Company Quick10K Filing
Quick10K
Mazor Robotics
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
CMTV Community Bancorp 88
BRFH Barfresh 40
OPXS Optex Systems Holdings 14
JANL Janel 4
HHER Her Imports 0
C964 Heron Lake Bioenergy 0
RVA Reva Medical 0
FULO Fullnet Communications 0
BMIX Brazil Minerals 0
GRSU Greenhouse Solutions 0
MZOR 2017-12-31
Part I
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments
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 Disclosures 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 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
Note 1 - Reporting Entity.
Note 1 - Reporting Entity
Note 2 - Basis of Preparation
Note 2 - Basis of Preparation (Cont'D)
Note 3 - Significant Accounting Policies
Note 3 - Significant Accounting Policies (Cont'D)
Note 4 - Cash and Cash Equivalents
Note 5 - Investments
Note 6 - Other Current Assets
Note 7 - Inventory
Note 8 - Property and Equipment, Net
Note 9 - Intangible Assets
Note 10 - Other Current Liabilities
Note 11 - Employee Benefits
Note 12 - Taxes on Income
Note 12 - Taxes on Income (Cont'D)
Note 13 - Commitments
Note 14 - Revenues
Note 15 - Segment Reporting
Note 16 - Cost of Sales
Note 17 - Research and Development Expenses, Net
Note 18 - Selling and Marketing Expenses
Note 19 - General and Administrative Expenses
Note 20 - Financing Income and Expenses
Note 21 - Related Parties
Note 21 - Related Parties (Cont'D)
Note 22 - Equity
Note 22 - Equity (Cont'D)
Note 23 - Share-Based Payments
Note 23 - Share-Based Payments(Cont'D)
Note 24 - Loss per Share
Note 25 - Financial Risk Management
Note 25 - Financial Risk Management (Cont'D)
Note 26 - Financial Instruments
Note 26 - Financial Instruments (Cont'D)
Note 27 - Subsequent Events
EX-4.16 exhibit_4-16.htm
EX-4.17 exhibit_4-17.htm
EX-4.18 exhibit_4-18.htm
EX-4.19 exhibit_4-19.htm
EX-12.1 exhibit_12-1.htm
EX-12.2 exhibit_12-2.htm
EX-13.1 exhibit_13-1.htm
EX-13.2 exhibit_13-2.htm
EX-15.1 exhibit_15-1.htm

Mazor Robotics Earnings 2017-12-31

MZOR 20F Annual Report

Balance SheetIncome StatementCash Flow

20-F 1 zk1821501.htm 20-F



UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2017
 
or
 
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to _______________
 
or
 
Shell Company Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of event requiring this shell company report: __________
 
Commission file no.: 001-35920
 
MAZOR ROBOTICS LTD.
(Exact name of registrant as specified in its charter)
 
Translation of registrant’s name into English: Not applicable
     
State of Israel
 
5 Shacham Street
(Jurisdiction of incorporation or organization)
 
North Industrial Park, Caesarea
   
3088900 Israel
   
(Address of principal executive offices)
 
Sharon Levita
Chief Financial Officer & VP Business Operations
+972-4-618-7101
Sharon.Levita@MazorRobotics.com
5 Shacham Street
North Industrial Park, Caesarea
3088900 Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of each class:
 
Name of each exchange on which registered or to be
American Depositary Shares each representing 2
 
registered:
Ordinary Shares, par value NIS 0.01 per share(1)
 
Nasdaq Global Market
Ordinary Shares, par value NIS 0.01 per share(2)
   
 
(1)
Evidenced by American Depositary Receipts.
 
(2)
Not for trading, but only in connection with the listing of the American Depositary Shares.
 

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
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 52,082,735 ordinary shares.
 
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 Exchange Act.
 
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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
 
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. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
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.
 
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. 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.
 
Yes     No
 
2

TABLE OF CONTENTS
       
     
Page
 
5
 
6
 
7
       
7
7
 
7
 
8
A.
Selected Financial Data. 
 
8
B.
Capitalization and Indebtedness. 
 
9
C.
Reasons for the Offer and Use of Proceeds. 
 
9
D.
Risk Factors. 
 
9
 
42
A.
History and Development of the Company. 
 
42
B.
Business Overview. 
 
43
C.
Organizational Structur.
 
73
D.
Property, Plants and Equipment. 
 
74
74
 
74
A.
Operating Results. 
 
74
B.
Liquidity and Capital Resources. 
 
83
C.
Research and Development, Patents and Licenses, Etc. 
 
85
D.
Trend Information. 
 
85
E.
Off-Balance Sheet Arrangements. 
 
86
F.
Tabular Disclosure of Contractual Obligations. 
 
87
 
87
A.
Directors and Senior Management. 
 
87
B.
Compensation. 
 
90
C.
Board Practices. 
 
93
D.
Employees. 
 
104
E.
Share Ownership. 
 
105
 
107
A.
Major Shareholders. 
 
107
B.
Related Party Transactions. 
 
108
C.
Interests of Experts and Counsel. 
 
109
 
109
A.
Consolidated Statements and Other Financial Information. 
 
109
B.
Significant Changes. 
 
110
 
111
A.
Offer and Listing Details. 
 
111
B.
Plan of Distribution. 
 
112
C.
Markets. 
 
112
D.
Selling Shareholders. 
 
112
E.
Dilution. 
 
112
F.
Expenses of the Issue. 
 
112
 
113
A.
Share Capital. 
 
113
B.
Memorandum and Articles of Association. 
 
113
C.
Material Contracts. 
 
113
D.
Exchange Controls.
 
114

3

E.
Taxation. 
 
114
F.
Dividends and Paying Agents. 
 
125
G.
Statement by Experts. 
 
125
H.
Documents on Display. 
 
125
I.
Subsidiary Information. 
 
125
 
126
 
127
A.
Debt Securities. 
 
127
B.
Warrants and Rights. 
 
127
C.
Other Securities. 
 
127
D.
American Depositary Shares. 
 
127
       
129
   
129
129
 
129
 
130
130
 
130
131
 
131
131
 
131
 
133
       
 
133
       
 
133
 
133
 
135
       
 
137
 
4

 
 
INTRODUCTION
 
Mazor Robotics, an Israeli company, is a leading innovator that has pioneered robotic guidance systems and complementary products in the spine and brain surgical markets which we believe may provide a safer surgical environment for patients, surgeons and operating room staff. We engage in the development, production and marketing of innovative medical devices for supporting surgical procedures in the fields of orthopedics and neurosurgery. We operate in the fields of image guided surgery and computer-assisted surgery enabling the use of surgical instruments with high precision and minimal invasiveness, aiming to simplify complex and minimally-invasive surgical procedures. We believe that our Mazor Core technology – the collaboration of four key technologies in Mazor’s systems -  provides predictable, efficient and precise surgical procedures. We believe that our portfolio of products, based on our proprietary Mazor Core technology and including the Mazor XTM Robotic Guidance System, or Mazor X, and the Renaissance® Surgical -Guidance System, or Renaissance, are transforming spine surgery from freehand procedures to highly accurate, state-of-the-art, guided procedures that raise the standard of care with better clinical results. We believe in evidence-based medicine, with more than fifty-five peer-reviewed studies validating the clinical value proposition of our products. The Mazor X, Renaissance and SpineAssist (our predecessor to the Renaissance) systems have been used to perform a wide variety of spine procedures on over 32,000 patients worldwide (with over 220,000 implants placed). We believe in ongoing innovation. In 2014, we introduced the Renaissance for brain surgery and in 2015 we introduced the PRO (Predictable Renaissance Operation) product line, which currently includes three solutions designed to support brain procedures, as well as, trauma and lateral spine procedures. We are continuing the development of the Renaissance platform for trajectory guidance in spine and brain surgery procedures. In July 2016, we unveiled the Mazor X system, a transformative robotic guidance platform for spine surgeries and in October 2016, we commercially launched the Mazor X system. The Mazor X system was developed with the goal of enhancing predictability and patient benefit, through the combination of analytical tools, multiple-source data, precision guidance, optical tracking, intra-op verification, and connectivity technologies. The Mazor X system was designed to expand the field of precision guided spine surgery beyond trajectory guidance. In April 2017, we received 510(k) clearance from the FDA for the Mazor X Align™ software, a spinal deformity correction planning software for the Mazor X system. The Mazor X Align is the first advanced application being integrated onto the Mazor X platform. We are continuing the development of the Mazor X platform for additional spine surgery procedures. On May16, 2016, we entered into a strategic, two-phase Exclusive Lead Sharing and Distribution Agreement and a Purchase Agreement with Medtronic plc and certain of its affiliates, or Medtronic. Under the first phase of this agreement, Medtronic was charged to generate sales leads for the Mazor X system. Mazor was stipulated as Medtronic’s sole strategic partner for development and commercialization of the Mazor X for robotic-based spinal applications. In addition, Medtronic made a $32 million investment in Mazor by two tranches – in May and July 2016. On August 30, 2017, we entered into the next phase of our strategic partnership with Medtronic, whereby Medtronic assumed exclusive global commercial responsibility for the Mazor X system for spinal applications, and made a $40 million third tranche investment in Mazor. These developments were a result of the achievement of certain sales and marketing milestones by both companies.
 
We were incorporated under the laws of the State of Israel on September 12, 2000. Our Ordinary Shares are listed on the Tel Aviv Stock Exchange, or TASE, under the symbol “MZOR”. American Depositary Shares, or ADSs, each representing two of our Ordinary Shares are traded on the Nasdaq Global Market under the symbol “MZOR.”
 
Unless the context otherwise indicates or requires, “Mazor Robotics,” “Mazor,” the Mazor Robotics logo and all product names and trade names used by us in this Annual Report, including Renaissance® and Mazor X™, Mazor CoreTM, Mazor X AlignTM, and PROlatTM are our proprietary trademarks and service marks. These trademarks and service marks are important to our business. Although we have omitted the “®” and “TM” trademark designations for such marks in this Annual Report, all rights to such trademarks and service marks are nevertheless reserved.
 
Unless derived from our financial statements or otherwise indicated, U.S. dollar translations of NIS amounts presented in this Annual Report are translated using a rate of NIS 3.467 to USD 1.00, the last exchange rate published by the Bank of Israel by December 31, 2017.
 
5

 
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Certain information included or incorporated by reference in this Annual Report may be deemed to be “forward-looking statements”. Forward-looking statements are often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,” “believe,” “should,” “intend,” “project” or other similar words, but are not the only way these statements are identified.
 
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations or of financial condition, statements relating to the research, development and use of our products, and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.
 
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.
 
Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things:
 
the outcomes of the agreements with Medtronic and its affiliates;
 
our ability to promote the Mazor X system and the Renaissance system;
 
the impact of competition and new technologies;
 
general market, political and economic conditions in the countries in which we operate;
 
projected capital expenditures and liquidity;
 
changes in our strategy;
 
government regulations and approvals;
 
changes in customers’ budgeting priorities;
 
litigation and regulatory proceedings;
 
the overall global economic environment; 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.
 
Readers are urged to carefully review and consider the various disclosures made throughout this Annual Report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
 
In addition, the section of this Annual Report entitled “Item 4. Information on the Company” contains information obtained from independent industry and other sources that we have not independently verified. You should not put undue reliance on any forward-looking statements. Any forward-looking statements in this Annual Report are made as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
 
6

 
DEFINITION OF CERTAIN TERMS
 
In this Annual Report, unless the context otherwise requires, references to:
 
“Mazor Robotics”, “Mazor,” the “Company”, the “registrant”, “us”, “we” and “our” refer to Mazor Robotics Ltd., an Israeli company, and, unless the context indicates otherwise, the Subsidiaries;
 
“ADSs” are to our American Depositary Shares, each representing two of our Ordinary Shares;
 
“Companies Law” are to Israel’s Companies Law, 5759-1999, as amended;
 
“Dollars”, “U.S. dollars”, “U.S. $” and “$” are to United States Dollars;
 
“Exchange Act” are to the United States Securities Exchange Act of 1934, as amended;
 
“FDA” are to the United States Food and Drug Administration;
 
“IRS” are to the United States Internal Revenue Service;
 
“Nasdaq” are to the Nasdaq Global Market;
 
“IIA” are to The Israel Innovation Authority, formerly known as the Office of the Chief Scientist of the Ministry of Economy;
 
“Ordinary Shares”, “our shares” and similar expressions refer to our ordinary shares, par value NIS 0.01 per share;
 
“SEC” are to the United States Securities and Exchange Commission;
 
“Securities Act” are to the United States Securities Act of 1933, as amended;
 
“Shekels” and “NIS” are to New Israel Shekels, the Israeli currency;
 
“Subsidiaries” are to the U.S. Subsidiary and to Mazor Robotics Pte Ltd., a Singapore company, and a wholly owned subsidiary of Mazor;
 
“TASE” are to the Tel Aviv Stock Exchange; and
 
“U.S. Subsidiary” are to Mazor Robotics, Inc., a Delaware corporation, and a wholly owned subsidiary of Mazor.
 
PART I
 
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
7

 
ITEM 3.                 KEY INFORMATION
 
A.
Selected Financial Data
 
The selected consolidated financial data for the fiscal years set forth in the table below have been derived from our consolidated financial statements and notes thereto. The selected consolidated statement of income data for fiscal years 2017, 2016 and 2015, and the selected consolidated statement of financial position data as of December 31, 2017 and 2016, have been derived from our audited consolidated financial statements and notes thereto set forth elsewhere in this Annual Report. The selected consolidated statement of income data for fiscal years 2014 and 2013, and the selected consolidated statement of financial position data as of December 31, 2015, 2014, and 2013, respectively, has been derived from other audited consolidated financial statements not included herein. The selected financial data should be read in conjunction with our consolidated financial statements, and are qualified entirely by reference to such consolidated financial statements. Additionally, and as explained in Note 2B to the December 31, 2017 consolidated financial statements, our functional currency is U.S. dollars
 
(in thousands except net loss per share data)
 
   
Years Ended December 31,
 
   
2017
   
2016
   
2015
   
2014
   
2013
 
Statement of Income Data
                             
Revenues
 
$
64,947
   
$
36,379
   
$
26,096
   
$
21,208
   
$
19,983
 
Cost of sales
 
$
23,684
   
$
10,330
   
$
5,827
   
$
4,396
   
$
4,280
 
Gross profit
 
$
41,263
   
$
26,049
   
$
20,269
   
$
16,812
   
$
15,703
 
Operating costs and expenses:
                                       
Research and development expenses, net (1)
 
$
8,192
   
$
5,736
   
$
6,324
   
$
5,776
   
$
4,174
 
Selling and marketing expenses          
 
$
39,499
   
$
33,637
   
$
24,947
   
$
21,352
   
$
15,692
 
General and administrative expenses
 
$
7,375
   
$
5,697
   
$
4,305
   
$
4,392
   
$
2,766
 
Total operating costs and expenses          
 
$
55,066
   
$
45,070
   
$
35,576
   
$
31,520
   
$
22,632
 
Operating loss
 
$
(13,803
)
 
$
(19,021
)
 
$
(15,307
)
 
$
(14,708
)
 
$
(6,929
)
Net loss
 
$
(12,419
)
 
$
(18,668
)
 
$
(15,385
)
 
$
(15,272
)
 
$
(20,529
)
Loss per share - Basic and diluted          
 
$
(0.25
)
 
$
(0.42
)
 
$
(0.36
)
 
$
(0.37
)
 
$
(0.57
)
Weighted average number of Ordinary Shares used to calculate basic and diluted loss per share
   
49,154
     
44,881
     
42,284
     
41,808
     
35,781
 
 
(1)
Net of joint research and development participation, in the amount of $927 thousand for 2017 and development costs capitalized to intangible assets, in the amount of $2,332 thousand for 2016.
 
(in thousands)
 
As of December 31,
 
   
2017
   
2016
   
2015
   
2014
   
2013
 
Statement of Financial Position Data:
                             
Cash and cash equivalents          
 
$
46,376
   
$
14,954
   
$
13,519
   
$
22,255
   
$
19,803
 
Short-term investments          
 
$
56,708
   
$
37,862
   
$
21,687
   
$
24,507
   
$
45,014
 
Long-term investments          
 
$
5,171
   
$
9,017
   
$
5,023
   
$
5,473
   
$
 
Total assets          
 
$
130,996
   
$
82,725
   
$
50,970
   
$
60,686
   
$
70,889
 
Total non-current liabilities          
 
$
414
   
$
325
   
$
299
   
$
278
   
$
332
 
Accumulated loss          
 
$
(134,279
)
 
$
(121,860
)
 
$
(103,192
)
 
$
(87,807
)
 
$
(72,535
)
Total equity          
 
$
113,763
   
$
64,889
   
$
42,400
   
$
54,267
   
$
64,093
 
 
B.
Capitalization and Indebtedness
 
Not applicable.
 
C.
Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
D.            Risk Factors
 
You should carefully consider the risks described below, together with all the other information in this Annual Report. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. If any of these risks occur, our business and financial condition could suffer and the price of our shares could decline.
 
8


Risks Related to Our Business
 
We are an emerging growth company, and we have incurred significant losses since our inception.
 
We are an emerging growth company. The future success of our business depends on our ability to continue to develop and obtain regulatory clearances or approvals for innovative and commercially successful products in our field, which we may be unable to do in a timely manner, or at all. Our success and ability to generate revenue or be profitable also depends on our ability to maintain and expand our sales and marketing force and related agreements, generate product sales and control costs, all of which we may be unable to do. Our limited operating history also limits your ability to make a comparative evaluation of us, our products and our prospects.
 
We have sustained net losses in every fiscal year since our inception in 2000, including a net loss of $12.4 million for the year ended December 31, 2017. As of December 31, 2017, we had total shareholders’ equity of $113.8 million and cash and cash equivalents, short term investments and long-term investments of approximately $108.3 million. Our accumulated deficit as of December 31, 2017 was $134.3 million. We anticipate that we will continue to incur substantial net losses for at least the next 12 months as we expand our research and development team to support the existing and new capabilities of the Mazor X system and Renaissance, or our Robotic Guidance Systems, and expand their adoption and clinical implementation. Our losses have had and will continue to have an adverse effect on our shareholders’ equity and working capital. Any failure to achieve and maintain profitability would continue to have an adverse effect on our shareholders’ equity and working capital and could result in a decline in our share price or cause us to cease operations.
 
We cannot assure investors that our existing cash and investment balances will be sufficient to meet our future capital requirements.
 
We believe our existing cash, cash equivalents, investment balances, and interest income we earn on these balances, if any, will be sufficient to meet our anticipated cash requirements through at least the next 12 months. To the extent our available cash, cash equivalents and investment balances are insufficient to satisfy our operating requirements or other strategic needs, we will either need to seek additional sources of funds, including selling additional equity or debt securities or entering into a credit facility. However, we may be unable to obtain additional financing. As a result, we may be required to reduce the scope of, or delay or eliminate, some or all of our current and planned research, development and commercialization activities. We also may have to reduce marketing, customer service or other resources devoted to our products. Any of these actions could materially harm our business and results of operations. Even if we are able to continue to finance our business, the sale of additional equity and debt securities may result in dilution to our current shareholders or may require us to grant a security interest in our assets. If we raise additional funds through the issuance of debt securities, these securities may have rights senior to those of our Ordinary Shares and could contain covenants that could restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, or at all.
 
In May 2016 we entered into a strategic, two-phase Exclusive Lead Sharing and Distribution Agreement and a Purchase Agreement with Medtronic and certain of its affiliates. In August 2017, we entered the next phase of this agreement, in which Medtronic assumed global exclusive commercial rights to the Mazor X system for spine surgeries. We rely significantly on the results of Medtronic’s sales, as our exclusive global distributor of the Mazor X for spine surgeries. Failure by Medtronic to generate Mazor X system sales and support of the clinical installed base, could have substantial impact on our business.
 
The Exclusive Lead Sharing and Distribution Agreement with Medtronic provides for the exclusive global distribution of the Mazor X system and related products for spine surgeries, clinical support of the Mazor X installed base, and co-development activities in the spine field. As part of the implementation of this agreement, approximately 30 members of our clinical and sales teams transferred to Medtronic in order to allow the continuation of the sales activity, clinical support and training for the Mazor X system. The Purchase Agreement provides for a multi-tranche equity investment in Mazor (of which the first three tranches were completed during 2016 and 2017; Medtronic still has the right to exercise warrants issued to them during August 2017 until March 2019). We believe that the agreements with Medtronic created a high level of visibility for our company and product offerings, as well as helping to validate the vision of robotic-guided spine surgery. Through the size of the Medtronic sales force, scope of training programs, marketing campaigns and other activities, Mazor has greater exposure to the spine market. Should Medtronic fail to generate significant Mazor X system sales, or fail to drive Mazor X system utilization, it could have a substantial negative impact on our business. Considering the growing and competitive market, significant amounts of time and resources will need to be invested in order to rebuild our global sales and distribution network of the Mazor X system for spine application in case of termination of our relationship with Medtronic.
 
9


We face competition from large, well-established medical device companies that are likely to launch new navigation and/or robotic–based products, as well as new techniques and devices for minimally invasive approaches in spine surgeries.
 
Large, well-established medical device companies, such as Zimmer Biomet Holdings Inc., Globus Medical Inc., and Brainlab AG have robotics guidance products for spine surgeries in different phases of development and/or commercialization. In July 2016, Zimmer Biomet acquired the majority of the outstanding share capital of MedTech SA, developer of the FDA-cleared and CE marked ROSA™ robot which is indicated for both spine and brain surgeries. Globus Medical Inc. has received CE Mark and FDA clearance for its surgical Excelsius GPS robotic positioning platform for spine and has started selling in the U.S. market since the fourth quarter of 2017. In August 2017 Globus also acquired the Swiss firm KB Medical, developer of the robotic AQrate system for spine surgeries. Brainlab has presented a prototype of an electro-mechanical surgical support arm in some of the major spine conferences in 2017. There have been some scientific reports on performance in cervical spine surgeries by TINAVI Medical Technologies Co., Ltd., a Beijing, China-based medical device company, which offers surgical robotic systems to assist orthopedic surgeons in open and minimally invasive surgeries. Additionally, there are companies with robotic products that have expressed interest or experimented in spine surgery guidance, such as Stryker Corporation with the Mako system, and Intuitive Surgical Inc. with its da Vinci system. There are also navigation systems that have been marketed over the past two decades in the spine market, though these have gained relatively low market share. These technologies have shown clinical value and could be further developed and marketed with greater success. These companies and many others are actively innovating in the field and some offer their robotic, or navigation systems with intra-operative 3-dimensional imaging systems that are often valuable to hospitals and physicians beyond the applicability for spine surgeries but also in fields such as trauma, ENT (ear, nose and throat), and brain surgeries. Whereas until recently Mazor Robotics had the only marketable product in the field of robotic-guided spinal surgery, there are currently several other players in direct competition, with others competing in a less direct way. Accordingly, a surgeon interested in computer assisted spine surgery currently has a choice between at least three different products with regulatory clearances for spine surgery and several additional guidance systems in advanced development, as well as the “older” navigation systems. We cannot assure that a surgeon will prefer our product over the current and evolving competition.
 
Many of Mazor’s competitors enjoy competitive advantages, including:
 
significantly greater name recognition;
 
longer operating histories;
 
established exclusive relationships with healthcare professionals, customers and third-party payors;
 
established distribution networks;
 
a more compelling technology with greater clinical value;
 
competitive pricing;
 
additional lines of products and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage;
 
greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory clearance for products and marketing approved products; and
 
greater financial and human resources for product development, sales and marketing and patent litigation.
 
There can be no assurance that we will be able to compete successfully against current or future competitors or that competition will not have a material adverse effect on our future revenues and, consequently, on our business, operating results and financial condition.
 
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We depend on the success of two main products for our revenue, which could impair our ability to achieve profitability.
 
We expect to derive most of our future revenues from sales of our Robotic Guidance Systems, recurring sales of disposable products required to use the Robotic Guidance Systems in each surgical procedure, and service plans that are sold with our Robotic Guidance Systems. Our future growth and success is dependent on successfully increasing the commercialization of our Robotic Guidance Systems and the adoption of our Robotic Guidance Systems by hospitals, surgeons and patients. If we are unable to achieve increased commercial adoption of our Robotic Guidance Systems, are unable to obtain regulatory clearances or approvals for future products, are unable to react timely to the or experience a decrease in the utilization of our product line or procedure volume, our revenue would be adversely affected and we would not become profitable. If adverse economic, industry or regulatory events or changes occur, we may have to write off inventory as obsolete, which could negatively impact our business, revenue and profitability.
 
If surgeons and hospitals do not broadly adopt the concept of computer assisted spine surgeries and do not perceive such technology and related products as valuable and having significant advantages over the current “freehand” standard-of-care procedures, patients will be less likely to accept or be offered surgery with our Robotic Guidance Systems, and we will fail to meet our business objectives.
 
Surgeons’ and hospitals’ perceptions of our technology having significant advantages are likely to be based on a determination that, among other factors, our products are safe, reliable, cost-effective and represent acceptable methods of treatment. Even if we can prove the clinical value of our Robotic Guidance Systems through continued clinical use and clinical studies, surgeons may elect not to use our current and future surgical solutions for any number of other reasons. For example, surgeons may continue to operate freehand simply because such surgeries are already widely accepted. In addition, surgeons may be slow to adopt our current and future surgical solutions because of the perceived liability risks arising from the use of new products. Surgeons may not accept our current and future surgical solutions if we fail to maintain an acceptable level of product reliability or if we encounter regulatory approval or compliance issues. Hospitals may not accept our Robotic Guidance Systems because of the capital expense, which may represent a significant portion of a hospital’s capital budget. Our Robotic Guidance Systems may not be cost-efficient if hospitals are not able to perform a significant volume of procedures using them.
 
If our current and future surgical solutions fail to achieve increased market acceptance for any of these or other reasons or if we are not successful in enforcing the contractual commitment to purchase disposable products exclusively from us, we will not be able to generate the revenue necessary to develop a sustainable business.
 
We depend on key employees, and if we fail to attract and retain employees with the expertise required for our business and to provide for the succession of senior management, we cannot grow or achieve profitability.
 
We are dependent on members of our senior management, in particular Ori Hadomi and Eliyahu Zehavi. Our future success will depend in part on our ability to retain our management and scientific teams, to identify, hire and retain additional qualified personnel with expertise, mainly for the research and development team, and to effectively provide for the succession of senior management. Competition for qualified personnel in the medical device industry is intense and finding and retaining qualified personnel with experience in our industry is very difficult. We believe that there are only a limited number of individuals with the requisite skills to serve in many of our key positions, particularly in Israel, and we compete for key personnel with other medical equipment and software manufacturers and technology companies, as well as research institutions. It is often difficult to hire and retain these persons, and we may be unable to replace key persons if they leave or to fill new positions requiring key persons with appropriate experience. A significant portion of our compensation to our key employees is in the form of equity grants. A prolonged depression in our stock price could make it difficult for us to retain our employees and recruit additional qualified personnel.
 
We do not maintain life insurance on any of our personnel. The loss of key employees, the failure of any key employee to perform or our inability to attract and retain skilled employees, as needed, or an inability to effectively plan for and implement a succession plan for key employees could harm our business.
 
As previously disclosed, in May 2017, the Israeli Securities Authority, or the ISA, conducted a search at the offices of Mazor and also questioned certain officers in connection with an investigation held by the ISA. The subject matter of the investigation relates to insider trading by third parties and Ori Hadomi was questioned as a suspect in connection with such allegations. Both the search in Mazor’s offices and Mr. Hadomi’s interrogation were conducted on the same date in May 2017, and to our knowledge since then Mr. Hadomi was not called for any further questioning. Mazor and Mr. Hadomi intend to continue to cooperate with the ISA in the future, to the extent required. The board of directors of Mazor have expressed their full support and confidence in Mr. Hadomi and in his continuous leadership of Mazor and its development.  The impact of this investigation on Mr. Hadomi’s position cannot be determined at this time but the loss of Mr. Hadomi could have a material adverse effect on us and our business.
 
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Adverse changes in economic conditions and reduced spending on innovative medical technology may adversely impact our business.
 
The purchase of our Robotic Guidance Systems is discretionary and requires our customers to make significant initial commitments of capital and other resources. In addition, purchase of our Robotic Guidance Systems requires a commitment to purchase exclusively from us and our distributors, other products and services, including our single-use disposable components. Continuing weak economic conditions or reduction in healthcare technology spending, even if economic conditions improve, could adversely impact our business, operating results and financial condition in a number of ways, including by causing longer sales cycles, lower prices for our products and services and reduced unit sales.
 
Fluctuations in credit and financial market conditions could delay or prevent our customers from obtaining financing to purchase or lease our Robotic Guidance Systems, which would adversely affect our business, financial condition and results of operations.
 
Due to the fluctuations in credit markets and currency exchange rates, our customers and overseas distributors may be delayed in obtaining, or may not be able to obtain, necessary financing for their purchases or leases of our Robotic Guidance Systems. Shifts in the world economy that have systemic or local impact might in some instances lead to our customers or overseas distributors postponing ordering of our Robotic Guidance Systems or the shipment and installation of previously ordered systems, cancelling their system orders, or cancelling their agreements with us. An increase in delays and order cancellations of this nature could adversely affect our product sales and revenues and, therefore, harm our business and results of operations.
 
Long lead times required by certain suppliers could prevent us from meeting the demand for our products. If we don’t accurately forecast such demand, our operating results could be adversely affected.
 
Market uncertainty makes it difficult for us, our customers, our distributors and our suppliers to accurately forecast future product demand trends, which could cause us to order and/or produce excess products that can increase our inventory costs and result in obsolete inventory. Alternatively, this forecasting difficulty could cause a shortage of products, or materials used in our products, that could result in an inability to satisfy demand within a timeframe acceptable by our customers for our products and a resulting material loss of potential revenue.
 
In addition, some of our suppliers may require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time, which can be up to six months, may require us to place orders far in advance of the time when certain products will be offered for sale, thereby also making it difficult for us to accurately forecast demand for our products, exposing us to risks relating to shifts in consumer demand and trends and adversely affecting our operating results.
 
Because of the numerous risks and uncertainties associated with the development of medical devices, including future products, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of our products and successfully deliver commercial products to the market.
 
Our future capital requirements will depend on many factors, including but not limited to the following:
 
the revenue generated by sales of our current and future products;
 
our ability to manage our inventory;
 
the expenses we incur in selling and marketing our products and supporting our growth;
 
the costs and timing of regulatory clearance or approvals for new products or upgrades or changes to our current products;
 
 
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the rate of progress, cost, and success or failure of on-going development activities;
 
the emergence of competing or complementary technological developments;
 
the costs of filing, prosecuting, defending and enforcing any patent or license claims and other intellectual property rights, or participating in litigation related activities;
 
the terms and timing of any collaborative, licensing, or other arrangements that we may establish;
 
the acquisition of businesses, products and technologies; and
 
general economic conditions and interest rates, including the continuing weak conditions.

Our reliance on third-party suppliers, including single source suppliers, for most of the components of our Robotic Guidance Systems could harm our ability to meet demand for our products in a timely and cost effective manner.
 
We rely on third-party suppliers to manufacture and supply almost all of the components used in our Robotic Guidance Systems, including a number of single source suppliers to provide us with several of the major components of our Robotic Guidance Systems. We currently do not have long-term contracts with most of our suppliers. As a result, some of our suppliers are not required to provide us with any guaranteed minimum production levels, and we cannot guarantee that we will be able to obtain sufficient quantities of key components in the future. In addition, our reliance on third-party suppliers involves a number of risks, including, among other things:
 
our suppliers may encounter financial hardships as a result of unfavorable economic and market conditions unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements;
 
suppliers may fail to comply with regulatory requirements, be subject to lengthy compliance, validation or qualification periods, or make errors in manufacturing components that could negatively affect the efficacy or safety of our products or cause delays in supplying of our products to our customers;
 
newly identified suppliers may not qualify under the stringent regulatory standards to which our business is subject;
 
we or our suppliers may not be able to respond to unanticipated changes in customer orders, and if orders do not match forecasts, we or our suppliers may have excess or inadequate inventory of materials and components;
 
we may be subject to price fluctuations due to a lack of long-term supply arrangements for key components;
 
we may experience delays in delivery by our suppliers due to changes in demand from us or their other customers;
 
we or our suppliers may lose access to critical services and components, resulting in an interruption in the manufacture, assembly and shipment of our systems;
 
our suppliers may be subject to allegations by other parties of misappropriation of proprietary information in connection with their supply of products to us, which could inhibit their ability to fulfill our orders and meet our requirements;
 
fluctuations in demand for products that our suppliers manufacture for others may affect their ability or willingness to deliver components to us in a timely manner;
 
our suppliers may wish to discontinue supplying components or services to us (e.g., for risk management reasons); and
 
we may not be able to find new or alternative components or reconfigure our system and manufacturing processes in a timely manner if the necessary components become unavailable.
 
If any of these risks materialize, costs could significantly increase and our ability to meet demand for our products could be impacted, and particularly, we could be in default of our contractual obligations to customers. If we are unable to satisfy commercial demand for our Robotic Guidance Systems or for our single-use disposable components in a timely manner, our ability to generate revenue would be impaired, market acceptance of our products could be adversely affected, and customers may instead purchase or use alternative products. In addition, we could be forced to secure new or alternative components through a replacement supplier. Securing a replacement supplier could be difficult, especially for complex components such as our Robotic Guidance Systems’ components that are manufactured in accordance with our custom specifications. The introduction of new or alternative components may require design changes to our system that may be subject to FDA and other regulatory clearances or approvals. We may also be required to assess the new manufacturer’s compliance with all applicable regulations and guidelines, which could further impede our ability to manufacture our products in a timely manner. As a result, we could incur increased production costs, experience delays in deliveries of our products, suffer damage to our reputation and experience an adverse effect on our business and financial results.
 
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The overall size and risk of turnover in our capital and clinical sales, service teams might impair our ability to generate revenues.
 
To reach our revenue targets, we need to cooperate and support Medtronic’s market efforts for the Mazor X system and maintain a strong direct sales force team, especially in the U.S. and in our sales channels for the Renaissance system. Maintaining a sales and marketing infrastructure is expensive and requires significant resources and an inability to retain qualified personal could impair the adoption of our products. Additionally, any sales and marketing organization that we maintain internally may be competing directly against the experienced and well-funded sales and marketing infrastructure of some of our competitors and our distribution partner for the Mazor X system for spine surgeries. We will face significant challenges and risks in developing our sales and marketing organization, including, among others:
 
the uncertainty involved with the future of the relationship with Medtronic,

·
the profile and structure of our team might change and for a period of transition;
 
our ability to recruit, train and retain adequate numbers of qualified sales and marketing personnel;
 
the ability of sales personnel to obtain access to surgeons and persuade adequate numbers of hospitals to purchase our products;
 
costs associated with hiring and training a sales and marketing organization; and
 
government scrutiny with respect to promotional activities in the healthcare industry both domestically and abroad.
 
Medical device development is costly and involves continual technological change, which may render our current or future products obsolete.
 
Innovation is rapid and continuous in the medical device industry, and our competitors in the medical device industry make significant investments in research and development. If new products or technologies emerge that provide the same or superior benefits as our products at equal or lower cost, they could render our products obsolete or unmarketable. Because our products can have long development and regulatory clearance or approval cycles, we must anticipate changes in the marketplace and the direction of technological innovation and customer demands. In addition, we face increasing competition from well-financed medical device companies in our attempts to acquire such new technologies, products and businesses. As a result, we cannot be certain that our products will be competitive with current or future products and technologies.
 
Our success depends, in part, on our ability to enter the brain-surgery market, and this market has significant barriers to entry.
 
Computer-assisted surgeries are the accepted standard-of-care in brain procedures, and stereotactic frames and frameless navigation devices have dominated this market for almost two decades. There are currently two other dominant robotic devices for brain surgeries, which are Medtech’s ROSA™ robot and Renishaw’s Neuromate©. These products compete directly with our Robotic Guidance Systems. As a result, we cannot be certain that surgeons will use our products or that our products will be competitive with current or future products and technologies. If we are unable to penetrate the brain-surgery market, we may not be able to generate the revenue necessary to develop a sustainable business.
 
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We may encounter problems or delays in the assembly of our products or fail to meet certain regulatory requirements.
 
The current and intended future versions of our Robotic Guidance Systems are complex and require the integration of a number of separate components and processes. To become profitable, we must assemble and test our Robotic Guidance Systems in commercial quantities in compliance with regulatory requirements and at an acceptable cost. Increasing our capacity to assemble and test our products on a commercial scale will require us to improve internal efficiencies. We may encounter a number of difficulties in increasing our assembly and testing capacity, including:
 
managing production yields;
 
maintaining quality control and assurance;
 
providing component and service availability;
 
managing subcontractors;
 
hiring and retaining qualified personnel; and
 
complying with state, federal and foreign regulations.
 
If we are unable to satisfy commercial demand for our Robotic Guidance Systems due to our inability to assemble and test the system in compliance with applicable regulations, our business and financial results, including our ability to generate revenue, would be impaired, market acceptance of our products could be materially adversely affected and customers may instead purchase or use competing products.
 
Any failure in our efforts to train our distributors, surgeons or hospital staff adequately could result in lower than expected product sales and potential liabilities.
 
A critical component of our sales and marketing efforts is the training of our distributors, surgeons and operating room staff to properly use our Robotic Guidance Systems. We rely on our distributors, surgeons and hospital staff to devote adequate time to learn to use our products. Convincing surgeons and hospital staff to dedicate the time and energy necessary for adequate training in the use of our system is challenging, and we cannot assure that we will be successful in these efforts. Moreover, the training of surgeons on the Mazor X system for spine surgeries, is under the responsibility of Medtronic and the successful execution of training programs is highly dependent on our team’s ability to conduct successful “train the trainer” programs to Medtronic’s training team and Medtronic’s allocation of resources allocated to training programs. If surgeons or hospital staffs are not properly trained, they may misuse or ineffectively use our products. If nurses or other members of the hospital staff are not adequately trained to assist in using our Robotic Guidance System, surgeons may be unable to use our products. Insufficient training may result in reduced system use, unsatisfactory patient outcomes, patient injury and related liability or negative publicity, which could have an adverse effect on our product sales or create substantial potential liabilities.
 
We will likely continue to experience extended and variable sales cycles, which could cause significant variability in our results of operations for any given quarter.
 
As Medtronic is an exclusive global distributor of the Mazor X system for spine surgeries, the revenues generated from the Mazor X system are highly dependent on Medtronic’s ability to promote and market the product. We face risks from this relationship, including risk of turnover of Medtronic’s capital and sales teams and any other organizational changes as well as the overall management of their commercial activity of the Mazor X System. Furthermore, Medtronic has different fiscal quarter definitions than we do, and Mazor X sales quotas were set according to Medtronic’s fiscal years, therefore, we might experience fluctuations, as a result of different sales and procurement considerations of Medtronic.
 
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In addition, our Robotic Guidance Systems have lengthy sales cycles because they are a major piece of capital equipment, the purchase of which will generally require the approval of senior management at hospitals, inclusion in the hospitals’ budget process for capital expenditures and, in some instances, a certificate of need from the state or other regulatory clearance. As a result, a relatively small number of units are currently installed each quarter. We estimate that the sales cycle of our Robotic Guidance Systems will continue to take an average of nine months from the point of initial identification and contact with a qualified surgeon until closing of the purchase with the hospital. In addition, the introduction of new Mazor products and competitive products could adversely impact our sales cycle as customers take additional time to assess them. Because of the lengthy sales cycle, the unit price of our Robotic Guidance Systems and the relatively small number of systems installed each quarter, each installation of our Robotic Guidance Systems can represent a significant component of our revenue for a given quarter, particularly in the near term and during any other periods in which our sales volume is relatively low.

Certain factors that may contribute to variability in our operating results may include:
 
different sale cycles by our distributors;
 
delays in shipments due, for example, to natural disasters or labor disturbances;
 
delays or unexpected difficulties in the manufacturing processes of our suppliers or in our assembly process;
 
timing of the announcement, introduction and delivery of new products or product upgrades by us and by our competitors;
 
timing and level of expenditures associated with expansion of sales and marketing activities and our overall operations;
 
changes in third-party coverage and reimbursement, changes in government regulation, or a change in a customer’s financial condition or ability to obtain financing; and
 
hospitals’ tendency to group purchases at the beginning of their budgetary cycle, which is different among hospitals.
 
These factors are difficult to forecast and may contribute to substantial fluctuations in our quarterly revenue and substantial variation from our projections, particularly during the periods in which our sales volume is low. Moreover, many of our expenses, such as office leases and most personnel costs, are relatively fixed. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in revenue may cause significant variation in operating results in any quarter. Based on the above factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. These and other potential fluctuations also mean that you will not be able to rely upon our operating results in any particular period as an indication of future performance.
 
We may fail to respond to cost containment efforts by our customers, which could have an adverse impact on our sales, financial condition and results of operations.
 
Some of our customers and potential customers have joined group purchasing organizations in an effort to contain costs; these group purchasing organizations negotiate pricing arrangements with medical supply manufacturers and distributors and make these negotiated prices available to the group purchasing organization’s affiliated hospitals and other members. If we fail to respond to the cost containment efforts of our customers and potential customers, we may lose sales or face downward pricing pressure, which could result in an adverse impact on our financial condition and results of operations.
 
If we are unable to ensure ongoing customer satisfaction and performance requirements our ability and Medtronic’s ability to generate new sales transactions and support utilization of our Robotic Guidance Systems might be impaired and our business could be negatively impacted.
 
In order to generate sales of our Robotic Guidance Systems and support the clinical utilization, we need to maintain a high-level of product satisfaction by surgeons and hospital staff. The complexity of the Mazor X system combined with our reliance on Medtronic to provide the voice of the customer for the Mazor X system may impact our ability to ensure customer satisfaction and could cause a substantial negative impact to our business.
 
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If we receive a significant number of warranty claims or our Robotic Guidance Systems, and specifically the Mazor X, require significant amounts of service after sale, our costs might increase and our business and financial results will be adversely affected.
 
Sales of our Robotic Guidance Systems generally include a warranty and maintenance obligation on our part for services for a period of twelve months from the date a system is installed at a customer’s facility. We also provide technical and other services to customers beyond the warranty period pursuant to a supplemental service plan sold with each system. If product returns or warranty claims are significant or exceed our expectations, we could incur unanticipated reductions in sales or additional expenditures for parts and service. In addition, our reputation could be damaged and our products may not achieve market acceptance.

Software defects may be discovered in our products.
 
Our Robotic Guidance Systems incorporate sophisticated computer software. Complex software frequently contains errors, especially when first introduced. Because our products are designed to be used to perform complex surgical procedures, we expect that physicians and hospitals will have an increased sensitivity to the potential for software defects. We cannot assure you that our software will not experience errors or performance problems in the future. If we experience software errors or performance problems, we would likely also experience:
 
loss of revenue;
 
delay in market acceptance of our products;
 
damage to our reputation;
 
additional regulatory filings;
 
product recalls;
 
increased service or warranty costs; and
 
product liability claims relating to the software defects.
 
We may be subject to product liability claims, product actions, including product recalls, and other field or regulatory actions that could be expensive, divert management’s attention and harm our business.
 
Our business exposes us to potential liability risks, product actions and other field or regulatory actions that are inherent in the manufacturing, marketing and sale of medical device products, particularly those used in surgery. We may be held liable if our products cause injury or death or are found otherwise unsuitable or defective during usage. Our Robotic Guidance Systems incorporate mechanical and electrical parts, complex computer software and other sophisticated components, any of which can contain errors or failures. Complex computer software is particularly vulnerable to errors and failures, especially when first introduced. In addition, new products or enhancements to our existing products may contain undetected errors or performance problems that, despite testing, are discovered only after installation.
 
If any of our products are defective, whether due to design or manufacturing defects, improper use of the product or other reasons, we may voluntarily or involuntarily undertake an action to remove, repair, or replace the product at our expense. In some circumstances, we will be required to notify regulatory authorities of an action pursuant to a product failure. We are also required to submit a Medical Device Report, or MDR, to the FDA for any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. Other countries in which we market our products have similar reporting requirements.
 
A required notification to a regulatory authority or a failure to make a timely required notification could result in an investigation by regulatory authorities of our products, which could in turn result in field corrective actions, restrictions on the sale of the products, and civil or criminal penalties. In addition, because our products are designed to perform complex surgical procedures, defects could result in a number of complications, some of which could be serious and could cause significant harm to the patient or even cause death. The adverse publicity resulting from any of these events could cause surgeons or hospitals to review and potentially terminate their relationships with us.
 
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The medical device industry has historically been subject to extensive litigation over product liability claims. We anticipate that as part of our ordinary course of business we will be subject to product liability claims alleging defects in the design, manufacture or labeling of our products. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs and high punitive damage payments. Although we maintain product liability insurance, the coverage is subject to deductibles and limitations, and may not be adequate to cover future claims. Additionally, we may be unable to maintain our existing product liability insurance in the future at satisfactory rates or adequate amounts.

If coverage or reimbursement from third-party payors for procedures in which our Robotic Guidance Systems are used, namely spinal fusions, is decreased or limited, hospitals may not purchase Robotic Guidance Systems and surgeons may perform fewer spinal fusions, which would harm our business and financial results.
 
Our ability to successfully commercialize our Robotic Guidance Systems depends significantly on the availability of coverage and reimbursement for thoracic-lumbar spinal fusion procedures from third-party payors, including governmental programs such as Medicare and Medicaid, as well as private insurance and private health plans. Reimbursement is a significant factor considered by hospitals in determining whether to acquire new capital equipment such as our technology. Although our customers have been successful in obtaining coverage and reimbursement for procedures using our products, we cannot be assured that procedures using our technology will be covered or reimbursed by third-party payors in the future or that such reimbursements will not be reduced to the extent that they will adversely affect capital allocations for purchase of our Robotic Guidance Systems.
 
As part of healthcare reform and other cost containment initiatives, the U.S. Congress, or the Congress, may pass legislation impacting coverage and reimbursement for healthcare services, including Medicare reimbursement to physicians and hospitals. Many private third-party payors look to Medicare’s coverage and reimbursement policies in setting their coverage policies and reimbursement amounts. If the Centers for Medicare & Medicaid Services, or CMS, the federal agency that administers the Medicare program, or Medicare contractors limit payments to hospitals or surgeons for thoracic-lumbar spinal fusion surgeries, private payors may similarly limit payments. In addition, state legislatures may enact laws limiting or otherwise affecting the level of Medicaid reimbursements. As a result, hospitals may not purchase our Robotic Guidance Systems and surgeons may choose to decrease their volume of thoracic-lumbar spinal fusions, and, as a result, our business and financial results would be adversely affected.
 
Because hospitals receive a fixed reimbursement amount from Medicare for specified procedures or conditions, a hospital must absorb the cost of our products as part of the reimbursement payment it receives, which makes the hospital’s purchasing decisions riskier, particularly those related to expensive capital equipment.
 
Medicare pays acute care hospitals a prospectively determined amount for inpatient operating costs under the Medicare hospital inpatient prospective payment system, or PPS. Under the Medicare PPS, the prospective payment for a patient’s stay in an acute care hospital is determined by the patient’s condition and other patient data and procedures performed during the inpatient stay using a classification system known as diagnosis related groups, or DRGs. CMS implemented a revised version of the DRG system that uses Medicare Severity DRGs, or MS-DRGs, instead of the DRGs which Medicare used previously. The MS-DRGs are intended to more accurately account for the patient’s severity of illness when assigning each patient’s stay to a payment classification. Medicare pays a fixed amount to the hospital based on the MS-DRG into which the patient’s stay is assigned, regardless of the actual cost to the hospital of furnishing the procedures, items and services provided. Accordingly, acute care hospitals generally do not receive direct Medicare reimbursement under the PPS for the specific costs incurred in purchasing medical devices, except under limited circumstances. Rather, reimbursement for these costs is deemed to be included within the MS-DRG based payments made to hospitals for the services furnished to Medicare eligible inpatients in which the devices are utilized. Accordingly, a hospital must absorb the cost of our products as part of the payment it receives for the procedure in which the device is used. In addition, physicians that perform procedures in hospitals are paid a set amount by Medicare for performing such services under the Medicare Physician Fee Schedule. Medicare payment rates for both systems are established annually.
 
At this time, we do not know the extent to which hospitals and physicians would consider third-party reimbursement levels adequate to cover the cost of our products. Failure by hospitals and surgeons to receive an amount that they consider to be adequate reimbursement for procedures in which our products are used could deter them from purchasing or using our products and limit our sales growth. In addition, pre-determined MS-DRG payments or Medicare Physician Fee Schedule payments may decline over time, which could deter hospitals from purchasing our products or physicians from using them. If hospitals are unable to justify the costs of our products or physicians are not adequately compensated for procedures in which our products are utilized, they may refuse to purchase or use them, which would significantly harm our business.
 
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Notwithstanding current or future FDA clearances, if granted, third-party payors may deny coverage and reimbursement if the payor determines that a therapeutic medical device is unnecessary, inappropriate, not cost-effective or experimental, or is used for a non-approved indication. Although we are not aware of any potential customer that has declined to purchase our Robotic Guidance Systems based upon third-party payors’ coverage and reimbursement policies, cost control measures adopted by third-party payors may have a significant effect on surgeries performed using our Robotic Guidance Systems or as to the levels of reimbursement.

Broad-based domestic and international government initiatives to reduce spending, particularly those related to healthcare costs, may reduce reimbursement rates for spinal surgery procedures, which will reduce the cost-effectiveness of our products.
 
Healthcare reforms, changes in healthcare policies and changes to third-party coverage and reimbursement, including recently enacted legislation reforming the U.S. healthcare system, may affect demand for our products and may have a material adverse effect on our financial condition and results of operations. There can be no assurance that current levels of reimbursement will not be decreased in the future, or that future legislation, regulation, or reimbursement policies of third-party payors will not adversely affect the demand for our products or our ability to sell products on a profitable basis.
 
The Patient Protection and Affordable Care Act, or PPACA, adopted in the United States in March 2010 and related regulations include new taxes impacting certain health-related industries, including medical device manufacturers. The legislation imposes significant new taxes on medical device makers in the form of a 2.3% excise tax on all U.S. medical device sales beginning in 2013. This excise tax applies to our medical devices. The Consolidated Appropriations Act, 2016, signed into law on December 18, 2015, includes a two-year suspension on the medical device excise tax. Thus, the medical device excise tax did not apply to the sale of a taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on January 1, 2016, and ending on December 31, 2017. On January 22, 2018, H.R. 195 was signed into law and extended the suspension for an additional two years until December 31, 2019.
 
Other significant measures contained in PPACA include initiatives to revise Medicare payment methodologies, initiatives to promote quality indicators in payment methodologies, initiatives related to the coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, and annual reporting requirements related to payments to physicians and teaching hospitals.
 
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2, 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 at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. On March 1, 2013, President Obama signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect. The ATRA also, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.
 
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or internationally, or the effect any future legislation or regulation will have on us. The taxes imposed by PPACA and the expansion of government’s role in the U.S. healthcare industry may result in additional losses to us, lower reimbursements by third-party payors for surgeries in which our products are used, and reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations, possibly materially.
 
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Changing models for the provision of healthcare may affect the cost-effectiveness of our Robotic Guidance Systems.
 
All third-party payors, whether governmental or private, whether within the United States or abroad, are developing increasingly sophisticated methods of controlling healthcare costs. These cost control methods include PPSs, capitated rates, benefit redesigns, pre-authorization or second opinion requirements prior to major surgery, an emphasis on wellness and healthier lifestyle interventions and an exploration of other cost-effective methods of delivering healthcare. These cost control methods also potentially limit the amount which healthcare providers may be willing to pay for medical technology which could, as a result, adversely affect our business and financial results. In addition, no uniform policy of coverage and reimbursement for medical technology exists among all these payors. Therefore, coverage and reimbursement for medical technology can differ significantly from payor to payor, and country to country.
 
We may attempt to acquire new products or technologies, and if we are unable to successfully complete these acquisitions or to integrate acquired businesses, products, technologies or employees, we may fail to realize expected growth.
 
Our success will depend, in part, on our ability to expand our product offerings and continue to offer the advanced computer assisted solutions for spine and brain surgery and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses, products or technologies rather than through internal development. Successful acquisitions present a number of hurdles and risk, including:
 
the identification of suitable acquisition candidates can be difficult, time consuming and costly;
 
integrating any acquisitions that we make into our operations is difficult, time consuming, and expensive, and may involve new regulatory requirements; and
 
future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or expenses, or other charges such as amortization of intangible assets, any of which could harm our business and materially adversely affect our financial results or cause a reduction in the price of our Ordinary Shares.
 
If we do not effectively manage our growth, we may be unable to successfully develop, market and sell our products.
 
In order to achieve our business objectives, we must continue to grow. Continued growth presents numerous challenges, including:
 
implementing appropriate operational and financial systems and controls;
 
expanding manufacturing and assembly capacity and increasing production;
 
developing our sales and marketing infrastructure and capabilities;
 
identifying, attracting and retaining qualified personnel in our areas of activity;
 
hiring, training, managing and supervising our personnel; and
 
continuous compliance with regulatory and quality assurance requirements.
 
We cannot be certain that our systems, controls, infrastructure and personnel will be adequate to support our future operations. Any failure to effectively manage our growth could impede our ability to successfully develop, market and sell our products and our business will be harmed.
 
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If we are successful in our efforts to market and sell our Robotic Guidance Systems outside of the United States, we will be subject to various risks relating to our international activities, which could adversely affect our business and financial results.
 
We are continuing to pursue international markets for the sale of our products and, as of December 31, 2017, there were over 50 SpineAssist and Renaissance systems installed in Europe, Asia and Australia. As a result of these efforts, we are exposed to risks separate and distinct from those we face in our U.S. operations. Our international business may be adversely affected by changing economic conditions in foreign countries. In addition, because international sales may be denominated in the functional currency of the country where the product is being shipped, increases or decreases in the value of the U.S. dollar relative to foreign currencies could affect our results of operations. Engaging in international business inherently involves a number of other difficulties and risks, including:
 
approval and/or registration of product submissions with healthcare systems outside the United States; e.g. obtaining CE-certification to allow marketing in the EU. Different countries have different requirements, and those vary as well as constantly change.
 
gathering the clinical data that may be required for product submissions with healthcare systems outside the United States;
 
import restrictions and controls and other government regulation relating to technology;
 
pricing pressures that we may experience internationally;
 
the availability and level of reimbursement within prevailing foreign healthcare payment systems;
 
compliance with existing and changing applicable foreign regulatory laws and requirements, including but not limited to the European Medical Device Directive (Council Directive 93/42/EEC), the U.S. Foreign Corrupt Practices Act of 1977, or FCPA, Section 291A of the Israel Penal Code (prohibiting bribery of foreign government officials) as well as the domestic implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in all applicable countries;
 
foreign laws and business practices favoring local companies;
 
longer payment cycles; and
 
shipping delays.
 
Our exposure to each of these risks may increase our costs, impair our ability to market and sell our products and require significant management attention, resulting in harm to our business and financial results.
 
Our Robotic Guidance Systems are used mainly for vertebral fixation procedures during thoracic-lumbar spinal fusion surgeries. Should the standard of care change and these procedures be abandoned as the treatment of choice for the current indications, it might negatively affect our business.
 
According to the Orthopedic Network News report dated October 2015, an estimated 409,400 thoracic-lumbar fusion surgeries will be performed in the United States during 2015. These surgeries are the standard of care in several common spinal pathologies. However, new treatment methods continue to be innovated, such as motion preserving techniques and devices that might not benefit from the use of Mazor X and Renaissance during such surgical procedures. In such a case, the appeal to surgeons in using Mazor X and Renaissance could be diminished and have a negative effect on our business performance.
 
We unveiled the Mazor X, a new guidance system for spine surgeries in July 2016 and commercially launched the Mazor X in October 2016. Mazor X is the culmination of a very substantial investment by us over the past few years. Like any new system it could suffer from performance issues and its appeal to potential customers, or perceived value might not justify purchases. Such outcomes might negatively affect our business.
 
While great care was invested in capturing the “voice of the customer” and many industry inputs from a variety of sources, it is possible that the Mazor X will disappoint surgeons in its performance and/or value-proposition. In a market with new robotic systems with different unique selling propositions and advantages, our new product may not capture the attention we expect. While we strive to remain the commercial leader of the market segment based on innovation leadership and quality processes, our success is not guaranteed. Moreover, Globus commercially launched the Excelsius system in the third quarter of 2017. This system offers integrated navigational capabilities that do not yet exist on the Mazor X robotic guidance platform.
 
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We may face both reputational and SEC enforcement risks with respect to conflict minerals obligations.
 
We are subject to disclosure requirements under section 102 of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the source of certain minerals for which such conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured which are mined from the Democratic Republic of Congo, and adjoining countries, including: Angola, Burundi, Central African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia. These rules require reporting companies to file a conflict minerals report as an exhibit to a Form SD report with the SEC. The conflict minerals report is required to set out the due diligence efforts and procedures exercised on the source and chain of custody of such conflict minerals, in accordance with internationally recognized due diligence framework, and a description of our products containing such conflict minerals. Although we expect that we will be able to comply with the SEC rules and timely file our next annual report, in preparing to do so we are dependent upon information supplied by certain suppliers of products that contain, or potentially contain, conflict minerals. Such preparation may be costly. To the extent that the information that we receive from our suppliers is inaccurate or inadequate or our processes in obtaining that information do not fulfill the SEC’s requirements, we could face both reputational and SEC enforcement risks.
 
Cyber security attacks or breaches of our data could adversely affect our reputation and business.

A cyber incident is considered to be any event that threatens the confidentiality, integrity or availability of information resources. More specifically, a cyber incident is an intentional attack or an unintentional event that can include gaining unauthorized access to systems to disrupt operations, corrupt data or steal confidential information.

In the ordinary course of our business, we collect and store sensitive data. This includes, where required or permitted by applicable laws, personally identifiable information. Certain third parties with whom we collaborate with also collect and store such data. The secure maintenance of this information is critical to our operations and business strategy. Despite our security measures, such as abstaining from using patients’ names in all communications, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise information stored on our networks or those of our partners. Any access, disclosure or other loss of such information could result in legal claims or proceedings, liability under laws and regulations, such as HIPAA, that protect the privacy of personal information, recovery costs, disruption of our operations, including delays in our regulatory approval efforts, and damage our reputation, which could adversely affect our business.
 
Risks Related to Our Intellectual Property
 
If we, or the other parties from whom we license intellectual property, are unable to secure and maintain patent or other intellectual property protection for the intellectual property used in our products, our ability to compete will be harmed.
 
Our commercial success depends, in part, on obtaining and maintaining patent and other intellectual property protection for the technologies used in our products. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. Furthermore, we presently license intellectual property from other parties, and we might in the future opt to license additional intellectual property from other parties. If we, or the other parties from whom we license or would license intellectual property, fail to obtain and maintain adequate patent or other intellectual property protection for intellectual property used in our products, or if any protection is reduced or eliminated, others could use the intellectual property used in our products, resulting in harm to our competitive business position. In addition, patent and other intellectual property protection may not provide us with a competitive advantage against competitors that devise ways of making competitive products without infringing any patents that we own or have rights to.
 
U.S. patents and patent applications may be subject to interference proceedings, and U.S. patents may be subject to re-examination proceedings in the U.S. Patent and Trademark Office. Foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices. Any of these proceedings could result in loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of the patent or patent application. Changes in either patent laws or in interpretations of patent laws may also diminish the value of our intellectual property or narrow the scope of our protection. Interference, re-examination and opposition proceedings may be costly and time consuming, and we, or the other parties from whom we might potentially license intellectual property, may be unsuccessful in defending against such proceedings. Thus, any patents that we own or might license may provide limited or no protection against competitors. In addition, our pending patent applications and those we may file in the future may have claims narrowed during prosecution or may not result in patents being issued. Even if any of our pending or future applications are issued, they may not provide us with adequate protection or any competitive advantages. Our ability to develop additional patentable technology is also uncertain.
 
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Non-payment or delay in payment of patent fees or annuities, whether intentional or unintentional, may also result in the loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to other parties. In addition, many countries limit the enforceability of patents against other parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. In addition, the laws of some foreign countries have different rules of protecting intellectual property rights, particularly in the field of medical products and procedures. Among these countries is China where we have sales pursuant to a distribution agreement with a local distributor.

If we are unable to prevent unauthorized use or disclosure of our proprietary trade secrets and unpatented know-how, our ability to compete will be harmed.
 
Proprietary trade secrets, copyrights, trademarks and unpatented know-how are also very important to our business. We rely on a combination of trade secrets, copyrights, trademarks, confidentiality agreements and other contractual provisions and technical security measures to protect certain aspects of our technology, especially where we do not believe that patent protection is appropriate or obtainable. We require our employees and consultants to execute confidentiality agreements in connection with their employment or consulting relationships with us. We also require our employees and consultants to disclose and assign to us all inventions conceived during the term of their employment or engagement while using our property or which relate to our business. We also have taken precautions to initiate reasonable safeguards to protect our information technology systems. However, these measures may not be adequate to safeguard our proprietary intellectual property and conflicts may, nonetheless, arise regarding ownership of inventions. Such conflicts may lead to the loss or impairment of our intellectual property or to expensive litigation to defend our rights against competitors, who may be better funded and have superior resources. Our employees, consultants, contractors, outside clinical collaborators and other advisors may unintentionally or willfully disclose our confidential information to competitors. In addition, confidentiality agreements may be unenforceable or may not provide an adequate remedy in the event of unauthorized disclosure. Enforcing a claim, that a third party illegally obtained and is using our trade secrets, is expensive and time consuming, and the outcome is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. As a result, other parties may be able to use our proprietary technology or information, and our ability to compete in the market would be harmed.
 
We could become subject to patent and other intellectual property litigation that could be costly, result in the diversion of management’s attention, require us to pay damages and force us to discontinue selling our products.
 
The medical device industry is characterized by competing intellectual property and a substantial amount of litigation over patent and other intellectual property rights. In particular, the fields of orthopedic implants, computer-assisted surgery, or CAS, systems, and robotics are well established and crowded with the intellectual property of competitors and others. A number of companies in our market, as well as universities and research institutions, have been issued patents and have filed patent applications which relate to the use of CAS.
 
Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of a patent litigation action is often uncertain. We have not conducted an extensive search of patents issued or assigned to other parties, including our competitors, and no assurance can be given that patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas, our competitors or other parties may assert that our products and the methods we employ in the use of our products are covered by U.S. or foreign patents held by them. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in the market for computer and robotic-assisted surgery grows, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. In certain situations, we may determine that it is in our best interests or their best interests to voluntarily challenge a party’s products or patents in litigation or other proceedings, including patent interferences or re-examinations. As a result, we may become involved in litigation that could be costly, result in diversion of management’s attention, require us to pay damages and force us to discontinue selling our products.
 
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Infringement actions and other intellectual property claims and proceedings brought against or by us, whether with or without merit, may cause us to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. Some of our competitors may be able to sustain the costs of complex patent or intellectual property litigation more effectively than we can because they have substantially greater resources.
 
We cannot be certain that we will successfully defend against allegations of infringement of patents and intellectual property rights of others. In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the other party’s patents or other intellectual property were to be upheld as valid and enforceable and we were to be found to infringe the other party’s patents or violate the terms of a license to which we are a party, we could be required to pay damages. We could also be prevented from selling our products unless we could obtain a license to use technology or processes covered by such patents or were able to redesign the product to avoid infringement. A license may not be available at all or on commercially reasonable terms or we may not be able to redesign our products to avoid infringement. Modification of our products or development of new products could require us to conduct clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time consuming and expensive. In these circumstances, we may be unable to sell our products at competitive prices or at all, and our business and operating results could be harmed.
 
Our product development is limited by existing intellectual property owned by other companies. Our development of new generations of our products might depend on licensing of such intellectual property.
 
As we enhance our current product offerings and develop new ones, we may find it advisable or necessary to seek licenses from other parties who hold patents covering technology or methods necessary for the development of our products. If we cannot obtain these licenses, we could be forced to design around those patents at additional cost or abandon the product altogether. As a result, our ability to grow our business and compete in the market may be harmed.
 
We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.
 
Many of our employees were previously employed at universities or other medical device companies, including our competitors or potential competitors. We could in the future be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or features that are important or essential to our products would have a material adverse effect on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management. Incurring such costs could have a material adverse effect on our financial condition, results of operations and cash flow.
 
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We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
 
We enter into agreements with our employees pursuant to which such individuals grant us all rights to any inventions created in the scope of their employment or engagement with us. A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israel Patents Law, 5727-1967, or the Patent Law, inventions conceived by an employee during the scope of his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between employee and employer giving the employee service invention rights. The Patent Law also provides that in the absence of an agreement between an employer and an employee regarding compensation for service inventions, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for their inventions. Recent decisions by the Committee have created uncertainty in this area, as it held that employees may be entitled to remuneration for their service inventions despite having specifically waived any such rights. Further, the Committee has not yet determined the method for calculating this Committee-enforced remuneration. Although our employees have agreed to assign to us invention ownership rights, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could otherwise negatively affect our business.

Risks Related to Regulatory Compliance
 
If we fail to comply with the extensive government regulations relating to our business, we may be subject to fines, injunctions and other penalties that could harm our business.
 
Our medical device products and operations are subject to extensive regulation by the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and various other federal, state and foreign governmental authorities. Government regulations and requirements specific to medical devices are wide ranging and govern, among other things:
 
design, development and manufacturing;
 
testing, labeling and storage;
 
clinical trials;
 
product safety;
 
marketing, sales and distribution;
 
premarket clearance or approval;
 
record keeping procedures;
 
advertising and promotions;
 
recalls and field corrective actions;
 
post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; and
 
product import and export.
 
In the United States, before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we must first receive either premarket clearance under Section 510(k) of the FDCA, or Premarket Approval, or PMA, from the FDA, unless an exemption applies. In the 510(k) marketing clearance process, the FDA must determine that a proposed device is “substantially equivalent” to a legally marketed device, known as a “predicate” device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Bench tests, pre-clinical and/or clinical data are sometimes required to support substantial equivalence. The PMA approval pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on data obtained in clinical trials. Both of these processes can be expensive and lengthy and entail significant fees, unless exempt. The FDA’s 510(k) marketing clearance process usually takes from three to 12 months, but it can last longer. The process of obtaining PMA approval is much more costly and uncertain than the 510(k) marketing clearance process. It generally takes from one to three years, or even longer, from the time the PMA application is submitted to the FDA, until an approval is obtained. There is no assurance that we will be able to obtain FDA clearance or approval for any of our new products on a timely basis, or at all.
 
In the United States, our currently commercialized products have received pre-market clearance under Section 510(k) of the FDCA. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the more costly, lengthy and uncertain PMA process. Although we do not currently market any devices under PMA, the FDA may demand that we obtain a PMA prior to marketing certain of our future products.
 
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In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently cleared products on a timely basis. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the program, and in January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices. The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as bolster patient safety. In addition, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms which are further intended to clarify and improve medical device regulation both pre- and post-approval.
 
Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing responsibilities under FDA regulations. The failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as:
 
warning letters;
 
fines;
 
injunctions;
 
civil penalties;
 
termination of distribution;
 
recalls or seizures of products;
 
delays in the introduction of products into the market;
 
total or partial suspension of production;
 
refusal to grant future clearances or approvals;
 
withdrawals or suspensions of current clearances or approvals, resulting in prohibitions on sales of our products; and
 
in the most serious cases, criminal penalties.
 
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, results of operations and financial condition.
 
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Modifications to our currently FDA-cleared products or the introduction of new products may require new regulatory clearances or approvals or require us to recall or cease marketing of our current products until clearances or approvals are obtained.
 
Our Robotic Guidance Systems have received marketing clearance from the FDA based on 510(k) applications. See “Item 4. Information on the Company - B. Business Overview - Regulatory Requirements of the U.S. Food and Drug Administration.” We have not been required by the FDA to obtain PMA nor to conduct any clinical trials in support of these applications. Modifications to our products, however, may require new regulatory approvals or clearances or require us to recall or cease marketing the modified products until these clearances or approvals are obtained. Any modification to one of our 510(k) cleared products that would constitute a major change in its intended use, or any change that could significantly affect the safety or effectiveness of the device would require us to obtain a new 510(k) marketing clearance and may even, in some circumstances, require the submission of a PMA application, if the change raises complex or novel scientific issues or the product has a new intended use. The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) submission in the first instance, but the FDA may review any manufacturer’s decision. The latest 510(k) marketing clearance for Renaissance expands the indication for use of Renaissance to brain surgeries. We may continue to make additional modifications in the future to Renaissance without seeking additional clearances or approvals if we believe such clearances or approvals are not necessary. In 2017 the FDA introduced stringent new guidance regarding the assessment of whether a new 510(k) is required for changes or modifications to existing devices. If the FDA disagrees with our past or future decisions not to seek a new 510(k) for changes or modifications to existing devices and requires new clearances or approvals, we may be required to recall and stop marketing our products as modified, which could require us to redesign our products, conduct clinical trials to support any modifications, and pay significant regulatory fines or penalties. In addition, the FDA may not approve or clear our products for the indications that are necessary or desirable for successful commercialization or could require clinical trials to support any modifications. Any delay or failure in obtaining required clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. Any of these actions would harm our operating results.
 
Moreover, clearances and approvals are subject to continual review, and the later discovery of previously unknown problems can result in product labeling restrictions or withdrawal of the product from the market. The loss of previously received approvals or clearances, or the failure to comply with existing or future regulatory requirements could reduce our sales and future growth prospects.
 
We are currently required by the FDA to refrain from using certain terms to label and market our products, which could harm our ability to market and commercialize our current or future products.
 
The FDA’s 510(k) clearances include a specification of a product’s indication for use, and also authorize specific labeling and marketing claims and language in promotional materials for the U.S. market. Use of a device outside its cleared or approved indications is known as “off-label” use. Physicians may use our products off-label, as the FDA does not restrict or regulate a physician’s choice of treatment within the practice of medicine. If the FDA, or other regulatory bodies, determine that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, which could have an adverse impact on our reputation and financial results. Failure to conform with the specific cleared labeling of our products would be considered mislabeling or off-label promotion which might lead to:
 
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
 
customer notifications, refunds, detention or seizure of our products;
 
refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
 
withdrawing 510(k) marketing clearances that have already been granted, or PMA approvals which we may receive in the future;
 
refusing to provide Certificates for Foreign Government;
 
refusing to grant export approval for our products; or
 
pursuing criminal prosecution.
 
Such penalties might result in damage to our reputation and business. In addition, any FDA action could trigger scrutiny by other federal and state regulatory agencies. Such scrutiny could also occur, regardless of FDA action.
 
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Other countries, other than the United States, have similar advertising regulatory requirements.
 
Any of these sanctions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and financial condition.
 
Our distributors might use misleading or incorrect promotional material, putting Mazor at off-label risk in terms of the FDA and other regulators.
 
We may inadvertently breach government and contractual privacy laws and obligations.
 
In the course of performing our business, we obtain certain confidential patient health information, such as patient names and dates of surgical procedures. In the event of an inadvertent disclosure, we could be subject to enforcement measures, including civil and criminal penalties and fines for violations of the privacy or security standards, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, including the final omnibus rule published on January 25, 2013, or subject to violation of contractual claims of customers.  Similarly, since some of our third party contractors may also be exposed to certain confidential patient health information, a disclosure by such third parties could potentially expose us to penalties and fines as mentioned above.
 
Additionally, privacy related regulatory requirements as well as their interpretation, both in the U.S. and abroad, are continuing to evolve. Enactment of new regulatory requirements would require us to change our current practices and may incur considerable costs.
 
Failure to obtain regulatory approval in additional foreign jurisdictions will prevent us from expanding the commercialization of our products abroad.
 
To be able to market and sell our products in most countries other than the United States, we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to country. Clearance or approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA clearance or approval. Obtaining and maintaining foreign regulatory approvals are expensive, and we cannot be certain that we will receive regulatory approvals in any foreign country in which we plan to market our products, on a timely basis, if at all. If we fail to obtain or maintain regulatory approval in any foreign country in which we plan to market our products on a timely basis, or at all, our ability to generate revenue will be harmed.
 
As we modify existing products or develop new products in the future, including new accessories and surgical instruments, we apply for permission to affix to such products a European Union CE mark, which is a legal requirement for medical devices intended for sale in the European Union. In addition, we will be subject to annual regulatory audits in order to maintain those CE mark permissions. We do not know whether we will be able to continue to affix the CE mark for new or modified products or that we will continue to meet the quality and safety standards required to maintain the permissions we have already received. If we are unable to maintain permission to affix the CE mark to our products, we will no longer be able to sell our products in member countries of the European Union or other areas of the world that require CE marking for the marketing and distribution of medical devices.
 
In 2020, the EEA Member States will implement the European Union (EU) Medical Device Regulation (MDR 2017/745), which will replace the current EU Medical Device Directive that governs medical devices in the EEA. All medical device companies which manufacture and/or market products in the EEA, including Mazor Robotics, will be required to comply with the new regulations, which increases technical documentation requirements and may alter the classification of some products. Most devices that are CE marked under the EU Medical Device Directive prior to 2020 will continue to be marketed in the EU under certain conditions until 2024, at which point these products must comply with the new regulation.

We are required to comply with certain European environmental regulations. If we fail to comply with such regulations, we may be subject to fines and other penalties that could harm our business.
 
               Our European activities require us to comply with the Restriction of Hazardous Substances Directive 2002/95/EC ("RoHS"), the Waste Electrical and Electronic Equipment directive 2002/96/EC (“WEEE”) and the Registration, Evaluation, Authorisation and Restriction of Chemicals regulation 1907/2006/EC (“REACH”). Failure to comply with such regulations could adversely affect our business. Furthermore, our distributors may halt or terminate distribution activities in the event of non-compliance with such regulations which could adversely impact our sales.
 
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If we or our third-party manufacturers or suppliers fail to comply with Quality System Regulations, our manufacturing operations could be interrupted and our product sales and operating results could suffer.
 
We and some of our third-party manufacturers and suppliers are required to comply with the Quality System Regulations, or QSR, which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. We and our manufacturers and suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process if we or our distributors market our products abroad. We continue to monitor our quality management in order to improve our overall level of compliance. Our facilities are subject to periodic and unannounced inspection by U.S. and foreign regulatory agencies, including notified bodies, to audit compliance with the QSR and comparable foreign regulations. If our facilities or those of our manufacturers or suppliers are found to be in violation of applicable laws and regulations, or if we or our manufacturers or suppliers fail to take satisfactory corrective action in response to an adverse inspection, the regulatory authority could take enforcement action, including any of the following sanctions:
 
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
 
customer notifications or repair, replacement, refunds, detention or seizure of our products;
 
operating restrictions or partial suspension or total shutdown of production;
 
refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
 
withdrawing 510(k) marketing clearances that have already been granted, or PMA approvals that we may receive in the future;
 
refusing to provide Certificates for Foreign Government;
 
refusing to grant export approval for our products; or
 
pursuing criminal prosecution.
 
Any of these sanctions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands, and could have a material adverse effect on our reputation, business, results of operations and financial condition. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits.
 
Our products may in the future be subject to product actions that could harm our reputation, business operations and financial results.
 
Manufacturers may, on their own initiative, initiate actions, including a non-reportable market withdrawal or a reportable product recall, for the purpose of correcting a material deficiency, improving device performance, or other reasons. Additionally, the FDA and similar foreign health or governmental authorities have the authority to require an involuntary recall of commercialized products in the event of material deficiencies or defects in design, manufacturing or labeling or in the event that a product poses an unacceptable risk to health. 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 a device intended for human use would cause serious, adverse health consequences 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. Product actions involving any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations.
 
Companies are required to maintain certain records of actions, even if they determine such actions are not reportable to the FDA. If we determine that certain actions do not require notification of the FDA, the FDA may disagree with our determinations and require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted or failing to timely report or initiate a reportable product action.
 
Depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties and civil or criminal fines.
 
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If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
 
Under FDA regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. In addition, all manufacturers placing medical devices in European Union markets are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the relevant authority in whose jurisdiction the incident occurred. We anticipate that in the future it is likely that we may experience events that would require reporting to the FDA pursuant to the MDR regulations. Any adverse event involving our products could result in future voluntary corrective actions, such as product actions or customer notifications, or agency actions, such as inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
 
In addition, as the frequency of use of our Robotic Guidance Systems increases and our business continues to grow, we may experience an increase in the number of incidents that could lead to MDR reports which we might need to file. The decision to file an MDR involves a judgment by us as the manufacturer. We have made decisions that certain types of events are not reportable under the MDR regulations; however, there can be no assurance that the FDA will agree with our decisions. If we fail to report MDRs to the FDA within the required timeframes, or at all, or if the FDA disagrees with any of our determinations regarding the reportability of certain events, the FDA could take enforcement actions against us, which could have an adverse impact on our reputation and financial results.
 
We may be subject to fines, penalties, or licensure requirements, or legal liability, if it is determined that our clinical sales representatives and other employees are practicing medicine without a license.
 
State laws prohibit the practice of medicine without a license. Our clinical sales representatives, or CSRs, provide preoperative and intraoperative clinical and technical support to our customers, including assistance setting up the equipment, participation in the preoperative planning process, and facilitation of the surgeon’s use of our Robotic Guidance Systems during surgery. Our CSRs are not engaged in the practice of medicine, but rather are assisting our customers in the safe and proper usage of our equipment and products. Nevertheless, a governmental authority or individual actor could allege the activities of our CSRs to constitute the practice of medicine. A state may seek to have us discontinue the services provided by our CSRs or subject us to fine, penalties or licensure requirements. Any determination that our CSRs are practicing medicine without a license may result in significant liability to us.
 
The application of state certificate of need regulations could substantially limit our ability to sell our products and grow our business.
 
Some states require healthcare providers to obtain a certificate of need or similar regulatory approval prior to the acquisition of high-cost capital equipment such as our Robotic Guidance Systems. In some states, the process required of our customers to obtain this certificate is lengthy and could result in a longer sales cycle for our Robotic Guidance Systems. Further, in many cases, only a limited number of these certificates are available. As a result, our customers may be unable to obtain a certificate of need for the purchase of our Robotic Guidance Systems, which could cause our sales to decline.
 
Federal regulatory reforms may adversely affect our ability to sell our products profitably.
 
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a medical device. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. Once implemented, compliance with those regulations may require us to take additional steps in the manufacture of our products and labeling. These steps may require additional resources and could be costly.
 
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For example, attention is directed to the reference to the PPACA above, under the heading “Broad-based domestic and international government initiatives to reduce spending, particularly those related to healthcare costs, may reduce reimbursement rates for spinal surgery procedures, which will reduce the cost-effectiveness of our products.”
 
We may be subject, directly or indirectly, to federal and state healthcare regulations and could face substantial penalties if we are unable to fully comply with such regulations and laws.
 
While we do not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, many healthcare laws and regulations apply to our business. For example, we could be subject to patient privacy regulation and enforcement by both the federal government and the states in which we conduct our business. There are multiple healthcare laws and regulations that may affect our ability to operate. New laws and regulations are being continually proposed and adopted. For example, the PPACA imposes new tracking reporting and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to physicians and teaching hospitals. Device manufacturers were required to begin collecting data on August 1, 2013, register with CMS by March 31, 2014 and are required to submit certain reports to CMS disclosing payments and transfers of value made to physicians and teaching hospitals in the preceding calendar year on or before the 90th day of each calendar year. Any failure to provide the required information may result in civil monetary penalties. There are also a number of states that require the establishment of healthcare compliance programs or reporting of certain compensation or benefits provided to healthcare professionals. See “Item 4. Information on the Company - B. Business Overview - Fraud and Abuse Laws - Anti-Kickback Statutes and Federal False Claims Act.”
 
Compliance with the reporting and disclosure obligations of the Physician Payment Sunshine Act, which is part of the Affordable Care Act of 2010, could adversely affect our business.
 
Compliance with the reporting and disclosure obligations of the Physician Payment Sunshine Act, or the Sunshine Act, which is part of the Affordable Care Act of 2010, could adversely affect our business.
 
The Sunshine Act imposes 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 or before the 90th day of each calendar year, manufacturers covered under the Sunshine Act will be required to submit a report disclosing payments and transfers of value made in the preceding calendar year, and CMS then will publish the reported data on or before June 30 of the reporting year. In addition, medical device companies are also required to report payments to the government on an annual basis.
 
The Sunshine Act preempts similar state reporting laws, although we or our Subsidiaries may be required to continue to report under certain of such state laws. While we believe we have substantially compliant programs, systems and controls in place to comply with the Sunshine Act requirements, if we fail to comply with the data collection and reporting obligations imposed by the Sunshine Act, we may be subject to severe penalties, including fines.
 
Additionally, we have implemented a series of policies and procedures for employees involved in the data collection process, and have systems in place to capture the necessary data. We have also established policies and procedures to ensure that data was reported completely, in the correct format, and on time. Despite these policies and procedures, we cannot assure you that we will collect and report all data accurately and in a timely manner. If we fail to accurately or timely report this information, we could suffer severe penalties, including fines.
 
If we fail to comply with federal or state anti-kickback laws, we could be subject to criminal and civil penalties, loss of licenses and exclusion from Medicare, Medicaid and other federal and state healthcare programs, which could have a material adverse effect on our business, financial condition and results of operations.
 
Section 1128B(b) of the Social Security Act, or the SSA, commonly referred to as the “Anti-Kickback Statute,” prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or services payable by the Medicare and Medicaid programs or any other federally funded healthcare program. The Anti-Kickback Statute is very broad in scope, and many of its provisions have not been uniformly or definitively interpreted by courts or regulations.
 
We have arrangements with surgeons, hospitals and other entities which may be subject to scrutiny. For example, we have consulting agreements with spine surgeons and neurosurgeons using or considering the use of our Robotic Guidance Systems, for assistance in product development, and professional training and education, among other things. Payment for some of these consulting services has been in the form of stock options rather than per hour or per diem amounts that would require verification of time worked. We may continue in the future to make payment for these consulting services in the form of royalties or also possibly in the form of part-time employment. In addition, various agencies may view these arrangements with our customers, including the provision of marketing grants to customers for the purposes of training surgeons and the provision of accessories at no charge or discounted prices with the purchase of our Robotic Guidance Systems, as not fully complying with federal and state fraud and abuse laws. To the extent we are found to not be in compliance, we could face potentially significant fines and penalties in addition to other more significant sanctions and we may be required to restructure our operations.
 
Violations of the Anti-Kickback Statute and similar state laws may result in significant fines, imprisonment and exclusion from the Medicare, Medicaid and other federal or state healthcare programs. Such fines and exclusion could have a material adverse effect on our business, financial condition and results of operations. While we believe that our arrangements with physician consultants in product development and product training and education do not violate the law, there can be no assurance that federal or state regulatory authorities will not challenge these arrangements under anti-kickback laws. See “Item 4. Information on the Company B. Business Overview – Fraud and Abuse Laws - Anti-Kickback Statutes and Federal False Claims Act.”
 
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The orthopedic medical device industry is, and in recent years has been, under heightened scrutiny.
 
The orthopedic medical device industry is, and in recent years has been, under heightened scrutiny as the subject of government investigations and enforcement actions involving manufacturers who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business, specifically including arrangements with physician consultants.
 
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, including anti bribery laws such as the FCPA, the Israeli Penal Code, and the domestic implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If the surgeons or other providers or entities with which we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.
 
Risks Relating Primarily to Our Location in Israel
 
Our headquarters and other significant operations are located in Israel and, therefore, our results may be adversely affected by military instability in Israel.
 
Our executive offices are located in Israel. In addition, the majority of our officers and directors are residents of Israel. Accordingly, geopolitical and/or military conditions in Israel and its region may directly or indirectly 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 summer of 2014 and in November 2012, Israel was engaged in armed conflicts with a militia group and political party, which controls the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. These conflicts involved missile strikes against civilian targets in various parts of northern Israel, including areas in which our employees and consultants are located, and negatively affected business conditions in 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, November 2012 and again in the summer of 2014 in an endeavor to prevent continued rocket attacks against Israel’s southern towns. In addition, Israel faces threats from more distant neighbors, in particular, Iran, an ally of Hezbollah and Hamas. The United States has threatened Syria, another ally of Iran, with military action and there is a risk that as a result of such military confrontation, Israel will be attacked.
 
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. Any hostilities involving Israel 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 the share price of publicly traded companies having operations in Israel, such as us. Similarly, Israeli corporations are limited in conducting business with entities from several countries. For example, in 2008, the Israeli legislature provided a law forbidding any investments in entities that transact business with Iran.
 
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Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions, could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face.
 
Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure 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 may be disrupted as a result of the obligation of management or key personnel to perform military service.
 
Our employees and consultants in Israel, including members of our senior management, may be obligated to perform up to one month, and in some cases longer periods, of annual military reserve duty until they reach the age of 40 (or older, for citizens who hold certain positions in the Israeli armed forces reserves), and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of our officers, employees and consultants. Such disruption could materially adversely affect our business and operations.
 
Exchange rate fluctuations between the U.S. dollar and the NIS currencies may negatively affect our earnings.
 
We incur expenses both in U.S. dollars and NIS, but our financial statements are denominated in U.S. dollars. As a result, we are exposed to the risks that the NIS may appreciate relative to the U.S. dollar, or the NIS instead devalues relative to the U.S. dollar, and 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 U.S. dollar cost of our operations in Israel would increase and our U.S. dollar-denominated results of operations would be adversely affected. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the U.S. dollar.
 
Our operations also could be adversely affected if we are unable to effectively protect ourselves against currency fluctuations in the future. We engage in short-term currency hedging activities. These measures, however, may not adequately protect us from material adverse effects due to the impact of inflation in Israel and United States or from fluctuations in the relative values of the dollar and foreign currencies in which we transact business, and may result in a financial loss. For further information, see Item 5 “Operating and Financial Review and Prospects” elsewhere in this Annual Report.
 
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We are entitled to significant tax benefits in Israel that may be reduced or eliminated in the future.
 
Our investment program in Israel has been granted “Beneficiary Enterprise” status and we are therefore eligible for significant tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law, which was significantly amended by an amendment effective April 1, 2005, or the 2005 Amendment, and further amended by an amendment effective January 1, 2011, or the 2011 Amendment.
 
For example, once we reach profitability for tax purposes, we will be exempt from corporate tax for a period of two years and will be subject to a reduced corporate tax rate of between 10% and 25% for the remainder of the benefits period, depending on the level of foreign investment in our Company in each year and on the period of when profitability is reached.
 
In order to remain eligible for the tax benefits of an investment program that is implemented in accordance with the provisions of the Investment Law, referred to as an “Approved Enterprise,” or a “Beneficiary Enterprise,” we must continue to meet certain conditions stipulated in the Investment Law and its regulations. If we do not meet these requirements, we may not be eligible to receive tax benefits and we could be required to refund any tax benefits that we may receive in the future, in whole or in part, with interest. Furthermore, the tax benefits available under the Investment Law may be terminated or reduced in the future. If these tax benefits are terminated, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies in 2017 was 24%. See “Item 10. Additional Information - E. Taxation.”
 
Additionally, if we increase our activities outside of Israel (for example, through acquisitions) our expanded activities might not be eligible for inclusion in future Israeli tax benefit programs. Finally, in the event of a distribution of a dividend from the income that will be tax exempt under the Investment Law, in addition to withholding tax at a rate of 15% (or a reduced rate under an applicable double tax treaty), we will be subject to tax at the corporate tax rate applicable to our Approved Enterprise’s and Beneficiary Enterprise’s income on the amount distributed in accordance with the reduced corporate tax applicable to such profits. See “Item 10. Additional Information - E. Taxation.”
 
Government authorities may question our tax positions or transfer pricing policies or change their laws in a manner that could increase our effective tax rate or otherwise harm our business.
 
We conduct operations with our Subsidiaries pursuant to transfer pricing arrangements. Transfer prices are prices that one company in a group of related companies charges to another member of the group for goods, services or the use of property. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arms’ length and that contemporaneous documentation is maintained to support the transfer prices. While we believe we have proper transfer pricing arrangements, our transfer pricing procedures are not binding on applicable tax authorities. Tax laws are continually changing and are subject to the interpretation of government agencies, which from time to time review and audit our business in the jurisdictions in which we conduct business throughout the world. If regulators challenge our tax positions, corporate structure, transfer pricing arrangements or intercompany transfers, we may be subject to fines and payment of back taxes, our effective tax rate may increase and our financial condition, results of operations and cash flow could be materially adversely affected.
 
In the past, we received Israeli government grants for certain of our research and development activities. The terms of those grants may require us, in addition to payment of royalties, to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel. We may be required to pay penalties in addition to repayment of the grants.
 
Our research and development efforts, during the period between 2003 through 2010 were financed in part through royalty-bearing grants, in an amount of $1.3 million that we received from the IIA. With respect to such grants we paid royalties at a rate of 3% to 3.5% on sales proceeds up to the total amount of grants received, linked to the dollar and bearing interest at an annual rate of LIBOR applicable to dollar deposits. Even though we have repaid in full these amounts, we will still be required to comply with the requirements of the Israeli Encouragement of Industrial Research and Development Law, 1984, or the R&D Law, and related regulations, with respect to those past grants. When a company develops know-how, technology or products using IIA grants, the terms of these grants and the R&D Law restrict the transfer outside of Israel of such know-how, and the manufacturing or manufacturing rights of such products, technologies or know-how, without the prior approval of the IIA. Therefore, if aspects of our technologies are deemed to have been developed with IIA funding, the discretionary approval of an IIA committee would be required for any transfer to third parties outside of Israel of know how or manufacturing or manufacturing rights related to those aspects of such technologies. Furthermore, the IIA may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel or may not grant such approvals at all.
 
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The transfer of IIA-supported technology or know-how outside of Israel may involve the payment of significant amounts, depending upon the value of the transferred technology or know-how, the amount of IIA support, the time of completion of the IIA-supported research project and other factors. These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with IIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA.
 
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, 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 merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a 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. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the company’s outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.
 
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to a shareholder whose country of residence does not have a tax treaty with Israel exempting such shareholder from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
 
These and other similar provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.
 
It may be difficult to enforce a judgment of a U.S. court against us and our officers and directors and the Israeli experts named in this Annual Report in Israel or the U.S., to assert United States securities laws claims in Israel or to serve process on our officers and directors and these experts.
 
We were incorporated in Israel. Substantially all of our executive officers and directors currently reside outside of the United States, and all of our assets and most of the assets of these persons are located outside of the United States. 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 necessarily be enforced by an Israeli court. It also may be difficult to affect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Additionally, it may be difficult for an investor, or any other person or entity, to initiate an action with respect to U.S. securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning 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 often involves the testimony of 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, it may be impossible to collect any damages awarded by either a U.S. or foreign court.
 
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The rights and responsibilities of a shareholder will be governed by Israeli law which differs 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 articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders typical corporations incorporated in the United States. In particular, a shareholder of an Israeli company has certain duties to act in good faith and fairness towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at the 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 related party transactions requiring shareholder approval. In addition, 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 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.
 
Risks Related to an Investment in Our Shares and ADSs
 
We may be a “passive foreign investment company,” or PFIC, for U.S. federal income tax purposes in the current taxable year or may become one in any subsequent taxable year. There generally would be negative tax consequences for U.S. taxpayers that are holders of our Ordinary Shares or ADSs if we are or were to become a PFIC.
 
We will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (1) at least 75% of our gross income is “passive income” or (2) on average at least 50% of our assets by value produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account. We believe that we will not be a PFIC for our current taxable year and do not expect to become a PFIC in the foreseeable future. The tests for determining PFIC status are applied annually, and it is difficult to make accurate projections of future income and assets which are relevant to this determination. In addition, our PFIC status may depend in part on the market value of our Ordinary Shares. Accordingly, there can be no assurance that we currently are not or will not become a PFIC in the future. If we are a PFIC in any taxable year during which a U.S. taxpayer holds our Ordinary Shares or ADSs, such U.S. taxpayer would be subject to certain adverse U.S. federal income tax rules. In particular, if the U.S. taxpayer did not make an election to treat us as a “qualified electing fund,” or QEF, or make a “mark-to-market” election, then “excess distributions” to the U.S. taxpayer, and any gain realized on the sale or other disposition of our Ordinary Shares or ADSs by the U.S. taxpayer: (1) would be allocated ratably over the U.S. taxpayer’s holding period for the Ordinary Shares (or ADSs, as the case may be); (2) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. In addition, if the IRS determines that we are a PFIC for a year with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. taxpayer to make a timely QEF or mark-to-market election. U.S. taxpayers that have held our Ordinary Shares or ADSs during a period when we were a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in subsequent years, subject to exceptions for U.S. taxpayer who made a timely QEF or mark-to-market election. A U.S. taxpayer can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto. Although we have no obligation to do so, we intend to notify U.S. taxpayers that hold our Ordinary Shares or ADSs if we believe we will be treated as a PFIC for any taxable year in order to enable U.S. taxpayers to consider whether to make a QEF election. In addition, we intend to furnish such U.S. taxpayers annually with information needed in order to complete IRS Form 8621 and to make and maintain a valid QEF election for any year in which we or any of our Subsidiaries are a PFIC. U.S. taxpayers that hold our Ordinary Shares or ADSs are strongly urged to consult their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner, and consequences to them of making a QEF or mark-to-market election with respect to our Ordinary Shares or ADSs in the event that we are a PFIC. See “Item 10. Additional Information - E. Taxation - U.S. Federal Income Tax Considerations” for additional information.
 
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The market prices of our Ordinary Shares and ADSs are subject to fluctuation, which could result in substantial losses by our investors.
 
The stock market in general and the market prices of our Ordinary Shares on the TASE and the ADSs on Nasdaq, in particular, are subject to fluctuation, and changes in these prices may be unrelated to our operating performance. The market price of our Ordinary Shares and ADSs are subject to a number of factors, including:
 
announcements of technological innovations or new products by us or others;
 
announcements by us of significant acquisitions, strategic partnerships, in-licensing, out-licensing, joint ventures or capital commitments;
 
expiration or terminations of licenses, research contracts or other collaboration agreements;
 
public concern as to the safety of our equipment we sell;
 
general market conditions;
 
the volatility of market prices for shares of medical devices companies generally;
 
success or failure of research and development projects;
 
departure of key personnel;
 
developments concerning intellectual property rights;
 
developments concerning regulatory approvals;
 
regulatory actions or investigations;
 
developments concerning standard-of-care in spine surgeries;
 
variations in our and our competitors’ results of operations;
 
changes in revenues, gross profits and earnings announced by us;
 
changes in estimates or recommendations by securities analysts, if our Ordinary Shares or the ADSs are covered by analysts;
 
changes in government regulations or patent decisions; and
 
general market conditions and other factors, including factors unrelated to our operating performance.
 
These factors may materially and adversely affect the market price of our Ordinary Shares and the ADSs and result in substantial losses by our investors.
 
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We do not know whether a market for the ADSs will be sustained or what the trading price of the ADSs will be and as a result it may be difficult to sell ADSs.
 
Although the ADSs trade on Nasdaq, an active trading market for the ADSs may not be sustained. It may be difficult to sell ADSs without depressing the market price for the ADSs or at all. As a result of these and other factors, holders of ADS may not be able to sell ADSs at or above their purchase price or at all. Further, an inactive market may also impair our ability to raise capital by selling ADSs and Ordinary Shares and may impair our ability to enter into strategic partnerships or acquire companies or products by using our Ordinary Shares as consideration.
 
Future sales of our Ordinary Shares or ADSs could reduce the market price of our Ordinary Shares and ADSs.
 
Substantial sales of our Ordinary Shares or ADSs, either on the TASE or on Nasdaq may cause the market price of our Ordinary Shares or ADSs to decline. All of our outstanding Ordinary Shares are registered and available for sale in Israel. Sales by us or our security holders of substantial amounts of our Ordinary Shares or ADSs, or the perception that these sales may occur in the future, could cause a reduction in the market price of our Ordinary Shares or ADSs.
 
The issuance of any additional Ordinary Shares, any additional ADSs, or any securities that are exercisable for or convertible into our Ordinary Shares or ADSs, may have an adverse effect on the market price of our Ordinary Shares and ADSs and will have a dilutive effect on our existing shareholders and holders of ADSs.
 
We do not intend to pay any cash dividends on our Ordinary Shares in the foreseeable future and, therefore, any return on your investment in our Ordinary Shares or ADSs must come from increases in the value and trading price of our Ordinary Shares and ADSs.
 
We have never declared or paid cash dividends on our Ordinary Shares and do not anticipate that we will pay any cash dividends on our Ordinary Shares in the foreseeable future; therefore, any return on your investment in our Ordinary Shares or ADSs must come from increases in the value and trading price of our Ordinary Shares and ADSs.
 
We intend to retain our earnings to finance the development and expenses of our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our board of directors may deem relevant.
 
Holders of ADSs may not receive the same distributions or dividends as those we make to the holders of our Ordinary Shares, and, in some limited circumstances, holders of ADSs may not receive dividends or other distributions on our Ordinary Shares and may not receive any value for them, if it is illegal or impractical to make them available to holders of ADSs.
 
The depositary for the ADSs has agreed to pay to holders of ADSs the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. Holders of ADSs will receive these distributions in proportion to the number of ordinary shares the held ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act, but that are not properly registered or distributed under an applicable exemption from registration. In addition, conversion into U.S. dollars from foreign currency that was part of a dividend made in respect of deposited Ordinary Shares may require the approval or license of, or a filing with, any government or agency thereof, which may be unobtainable. In these cases, the depositary may determine not to distribute such property and hold it as “deposited securities” or may seek to effect a substitute dividend or distribution, including net cash proceeds from the sale of the dividends that the depositary deems an equitable and practicable substitute. We have no obligation to register under U.S. securities laws any ADSs, Ordinary Shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Ordinary Shares, rights or anything else to holders of ADSs. In addition, the depositary may withhold from such dividends or distributions its fees and an amount on account of taxes or other governmental charges to the extent the depositary believes it is required to make such withholding. This means that holders of ADSs may not receive the same distributions or dividends as those we make to the holders of our Ordinary Shares, and, in some limited circumstances, may not receive any value for such distributions or dividends if it is illegal or impractical for us to make them available to holders of ADSs. These restrictions may cause a material decline in the value of the ADSs.
 
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Holders of ADSs must act through the depositary to exercise their rights as shareholders of our company.
 
Holders of ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying Ordinary Shares in accordance with the provisions of the deposit agreement for the ADSs. Under Israeli law, the minimum notice period required to convene a shareholders meeting is no less than 35 or 21 calendar days, depending on the proposals on the agenda for the shareholders meeting. When a shareholder meeting is convened, holders of ADSs may not receive sufficient notice of a shareholders’ meeting to permit them to withdraw their Ordinary Shares to allow them to cast their vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to holders of ADSs or carry out their voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to holders of ADSs in a timely manner, but we cannot assure holders that they will receive the voting materials in time to ensure that they can instruct the depositary to vote their ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote and they may lack recourse if their ADSs are not voted as they requested. In addition, in the capacity as a holder of ADSs, they will not be able to call a shareholders’ meeting.
 
Raising additional capital by issuing securities may cause dilution to existing shareholders.
 
We may need to raise substantial future capital to continue to complete commercialization of our products and the research and development and clinical and regulatory activities necessary to develop new products or for other corporate purposes. Our future capital requirements will depend on many factors, including:
 
the revenue generated by sales of our current and future products;
 
our ability to manage our inventory;
 
the expenses we incur in selling and marketing our products and supporting our growth;
 
the costs and timing of regulatory clearance or approvals for new products or upgrades or changes to our current products;
 
the rate of progress, cost, and success or failure of on-going development activities;
 
the emergence of competing or complementary technological developments;
 
the costs of filing, prosecuting, defending and enforcing any patent or license claims and other intellectual property rights, or participating in litigation related activities;
 
the terms and timing of any collaborative, licensing, or other arrangements that we may establish;
 
the acquisition of businesses, products and technologies; and
 
general economic conditions and interest rates, including the continuing weak conditions.
 
If we raise additional funds by issuing equity or convertible debt securities, we will reduce the percentage ownership of our then-existing shareholders, and these securities may have rights, preferences or privileges senior to those of our existing shareholders.
 
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We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
 
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years from our 2013 initial public offering in the United States. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved, to the extent applicable. In this Annual Report, we have included certain information about executive compensation related information that is not required by an emerging growth company. We cannot predict whether investors will find our Ordinary Shares or ADSs less attractive if we rely on these exemptions. If some investors find our Ordinary Shares or ADSs less attractive as a result, there may be a less active trading market for our Ordinary Shares or the ADSs and the price of our Ordinary Shares or the ADSs may be more volatile.
 
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We chose to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.
 
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
 
The trading market for our Ordinary Shares and ADSs depends on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade our stock or negatively change their opinion of our Ordinary Shares and ADSs, the price of our Ordinary Shares and ADSs would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
 
We may be subject to securities litigation, which is expensive and could divert management attention.
 
The price of our Ordinary Shares and ADSs may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We have been subjected to securities litigation and may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
 
Risks Associated with the Nasdaq Listing of the ADSs
 
Our Ordinary Shares and ADSs are traded on different markets and this may result in price variations.
 
Our Ordinary Shares have been traded on the TASE since August 2007. The ADSs commenced trading on the Nasdaq Capital Market in May 2013 and are currently traded on the Nasdaq Global Market. Trading in those securities on those markets takes place in different currencies (dollars on Nasdaq and NIS on the TASE), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). The trading prices of our securities on these two markets may differ due to these and other factors. Any decrease in the price of our securities on one of these markets could cause a decrease in the trading price of our securities on the other market.
 
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We incur costs as a result of ADSs trading on Nasdaq, and our management is required to devote substantial time to compliance initiatives and reporting requirements.
 
As a public company in the United States, we incur significant accounting, legal and other expenses as a result of the trading of the ADSs on Nasdaq. These include costs associated with corporate governance requirements of the SEC and Nasdaq rules, as well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act. These rules and regulations generate legal and financial compliance costs, investor relations costs, stock exchange listing fees and shareholder reporting costs, and made some activities more time consuming and costly. Any future changes in the laws and regulations affecting public companies in the United States and Israel, including Section 404 and other provisions of the Sarbanes-Oxley Act, the rules and regulations adopted by the SEC and the rules of Nasdaq, as well as applicable Israeli reporting requirements, for so long as they apply to us, will result in increased costs to us as we respond to such changes. These laws, rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain 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.
 
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of applicable SEC and Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic issuers.
 
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the rules of Nasdaq for domestic issuers. For instance, we follow home country practice in Israel with regard to, among other things, composition of the board of directors, director nomination procedures, approval of compensation of officers, and quorum at shareholders’ meetings. In addition, we follow our home country law, instead of the rules of Nasdaq which require that we obtain shareholder approval, for certain dilutive events, such as for 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 more 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 U.S. company listed on Nasdaq may provide less protection than is accorded to investors under the rules of Nasdaq applicable to domestic issuers.
 
In addition, as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
 
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
 
We are a “foreign private issuer,” as such term is defined in Rule 405 under the Securities Act, and therefore, we are not required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. Under Rule 405, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 29, 2018.
 
In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management is comprised of 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 to 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, more extensive and are subject to more demanding deadlines than the forms available to a foreign private issuer. For example, the annual report on Form 10-K requires domestic issuers to disclose executive compensation information on an individual basis with specific disclosure regarding the domestic compensation philosophy, objectives, annual total compensation (base salary, bonus, equity compensation) and potential payments in connection with change in control, retirement, death or disability, while the SEC forms applicable to foreign private issuers permit them to disclose compensation information on an aggregate basis if executive compensation disclosure on an individual basis is not required or otherwise has not been provided in the issuer’s home jurisdiction. We disclose individual compensation information, but this disclosure is not as comprehensive as that required of U.S. domestic issuers since we are not required to disclose more detailed information in Israel. We intend to continue this practice as long as it is permitted under the SEC’s rules and Israel’s rules do not require more detailed disclosure. If we lose our foreign private issuer status, we will have to file quarterly reports on Form 10-Q and we will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with good 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 Nasdaq that are available to foreign private issuers.
 
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If we are unable to continue to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, or our internal control over financial reporting is not effective, the reliability of our financial statements may be questioned and the price of our Ordinary Shares and the ADSs may suffer.
 
Section 404 of the Sarbanes-Oxley Act requires a company subject to the reporting requirements of the U.S. securities laws to do an annual comprehensive evaluation of its and its subsidiaries’ internal control over financial reporting. To comply with this statute, we are required to document and test our internal control procedures; our management is required to assess and issue a report concerning our internal control over financial reporting. In addition, our independent registered public accounting firm may be required to issue an opinion on the effectiveness of our internal control over financial reporting at a later date.
 
The continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming. Furthermore, as our business continues to grow both domestically and internationally, our internal controls will become more complex and will require significantly more resources and attention to ensure our internal controls remain effective overall. During the course of its testing, our management may identify material weaknesses or significant deficiencies, which may not be remedied in a timely manner. If our management cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm identifies material weaknesses in our internal control, investor confidence in our financial results may weaken, and the market price of our securities may suffer.
 
ITEM 4.
INFORMATION ON THE COMPANY
 
A.
History and Development of the Company
 
Our legal and commercial name is Mazor Robotics Ltd. We were incorporated in the State of Israel on September 12, 2000. In July 2003, we changed our name from Masor Surgical Technologies Ltd. to Mazor Surgical Technologies Ltd., and in 2010 we changed our name to Mazor Robotics Ltd. In August 2007, we completed our initial public offering in Israel, and our Ordinary Shares have since been traded on the TASE, under the symbol “MZOR.” In May 2013, ADSs representing our Ordinary Shares commenced trading on the Nasdaq Capital Market under the trading symbol “MZOR” and are currently traded on the Nasdaq Global Market. Each ADS represents two of our Ordinary Shares.
 
We are a public limited liability company and operate under the provisions of the Companies Law. Our registered office and principal place of business are located at 5 Shacham Street, North Industrial Park, Caesarea, 3088900, Israel. Our telephone number in Israel is +972-4-618-7100. Our website address is www.mazorrobotics.com. The information contained on our website or available through our website is not incorporated by reference into and should not be considered a part of this Annual Report and the reference to our website in this Annual Report is an inactive textual reference only.
 
In August 2004, we formed a wholly owned subsidiary in the State of Delaware under the name Mazor Surgical Technologies Inc. In October 2010, the U.S. Subsidiary changed its name to Mazor Robotics Inc. The U.S. Subsidiary has been appointed as our agent in the United States, and its registered office is located at 2711 Centerville Rd., Suite 400, Wilmington, New Castle, DE 19808.
 
In August 2014, we formed a wholly owned subsidiary in Singapore under the name Mazor Robotics Pte. Ltd and its registered office is located at 10 Anson Road, #26-04 International Plaza, Singapore 079903. This Singaporean subsidiary has been established to accommodate the clinical service activities we provide to our surgical systems sites in the Asia-Pacific region.
 
We engage in the development, production, marketing and servicing of innovative medical devices for supporting surgical robotic guided procedures in the field of orthopedics and neurosurgery. We are a leading innovator in spine and brain surgery and pioneered cutting-edge robotic guidance systems and complementary products in the spine and brain surgery market. These products may provide a safer surgical environment for patients, surgeons and operating room staff.
 
We operate in the field of computer assisted surgery (also known as CAS) that enables the use of surgical instruments with high precision and minimal invasiveness and that contributes to the safety of a wide range of surgical procedures. Mazor Robotics’ core precision guidance technology that is implemented in the Renaissance system and the Mazor X system is transforming spine surgery from freehand procedures to highly accurate, state-of-the-art, guided procedures that raise the standard of care with better clinical results. The Mazor X, Renaissance and SpineAssist (our predecessor to the Renaissance) systems have been used to perform a wide variety of spine procedures on over 32,000 patients worldwide (with over 220,000 implants placed). We are continuing the development of the Robotic Guidance Systems for additional spine and brain surgery procedures.
 
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On May 16, 2016, we entered into two strategic agreements with Medtronic.  One agreement is a two-phase, Exclusive Lead Sharing and Distribution Agreement which provides for co-promotion, co-development and, upon meeting certain milestones, potential exclusive global distribution of the Mazor X system for spinal surgeries, or the Distribution Agreement. The second agreement is a Purchase Agreement which provides for an equity investment by Medtronic, in Mazor. The Distribution Agreement and the Purchase Agreement, or collectively, the Medtronic Agreements are aimed at accelerating our growth and market reach by leveraging the strategic partnership for commercialization of the Mazor X system for spinal surgeries and development of synergistic products. With the combined expertise and experience of our two companies, we believe we can transform spine surgery for the benefit of more patients and those who treat them.
 
On July 12, 2016, we unveiled the Mazor X system, followed by the commercial launch of the system in October 2016.  The Mazor X system was developed with the goal of enhancing predictability and patient benefit, through the combination of analytical tools, multiple-source data, precision guidance, optical tracking, intra-op verification and connectivity technologies. The Mazor X platform is designed to expand the field of precision-guided spine surgery beyond trajectory guidance.
 
On August 30, 2017, we entered into the next phase of our strategic partnership with Medtronic, with Medtronic assuming exclusive worldwide distribution of the Mazor X system for spinal surgeries, and Medtronic making a $40 million third tranche investment in Mazor’s shares and warrants. This development follows are a result of the early achievement of certain sales and marketing milestones by both companies, as well as higher than expected global market acceptance and demand for the Mazor X system.
 
Principal Capital Expenditures
 
We had capital expenditures of approximately $2,364,000 in 2017, $4,263,000 in 2016 and $702,000 in 2015. Our capital expenditures consisted mainly of the purchase of machinery and equipment, development costs capitalized to intangible asset, systems used for training and demonstration and leasehold improvements. We have financed our capital expenditures from our available cash and short-term investment and equity offerings, and expect to continue to finance our capital expenditures in a similar manner in 2018. We expect our capital expenditures in 2018 will be approximately $1,700,000 and will include amounts expended towards manufacturing infrastructure.
 
B.
Business Overview
 
We are a medical device company developing and marketing innovative robotic guidance systems and complementary products. Our expertise is in robotic computerized and imaging-based systems, primarily in the field of spine surgery. Our Robotic Guidance Systems enable surgeons to advance from freehand surgical procedures to accurate, pre-planned, state-of-the-art, precision guided procedures. Our Robotic Guidance Systems are used in multiple types of spine surgeries, whether open or minimally invasive, for a variety of clinical indications in spine and brain surgery. Our Mazor X system, our Renaissance system and its predecessor have been used in over 32,000 spine surgeries, including fusion, correction of spinal deformities, biopsy collection, tumor excision and cement augmentations. Our Robotic Guidance Systems have the ability to improve clinical outcomes for patients, and may provide a safer surgical environment for surgeons and operating room staff and deliver economic value to hospitals and payors.
 
Technology Overview – Mazor Core
 
The Mazor Core Technology, used in our Mazor X and Renaissance surgical guidance systems, is the collaboration of four key technologies in Mazor’s systems to provide predictable, efficient and precise surgical procedures.
 
1) Surgical Planning Suite
 
Sophisticated 3D analytics and virtual tools developed to determine procedure goals and surgical plan.
 
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The suite of tools allow creation of a “surgical blueprint” that separates the surgeon’s analytical planning process from the actual surgery.
 
During surgery, the surgeon executes the plan as an efficient and predictable procedure with no anatomical surprises. Implants are pre-selected and prepped, the team knows what to expect.
 
2) Anatomy Recognition Engine
 
The advanced anatomy recognition engine reads images and recognizes anatomical features based on advanced and proprietary algorithms.
 
The engine is fundamental for planning and serves as the underlying technology for features such as vertebral segmentation, image registration and alignment calculations.

3) Patient Connection Platforms
 
Set of biocompatible devices that rigidly affix the robotic system/arm to the patient’s skeletal anatomy during surgery, ensuring precision through a stable, solid connection.
 
This unique feature maintains patient-machine unity during the operation and is a major contributor to accuracy.

4) Cross-Modality Image Registration
 
Sophisticated registration tool with the ability to analyze and match images from different modalities and body positions, e.g. pre-op CT with intra-op fluoroscopy.
 
Each vertebra is registered independently of the others and irrespective of modality, date of the image, or patient position.

Renaissance System

The key elements of the Renaissance system include our RBT Device, which is a portable, computer-controlled Stewart platform that spatially positions and orients surgical tools, our Renaissance Work Station, houses our proprietary software, and several mounting platforms we have designed to serve as an interface between the patient and the RBT Device. The Mazor Core technology implemented in the Renaissance system enables surgeons to perform procedures with a higher degree of accuracy and precision compared to the current freehand standard of care. A pre-operative plan for each patient is developed by the surgeon using our proprietary software based on a standard three-dimensional, or 3D, computed tomography, or CT, image. The surgeon performs the procedure using a patient connection platform attached to the RBT Device and is guided by the RBT Device to a precise location and trajectory along the spine or in the brain in accordance with the pre-operative plan. At the beginning of the surgical procedure, an automatic 3D synchronization process independently registers the location of the system relative to the position of the patient’s spine or in his brain and the pre-operative plan. Unlike conventional robotic surgery, where the robot performs the procedure guided by the surgeon, the Renaissance system guides the surgeon who performs the procedure in accordance with the pre-operative plan.
 
The Renaissance system is FDA–cleared, CE–marked and has regulatory clearances in several other markets, including China, Taiwan, Thailand, Canada, Russia, Singapore, Israel and Australia.
 
Mazor X System
 
The Mazor X system utilizes the underlying Mazor Core technology of the Renaissance and the cumulative experience in the operating room, with expanded features and capabilities. Key features of the Mazor X are sophisticated 3D planning software and advanced algorithms running on a workstation and a guidance system. The guidance system includes a surgical arm, an integrated 3D camera with spatial tracking and a surgeon control panel in the sterile area.  The Mazor X system’s platform integrates three processes: pre-op analytics, intra-op guidance, and intra-op verification. Pre-op analytics are performed using cutting-edge anatomy recognition abilities for surgical visualization and imaging-based 3D implant and trajectory placement planning. The planning may take place prior to the surgery or during the surgery using scan & plan, if a 3D image system is available in the operating room. Intra-op guidance utilizes precision mechanics and the surgical arm to guide tools and implants according to the surgical plan. Before instrumenting, the Mazor X eye camera provides intra-op verification of the surgical arm trajectory and position. Once verification is complete, the surgical arm and drill guide keep tools and implants on target for each trajectory. This process continues until all trajectories have been reached and implants are inserted safely and accurately into their planned position.
 
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In September 2015, we received 510(k) clearance from the FDA for the Mazor X system.
 
In April 2017, we received 510(k) clearance from the FDA for the Mazor X Align software, a spinal deformity correction planning software for the Mazor X system.
 
In September 2017, we received CE clearance for the Mazor X system.
 
Mazor Robotics’ products are currently active in 15 countries, with 12 distributors representing us in 18 countries.
 
Industry Overview - Spine
 
Spine Disorder Market Overview
 
Spine disorders are a leading driver of healthcare costs worldwide. Spine disorders also are a leading cause of disability among people aged between 19 and 45 in the United States, and are the most common cause of job-related disability. Spine disorders afflict women and men equally and are the second most common neurological ailment in the United States - only headaches are more common. In the United States, according to the Orthopedic Network News, there are approximately 1.48 million spinal operations performed annually.
 
We believe the spine disorder market will continue to grow as a result of a growing, aging and more active population and rising obesity rates, which all are expected to be key drivers in the continued growth of incidence of spine disorders. The U.S. Census Bureau projects that the 65 and older age group in the U.S. will almost double from 48 million in 2015 to 88 million in 2050. In addition, improvements in healthcare have led to increasing life expectancies worldwide and the opportunity to lead more active lifestyles at advanced ages. These trends are expected to generate increased demand for spine surgeries.
 
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Overview of Spine Disorders
 
Spine disorders range in severity, causing symptoms ranging from mild pain and loss of feeling to extreme pain and paralysis. These disorders are primarily caused by degenerative disc diseases, stenosis, deformity, osteoporosis, tumors and trauma.
 
Degenerative disc disease describes the most common type of spine disorder which primarily results from repetitive stresses experienced during the normal aging process. Disc degeneration occurs as the outer layer starts to shear and the inner cores of intervertebral discs lose elasticity and shrink. Over time, these changes can cause the discs to lose their normal height and shock-absorbing characteristics, which leads to back pain and reduced flexibility. Herniated discs are a common form of degenerative disc disease.
 
Lumbar stenosis is a condition whereby either the spinal canal or vertebral foramen becomes narrowed in the lower back impinging the nerves in the lumbar spine. This condition is often caused by the degenerative processes in the spine and the resulting compression can lead to back and leg pain. If the narrowing is substantial, it causes compression of the nerves and the painful symptoms of lumbar spinal stenosis.
 
Spine deformity is a term used to describe any variation in the natural curvature of the spine. Natural curves help the upper body maintain proper balance and alignment over the pelvis. Common forms of deformity include scoliosis, which is a lateral or side-to-side curvature of the spine, and kyphosis, which is an abnormal concave curvature leading to a rounded (humped) back.
 
Vertebral compression fractures are fractures of the vertebrae that result in the collapse of the vertebral body. These fractures, which can be very painful to the patient, are often the result of osteoporosis, which causes the vertebrae to weaken and become brittle, or spine tumors, but can also result from trauma.
 
Primary spine tumors are relatively rare. Benign tumors are typically removed surgically while malignant tumors are more difficult to treat and are often metastases which originate from tumors in other organs.
 
Current Treatments for Spine Disorders
 
Treatment alternatives for spine disorders range from non-operative conservative therapies to surgical interventions. Conservative therapies include bed rest, medication and physical therapy. Surgical treatments for spine disorders can be instrumented, which include the use of implants, or non-instrumented, which forego the use of any such implants. The most common instrumented treatment is spinal fusion, where two or more adjacent vertebrae are fused together with implants to restore disc height and provide stability.
 
Introduction of Minimally Invasive Surgery
 
Over the past 30 years, minimally invasive surgical techniques have transformed many surgical procedures. Compared to traditional open surgical techniques, minimally invasive techniques potentially offer benefits for patients, surgeons and hospitals. For patients, these techniques can result in significantly reduced trauma, risk of infections, faster convalescence and better aesthetic outcomes. For the surgeon, these techniques can reduce procedure-related complications and have the potential to reduce risks associated with more invasive procedures. For the hospital, these procedures can result in reduced hospital stays due to faster recovery times, lower rates of complications and a higher level of patient satisfaction.
 
Despite the potential benefits of minimally invasive spinal surgery techniques, they can also present several notable limitations, including the need for additional training for the surgeon, increased intraoperative use of X-ray radiation, and longer operations, and have been shown in some studies to lower the accuracy of implant placement. As a result, while minimally invasive approaches have seen substantial adoption in various surgical fields where procedures can be performed within existing anatomical cavities, they are currently used in only 10-15% of spinal fusion procedures which are currently performed in a minimally invasive approach, according to the SRS database (Hamilton et al. Spine 2011) and the Orthopedic Network News report from October 2016.
 
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Robot Assisted Surgery
 
We believe that the application of robotic technologies in minimally invasive surgical procedures represents the next generation in the evolution of the surgical technique. These technologies are being developed to provide surgeons with a more precise, repeatable and controlled ability to perform complex procedures. With the assistance of robotic technology, an increasing number of surgeons have been able to perform procedures previously limited to a small subset of highly-skilled surgeons. In addition, robotic technology has enabled these procedures to be performed in a more minimally invasive manner, requiring only small incisions, which result in reduced procedure related trauma, fewer infections and post-procedure complications, and reduced recovery and hospitalization times.
 
The Limitations of Current Spine Procedures
 
Although minimally invasive techniques have been widely adopted in many fields of surgery, they have had limited adoption in spine surgery. We believe that the principal barriers to the adoption of minimally invasive techniques for spine surgery are:
 
restricted or even no line-of-sight at the anatomical site;
 
cumbersome handling of surgical instruments, limiting the procedure;
 
dependence on two-dimensional imaging for three-dimensional surroundings; and
 
intra-operative exposure to radiation.
 
As a result, the majority of spine surgeries are performed freehand. According to a review of over 108,000 cases (Hamilton et al., Spine 2011) only 13.2% of spine surgeries are performed in a minimally invasive manner. This was echoed in a report by the 2016 Orthopedic Research Network reporting that cannulated pedicle screws (designed and used primarily for minimally invasive spine surgeries) have hovered between 9-15% since 2008. Although open freehand surgery allows for direct visualization of the anatomy, such surgeries may result in:
 
increased procedure-related blood loss, pain and scarring at the incision site;
 
increased likelihood of complications, such as infections;
 
slower recovery times and longer post-operative hospital stays; and
 
undesirable aesthetic outcomes.
 
Industry Overview - Brain
 
Neurosurgical Market Overview
 
It is estimated that 50 million Americans suffer from neurological illnesses, at an annual cost of over $450 billion in direct and indirect costs. Only a fraction of them are candidates for neurosurgical treatments, and fewer still require stereotactic brain surgeries.  Based on demographic trends, it is forecasted that the volume of intracranial neurosurgical procedures will continue to grow at about 1.2% per year. But this statistic does not take into account changes in indications for surgeries and new treatment options. New indications may increase the market potential, while new, less-invasive, treatment options may decrease the market potential for open neurosurgical treatments. Costs of procedures are expected to grow, driven by more sophisticated technologies and treatment options.
 
In 2016, there were about 35,000 stereotactic brain surgeries performed globally, in about 2,800 medical centers, almost half of them in the United States. Currently, three procedures, namely Deep Brain Stimulation (DBS), Stereoelectroencephalography (sEEG), and Stereotactic Brain Biopsies, account for over 95% of the stereotactic brain surgeries market.
 
Overview of Brain Biopsies
 
The incidence of primary brain tumors for 2013 is estimated by the American Brain Tumor Association at almost 70,000 cases. Of these cases, almost 25,000 cases are malignancies and over 45,000 are benign. The majority of brain tumors are metastases from malignancies in other organs (mainly lung and breast), but statistics for brain metastases are not readily available. Therefore, the incidence of primary and secondary brain tumors is estimated at more than 140,000 cases annually.
 
In some of the cases, the CT- or Magnetic Resonance Imaging (MRI) generated images are insufficient for the determination of the appropriate treatment option. In such cases a biopsy is usually indicated. It is estimated that in 2017, 60,000 biopsies were performed.
 
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Overview of Deep Brain Stimulation (DBS) Electrode Placement Surgeries
 
The FDA approved DBS as a treatment for essential tremor in 1997, later adding further indications, including Parkinson’s Disease (2002), dystonia (2003) and Obsessive Compulsive Disorder (OCD) (2009). Several other indications are in various phases of research, like chronic pain, various affective disorders, including major depression, and other neurological disorders, mainly in severe cases and/or refractory to medication or other treatments.
 
In 2017, there were over 18,000 DBS surgeries globally, of which over 10,000 were performed in the United States. Parkinson’s disease accounts for about 75-80% of the DBS surgeries, even though of the 1% of people over the age of 60 who are affected by Parkinson’s disease, only 1 to 10% are eligible for DBS according to treatment guidelines. The DBS market was estimated at $493 million in 2014 and expected to grow at about 7% CAGR to $692 million in 2019.
 
Overview of Stereoelectroencephalography (sEEG)
 
Introduced in March 2009, by surgeons at the Cleveland Clinic, the objective of sEEG is to locate the epileptic focus/foci (point of origin) in cases refractory to conservative treatment that necessitate surgical intervention. The patients are frequently under 10 years old and remain hospitalized for monitoring for 1-2 weeks following the sEEG procedure.  It is estimated that there are about 5,000 sEEG procedures annually, of which about 3,000 are performed in the United States, in about 300 medical centers. Medtech SA, which was recently purchased by Zimmer Biomet Holdings Inc., is considered the market leader in this procedure, with systems in 35 medical centers performing sEEG currently.
 
Current Neurosurgical Options
 
Treatment options for neurological illnesses range widely by diagnosis and disease state from “watchful waiting” to non-operative conservative therapies (e.g., medications), External Beam Radiation Therapy, and a number of surgical interventions.
 
When neurosurgical intervention procedures are indicated, much care is taken to avoid damage to neighboring regions of the brain and the vascular system, as well as along the surgical pathway to the lesion. Careful planning of the surgical approach is based on advanced imaging modalities. Execution of the required precise spatial localization according to the surgical plan is performed using intra-operative guidance systems, which are generally categorized as either frame-based or frameless systems. Frame-based systems, or standard stereotaxy, are considered a more accurate option but, among their limitations are that they are cumbersome to use, difficult to modify trajectories during surgery, and uncomfortable for the patient. Frameless trackable/fiducial marker-based systems use image guided navigation or patient-specific, custom-made mounts to improve accuracy.
 
Of the 19,700 stereotactic biopsies performed in 2010, about 17,000 were performed with a frame-based system and about 2,700 used a frameless system. It was estimated in 2011 that by 2015 frameless systems will be used more frequently in these procedures, from 13.7% of the cases to over 20%.
 
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There were approximately 18,000 DBS procedures performed in 2017 predominantly with the frameless systems.
 
An emerging market segment in brain surgery is robotic neurosurgical systems. Of the various developments and companies involved in this field there are three main players in this market segment which are commercially available: Mazor Robotics, Zimmer Biomet (Medtech) and Renishaw.
 
The Limitations of Current Neurosurgical Procedures
 
Frame-based systems limit the surgeon’s movement and are difficult to redirect intra-operatively. The rigid frames are cumbersome for the patients and the complex set-up can make operating times longer. Additionally, they are highly uncomfortable and daunting for the patients and can reduce their cooperation during awake DBS surgeries (which comprises 95% of all DBS surgeries).
 
Navigation based systems (e.g. Brainlab AG’s Curve and Medtronic Stealth) depend on direct line of sight between an infra-red camera and specialized, reflective markers. These systems are considered to be less accurate by surgeons than frame-based systems and not accurate enough for DBS procedures. Their online representation of spatial location in real-time does not represent the actual location of the surgical instruments but rather the system’s perception of the location of the instruments. The representation of the instruments in three planes can lengthen the learning curve of these systems as the surgeon needs to correct the position in a single plane in a three dimensional world.
 
The Mazor Robotics Solutions
 
Our Robotic Guidance Systems enable surgeons to advance from freehand surgical procedures to accurate, state-of-the-art, precision guided procedures. Our Robotic Guidance Systems have the ability to improve clinical outcomes for patients, may provide a safer surgical environment for surgeons and operating room staff by possibly reducing exposure to radiation, and deliver economic value to hospitals and payors. We believe our Mazor X and Renaissance systems offer the following benefits to patients, surgeons and hospitals:
 
Potential Reduction in Surgical Complications and Revision Surgeries.
 
At the North American Spine Society (NASS) Annual Meeting in 2017, a group including 10 investigators presented interim results from the first multi-center prospective study of robotic-guided spine surgery, also known as the MIS ReFRESH study. The results demonstrate that spinal surgeries performed using Mazor Robotics’ proprietary Mazor Core technology have a five-fold reduction in surgical complications and a seven-fold reduction in revision surgeries, compared to freehand-based minimally invasive lumbar fusion surgeries. MIS ReFRESH is a prospective, comparative, multi-center study in robotic-guided spine surgery using the Renaissance Guidance System. The study is designed to assess the clinical impact of robotic-guidance, compared to fluoro-guidance on the incidence of clinical complications and revisions and use of intra-operative fluoroscopy. The prospective study was initiated in 2014.
 
There were 379 patients enrolled in the study, of which 287 were in the robotic-guided arm and 92 in the fluoro-guided control arm. When accounting for multiple parameters in the statistical analysis, the statistically significant interim results demonstrated the following:
 
          Relative Risk (RR) for an adverse event or complication was 5.3 times higher in the fluoro-guided control arm compared to the robotic guidance arm (p<0.001); and
 
          RR for revision surgery was 7.1 times higher for a fluoro-guided surgery compared to the robotic guided cases (p=0.012).
 
Reproducible Precision and Accuracy. Clinical studies performed with the Renaissance system have shown very high levels of accuracy, with most ranging between 98.5-100% accurately placed implants. By contrast, the scientific literature on accuracy of freehand implant placement varies; however, a meta-analysis of 12,299 thoracolumbar screws, published in Spine, demonstrated 90.3% of implants were placed accurately in freehand surgeries.
 
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Use in a Variety of Procedures. Our Robotic Guidance Systems are particularly advantageous in complex spinal procedures, such as the correction of scoliosis and other spinal deformities, long fusions and repeat/revision surgery. Precision and planning is of particular importance in complex procedures where accuracy and precision are a challenge for even the most experienced surgeons.
 
Possible Reduced Exposure to Radiation. Spine surgeries, particularly minimally invasive surgeries, require the use of high levels of X-ray imaging, and exposes surgeons and patients to harmful radiation. The use of our Robotic Guidance systems may significantly reduce the need for X-ray imaging during the surgery and provide for a safe overall surgical environment.
 
Ease of Use. Our Robotic Guidance Systems leverage and complement the surgical skills and techniques already familiar to the surgeon. This familiarity in approach combined with greater accuracy and precision accelerates the learning curve, making it usable by surgeons with a broad range of training and skills.
 
Reduced Costs. We believe the use of our Robotic Guidance Systems result in shorter hospital stays due to faster recovery times, lower rates of complications and a higher level of patient satisfaction.
 
Clinical Differentiation. We believe the benefits mentioned above will help surgeons and hospitals differentiate themselves, attracting more patients to seek medical care from them, over competitors offering less innovative and precise alternatives.
 
Our Product Strategy
 
Mazor is a patient-focused, global innovative leader, with the goal of delivering advanced image based robotic guidance products in and out of spine.
 
Our product strategy to achieve this goal includes the following:
 
Global Commercialization of our Robotic Guidance Systems
 
We continue to focus on commercializing our Robotic Guidance Systems by expanding our sales and marketing infrastructure through internal resources and externally through arrangements, such as through the Medtronic Agreements. We have a presence in more than 180 hospitals in 15 countries, including over 110 Robotic Guidance Systems installed in the United States. Within the United States alone the addressable market includes over 2,000 hospitals and surgical centers, creating significant opportunity for us to expand our presence and accelerate our revenue growth. 
 
·
Renaissance strategy
 
The sales efforts for the Renaissance system is driven by our global sales team and our international distribution partners (other than Medtronic). Mazor is targeting smaller hospitals and Ambulatory Surgery Centers (ASCs) by focusing on the value pricing for the Renaissance and segmenting by case volume and system costs. Mazor is not competing with Medtronic. Instead, there is a goal to ensure that any site with any budget selects a Mazor Core technology system. Internationally, we continue to work with our partners to penetrate markets with the Renaissance system.
 
Mazor X Strategy – Global commercialization partnership with Medtronic
 
Effective September 18, 2017, Medtronic assumed global spine market commercial responsibility for Mazor X systems.  In late October, Medtronic also assumed responsibility for sales of disposables and case support. Their responsibility is to perform all go to market activities globally, including full responsibility for marketing, sales activities and market education to continue and successfully penetrate the spine market with the Mazor X systems.  The agreement with Medtronic includes mutually agreed annual minimums for purchase of Mazor X systems. Over the next four and a half years these annual minimums could result in the cumulative purchase of hundreds of Mazor X systems, which would drive improvement in Mazor’s financial results during the next several years.  The sales and marketing effort of Medtronic is expanding beyond the United States to target markets all around the world in accordance with our regulatory work plan.
 
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Strengthen and Operate a Global Service Organization
 
As responsibility for commercialization of Mazor X for spine surgeries transitioned to Medtronic, Mazor maintained the important role of providing service to the growing global installed base of systems both for Mazor X as well as the Renaissance system.  This contributes to our financial model and keeps us closely connected to the market allowing us to be inspired with customer needs and to identify opportunities for further developments and improvements.
 
Ongoing Innovation - Invest in research and development
 
We will continue to make significant investments in research and development including investments to upgrade the hardware and software components of our Robotic Guidance Systems and to develop additional applications using our proprietary technologies and to develop future products. In addition, as part of the Medtronic Agreements we are collaborating with Medtronic to further develop additional innovative solutions with our Mazor X system in combination with Medtronic product offerings for spinal applications.
 
Accelerated Adoption
 
We intend to continue to explore new ways to achieve this by striving for partnerships with strategic players and to gain the benefits associated with the synergy between Mazor and potential partners.
 
New Applications
 
Explore new ways to utilize our core knowledge and intellectual property to enter new applications. We intend to achieve this by our continued effort of our research and development team and potentially with synergy between Mazor and potential partners in areas out of spine surgery.
 
Our Products
 
Components of the Mazor X system - A surgical assurance platform for spine surgery, integrating data sources, analytical tools, guidance and imaging technologies to maximize procedure predictability and patient benefit. The Mazor X system, which is based on the same Mazor Core technology as the Renaissance, expands beyond trajectory guidance to address additional needs of spine surgeons and their patients.
 
The Mazor X Platform includes:
 
Mazor X Robotic Guidance System includes the following key components:
 
o
A precision Surgical Arm - The Surgical Arm unique design and innovative structure comprises a set of six joints, enabling the arm to reach a wide variety of trajectories.  The Surgical Arm is controlled by the Mazor X Workstation computer and a Central Control Unit. Arm movement is as a result of the surgical plan (described below) and is monitored in a closed loop controlling process.
 
o
An integrated camera with spatial tracking – The Mazor X-Eye camera provides positioning verification and enables tracking functionality.
 
o
A surgeon control panel in the sterile area – The surgeon’s screen is a LCD screen mounted on a movable screen arm located at the top of the Robotic System. Use of this multi-touch screen provides the surgeon with a close and convenient method of interaction with the system. Information displayed on the surgeon’s screen and Workstation monitor is dynamically updated in real-time, simultaneously.
 
Mazor X Workstation running sophisticated software and including a large touch screen serving as a user control panel, hardware components and storage for the Robotic Guidance System when not in use. The Workstation is the main console from which the user interacts with the Mazor X system. The Workstation is a compact, fully-portable unit that facilitates easy mounting of the Surgical Arm onto an operating room table in preparation for an operation.
 
Mazor X Spine Disposables. Mazor X disposable kits are designed to be easily adapted to the surgical arm for a multitude of surgical applications.
 
Mazor X Spine Accessories. Mazor X accessories include trays of reusable surgical tools.
 
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Surgical Workflow using Mazor X system
 
Surgical workflow using Mazor X involves the following basic 3D Planning and Intra-Operative steps:
 
3D Planning
 
Pre-Op Analytics – 3D Planning is performed using cutting-edge anatomy recognition and vertebral segmentation algorithms for surgical visualization based on a patient’s images. The resulting Surgical Plan includes implant and trajectory placement planning.  The Surgical Plan may be created prior to the surgery or during the surgery using Scan & Plan.

Automated Anatomy Recognition
Vertebral Segmentation
 
Mazor X Scan & Plan– Utilizes 3D intra-operative imaging systems, such as a Medtronic O-arm system, to perform a patient scan that is then used to create the surgical plan instead of a pre-op CT. Mazor X Scan & Plan is especially useful in trauma cases or when a pre-op CT is not available.
 
Intra-Operative Procedure steps:
 
o
Import the Pre-Op Analytics plan into the Mazor X Workstation
 
o
Attachment of Hardware - The patient connection platform is rigidly attached to the patient’s spine to ensure that maximum accuracy is maintained throughout the surgical procedure, even if patient movement occurs.
 
o
Perform a 3Define Scan – This reconstructs the 3D volume to assess the working area for the system.
 
o
3D synchronization - To execute the surgical plan, it is necessary to match the CT-based plan with the patient’s spine through a CT-to-fluoro registration process. The surgical arm position is marked by a proprietary 3D Marker which is attached to it. Two fluoroscopic images of the 3D marker and the spine are taken (anterior-posterior and oblique views). Mazor X  software then automatically matches the vertebrae seen in the fluoroscopic images to those in the pre-operative CT. This automatic registration process is critical for the software to identify the location of the surgical arm relative to the patient’s spine. It allows the software to calculate the motion necessary for executing planned trajectories. The accuracy of the registration process is confirmed by the surgeon after visual verification for each vertebra.

 
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o
Intra-operative verification - Before instrumenting, the Mazor X Eye camera provides intra-op verification of the surgical arm trajectory and position
 
 
o
Intra-operative guidance for surgical execution- Utilizes precision surgical arm to guide tools and implants at the right trajectory according to the surgical plan.
 
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o
Perform surgical procedure
 
Mazor X Align software – An advanced application that will run on the Mazor X platform. Mazor X Align uses advanced measurement and visualization tools to create a simulation of the overall spinal alignment before surgery. Mazor X Align leverages the Mazor technology experience with tools for placement and trajectory planning, for predictable planning of the entire spine alignment.
 
In April 2017, we received 510(k) clearance from the FDA for the Mazor X Align software, a spinal deformity correction planning software for the Mazor X system. The Mazor X Align is being integrated for evaluation into the Mazor X platform of selected sites in 2018.
 
 
Specialized applications (under development):
 
o
ArcAid – The ArcAid custom bends rods on-site for personalized patient spinal correction. ArcAid bends according to a personalized rod bending blueprint, derived from the Mazor X Align, to provide the best fit to the desired corrected spinal alignment.
 
o
Co-development applications with Medtronic – Mazor and Medtronic have defined a joint  roadmap for co-development whose goals include integration of Medtronic’s implant and navigation technology and guidewireless implants into the Mazor X and development of complete procedural solutions.
 
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Components of the Renaissance system
 
RBT Device. Our RBT Device is a portable, computer-controlled Stewart platform that spatially positions and orients surgical tools intra-operatively in accordance with the planned surgical blueprint. All RBT Device movements are a result of the pre-operative plan and are monitored by a closed-loop control process.
 
Renaissance Workstation. The RBT Device is housed in our Renaissance Workstation, a mobile workstation that houses our proprietary software which also contains the controllers for the RBT Device, image processing unit, electronics, computer and graphical user interface software. It is equipped with a control panel, including a multi-touch screen monitor. The Renaissance Workstation is used both for pre-operative planning of the procedure, as well as for intra-operative control of the system to implement the pre-operative plan.
 
Mounting platforms. There are several different mounting platforms that serve as an interface and reference frame between the patient and the RBT Device. All are rigidly attached to the patient’s spine or skull to maintain accuracy, despite breathing and other minor patient movements. The mounting platforms are selected by the surgeon for each procedure based on the surgical approach and surgeon’s preference.
 
Renaissance Spine Disposables. Renaissance disposable kits are designed to easily adapt the RBT Device to a multitude of surgical applications and for the different mounting platforms utilized by the surgeon.
 
Renaissance Spine Accessories. Renaissance accessories include trays of reusable surgical tools.
 
Surgical Workflow using Renaissance for Spine procedures
 
Surgical workflow using Renaissance involves four basic steps:
 
pre-operative planning;
 
attachment of hardware;
 
3D synchronization; and
 
surgical execution.
 
Pre-operative planning. A CT scan of the patient’s spine is uploaded to Renaissance software to create a detailed 3D model of the patient’s spine. This stage enables accurate visualization of the patient’s spinal anatomy and condition, and enables the creation of a customized surgical plan in a virtual 3D environment. In addition, pre-operative planning provides better preparation for each surgery, identifies anatomical challenges, and predefines trajectories for the implants. The surgeon selects implant sizes optimized for achieving the best surgical outcome. All pre-operative planning can be performed on a personal computer with our proprietary software. To enhance safety, the pre-operative “blueprint” can be reviewed in a virtual video mode in our planning software, which provides a slice-by-slice image display in all three surgical planes, as well as a full 3D review of the surgical blueprint (Fig. 1).

 
 
 
Figure 1: Planning Software and 3D visualization of planning
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Attachment of hardware. In the operating room, one of a few Renaissance mounting options is selected in accordance with the clinical indication and surgeon’s preference. The mounting platform is rigidly attached to the patient’s spine or skull to ensure that maximum accuracy is maintained throughout the surgical procedure, even if patient movement occurs.
 
Three-dimensional (3D) synchronization. To execute the surgical blueprint, it is necessary to match the CT-based plan with the patient’s spine and the mounting platform. The mounting platform’s spatial location is marked by a proprietary 3D Marker which is attached to it. Two fluoroscopic images of the 3D marker and the spine are taken (anterior-posterior and oblique views). Renaissance software then automatically matches the vertebrae seen in the fluoroscopic images to those in the pre-operative CT. This automatic registration process is critical for the software to identify the location of the mounting platform relative to the patient’s spine. It allows the software to calculate the motion necessary for the RBT Device. The accuracy of the 3D synchronization process is confirmed by the surgeon after visual verification for each vertebra.

 
Figure 2: 3D Marker; C-arm in two positions taking registration images for 3D Synchronization process
 
Surgical execution. Once the 3D Synchronization is completed, the RBT Device is attached to the mounting platform based on instructions that are defined by the software after processing registration data with the pre-operative planning. Upon activation by the surgeon, the RBT Device moves an arm that is attached to it, and positions it at the location so that its trajectory is precisely aligned with the pre-operative plan. A cannula which is passed through the arm, along the line of the trajectory, is used by the surgeon to guide the surgical tools and drills used in the surgery. This process is repeated for each vertebrae until the surgeon completes the instrumentation according to the pre-operative plan and intraoperative clinical judgment.
 
 
Figure 3: RBT Device (with an arm connected to it) on Clamp Mount ready to guide the surgeon
 
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Surgical Workflow using Renaissance for Brain procedures
 
We have developed the Renaissance Brain Module, a new application of our Renaissance system intended to provide precise control over the insertion of surgical instruments (drills, cannulas, electrodes, needles, etc.) during stereotactic brain surgery. The Renaissance Brain Module can be used for guiding high accuracy linear trajectories into the brain. Our head-mounted Renaissance Brain Module was cleared by the FDA in July 2012 and CE-marked in August 2012. We commercially launched the Renaissance Brain Module at the annual meeting of the American Association of Neurological Surgeons in April 2014.
 
The Renaissance Brain Module utilizes a small, frameless platform with three points of fixation to the skull to provide highly accurate access to the areas of the brain where surgical intervention is needed. This helps to minimize incisions and scarring while providing surgeons with high versatility in their surgical approach as well as facilitating intra-operative changes of trajectories.
 
Surgical workflow using the Renaissance Brain Module for brain surgery involves four basic steps:
 
pre-operative planning;
 
attachment of hardware (mounting platform);
 
synchronization; and
 
surgical execution.
 
Pre-operative planning: A Renaissance brain procedure usually begins with a pre-operative MRI scan of the patient. The scan is uploaded into Renaissance’s pre-operative 3D software for surgeons to plan the optimal trajectories prior to the procedure. Sometimes other imaging studies are loaded and fused together to provide additional layers of information such as Magnetic Resonance Angiography and CT.
 
 
Figure 4: Planning Software
 
Attachment of hardware: A small platform is mounted to the skull using local anesthesia. This can be a less-invasive and faster approach compared to the larger frames that are traditionally used during these procedures. The Renaissance Brain Module’s smaller platform may also improve patient comfort and increase freedom of movement. It also enables trajectories that are beyond the working volume of other guidance systems.
 
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Figure 5: Mounting of the platform to the skull
 
Synchronization: A proprietary Star Marker is attached to the platform and a CT scan is taken. The CT scan is then fused with the pre-operative plan created by the surgeon with the Renaissance software. This correlates the virtual plan with the physical location of the patient and the attached mounting platform. Based on this information, the software controls the kinematics of the RBT Device to provide the surgeon with the desired trajectories above the patient’s skull.
 
 
Figure 6: Star Marker attached to the mounting platform on the patient’s head, while a CT scan is taken for the synchronization with the pre-operative plan.
 
Surgical execution: After the scans are synchronized, the RBT Device is attached to the mounting platform based on instructions that are defined by the software after processing registration data with the pre-operative planning. Upon activation by the surgeon, the RBT Device moves an arm that is attached to it, and positions it at the location so that its trajectory is precisely aligned with the pre-operative plan.
 
 
Figure 7: RBT Device (with an arm connected to it) mounted ready to guide the surgeon.
 
We collaborated with Alpha-Omega Ltd., a manufacturer of actuators that advance electrodes into the patient’s brain. The first in-vivo procedure using the Renaissance system was performed in August 2013.
 
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Mazor’s “PRO” Solutions
 
In October 2015, we launched the ‘PRO’ (Predictable Renaissance Operation) Solutions at the annual meeting of the North American Spine Society (NASS) which was held in Chicago, IL. The PRO Solutions are designed to diversify Renaissance procedures allowing additional options and flexibility to the users and include:
 
PRO Scan & Plan
 
This application is designed to obviate the need for a pre-operative CT scan by using an available intra-operative 3D imaging system (fluoroscopy- or CT-based). This 3D scan is performed after attaching the selected Renaissance mounting system, with a spatial marker, to the patient. When using this application, there is no need to correlate the plan with the patient’s location relative to the RBT Device, as the 3D synchronization process is inherent to the image acquisition process. Once the 3D images are acquired, the surgeon utilizes them to plan the operation based on these images in the operating room.
 
PROlat Posterior guided instrumentation in the lateral decubitus position
 
PROlat enables placement of pedicle screws using a posterior approach while the patient is in the lateral decubitus position. Maintaining the patient in the lateral position for insertion of implants, following interbody introduction, can significantly shorten the surgery time and reduce the potential for unnecessary risks to the patient.
 
Other Potential Applications
 
We believe that with further research and development of our technology, we can develop applications for other areas of the body or for additional applications within brain and spine surgeries. Should we elect to develop and commercialize additional potential applications of Renaissance and Mazor X within or outside of the brain and spine surgery markets, we will need to seek the appropriate marketing clearance from the FDA and any other required regulatory approvals for such applications.
 
Sales and Marketing
 
We are continuing to develop a sales and marketing organization that consists of a capital sales team, a clinical sales team and a marketing team. Our sales and marketing team is comprised of executives with experience from major surgical robotic technology companies including Intuitive Surgical Inc., Johnson and Johnson, Hansen Medical Inc., Stereotaxis Inc. and others. The capital sales team drives capital equipment sales of Renaissance and Mazor X and the associated applications, while the clinical sales team focuses on the further penetration of existing clients through education marketing activities and training.
 
Our sales and marketing organization underwent changes upon entry into the second phase of the Medtronic Agreements which we entered into on August 30, 2017. As of September 18, 2017, Medtronic assumed global responsibility for the sales, marketing and clinical support of the Mazor X for spinal applications starting in the U.S. and gradually entering new markets in Europe and APAC starting in 2018. In order to assure continuation approximately 30 members of our clinical and sales teams transferred to Medtronic and continue to focus on sales of the Mazor X system.
 
Following these changes, the Mazor X sales, clinical support and marketing activities addressing the spine surgery market, are performed by our strategic partner, Medtronic, globally. We are continuing to develop a sales and marketing organization that consists of a global sales team, in combination with a distributor support team. The Mazor global sales team drives capital equipment sales of Renaissance and supports the activities of Medtronic with the sales and marketing of Mazor X systems and the associated applications. The Mazor clinical team focuses on the further penetration of existing clients through education marketing activities and training including supporting cases using the Renaissance activities.
 
As of December 31, 2017, our U.S. sales team had a total of 58 employees. The U.S. Commercial Renaissance team includes a Vice President of Global Renaissance Business, 45 Renaissance clinical representatives, five regional directors and two sales directors. In addition, our U.S. sales team includes five team members who are dedicated to Mazor X. The international sales team includes the Vice President for Sales, one capital sales director, one clinical sales director and two clinical sales representatives. The international sales team sells mainly through distributors covering nine countries in Europe and eight countries in the Asia-Pacific region. Together with the marketing team, they are responsible for defining and executing our global commercialization strategy.
 
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Our product and marketing team includes 11 members including one part-time employee, and including five members in the U.S. based team. In addition, we have one training specialist in charge of coordinating and providing training to new and existing customers. Three members of our training team joined Medtronic as part of the second phase of the lead sharing.
 
Our sales and marketing goals are to continue to drive capital equipment sales of our Robotic Guidance Systems and associated applications and to generate recurring revenue through sales of disposable products and service contracts. To achieve these goals, we must continue to promote adoption and build demand for the procedure among patients through the following sales and marketing strategy:
 
Facilitate independent clinical research by surgeons. We collaborate with surgeons to conduct research on the implementation, clinical outcomes, radiation exposure and other variables which are inherent to, or derived from, the adoption and utilization of Robotic Guidance Systems in a surgical spine program.
 
Encourage medical facilities to embark on a marketing program that would promote and publicize their Robotic Guidance System-based spine program. We work with hospitals and help them to educate surgeons, referring physicians and patients regarding the clinical benefits that Robotic Guidance Systems provide. This increased patient awareness in the community regarding such benefits has the potential to improve quality of care for patients undergoing procedures using our products.
 
Training and Education. We and our strategic partner, Medtronic train and educate through a variety of activities such as observing Robotic Guidance Systems cases, participating in bio-skills workshops to provide prospective customers with hands-on experience by operating on a cadaver using the Robotic Guidance Systems system and participating in peer-to-peer interactions. We also offer comprehensive and advanced training to our surgeons and operating room staff.
 
The generation of recurring revenues through sales of our disposable products and service contracts is an important part of our Robotic Guidance Systems business model. We anticipate that as we leverage each new installation of our Robotic Guidance Systems to generate recurring sales of disposable products our recurring revenues will grow. Because of the technical design and programming of our Robotic Guidance Systems, the system only works with Mazor’s proprietary disposable kits. We also offer annual service contracts that provide maintenance and support services related to our Robotic Guidance Systems beyond the basic one-year warranty period.
 
We and Medtronic provide training to surgeons and hospital staff on the use of our Robotic Guidance Systems. Through training we are increasing familiarity with our Robotic Guidance Systems and helping ensure safe and proper usage of our equipment and products by surgeons and hospitals, which we hope enables seamless adoption of our Robotic Guidance Systems. The presence of our representatives in the hospitals also provides us with immediate feedback and understanding of our customers’ preferences and requirements in clinical conditions.
 
Seasonality of Business
 
While our business is growing and changing rapidly, we believe it is subject to quarterly seasonal fluctuations because of customary capital expenditure trends by hospitals due to various hospital budget considerations which are not in our control. Hospitals tend to group purchases at the beginning of their budgetary cycle, which is different among hospitals. In addition, sales through distributors, can lead to seasonal fluctuations.  Therefore, it is hard to predict results of a certain quarter and some quarters may be weaker than others. For the year ended December 31, 2017, no single hospital customer accounted for more than ten percent of our total revenue and the loss of any single hospital customer is not expected to have a material adverse effect on us. However, as a result of the Medtronic Distribution Agreement, Medtronic accounts for more than ten percent of our total revenue for the year ended December 31, 2017, with revenues of approximately $14,400,000.
 
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Intellectual Property
 
We seek patent protection for our products and technologies in the United States and internationally. Our policy is to pursue, maintain and defend patent rights developed internally and to protect the technology, inventions and improvements that are commercially important to the development of our business.
 
We own 20 U.S. patents. In addition, we have filed in the United States eight additional patent applications and two provisional patent applications. A provisional patent application is a preliminary application that can be filed less formally than a non-provisional application, and establishes a priority date for the patenting process for the invention disclosed therein.
 
We have also licensed five U.S. patents. In addition, we own forty-two patents, grouped in eight families of separate inventions that were granted in other countries. We also have two further applications in which claims were allowed and grant is awaited. We also have eleven pending patent applications outside of United States, grouped in seven families of separate inventions. We also have seven PCT (Patent Cooperation Treaty) international patent applications. A PCT application is an application made in multiple countries, which ultimately needs converting into National Phases in separate countries. All of our patents and patent applications are in the areas of computer-assisted surgery, robotics, imaging and implants. Our patents expire between the years 2021 and 2033. Certain of our in-licensed patents have royalty obligations.
 
We cannot be sure that any patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future. There is also a significant risk that any issued patents will have substantially narrower claims than those that are currently sought.
 
We cannot be sure that any of our patents will be commercially useful in protecting our technology. We also rely on trade secrets to protect our product candidates. Our commercial success also depends in part on our non-infringement of the patents or proprietary rights of third parties. For a more comprehensive discussion of the risks related to our intellectual property, please see “Item 3. Key Information – D. Risk Factors – Risks Related to Our Intellectual Property.”
 
We also protect our proprietary technology and processes, in part, by confidentiality and invention assignment agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. We also rely on trade secrets to protect our product candidates. However, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, scientific advisors or other contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
 
Exclusive Lead Sharing and Distribution Agreement and Purchase Agreement with Medtronic.
 
On May 16, 2016, Mazor entered into two strategic agreements with Medtronic. One agreement is a two - phase Exclusive Lead Sharing and Distribution Agreement which provides for co-promotion, co-development and, upon meeting certain milestones, potential global distribution of the Mazor X System. The second agreement is a Purchase Agreement which provides for an equity investment by Medtronic in Mazor.
 
On August 30, 2017, Medtronic and Mazor entered into the second phase of the agreement.
 
Exclusive Lead Sharing and Distribution Agreement
 
The Exclusive Lead Sharing and Distribution Agreement is a commercial agreement which had an initial U.S.-based co-promotion phase. During the second phase which commenced on September 18, 2017, Medtronic assumed exclusive global sales and distribution rights for the Mazor X system. The second phase includes annual minimum sales amounts with a cumulative potential of hundreds of Mazor X systems over a four-year period. The commercial agreement relates to Mazor X systems and applications for the spine surgery market. Under the agreement, Medtronic placed an order for 15 Mazor X Systems during 2016, of which nine systems were supplied by December 31, 2016 and the remaining six systems were supplied in the first quarter of 2017.
 
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The agreement also provides for collaboration in the following main areas:

Phase I
 
Marketing activities – Medtronic was committed to actively marketing the Mazor X system. We and Medtronic were working on joint efforts to create market awareness of the Mazor X System.
 
Sales Activities – In the first phase of the agreement, Medtronic’s sales team was responsible for generating awareness for and interest in the Mazor X System for spinal applications. This involved bringing surgeons to labs and generating qualified leads, before providing the leads to Mazor’s capital sales team to close the sales.
 
Co-development activities – We and Medtronic worked to co-develop synergistic products and applications for spine surgery.
 
Revenue sharing – We paid lead sharing fees to Medtronic for Qualified leads Medtronic delivered to us. Medtronic paid a synergy fee to us for every case where a Mazor X system was used in association with Medtronic implants. Under certain circumstances, Medtronic paid a synergy fee to us regarding Renaissance usage with Medtronic implants.
 
Phase II

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As of September 18, 2017, Medtronic assumed commercial responsibility for the capital sales of the Mazor X system and accessories for spine surgery including marketing, training and education.  In late October 2017, Medtronic assumed responsibility for sales of accessories and case support.

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Medtronic hired members of our capital sales, clinical sales, and training teams.  In addition, Medtronic sales team members were trained on selling the Mazor X system and began selling the system.
 
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Medtronic is committed to annual minimums with a cumulative potential of hundreds of Mazor X systems over a four-year period.

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Initial focus will be in the United States with ramp up in Europe and globally, timed with regional regulatory clearances.
 
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Our revenue streams under the agreement will be from system sales, disposable kits, implant fees, and service fees.  Revenue streams to Medtronic will be from system sales and disposable kits.
 
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We are continuing to provide service and maintenance of Mazor X systems globally.
 
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Co-Development Programs will continue towards integrating the Medtronic navigational capability and robot-guided (guidewireless) implants into the Mazor X robotic guidance platform as well as developing complete procedure solutions.
 
Purchase Agreement
 
The Purchase Agreement provided for a multi-tranche equity investment in Mazor.  In the first tranche, which closed in May 2016, Medtronic purchased 1,042,992 ADSs representing 2,085,984 Ordinary Shares, at a price per ADS of $11.42, for a total of $11.9 million, before deducting issuance expenses payable by us.
 
In the second tranche, which closed in August 2016, Medtronic purchased 915,692 ADSs representing 1,831,384 Ordinary Shares. The price per ADS in the second tranche was $21.84, or a total of $20 million, before deducting issuance expenses payable by us.
 
In the third tranche, which closed in September 2017, Medtronic purchased 1,040,107 ADSs, representing 2,080,214 Ordinary Shares The price per ADS in the third tranche was $38.46. As part of this transaction, we also issued to Medtronic warrants to purchase an additional 1,210,000 ADSs at an exercise price of $44.23 per ADS. Medtronic has the right to exercise the warrants immediately in whole or in part, for cash, and they expire after 18 months. Total consideration for the ADSs and the warrants amounted to approximately $40 million, before deducting issuance expenses payable by us.
 
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Competition
 
We believe that the principal competitive factors in our market include:
 
the safety and efficacy of the procedure and product offerings, as documented through published studies and other clinical reports;
 
product benefits, including the ability to offer spine surgeons a complete solution for posterior spinal procedures;
 
the cost of product offerings and their clinical value within the economics of the procedure they are used in;
 
the strength of acceptance and adoption by spine surgeons and hospitals;
 
the ability to deliver new product offerings and enhanced technology to expand or improve upon existing applications through continued research and development;
 
the quality of training, services and clinical support provided to surgeons and hospitals;
 
the ability to provide proprietary products protected by strong intellectual property rights; and
 
the ability to offer products that are intuitive and easy to learn and use.
 
Competitors
 
There are currently three main competing robotic guidance systems for spine surgeries which are commercially available: 1)  Excelsius GPS by Globus Medical. In the third quarter of 2017 Globus Medical Inc. received FDA clearance for the Excelsius GPS system, which was acquired from Excelsius Surgical LLC in 2014 and which already has CE marking. Globus is actively and aggressively marketing the system, with a focus on the U.S. market. Globus also acquired KB Medical SA which develops the AQrate robotic guidance system for spine.; 2) ROSA system by Zimmer Biomet Holdings Inc.- Zimmer  Biomet is commercializing the ROSA system, which is both CE-marked and FDA-cleared for use in brain and lumbar spine surgeries; and 3) TINAVI Medical Technologies Co., Ltd., a Beijing, China,-based medical device company, offers Phecda surgical robotic system to assist orthopedic surgeons in open and minimally invasive surgeries. It is commercialized within China and we believe that they are in the process of getting FDA clearance and a CE mark. All of these systems rely on image-guided navigation systems.
 
Additional companies that could choose to enter this market include Stryker Corporation, potentially adapting the Mako system to spine surgeries, and Intuitive Surgical Inc. with its da Vinci system which has been used clinically for several specific spinal indications.
 
In previous years, we considered the navigation systems, such as those offered by Medtronic, Stryker Corporation and Brainlab AG, as our main competitors. While these have gained relatively low market share in spine, these technologies have been gaining traction in recent years, especially due to the growing availability of 3-dimensional intra-operative imaging systems such as Medtronic’s O-arm, which is conditional for these systems (as well as for the new robotic systems that have entered the market).
 
We believe that surgeons are likely to adopt robotic-based technologies for spine and brain surgeries and view this as the main competitive field for our products. Large, well-known companies, however, have the ability to acquire and/or develop robotic technologies that may compete with our products.
 
We intend to compete and drive increased adoption of our Renaissance and Mazor X systems based on their benefits, including the safety and efficacy of our procedure, the ability to expand or improve upon existing applications through continued research and development and the ability to offer products that are intuitive and easy to learn and use.
 
Several competitors and potential competitors have significantly greater resources, sales and distribution networks, and other advantages over our independent capability. However, the strategic partnership between us and Medtronic can provide a long-term ability to help meet these competitive challenges. In September 2017, we and Medtronic advanced to the second phase of the agreement which represents global distribution of the Mazor X system by Medtronic. Concomitantly, we are continuing to develop and commercialize Renaissance while supporting its worldwide install-base of over 100 systems.
 
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Regulatory Requirements of the U.S. Food and Drug Administration
 
Our research, development and clinical programs, as well as our manufacturing and marketing operations, are subject to extensive regulation in the United States and other countries. Most notably, all of our products sold in the U.S. are subject to regulation as medical devices under the FDCA, as implemented and enforced by the FDA. The FDA governs the following activities that we perform or that are performed on our behalf, to ensure that medical products we manufacture, promote and distribute domestically or export internationally are safe and effective for their intended uses:
 
product design, preclinical and clinical development and manufacture;
 
product premarket clearance and approval;
 
product safety, testing, labeling, advertising, promotion and storage;
 
record keeping procedures;
 
product marketing, sales and distribution;
 
quality system requirements;
 
recalls and field safety corrective actions;
 
post-market approval studies;
 
product import and export; and
 
post-marketing surveillance, complaint handling, medical device reporting, reporting of deaths, serious injuries or device malfunctions and repair or recall of products.
 
FDA Premarket Clearance and Approval Requirements
 
Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either premarket notification (510(k)) marketing clearance or approval of a PMA from the FDA. The FDA classifies medical devices into one of three classes. Class I devices, considered to have the lowest risk, are those for which safety and effectiveness can be assured by adherence to the FDA’s general regulatory controls for medical devices, which include compliance with the applicable portions of the QSR, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials (General Controls). Class II devices are subject to the FDA’s General Controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device (Special Controls). Manufacturers of most class II and some class I devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. This process is generally known as 510(k) marketing clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in class III, requiring approval of a PMA.
 
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510(k) Marketing Clearance Pathway
 
The 510(k) clearance process is the regulatory process applicable to our current, marketed products. To obtain 510(k) marketing clearance, we must submit a premarket notification demonstrating that the proposed device is “substantially equivalent” to a legally marketed “predicate device” that is either in class I or class II, or to a class III device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA. A Special 510(k) is an abbreviated 510(k) application which can be used to obtain clearance for certain types of device modification such as modifications that do not affect the intended use of the device or alter the device’s fundamental scientific technology. A Special 510(k) generally requires less information and data than a complete, or Traditional 510(k). In addition, a Special 510(k) application often takes a shorter period of time, which could be as short as 30 days, than a Traditional 510(k) marketing clearance application. An abbreviated 510(k) is another type of 510(k) that is intended to streamline the review of data in a 510(k) through the reliance on one or more FDA-recognized consensus standards, special controls established by regulation, or FDA guidance documents. In most cases, an abbreviated 510(k) includes one or more declarations of conformity to an FDA-recognized consensus standard.The FDA’s 510(k) marketing clearance pathway usually takes from three to twelve months, but may take significantly longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence. There is no guarantee that the FDA will grant 510(k) marketing clearance for our future products and failure to obtain necessary clearances for our future products would adversely affect our ability to grow our business.
 
Medical devices can be marketed only for the indications for which they are cleared or approved. After a device receives 510(k) marketing 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) marketing clearance or, depending on the modification, PMA approval. The FDA requires each manufacturer to determine whether the proposed changes requires submission of a 510(k) or a PMA, 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) marketing clearance or PMA approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties. We have made and plan to continue to make additional product enhancements to the Renaissance system and Mazor X system and other products that we believe do not require new 510(k) marketing clearances. We cannot be assured that the FDA would agree with any of our decisions not to seek 510(k) marketing clearance or PMA approval.
 
For risks related to 510(k) marketing clearance, see “Item 3. Key Information – D. Risk Factors – Risks Related to Regulatory Compliance.”
 
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Clinical Trials
 
Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) marketing clearance. Such trials generally require submission of an investigational device exemption application, or IDE, to the FDA for a specified number of patients and study sites, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. If an IDE is required, the FDA will review the submission and it must be approved, and the appropriate institutional review boards, or IRBs, at the clinical sites must approve the study, before clinical trials may begin. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an IRB, for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial, we are also required to obtain the patient’s informed consent in form and substance that complies with both FDA requirements and state and federal privacy and human subject protection regulations. We, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance or approval to market the product in the United States. Similarly, in Europe the clinical study must be approved by a local ethics committee and in some cases, including studies with high-risk devices, by the ministry of health in the applicable country.
 
Post-Market Studies
 
To date, none of our submissions to the FDA has required the submission of clinical data and all of our clinical studies to date have been post-market studies.
 
Pervasive and Continuing Regulation
 
After a device is placed on the market, numerous regulatory requirements continue to apply. These include:
 
product listing and establishment registration;
 
handling of complaints;
 
Product servicing: performing routine service to maintain product ability to meet its specifications;
 
QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all phases of the design and manufacturing process;
 
promotional material review: regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication;
 
clearance or approval 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;
 
post-approval restrictions or conditions, including post-approval study commitments;
 
post-market surveillance regulations, including MDR requirements, which require that we report to the FDA any incident in which our products may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury; and
 
assessments and execution of field corrections or removals.
 
 
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We must also obtain all necessary state permits or licenses to operate our business. As a manufacturer, we are subject to announced and unannounced inspections by the FDA and the EU Notified Body to determine our compliance with FDA’s QSR and other regulations.
 
Failure to comply with applicable regulatory requirements, including delays in or failures to report incidents to the FDA as required under the MDR regulations, can result in enforcement action by the FDA, which may include any of the following sanctions:
 
warning letters, untitled letters fines, injunctions, consent decrees and civil penalties;
 
customer notifications or repair, replacement, refunds, recall, administrative detention or seizure of our products;
 
operating restrictions or partial suspension or total shutdown of production;
 
refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
 
withdrawing 510(k) marketing clearances or PMA approvals that have already been granted;
 
refusal to grant export approval for our products; or
 
criminal prosecution.
 
We cannot be assured that we have adequately complied with all regulatory requirements or that one or more of the referenced sanctions will not be applied to us as a result of a failure to comply.
 
Marketing Approvals Outside the United States
 
Sales of medical devices outside the United States are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ.
 
In the European Economic Area, or the EEA (which is comprised of the 28 Member States of the EU plus Norway, Iceland and Liechtenstein), medical devices must comply with the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC). Other countries, such as Switzerland and Turkey, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices compliance with the essential requirements of the EU Medical Devices Directive, as a prerequisite to be able to affix the CE mark of conformity, without which medical devices cannot be marketed or sold in these countries. To demonstrate compliance with the essential requirements medical devices manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements, a conformity assessment procedure requires the intervention of a Notified Body, a third party organization designated by competent authorities of an EEA country to conduct conformity assessments. The Notified Body would typically audit and examine the products’ Technical File and the quality system for the manufacture, design and final inspection of the devices before issuing a CE Certificate of Conformity demonstrating compliance with the relevant essential requirements of the Medical Devices Directive. In addition, compliance with ISO 13845 on quality systems issued by the International Organization for Standards, among other standards, establishes the presumption of conformity with the quality management system requirements of the Medical Devices Directive. In addition, many countries apply requirements in their reimbursement, pricing or health care systems that affect companies’ ability to market products.
 
Health Care Laws and Regulations
 
Third-Party Coverage and Reimbursement
 
In the United States and elsewhere, health care providers that perform surgical procedures using medical devices such as ours generally rely on third-party payors, including governmental payors such as Medicare and Medicaid and private payors, to cover and reimburse the associated medical and surgical costs. Consequently, sales of medical devices are dependent in part on the availability of reimbursement to the customer from third-party payors. The manner in which reimbursement is sought and obtained varies based upon the type of payor involved and the setting in which the product is furnished and utilized. In general, third-party payors will provide coverage and reimbursement for medically reasonable and necessary procedures and tests that utilize medical devices and may provide separate payments for the implanted or disposable devices themselves. Most payors, however, will not pay separately for capital equipment, such as for our Robotic Guidance Systems. Instead, payment for the cost of using the capital equipment is considered to be covered as part of payments received for performing the procedure. In determining payment rates, third-party payors are increasingly scrutinizing the prices charged for medical products and services in comparison to other therapies. The procedures in which our products are used may not be reimbursed by these third-party payors at rates sufficient to allow us to sell our products on a competitive and profitable basis.
 
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In addition, in many foreign markets, including the countries in the European Union, pricing of medical devices is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to limit payments by governmental payors for medical devices, and the procedures in which medical devices are used.
 
In March 2010, comprehensive health care reform legislation was enacted through the passage of PPACA. Significant measures contained in the PPACA include initiatives to revise Medicare payment methodologies, initiatives to promote quality indicators in payment methodologies (including the bundling of hospital and physician payments), initiatives related to the coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, and annual reporting requirements related to payments to physicians and teaching hospitals. At this time it is not possible to predict whether these initiatives will have a positive or negative impact on us. The PPACA also includes taxes impacting certain health-related industries, including medical device manufacturers. For further information, see “Item 10. Additional Information - E. Taxation - Medical Devices Excise Tax.” (see section E Taxation - Medical Devices Excise Tax)
 
In addition to PPACA, 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 internationally, or the effect any future legislation or regulation will have on us. The taxes imposed by the PPACA and the expansion in government’s role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursements by payors for our products, and reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations, possibly materially.
 
Medicare and Medicaid
 
The Medicare program is a federal health benefit program administered by the CMS, that covers and pays for certain medical care items and services for eligible elderly (age>65), blind and disabled individuals, and individuals with end stage renal disease. The Medicaid program is a federal-state partnership under which states receive matching federal payments to fund healthcare services for the poor. Because about 40% of patients undergoing spine surgery are Medicare beneficiaries, and because some private commercial health insurers and some state Medicaid programs may follow the coverage and payment policies for Medicare, Medicare’s coverage and payment policies are significant to our business.
 
Medicare coverage for procedures using our technology currently exists in the hospital inpatient setting, which falls under Part A of the Medicare program. Under Medicare Part A, Medicare reimburses acute care hospitals a flat prospectively determined payment amount for beneficiaries receiving covered inpatient services in an acute care hospital. This method of payment is known as the PPS. Under PPS, the prospective payment for a patient’s stay in an acute care hospital is determined by the patient’s condition and other patient data and procedures performed during the inpatient stay using a classification system known as DRGs. CMS has implemented a revised version of the DRG system that uses MS-DRGs, instead of the DRGs Medicare previously used. The MS-DRGs are intended to more accurately account for the patient’s severity of illness when assigning each patient’s stay to a payment classification. Medicare pays a fixed amount to the hospital based on the MS-DRG into which the patient’s stay is classified, regardless of the actual cost to the hospital of furnishing the procedures, items and services that the patient’s condition requires, except under limited circumstances. Accordingly, acute care hospitals generally do not receive direct Medicare reimbursement under PPS for the specific costs incurred in purchasing medical devices. Rather, reimbursement for these costs is deemed to be included within the MS-DRG based payments made to hospitals for the services furnished to Medicare eligible inpatients in which the devices are utilized. For cases involving unusually high costs, a hospital may receive additional “outlier” payments above the pre-determined amount. In addition, there is a mechanism by which new technology services can apply to Medicare for additional payments above the pre-determined amount, although such requests have not been granted frequently.
 
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Because PPS payments are based on predetermined rates and may be less than a hospital’s actual costs in furnishing care, acute care hospitals have incentives to lower their inpatient operating costs by utilizing products, devices and supplies that will reduce the length of inpatient stays, decrease labor or otherwise lower their costs. For each MS-DRG, a relative weight is calculated representing the average resources required to care for cases grouped in that particular MS-DRG relative to the average resources used to treat cases in all MS-DRGs. MS-DRG relative weights are recalculated every year to reflect changes in technology and medical practice in a budget neutral manner. Under the MS-DRG payment system, there can be significant delays in obtaining adequate reimbursement amounts for hospitals for new technologies such that reimbursement may be insufficient to permit broad acceptance by hospitals.
 
Our Robotic Guidance Systems are usually used in the inpatient setting in spinal fusion procedures which are considered standard-of-care for several diseases. Our Robotic Guidance Systems are employed in several other spine surgeries (e.g., spinal biopsy, cement augmentations), all of which are well established treatments for specified spinal diseases. We anticipate that Medicare will continue to reimburse hospitals for spinal fusions using our Robotic Guidance Systems, but CMS can revise MS-DRG assignments from year to year.
 
Our Robotic Guidance Systems are sometimes used in ASCs or in outpatient procedures. While these are currently only a small fraction of our spine business, the proportion of spinal fusions performed in these facilities could grow (e.g. due to lower operational costs, provider and/or patient preferences) at the expense of cases performed in in-patient facilities.
 
In addition to payments to hospitals for procedures using our technology, Medicare makes separate payments to physicians for their professional services. The American Medical Association, or AMA, has developed a coding system known as the Current Procedural Terminology codes, or CPT, codes, which have been adopted by the Medicare program to describe and develop payment amounts for certain physician services. The Medicare Physician Fee Schedule uses CPT codes (and other codes) as part of the determination of allowable payment amounts to physicians. In determining appropriate payment amounts for surgeons, CMS receives guidance from the AMA regarding the relative technical skill level, level of resources used, and complexity of a new surgical procedure. Generally, the FDA approval of a new product is necessary, but not necessarily sufficient, for the designation of a new procedure code for a new surgical procedure using that product. Codes are assigned by either the AMA (for CPT codes) or CMS (for Medicare specific codes) and new codes usually become effective on January 1st of each year. Physicians using our Robotic Guidance Systems placing pedicle screws in posterior spinal fixation procedures submit bills under various CPT codes. These codes are separate from the arthrodesis codes (for the fusion procedure) and other intraoperative procedures such as bone grafting.
 
Commercial Insurers
 
In addition to the Medicare program, many private payors look to CMS policies as a guideline in setting their coverage policies and payment amounts. The current coverage policies of these private payors may differ from the Medicare program, and the payment rates they make may be higher, lower, or the same as the Medicare program. A decrease of, or limitation on, reimbursement payments for doctors and hospitals by CMS or other agencies may affect coverage and reimbursement determinations by many private payors. Additionally, some private payors do not follow the Medicare guidelines, and those payors may reimburse only a portion of the costs associated with the use of our products, or not at all.
 
Fraud and Abuse Laws
 
Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a number of laws whose purpose is to eliminate fraud and abuse in federal health care programs. Our business is subject to compliance with these laws.
 
HIPAA and Other Fraud and Privacy Regulations
 
Among other things, HIPAA created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The HIPAA health care fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment and/or exclusion from government sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment.
 
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In addition to creating the two new federal healthcare crimes, regulations implementing HIPAA also establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses, which are referred to as “covered entities.” Three standards have been promulgated under HIPAA’s regulations: the Standards for Privacy of Individually Identifiable Health Information, which restrict the use and disclosure of certain individually identifiable health information, the Standards for Electronic Transactions, which establish standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures, and the Security Standards, which require covered entities to implement and maintain certain security measures to safeguard certain electronic health information, including the adoption of administrative, physical and technical safeguards to protect such information.
 
In 2009, Congress passed the American Recovery and Reinvestment Act of 2009, or ARRA, which included sweeping changes to HIPAA, including an expansion of HIPAA’s privacy and security standards. ARRA includes HITECH, which, among other things, made HIPAA’s privacy and security standards directly applicable to “business associates” of covered entities effective February 17, 2010. A business associate is a person or entity that performs certain functions or activities on behalf of a covered entity that involve the use or disclosure of protected health information in connection with recognized health care operations activities. As a result, business associates are now subject to significant civil and criminal penalties for failure to comply with applicable standards. Moreover, HITECH creates a new requirement to report certain breaches of unsecured, individually identifiable health information and imposes penalties on entities that fail to do so. A breach notice must be made as soon as is reasonably practicable, and no later than 60 days following such breach discovery. However, a timely given breach notice will necessarily excuse the reporting entity from the penalties for the underlying breach. Breach notice must be made to affected individuals and to The Department of Health and Human Services (“HHS”) of the U.S. government, and in some cases they must be reported through local and national media, depending on the size of the breach. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions. The final omnibus rule modifies the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches. We believe that we are neither a covered entity nor, as of February 17, 2010, a business associate of our hospital customers. As such, we believe that we are not directly subject to these HIPAA standards; however, there is no guarantee that the government will agree with our determination. If the government determines that we are a business associate, we could be subject to enforcement measures, including civil and criminal penalties and fines for violations of the privacy or security standards. For the purpose of avoiding risk associated with our exposure to individually identifiable health information, we have voluntarily adopted and trained our personnel on an internal policy addressing the fundamentals of HIPAA compliance. While the government intended this legislation to reduce administrative expenses and burdens for the healthcare industry, our compliance with certain provisions of these standards entails significant costs for us.
 
In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
 
Anti-Bribery Laws
 
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business in international jurisdictions and could expose us or our employees to fines and penalties in the U.S. and abroad. These numerous and sometimes conflicting laws and regulations include the FCPA. The FCPA prohibits U.S. companies, companies whose securities are listed for trading in the United States and other entities, and their officers, directors, employees, shareholders acting on their behalf and agents from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad or otherwise obtaining favorable treatment. The FCPA also requires companies to maintain records that fairly and accurately reflect transactions and maintain internal accounting controls. In many countries, hospitals are government-owned and healthcare professionals employed by such hospitals, with whom we regularly interact, may meet the definition of a foreign official for purposes of the FCPA. Additionally, recently enacted U.S. legislation increases the monetary reward available to whistleblowers who report violations of federal securities laws, including the FCPA, which may result in increased scrutiny and allegations of violations of these laws and regulations. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our reputation.
 
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Anti-Kickback Statutes and Federal False Claims Act
 
The federal healthcare programs’ Anti-Kickback Statute prohibits persons from soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value, including for example gifts, certain discounts, the furnishing of free supplies, equipment or services, credit arrangements, payments of cash and waivers of payments. The PPACA amended the intent requirement of the Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of the Anti-Kickback Statute or specific intent in order to violate it. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, the PPACA provides 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 False Claims Act or federal civil money penalties statute, discussed in more detail below.

The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the Office of Inspector General of the U.S. Department of Health and Human Services, or OIG, to issue a series of regulations, known as “safe harbors.” These safe harbors, issued by the OIG beginning in July 1991, set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG.
 
Many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.
 
Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and recently have brought cases against companies, and certain sales, marketing and executive personnel, for allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business. In order to fight fraud and abuse in federal healthcare programs Congress has enacted several laws, such as the PPACA as amended by the Healthcare and Education Affordability Reconciliation Act, commonly referred to collectively as the Affordable Care Act. The Affordable Care Act widens the government’s investigative and enforcement power and increases fraud and abuse penalties, while making it easier to bring suit under the Anti-Kickback Statute and the False Claims Act (as specified below in more detail). The Affordable Care Act also allocates additional resources and tools for the government to police healthcare fraud, for example, expanding HHS’s power to issue subpoenas and increasing the funding to investigate fraud and abuse within the healthcare system.
 
The above dovetails with developments affecting the healthcare industry such as the increased use of the federal Civil False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought against healthcare providers by private individuals has increased dramatically. In addition, various states have enacted false claim laws analogous to the Civil False Claims Act, although many of these state laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare program.
 
When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties from $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government. The False Claims Act has been used to assert liability on the basis of inadequate care, kickbacks and other improper referrals, and improper use of Medicare numbers when detailing the provider of services, in addition to the more predictable allegations as to misrepresentations with respect to the services rendered. In addition, companies have been prosecuted under the False Claims Act in connection with alleged off-label promotion of products. Our future activities relating to the reporting of wholesale or estimated retail prices for our products, the reporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our products, and the sale and marketing of our products, may be subject to scrutiny under these laws.
 
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Additionally, several bills have been passed or are pending, at both the state and federal levels that expand the anti-kickback laws to require, among other things, extensive tracking and maintenance of databases regarding relationships to physicians and healthcare providers. The PPACA imposes new reporting and disclosure requirements on device manufacturers for any “transfer of value” made or distributed to physicians and teaching hospitals, otherwise known as the Sunshine Act. Device manufacturers were required to begin collecting data on August 1, 2013, register with CMS by March 31, 2014 and are required to submit certain reports to CMS disclosing payments and transfers of value made to physicians and teaching hospitals in the preceding calendar year on or before the 90th day of each calendar year.
 
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. Some states, such as California, Massachusetts and Nevada, mandate implementation of commercial compliance programs, while certain states, such as Massachusetts and Vermont, impose restrictions on device manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to physicians. The implementation of the infrastructure to comply with these bills and regulations could be costly and any failure to provide the required information may result in civil monetary penalties.
 
We believe our current consulting agreements with physicians represent legitimate compensation for needed documented services actually furnished to us. However, engagement of physician consultants by orthopedic medical device manufacturers has recently been subject to heightened scrutiny, and has resulted in four of the major orthopedic medical device implant manufacturers entering deferred prosecution agreements with the federal government and agreeing to pay substantial amounts to the federal government in settlement of Anti-Kickback Statute allegations, and all such companies submitting to supervision by a court appointed monitor throughout the term of the eighteen month agreements. In this environment, our engagement of physician consultants in product development and product training and education could subject us to similar scrutiny. We are unable to predict whether we would be subject to actions under the Anti-Kickback Statute or False Claims Act or any similar state law, or the impact of such actions.
 
It is possible that regulatory agencies may view our physician and customer arrangements as prohibited arrangements that must be restructured, or discontinued, or for which we could be subject to other significant penalties. We would be materially and adversely affected if regulatory agencies interpret our financial relationships with spine surgeons, hospitals or other customers who order our products to be in violation of applicable laws. In addition, various agencies may view these arrangements with our customers, including the provision of marketing grants to customers for the purposes of training surgeons and the provision of accessories at no charge or discounted prices with the purchase of our Robotic Guidance Systems, as not fully complying with federal and state fraud and abuse laws. To the extent we are found to not be in compliance, we could face potentially significant fines and penalties in addition to other more significant sanctions and we may be required to restructure our operations. This could subject us to monetary penalties for non-compliance, the cost of which could be substantial. The costs of defending such claims, as well as any sanctions imposed or negative public perceptions resulting therefrom could have a material adverse effect on our financial performance.

Manufacturing and Assembly
 
Our Robotic Guidance Systems include off-the-shelf and custom-made components produced to our specifications by various third parties. We purchase from a number of suppliers’ major components of the Mazor X and Renaissance system. For the Mazor X system we, or our subcontractors, purchase the computer hardware, the controllers, the screen, system console, the molded plastic housing and machined metal parts, and the various electro-mechanical components that support the Mazor X system. For the Renaissance system, we purchase the computer hardware, the RBT Device and its controllers, the screen, system console, the molded fiberglass housing and machined metal parts, and the various electro-mechanical components that support the Renaissance system. We internally develop the software components and license certain software components that are generally available for commercial use as open source software.
 
We outsource manufacturing of the Mazor X system and the Renaissance system, as well as most of the product’s sub-assemblies which are assembled by subcontractors according to work plans and designs prepared by us. We believe that outsourcing allows us to carry lower inventory levels and maintain fixed unit costs with minimal infrastructure and without incurring significant capital expenditures and rely on the economy of scale of the subcontractors. We have non-disclosure agreements with our subcontractors. The manufacturing plan is based on our sales forecast, and we believe that at this stage, by using our current subcontractors, we are able to meet demand level and increase production quantities if necessary.
 
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We believe that our subcontractors’ manufacturing processes are in compliance with pertinent U.S. and/or international quality and safety standards, such as ISO 9001, ISO 13485, or the FDA’s QSR.
 
We conduct in-house prototype development and present detailed manufacturing documentation to our subcontractors, who then purchase most of the necessary components and manufacture the product or subassemblies. These manufacturing subcontractors provide us fully assembled, or “turn-key,” services.
 
We control and monitor the quality of our products by testing each product and through extensive involvement in the production process in house and at the facilities of our subcontractors. To the best of our knowledge, our subcontractors have no significant manufacturing limitation in reference to our manufacturing needs.
 
As of the date hereof, six of our subcontractors are single sources subcontractors. Replacement of two of these single source subcontractors may take between three to four months, while replacement of the other four single source subcontractors may take between six to eight months. One of these key supplier single source subcontractors is MPS Micro Precision Systems AG, manufacturer of the RBT Device for the Renaissance. Due to their nature, certain components must be ordered up to six months in advance, resulting in substantial lead time for certain production runs. In the event that such limited source suppliers are unable to meet our requirements in a timely manner, we may experience an interruption in production until we can obtain an alternate source of supply. See “Item 3. Key Information - D. Risk Factors - Risks Related to Our Business - Our reliance on third-party suppliers, including single source suppliers, for most of the components of the Mazor X and certain components of the Renaissance could harm our ability to meet demand for our products in a timely and cost effective manner.” In order to mitigate this risk, we provide our suppliers with blanket purchase orders and a three to nine month estimate of future orders. In addition, our agreements with such single source subcontractors provide, among other things, that should the subcontractor wish to terminate our agreement, it must provide us with a long prior notice with respect thereof. We engaged with Sanmina - SCI Israel Medical Systems Ltd., or Sanmina, during 2014.
 
Starting in 2016, Sanmina is our main subcontractor for the manufacturing of the Mazor X. With respect to Sanmina, our agreement requires a prior notice of nine months for termination by Sanmina and 30 days by us. Furthermore, to mitigate the risk of loss of our suppliers, we constantly hold safety inventory stock of complete units of the Mazor X System and the Renaissance system.
 
C.
Organizational Structure
 
We currently have two wholly owned subsidiaries: Mazor Robotics, Inc., which is incorporated in Delaware, United States and Mazor Robotics Pte. Ltd., which is incorporated in Singapore.
 
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D.
Property, Plant and Equipment
 
Our offices and research and development facility are located at 5 Shacham Street, North Industrial Park, Caesarea 3088900, Israel, where we occupy approximately 3,123 square meters. We lease this facility, our lease ends on June 30, 2021 and we have an option to extend the lease term for an additional five years. Our monthly rent payment pursuant to the lease for our offices and research and development facility as of December 31, 2017 was NIS 181,000 linked to the Israeli CPI (approximately $52,000).
 
Our U.S. headquarters are located in Orlando, Florida, where we occupy approximately 6,445 square feet. We lease our U.S. headquarters, and this lease ends in April 2018. In 2018 we exercised a renewal right and renewed the lease until December 31, 2018. Our monthly rent payment pursuant to the lease for our U.S. headquarters as of December 31, 2017 is $13,299.
 
ITEM 4A.              UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 5.                 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included in this Annual Report. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Cautionary Note Regarding Forward-Looking Statements” and in “Item 3. Key Information - D. Risk Factors.”
 
A.
Operating Results
 
Overview
 
We are a medical device company developing and marketing innovative Robotic guidance systems and complementary products. Our expertise is in robotic, computerized and imaging-based systems, primarily in the field of spine surgery. Our Robotic Guidance Systems enable surgeons to advance from freehand surgical procedures to accurate, pre-planned, state-of-the-art, precision guided procedures. Our Mazor X system, our Renaissance system and its predecessor have been used in over 32,000 spine surgeries, including fusion, correction of spinal deformities, biopsy collection, tumor excision and cement augmentations. Our Robotic Guidance Systems have the ability to improve clinical outcomes for patients, may provide a safer surgical environment for surgeons and operating room staff by reducing exposure to radiation, and deliver economic value to hospitals and payors. In October 2016, we commercially launched the FDA-cleared Mazor X system, and to date the Mazor X system was used in thousands of surgeries.
 
We have incurred net losses in each year since our inception in 2000 and, as of December 31, 2017, we had an accumulated deficit of $134,279,000. We expect to continue to incur significant operating losses as we expand our research and development capabilities, including the support of existing products and the research and development of potential future products in and out of the spine surgical market. During 2017, we entered into the second phase of the Medtronic Agreements. Therefore, we expect to have a significant reduction in our sales and marketing activities as Medtronic assumed full global responsibility for the Mazor X Surgical Assurance Platform and its accessories for spinal applications.
 
Recent business events and key milestones in the development of our business include the following:
 
A significant increase of our installed base globally, with over 180 systems, including over 120 systems installed in the United States, as of December 31, 2017. During the year ended December 31, 2017, we received record orders for 73 systems, including 64 orders for the Mazor X system – of which, 34 systems were ordered by Medtronic, and nine Renaissance systems orders received in the U.S. and from our distribution partners in Australia, China, Thailand and Germany.
 
·
Medtronic assumed exclusive global commercial responsibility for the Mazor X system for spinal applications.
 
·
Approximately 30 members of the current Mazor sales organization joined Medtronic to assure continuation of the momentum.
 
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·
Co-development of future products for the spine market that combine our core expertise in surgical planning and precision-guided surgical systems with Medtronic’s navigation capabilities and implant systems.
 
A third tranche of investment in Mazor by Medtronic occurred in 2017 bringing Medtronic’s total investment in Mazor to $72 million. We also issued to Medtronic warrants to purchase an additional 1.21 million Mazor ADSs. The exercise price of the warrants is $44.23 per ADS. Medtronic has the right to exercise the warrants immediately in whole or in part, for cash, and they expire after 18 months.
 
The results from the first multi-center prospective study of spinal surgical robotics, demonstrating that spinal surgeries performed using our proprietary Mazor Core technology have a five-fold reduction in surgical complications and a seven-fold reduction in revision surgeries, compared to freehand-based minimally invasive lumbar fusion surgeries.
 
FDA clearance of the Mazor X Align software was obtained in April 2017.
 
We believe that the key to the continuing growth of our business is expanding the acceptance of our Robotic Guidance Systems for both spinal and brain surgery, and introducing other potential future applications.
 
Critical Accounting Policies and Significant Judgments and Estimates
 
The preparation of financial statements in conformity with International Financial Reporting Standards, or IFRS, requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
 
The accounting estimates used in the preparation of our financial statements require management to make assumptions regarding circumstances and events that involve considerable uncertainty. Management prepares the estimates based on past experience, various facts, external circumstances, and reasonable assumptions according to the pertinent circumstances of each estimate.
 
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any affected future periods.
 
Our significant accounting policies are more fully described in Note 3 to our consolidated financial statements as of December 31, 2017 included elsewhere in this Annual Report. However, certain of our accounting policies are particularly important to the description of our financial position and results of operations. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. Those estimates are based on our historical experience, the terms of existing contracts, our observation of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. These estimates are subject to an inherent degree of uncertainty. Our critical accounting policies include:
 
Revenue Recognition
 
Revenue is generated from three main components: (1) sales of our Robotic Guidance Systems, including installation services and training; (2) sales of disposable components and accessories; and (3) warranty and maintenance services related to the systems sold, which includes replacement parts, software updates, preventive maintenance and on-call support as detailed in the agreement.
 
The allocation of consideration from a revenue arrangement to its separate units of account is based on the relative fair values of each unit. If the fair value of the delivered item is not reliably measurable, then revenue is allocated based on the difference between the total arrangement consideration and the fair value of the undelivered item. We usually determine the fair value of the warranty and maintenance services component based on the renewal quote offered in the agreement. Warranties granted to customers are considered an additional element in the sale of the system, because they include training, service, the provision of spare parts, telephone support, on-site support and a positive representation that the product will either perform according to certain specifications or that we will repair or replace the product if it ceases to work properly. Therefore, we consider such warranty as a separate element of the system sale.
 
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We recognize revenue from the above mentioned components in accordance with International Accounting Standards No. 18, “Revenue,” including provisions related to recognition of revenue from multiple-component transactions, when the significant risks and rewards of ownership of the goods transferred to the customer; it is probable that the economic benefits associated with the transaction will flow to us; the costs incurred or to be incurred in respect of the transaction can be measured reliably; we retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; and the amount of revenue can be measured reliably.

The revenue from sales of systems is recognized at the time of transfer of the significant risks and rewards of ownership as follows:
 
sales to end customers - Upon the completion of installation of the system, training of at least one surgeon, which typically occurs prior to or concurrent with the system installation, and customer acceptance, if required.
 
sales to distributors - Upon delivery to the distributor, according to contractual delivery terms, provided that the significant risks and rewards of ownership of the system are transferred to the distributor upon delivery, the distributor has no right of return, receipt of the consideration is probable and not dependent on the distributor’s ability to collect from the end customer, the commitment to carry out installation and training for the end customer lies with the distributor and that the distributor has been authorized to perform the installation and training for the end customers, or if the distributor has the ability to perform the installation and training for the end customer independently. If the above conditions are not met, we recognize revenue at the time of fulfillment of the conditions for recognition of revenue from the end customer.
 
Revenue from the disposable components sales is recognized at the time of the transfer of the significant risks and rewards of ownership as follows:
 
in sales to end customers - Upon delivery.
 
in sales to distributors - Upon delivery to the distributor, provided that the significant risks and rewards of ownership of the components are transferred to the distributor upon delivery, the distributor has no right of return and that the receipt of the consideration is probable and not dependent on the distributor’s ability to collect from the end customer.
 
Revenue from warranty and maintenance services is recognized proportionately over the period of rendering of the service and subject to the other conditions for revenue recognition specified above.
 
For system sales, where a commitment for future trade-in exists, we examine whether the transaction meets all revenue recognition criteria. If one or more of the revenue recognition criteria are not met, revenue is deferred and the system is presented in inventory until the earliest of trade-in commitment is fulfilled, or trade-in option expire.
 
In rare circumstances, we may bill a customer for a product and retain physical possession of the product until it is transferred to the customer at a point in time in the future. If such delivery is delayed at the customer’s request and the customer assumes title and accepts billing, revenue is recognized when the buyer takes title, provided that:
 
it is probable that the delivery will be made;
the item is on hand, identified and ready for delivery to the customer at the time the sale is recognized;
the customer specifically acknowledges the deferred delivery instructions, and
the usual payment terms apply.
 
Functional Currency
 
The consolidated financial statements are presented in U.S. dollars, which is the Company’s functional currency.
 
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Share-Based Compensation
 
We account for share-based compensation arrangements in accordance with the provisions of International Financial Reporting Standard 2, or IFRS2. IFRS2 requires us to recognize share-based compensation expense for awards of equity instruments based on the grant-date fair value of those awards. The cost is recognized as compensation expense, based upon the grant-date fair value of the equity or liability instruments issued. The fair value of our option grants is computed as of the grant date based on the binominal model, using the standard parameters established in that model including estimates relating to the share price on the measurement date, exercise price of the instrument, expected volatility (based on the historical volatility), the expected life span of the options, and the risk-free interest rate (based on government debentures). As our stock is publicly traded on the TASE, we do not need to estimate the fair market value of our shares. Rather, we use the actual closing market price of our Ordinary Shares on the date of grant, as reported by the TASE. The value of the transactions, measured as described above, is recognized as an expense over the vesting period. When award grant has graded-vesting feature, each installment of the awards is separately measured and the expenses are recognized over the related vesting period.
 
Capitalization of Development Costs
 
We capitalize development expenditure in accordance with International Accounting Standard No. 38 “Intangible Assets,” or IAS 38, only if development costs can be measured reliably; the product or process is technically and commercially feasible; future economic benefits are probable and we intend to and have sufficient resources to complete development and to use or sell the asset.
 
We capitalize development costs based on our judgment regarding technological and commercial feasibility, which generally exists when a product development project reaches a defined milestone, or when we enter into a transaction to sell the know-how that was derived from the development. In regard to our products, technological feasibility usually occur only after the receipt of approval from the FDA.
 
Inventory Valuation
 
Inventory is measured at the lower of cost and net realizable value. Inventory costs include direct materials and direct labor. We review our inventory periodically to determine net realizable value and the necessity of provisions for obsolescence, which may result from excess, slow-moving or obsolete inventories. We write down inventory, if required, based on forecasted demand and technological obsolescence. These factors are impacted by market and economic conditions, technology changes and new product introductions and require estimates that may include uncertain elements.
 
Accounting for Income Taxes
 
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposures and make an assessment of temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities. Changes to these estimates may result in a significant increase or decrease to our tax provision in the current or subsequent period.
 
We recognize deferred tax assets for unused tax losses, tax benefits, and deductible temporary differences to the extent that it is probable that future taxable income will be available against which that can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. A provision for uncertain tax positions, including additional tax and interest expenses, is recognized when it is more probable than not that the Company will have to use its economic resources to pay the obligation.
 
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The calculation of our tax liabilities or reduction in deferred tax asset involves dealing with uncertainties in the application of complex tax regulations and estimates of future taxable income in different geographical jurisdictions. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a periodical basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effective settlement of audit issues, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
 
Results of Operations
 
Comparison of year ended December 31, 2017 and year ended December 31, 2016
 
Revenue
 
The following table presents our total revenues by geographic area and by line of product for the fiscal years indicated (in thousands of U.S. dollars and as a percentage of total revenues):

   
For the Year Ended December 31,
 
   
2017
   
2016
 
United States          
 
$
59,525
     
92
%
 
$
30,716
     
84
%
International          
 
$
5,422
     
8
%
 
$
5,663
     
16
%
Total          
 
$
64,947
     
100
%
 
$
36,379
     
100
%

   
2017
   
2016
 
Systems          
 
$
37,071
     
57
%
 
$
19,624
     
54
%
Sale of disposables          
 
$
16,246
     
25
%
 
$
10,295
     
28
%
Services and other          
 
$
11,630
     
18
%
 
$
6,460
     
18
%
Total          
 
$
64,947
     
100
%
 
$
36,379
     
100
%
 
Total revenue was $64,947,000 for the year ended December 31, 2017, compared to $36,379,000 for the year ended December 31, 2016. The increase in revenue of $28,568,000, or 79%, was due to a $17,447,000, or 89%, increase in sales of systems, a $5,951,000, or 58%, increase in disposables revenue, an $5,170,000, or 80%, increase in service and other revenue.
 
The increase in sales of our Robotic Guidance Systems during the year ended December 31, 2017 compared to the year ended December 31, 2016 was due to the revenue recognition from 75 units of our Robotic Guidance Systems sold during the year ended December 31, 2017, compared to 41 units of our Robotic Guidance Systems during the year ended December 31, 2016. The increase in the number of systems sold was mainly due to the successful launch of the Mazor X system in the U.S. market and the entrance to the exclusive global distribution agreement of the Mazor X system for spinal application, with Medtronic.
 
The increase in disposables revenue during the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily due to the expansion of our worldwide installed base of our Robotic Guidance Systems and the high utilization rates of our installed base. The increase in service and other revenue during the year ended December 31, 2017 compared to the year ended December 31, 2016 was attributable to an increase in the installed base of our Robotic Guidance Systems covered under warranty and maintenance contracts, mainly in the United States.
 
The increase in revenue derived from the United States of $28,809,000, or 94%, was primarily due to the increase in revenues from the sale of Robotic Guidance Systems, as we recognized revenues from 68 systems sold in the year ended December 31, 2017, compared to 30 systems sold in the year ended December 31, 2016. The increase is also attributed to the increase in disposables, service and others. The decrease in international revenue of $241,000, or 4%, was due to a slight decrease in revenues from our Robotic Guidance Systems, offset by a slight increase in revenues from disposables.
 
78

 

Cost of Sales
 
Cost of sales was $23,684,000 for the year ended December 31, 2017, compared to $10,330,000 for the year ended December 31, 2016. The increase in cost of sales of $13,354,000, or 129%, is attributed mainly to the higher manufacturing costs of the Mazor X system compared to the Renaissance system. In addition, there was an increase in salaries and related expenses associated with the incremental number of employees added in the operations department.
 
Gross Profit
 
Gross profit was $41,263,000 for the year ended December 31, 2017, or 63.5% of revenues, compared to $26,049,000, or 71.6% of revenues, for the year ended December 31, 2016. The decrease in gross margin is mainly attributed to the higher manufacturing costs of the Mazor X system compared to the Renaissance system and the pricing terms with Medtronic, as an exclusive distributor of the Mazor X system for spinal applications.
 
Operating Expenses

   
For the Year Ended
December 31,
   
Increase (decrease) in
 
   
2017
   
2016
   
Dollars
   
%
 
   
(in thousands)
       
Research and development, net          
 
$
8,192
   
$
5,736
     
2,456
     
43
 
Selling and marketing          
 
$
39,499
   
$
33,637
     
5,862
     
17
 
General and administrative          
 
$
7,375
   
$
5,697
     
1,678
     
29
 
Total operating expenses          
 
$
55,066
   
$
45,070
     
9,996
     
22
 
 
Research and Development Expenses
 
Research and development expenses were $8,192,000 for the year ended December 31, 2017, compared to $5,736,000 for the year ended December 31, 2016. The increase of $2,456,000, or 43%, was primarily due to capitalization of development costs in the amount of $2,332,000 as intangible asset in 2016 and to an increase in salaries and related expenses associated with the incremental number of employees added in the research and development department, to support our continuous efforts in developing additional applications and new products. This increase was offset by joint research and development projects related to the Mazor X system and new additional features and capabilities funded by Medtronic in 2017.
 
Selling and Marketing Expenses
 
Selling and marketing expenses were $39,499,000 for the year ended December 31, 2017, compared to $33,637,000 for the year ended December 31, 2016. The increase of $5,862,000, or 17%, was primarily due to the expansion of efforts to further penetrate mainly the U.S. Such efforts included, among other things, recruitment of additional sales personnel in the United States, and expansion of marketing activities, such as participation in exhibitions, holding labs and continued introduction activities for both our Mazor X system and our Renaissance system. This was offset by decrease in expenses in the last quarter of 2017, upon the entrance to global distribution agreement with Medtronic, as Medtronic assumed commercial responsibility for the Mazor X for spinal applications effective September 18, 2017.
 
79

 
General and Administrative Expenses
 
General and administrative expenses were $7,375,000 for the year ended December 31, 2017, compared to $5,697,000 for the year ended December 31, 2016. The increase is mostly due to an increase in salaries and related expenses in the general and administrative departments and expenses associated with consultants and advisors.
 
Financing income, net
 
Financing income, net was $1,228,000 for the year ended December 31, 2017, compared to $397,000 for the year ended December 31, 2016. The increase is mainly attributed to an increase in interest income from bank deposits,  as well as an increase in net income from change in exchange rates.

Taxes on Income
 
We recorded an income tax benefit of $156,000 for the year ended December 31, 2017, compared to an expense of $44,000 for the year ended December 31, 2016. This is mainly due to taxable deductions we incur in the U.S.
 
Net Loss and net Loss per Share
 
Loss was $12,419,000, or $0.25 per share, for the year ended December 31, 2017, compared to loss of $18,668,000, or $0.42 per share, for the year ended December 31, 2016.
 
Comparison of year ended December 31, 2016 and year ended December 31, 2015
 
Revenue
 
The following table presents our total revenues by geographic area and by line of product for the fiscal years indicated (in thousands of U.S. dollars and as a percentage of total revenues):

   
For the Year Ended December 31,
 
   
2016
   
2015
 
United States          
 
$
30,716
     
84
%
 
$
20,271
     
78
%
International          
 
$
5,663
     
16
%
 
$
5,825
     
22
%
Total          
 
$
36,379
     
100
%
 
$
26,096
     
100
%

   
2016
   
2015
 
Systems          
 
$
19,624
     
54
%
 
$
13,373
     
51
%
Sale of disposables          
 
$
10,295
     
28
%
 
$
7,648
     
29
%
Services and other          
 
$
6,460
     
18
%
 
$
5,075
     
20
%
Total          
 
$
36,379
     
100
%
 
$
26,096
     
100
%
 
Total revenue was $36,379,000 for the year ended December 31, 2016, compared to $26,096,000 for the year ended December 31, 2015. The increase in revenue of $10,283,000, or 39%, was due to a $6,251,000, or 47%, increase in sales of systems, a $2,647,000, or 35%, increase in disposables revenue, an $1,385,000, or 27%, increase in service and other revenue.
 
The increase in sales of our Robotic Guidance Systems during the year ended December 31, 2016 compared to the year ended December 31, 2015 was due to the revenue recognition from 41 units of our Robotic Guidance Systems sold during the year ended December 31, 2016, compared to 23 units of our Renaissance system, one system upgrade sold and two Renaissance system placements during the year ended December 31, 2015. The increase in the number of systems sold was as a result of the successful launch of our Mazor X system and the collaboration with Medtronic that started from May 2016.
 
80

 
 
The increase in disposables revenue during the year ended December 31, 2016 compared to the year ended December 31, 2015 was primarily due to the continued adoption and usage of Renaissance, driven by the growth of our commercial installed base worldwide.
 
The increase in service and other revenue during the year ended December 31, 2016 compared to the year ended December 31, 2015 was attributable to an increase in the installed base of Renaissance systems covered under warranty and maintenance contracts, mainly in the United States.
 
The increase in revenue derived from the United States of $10,445,000, or 52%, was primarily due to the increase in revenues from the sale of Robotic Guidance Systems, as we recognized revenues from 30 systems sold in the year ended December 31, 2016, compared to 16 Renaissance systems sold and two Renaissance system placements in the year ended December 31, 2015. The increase is also attributed to the increase in disposables, service and others. The decrease in international revenue of $162,000, or 3%, was due to a slight decrease in revenues from disposables, offset by a slight increase in revenues from service and others.

Cost of Sales
 
Cost of sales was $10,330,000 for the year ended December 31, 2016, compared to $5,827,000 for the year ended December 31, 2015. The increase in cost of sales of $4,503,000, or 77%, is primarily attributed to an increase in cost of materials, reflecting recognition of the costs from sales. In addition, there was an increase in salaries and related expenses associated with the incremental number of employees added in the operations department and an increase in intangible asset amortization.
 
Gross Profit
 
Gross profit was $26,049,000 for the year ended December 31, 2016, or 71.6% of revenues, compared to $20,269,000, or 77.7% of revenues, for the year ended December 31, 2015. The decrease in gross margin is mainly attributed to the reduced sales price to Medtronic of the Mazor X and higher manufacturing costs of the Mazor X system, compared to the Renaissance system.
 
Operating Expenses

   
For the Year Ended
December 31,
   
Increase (decrease) in
 
   
2016
   
2015
   
Dollars
   
%
 
   
(in thousands)
       
Research and development, net          
 
$
5,736
   
$
6,324
     
(588
)
   
(9
)
Selling and marketing          
 
$
33,637
   
$
24,947
     
8,690
     
35
 
General and administrative          
 
$
5,697
   
$
4,305
     
1,392
     
32
 
Total operating expenses