require us to notify the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action against us based on our failure to report the recalls when they were conducted.
 
If our C-Scan system or future products cause or contribute to a death or a serious injury, or malfunction in such a way that causes or contributes to a death or serious injury, we will be subject to medical device reporting regulations, which can result in corrective actions or enforcement actions from regulatory authorities.
 
Under FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of our device (or any similar future product) were to recur. If we fail to investigate and report these events to FDA within the required timeframes, or at all, the FDA could take enforcement action against us. Any such adverse event involving our products also could result in future corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, including any legal action taken against us, will require us to devote sufficient time and capital to the matter, distract management from operating our business, and may harm our reputation and financial results.
 
In addition, we must also comply with the EU Medical Device Vigilance System (MEDDEV 2.12/1 rev.8), which is intended to protect the health and safety of patients, users and others by establishing reporting procedures. Under this system, incidents (which are defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, may lead to or may have led to the death of a patient, or user or of other persons or to a serious deterioration in their state of health) must be reported by manufacturers through a Manufacturer’s Incident Reports to competent authorities within periods of time specified in the MEDDEV 2.12/1 rev. 8. Such incidents are evaluated and, where appropriate, information is disseminated between the competent authorities of the EU Member States. The MEDDEV 2.12/1 rev. 8 is also intended to facilitate a direct, early and harmonized establishment of Field Safety Corrective Actions, or FSCAs, across the EU Member States in which the device is being marketed. An FSCA is an action taken by a manufacturer to reduce a risk of death or serious deterioration in the state of health associated with the use of a medical device that is already placed on the market. An FSCA may include device recall, modification, exchange, or destruction. FSCAs must be reported by the manufacturer or the manufacturer’s European Authorized Representative, to its customers and/or the end users of the device through a Field Safety Notice. FSCAs must also be reported to the competent authorities of the EU Member States.

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Our business is subject to complex environmental legislation that may increase our costs and our risk of noncompliance.
 
Our research and development and manufacturing processes involve the handling of potentially harmful radioactive and other hazardous materials. We are subject to local laws and regulations governing the use, shipping, handling, storage and disposal of these materials, and we incur expenses related to compliance with these laws and regulations. If we are found to have violated environmental, health and safety laws, whether as a result of human error, equipment failure or other causes, we could be held liable for damages, penalties and costs of remedial actions which could materially adversely affect our business, financial condition and results of operations. In the future, we could be subject to additional environmental requirements or existing environmental laws could become more stringent, which could lead to greater compliance costs and increasing risks and penalties associated with violations. For example, changes to, or restrictions on, permitting requirements or processes, hazardous or radioactive material storage or handling might require an unplanned capital investment or relocation. If we fail to comply with existing or new environmental laws or regulations, our business, financial condition and results of operations could be materially adversely affected.
 
If we are unable to achieve reimbursement and coverage from government and private third-party payors for procedures using our C-Scan system, or if reimbursement is insufficient to create an economic benefit for purchasing or using our C-Scan   system when compared to alternative procedures, demand for our products may not grow at the rate we expect.
 
The demand for our C-Scan system will depend significantly on the eligibility of the procedures performed using our C-Scan system for reimbursement through government-sponsored healthcare payment systems and private third-party payors. Reimbursement practices vary significantly from country to country and within some countries, by region, and we must obtain reimbursement approvals on a country-by-country and/or region-by-region basis. In general, the process of obtaining reimbursement and coverage approvals has been longer outside of the United States. We may not be able to obtain reimbursement approvals in a timely manner or at all and existing reimbursement and coverage policies may be revised from time to time by government and private third-party payors. If physicians, hospitals and other healthcare providers are unable to obtain sufficient coverage and reimbursement from government and private third-party payors for procedures using our C-Scan system, if reimbursement is, or is perceived by our customers to be, insufficient to create an economic incentive for purchasing or using our C-Scan system, or if such reimbursement does not adequately compensate physicians and health care providers compared to the other procedures they offer, demand for our products may not grow at the rate we expect.
 
Federal and state privacy laws, and equivalent laws of third countries, may increase our costs of operation and expose us to civil and criminal sanctions.
 
The Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations that have been issued under it, to which we refer collectively as HIPAA, and similar laws outside the United States, contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. The HIPAA privacy rules prohibit “covered entities,” such as healthcare providers and health plans, from using or disclosing an individual’s protected health information, unless the use or disclosure is authorized by the individual or is specifically required or permitted under the privacy rules. Under the HIPAA security rules, covered entities must establish administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health information maintained or transmitted by them or by others on their behalf. While we do not believe that we are a covered entity under HIPAA, many of our customers are covered entities subject to HIPAA. Such customers may require us to enter into business associate agreements, which will obligate us to safeguard certain health information we obtain in the course of our relationship with them, restrict the manner in which we use and disclose such information and impose liability on us for failure to meet our contractual obligations.
 
In addition, under The Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, which was signed into law as part of the U.S. stimulus package in February 2009, certain of HIPAA’s privacy and security requirements are now also directly applicable to “business associates” of covered entities and subject them to direct governmental enforcement for failure to comply with these requirements. We may be deemed as a “business associate” of some of our customers. As a result, we may be subject as a “business associate” to civil and criminal penalties for failure to comply with applicable privacy and security rule requirements. Moreover, HITECH created a new requirement obligating “business associates” to report any breach of unsecured, individually identifiable health information to their covered entity customers and imposes penalties for failing to do so.
 
In addition to HIPAA, most U.S. states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many U.S. states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. These U.S. state laws, which may be even more stringent than the HIPAA requirements, are not preempted by the federal requirements, and we are therefore required to comply with them to the extent they are applicable to our operations.
 
These and other possible changes to HIPAA or other U.S. federal or state laws or regulations, or comparable laws and regulations in countries where we conduct business, could affect our business and the costs of compliance could be significant. Failure by us to comply with any of the standards regarding patient privacy, identity theft prevention and detection, and data security may subject us to penalties, including civil monetary penalties and in some circumstances, criminal penalties. In addition, such failure may damage our reputation and adversely affect our ability to retain customers and attract new customers.

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The protection of personal data, particularly patient data, is subject to strict laws and regulations in many countries. The collection and use of personal health data in the EU is governed by the General Data Protection Regulation Reg. EU 2016/769, which became applicable on May 25, 2018, or the GDPR. The GDPR imposes a number of requirements, including an obligation to seek the consent of individuals to whom the personal data relates, the information that must be provided to the individuals, notification of data processing obligations to the competent national data protection authorities of individual EU Member States and the security and confidentiality of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the EU to the U.S. Failure to comply with the requirements of the GDPR and the related national data protection laws of the EU Member States may result in fines and other administrative penalties and harm our business. We may incur extensive costs in ensuring compliance with these laws and regulations, particularly if we are considered to be a data controller within the meaning of the GDPR.
 
The adoption of healthcare reform and deficit reduction measures in the United States may adversely affect our business and financial results.
 
The Patient Protection and Affordable Care Act of 2010, or the PPACA, which was modified on March 30, 2010 by the enactment of the Health Care and Education Reconciliation Act of 2010, affects the way healthcare is financed by both governmental and private insurers, and significantly impacts the device industry. The PPACA is intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health policy reforms. The PPACA imposes, among other things, an annual excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the United States beginning in 2013, resulting in an anticipated cost to the medical device industry of up to $20 billion over the next decade. We likely will be subject to the excise tax with respect to our C-Scan system if it is approved for sale in the United States. The PPACA also limits the rate of growth in Medicare payments to providers and authorizes certain voluntary demonstration projects beginning no later than 2013 around development of bundling payments for acute, inpatient hospital services, physician services, and post-acute services for episodes of hospital care. In addition, the PPACA provides for the establishment of an Independent Payment Advisory Board, or IPAB, that, beginning in 2014, could recommend changes in Medicare payments to physicians and other providers that would take effect unless Congress passes an alternative measure to achieve the same amount of savings. The IPAB has not yet been created. The PPACA also increases fraud and abuse penalties and expands the scope and reach of the Federal Civil False Claims Act and government enforcement tools, which may adversely impact healthcare companies.

There have been judicial and congressional challenges to the PPACA, as well as efforts by the Trump Administration to repeal or replace certain aspects of the PPACA . The U.S. Supreme Court heard a constitutional challenge to the PPACA and in June 2012 held that the PPACA is constitutional. However, states are allowed to opt out of the expansion of eligibility criteria for Medicaid under the PPACA and many states have chosen to do so, causing many uninsured patients to remain without coverage. In addition to the PPACA, the effect of which cannot presently be quantified given its recent enactment, various healthcare reform proposals have also emerged at the state level. We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or the effect any future legislation or regulation will have on us. However, we anticipate that the PPACA, as well as other healthcare reform measures that may be adopted in the future, may result in more rigorous coverage criteria and an additional downward pressure on the price that we receive for any approved product, and could adversely affect our business. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. Insurers may also refuse to provide any coverage of uses of approved products for medical indications other than those for which the FDA has granted market approvals, all of which may adversely affect our business, financial condition and results of operations, possibly materially.
 
Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the PPACA or otherwise circumvent some of the requirements for health insurance mandated by the PPACA. However, to date, the Executive Orders have had limited effect and the Congressional activities have not resulted in the passage of a law repealing or replacing the PPACA. If a law is enacted, many if not all of the provisions of the PPACA may no longer apply to prescription drugs. While we are unable to predict what changes may ultimately be enacted, to the extent that future changes affect how any future products are paid for and reimbursed by government and private payers our business could be adversely impacted.  On December 14, 2018, a federal district court in Texas ruled that the PPACA is unconstitutional as a result of the Tax Cuts and Jobs Act, the federal income tax reform legislation previously passed by Congress and signed by President Trump on December 22, 2017, that eliminated the individual mandate portion of the PPACA.  The case, Texas, et al, v. United States of America, et al., (N.D. Texas), is an outlier, and the ruling has been stayed by the ruling judge.  We are not able to state with any certainty what will be the impact of this court decision on our business pending further court action and possible appeals.
 
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. In August 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of an amount greater than $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, starting in 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, reduced Medicare payments to several categories of healthcare providers and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. If we ever obtain regulatory approval and commercialization of our C-Scan system or any future product candidates, these laws may result in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers and accordingly, our financial operations. Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our C-Scan system or any future product candidates may be.

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Although we cannot predict the full effect on our business of the implementation of existing legislation or the enactment of additional legislation pursuant to healthcare and other legislative reform, we believe that legislation or regulations that would reduce reimbursement for, or restrict coverage of, our C-Scan system or any future product candidates, could adversely affect how much or under what circumstances healthcare providers will prescribe or administer our products. This could materially and adversely affect our business by reducing our ability to generate revenue, raise capital, obtain additional collaborators and market our C-Scan system or any future product candidates. In addition, we believe the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of pharmaceutical products, which may adversely impact any future product sales.

In addition to healthcare reform, other deficit reduction measures could affect reimbursement for our device and related procedures. For example, beginning April 1, 2013, Medicare payments for all items and services have been reduced by 2% under the sequestration (i.e., automatic spending reductions) required by the Budget Control Act of 2011, as amended by the American Taxpayer Relief Act of 2012. These cuts will remain in effect until 2024 unless Congress enacts legislation to cancel or delay the cuts. These payment reductions, or similar efforts to reduce Medicare spending to control the federal deficit, could adversely affect our business by reducing reimbursement to the providers who purchase and use our devices and perform related procedures.
 
The implementation of the reporting and disclosure obligations of the Physician Payment Sunshine Act's provisions relating to healthcare reform could adversely affect our business. A health care reform provision, generally referred to as the Physician Payment Sunshine Act or Open Payments Program, has imposed new reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. On February 1, 2013, the Centers for Medicare and Medicaid Services, or CMS, released the final rule to implement the Physician Payment Sunshine Act. As required under the Physician Payment Sunshine Act, CMS will publish information from these reports on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities.
 
The final rule implementing the Physician Payment Sunshine Act is complex, ambiguous, and broad in scope. If we participate in federal healthcare programs, meaning our product is reimbursed by a federal healthcare program such as Medicare, Medicaid, or Children’s Health Insurance Program, our product would be considered a “covered device.” Within 180 days of becoming “covered,” we would be required to collect and report detailed information regarding certain financial relationships we have with physicians and teaching hospitals. The Physician Payment Sunshine Act preempts similar state reporting laws, although we may be required to report under certain of such state laws. Our compliance with the new final rule imposes additional costs on us and requires additional resources including dedicated personnel with experience and expertise in this area. Failure to comply may expose us to federal and/or state enforcement action and fines.
 
If we fail to comply with the U.S. federal Anti-Kickback Statute and similar state and third-country laws, we could be subject to criminal and civil penalties and exclusion from federally funded healthcare programs including the Medicare and Medicaid programs and equivalent third-country programs, which would have a material adverse effect on our business and results of operations.
 
A provision of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration, directly or indirectly, in cash or in kind, to induce or reward the referring, ordering, leasing, purchasing or arranging for, or recommending the ordering, purchasing or leasing of, items or services payable, in whole or in part, by Medicare, Medicaid or any other federal healthcare program. PPACA, among other things, clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny. The federal Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. In addition, most of the states have adopted laws similar to the federal Anti-Kickback Statute, and some of these laws are even broader than the federal Anti-Kickback Statute in that their prohibitions may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the source of payment. Violations of the federal Anti-Kickback Statute may result in substantial criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal healthcare programs.
  
All of our financial relationships with healthcare providers, purchasers, formulary managers, and others who provide products or services to federal healthcare program beneficiaries are potentially governed by the federal Anti-Kickback Statute and similar state laws. We believe our operations are in compliance with the federal Anti-Kickback Statute and similar state laws. However, we cannot be certain that we will not be subject to investigations or litigation alleging violations of these laws, which could be time-consuming and costly to us and could divert management’s attention from operating our business, which in turn could have a material adverse effect on our business. In addition, if our arrangements were found to violate the federal Anti-Kickback Statute or similar state laws, the consequences of such violations would likely have a material adverse effect on our business, results of operations and financial condition.
 
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There are other federal and state laws that may affect our ability to operate, including the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Moreover, we may be subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government healthcare benefit programs. Moreover, there are analogous state laws. Violations of these laws can result in substantial criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal healthcare programs.
 
Similar restrictions are imposed by the national legislation of many third countries in which our medical devices will be marketed. Moreover, the provisions of the Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more aggressive and frequent investigations and enforcement by both the U.S. Securities and Exchange Commission and the Department of Justice. A determination that our operations or activities violated United States or foreign laws or regulations could result in imposition of substantial fines, interruption of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. In addition, lawsuits brought by private litigants may also follow as a consequence.
 
Our failure to comply with the necessary regulatory approval regarding the use of radioactive materials could significantly impair our ability to develop, manufacture and/or sell our C-Scan system.
 
The manufacture of our C-Scan system requires the use and storage of radioactive materials. In order to use such materials in the development and manufacture of our C-Scan system in Israel, we are required to obtain a permit from the Israeli Commissioner for Environmental Radiation, or the Commissioner, pursuant to the Israeli Pharmaceutical Regulations (Radioactive Elements and By-Products), 5740–1980. Should we fail to comply with the conditions of our currently existing permit, the Commissioner would have authority to cancel our permit. Should the Commissioner determine that our activities or facilities constitute a danger to the health and well-being of a person, the public or the environment, the cancellation of our permit could be immediate and without prior notice. Furthermore, we cannot guarantee the annual renewal of our permit and/or annual renewal subject to identical conditions, as the approval of an annual application and the conditions thereof are at the discretion of the Commissioner. Similar requirements and regulations may apply to the manufacture of our C-Scan system in other countries. Cancellation of or failure to renew our permit could have materially adverse consequences on our ability to manufacture and sell our products and therefore on our ability to continue our business and operations.
 
Risks Related to Our Intellectual Property
 
If we are unable to protect our intellectual property rights, our competitive position could be harmed.
 
Our success and ability to compete depends in large part upon our ability to protect our intellectual property. Although we have patents issued in Israel, Europe, United States, Japan, China, India, Hong Kong, Canada, South Korea and Australia, we continue to file and prosecute in many of the same countries and additional countries such as Brazil. We face several risks and uncertainties in connection with our intellectual property rights, including, among others:
 
 
 •
pending and future patent applications may not result in the issuance of patents or, if issued, may not be issued in a form that will be advantageous to us;
 
 
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our issued patents may be challenged, invalidated or legally circumvented by third parties;
 
 
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our patents may not be upheld as valid and enforceable or prevent the development of competitive products;
 
 
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the eligibility of certain inventions related to diagnostic medicine, more specifically diagnostic methods and processes, for patent protection in the United States has been limited recently which may affect our ability to enforce our issued patents in the United States or may make it difficult to obtain broad patent protection going forward in the United States;
 
 
 •
for a variety of reasons, we may decide not to file for patent protection on various improvements or additional features; and
 
 
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intellectual property protection and/or enforcement may be unavailable or limited in some countries where laws or law enforcement practices may not protect our proprietary rights to the same extent as the laws of the United States, the European Union, Canada or Israel.
 
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Consequently, our competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete. In addition, competitors could attempt to develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect us from our competitors’ products and methods, our competitive position could be materially adversely affected.
 
Because the medical device industry is litigious, we are susceptible to intellectual property suits that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling our C-Scan system.
 
There is a substantial amount of litigation over patent and other intellectual property rights in the medical device industry. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. We are presently unaware of any other parties’ valid patents and proprietary rights which our evolving product designs would infringe. Searches typically performed to identify potentially infringed patents of third parties are often not conclusive and because patent applications can take many years to issue, there may be applications now pending, which may later result in issued patents which our current or future products may infringe. In addition, our competitors or other parties may assert that our C-Scan system and the methods it employs may be covered by patents held by them. If our C-Scan system infringes a valid patent, we could be prevented from manufacturing or selling it unless we can obtain a license or redesign the product to avoid infringement. A license may not always be available or may require us to pay substantial royalties. We also may not be successful in any attempt to redesign our product to avoid infringement. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and could divert our management’s attention from operating our business.
  
The steps we have taken to protect our intellectual property may not be adequate, which could have a material adverse effect on our ability to compete in the market.
 
In addition to patents, we rely on confidentiality, non-compete, non-disclosure and assignment of inventions provisions, as appropriate, with our employees, consultants and, to some extent, our distributors, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our intellectual property from unauthorized disclosure, third-party infringement or misappropriation, for the following reasons:
 
 
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the agreements may be breached, may not provide the scope of protection we believe they provide or may be determined to be unenforceable;
 
 
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we may have inadequate remedies for any breach;
 
 
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proprietary information could be disclosed to our competitors; or
 
 
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others may independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technologies.
 
Specifically with respect to non-compete agreements, under current United States and Israeli law, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us. For example, Israeli courts have recently required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, we may be unable to prevent our competitors from benefiting from the expertise of our former employees. In addition, some states in the United States, such as California, have laws which severely restrict the use of non-compete undertakings.
 
If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it could harm our ability to protect our rights and could have a material adverse effect on our business, financial condition and results of operations.
 
Furthermore, although our employees and consultants have agreed to assign to us all rights to any intellectual property created in the scope of their employment or engagement with us and most of our current employees and consultants, have agreed to waive their economic rights with respect to our intellectual property, we cannot assure you that such claims will not be brought against us by current or former employees or consultants, despite their contractual representations and obligations toward us, or by any of the medical and/or governmental institutions that employ or engage such consultants, claiming alleged rights to our intellectual property or demanding remuneration in consideration for assigned intellectual property rights, which could result in litigation and adversely affect our business, financial condition and results of operations.

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Third-party claims of infringement or other claims against us could require us to redesign our C-Scan system, seek licenses, or engage in future costly intellectual property litigation, which could negatively affect our future business and financial performance.
 
Substantial litigation over intellectual property rights exists in the medical device industry in general and in the medical imaging or screening sectors in particular. We expect that we may be subject to third-party infringement claims as our revenues increase, the number of competitors grows and the functionality of products and technology in different industry segments converges. Third parties may currently have, or may eventually be issued, patents on which our current or future products or technologies may infringe.
 
In addition, litigation in which we are accused of infringement may cause negative publicity, adversely impact prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing or selling our current or future products, require us to develop non-infringing technology, make substantial payments to third parties or enter into royalty or license agreements, which may not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology in a timely and cost-effective manner, our ability to generate significant revenues may be substantially harmed and we could be exposed to significant liability. A court could enter orders that temporarily, preliminarily or permanently enjoin us or our customers from making, using, selling, offering to sell or importing our current or future products, or could enter an order mandating that we undertake certain remedial activities. Claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our reputation, business, financial condition or results of operations.
 
We may also become involved in litigation in connection with our brand name rights. We do not know whether others will assert that our brand name infringes their trademark rights. In addition, names we choose for our products may be claimed to infringe names held by others. If we have to change the names we use, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales.
 
Third parties may challenge the validity of our issued patents or challenge patent applications in administrative proceedings before various patent offices which, if successful, could negatively affect our future business and financial performance.
 
Various patent offices, including in the United States and Europe, provide administrative proceedings by which a third party can challenge the validity of an issued patent or challenge an application that is being examined absent any threat of litigation. In some instances, including in the United States, the administrative proceedings provide a more efficient and favorable forum to challenge our patents which may lead to more opportunities for competitors to do so, particularly smaller competitors with limited resources. Moreover, the standards utilized in these administrative proceedings, at least in the United States, provide certain legal advantages versus challenging the validity of a patent in a district court. If a third party is successful in one of these administrative proceedings, the patent will no longer be enforceable in the corresponding jurisdiction. With this loss in patent rights, we will not be able to prevent third parties from offering identical or similar competing products which may result in lower profits and a less substantial market share.
 
We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.
 
We rely on patents to protect a portion of our intellectual property and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in the medical device industry are generally uncertain. In order to protect or enforce our patent rights, we may initiate patent and related litigation against third parties, such as infringement suits or interference proceedings. Any lawsuits that we initiate could be expensive, take significant time and divert our management’s attention from other business concerns and the outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not being issued. In addition, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, including attorney fees, if any, may not be commercially valuable. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.
 
We rely on trademark protection to distinguish our products from the products of our competitors; however, if a third party is entitled to use our trademark, we could be forced to rebrand, which could result in loss of brand recognition and our ability to distinguish our products may be impaired, which could adversely affect our business.
 
We rely on trademark protection to distinguish our products from the products of our competitors. In jurisdictions where we have not registered our trademarks and logos and are using them, and as permitted by applicable local law, we rely on common law trademark protection.  Third parties may oppose our trademark applications, or otherwise challenge our use of the trademarks, and may be able to use our trademarks in jurisdictions where they are not registered or otherwise protected by law.  If our trademarks are successfully challenged or if a third party is using confusingly similar or identical trademarks in particular jurisdictions before we do, we could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote additional resources to marketing new brands. If others are able to use our trademarks, our ability to distinguish our products may be impaired, which could adversely affect our business. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks.
 
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We may not be able to enforce covenants not to compete at all or, we may be unable to enforce them for the duration contemplated in our employment contracts and may, therefore, be unable to prevent competitors from benefiting from the expertise of some of our former employees involved in research and development activities.
 
We currently have non-compete agreements with substantially all of our employees who are involved in research and development, all of whom are located in Israel. These agreements prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors for a limited period of time following termination of employment. In many jurisdictions, courts are increasingly refusing to enforce restrictions on competition by former employees or have interpreted them narrowly. For example, in Israel, where all of our employees reside, courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, an Israeli court may refuse to enforce our non-compete restrictions or reduce the contemplated period of non-competition such that we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
 
Risks Related to Our Operations in Israel
 
Our principal offices, research and development facilities and some of our suppliers are located in Israel and, therefore, our business, financial condition and results of operation may be adversely affected by political, economic and military instability in Israel.
 
Our principal offices and research and development facilities are located in northern Israel. In addition, substantially all of our employees and officers, and one of our directors, are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations.
 
During the Second Lebanon War of 2006, between Israel and Hezbollah, a militant Islamic movement, rockets were fired from Lebanon into Israel, including into the Haifa area, where our facility is located, causing casualties and major disruption of economic activities in northern Israel. An escalation in tension and violence between Israel and the militant Hamas movement (which controls the Gaza Strip) and other Palestinian Arab groups, culminated with Israel’s military campaign in Gaza in December 2008, in November 2012 and again in July and August 2014 in an endeavor to prevent continued rocket attacks against Israel’s southern towns, as well as other tension and violence between Israel and Palestinian Arab groups and individuals. It is unclear whether any negotiations that may occur between Israel and the Palestinian Authority will result in an agreement. In addition, Israel faces threats from more distant neighbors, in particular, Iran, an ally of Hezbollah and Hamas, and the militant group known as the Islamic State of Iraq and Syria.
 
Popular uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries. Furthermore, several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in the region continue or intensify. Such restrictions may seriously limit our ability to sell our products to customers in those countries. Similarly, Israeli corporations are limited in conducting business with entities from several countries. Parties with whom we may do business could decline to travel to Israel during periods of heightened unrest or tension. In addition, the political and security situation in Israel may result in parties with whom we may have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements. In addition, any hostilities involving Israel could have a material adverse effect on our facilities including our corporate office or on the facilities of our local suppliers, in which event all or a portion of our inventory may be damaged, and our ability to deliver products to customers could be materially adversely affected.
 
Furthermore, the war and terrorism insurance we maintain may not be adequate to cover our losses associated with armed conflicts and terrorist attacks. Although the Israeli government in the past covered the reinstatement value of certain damages that were caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business.
 
Our operations could also be disrupted by the obligations of personnel to perform military service. As of December 31, 2018, we had 56 employees and independent contractors, all of whom were based in Israel. Some of these employees may be called upon to perform up to 54 days in each three year period (and in the case of military officers, up to 84 days in each three year period) of military reserve duty until they reach the age of 40 (and in some cases, depending on their specific military profession up to 45 or even 49 years of age) and, in certain emergency circumstances, may be called to immediate and unlimited active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists and it is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of employees related to military service, which could materially adversely affect our business and results of operations.
 
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Any hostilities involving Israel, terrorist activities or political instability in the region or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturns in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect our share price.
 
Pursuant to the terms of the Israeli government grants we received for research and development expenditures, 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 grants from the Government of the State of Israel through the IIA (formerly the OCS) for the financing of a portion of our research and development expenditures pursuant to the Innovation Law and related regulations and guidelines. As of December 31, 2018, we had received funding from the IIA in the aggregate amount of approximately $5.3 million.  As of December 31, 2018, we had not paid any royalties to the IIA and had a contingent obligation to the IIA in the amount of approximately $5.6 million. In December 2018, we applied for an additional IIA grant, and our application was rejected. We may apply for additional IIA grants in the future; however, there is no assurance that such applications will be approved in the amount requested or at all. Furthermore, the funds available for IIA grants out of the annual budget of the State of Israel have been reduced in the past and may be further reduced in the future.  We cannot predict whether we will be entitled to any future grants, or the amounts of any such grants.
 
Under the terms of the Innovation Law as currently in effect, products developed with IIA grants are required to be manufactured in Israel, unless approval for transferring such manufacturing outside Israel is received from the IIA (however, only a notice to the IIA, as opposed to approval, is required for the transfer outside Israel of up to 10% of the manufacturing). Such approval may be provided by the IIA in connection with the approval of the grant application itself (as we requested in certain of our grant applications), in which case the royalty repayment rate is increased, typically by 1%, with respect to any such approved percentage.  If manufacturing of IIA-funded products is transferred outside Israel (following IIA approval) in excess of the percentage approved by the IIA in connection with the grant approval, then the royalty repayment rate is increased by 1% and the royalty repayment amount with respect to such products may be increased to up to three times the amount of the grants received, depending on the percentage manufactured outside Israel (plus accrued interest).  IIA prior approval is also required for the transfer of IIA-funded know-how to a third party outside of Israel (including by way of license), which we may not receive (and any such approval would typically be subject to payment of a redemption fee, calculated according to a formula under the Innovation Law, which may be in the amount of up to six times the amount of the grants received, plus accrued interest). We are exploring whether certain components of our C-Scan system can be assembled outside of Israel. In particular, we are continuing to explore whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the X-ray source subsequently assembled into our C-Scan system at a reactor site or at a distribution center outside Israel.  Even following the full repayment of any IIA grants, we must nevertheless continue to comply with the requirements of the Innovation Law and related regulations and guidelines. The foregoing restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with IIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA.

If we fail to comply with any of the conditions and restrictions imposed by the Innovation Law and related regulations and guidelines, or by the specific terms under which we received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain circumstances, may be subject to criminal charges.
 
Your rights and responsibilities as a shareholder are governed by Israeli law, which differ in some material respects from the rights and responsibilities of shareholders of U.S. companies.

The rights and responsibilities of the holders of our ordinary shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S. based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and certain related party transactions requiring shareholder approval under Israeli law. In addition, a controlling shareholder of an Israeli company or a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company or has other powers towards the company, has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.

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It may be difficult to enforce a judgment of a U.S. court against us, certain of our officers and directors or the Israeli experts named in this Annual Report in Israel or the United States, to assert U.S. securities laws claims in Israel or to serve process on certain of our officers and directors and these experts.
 
We are incorporated in Israel. All of our executive officers, one of our directors and our Israeli experts, reside in Israel, and substantially all of our assets and a substantial portion of the assets of these persons are located in Israel. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a U.S. or foreign court.
  
Provisions of Israeli law and our amended articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction are favorable to us and our shareholders.
 
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a full tender offer for all of a public company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital and the approval of a majority of the offerees that do not have a personal interest in the tender offer, unless at least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer (unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an Israeli court for an appraisal right, to alter the consideration for the acquisition. In addition, a statutory merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party.
 
We may become subject to claims for payment of compensation for assigned service inventions by our current or former employees, which could result in litigation and adversely affect our business.

Under the Israeli Patents Law, 5727-1967, or the Patents Law, inventions conceived by an employee during the scope of his or her employment are regarded as “service inventions” and are owned by the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. Section 134 of the Patents Law provides that if no agreement between an employer and an employee exists that prescribes whether, to what extent, and on what conditions the employee is entitled to remuneration for his or her service inventions, then such matters may, upon application by the employee, be decided by a government-appointed compensation and royalties committee established under the Patents Law, or the Committee.  Although our employees have agreed to assign to us all rights to any intellectual property created in the scope of their employment and most of our current employees, including all those involved in the development of our intellectual property, have agreed to waive their economic rights with respect to service inventions, we cannot assure you that claims will not be brought against us by current or former employees demanding remuneration in consideration for assigned service inventions. If any such claims were filed, we could potentially be required to pay remuneration to our current or former employees for such assigned service inventions, or be forced to litigate such claims, which could negatively affect our business.
 
Risks Related to Ownership of our Ordinary Shares

Our corporate actions are significantly influenced by our principal shareholders, who have the ability to exert significant influence over important corporate matters that require approval of shareholders, which may deprive you of an opportunity to receive a premium for your ordinary shares and materially reduce the value of your investment.
 
Based on recently filed Section 13 filings and a Non-Objecting Beneficial Owner list, each of our four largest shareholders beneficially owned approximately 9%, 8%, 8% and 7% of our ordinary shares, respectively, representing in the aggregate 32% of our ordinary shares. As a result, such shareholders may be able to significantly influence the outcome of matters required to be submitted to our shareholders for approval, including decisions relating to the election of our board of directors (which has the authority to direct our business and to appoint and remove our officers), approving or rejecting any proposed merger or consolidation of our company and amending our articles of association (which govern the rights attached to our ordinary shares). The interests of our principal shareholders may not always be aligned with those of our other shareholders. In addition, conflict of interests may exist or occur between our principal shareholders. Any material conflicts of interests between our major shareholders and other stakeholders may have a material adverse effect on our business, financial condition and results of operations.  Furthermore, these parties’ significant interest in us may discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of the ordinary shares. As a result of the foregoing, the value of your investment could be materially reduced.
 
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We have and will continue to incur significant costs as a result of operating as a public company in the United States, and our management is required to devote substantial time to compliance initiatives.
 
As a public company whose securities are traded in the United States, we have and will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, as well as rules and regulations implemented by the U.S. Securities and Exchange Commission and the Nasdaq Stock Market, impose various requirements on public companies, including requiring the establishment and maintenance of effective disclosure and financial controls. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Changes in the laws, rules and regulations affecting public companies would result in increased costs to us as we respond to their requirements. These rules and regulations could make it more difficult or more expensive for us to obtain certain types of insurance, including director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to obtain or maintain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.
 
We are required to develop and maintain proper and effective internal controls over financial reporting. We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may have one or more material weaknesses, which may adversely affect investor confidence in our company and, as a result, the value of our securities.
 
Section 404 of the Sarbanes-Oxley Act requires the management of public companies to conduct an annual review and evaluation of their internal controls and to obtain an attestation report from their registered public accounting firm regarding the effectiveness of internal controls. However, so long as we qualify as an emerging growth company, we will be exempt from the auditors’ attestation requirement under Section 404 of the Sarbanes-Oxley Act. We would no longer qualify as an emerging growth company at such time as described in the risk factor below.
 
To maintain the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, we expect that we will need to continue enhancing existing, and implement new, financial reporting and management systems, procedures and controls to manage our business effectively and support our growth in the future. The process of evaluating our internal control over financial reporting requires an investment of substantial time and resources, including by our Chief Financial Officer and other members of our senior management. The determination and any remedial actions required could divert internal resources and take a significant amount of time and effort to complete and could result in us incurring additional costs that we did not anticipate, including the hiring of outside consultants. During the evaluation and testing process, if we identify one or more additional material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause the price of our securities to decline.
 
Our ordinary shares could be delisted from the Nasdaq Capital Market.

Nasdaq has established certain standards for the continued listing of a security on the Nasdaq Capital Market.  The standards for continued listing include, inter  alia, that the minimum bid price for the listed securities be at least $1.00 per share. Under these rules, a security is considered deficient if it fails to achieve at least a $1.00 closing bid price for a continuous period of 30 business days. On January 18, 2018, we received a notification from Nasdaq stating that the bid price for our ordinary shares had closed below the minimum $1.00 per share for 30 consecutive business days, which is not in compliance with the Nasdaq rules for continued listing. We were provided by Nasdaq with a compliance period of 180 calendar days (i.e., until July 17, 2018) in which to regain compliance pursuant to Nasdaq Listing Rules. In order to regain compliance, on April 2, 2018, our shareholders approved a reverse share split of our ordinary shares within a range of 1:8 to 1:12, the exact ratio to be determined by further action of our Board of Directors, to be effective on a date to be determined by our Board of Directors and announced by us, and to amend our Articles of Association accordingly. On April 2, 2018, our Board approved a reverse share split of our ordinary shares at a ratio of 1-for-12, effective as of April 4, 2018. On April 18, 2018, Nasdaq provided confirmation that we regained compliance with the minimum bid price listing requirements.

If we are delisted from Nasdaq, our ordinary shares may be eligible for trading on an over-the-counter market in the United States. In the event that we are not able to obtain a listing on another U.S. stock exchange or quotation service for our ordinary shares, it may be extremely difficult or impossible for shareholders to sell their ordinary shares in the United States. Moreover, if we are delisted from Nasdaq, but obtain a substitute listing for our ordinary shares in the United States, it will likely be on a market with less liquidity, and therefore, experience potentially more price volatility than experienced on Nasdaq. Shareholders may not be able to sell their ordinary shares on any such substitute U.S. market in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market. As a result of these factors, if our ordinary shares are delisted from Nasdaq, the price of our ordinary shares is likely to decline. A delisting of our ordinary shares from Nasdaq could also adversely affect our ability to obtain financing for our operations and/or result in a loss of confidence by investors, or employees.
 
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While we currently qualify as an “emerging growth company” under the JOBS Act, we will cease to be an emerging growth company on or before the end of 2020, and at such time our costs and the demands placed upon our management will increase.
 
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may choose to take advantage of certain exemptions from reporting requirements applicable to other public companies that are not emerging growth companies. We will continue to be deemed an emerging growth company until the earliest of (i) the last day of the fiscal year in which our annual gross revenues exceed $1.07 billion (as indexed for inflation); (ii) the last day of the fiscal year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which we are deemed to be a ‘large accelerated filer,’ as defined by the U.S. Securities and Exchange Commission, which would generally occur upon our attaining a public float of at least $700 million. Once we lose emerging growth company status, we expect the costs and demands placed upon our management to increase, as we will be required to comply with additional disclosure and accounting requirements.

We are a foreign private issuer and, as a result, we are not be subject to U.S. proxy rules and are subject to the Securities Exchange Act of 1934 reporting obligations that, to some extent, are more lenient and less frequent than those applicable to a U.S. issuer.

We report under the Securities Exchange Act of 1934, as amended, or the Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same as the information that is required in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual reports on Form 10-K within 90 days after the end of each fiscal year, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation FD (Fair Disclosure), aimed at preventing issuers from making selective disclosures of material information. Although we intend to make interim reports available to our shareholders in a timely manner, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.
  
As a foreign private issuer, we are permitted, to follow, and follow certain home country corporate governance practices instead of otherwise applicable Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.

As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the Listing Rules of the Nasdaq Stock Market for domestic U.S. issuers.  For instance, we follow home country practice in Israel with regard to, among other things, director nomination procedures, the approval of compensation of officers and quorum requirements at general meetings of our shareholders. In addition, we intend to follow our home country law instead of the Listing Rules of the Nasdaq Stock Market that require us to obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection to you than what is accorded to investors under the Listing Rules of the Nasdaq Stock Market applicable to domestic U.S. issuers.
 
If we lose our status as a foreign private issuer under the SEC’s rules, our compliance costs will increase.

We would lose our foreign private issuer status if more than 50 percent of our outstanding voting securities are directly or indirectly held of record by residents of the United States and if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status.  Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs for us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

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Exchange rate fluctuations between the U.S. dollar and the NIS and the Euro and inflation may negatively affect our earnings and we may not be able to hedge our currency exchange risks successfully.

The dollar is our functional and reporting currency. However, a significant portion of our operating expenses, including personnel and facilities related expenses, are incurred in NIS. As a result, we are exposed to the risks that the NIS may appreciate relative to the U.S. dollar, or, if the NIS instead 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. The Israeli rate of inflation has not had a material adverse effect on our financial condition during the years 2018, 2017 and 2016.  In addition, we expect to incur operating expenses denominated in Euros, and therefore, our operating results are also subject to fluctuations due to changes in the U.S. dollar/Euro exchange rate. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS, the Euro and other foreign currencies against the U.S. dollar. While we have recently begun to engage in currency hedging arrangements, these measures may not adequately protect us from fluctuations in the exchange rates of the NIS, the Euro and other foreign currencies in relation to the U.S. dollar (and/or from inflation of such foreign currencies), and involve costs and risk of their own.
 
We have never declared or paid a dividend and currently do not intend to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our securities.

We have never declared and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. Our board of directors has discretion to declare and pay dividends on our ordinary shares and will make any determination to do so based on a number of factors, such as our operating results, financial condition, current and anticipated cash needs and other business and economic factors that our board of directors may deem relevant. In addition, we are only permitted to pay dividends out of “profits” (as defined by the Israeli Companies Law, 1999, or the Israeli Companies Law), provided that there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations, as they become due. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if the trading price of our securities appreciates. Further, you should not rely on an investment in us if you require dividend income from your investments.
 
If securities or industry analysts do not publish research or reports about us or our business or publish unfavorable research about us or our business, the price of our securities and their trading volume could decline.
 
The trading market for our securities will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently have limited research coverage by securities and industry analysts. If one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. We do not have control over these analysts and we do not have commitments from them to continue to write research reports about us or our business. The price of our ordinary shares could decline if one or more equity research analysts downgrade our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.
  
Our stock price has and may be subject to fluctuation, and purchasers of our securities could incur substantial losses.

Our stock price has been subject to considerable fluctuation since our initial public offering in February 2015, with the closing price per share having varied from a low of $1.62 to a high of $70.56, and may be subject to fluctuation in the future. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their securities at or above the purchase price. The market price for our ordinary shares on the Nasdaq Capital Market may fluctuate as a result of a number of factors, some of which are beyond our control, including, among others:
 
 
 •
we may not be able to develop our C-Scan system at the rate or to the stage we desire;
 
 
 •
inability to obtain the approvals necessary to commence further clinical trials;
 
 
 •
unsatisfactory results of clinical trials;
 
 
 •
announcements of regulatory approval or the failure to obtain it, or specific label indications or patient populations for its use, or changes or delays in the regulatory review process;
 
 
 •
any intellectual property infringement actions in which we may become involved;
 
 
 •
announcements concerning our competitors or the medical device industry in general;
 
 
 •
achievement of expected product sales and profitability or our failure to meet expectations;
 
 
 •
our commencement of, or involvement in, litigation;
 
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 •
any major changes in our board of directors or management;
 
 
 •
legislation in the United States relating to the sale or pricing of medical device;
 
 
 •
future substantial sales of our ordinary shares;
 
 
 •
changes in earnings estimates or recommendations by securities analysts, if our ordinary shares are covered by analysts; or
 
 
 •
the trading volume of our ordinary shares.

In addition, the stock market in general, and Nasdaq Stock Market in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of small companies. Broad market and industry factors may negatively affect the market price of our ordinary shares, regardless of our actual operating performance. Further, a systemic decline in the financial markets and related factors beyond our control may cause our share price to decline rapidly and unexpectedly.
 
The trading market for our ordinary shares is not always active, liquid and orderly, which may inhibit the ability of our shareholders to sell ordinary shares.

Prior to our initial public offering in February 2015, there was no public market for our ordinary shares. Since that time, the trading market for our ordinary shares has not always been active, liquid or orderly. The lack of an active market at times may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares.
 
We have broad discretion in how we use the net proceeds from our financings, and we may not use these proceeds effectively.

Our management has broad discretion as to the application of the net proceeds of our financings. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Moreover, our management may use the net proceeds for corporate purposes that may not increase our profitability or our market value.
  
Risks Related to Taxation
 
There is a risk that we could be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes by reason of the transactions related to our acquisition of all of the business operations and substantially all of the assets of Check-Cap LLC on May 31, 2009 (hereinafter sometimes referred to as the “reorganization”) .

Section 7874(b) of the Internal Revenue Code of 1986, as amended, or the Code, generally provides that a foreign corporation (i.e., a corporation created or organized under the laws of a jurisdiction outside of the United States) would be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes if, pursuant to a plan or a series of related transactions, (1) the foreign corporation acquires, directly or indirectly, substantially all of the assets of a domestic corporation (or substantially all of the properties constituting a trade or business of a domestic partnership), (2) after the acquisition, the former shareholders of the acquired corporation by reason of holding shares of the acquired corporation (or, in the case of an acquisition with respect to a domestic partnership, the former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership) own at least 80% of the stock (by vote or value) of the acquiring corporation, and (3) after the acquisition, the expanded affiliated group that includes the acquiring corporation does not have substantial business activities in the foreign country in which, or under the laws of which, the acquiring corporation is created or organized when compared to the total business activities of such expanded affiliated group. On the basis of analysis of the relevant facts and circumstances and the relevant law (including the temporary regulations under Section 7874 applicable at the time of the reorganization), it was determined that the third condition described in the preceding sentence was not met with respect to the reorganization and, therefore, that the inversion tax rules of Section 7874(b) would not apply to treat us as a domestic corporation for U.S. federal income tax purposes. However, since this determination was made on the basis of all of the relevant facts and circumstances, and it is not clear which facts and circumstances the Internal Revenue Service, or the IRS, may consider more important than others, this conclusion is not free from doubt.
 
If Section 7874(b) were to apply to the reorganization (and we were to be treated as a domestic corporation for U.S. federal income tax purposes), then, among other things, (i) we would be subject to U.S. federal income tax on our worldwide taxable income (if and when we have taxable income); (ii) certain payments (e.g., interest and dividends) that we make (or have made) to our foreign investors may be (or may have been) subject to U.S. withholding taxes; (iii) we may be subject to significant penalties for the failure to file certain tax returns and reports, including reports with respect to our foreign bank accounts; and (iv) the U.S. unitholders of Check-Cap LLC would not have been subject to U.S. federal income tax on royalties that are deemed to be paid to them under Section 367(d) of the Code as a result of the reorganization. As discussed under Item 5B “Operating and Financial Review and Prospects – Liquidity and Capital Resources – Application of Critical Accounting Policies and Estimates – Royalties provision – Reimbursement liability to Check-Cap LLC unitholders,” and Item 5F “Operating and Financial Review and Prospects-Tabular Disclosure of Contractual Obligations,” as part of the reorganization, we committed to reimburse the unitholders of Check-Cap LLC for any tax burdens that may be imposed on them due to the reorganization, including royalties that are deemed to be paid to the U.S. unitholders under Section 367(d) of the Code.
 
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Prospective investors are urged to consult their own advisors on these issues. The balance of this discussion, including the discussion under Item 10E “Additional Information – Taxation – U.S. Federal Income Taxation,” assumes that we will be and have been treated as a foreign corporation for U.S. federal income tax purposes.
 
We may be eligible for tax benefits from government programs, which require us to meet certain conditions, including regarding the location of our property, plant and equipment and manufacturing in Israel. We can provide no assurance that we would continue to be eligible for such benefits and/or that any such benefits will not be terminated in the future.

Our manufacturing facilities in Israel may qualify as a “Benefited Enterprise” under the Israeli Law for Encouragement of Capital Investments, 5719-1959, which would entitle us to receive certain tax benefits. In order to be eligible for such benefits, we would be required to meet certain conditions, including the making of a minimum capital investment in our productive assets and the carrying on of a required portion of our manufacturing in Israel. The amount of the benefit will be determined in accordance with various conditions, including the location of our property, plant and equipment and the location of certain of our sub-contractors. If we cease to meet the required conditions for eligibility, the tax benefits could be cancelled and we could be required to pay increased taxes or to refund the amounts of the benefits received with interest and penalties. We can provide no assurance as to the amount of future capital investment in our productive assets, our future manufacturing location and the future location of our property, plant and equipment and certain of our sub-contractors, and therefore, we cannot provide assurance that we will be eligible for such tax benefits or assurance as to the amount of such tax benefits. Even if we continue to meet the relevant requirements, the tax benefits that Benefited Enterprises receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we would be required to pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. See Item 10E “Additional Information—Taxation—Israeli Tax Considerations and Government Programs—Law for the Encouragement of Capital Investments, 5719-1959” for additional information concerning these tax benefits.
  
There is a risk that we may be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. investors.
 
In general, we will be treated as a PFIC for any taxable year in which either (1) at least 75% of our gross income (including our pro rata share of the gross income of our 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (including our pro rata share of the assets of our 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in Item 10E “Additional Information—Taxation—U.S. Federal Income Taxation—General”) of our securities, the U.S. Holder may be subject to increased U.S. federal income tax liability upon a sale or other disposition of our securities or the receipt of certain excess distributions from us and may be subject to additional reporting requirements. We believe that we were a PFIC for the taxable year ended December 31, 2018 and may be a PFIC for the taxable year ending December 31, 2019Our actual PFIC status for our current taxable year or any subsequent taxable year is uncertain and will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our taxable year ending December 31, 2019 or any subsequent taxable year.
 
U.S. investors are urged to consult their own tax advisors regarding the possible application of the PFIC rules. For more information, see Item 10E “Additional Information—Taxation—U.S. Federal Income Taxation—U.S. Holders—Passive Foreign Investment Company Rules.”
 
There is a risk that a holder of Long Term Incentive Warrants will recognize ordinary compensation income on the exercise of the Long Term Incentive Warrants, which may result in U.S. federal and Israeli income tax liability to such holder without the receipt of cash.

While not free from doubt, the Long Term Incentive Warrants may be treated for U.S. federal and Israeli income tax purposes as compensatory warrants (i.e., warrants issued to compensate an original purchaser of units in our initial public offering for holding the ordinary shares underlying the units for a certain period of time after the closing date of our initial public offering). Based on this characterization, a holder may recognize ordinary compensation income for U.S. federal and Israeli income tax purposes on the exercise of the Long Term Incentive Warrants, as described under Item 10E “Additional Information—Taxation—Israeli Tax Considerations and Government Programs—Taxation of our Shareholders—Taxation of Non-Israeli Shareholders upon Exercise of Long Term Incentive Warrants” and Item 10E “Additional Information—Taxation—U.S. Federal Income Taxation—U.S. Holders—Exercise of Long Term Incentive Warrants” and “Non-U.S. Holders.” Such compensation income may result in U.S. federal or Israeli income tax liability to such holder without the receipt of cash. Holders of Long Term Incentive Warrants are urged to consult their own tax advisors with respect to the U.S. federal and Israeli income tax consequences that may arise with respect to the Long Term Incentive Warrants.
 
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ITEM 4. INFORMATION ON OUR COMPANY
 
A.
History and Development of the Company
 
Our History
 
Our legal and commercial name is Check-Cap Ltd. We were formed as a company in Israel on April 5, 2009. On May 31, 2009, we acquired all of the business operations and substantially all of the assets of Check-Cap LLC, a Delaware limited liability company formed in December 2004. On May 15, 2015, we formed our wholly-owned subsidiary Check-Cap US, Inc., a Delaware corporation.
 
On February 24, 2015, we successfully completed an initial public offering in the United States and the listing of our securities on the Nasdaq Capital Market.
 
We are subject to the provisions of the Israeli Companies Law. Our principal executive offices are located at Check-Cap Building, 29 Abba Hushi Avenue, P.O. Box 1271, Isfiya, 3009000, Israel. Our telephone number is +972-4-8303400 and our website is located at www.check-cap.com (the information contained therein or linked thereto shall not be considered incorporated by reference in this Annual Report). Our U.S. agent is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

We use our website (http://www.check-cap.com) as a channel of distribution of company information. The information we post through this channel may be deemed material. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website are not, however, a part of this Annual Report.

Principal Capital Expenditures
 
For a discussion of our capital expenditures, see Item 5 “Operating and Financial Review and Prospects—Liquidity and Capital Resources.” 

B.
Business Overview
 
Our Company
 
We are a clinical stage medical diagnostics company engaged in the development of a capsule-based system that utilizes ultra-low-dose X-rays to generate structural information on the endoluminal surface of the colon that may be used for screening of the colon to detect polyps, masses and CRC. While CRC is the second leading cause of death from cancer for both sexes combined in the United States and is preventable with early screening and intervention, according to the National Health Interview Survey, in 2015, only 63% of Americans over the age of 50 reported being current with CRC screening recommendations. Unlike other screening modalities that are designed for direct visualization and imaging of the internal colon, such as optical colonoscopy, CTC and other capsule-based technologies, our C-Scan system is designed to function without any cathartic preparation of the colon, and to transit the gastrointestinal tract by natural motility while the patient continues his or her normal daily routine. Furthermore, the C-Scan system does not require fasting prior to or during capsule transit. Our C-Scan system is comprised of three main components: (1) C-Scan Cap, an ingestible X-ray scanning capsule; (2) C-Scan Track, a biocompatible unit worn on the patient’s back for capsule control, tracking and data recording; and (3) C-Scan View, a PC-based, standalone application used to process and display structural information of the colon. We believe that this solution will be attractive to both physicians and patients, with the potential to increase the number of people completing CRC screening.

Our C-Scan Cap is swallowed and propelled by natural motility through the gastrointestinal tract and excreted naturally with no need for retrieval for data collection. Unlike other existing CRC screening methods, this process should not disrupt a patient’s normal activities or require fasting. Our C-Scan Cap employs ultra-low-dose X-rays, which allow the C-Scan system to image the interior lining of the colon even when surrounded by intestinal content. As such, we believe that patients using our C-Scan system will not be required to undergo any prior bowel preparation.

Our C-Scan Cap is being designed to transmit position, motility and the data it collects to the C-Scan Track that will be worn on the patient’s back. The external data recorder is being designed to enable the transfer of the data to our C-Scan View application to allow physicians to analyze the data collected by our C-Scan Cap. The C-Scan Track is being designed to provide the physician with accurate localization data aligned with a reconstructed image. We intend for physicians to be able to review the colon’s inner images in less time than is required to perform an optical colonoscopy.
 
Colonic polyps are tissue growths that occur on the lining of the colon. Polyps in the colon are common, and certain types of polyps may become cancerous over time. In the event that polyps are identified by our C-Scan system, the patient may be advised to undergo a subsequent traditional colonoscopy procedure to examine, remove and biopsy the polyps. For those patients who require a subsequent colonoscopy, concerns regarding pain, discomfort and embarrassment may still remain. We do not, however, believe that these concerns will make the use of our C-Scan system any less attractive to physicians and patients. Although patients who are initially screened utilizing a traditional colonoscopy could avoid the need for a second colonoscopy if polyps are discovered, we believe that our C-Scan system will still be attractive to physicians and patients as a large number of patients who are screened will not require a subsequent colonoscopy. Published data from a multi-center CT colonography screening study of 2,531 asymptomatic adults published in The New England Journal of Medicine in 2008 showed that if all patients with a lesion measuring 5mm or more on CT colonography were referred for colonoscopy, the colonoscopy-referral rate would have been 17%.

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We initiated our first clinical studies in 2010, consisting of two single-center feasibility studies with non-scanning (no X-ray source) capsules for the purposes of measuring gastrointestinal tract activity, colon contractions and associated capsule motility, and shortening capsule transit time.

In 2013, we initiated a multi-center prospective clinical feasibility study, designed to allow for the recruitment of 100 subjects, to establish clinical proof of concept, safety and functionality of our C-Scan system in patients eligible for CRC screening. Analysis conducted on the first 66 capsules swallowed by participants showed that 65 of 66 capsules swallowed were naturally eliminated, without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure was 0.06 ± 0.04 mSv (similar to a single chest radiograph). Both pedunculated and sessile polyps were detected in several patients and validated later by colonoscopy.
  
In September 2017, we completed a multi-center study of the C-Scan system in support of CE Mark submission.  The objective of the study was to assess safety and the clinical performance of the C-Scan system in detecting patients with polyps. The three-center trial enrolled 66 patients, with a mean age of 59 years. Following capsule ingestion, subjects swallowed small doses of contrast agent and fiber supplements with each meal throughout capsule passage. Average capsule transit time was 52±32 hours, and the average total X-ray dose was 0.05 mSv (CT colonography effective dose is ~ 6.0 mSv).  No bowel preparation, sedation, or change in diet was required.  Both confirmatory colonoscopy, performed by an independent investigator, and C-Scan review, performed by a central review group, were blinded to results. The study demonstrated a 44% sensitivity in the 45 subjects included in the analysis for polyps, with specificity (ability to correctly identify lack of polyps) of 89%.  Sensitivity strongly correlated (R-squared = 0.98) to the percentage of the colon scanned.  Sensitivity was 78% (p<0.05) and 100% (p<0.05) for subjects where greater than 50% and 70% of the colon was scanned, respectively.  Specificity was consistent for all subjects.
 
In the fourth quarter of 2017, we initiated a clinical study for the purpose of introducing an advanced version of the C-Scan system, Version 3 (formerly referred to as Advanced C-Scan system), which incorporates the latest algorithms and system optimization and tailors scanning of the colon to the patient’s natural colonic movements to maximize the amount of the colon that is tracked and imaged.  Evaluable results of 21 patients showed average colon imaging coverage of 64%, a 40% improvement over 46% average colon imaging coverage in the multi-center study. Sensitivity was 78% (p<0.05) for subjects with greater than 50% colon imaging coverage and 100% (p<0.05) for subjects with greater than 70% colon imaging coverage. Specificity  was consistent at around 89%.

Following our certification to ISO 13485:2016 by our Notified Body, and completion of our multi-center clinical study and achievement of compliance with the requirements of the Medical Devices Directive, in September 2017, we submitted a request for CE marking for the marketing and sale of our C-Scan system in the European Union.  We received the CE Mark approval on January 9, 2018.  In September 2018, we received approval from the Medical Devices and Accessories Division of the Israeli Ministry of Health, or AMAR, for the marketing and sale of C-Scan system in Israel, which was valid until February 28, 2019. We have submitted a request to the Israeli Ministry of Health for the extension of the AMAR approval, which is currently pending.

During the first quarter of 2018, we initiated a multi-center EU post-approval study using our C-Scan system Version 3 for the purpose of collecting additional evidence of clinical effectiveness and clinical utility to support market adoption. In September 2018, we announced interim results from our ongoing post-CE approval study of our C-Scan® System Version 3, demonstrating 76% sensitivity (P=0.0038) and 80% specificity, and we expect to announce final results in the second quarter of 2019.

We conducted pre-submission meetings with the FDA during the period of December 2016 and February 2017 for the purpose of receiving feedback on the regulatory pathway for our system in the United States. We also sought feedback on a proposed protocol for a feasibility or pilot study, the primary purposes of which is to establish the safety of the C-Scan system and evaluate user compliance and satisfaction. In December 2018, we received from the FDA conditional approval of our IDE application to initiate a U.S. pilot study of the C-Scan system and received final approval from the FDA in February 2019. The U.S. pilot study (NCT03735407) is a single-arm study enrolling up to 45 subjects considered to be of average risk for polyps and colon cancer. The study will evaluate the safety, usability, and subject compliance of the C-Scan system.

Following successful completion of the pilot study, receipt of required approvals and available capital, we plan to initiate during 2020, a pivotal study in the United States to (i) demonstrate device safety as evidenced by a lack of device-related serious adverse events; and (ii) provide efficacy data concerning our C-Scan system’s performance. We anticipate that FDA approval for the pivotal study will be subject to our providing sufficient clinical data from previous clinical studies, which may include the multi-center clinical feasibility study, the multicenter safety and clinical performance study, and U.S. pilot study. However, there can be no assurance that we will receive approvals for the pivotal study to be conducted in the United States.
 
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We are considering clinical trials for regulatory approvals in Japan and China in parallel to the U.S. pivotal study, subject to available capital and engagement with strategic partners. Pivotal studies are expected, among other things, to compare polyps identified by our C-Scan system with the polyps identified by traditional optical colonoscopy. These clinical findings may be analyzed in comparison with results obtained from FOBTs and FITs.
 
Following and subject to the successful completion of our pivotal trial and available capital, our current strategy is to submit a direct de novo reclassification petition, which we anticipate submitting in 2021, for initial FDA approval for the marketing of our C-Scan system in the United States. Direct de novo reclassification typically takes at least 9 to 12 months from filing to clearance. If the FDA determines that our C-Scan system is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. The PMA pathway is much more costly and uncertain than the 510(k) clearance process or de novo reclassification, and generally takes at least 12 to 18 months, or even longer, from the time the application is filed with FDA to ultimate approval.
  
Since our formation, we have not generated any revenue. We do not anticipate generating any revenue for the foreseeable future and we do not yet have any specific launch dates for our product. We incurred net losses of $10.6 million in 2018, $9.8 million in 2017 and $8.8 million in 2016.  As of December 31, 2018, we had an accumulated deficit of $63.3 million and a total shareholders’ equity of $13 million.
 
Our Solution
 
CRC screening can reduce the incidence of and mortality from the disease by detecting polyps at an earlier, more treatable stage. CRC is one of the few cancers that can be prevented through screening because pre-cancerous polyps, from which colon cancers often develop, can be identified and removed. Today, there is a range of options for CRC screening in the average-risk population, with current technology falling into two general categories: (i) structural exams, such as optical colonoscopy (which is currently regarded as the “gold standard” for CRC screening), sigmoidoscopy, CTC and optical capsules (all of which require aggressive bowel preparation), which are invasive exams that enable physicians to visualize the colon for abnormalities; and (ii) stool and serum based tests, such as FOBTs, FITs, stool DNA, and blood tests, which test for blood in stool and irregularities in blood and DNA. Notwithstanding the many CRC screening alternatives, despite the fact that the tests are encouraged by clinicians and insurers and the clinical value of screening for CRC, a large portion of the population is still reticent to go for CRC screening and are not satisfied with the currently available alternatives.
 
We believe that our C-Scan system could represent a potential breakthrough in CRC screening by providing structural information on the endoluminal surface of the colon without the discomfort and embarrassment experienced by some patients undergoing a traditional optical colonoscopy and other currently available screening methods by offering the following benefits:
 
 
 •
eliminating the need for fasting and prior bowel preparation, which would differentiate our system from every other currently available structural screening exam;
 
 
 •
providing patients with a procedure that requires them to swallow our C-Scan Cap and small amounts of a contrast agent, thereby minimizing any disruption to their normal activities;
 
 
 •
eliminating the need to sedate patients;
 
 
 •
obviating the requirement for the insufflation (the forcing of air into the gastrointestinal tract) of patients; and
 
 
 •
providing digital reporting, storage and remote consulting capabilities.
 
Although our C-Scan system utilizes radiation that is less than one mSv, we believe that the potential risks associated with such radiation exposure are low compared to the potential risks associated with other procedures such as perforation, bleeding or sedation related effects (optical colonoscopy and sigmoidoscopy) and dehydration and damage to kidneys. Unlike FOBTs, FITs and stool DNA tests, our capsule-based imaging modality generates structural information on the colon, which could assist in the detection of pre-cancerous polyps. We therefore do not believe that the ultra-low-dose radiation in our capsule will make our C-Scan system less attractive to physicians and patients than other less-effective products that do not employ any radiation.

The Radiation Safety Division of the Soreq Nuclear Research Center found, as set forth in its report of November 2010 that was prepared at our request and based on the information provided by us and the relevant methods and principles known at such time, or the Report, that the radiation dose to the patient in the proposed screening procedure utilizing the scanning device developed by us at that time in routine operation and normal conditions is low relative to the radiation dose involved in conventional imaging procedures using X-rays (such as fluoroscopy and CT) and is also low when compared to the radiation dose involved in established screening procedures such as mammography, all as more fully described in the Report. In addition, Michael S. Gossman, M.S., DABR, FAAPM, FACR, the Chief Medical Physicist in Radiation Oncology and Radiation Safety Officer, Regulation Directive Medical Physics, concluded, as set forth in his report dated November 14, 2018 that was prepared at our request and submitted to the FDA in connection with the IDE application for the U.S. pilot study, following analysis of both normal capsule transit and extreme conditions, that the C-Scan system is safe for medical diagnostics and exposes patients to very low dose radiation during normal operation and that even in extreme and unlikely scenarios, patient exposure to radiation is unlikely to cause severe harm to patients undergoing the C-Scan procedure.

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We believe that gastroenterologists will adopt our technology and encourage the use of our capsule. This may increase the number of people undergoing CRC screening and may cause more people with polyps to obtain a polypectomy – a therapeutic procedure during which polyps are removed.
 
Our goal is to become a leading supplier of CRC screening technology and to establish our technology as a leading CRC screening method. Key elements of our strategy include:
 
 
 •
seeking to obtain regulatory approvals for the sale of our C-Scan system initially in the United States and Japan following receipt of CE marking for the marketing and sale of our C-Scan system in the European Union;
 
 
 •
in Europe and Japan, we intend to offer our C-Scan system as an imaging and screening tool for the general population. In the United States, we may choose to first obtain regulatory clearance/approval for our C-Scan system in a screening sub-population, and after we have conducted more extensive clinical studies in the United States, we would anticipate applying to the FDA for the use of our C-Scan system as a primary screening tool;

 
 •
obtaining government and private third-party reimbursement for our technology;
 
 
 •
improving and enhancing our existing technology portfolio and developing new technologies; and
 
 
 •
successfully marketing our product to establish a large customer base.
 
Our Technology
 
Our technology is based on an ingestible capsule (C-Scan Cap), which is swallowed by the patient and propelled by natural motility through the gastrointestinal tract. Our capsule transmits information to a receiving device (C-Scan Track) worn on the patient’s body that stores the information for off-line analysis. Our C-Scan Cap consists of an X-ray source and several X-ray detectors. The X-ray source is contained in a rotating radiation shield, enabling the generation of 360-degree angular scans. The collection of successive angular scans is intended to enable the virtual reconstruction of a portion of the colon’s inner surface. During movement of our capsule longitudinally through the colon, successive images of portions of the colon enable the three-dimensional reconstruction of the colon. Our C-Scan system is also intended to enable identification of polyps, masses, and colorectal cancers which protrude inward into the colon, through the detection of irregularities in the topography of the colon's inner surface.
 
Our C-Scan system is intended to be prescribed to patients by physicians. Immediately prior to capsule ingestion, patients will swallow 15ml of iodinated oral contrast medium, combined with oral fiber, and continue to do so with normal daily meals in order to enhance the contrast of the colon surface. The capsule is propelled by natural motility through the gastrointestinal tract. During transit, information is transmitted to the C-Scan Track, which stores the information for off-line analysis. After our C-Scan Cap is expelled from a patient’s body, the C-Scan Track data will be downloaded into our workstation (C-Scan View) through which physicians will utilize our data viewer software application to analyze the data collected by our C-Scan system. Our proprietary software is being designed to process the data and produce a two and three-dimensional visualization of the colon’s inner surface. A physician will then analyze the visualization to determine whether any anatomical anomalies are present on the inner surface of the colon.
 
Our C-Scan system consists of the following three main subsystems that together enable the generation of high-resolution 3D imaging of the colon’s inner surface, further described below: (i) an ultra-low-dose X-ray based colon scanning capsule (C-Scan Cap); (ii) C-Scan Track; and (iii) a PC-based standalone application (C-Scan-View).
 
C-Scan Cap
 
C-Scan Cap is an X-ray scanning capsule, designed to measure, collect and transmit structural information, and is comprised of the following components:
 
 
 •
X-ray Source – Including radioactive material sealed in a cylindrical housing.
 
 
 •
Collimator – Radiation shield around the source, which absorbs most of the radiation. Several radial holes enable emission of radiation in defined directions.

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 •
X-ray Sensor – Comprised of several solid state X-ray detectors for measuring the scattered radiation intensity.
     
 
 •
Tilt Sensor – Indication of capsule motion (3D acceleration).

 
 •
Rotation Motor – For rotating the collimator and X-ray Source.
 
 
 •
Compass sensor – Indication of true north (reference coordinate system).
 
 
 •
Pressure sensor – indicating the hydrostatic pressure inside the colon.

 
 •
Source Concealment Mechanism – Conceals the source inside the radiation shield.

 
 •
R-T – Radio frequency transceiver device to communicate with the receiver.
 
 
 •
Batteries – Electrical power supply for the capsule.
 
 
 •
Memory – Data storage. The capsule should be able to store up to an hour of measured data.
  
 
 •
C-Scan Track Coil – Transmits a continuous electromagnetic field utilized by an external localization system to track 3D position.
  
Image for illustration purpose only
 
C-Scan Track
 
C-Scan Track is a small, disposable system of biocompatible stickers which are designed to automatically track the imaging capsule’s positioning and orientation throughout the gastrointestinal tract transit, control the capsule scan mechanism through an embedded scan control algorithm or SCA, capture imaging data from the capsule through radio frequency communication to a non-volatile memory device, and enable data retrieval, through either wired or wireless communication, to an external processor.
 
The C-Scan Track is comprised of the following components:
 
 
 •
Sticker Housings – Biocompatible and water-resistant stickers and housing integrating all functional components, attached to the patient’s back, enabling five days of continuous operation.
 
 
 •
Recorder – Consists of receiver electronics embedded software and nonvolatile memory.
 
 
 •
Antennas – Radio frequency antennas are embedded into the sticker housings and used to communicate with the capsule.
 
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 •
Activation/Deactivation Circuit – Used to activate/deactivate the C-Scan Track through a specialized protocol.
     
 
 •
UI Indicators – Provides user with vocal and vibration indication as required.
 
 
 •
PCB – Electronics’ printed circuit boards.
 
 
Microcontroller – Runs embedded software, logic that manages the C-Scan Track and SCA.
 
 
 •
RF Transceivers – Several transceivers used to communicate with the capsule.
 
 
 •
TILT/Compass Sensors – To determine the patient’s body movements.
 
 
 •
Batteries – Electrical power supply for the C-Scan Track.
  
 
 •
Memory – Non-volatile data storage to store data acquired by the system.
 
 
Image for illustration purpose only
 
C-Scan View
  
C-Scan View is a specialized, user friendly, personal computer-based software package designed to retrieve and process clinical data from the C-Scan Track and to reconstruct and produce 3D visualization and 2D maps of the colon’s inner surface. The C-Scan Track is comprised of the following software components:
 
 
 •
Communication Driver Software – to communicate with the C-Scan Track and retrieve collected data following procedure completion.
 
 
 •
Data Processing Software – to process and reconstruct clinical data into a 3D structure.
 
 
 •
Data Display and Management Software – includes the following functions:

 
 ○
3D visualization and 2D maps of the reconstructed colon surface.
 
 
 ○
Annotation tools.
 
 
 ○
Registration of patient and capsule data and management of the patient database.
 
 
 ○
Report – to enable generation of clinical results report out.

Image for illustration purpose only
 
C-Scan System Non-Clinical, Pre-Clinical and Clinical History 
 
We have developed and validated our capsule-based imaging modality for providing structural information on colonic polypoid lesions and masses for CRC screening. Below is a summary of the validation tests carried out by us in the laboratory, in phantoms, animals and humans, which were designed to evaluate this new imaging modality’s performance and potential clinical value. 
  
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Non-Clinical and Pre-Clinical Testing 
 
Imaging Performance Testing
 
The C-Scan Cap transmits data as it transits the colon. This data consists of imaged slices perpendicular to the capsule’s longitudinal axis; slices are then reconstructed by the C-Scan View to produce 2D and 3D images of the inner surface of the colon. Following are performance measurements of the capsule imaging. 
 
•          Modulation Transfer Function, or MTF. The capsule was moved along a longitudinal-edge phantom setup in 3mm steps. The figure below shows a typical raw signal after filtering for peak detection. The same test was carried out using an angular-edge phantom setup, which demonstrated similar results to those shown below. These tests do not take into account noise characteristics.
 
Image for illustration purpose only
 
For each position of the capsule in the phantom, the mean signal intensity (peak) was measured, the result of which is shown in the right figure below. Resulting line spread function, or LSF, which is the differential of the curve in the left figure below. 
 
Image for illustration purpose only
 
The graphs above demonstrate that the existing design of our C-Scan system can detect objects of approximately 2-3mm when noise is not taken into account.

 
          Resolution Limit: Estimation of the Smallest Visible Object Size. In order to estimate the size of the smallest visible object, both spatial resolution and noise characteristics must be taken into account. The graph below presents the estimated MTF of our C-Scan system. Noise analysis indicates MTF 1/3 for minimum visibility, which demonstrates that the smallest visible object that can be detected with the existing design of our C-Scan system (in the conditions used, which included a colon diameter of 30mm) is of approximately 5-6 mm (see graph below).
 
Image for illustration purpose only
 
Image Reconstruction 
 
Two main characteristics of our C-Scan system contribute to the image reconstruction performance: 
 
 
The number of photons hitting the detector per time frame.
 
 
The angular spread of the photon beam coming out of the capsule collimator.
 
Based on the laboratory tests performed with the previous version of our C-Scan system, polyps of 6 mm and larger should be visible and 10 mm polyps and larger are expected to be detected at high sensitivity. To further enhance the visibility of 6 mm - 9 mm polyps, a new design of the collimator was successfully tested in a prototype version of our C-Scan Cap, which is expected to enable 2.5 times the number of photons to be detected by the detectors, allowing the implementation of an image enhancement algorithm, which is expected to improve the imaging performance.
 
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Animal Testing and Tissue Equivalent Phantom Image Reconstruction
 
The physics of our imaging modality was tested in the laboratory on phantoms with tissue equivalent material and in animals to ensure that laboratory conditions mimic real life clinical scenarios.
 
Following the initial proof of concept, we performed a series of studies in order to evaluate the feasibility and preliminary safety of our technology. All studies were performed in pigs ranging from 60 to 90 kg. Pigs, which are commonly used in gastrointestinal studies, were selected as the animal model for preliminary evaluation of our C-Scan system based on the resemblance of the porcine colon size and morphology to the human colon. However, there are marked differences between the colon of pigs and that of humans. The pig colon is much longer and has a larger diameter, in addition to other anatomical differences. In the pig model, the pressure waves of peristalsis are believed to be more frequent and shorter than in humans. As a result, we believe that colon content movement is substantially slower and more frequent in pigs than in humans. In these studies, we did not intend to collect statistically significant data; hence, the tests were repeated a limited number of times until adequate data was collected.
 
The first test was performed to demonstrate imaging proof-of-concept using a wired C-Scan system. This technology included all the basic features intended to be included in the clinical C-Scan system, but on a larger scale due to the use of off-the-shelf components. The subsequent studies used versions of the C-Scan system that integrated most of the imaging components, software and electronics of the C-Scan system that we used with humans. Since off-the-shelf components were used, the animal capsules were larger and heavier than the version of our C-Scan system that are used clinically. 
 
Raw data from an animal colon showing a decrease in X-ray florescence, or XRF, photon signals and an increase in Compton backscattering, or CMT, signals corresponding to the position of a polyp that was detected when our C-Scan Cap passed over the polyp is shown in the image below. These two signals are combined in order to form a three dimensional image below.
 
Image for illustration purpose only
 
The animal studies conducted to date demonstrate that our technology provides sufficient resolution, in these studies, for the detection of 10 mm polyps which is the size of clinically significant polyps. The animal studies also demonstrated that 5 mm polyps can be detected, though with lower resolution than 10 mm polyps in the first animal capsule. Animal health was maintained throughout the studies. No adverse effects related to passage of our capsule were noted.
 
The capsules evaluated in the animal studies were significantly larger than the capsules that we are using with humans. The differences in anatomy, physiology, and capsules may have several effects on the data compared to use in the human population. Motility of the capsules through the digestive C-Scan system was slow due to the specific shape of the porcine gastrointestinal tract. In addition, because of the size of the capsule, it was retained in the stomach for many hours and even days. Accordingly, the animal model required that normal ingestion be replaced by direct insertion of the capsule into the small bowel. In order to simplify the development and animal testing, we used Tungsten radiation source with long half-life (120 days).
 
Following the success of the animal testing, a series of in-vitro tests were conducted to simulate different clinical scenarios in the laboratory using a miniaturized human capsule. Polyps were created and reconstruction of the laboratory phantoms with a human capsule was generated to assess the ability to detect polyps as the capsule advances in the colon. The in-vitro tests demonstrated the imaging capabilities of our imaging technology. Below is the reconstruction of a laboratory phantom image. 
 
Image for illustration purpose only
  
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Polyp Detection Analysis
 
Laboratory tests were carried out to estimate the capsule’s ability to detect polyps in phantoms and demonstrate sensitivity and specificity of such detection. Below is an example of the reconstruction of a scan composed of three slices: XRF, CMT and a fused (combined) image. 
 
 
Receiver Operating Characteristics
 
Standard receiver operating characteristics, or ROC, curves were generated from phantom data with 8 mm polyp in a 30 mm barrel phantom with 3% iodine concentration mimicking the colon contents. CMT, XRF and fused (combined) data were analyzed based on 2D slices that were generated and standard deviation indicator. There were a few cases where the noise in the phantoms was high enough to generate polyp false positive condition separately for each data type, especially in CMT. However, fusion of CMT and XRF data contributed to noise reduction and enabled to demonstrate 100% true positive and 0% false positive.
 

Clinical Trials
 
We initiated our first clinical study at University Hospital, Hamburg, Germany in 2010. The purpose of this study was to monitor and record the colon contractions and the associated motility of the capsule in the colon.  This study was conducted with a passive capsule that contained no X-ray source or detectors. It included several electronic components of the C-Scan system and had similar dimensions to the current capsule.  63 healthy volunteers were enrolled and no adverse events were reported.
 
We completed a limited, single-center, feasibility study at Rambam Medical Center, Haifa, Israel to assess the motility of a non-scanning capsule in healthy subjects. The objective of the study was optimizing the daily routine of the subjects in order to shorten the transit time of our capsule. 15 subjects participated and swallowed a capsule with the same weight and dimensions as our current C-Scan capsule. No adverse events were reported and all capsules were retrieved. A structured daily routine determined the timing of the following: capsule ingestion, the subjects’ daily meals, the contrast agent ingestion and one evening dose of 10 mg of Bisacodyl, and all subjects continued their regular active lifestyles (such as work and exercise). The average transit time of the capsule in the 15 subjects was approximately 38 ± 19 hours, which is comparable to the average transit time of our capsule in subjects participating in the multi-center feasibility study, in which the participants do not ingest a daily dose of Bisacodyl, and participants are released to their homes and continue their regular lifestyles during the study.
  
A 10 subject clinical proof-of-concept study, conducted at Tel Aviv Sourasky Medical Center in Israel and using a prior version of our C-Scan system, did not identify any material safety or feasibility issues. The study demonstrated the applicability of our C-Scan system to the human colon, generating images of the colon without any prior bowel preparation. All subjects ingested the capsule easily with smooth passage within the designated transit time, on average, within 48-72 hours. There were no reported device-related adverse events. Mild effects on bowel movements were noted, which were determined to be related to the contrast agent and passed within one to two days after the capsule excretion.  Estimated total radiation exposure was calculated using standard established factors for calculating effective radiation exposure, such as the duration of the capsule inside the body, and was based on the activity of the radiation source inside the C-Scan Cap and radiation energy, both of which were measured for each case study. The average calculated exposure for the entire procedure in the 10-case study, from ingestion of the capsule to excretion, was 0.03 mSv (STD 0.007 mSv). This level of radiation exposure is similar to a single chest X-ray (approximately 0.06mSv) and two orders of magnitude less than a CTC.
 
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The 10-subject study constituted the initial phase of a multi-center, prospective clinical feasibility study to establish the safety, functionality and preliminary efficacy of our C-Scan system in patients eligible for CRC screening, by comparing results from the clinical feasibility study with those from non-invasive, low-sensitivity FITs, as well as from optical colonoscopies. The feasibility study has been designed to allow for the recruitment of 100 subjects. The study was conducted at multiple centers in Israel. The clinical feasibility study was used to evaluate the image resolution generated by the capsule in a human colon without cathartic preparation, assess polyp imaging in various shapes and in different segments of the colon, and evaluated the safety of the device in terms of total and segmental transit time and analyze the effects of the presence of polyps and variable colon dimensions on these parameters. During the feasibility study we collected data regarding the overall imaging of the colon’s internal surfaces during the passage of the capsule to support the development of a correlation map of polyps identified through our imaging system with polyps imaged by optical colonoscopy and CTC. Additionally, the feasibility study allowed for the measurement of total radiation exposure and the distribution of contrast material within the colon.
 
Analysis conducted on the first 66 capsules swallowed by participants enrolled in the multi-center, prospective clinical feasibility study showed that 65 of 66 capsules swallowed were naturally eliminated, without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure was 0.06 ± 0.04 mSv (similar to a single chest radiograph). Image reconstructions allowed 2D/3D views of the colonic wall and lumen with the typical contour of different segments (hepatic flexure, triangular shape of the transverse colon). Both pedunculated and sessile polyps were detected in several patients and validated later by colonoscopy.
 
In September 2017, we completed a multi-center study of the C-Scan system in support of CE Mark submission. The objective of the study was to assess safety and the clinical performance of C-Scan in detecting patients with polyps. The three-center trial enrolled 66 patients, with a mean age of 59 years. Following capsule ingestion, subjects swallowed small doses of contrast agent and fiber supplements with each meal throughout capsule passage. Average capsule transit time was 52±32 hours, and the average total X-ray dose was 0.05 mSv (CT colonography effective dose is ~ 6.0 mSv). No bowel preparation, sedation, or change in diet was required. Both confirmatory colonoscopy, performed by an independent investigator, and C-Scan review, performed by a central review group, were blinded to results.  The study demonstrated a 44% sensitivity in the 45 subjects included in the analysis for polyps, with specificity (ability to correctly identify lack of polyps) of 89%. Sensitivity strongly correlated (R-squared = 0.98) to the percentage of the colon scanned. Sensitivity was 78% (p<0.05) and 100% (p<0.05) for subjects where greater than 50% and 70% of the colon was scanned, respectively. Specificity was consistent for all subjects.
 
In the fourth quarter of 2017, we initiated a clinical study for the purpose of introducing an advanced C-Scan version with improved colon scan coverage, Version 3 (formerly referred to as Advanced C-Scan system), which incorporates the latest algorithms and system optimization and tailors scanning of the colon to the patient’s natural colonic movements to maximize the amount of the colon that is tracked and imaged.  Evaluable results of 21 patients showed average colon imaging coverage of 64%, a 40% improvement over 46% average colon imaging coverage in the multi-center study. Sensitivity was 78% (p<0.05) for subjects with greater than 50% colon imaging coverage and 100% (p<0.05) for subjects with greater than 70% colon imaging coverage. Specificity was consistent at around 89%.

During the first quarter of 2018, we initiated a multi-center EU post-approval study using our C-Scan system Version 3 for the purpose of collecting additional evidence of clinical effectiveness and clinical utility to support market adoption. The objective of the study is to assess safety and clinical performance of the C-Scan system Version 3 in detecting patients with polyps. In September 2018, we announced interim results on 31 evaluable patients. The C-Scan system Version 3, equipped with improved algorithms, demonstrated a sensitivity (ability to correctly identify polyps) of 76% (P=0.0038), with specificity (ability to correctly identify lack of polyps) of 80% for polyp detection, when using the full patient population with a gender-based analysis. Confirmatory colonoscopy and C-Scan system results analysis were performed by independent expert investigators who were blinded to corresponding test’s results. Improvements to the C-Scan system Version 3 include better scan imaging density, 2D/3D imaging and a new motility analysis algorithm that was recently tested during two years of continued clinical study.  We expect to announce final results in the second quarter of 2019.
 
In December 2018, we received from the FDA conditional approval of our IDE application to initiate a U.S. pilot study of the C-Scan system, and received final approval from the FDA in February 2019. The U.S. pilot study (NCT03735407) is a single-arm study enrolling up to 45 subjects considered to be of average risk for polyps and colon cancer. The study will evaluate the safety, usability, and subject compliance of the C-Scan system.
 
Research and Development
 
Our research and development strategy is centered on developing our C-Scan system. Our research and development team is located at our facilities in Isfiya, Israel, and consists of 34 individuals employed on a full-time basis and 6 individuals on a part-time basis as of March 1, 2019.
 
We have received grants from the Government of the State of Israel through the IIA (formerly the OCS) for the financing of a portion of our research and development expenditures pursuant to the Innovation Law and related regulations and guidelines. As of December 31, 2018, we had received funding from the IIA in the aggregate amount of approximately $5.3 million and had a contingent obligation to the IIA in the amount of approximately $5.6 million. As of December 31, 2018, we had not paid any royalties to the IIA.  We may apply for additional IIA grants in the future; however, there is no assurance that such applications will be approved in the amount requested or at all.  Furthermore, the funds available for IIA grants out of the annual budget of the State of Israel have been reduced in the past and may be further reduced in the future.  We cannot predict whether we will be entitled to any future grants, or the amounts of any such grants.
 
We incurred approximately $7.6 million, $6.8 million, and $5.5 million in research and development expenses, net (after deducting participation by others and government grants) for the years ended December 31, 2018, 2017 and 2016, respectively. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Operations Overview—Research and Development Expenses, Net.”
 
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Intellectual Property
 
An important part of our competitive strategy is to seek, when appropriate, protection for our products and proprietary technology through a combination of U.S. and foreign patents, trademarks, trade secrets and non-disclosure and confidentiality, assignment of invention and other contractual arrangements with our employees, consultants and suppliers. These measures, however, may not be adequate to protect our technology from unauthorized disclosure, third-party infringement or misappropriation as these parties may breach these agreements, and we may not have adequate remedies for any such breach. We intend to prosecute and defend our proprietary technology. The primary test for patent protection eligibility includes novelty, non-obviousness and usefulness.
 
We submit applications under the Patent Cooperation Treaty, or PCT, which is an international patent law treaty that provides a unified procedure for filing a single initial patent application to seek patent protection for an invention simultaneously in each of the member states. Although a PCT application is not itself examined and cannot issue as a patent, it allows the applicant to seek protection in any of the member states through national-phase applications.
 
As of December 31, 2018, we had 36 granted patents (not including separate validations in Europe), 1 allowed patent application and 23 pending patent applications worldwide relating to various elements and functions of our products and related enhancements. We have submitted patent applications covering our technology in the United States, member states of the European Patent Organisation, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and South Korea. We have received patent grants for our core patent by the United States Patent and Trademark Office as well as from the European Patent Office, Australia, China, Hong Kong, Israel, India, Canada, South Korea and Japan.  We also filed patent applications describing the use of our technology in several other medical applications.
 
Our registered U.S. Patent Number 7,787,926 discloses an ingestible capsule with a radiation source and radiation detectors that, when used in conjunction with a radio opaque contrast agent, is adapted to detect clinically relevant findings in the colon. Utilizing X-ray fluorescence and Compton back scatterings, the capsule is able to measure the distance between the capsule and the colon wall and to distinguish between gas, intestinal contents, and clinically significant findings in the gastrointestinal tract.  If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for this patent will expire on August 28, 2026.
 
A second PCT patent application (PCT/IL2008/000163), granted in Europe, Israel, United States, Australia, India, China, Canada and Hong Kong, discloses additional features such as a rotating collimator and improved scanning mechanisms, the capability to determine tissue density to differentiate between different types of polyps, as well as the capability to determine capsule movement in the colon. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for all national phases will expire on February 6, 2028, other than the U.S. patent that will expire on April 4, 2030.

Another PCT application (PCT/IL2011/000462), which is pending in Brazil in the PCT national-phase and granted in Europe, Israel, United States, Canada, Australia and South Korea, discloses a number of alternate fail safe concealment mechanisms that can be utilized in the capsule to ensure that the X-ray source is blocked when the capsule is not scanning and is open when it is scanning, allowing the capsule to image the colon. The fail-safe feature ensures that in the event of power failure, the radiation source is blocked and X-rays do not escape. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for all national phases will expire on June 9, 2031, other than the U.S. patent that will expire on July 5, 2032.
 
In another PCT patent application (PCT/IL2008/000765), which was granted in the United States, Europe, Israel and Japan, we disclose an imaging catheter that utilizes X-ray fluorescence, Compton back scattering and electron back scattering. The imaging catheter is designed for use in cardiac applications as well as intra-operative imaging applications such as imaging inside blood vessels where optical imaging cannot be performed because of obscuring circumstances. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for all national phases will expire on June 4, 2028, other than the U.S. patent that will expire on July 28, 2028.
  
While our policy is to obtain patents by application, to maintain trade secrets and to seek to operate without infringing on the intellectual property rights of third parties, technologies related to our business have been rapidly developing in recent years. Additionally, patent applications that we may file may not result in the issuance of patents, and our issued patents and any issued patents that we may receive in the future may be challenged, invalidated or circumvented. For example, we cannot predict the extent of claims that may be allowed or enforced in our patents nor be certain of the priority of inventions covered by pending third-party patent applications. If third parties prepare and file patent applications that also claim technology or therapeutics to which we have rights, we may have to partake in proceedings to determine priority of invention, which could result in substantial costs to us, even if the eventual outcome is favorable to us. Moreover, because of the extensive time required for clinical development and regulatory review of a product we may develop, it is possible that, before our C-Scan system can be commercialized, related patents will have expired or will expire a short period following commercialization, thereby reducing the advantage of such patent. Loss or invalidation of certain of our patents, or a finding of unenforceability or limited scope of certain of our intellectual property, could have a material adverse effect on us. See “Item 3D “Key Information—Risk Factors—Risks Related to Our Intellectual Property.”
 
In addition to patent protection, we rely on trade secrets, including unpatented know-how, technology innovation, drawings, technical specifications and other proprietary. We also rely on protection available under trademark laws, and hold the following registered trademarks in the United States and Hong Kong: “CHECK CAP”, CHECK CAP (logo), “C-Scan” and C-Scan (logo) and the following registered trademarks in the European Union: CHECK CAP (logo), “C-Scan” and C-Scan (logo), and the following trademark applications are pending in China: “CHECK CAP”, CHECK CAP (logo), “C-Scan” and C-Scan (logo).
 
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Competition
 
Competition for our C-Scan system comes from traditional well-entrenched manufacturers of tests and equipment for CRC screening, such as colonoscopy, sigmoidoscopy, CTC, optical capsule endoscopy, FOBTs and FITs. The principal manufacturers of equipment for optical colonoscopy and sigmoidoscopy include Olympus, Pentax, Hoya and Fuji Film. The principal manufacturers of equipment for CTC include General Electric Healthcare Systems, Siemens Medical Solutions, Philips Medical Systems Ltd. and Toshiba Corporation.  The principal manufacturer of equipment for optical capsule endoscopy includes Medtronic plc.  All of these companies have substantially greater financial resources than we do, and they have established reputations as well as worldwide distribution channels for providing medical instruments to physicians.
 
Several companies have developed or are developing non-invasive technologies based on stool, serum, or molecular diagnostics (from blood and other bodily fluids), or MDx, tests that are used to indicate the presence of CRC and polyps in the colon. These companies include Polymedco, Exact Sciences, Epigenomics AG, Gene News, EDP Biotech Corporation, Illumina, Inc., Quest Diagnostics and VolitionRx Nu.Q diagnostic.
 
Procedures for bowel cleansing that are less onerous are constantly being developed, which could make our entry into the market more difficult.  For instance, bowel cleansing initiated by the ingestion of pills or food-substitute diet regimes rather than through drinking large amounts of distasteful liquids may be viewed as an improvement to the cleansing process, but other screening methods may be even more palatable to patients.
 
Sales and Marketing
 
Our goal is to establish our position as a leading player in the CRC screening market. Although we do not currently generate revenues, we expect to generate revenues through sales of our C-Scan system following demonstration of acceptable clinical safety and effectiveness and obtaining required regulatory approvals and licensures.
 
Because we are still in the clinical and development stage, we are subject to certain challenges, including, among others, that:
 
 
 •
our technology has been tested on a limited basis and therefore we cannot assure the product’s clinical value;
     
 
 •
following the receipt of CE Mark of conformity to protection standards for sale of the C-Scan system in the European Union, we may need to obtain additional regulatory approvals in certain local jurisdictions in the European Union before we can commence marketing and sale of our C-Scan system and will need to obtain the requisite regulatory approvals in the United States, Japan and other markets where we plan to focus our commercialization efforts;
 
 
 •
we need to raise an amount of capital sufficient to complete the development of our technology, obtain the requisite regulatory approvals and commercialize our current and future products;
 
 
 •
we need to obtain reimbursement coverage from third-party payors for procedures using our C-Scan system;
 
 
 •
we need to scale-up our manufacturing capabilities of our C-Scan system in commercial quantities at an adequate quality and at an acceptable cost; and
 
 
 •
we need to establish and expand our user base while competing against other sellers of capsule endoscopy systems as well as other current and future CRC screening technologies and methods.
 
Our ability to operate our business and achieve our goals and strategies is subject to numerous risks as described more fully in “Risk Factors.”
 
Subject to our receipt of regulatory approvals, available capital, and engagement with strategic partners, we plan to initiate commercialization of our C-Scan system during the second half of 2019 in selected markets in Europe and Israel. We intend to target major markets in Europe. In these markets, we are planning to work with strategic partners and/or local distributors who are active in the gastroenterology field and who have already demonstrated excellent performance in introducing new and innovative technologies.
 
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In Europe and Japan, we intend to offer our C-Scan system as an imaging and screening tool for the general population. In the United States, we may choose to first obtain regulatory clearance/approval for our C-Scan system in a screening sub-population, and after we have conducted more extensive clinical studies in the United States, we would anticipate applying to the FDA for the use of our C-Scan system as a primary screening tool.
 
Subject to the successful completion of our clinical trials and the receipt of our initial FDA clearance/approval, we expect to launch the product in the U.S. market, where we will consider setting up our own sales force or aligning with a strategic partner. Initially, we are planning to sell our C-Scan system to the private sector. Simultaneously, we intend to work intensively to obtain reimbursement by Medicare and private insurers within the shortest possible time frame.
 
Subject to local regulatory approval, we also intend to market our C-Scan system in key markets in Asia. Initial efforts are expected in Japan, in view of its developed CRC screening market.
 
Manufacturing and Suppliers
 
Our manufacturing operations are conducted at a facility located in Isfiya, Israel. We lease approximately 900 square meters at this facility under a lease agreement expiring on May 31, 2022. We have the right to terminate the agreement at any time, upon as least 60 days prior written notice. We currently have sufficient space to manufacture our C-Scan system for the clinical studies, but have limited resources, facilities and experience in commercially manufacturing large quantities of our C-Scan system and software application to meet the demand we expect from our expanded commercialization efforts. We expect to face certain technical challenges as we increase manufacturing capacity, including, among others, logistics associated with the handling of radioactive materials, equipment design and automation, material procurement, lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and assurance standards, while maintaining commercially efficient pricing for our C-Scan system. Our production objective is to establish a scalable capacity in order to meet such expanded demand for our C-Scan system and market expansion. If we are unable to scale our manufacturing capabilities to meet market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.
 
We are continuing to upgrade and expand our production system and capacity and developing supply chain systems to support production for clinical trials and to meet standards for CE post-marketing. Our current capacity was built to accommodate our clinical phase. We have integrated a product life management system to enable overall life cycle tracking and documentation including full configuration management control and manufacturing documentation.
 
In July 2016, we entered into an agreement with GE Healthcare to develop and demonstrate proof of principle of the process for high-volume manufacturing for the production of the X-ray source and its assembly into our C-Scan capsule. The agreement was amended in November 2017 in order to further our manufacturing collaboration with GE. The agreement involves GE’s final assembly, packaging and shipping of C-Scan capsules, initially to support our U.S. pilot trial that we initiated in March 2019.  We will supply GE with supporting calibration and final assembly methodology and equipment.
 
We do not currently have any sales. We are planning to develop a scale-up plan to meet our expected commercial supply needs. We are also working on a plan to expand our manufacturing capacity to support the expected larger clinical volume and subsequent higher volumes expected in the early commercialization stage. We are considering, among other options, the expansion of our assembly line in Israel, the buildup of new assembly lines in the United States and Europe, and alternative sources for the key capsule components (such as the motor, X-ray detectors, electrical components and PCBs). All of the facilities in which manufacturing and assembly of our products will be conducted will need to comply with applicable regulations and standards for medical devices.
  
We have received grants from Government of the State of Israel through the IIA (formerly the OCS) for the financing of a portion of our research and development expenditures pursuant to the Innovation Law and related regulations and guidelines. The terms of the IIA grants subject us to certain restrictions relating to the transfer of the manufacturing of IIA-funded products outside Israel and the transfer of IIA-funded know-how outside Israel. We are exploring whether certain components of our C-Scan system can be assembled outside of Israel. In particular, we are continuing to explore whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the X-ray source subsequently assembled into our C-Scan system at a reactor site or at a distribution center outside Israel. Even following the full repayment of any IIA grants, we must nevertheless continue to comply with the requirements of the Innovation Law and regulations and guidelines thereunder. The foregoing restrictions may impair our ability to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. See “Risk Factors – Risks Related to Our Operations in IsraelPursuant 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.”
 
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We currently depend on single source suppliers for some of the components necessary for the production of our C-Scan system. For example, for the current version of the C-Scan system used in clinical trials, we currently have a single supplier for the motor used to rotate the collimated X-ray source in our C-Scan system and for each of the customized X-ray detectors, X-ray source and batteries used in our C-Scan system. There are a limited number of manufacturers worldwide who are capable of manufacturing the motor and the customized X-ray detectors and X-ray source that we currently use in our C-Scan system. In addition, the ASIC residing in our C-Scan system is currently manufactured for us by a single FAB. However, there are many alternative FABs worldwide and the design of our current ASIC could be adapted in the event it became necessary to use an alternative FAB.  Furthermore, we do not currently have written contracts with all of such suppliers.   While our current suppliers have been able to supply the required quantities of such components to date, if the supply of these components is disrupted or terminated or if our current suppliers are unable to supply required quantities of components, we may not be able to find alternative sources for these key components in a timely manner. Although we are planning to maintain strategic inventory of key components, the inventory may not be sufficient to satisfy the demand for our C-Scan system if such supply is interrupted, or subject to risk of loss due to catastrophic events such as a fire at our storage facility.  In addition, to partially mitigate the risks of reliance on single source suppliers, we are seeking alternate manufacturers for some of our components which requires us to dedicate significant resources and investment. There can be no assurance that we will be successful in seeking alternate suppliers.  As a result of the foregoing, we may be unable to meet the demand for our C-Scan system, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. If we are required to change the supplier of any of these key components, there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with FDA and other applicable quality standards and with all applicable regulations and guidelines. For example, our agreement with the supplier of the X-ray source used in our C-Scan system terminated on December 31, 2018 and while we and the X-ray source supplier have continued to perform the agreement on the same terms and are currently negotiating the agreement of the agreement, we cannot assure you that we will be able to negotiate a new agreement on acceptable terms. We have been informed that the supplier of the batteries used in our C-Scan system shall cease to manufacture the batteries by mid-2019 and may cease to accept new orders at any time and, therefore, although we acquired sufficient batteries for the foreseeable future, we will be required to find an alternative source for the X-ray source and batteries, which we may not be able to do in a timely manner.  The delays associated with the identification of a new manufacturer could delay our ability to manufacture our C-Scan system in a timely manner or within budget. Furthermore, in the event that the manufacturer of a key component of our C-Scan system ceases operations or otherwise ceases to do business with us, we may not have access to the information necessary to enable another supplier to manufacture the component. The occurrence of any of these events could harm our ability to meet demand for our C-Scan system in a timely manner or within budget.
 
Environmental Health and Safety Matters
 
We are subject to environmental health and safety laws and regulations in Israel, governing, among other things, the use of radioactive materials, including the Israeli Radioactive Elements and their Products, Regulation, 1980, the Israeli Work Safety Regulations (Occupational Safety and Health of Ionizing Radiation Practitioners) 1992-5753 and Women Employment Regulations (Work with Ionizing Radiation), 1979-5739. Our current research and development activities require, and our currently contemplated commercial activities will require, permits from various governmental authorities including, Israel’s Ministry of Environmental Protection, Israel’s Ministry of Health and local municipal authorities. Failure to obtain or maintain any such permits could have a material adverse effect on our business, financial condition and results of operations. The Ministry of Environmental Protection and the Ministry of Health conduct from time to time periodic inspections in order to review and ensure our compliance with the various regulations.
 
These laws, regulations and permits could potentially require expenditure by us for compliance or remediation. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to radioactive materials) or contribution claims. Some environmental, health and safety laws apply strict, joint and several liability. We may be identified as a responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.
 
In addition, laws and regulations relating to environmental, health and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to liabilities for activities which were previously permitted.
  
U.S. Government Regulation
 
Our C-Scan system is a medical device subject to extensive regulation by FDA and other U.S. federal and state regulatory bodies. To ensure that medical products distributed in the United States are safe and effective for their intended use, FDA has imposed regulations that govern, among other things, the following activities that we or our partners perform and will continue to perform:
 
 
 •
product design and development;
 
 
 •
product testing;

 
 •
validation and verifications;
 
 
 •
product manufacturing;
 
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 •
product labeling;
 
 
 •
product storage, shipping and handling;
 
 
 •
premarket clearance or approval;
 
 
 •
advertising and promotion;
 
 
 •
product marketing, sales and distribution; and
 
 
 •
post-market surveillance reporting death or serious injuries and medical device reporting.
 
FDA’s Premarket Clearance and Approval Requirements
 
Unless an exemption applies, before we can commercially distribute medical devices in the United States, we must obtain, depending on the type of device, either prior 510(k) clearance or PMA approval from the FDA. The FDA classifies medical devices into one of three classes:
 
 
 •
Class I devices, which are subject to only general controls (e.g., labeling, medical devices reporting, and prohibitions against adulteration and misbranding) and, in some cases, to the 510(k) premarket clearance requirements;
 
 
 •
Class II devices, generally requiring 510(k) premarket clearance before they may be commercially marketed in the United States; and
 
 
 •
Class III devices, consisting of devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially equivalent to a predicate device, generally requiring the submission of a PMA approval supported by clinical trial data.
 
510(k) Clearance Pathway
 
To obtain 510(k) clearance, we must submit a premarket notification, or 510(k) notice, demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of premarket approval applications. The FDA’s 510(k) clearance pathway may take approximately between 6 to 9 months, but it can take significantly longer. FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.
 
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, require premarket approval. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k), or a premarket approval, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or premarket approval is obtained. If the FDA requires us to seek 510(k) clearance or premarket approval for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.
 
De Novo Reclassification
 
If the FDA finds that there is no suitable predicate device for our C-Scan system, it will automatically be considered a class III device. However, in instances where a device is novel and there is no suitable predicate device, but that device is deemed to be of low to moderate risk, the FDA can reclassify the device to class I or class II via de novo reclassification. This process involves the submission of a reclassification petition, and the FDA's acceptance that “special controls” are adequate to ensure the product’s performance and safety.
 
The FDA now allows “direct” de novo reclassification petitions, a mechanism by which a sponsor can directly submit a detailed de novo reclassification petition as the device’s initial submission without having to first receive a not substantially equivalent, or NSE, decision on a 510(k) submission. The direct de novo pathway takes at least 9 to 12 months from submission of the petition to device clearance.
 
Our current strategy is to submit a direct de novo reclassification petition for our C-Scan system. To support a direct de novo reclassification petition, our objective is to demonstrate that the device poses a low to moderate risk to patients. If the FDA determines that our C-Scan system is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process.

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Alternatively, if we seek 510(k) clearance and our device is found not substantially equivalent, or NSE, a de novo petition must be filed within 30 days from the receipt of the NSE determination. The request should include a description of the device, labeling for the device, reasons for the recommended classification and information to support the recommendation. The de novo process following an NSE determination has a 60-day review period, although it is typical for the review to take far longer. If the FDA classifies the device into class II, the company will then receive an approval order to market the device. This device type can then be used as a predicate device for future 510(k) submissions. However, if the FDA subsequently determines that the device will remain in the class III category, then the device may not be marketed until the company has obtained an approved PMA.
 
Premarket Approval Pathway
 
A premarket approval application must be submitted if the device cannot be cleared through the 510(k) process or is found ineligible for de novo reclassification. The premarket approval application process is generally more costly and time consuming than the 510(k) process. A premarket approval application must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use.
 
After a premarket approval application is sufficiently complete, the FDA will accept the application and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the “accepted application,” although, generally, review of the application can take at least 12 to 18 months, but it may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations. New premarket approval applications or premarket approval application supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. Premarket approval supplements often require the submission of the same type of information as a premarket approval application, except that the supplement is limited to information needed to support any changes from the device covered by the original premarket approval application, and may not require as extensive clinical data or the convening of an advisory panel.
 
Clinical Trials
 
Clinical trials are almost always required to support a premarket approval application or de novo reclassification petition and are sometimes required for a 510(k) premarket notification. If the device presents a “significant risk,” as defined by the FDA, to human health, the FDA requires the device sponsor to file an IDE application with the FDA and obtain IDE approval prior to commencing the human clinical trials. The investigational device exemption application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The investigational device exemption application must be approved in advance by the FDA for a specified number of patients, unless the product is deemed a “non-significant risk” device and eligible for more abbreviated investigational device exemption requirements. Clinical trials for a significant risk device may begin once the investigational device exemption application is approved by the FDA and the appropriate institutional review boards at the clinical trial sites. Future clinical trials of our motion preservation designs will require that we obtain an investigational device exemption from the FDA prior to commencing clinical trials and that the trial be conducted under the oversight of an institutional review board at the clinical trial site. Our clinical trials must be conducted in accordance with FDA regulations and federal and state regulations concerning human subject protection, including informed consent and healthcare privacy. A clinical trial may be suspended by the FDA or the investigational review board at any time for various reasons, including a belief that the risks to the study participants outweigh the benefits of participation in the study. Even if a study is completed, the results of our clinical testing may not demonstrate the safety and efficacy of the device, or may be equivocal or otherwise not be sufficient to obtain approval of our product. Similarly, in Europe the clinical study must be approved by the local ethics committee and in some cases, including studies of high-risk devices, by the Ministry of Health in the applicable country.
 
Pervasive and Continuing FDA Regulation
 
After a device is placed on the market, numerous regulatory requirements continue to apply. These include:
 
 
 •
product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action;
     
 
 •
Quality System Regulation, or QSR, and current good manufacturing practices, or cGMP, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;

 
 •
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
 
 
 •
clearance of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices;
 
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 •
approval of product modifications that affect the safety or effectiveness of one of our approved devices;
 
 
 •
medical device reporting regulations, which require that manufacturers comply with FDA requirements to report if their device may have caused or contributed to a death or serious injury, or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of the device or a similar device were to recur;
 
 
 •
post-approval restrictions or conditions, including post-approval study commitments;
 
 
 •
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device;
 
 
 •
FDA’s recall authority, whereby it can ask, or under certain conditions order, device manufacturers to recall from the market a product that is in violation of governing laws and regulations;
 
 
 •
regulations pertaining to voluntary recalls; and
 
 
 •
notices of corrections or removals.
 
We and our third-party manufacturers must register with the FDA as medical device manufacturers and must obtain all necessary state permits or licenses to operate our business. As manufacturers, we and our third-party manufacturers are subject to announced and unannounced inspections by the FDA to determine our compliance with quality system regulation and other regulations. We have not yet been inspected by the FDA.
 
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
 
 
 •
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
 
 
 •
unanticipated expenditures to address or defend such actions;
 
 
 •
customer notifications for repair, replacement, refunds;
 
 
 •
recall, detention or seizure of our products;
 
 
 •
operating restrictions or partial suspension or total shutdown of production;
 
 
 •
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
 
 •
operating restrictions;

 
 •
withdrawing 510(k) clearances on PMA approvals that have already been granted;
 
 
 •
refusal to grant export approval for our products; or
 
 
 •
criminal prosecution.
 
Regulatory Pathway for our C-Scan System
 
We have established a clinical and regulatory strategy with our advisors and have conducted a pre-IDE meeting, now referred to as a pre-submission meeting, with FDA (an informal interaction to facilitate a clearer understanding of FDA’s expectations). During this process, we received the FDA’s feedback on our submission and our questions and we are planning to continue the dialogue with FDA before the submission of a formal request for the IDE that is necessary for us to conduct the U.S. pivotal clinical trial.
 
Our current strategy is to submit a direct de novo reclassification petition for our system. Although the FDA could require us to submit a PMA, we believe that the device could be considered for evaluation under the FDA’s de novo reclassification provisions, which allow a novel device to be reclassified into class I or class II. To support this, our objective is to demonstrate that the device poses a low to moderate risk to patients.
 
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We believe that important potential benefits of our C-Scan system for CRC screening are the elimination of the need for bowel preparation, the elimination of the need for conscious sedation, the minimally invasive, painless nature of the examination, and the ability to pursue normal daily activities immediately following the procedure. Furthermore, the C-Scan system is being designed to generate information from segments of the colon (e.g., cecum and ascending colon) that are difficult to access by conventional optical colonoscopy (i.e., incomplete colonoscopies) without the risks and discomforts of operative examination or other invasive methods. We believe these benefits will be attractive to a large number of patients from the target populations that so far refrained from any screening tests. Thus, we anticipate that our capsule will increase the public compliance to screening recommendation.
 
If FDA determines that our C-Scan system is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. Because of the technological characteristics of this device, the non-clinical tests (including lab and animals) and clinical data required may not be significantly different between de novo and PMA regulatory processes. We believe that under both scenarios, we will be required to conduct a multi-center clinical study to establish the safety and efficacy and to demonstrate sensitivity and specificity of our C-Scan system in several hundreds of patients.
 
FCC Clearance and Regulation
 
Because our C-Scan system includes a wireless radio frequency transmitter and receiver, it is subject to equipment authorization requirements in the United States. The U.S. Federal Communications Commission, or FCC, requires authorization of radio frequency devices before they can be sold or marketed in the United States, subject to limited exceptions. The authorization requirements are intended to confirm that the proposed products comply with FCC radio frequency emission, power level standards, and other technical requirements and will not cause interference. Our system is using the same frequency band as other approved capsules, and we expect that it will comply with the FCC’s technical requirements, so it is expected that it will be authorized by the FCC as well.
 
Third-Party Coverage and Reimbursement
 
Coverage of and reimbursement for our C-Scan system and related procedures, after approval, will be subject to the requirements of various third-party payors, including government-sponsored healthcare payment systems and private third-party payors. Coverage policies and reimbursement methodologies vary significantly from program-to-program and may be subject to federal and state regulations. For example, the Medicare statute requires all items and services to be “reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member” in order to be covered. Medicare currently does not provide separate reimbursement for many devices, but may include payment for the device in the payment for the related procedure. Third-party payors’ coverage and reimbursement policies, including their interpretations of whether an item or service is “reasonable and necessary” or experimental and their payment methodologies, are subject to change pursuant to legislation, regulation, or, in the case of private payors, negotiations with providers.
 
Fraud and Abuse Laws
 
In the United States, the healthcare industry is subject to extensive federal, state, and local regulation. Both federal and state governmental agencies subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. These laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices, by limiting the kinds of financial arrangements (including sales programs) we may have with hospitals, physicians and other potential purchasers of the medical devices. The laws and regulations that may affect our ability to operate include, but are not limited to:
 
 
 •
The federal Anti-Kickback Statute, which prohibits, among other things, knowingly or willingly offering, paying, soliciting or receiving remuneration, directly or indirectly, in cash or in kind, to induce or reward the purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any health care items or service for which payment may be made, in whole or in part, by federal healthcare programs such as Medicare and Medicaid. This statute has been interpreted to apply to arrangements between medical device manufacturers on one hand and prescribers, purchasers and formulary managers on the other. Further, PPACA, among other things, clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti-Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny;
 
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 •
The federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. In addition, PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Many medical device manufacturers and other healthcare companies have been investigated and have reached substantial financial settlements with the federal government under the civil False Claims Act for a variety of alleged improper marketing activities, including providing free product to customers with the expectation that the customers would bill federal programs for the product; providing consulting fees, grants, free travel, and other benefits to physicians to induce them to use the company’s products. In addition, in recent years the government has pursued civil False Claims Act cases against a number of manufacturers for causing false claims to be submitted as a result of the marketing of their products for unapproved, and thus non-reimbursable, uses. Device manufacturers also are subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government health benefit programs;
     
 
 •
Analogous state laws and regulations, such as state anti-kickback and false claims laws, may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the payor. Several states now require medical device manufacturers to report expenses relating to the marketing and promotion or require them to implement compliance programs or marketing codes. For example, California, Connecticut and Nevada mandate the implementation of corporate compliance programs, while Massachusetts and Vermont impose more detailed restrictions on device manufacturers' marketing practices and tracking and reporting of gifts, compensation and other remuneration to healthcare providers;
     
 
 •
The federal Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations and enforcement proceedings by both the Department of Justice and the U.S. Securities and Exchange Commission. Violations of these laws can result in the imposition of substantial fines, interruptions of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow as a consequence; and
     
 
 •
The federal Physician Payment Sunshine Act, being implemented as the Open Payments Program, requires manufacturers of “covered products” (drugs, devices, biologics, or medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program) to track and publicly report payments and other transfers of value that they provide to U.S. physicians and teaching hospitals, as well as any ownership interests that U.S. physicians hold in applicable manufacturer. Applicable manufacturers must submit a report to the Centers for Medicare & Medicaid Services, or CMS, by the 90th day of each calendar year disclosing payments and transfers of value made in the preceding calendar year.
 
Violations of any of the laws described above or any other governmental regulations that apply to us, may cause us to be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, like Medicare and Medicaid, and the curtailment or restructuring of our operations.
 
Privacy Laws
 
HIPAA/HITECH and related U.S. federal and state laws protect the confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under HIPAA.
 
These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their protected health information and limiting most use and disclosures of health information to the minimum degree reasonably necessary to accomplish the intended purpose. Because we intend to sell products, once approved, to persons and entities subject to HIPAA and are exposed to personally-identifiable health information in the course of our operations, we also may be subject to certain elements of HIPAA, particularly as a business associate to covered entities, as well as similar state laws. HIPAA imposes civil and criminal penalties for violations of its provisions, which could be substantial. State privacy laws have their own penalty provisions which may be applicable.

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NRC Regulatory Issues
 
As our C-Scan system includes an ingestible capsule with a radioactive source, the company must address Nuclear Regulatory Commission, or NRC, regulations, or relevant Agreement State regulations, in addition to FDA requirements as well as regulations of other nuclear regulatory commissions in jurisdictions in which we intend to commercialize our C-Scan system. An Agreement State is a state that has signed an agreement with the NRC authorizing the state to regulate certain uses of radioactive materials within the state. Agreement State regulations are substantially similar to the NRC’s regulations.
Our C-Scan system is loaded with the X-ray source, sealed and then ingested by the patient. Although the NRC places conditions and limitations on the disposal of radioactive material in the sanitary sewer, such conditions and limitations do not apply to radioactive material contained in the excreta of individuals that are undergoing medical diagnosis or therapy with radioactive material. However, there is no assurance that the NRC or other regulatory commissions worldwide will take a similar position in relation to our C-Scan system and we may face limitations by the NRC or other nuclear regulatory commissions in jurisdictions in which we intend to commercialize our C-Scan system in relation to the disposal of our C-Scan Cap in the sanitary system, such as requiring patients to retrieve our C-Scan system after use, which could make our C-Scan system less attractive.

The capsule is loaded with the X-ray source, sealed and then ingested by the patient. The capsule is excreted naturally through the patient’s system and is not intended to be recovered and therefore is disposed of in the sanitary sewer system. Although the NRC regulations in 10 CFR Part 20 place certain conditions and limitations on the disposal of radioactive material in the sanitary sewer, such conditions and limitations do not apply to radioactive material contained in excreta of individuals that are undergoing medical diagnosis or therapy with radioactive material. Our regulatory advisors have advised us that the NRC staff likely would take the position that a capsule containing radioactive material can be passed in excreta into the sanitary sewer system without limitation. If, however, the NRC were to find that our C-Scan system could not be passed in excreta into the sanitary sewer system without limitation pursuant to 10 CFR 20.2003(b) the NRC may place restrictions on the disposal of the C-Scan system in the sanitary sewer system.
 
An entity which manufactures, prepares, or transfers a medical capsule containing radioactive byproduct material needs to be licensed or covered by a license issued by the NRC or an Agreement State. An NRC or Agreement State licensee authorized to possess and/or distribute byproduct material can transfer the byproduct material only to another NRC, or Agreement State, approved entity or licensee. The NRC’s regulations permit only individuals who are authorized users (e.g., individuals who meet certain training and experience criteria regarding the safe use of radioactive drugs) or persons working under the supervision of an authorized user to administer radioactive drugs for medical use.
 
The NRC regulations do exempt certain products from the NRC’s regulations. Existing exemptions from licensing requirements for the use of byproduct material include exemptions for specific products (e.g., time pieces), exemptions for classes of products (e.g., gas or aerosol detectors), and broader materials exemptions for “exempt concentrations” and “exempt quantities” of radioactive material. These two broad materials exemptions specifically exclude the transfer of byproduct material contained in any food, drug, or product designed for ingestion by a human being. Capsules containing our X-ray source would not qualify as an “exempt quantity” because of their intended use (i.e., for ingestion) even though they may contain a smaller quantity of the source than the exempt quantities set forth in the regulations.
 
Accordingly, we will need to obtain the appropriate licenses from the NRC or an Agreement State prior to the clinical investigation and/or marketing of the device. We intend to engage a radiopharmaceutical company to manufacture our C-Scan Cap. The fact that another company will be manufacturing the capsule, however, does not exempt us from also obtaining radioactive materials licenses from the NRC or an Agreement State. Distribution activities are generally classified by the NRC as either “distribution” or “redistribution”, and both types of activities require a specific license. “Distribution” refers to the initial transfer from the manufacturing radiopharmacy, while “redistribution” refers to a subsequent transfer of the drug by an NRC licensee to an authorized user. In order to distribute the capsule commercially, we will need to obtain an NRC or Agreement State “medical distribution” radioactive materials license and may also need to obtain a radioactive materials license authorizing the possession of the radioactive material. Both types of licenses may be obtained by submitting a license application request to the NRC or an Agreement State. In the event that we develop the capsule outside the United States, we would be required to have one of our U.S. offices apply for and receive both the possession and medical distribution radioactive materials licenses. If we do not have an office in the United States, then we can contract with a company with a U.S. office to apply for and obtain these licenses, and that company would be the licensed U.S. distributor of the capsule.
 
We may be able to petition the NRC to carve out an exemption for the distribution licensing requirement to permit distribution to all health care professionals and not just those licensed by the NRC. This has been done successfully by other medical device companies. For example, Tri-Med, Inc. manufactures an ingestible capsule containing radioactive material for testing of H. Pylori. The company petitioned the NRC in 1994 for an exemption from the distribution licensing regulation. The NRC evaluated the petition and issued a proposed ruling for comments. After receiving comments on the proposed ruling, the NRC issued a final ruling, in 1997, providing for the exemption. This exemption is narrowly drawn, and specific to the distribution of a “radioactive drug containing one microcurie of carbon-14 urea to any person for ‘in vivo’ diagnostic use.” In creating the exemption, the NRC noted the importance of bringing an inexpensive and effective diagnostic tool to a large number of people, along with the minimum radiation contained in the capsule.
 
We may consider petitioning the NRC in a similar manner to make the device more widely available. As our C-Scan system imparts comparable radiation exposure to the Tri-Med device described above, and has the potential to be used widely for diagnosis, our C-Scan system may be a candidate for such an exemption.
 
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Regulation in Europe, Israel, Japan and Other Countries

The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Each European Union member state has implemented legislation applying these directives and standards at the national level. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Devices that comply with the requirements of the laws of the relevant member state applying the applicable European Union directive are entitled to bear CE conformity marking and, accordingly, can be commercially distributed throughout the member states of the European Union and other countries that comply with or mirror these directives. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body,” an independent and neutral institution appointed to conduct conformity assessment. This third-party assessment consists of an audit of the manufacturer’s quality system and clinical information, as well as technical review of the manufacturer’s product. An assessment by a Notified Body in one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. In addition, compliance with ISO 13845:2016 on quality systems issued by the International Organization for Standards, among other standards, establishes the presumption of conformity with the essential requirements for a CE marking. In addition, many countries apply requirements in their reimbursement, pricing or health care systems that affect companies’ ability to market products.
 
We obtained as of January 9, 2018 the CE mark of conformity for the C-Scan system.
 
Our C-Scan system and operations are also subject to regulation by AMAR, which is responsible for the registration of medical devices in Israel, issuance of import licenses and monitoring of marketing of medical equipment. In September 2018, we received approval AMAR for the marketing and sale of the C-Scan system in Israel, which was valid until February 28, 2019. We have submitted a request to the Israeli Ministry of Health for the extension of the AMAR approval, which is currently pending.

In Japan, manufacturing and marketing medical devices are regulated by the Pharmaceutical Affairs Law, or PAL. In accordance with the PAL, manufacturers must obtain a license for manufacturing medical devices from the Ministry of Health, Labour and Welfare, or MHLW. A license is required for each manufacturing plant specified by an MHLW Ministerial Ordinance.

A licensed manufacturer is responsible only for manufacturing medical devices. In regard to the marketing of medical devices, the PAL specifies that a Marketing Authorization Holder, or MAH, licensed by MHLW is responsible for putting medical devices into marketplace. Licenses for marketing medical devices are divided into the following 3 types, which correspond to the classifications below:
 
 
 •
No. 1 type license for marketing – Specially controlled medical devices (Class III, IV)
 
 
 •
No. 2 type license for marketing – Controlled medical devices (Class II)
 
 
 •
No. 3 type license for marketing – General medical devices (Class I)
 
Generally, the process for obtaining marketing clearance for medical devices in Japan ranges from twelve months (for products with only very minor modifications from previously cleared product versions) to a few years in the case of a completely new device.
 
In order for us to market our products in countries other than the United States, Israel, the EU and Japan (which were described above), we must obtain regulatory approvals and comply with extensive safety and quality regulations in these countries. These regulations, including the requirements for approvals or clearance and the time required for regulatory review varies from country to country. It is customary that once a product has been cleared for sales in the US and is CE marked in the EU, many other countries will follow. Failure to obtain regulatory approval or clearance in any foreign country in which we plan to market our product may harm our ability to generate revenue and harm our business.
 
Third-Party Reimbursement
 
Reimbursement in the United States
 
In the United States, healthcare providers that purchase medical devices generally rely on third-party payors, such as Medicare, Medicaid, private health insurance plans and health maintenance organizations, to reimburse all or a portion of the cost of the devices, as well as any related healthcare services utilizing the devices.
 
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Coverage is not guaranteed simply because a product has received FDA clearance or approval. Medicare’s general definition of a medically necessary service is one that is reasonable and necessary for the diagnosis or treatment of an illness or injury, or that improves the functioning of a malformed body member.
 
The cost-effectiveness of a device (or the service in which a device is used) may be a key factor in obtaining third-party payer reimbursement for such device or service.  According to various studies and publications, a key factor affecting the cost-effectiveness of colorectal cancer screening is patient adherence (for instance, see “Cost-Effectiveness of Colonoscopy in Screening for CRC,” Annals of Internal Medicine, October 17, 2000 vol. 133 no. 8 573-584). Adherence is strongly affected by patients’ willingness to use the device (or service incorporating a device) as a screening tool for CRC. Several models have been designed to demonstrate the cost effectiveness of optical colonoscopy, CTC, fecal testing and optical capsule endoscopy. Today, several technologies for CRC Screening - including: FOBT / FIT, Flexible Sigmoidoscopy, Optical Colonoscopy Barium Enema, and stool DNA – are covered for Medicare patients meeting certain eligibility criteria.
 
In 2009, the Centers for Medicare and Medicaid Services issued a decision memorandum concluding that the evidence was inadequate to support Medicare coverage CTC screening for CRC. Their main argument for the decision was that based on available evidence, screening with CTC would not necessarily result in cost saving, at least at current screening compliance rates. CTC was not seen as a tool which could potentially increase patients’ adherence. This procedure involves bowel preparation, as well as insufflations of the colon and the exposure of patients to very significant amount of radiation.
 
An important European study (C. Hassan et al, “Cost-Effectiveness of Capsule Endoscopy in Screening for Colorectal Cancer,” Endoscopy 2008, 40, 414-421) assessed the potential cost effectiveness of screening with optical capsule endoscopy and compared its cost-effectiveness with that of optical colonoscopy. Cost-effectiveness of screening was measured in terms of cost per life-year saved through prevention or down staging of CRC. The conclusion was that the cost effectiveness of capsule endoscopy in CRC screening will depend mainly on its ability to improve compliance in the general population.
 
Third-party payors in the United States began issuing coverage policies for optical capsule endoscopy in early 2002. Initially, all reimbursement policies provided coverage for optical capsule endoscopy of the small bowel only for the diagnosis of obscure gastrointestinal bleeding. Subsequently, reimbursement coverage has been expanded to include other diagnoses and as of December 31, 2012, approximately 220 million people in the United States are covered with most reimbursement policies providing coverage for a number of small bowel indications, including obscure gastrointestinal bleeding, suspected Crohn’s disease, suspected small bowel tumors and other small bowel pathologies.
 
Currently, there is no optical capsule endoscopy reimbursement available for the colon in the United States, nor is there a CPT code for such capsule or related method of screening. There can be no assurance that coverage will be obtained in the near future or at all. Third-party payors may deny coverage if they determine that a procedure was not reasonable or necessary as determined by the payor, was experimental or was used for an unapproved indication (among other factors). During the past several years, the major third-party payors have substantially revised their reimbursement methodologies in an attempt to contain or reduce their healthcare reimbursement costs.
 
Coverage Outside the United States
 
In countries outside the United States, coverage for CRC screening may be obtained from various sources, including governmental authorities, private health insurance plans, and labor unions. In some countries, private insurance systems may also offer payments for some therapies. Although not as prevalent as in the United States, health maintenance organizations are emerging in certain European countries. Coverage systems in international markets vary significantly by country and, within some countries, by region. Coverage approvals must be obtained on a country-by-country or region-by-region basis.
 
C.
Organizational Structure
 
On May 15, 2015, we formed our wholly-owned subsidiary Check-Cap US, Inc., a Delaware corporation.
  
D.
Property, Plants and Equipment
 
Our principal executive offices and operations are conducted at a facility located in Isfiya, Israel since June 1, 2009. We lease approximately 900 square meters at this facility under a lease agreement expiring on May 31, 2022, unless earlier terminated by us upon at least 60 days prior written notice. We believe that our current facilities are adequate to meet our current needs for the clinical phase of our development.  See Item 4B “Information on Our Company – Business Overview – Manufacturing and Suppliers.”
 
ITEM 4A. UNRESOLVED STAFF COMMENTS
 
None.

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included in this Annual Report beginning on page F-1. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 3D “Key Information - Risk factors” and elsewhere in this Annual Report.
 
Overview
 
We are a clinical stage medical diagnostics company engaged in the development of a capsule-based system that utilizes ultra-low-dose X-rays to generate structural information on the endoluminal surface of the colon that may be used for screening of the colon to detect polyps, masses and CRC. While CRC is the second leading cause of death from cancer for both sexes combined in the United States and is preventable with early screening and intervention, according to the National Health Interview Survey, in 2015, only 63% of Americans over the age of 50 reported being current with CRC screening recommendations. Unlike other screening modalities that are designed for direct visualization and imaging of the internal colon, such as optical colonoscopy, CTC and other capsule-based technologies, our C-Scan system is designed to function without any cathartic preparation of the colon, and to transit the gastrointestinal tract by natural motility while the patient continues his or her normal daily routine. Furthermore, the C-Scan system does not require fasting prior to or during capsule transit. Our C-Scan system is comprised of three main components: (1) C-Scan Cap, a ingestible X-ray scanning capsule; (2) C-Scan Track, a biocompatible unit worn on the patient’s back for capsule control, tracking and data recording; and (3) C-Scan View, a PC-based, standalone application used to process and display structural information of the colon.  We believe that this solution will be attractive to both physicians and patients, with the potential to increase the number of people completing CRC screening.
 
Check-Cap LLC was formed in 2004 as a Delaware limited liability company to develop a novel and superior solution for colon cancer screening. In 2009, all of the business operations and substantially all of the assets of Check-Cap LLC were transferred to Check Cap Ltd., a newly-incorporated Israeli company. Our offices are located near Haifa, in the northern part of Israel. Our management team includes an experienced group of executives in the business, research, clinical and regulatory fields. As of March 30, 2019, our research and development team consists of 39 experienced professionals (including employees and independent contractors) in a variety of fields such as clinics, physics, algorithms, electronics, software, mechanical engineering, verification and validation, and manufacturing.

Our C-Scan system is being designed to create a reconstructed three-dimensional image of the interior surface of the colon and to enable detection of clinically significant polyps with a high degree of sensitivity. Colonic polyps are tissue growths that occur on the lining of the colon. Polyps in the colon are extremely common and certain types of polyps can become cancerous over time.
 
For the past several years, we have focused on the research and development of our imaging technology.  For details regarding our clinical trials, see Item 4B “Business Overview— C-Scan System Non-Clinical, Pre-Clinical and Clinical History.”
 
We have generated significant losses to date, and we expect to continue to generate losses for at least the next several years as we continue our investment in research and development and clinical trials in order to complete the development of our C-Scan system and to attain regulatory approvals, begin the commercialization efforts for our products, increase our marketing and selling expenses, and incur additional costs as a result of being a public company in the United States. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may never achieve or sustain profitability. As of December 31, 2018, we had accumulated losses of approximately $63.3 million.
 
Our financing activities are described below under “Liquidity and Capital Resources.”

Our management plans to continue the development, clinical development and regulatory activities of our C-Scan system in 2019 and that costs associated with such activities are expected to increase in 2019, to reach market in a timely manner. Management plans include additional fund raising in the next year. If we are not successful in raising capital through public or private offerings or are unable to reduce our expenses, we may exhaust our cash resources and will be unable to continue our operations beyond February 2020. See “Item 3D “Key Information - Risk Factors— Risks Related to Our Financial Position.”
 
For a more detailed description of our business and plans, see Item 4B “Information on Our Company – Business Overview.”

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A.
Operating Results
 
Financial Operations Overview
 
Revenue
 
We have not generated any revenue since our inception. To date, we have funded our operations primarily through equity financings, as well as from grants that we received from the IIA (formerly the OCS). If our product development efforts result in clinical success, regulatory approval and the successful commercialization of our imaging system, we expect to generate revenue from sales of our C-Scan system.
 
Operating Cost and Expenses
 
Our operating costs and expenses are classified into two categories: research and development expenses and general and administrative expenses. For each category, the largest component is personnel costs, which consists of salaries, employee benefits and share-based compensation. Operating costs and expenses also include allocated overhead costs for depreciation of equipment. Operating costs and expenses are generally recognized as incurred. We expect personnel costs to continue to increase as we hire new employees to continue to grow our business.
 
Research and Development Expenses, Net
 
Research and development activities are central to our business model. We intend to increase our research and development operations in order to complete the development of our C-Scan system and to attain regulatory approvals.
 
Since 2016, we have spent approximately $21.5 million on research and development expenses as of December 31, 2018, of which $1.5 million was funded by government grants. Our total research and development expenses, net of participations in the years ended December 31, 2018, 2017, and 2016 were approximately $7.6 million, $6.8 million, and $5.5 million, respectively. All research and development expenses are expensed as incurred. We expect research and development expenses to increase in absolute terms in the near term. 

Research and development expenses consist primarily of costs incurred for our research activities, including:
 
 
 •
employee-related expenses for research and development staff, including salaries, benefits and related expenses, including share-based compensation and travel expenses;
 
 
 •
payments made to third-party contract research organizations, contract manufacturers, investigative sites and consultants;
 
 
 •
manufacturing development costs;
 
 
 •
costs associated with preclinical and clinical activities and regulatory operations;
 
 
 •
facilities, depreciation and other expenses, which include direct and allocated expenses for rent and maintenance of facilities; and
 
 
 •
costs associated with obtaining and maintaining patents.
 
Our research and development expenses, net are net of grants we have received from the Government of Israel through the IIA (formerly the OCS). Under the terms of the Innovation Law as currently in effect, in exchange for these grants, we are required to pay the IIA royalties from our revenues up to an aggregate of 100% (which may be increased under certain circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate of 12-month LIBOR. Pursuant to regulations under the Innovation Law, the rate of royalty repayment are 3% or 5% of revenues (and at an increased rate under certain circumstances) from sales of products and services based on IIA-funded know-how. As of December 31, 2018, we had received funding from the IIA (formerly the OCS) in the aggregate amount of approximately $5.3 million. As of December 31, 2018, we had not paid any royalties to the IIA and had a contingent obligation to the IIA in the amount of approximately $5.6 million. For additional information regarding the IIA grants, see Item 10E “Additional Information - Taxation - Israeli Tax Considerations and Government Programs - The Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly the Encouragement of Industrial Research and Development Law, 5744-1984).” There can be no assurance that we will continue to receive grants from the OCS in amounts sufficient for our operations, if at all.

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General and Administrative Expenses
 
Our general and administrative expenses consist primarily of salaries and other related costs, including share-based compensation expense, for persons serving as our executive, finance, legal, human resources and administrative personnel, professional service fees and other general corporate expenses, such as communication, office and travel expenses. We expect that our general and administrative expenses will increase in line with the future growth of our overall operations and, in part, due to costs associated with being a public company in the United States, including compliance under the Sarbanes-Oxley Act of 2002 and rules promulgated by the U.S. Securities and Exchange Commission. These public company-related expense increases will likely include costs of additional legal fees, accounting and audit fees, directors’ and officers’ liability insurance premiums and costs related to investor relations.
 
Financial Income and Finance Expenses
 
Our finance income and finance expenses in 2018, 2017 and 2016 consist primarily of interest earned on our cash, cash equivalents and short-term investments and changes in provision for royalties primarily to Check–Cap LLC unitholders.
 
Foreign currency transactions are translated into U.S. dollars using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of operations to “finance expenses”/”finance income.”
 
Taxes on Income
 
The standard corporate tax rate in Israel was 25% for the 2016 tax year, 24% for the 2017 tax year and 23% for the 2018 tax year and thereafter.
  
We do not generate taxable income in Israel, as we have historically incurred operating losses resulting in carryforward tax losses totaling approximately $54.5 million as of December 31, 2018.  We anticipate that we will be able to carry forward these tax losses indefinitely to future tax years. However, a tax loss that can be utilized in a certain tax year cannot be carried forward to future tax years. Accordingly, we do not expect to pay taxes in Israel until we have taxable income after the full utilization of our carry forward tax losses.
 
Under the Law for the Encouragement of Capital Investments, 5719-1959 and other Israeli legislation, we may be entitled to certain additional tax benefits, including reduced tax rates, accelerated depreciation and amortization rates for tax purposes on certain assets, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes. See Item 10E “Additional Information — Taxation— Israeli Tax Considerations and Government Programs” for additional information concerning these tax benefits.
 
Results of Operations
 
For convenience purposes, the numbers set forth in the management’s discussion and analysis below are, where applicable, rounded up and presented in millions, whereas the numbers in the tables below are presented in thousands. As result, the percentages set forth in the year-over-year comparisons below are based on numbers that have (where applicable) been rounded up to millions, which may slightly differ than the percentages that would result from the corresponding numbers set forth in the table that are presented in thousands. 

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
 
 
 
Year Ended December 31,
 
 
 
2018
   
2017
 
 
 
(US$ in thousands, except
per
share data)
 
Research and development expenses, net          
 
$
7,618
   
$
6,837
 
General and administrative expenses          
   
3,445
     
3,164
 
Operating loss          
   
11,063
     
10,001
 
Finance income, net          
   
473
     
236
 
Loss before income tax          
   
10,590
     
9,765
 
Taxes on income          
   
(1
)
   
6
 
Net loss          
 
$
10,589
   
$
9,771
 
 
Research and Development Expenses, net.  Our research and development expenses, net for the year ended December 31, 2018 were $7.62 million, as compared with $6.84 million for the year ended December 31, 2017, an increase of $781,000 or 11.4%. The increase in research and development, net expenses between 2018 and 2017 was primarily due to a $894,000 increase in materials and a $206,000 increase in other research and development expenses, both relating to our clinical trials, primarily in connection with our post-CE Mark clinical study and the preparation for the U.S. pilot study, including obtaining FDA approval.  The increase in research and development expenses, net between 2018 and 2017 was partially offset by a $246,000 decrease in salaries and related expenses, primarily due to the decrease in expenses associated with the position of our Vice President, Research and Development following the appointment of Mr. Shpigelman to such position instead of Mr. Ovadia, who was appointed as our CEO in February 2018, and a $145,000 decrease in fees to subcontractors and consultants.

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2018
   
2017
   
Change
 
 
 
(US$ in thousands)
 
Salaries and related expenses          
 
$
4,410
   
$
4,656
   
$
(246
)
Share-based compensation          
   
234
     
116
     
118
 
Materials          
   
1,508
     
614
     
894
 
Subcontractors and consultants          
   
311
     
456
     
(145
)
Depreciation          
   
138
     
147
     
(9
)
Cost for registration of patents          
   
126
     
157
     
(31
)
Other research and development expenses          
   
1,099
     
893
     
206
 
 
   
7,826
     
7,039
     
787
 
Less participation of the IIA (formerly the OCS) and the BIRD Foundation          
   
(208
)
   
(202
)
   
(6
)
Total research and development expenses, net          
 
$
7,618
   
$
6,837
   
$
781
 
  
General and Administrative Expenses. Our general and administrative expenses for the year ended December 31, 2018 were $3.45 million, as compared to $3.16 million for the year ended December 31, 2017, an increase of $281,000, or 8.9%.  The increase in general and administrative expenses is primarily due to the following: a $444,000 increase in salaries and related expenses primarily due to a $ 281,000 in severance paid to our former CEO, a $419,000 increase in professional fees primarily due to a $202,000 increase in legal fees, and a $325,000 increase in other general and administrative expenses, primarily associated with consulting fees and services incurred as a result of being a public company. The increase in general and administrative expenses net between 2018 and 2017 was partially offset by: a $909,000 decrease in share-based compensation, of which $502,000 relates to reversal of expenses associated with an equity award to our former CEO which was forfeited as a result of his separation from employment.

 
 
2018
   
2017
   
Change
 
 
 
(US$ in thousands)
 
Salaries and related expenses          
 
$
1,839
   
$
1,395
   
$
444
 
Share-based compensation          
   
(299
)
   
610
     
(909
)
Professional services          
   
833
     
414
     
419
 
Office rent and maintenance          
   
163
     
161
     
2
 
Depreciation          
   
10
     
10
     
-
 
Other general and administrative expenses          
   
899
     
574
     
325
 
Total general and administrative expenses          
 
$
3,445
   
$
3,164
   
$
281
 

Operating Loss.  Our operating loss for the year ended December 31, 2018 was $11.1 million, as compared with $10.0 million for the year ended December 31, 2017, an increase of $1.1, or 11%.  The increase was as a result of the $781,000 increase in research and development expenses, net for the year ended December 31, 2018 compared to the year ended December 31, 2017 and the $281,000 increase in general and administrative expenses in the same period.
 
Finance Income, net. Our finance income, net for the year ended December 31, 2018 was $473,000, as compared to $236,000 for the year ended December 31, 2017, an increase of $237,000.  The change in our finance income, net is primarily due to the following: 
 
 
For the year ended December 31, 2018, we recorded $243,000 of interest income on short-term deposits as compared to $66,000, for the year ended December 31, 2017, an increase of $177,000 resulting from a higher average short-term deposits balance in 2018 as a result of our May 2018 underwritten public offering and an increase in interest rates on these short-term deposits.
 
 
For the year ended December 31, 2018, we recorded finance income of $255,000 as a result of changes in provision for royalties, primarily to Check–Cap LLC unitholders, as compared to finance income of $82,000 for the year ended December 31, 2017, an increase of $173,000.
 
 
For the year ended December 31, 2018, we recorded $27,000 finance expense as a result of exchange rate differences as compared to finance income of $95,000 for the year ended December 31, 2017, a decrease of $122,000.
 
Loss before income tax. Our loss before income tax for the year ended December 31, 2018 was $10.59 million, as compared to $9.77 million for the year ended December 31, 2017, an increase of $825,000.
 
Net Loss. Our net loss for the year ended December 31, 2018 was $10.59 million, as compared to $9.77 million for the year ended December 31, 2017, an increase of $818,000.
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Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
 
 
 
Year