UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
OR
For
the fiscal year ended
OR
OR
For the transition period from _______ to _______
Commission
File No.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of the Registrant’s name into English)
State
of
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Chief Executive Officer
Tel:
Fax: 972.4.654.6880
(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: None.
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:
Ordinary Shares, nominal value NIS 0.01 per share
Indicate
the number of outstanding ordinary 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
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
If
this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐
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 a 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.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐ | Accelerated filer ☐ | |
Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report.
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements.
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒ | International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow: Item 17 ☐ Item 18 ☐
If
this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No
TABLE OF CONTENTS
i
ABOUT THIS ANNUAL REPORT
All references to “we”, “us”, “our”, “the Company”, “PV Nano”, “our company” and “our Company”, in this Annual Report on Form 20-F, or our annual report, are to P.V. Nano Cell Ltd., unless the context otherwise requires. All references to “Group” in this annual report on Form 20-F, are to the Company and its direct and indirect subsidiaries, unless the context otherwise requires. All references to “shares”, “ordinary shares” or “our ordinary shares” are to our ordinary shares, NIS 0.01 nominal value per share. All references to “Israel” are to the State of Israel. “U.S. GAAP” means the generally accepted accounting principles in the United States. Unless otherwise stated, all of our financial information presented in this annual report has been prepared in accordance with U.S. GAAP. Any discrepancies in any table between totals and sums of the amounts listed are due to rounding. Unless otherwise indicated, or the context otherwise requires, references in this annual report to financial and operational data for a particular year refer to the fiscal year of our company ended December 31 of that year.
Our reporting currency and financial currency is the U.S. dollar. In this annual report on Form 20-F, “NIS” means New Israeli Shekel, and “$,” “US$” and “U.S. dollars” mean United States dollars. Unless stated otherwise, U.S. dollar translation of NIS amounts presented in this annual report are translated using the rate of $1.00 = NIS 3.627, the exchange rate published by the Bank of Israel on December 31, 2023.
We have proprietary rights to trademarks used in this Annual Report that are important to our business, many of which are registered under applicable intellectual property laws. Solely for convenience, trademarks and trade names referred to in this Annual Report may appear without the “®” or “™” symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent possible under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trademarks, trade names or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies. Each trademark, trade name or service mark of any other company appearing in this Annual Report is the property of its respective holder.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties. All statements other than statements of historical facts contained in this annual report on Form 20-F are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
● | the potential market opportunities for commercializing our current and planned products; |
● | our ability to raise the capital needed to continue our operations and pay existing and future liabilities; |
● | our going concern qualification in our consolidated financial statements for the year ended December 31, 2023 and its impact on our capital raising efforts; |
● | our expectations and beliefs regarding the technological advantages, cost efficiencies and potential market size for our current and planned products; |
● | estimates of our expenses, future revenue, capital requirements, and our needs for additional financing; |
● | our ability to develop, advance, manufacture and commercialize our current and planned products; |
ii
● | the implementation of our business model and strategic plans for our business and products; |
● | the scope of protection we are able to establish and maintain for intellectual property rights covering our current and planned products; |
● | our ability to maintain and establish collaborations or obtain additional funding; |
● | our financial performance; |
● | developments and projections relating to our competitors and our industry; and |
● | the impact of the economic, political and security situation in Israel and other countries in which we may operate. |
Any forward-looking statements in this annual report on Form 20-F reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Item 3 D. — Risk Factors” and elsewhere in this annual report on Form 20-F. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
This annual report on Form 20-F also contains estimates, projections, and other information concerning our industry, our business, and the markets for our products, including data regarding the estimated size of those markets. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry and general publications, government data and similar sources.
iii
PART I
ITEM 1. Identity of Directors, Senior Management and Advisers.
Not applicable.
ITEM 2. Offer Statistics and Expected Timetable.
Not applicable.
ITEM 3. Key Information.
A. [Reserved].
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Our business faces significant risks. You should carefully consider all of the information set forth in this annual report and in our other filings with the United States Securities and Exchange Commission (the “SEC”), including the following risk factors which we face and which are faced by our industry. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. In that event, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements, as a result of certain important factors including the risks described below and elsewhere in this report and our other SEC filings. See “Cautionary Note Regarding Forward-Looking Statements” on page ii.
Risk Factors Summary
Risks Related to Our Financial Position and Capital Requirements
● | We have a relatively limited operating history on which to assess our business, have incurred significant losses since our inception, and anticipate that we will continue to incur significant losses for the foreseeable future. |
● | Our history of net losses has raised substantial doubt regarding our ability to continue as a going concern. If we do not continue as a going concern, investors could lose their entire investment. |
● | We will need significant additional capital on an immediate basis, which we may be unable to obtain. Raising additional capital by issuing securities may cause dilution to existing shareholders. |
1
Risks Related to Our Business
● | We have generated only minimal revenue from product sales and may never be profitable. |
● | Our failure to complete the development of our Sicrys paste, may adversely affect our ability to successfully commercialize our products and technologies. |
● | If our conductive inks and pastes fail to achieve and sustain sufficient market acceptance or if market penetration occurs more slowly than expected, our future revenues will be adversely affected. |
● | We believe that our future success depends on our ability to deliver products and services that meet changing technology and customer needs. |
● | We currently have minimal marketing and sales capabilities. If we are unable to establish significant sales and marketing capabilities or enter into agreements with third parties to market and sell our products once development of our technology for mass production is completed, we may be unable to generate significant revenue. |
● | Our ability to grow our business successfully depends, among other things, on our ability to expand our production and operating infrastructure in a way that would effectively support our growth in our target markets. |
● | We are subject to a multitude of manufacturing risks, any of which could substantially increase our costs and limit supply of our products and technologies. |
● | We are subject to risks resulting from fluctuations in the price of silver and other raw materials. |
● | Our business involves the use of hazardous materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do business, and if we fail to comply with such laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business. |
● | We face competition in the markets in which we operate and our competitors may develop products that are similar to, more advanced than, or more effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize our products and technologies. |
● | The health effects of nanotechnology are unknown. |
● | Our future success depends in part on our ability to retain our key personnel and to attract, retain, and motivate other qualified personnel. |
● | Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business. |
● | International expansion of our business exposes us to business, regulatory, political, operational, financial, and economic risks associated with doing business outside of Israel. |
● | Environmental, social and corporate governance (“ESG”) issues, including those related to climate change and sustainability, may have an adverse effect on our business, financial condition and results of operations and damage our reputation. |
● | Our business, operating results and growth rates may be adversely affected by current or future unfavorable economic and market conditions and adverse developments with respect to financial institutions and associated liquidity risk. |
2
Risks Related to Our Intellectual Property
● | If we are unable to obtain and maintain effective patent rights for our products and technologies or any future products and technologies, we may not be able to compete effectively in our markets. |
● | If we are unable to maintain effective proprietary rights for our products and technologies or any future products and technologies, we may not be able to compete effectively in our markets. |
● | Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts. |
● | We may become subject to claims of intellectual property infringement by third parties or may be required to indemnify our distributors or other third parties against such claims, which, regardless of their merit, could result in litigation, distract our management and materially adversely affect our business, results of operations or financial condition. |
● | We may not be successful in obtaining or maintaining necessary rights to our products and technologies through intellectual property rights in-licenses. |
● | We may not be able to fully enforce covenants not to compete with our key employees, and therefore we may be unable to prevent our competitors from benefiting from the expertise of such employees. |
● | We may not be able to protect our intellectual property rights throughout the world. |
Risks Related to Our Operations in Israel
● | Our headquarters and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel. |
● | The Israeli government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously received together with interest and penalties. |
● | Exchange rate fluctuations, primarily between the U.S. dollar and the NIS currencies, and inflation may negatively affect our results of operations. |
● | Provisions of Israeli law and our Amended and Restated Articles of Association (“Articles of Association”), may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets. |
● | It may be difficult to enforce a judgment of a United States court against us and our officers and directors and the Israeli experts named in this annual report on Form 20-F located in Israel or the United States, to assert United States securities laws claims in Israel or to serve process on our officers and directors and these experts. |
3
Risks Related to Our Ordinary Shares
● | Our U.S. investors may suffer adverse tax consequences if we are characterized as a passive foreign investment company. |
● | Your rights and responsibilities as 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. |
● | We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future. |
● | Our major shareholders, directors and officers as a group have significant voting power and may take actions that may not be in the best interest of shareholders. |
● | We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives. |
● | We are a “foreign private issuer” and have disclosure obligations that are different from those of U.S. domestic reporting companies. |
● | Offers or availability for sale of a substantial number of our ordinary shares may cause the price of our ordinary shares to decline. |
● | Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of December 31, 2023. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting. |
● | The market price of our ordinary shares may fluctuate significantly. |
● | Because our ordinary shares are traded as a “penny stock,” it may be more difficult for investors to sell our ordinary shares, and the market price of our ordinary shares may be adversely affected. |
Risks Related to Our Financial Position and Capital Requirements
We have a relatively limited operating history on which to assess our business, have incurred significant losses since our inception, and anticipate that we will continue to incur significant losses for the foreseeable future.
We have a limited operating history. We have incurred net losses since our inception in 2009, including a net loss of approximately $2.1 million for the year ended on December 31, 2023 and an accumulated deficit of approximately $42.7 million as of December 31, 2023. We are in default in repayment of our convertible notes which as of December 31, 2023 aggregated to approximately $1.5 million (including principal and interest). In addition, as of December 31, 2023, we had outstanding current liabilities towards (among others) the Israel Innovation Authority (“IIA”), service providers and suppliers in the aggregate amount of approximately $3.5 million. To date, we have financed our operations primarily through the issuance of equity instruments and convertible notes as well as through government grants. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to generate significant revenues via commercialization of our products or technologies. We do not know whether or when we will become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on an ongoing basis. Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows.
4
Our history of net losses has raised substantial doubt regarding our ability to continue as a going concern. If we do not continue as a going concern, investors could lose their entire investment.
We generated relatively limited revenues, which are not presently sufficient to sustain our operations. Our total revenues generated from sales were $478,584, $603,359 and $568,704 for the years ended December 31, 2023, 2022 and 2021, respectively. We have incurred net losses since our inception in 2009, including a net loss of approximately $2.1 million for the year ended December 31, 2023. In addition, we are in default in repayment of our convertible notes, which as of December 31, 2023, aggregated to approximately $1.5 million (including principal and interest). Further, as of December 31, 2023, we had outstanding current liabilities towards the IIA, service providers and suppliers in the aggregate amount of approximately $3.5 million. The future payments of such liabilities may have a significant effect on our cash availability in future periods. As of December 31, 2023, and as of the date of the filing of this annual report on Form 20-F, we had limited cash resources.
Our history of net losses has raised substantial doubt about our ability to continue as a going concern, and as a result, our independent registered public accounting firm included an explanatory paragraph in its report on our consolidated financial statements as of and for the year ended December 31, 2023 with respect to this uncertainty. We believe that we will need to raise significant additional funds before we have significant cash flow from operations. Accordingly, our ability to continue as a going concern will require us to seek alternative financing to fund our operations and pay existing and future liabilities. The substantial doubt about our ability to continue as a going concern could materially limit our ability to raise additional funds through the issuance of new debt or equity securities or otherwise. Future reports on our consolidated financial statements may include an explanatory paragraph with respect to our ability to continue as a going concern.
We will need significant additional capital on an immediate basis, which we may be unable to obtain. Raising additional capital by issuing securities may cause dilution to existing shareholders.
As of December 31, 2023, we had cash balance of $629,957. We are in default in repayment of our convertible notes which, as of December 31, 2023, aggregated to approximately $1.5 million (including principal and interest). In addition, as of December 31, 2023, we had outstanding current liabilities towards the IIA, service providers and suppliers in the aggregate amount of approximately $3.5 million. The future payments of such liabilities may have a significant effect on our cash availability in future periods. As of the date of this annual report, we had sufficient cash to fund operations as presently maintained through July 2024. We will need to raise additional capital to continue our operations beyond such period and to pay existing and future liabilities. There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are commercially acceptable to us. We may be required to pursue sources of additional capital through various means, including debt or equity financings. Future financing through equity investments is likely to be dilutive to existing shareholders. Furthermore, the terms of securities we may issue in future capital transactions may be more favorable for our new investors. Newly issued securities may include preferences, superior voting rights, the issuance of warrants or other derivative securities, and the issuance of incentive awards under equity employee incentive plans, which may have additional dilutive effects. Further, we may incur substantial costs in pursuing future capital and/or financing, including finder fees, investment banking fees, legal fees, accounting fees, printing and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities we may issue, such as convertible notes and warrants, which will adversely impact our financial condition. Our ability to obtain needed financing may be impaired by such factors as our history of losses and capital market conditions, including inflation and rising interest rates across the global economy, which have resulted in, and may continue to result in, significant disruption of global financial markets and could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
5
Risks Related to Our Business
We have generated only minimal revenue from product sales and may never be profitable.
We have generated only minimal revenue in the past, primarily from limited sales of our Sicrys inks. Our ability to generate revenue and achieve profitability depends on (among other things) our ability to demonstrate the technological advantage of and successfully commercialize our Sicrys pastes and inks and any future products and technologies. There is no assurance that we will be successful in any of these endeavors.
Our ability to generate future revenue from product sales depends heavily on our success in many areas, including but not limited to:
● | completing the development of our metallization solutions for the solar manufacturing market; |
● | obtaining market acceptance of our products and technologies; |
● | attracting, hiring, and retaining qualified personnel. |
● | developing paste and ink products compatible with commercially available printing technologies; |
● | expanding our distribution channels, including our ability to enter into cooperation arrangements with printing technologies manufacturers; |
● | ramping up our production capabilities if and when our sales volume increases; |
● | maintaining, protecting, and expanding our portfolio of intellectual property rights, including patents, trade secrets, and know-how; and |
● | addressing any competing technological and market developments. |
Our failure to complete the development of our Sicrys paste, may adversely affect our ability to successfully commercialize our products and technologies.
We continue to invest significant financial resources in the completion of the development of our Sicrys paste. However, research and development activities are inherently uncertain, and we could encounter difficulties in commercializing our research results. We seek to continuously improve our products and processes. While we believe that we will be able to manage these uncertainties, we may encounter unanticipated challenges and there can be no guarantee that our significant research and development expenditures will produce corresponding benefits. If we are unable to achieve the necessary technological developments, our overall growth and financial performance and our operating results could be adversely impacted.
If our conductive inks and pastes fail to achieve and sustain sufficient market acceptance or if market penetration occurs more slowly than expected, our future revenues will be adversely affected.
Our success depends, among other things, on our ability to gain market acceptance of our Sicrys inks and, following completion of development, pastes as a reliable and cost-saving alternative to existing production technologies. Compared to some competing technologies, our nano-metric conductive ink technology is relatively new, and most potential customers have limited knowledge of, or experience with, our conductive inks and pastes, may have substantial investments and know-how related to their existing printing technologies, and may perceive risks relating to the reliability, quality, usefulness and profitability of adopting our conductive inks and pastes when compared to other production technologies available in the market. Our potential customers may also need to devote significant time and effort to testing and validating our technology prior to its adoption. Any failure of our technology to meet our potential customer benchmarks could result in customers choosing to retain their existing technology or to purchase technologies other than ours. If we fail to achieve market acceptance of our conductive inks and pastes or if market penetration is slower than expected, then our opportunities to grow our revenues and reach profitability will be severely limited. There is no assurance that we will succeed in any of the foregoing.
6
We believe that our future success depends on our ability to deliver products and services that meet changing technology and customer needs.
Our business may be affected by rapid technological change, changes in user and customer requirements and preferences, frequent new product and service introductions embodying new technologies and the emergence of new standards and practices, any of which could render our existing products and proprietary technology obsolete. There is a risk that we may not be able to:
● | Develop or obtain leading technologies useful in our business; |
● | Enhance our existing products; |
● | Develop new products and technologies that address the increasingly sophisticated and varied needs of prospective customers; or |
● | Respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. |
We currently have minimal marketing and sales capabilities. If we are unable to establish significant sales and marketing capabilities or enter into agreements with third parties to market and sell our products once development of our technology for mass production is completed, we may be unable to generate significant revenue.
We have limited experience and capabilities in selling and marketing. In order to successfully commercialize our Sicrys inks and (following completion of development) pastes or any other products, we will need to either further develop these capabilities on our own or collaborate with third party distributors and sales agents with established sales and marketing operations and industry experience. However, there can be no assurance that we will be able to enter into agreements with such third-party distribution and sales agents on terms acceptable to us, or at all, or that such distributors or sales agents will be successful in marketing our inks and pastes. If we are not successful in entering into such agreements, our results of operation may be adversely affected.
Our ability to grow our business successfully depends, among other things, on our ability to expand our production and operating infrastructure in a way that would effectively support our growth in our target markets.
We manufacture our pastes and inks at our Migdal Ha’Emek facilities. We increased our facility’s production capacity during 2023 to support current customer demand, and plan to further increase production capacity in accordance with future customer demand, subject to sufficient available capital. Our future success requires (among other things) that we have adequate capacity in our manufacturing facilities to manufacture the quantities of products to support our current sales level and the anticipated increased levels that may result from our growth. We believe that the capacity of our current manufacturing facilities is sufficient to meet anticipated demand for our products through the end of 2024. However, there can be no assurance as to the timing or our ability to achieve planned, needed, or desired manufacturing capacity levels. In the event that demand for our inks and (following completion of development) pastes outgrows our internal manufacturing capacity, we may engage third-party manufacturers to produce additional inks and pastes, in which case there can be no assurance that we will be able to enter into agreements with such manufacturers on terms acceptable to us, or at all, or that, once contracted, such manufacturers will perform as expected. If we are not successful in expanding our production capacity or entering into such agreements with third parties, our results of operation may be adversely affected.
We are subject to a multitude of manufacturing risks, any of which could substantially increase our costs and limit supply of our products and technologies.
We currently only have one operating manufacturing line. The process of manufacturing our products and technologies is complex and subject to several risks and uncertainties, including, but not limited to, availability and prices of the raw materials (including silver in particular) necessary for production of our inks, and any major malfunctions in our manufacturing line. Any adverse developments affecting manufacturing operations for our products and technologies may result in shipment delays, inventory shortages, lot failures, withdrawals or recalls, or other interruptions in the supply of our products and technologies. We may also have to take inventory write-offs and incur other charges and expenses for products and technologies that fail to meet specifications, undertake costly remediation efforts, or seek more costly manufacturing alternatives.
7
We are subject to risks resulting from fluctuations in the price of silver and other raw materials.
The manufacturing process for our silver-based inks and pastes utilizes a silver salt, the price of which is linked to the price of silver. The price of silver as well as the price of other raw materials used in the manufacturing process for our inks and pastes is affected by numerous factors beyond our control, including inflation, fluctuation of the United States dollar and foreign currencies, global and regional demand, speculative activities by commodities traders and others and the political and economic conditions of major silver producing countries throughout the world The volatility of mineral prices represents a substantial risk which no amount of planning or technical expertise can fully eliminate. In the event the prices of silver or other raw materials used in our manufacturing process increase and remain high for prolonged periods of time, we may not be able to produce inks and pastes at a cost effective and competitive price. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, and cash flows.
Our business involves the use of hazardous materials, and we must comply with environmental, health and safety laws and regulations, which can be expensive and restrict how we do business, and if we fail to comply with such laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.
Our business involves the blending, controlled storage, use and disposal of hazardous materials. We are subject to numerous environmental, health and safety laws, regulations and permitting requirements, currently mainly in Israel, including those governing the emission and discharge of hazardous materials into ground, air or water; the manufacture, storage, use, management, handling and disposal of hazardous waste; the registration of chemicals and in the future also import and export of chemicals; the clean-up of contaminated sites; and the health and safety of our employees. We expect to be subject to similar regulations in any other jurisdictions in which we may establish manufacturing operations in the future. Although we believe the safety procedures we utilize for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. Some of these laws and regulations require us to obtain licenses or permits to conduct our operations. Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. If we violate or fail to comply with these laws, regulations, licenses or permits, we could be fined or otherwise sanctioned by regulators. We cannot predict the impact on our business of new or amended laws or regulations or any changes in the way existing and future laws and regulations are interpreted or enforced, nor can we ensure we will be able to obtain or maintain any required licenses or permits. In the event of an accident, local or foreign authorities may curtail the use of these materials and interrupt our business operations. If we are subject to any liability as a result of activities involving hazardous materials, our business and financial condition may be adversely affected and our reputation may be harmed.
We face competition in the markets in which we operate and our competitors may develop products that are similar to, more advanced than, or more effective than ours, which may adversely affect our financial condition and our ability to successfully commercialize our products and technologies.
We are currently aware of various existing products in the market and in development that may compete with our products and technologies, directly and indirectly. To our knowledge, other companies are currently developing and selling silver-based inkjet pastes and inks for printed electronics and digital electronic inkjet printing applications. We are also aware of several companies developing copper-based inks and pastes for inkjet printing and solar applications.
Many of our competitors have substantially greater financial, technical, and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations. Mergers and acquisitions in the conductive ink and paste industry may result in even more resources being concentrated in our competitors. As a result, these companies may be more effective in selling and marketing their products. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in this industry. Our competitors may succeed in developing, acquiring, or licensing on an exclusive basis, products that are more effective or less costly than our current or future products or technologies, or achieve earlier patent protection, product commercialization, and market penetration than we do. Additionally, technologies developed by our competitors may render our existing and potential products and technologies uneconomical or obsolete, and we may not be successful in marketing our products and technologies against competitors.
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The health effects of nanotechnology are unknown.
There is no scientific agreement on the health effects of nanomaterials, but some scientists believe that, in some cases, nanomaterials may be hazardous to an individual’s health or the environment. The science of nanotechnology is based on arranging atoms in such a way as to modify or build materials. Depending on the nanomaterials used, the resulting material may not be found in nature; therefore, the effects are unknown. Our technologies are based on nanometals that are, at most times, dispersed in a liquid minimizing the exposures risks. Moreover, once the metal particles have been printed and sintered, they are no longer nanometals, therefore lowering exposure risks. Although we take appropriate precautions for employees working with our materials and believe that any health risks related to the nanometals used in potential products can be minimized, we cannot assure that such precautions will be effective. Future research in the field of nanomaterials, in general, on health and environmental issues may have an adverse effect on products using our technology.
Our future success depends in part on our ability to retain our key personnel and to attract, retain, and motivate other qualified personnel.
We are highly dependent on our key personnel, and the loss of their services without proper replacements would adversely impact the achievement of our objectives. Recruiting and retaining additional key personnel and other qualified employees, consultants, and advisors for our business, including scientific and technical personnel, will also be critical to our success. We may not be able to attract and retain personnel on acceptable terms given the competition among numerous high-tech companies for individuals with similar skill sets. The inability to recruit and retain qualified personnel, or the loss of the services of our key personnel without proper replacement, may impede the progress of our research, development, and commercialization objectives.
Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.
A significant invasion, interruption, destruction or breakdown of our information technology systems and/or infrastructure by persons with authorized or unauthorized access could negatively impact our business and operations. We could experience business interruption, information theft and/or reputational damage from cyber-attacks or cyber-intrusions over the Internet, computer viruses, malware, natural disasters, terrorism, war, telecommunication and electrical failures, and attachments to emails. Any of the foregoing may compromise our systems and lead to data leakage either internally or at our third-party providers. The risk of a security breach or disruption, particularly through cyber-attacks or cyber-intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. If such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our business. Although we have invested in certain measures to reduce these risks, we cannot assure you that these measures will be successful in preventing compromise and/or disruption of our information technology systems and related data.
International expansion of our business exposes us to business, regulatory, political, operational, financial, and economic risks associated with doing business outside of Israel.
Our headquarters are located in Israel. Nevertheless, our business strategy incorporates potentially significant international expansion. Doing business internationally involves a number of risks, including but not limited to:
● | multiple, conflicting, and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits, and licenses; |
● | complexities and difficulties in obtaining protection for and enforcing our intellectual property rights; |
● | difficulties in staffing and managing foreign operations; |
● | limitations in our ability to penetrate international markets; |
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● | financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products, and exposure to foreign currency exchange rate fluctuations; |
● | changes in foreign regulations and customs; |
● | changes in currency exchange rates and currency controls; |
● | changes in a specific country’s or region’s political or economic environment; |
● | natural disasters, wars, terrorism, outbreak of disease, boycotts, curtailment of trade, and other business restrictions; |
● | certain expenses including, among others, expenses for travel, translation, and insurance; and |
● | certain countries’ regulations may make it difficult for us to import our inks and (following completion of development) pastes into such countries. |
Any of these factors could significantly harm our future international expansion and operations and, consequently, our results of operations.
Environmental, social and corporate governance (“ESG”) issues, including those related to climate change and sustainability, may have an adverse effect on our business, financial condition and results of operations and damage our reputation.
Public companies are facing increasing scrutiny related to ESG practices and disclosures from certain investors, customers, consumers, employees and other stakeholders. Complying with these demands or requirements could cause us to incur additional manufacturing, operating or product development costs. If our ESG practices fail to meet regulatory requirements or investor, employee or other stakeholders’ evolving expectations and standards for responsible corporate citizenship in areas including environmental stewardship, support for local communities, Board of Director and employee diversity, human capital management, employee health and safety practices, product quality, supply chain management, corporate governance and transparency, our reputation and employee retention may be negatively impacted, and our suppliers may be unwilling to continue to do business with us. If we do not adapt to or comply with new regulations, including the SEC’s recently approved rules that require companies to provide significantly expanded climate-related disclosures in their periodic reporting (assuming the ultimate implementation of such rules following the current stay thereof), or fail to meet evolving investor, industry or stakeholder expectations and concerns regarding ESG issues, investors may reconsider their capital investment in our Company, which could have a material adverse effect on our business or financial condition.
Our business, operating results and growth rates may be adversely affected by current or future unfavorable economic and market conditions and adverse developments with respect to financial institutions and associated liquidity risk.
Our business depends on the economic health of the global economies. If the conditions in the global economies remain uncertain or continue to be volatile, or if they deteriorate, including as a result of the impact of military conflict, terrorism or other geopolitical events, our business, operating results and financial condition may be materially adversely affected. Economic weakness, inflation and increases in interest rates, limited availability of credit, liquidity shortages and constrained capital spending have at times in the past resulted, and may in the future result, in challenging and delayed sales cycles, slower adoption of new technologies and increased price competition, and could negatively affect our ability to forecast future periods.
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In addition, increases in inflation raise our costs for commodities, labor, materials and services and other costs required to operate our business, and failure to secure these on reasonable terms may adversely impact our financial condition. Additionally, increases in inflation, along with the uncertainties surrounding any resurgence of COVID-19, geopolitical developments and global supply chain disruptions, have caused, and may in the future cause, global economic uncertainty and uncertainty about the interest rate environment, which may make it more difficult, costly or dilutive for us to secure additional financing. A failure to adequately respond to these risks could have a material adverse impact on our financial condition, results of operations or cash flows.
There can be no assurance that future credit and financial market instability and a deterioration in confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, liquidity shortages, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or if adverse developments are experienced by financial institutions, it may cause short-term liquidity risk and also make any necessary debt or equity financing more difficult, more costly, more onerous with respect to financial and operating covenants and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our strategy, our financial condition, results of operations or cash flows and stock price and could require us to alter our plans. In addition, there is a risk that one or more of our service providers, financial institutions, manufacturers, suppliers and other partners may be adversely affected by the foregoing risks, which could directly affect our ability to attain our operating goals on schedule and on budget.
Risks Related to Our Intellectual Property
If we are unable to obtain and maintain effective patent rights for our products and technologies or any future products and technologies, we may not be able to compete effectively in our markets.
We rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect the intellectual property related to our products and technologies. Our success depends in large part on our ability to obtain and maintain patent and other intellectual property protection in the United States and in other countries with respect to our proprietary technology and products.
We have sought to protect our proprietary position by filing patent applications in the United States and in other countries, as well as related to our novel technologies and products that are important to our business. The silver ink and dispersions-related patent applications based on PCT/US2011/063459 (WO2012078590), have been granted in several countries, including China, Russia, Japan, India, Israel, Korea, Brazil, France, Germany, the United Kingdom, the Netherlands, the U.S. and the European Union and we currently have additional patent applications pending in the U.S. supporting our silver-based inks, dispersions and some pastes. Our patent application based on PCT/IB2015/051536 (WO2015132719), relating to copper-based inks and dispersions, has been granted in several countries, including Europe, Russia, the United Kingdom, Belgium, Germany, Finland, France, Ireland, the Netherlands, Israel, Brazil, India and the United States. Additionally, we have patent applications based on PCT/IB2015/051536 (WO2015132719), relating to copper-based ink, which have been submitted to national phase in South Korea, Japan and China. This process is expensive and time consuming, and we may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection.
The patent position of technology companies generally is highly uncertain and involves complex legal and factual questions for which legal principles remain unsolved. The patents or patent applications that we own, or may in-license in the future, may fail to result in issued patents with claims that cover our products and technologies in the United States or in other foreign countries. There is no assurance that all potentially relevant prior art relating to our patents and patent applications has been found. The discovery of relevant prior art can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even if such patents cover our products and technologies, third parties may challenge their validity, enforceability, or scope, which may result in such patents being narrowed, found unenforceable or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protect our intellectual property, provide exclusivity for our products and technologies, or prevent others from designing around our claims. Any of these outcomes could impair our ability to prevent competition from third parties, which may have an adverse impact on our business.
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We have filed several patent applications covering various aspects of our products and technologies. Even though some have already been granted, we cannot provide any assurances about which, if any, additional patents will issue, the breadth of any such patent or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or licensed to us after patent issuance could deprive us of rights necessary for the successful commercialization of any products and technologies that we may develop. Further, if we encounter delays in regulatory approvals, the period of time during which we could market a product under patent protection could be reduced.
If we cannot obtain and maintain effective patent rights for our products and technologies, we may not be able to compete effectively and our business and results of operations would be harmed.
If we are unable to maintain effective proprietary rights for our products and technologies or any future products and technologies, we may not be able to compete effectively in our markets.
In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary knowhow that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our product candidate discovery and development processes that involve proprietary knowhow, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors, and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical security of our information technology systems. While we have confidence in these individuals, organizations and systems, agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors.
Although we expect all of our employees and consultants to assign their inventions to us, and all of our employees, consultants, advisors, and any third parties who have access to our proprietary knowhow, information, or technology to enter into confidentiality agreements, we cannot provide any assurances that all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Misappropriation or unauthorized disclosure of our trade secrets could impair our competitive position and may have a material adverse effect on our business. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secret.
Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.
There have been many lawsuits and other proceedings involving patent and other intellectual property rights in the high-technology industries, including patent infringement lawsuits, interferences, oppositions, and reexamination proceedings before the United States Patent and Trademark Office and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing products and technologies. As the conductive ink and paste industry expands and more patents are issued, the risk increases that our products and technologies may be subject to claims of infringement of the patent rights of third parties. We have never conducted a freedom to operate study.
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Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, or methods of manufacture related to the use or manufacture of our products and technologies. Because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that our products and technologies may infringe. In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents were held by a court of competent jurisdiction to cover the manufacturing process of any of our products and technologies, the holders of any such patents may be able to block our ability to commercialize such product or technology unless we obtained a license under the applicable patents, or until such patents expire or are finally determined to be invalid or unenforceable.
Similarly, if any third-party patents were held by a court of competent jurisdiction to cover aspects of our formulations, processes for manufacture, or methods of use, the holders of any such patents may be able to block our ability to develop and commercialize the applicable product or technology unless we obtained a license or until such patent expires or is finally determined to be invalid or unenforceable. In either case, such a license may not be available on commercially reasonable terms or at all.
Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop and commercialize one or more of our products and technologies. Defense of these claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to pay substantial damages (including treble damages and attorneys’ fees for willful infringement), pay royalties, redesign our infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.
We may become subject to claims of intellectual property infringement by third parties or may be required to indemnify our distributors or other third parties against such claims, which, regardless of their merit, could result in litigation, distract our management and materially adversely affect our business, results of operations or financial condition.
We have in the past and may in the future become subject to third-party claims that assert that our solutions, services and intellectual property infringe, misappropriate or otherwise violate third-party intellectual property or other proprietary rights.
Intellectual property disputes can be costly and disruptive to our business operations by diverting the attention and energies of management and key technical personnel, and by increasing our costs of doing business. Even if a claim is not directly against us, our agreements with distributors generally require us to indemnify them against losses from claims that our products infringe third-party intellectual property rights and entitle us to assume the defense of any claim as part of the indemnification undertaking. Our assumption of the defense of such a claim may result in similar costs, disruption and diversion of management attention to that of a claim that is asserted directly against us. We may not prevail in any such dispute or litigation, and an adverse decision in any legal action involving intellectual property rights could harm our intellectual property rights and the value of any related technology or limit our ability to execute our business.
Adverse outcomes in intellectual property disputes could:
● | require us to redesign our technology or force us to enter into costly settlement or license agreements on terms that are unfavorable to us; |
● | prevent us from manufacturing, importing, using, or selling some or all of our solutions; |
● | disrupt our operations or the markets in which we compete; |
● | impose costly damage awards; |
● | require us to indemnify our distributors and customers; and |
● | require us to pay royalties. |
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We may not be successful in obtaining or maintaining necessary rights to our products and technologies through intellectual property rights in-licenses.
Our products and technologies may, in the future, require the use of proprietary rights held by third parties. In addition, our products and technologies may require specific formulations to work effectively and efficiently and the rights to these formulations may be held by others. We may be unable to acquire or in-license any compositions, methods of use, processes, or other third-party intellectual property rights from third parties that we identify as necessary for our products and technologies. The licensing and acquisition of third-party intellectual property rights is a competitive area, and more established companies than us may pursue strategies to license or acquire third-party intellectual property rights that we may consider attractive. These established companies may have a competitive advantage over us due to their size, cash resources, and greater development and commercialization capabilities.
In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make an appropriate return on our investment. If we are unable to successfully obtain rights to required third-party intellectual property rights, we may have to abandon development of that product or technology and our business and financial condition could suffer.
We may not be able to fully enforce covenants not to compete with our key employees, and therefore we may be unable to prevent our competitors from benefiting from the expertise of such employees.
Our employment agreements with our key employees contain non-compete provisions. These provisions prohibit our key employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period of time. We may be unable to enforce these provisions under applicable laws in Israel where all of our key employees reside. In Israel, the Basic Law: Freedom of Occupation, as interpreted by binding case law, may restrict our ability to enforce non-compete provisions against our employees. If we cannot enforce our non-compete provisions against our employees, we may be unable to prevent our competitors from benefiting from the expertise of such employees. Even if these provisions are enforceable, they may not adequately protect our interests. As a result, if one or more of our employees leaves our employment and subsequently becomes employed by one of our competitors, our business, results of operations and ability to capitalize on our proprietary information may be materially adversely affected.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting, and defending patents on products and technologies in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and may also export otherwise infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or not successful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
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Risks Related to Our Operations in Israel
Our headquarters and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel.
Our executive offices, application department, labs, production site and warehouse are located in Migdal Ha’Emek, Israel. In addition, all of our officers and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel may directly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries and militia groups, including Hamas, an Islamist militia and political group that controls the Gaza Strip, and Hezbollah, an Islamist militia group that controls large portions of southern Lebanon.
In October 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets. Hamas also launched extensive rocket attacks on Israeli population and industrial centers located along Israel’s border with the Gaza Strip and in other areas within the State of Israel. These attacks resulted in thousands of deaths and injuries, and Hamas additionally kidnapped many Israeli civilians and soldiers. Following the attack, Israel’s security cabinet declared war against Hamas and commenced a military campaign against Hamas and these terrorist organizations in parallel continued rocket and terror attacks. Following the attack by Hamas on Israel’s southern border, Hezbollah in Lebanon has also launched missile, rocket, and shooting attacks against Israeli military sites, troops, and Israeli towns in northern Israel. In response to these attacks, the Israeli army has carried out a number of targeted strikes on sites belonging to Hezbollah in southern Lebanon. Furthermore, following Hamas’ attack on Israel and Israel’s security cabinet declaration of war against Hamas, the Houthi movement, which controls parts of Yemen, launched a number of attacks on marine vessels traversing the Red Sea that were thought to either be on route to Israel or to be partly owned by Israeli businessmen. In April 2024, Iran launched a series of over 300 drone and missile attacks on military and civilian targets in Israel. It is possible that other terrorist organizations, including Palestinian military organizations in the West Bank, as well as other hostile countries, will join the hostilities. It is currently not possible to predict the duration or severity of the ongoing conflict or its effect on our business, operations and financial conditions. The ongoing conflict is rapidly evolving and developing, and could disrupt our business and operations.
In connection with the Israeli security cabinet’s declaration of war against Hamas and possible hostilities with other organizations, several hundred thousand Israeli military reservists were drafted to perform immediate military service. While we have not been impacted by any absences of personnel military service call ups to date, military service call ups that result in absences of personnel from us for an extended period of time may materially and adversely affect our business, prospects, financial condition and results of operations. The intensity and duration of Israel’s current war is difficult to predict, as are such war’s implications on our business and operations.
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 you that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business.
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Further, in the past, the State of Israel and Israeli companies have been subjected to economic boycotts. Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies. These restrictions may limit materially our ability to obtain raw materials from these countries or sell our products to companies or persons in these countries. In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions in such agreements.
Finally, political conditions within Israel may affect our operations. Israel has held five general elections between 2019 and 2022, and prior to October 2023, the Israeli government pursued extensive changes to Israel’s judicial system, which sparked extensive political debate and unrest. To date, these initiatives have been substantially put on hold. Actual or perceived political instability in Israel or any negative changes in the political environment, may individually or in the aggregate adversely affect the Israeli economy and, in turn, our business, financial condition, results of operations and prospects.
Any armed conflicts, terrorist activities or political instability in Israel or the region or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect business conditions and harm our results of operations and could make it more difficult for us to raise capital.
The Israeli government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously received together with interest and penalties.
We have received grants from the IIA for research and development programs and may apply for further grants in the future. In order to maintain our eligibility for these grants, we must comply with the requirements of the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Law for the Encouragement of Research and Development in Industry 5744-1984), and the regulations and guidelines promulgated thereunder (the “Innovation Law”). Under the terms of the Innovation Law, in exchange for the research and development grants we received, we are required to pay the IIA royalties at the rate of 3% from our revenues up to an aggregate of 100% (which may be increased under certain circumstances, as described below) of the U.S. dollar-linked value of the grant, plus interest. Until October 25, 2023, the interest was calculated at a rate based on the last published 12-month LIBOR applicable to U.S. dollar deposits. On October 25, 2023, the IIA published a directive concerning changes in royalties to address the expiration of the LIBOR, according to which, (a) for IIA grants approved between January 1, 1999 and June 30, 2017 – the annual interest will be the interest in effect at the time of the grant approval; (b) for IIA grants approved between July 1, 2017 and December 31, 2023 – for the period prior to December 31, 2023, the interest shall be calculated based on the 12-month LIBOR applicable to U.S. dollar deposits, as published on the first trading day of each year or in an alternative publication of the Bank of Israel; and for periods as of January 1, 2024, the annual interest shall be calculated at a rate based on the 12-month secured overnight financing rate (SOFR), or at an alternative rate published by the Bank of Israel plus 0.71513%; and (c) for IIA grants approved on or following January 1, 2024, the annual interest shall be the higher of (i) the 12 months SOFR interest rate, plus 1%, and (ii) a fixed annual interest rate of 4%.
As of December 31, 2023, we and our wholly-owned subsidiaries had received funding from the IIA in the aggregate amount of approximately $3.6 million. As of December 31, 2023, we and our wholly-owned subsidiaries had paid royalties to the IIA in the aggregate amount of approximately $1.1 million and had an obligation to the IIA with respect to such funding (including interest) in the amount of approximately $3.2 million (approximately $2.0 million out of such amount are contingent liabilities and therefore, not recorded in our liabilities).
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The Innovation Law generally requires that the products developed as part of the programs under which the grants were given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside of Israel, unless a prior written approval is received from IIA (such approval is not required for the transfer of a portion of the manufacturing capacity which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside of Israel in the applications for funding, in which case only notification is required) and additional payments are required to be made to IIA. The export of products that incorporate the funded know-how is not restricted. As of the date of this annual report on Form 20-F, we have not sought to obtain such approvals, as we do not have immediate plans to manufacture outside of Israel. We may not receive the required approvals for any transfer of manufacturing activities, if such transfer will be contemplated in the future. Even if we do receive approval to manufacture products developed with IIA grants outside of Israel, the royalty rate may be increased and we may be required to pay up to 150% of some or all of the grant amounts requiring repayment plus interest, depending on the manufacturing volume that is performed outside of Israel. This restriction may impair our ability to outsource manufacturing or engage in our own manufacturing operations for those products or technologies.
Additionally, under the Innovation Law, we are prohibited from transferring, including by way of license, the IIA-financed technologies and related intellectual property rights and knowhow outside of the State of Israel, except under limited circumstances and only with the prior approval of the IIA. As of the date of this annual report on Form 20-F, we have not sought to obtain such approvals, as we do not have immediate plans to transfer the IIA-funded technologies and related intellectual property rights and knowhow outside of Israel. We may not receive the required approvals for any proposed transfer, if any, and even if received, we may be required to pay the IIA a portion of the consideration that we receive upon any sale of such technology to a non-Israeli entity up to 600% of the grant amounts plus interest. The scope of the support received, the royalties that we have already paid to the IIA, the amount of time that has elapsed between the date on which the knowhow or the related intellectual property rights were transferred and the date on which the IIA grants were received and the sale price and the form of transaction will be taken into account in order to calculate the amount of the payment to the IIA. Approval of the transfer of technology to residents of the State of Israel is required, and may be granted in specific circumstances only if the recipient abides by the provisions of applicable laws, including the restrictions on the transfer of knowhow and the obligation to pay royalties. No assurance can be made that approval to any such transfer, if requested, will be granted.
These restrictions may impair our ability to sell our technology assets or to perform or outsource manufacturing outside of Israel, engage in change of control transactions or otherwise transfer our knowhow outside of Israel and may require us to obtain the approval of the IIA for certain actions and transactions and pay additional royalties and other amounts to the IIA.
These restrictions will continue to apply even after we have repaid the full amount of royalties on the grants. If we fail to satisfy the conditions of the Innovation Law, we may be required to refund certain grants previously received together with interest and penalties, and may become subject to criminal charges.
The Government of Israel has reduced the grants available under the IIA’s program in recent years, and this program may be discontinued or curtailed in the future. If we do not receive additional grants in the future, we will be required to allocate other funds to product development at the expense of other operational costs.
We have also received a grant from the Israeli Ministry of Energy and Infrastructure (the “MoE”) for one of our research and development programs. In order to maintain our eligibility for this grant, we must meet specified conditions, including the payment of royalties of 5% (plus interest) of any revenues generated from the intellectual property generated under the program. As of December 31, 2023, we had received funding from the MoE in the aggregate amount of approximately NIS 585,119 (approximately $168,574, based on the exchange rate of $1.00 = NIS 3.471 in effect as of December 31, 2013) As of December 31, 2023, we had a contingent obligation to the MoE with respect to such funding (including interest), following the payment of royalties up to that date, in the amount of NIS 554,289 (approximately $152,823). If we fail to comply with these conditions in the future, sanctions (such as the cancellation of the grant) might be imposed on us, and we could be required to refund any payments previously received. The terms of the MoE’s grant require us, among other things, to obtain the MoE’s approval prior to any assignment of know-how developed under the research and development program funded with its grant and we must continue to comply with the grant requirements of our agreement with the MoE regarding intellectual property even following full repayment of any MoE grant. The MoE also has a right to receive a nonexclusive royalty free license to the know-how developed under any such program to the extent necessary for national needs. Pursuant to the terms of the grant, until the later of (i) full repayment of our contingent liability to the MoE, or (ii) finalization of the research and development program, we are required to notify the MoE of any new funding offered to us, including by the State of Israel, and the MoE has a right to negotiate with such investor(s) for the repayment by us of the grant provided to us by the Ministry.
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Exchange rate fluctuations, primarily between the U.S. dollar and the NIS currencies, and inflation may negatively affect our results of operations.
We incur expenses both in U.S. dollars and NIS, but our consolidated 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, if the NIS instead depreciates relative to the U.S. dollar, that the inflation rate in Israel may exceed such rate of depreciation of the NIS, or that the timing of such depreciation 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 depreciation (if any) of the NIS against the U.S. dollar. In addition, we may incur operating expenses denominated in Euros, and therefore, our operating results may also be subject to fluctuations due to changes in the U.S. dollar/Euro exchange rate. We cannot predict any future trends in the rate of inflation in Israel or the rate of depreciation (if any) of the NIS, the Euro and other foreign currencies against the U.S. dollar. Given our general lack of currency hedging arrangements to protect us from fluctuations in the exchange rates of the NIS and Euro and other foreign currencies in relation to the U.S. dollar (and/or from inflation of such foreign currencies), we may be exposed to adverse effects from such movements. The rate of inflation in Israel or Europe or in currency exchange rates may materially change and we might not be able to effectively mitigate these risks.
Provisions of Israeli law and our Amended and Restated Articles of Association (“Articles of Association”), may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.
Provisions of Israeli law and our Articles of Association could have the effect of delaying or preventing a change in control of our company; may make it more difficult for a third-party to acquire us; may make it more difficult for our shareholders to elect different individuals to our board of directors, even if doing so would be considered to be beneficial by some of our shareholders; and may limit the price that investors may be willing to pay in the future for our ordinary shares. Among other things:
● | Israeli corporate law regulates mergers and requires that a tender offer be effected when more than a specified percentage of shares in a company are purchased; |
● | any amendment of our Articles of Association generally requires a vote of the holders of a majority of our outstanding ordinary shares entitled to vote and present at a general meeting of shareholders; however, the amendment of a limited number of provisions related to the board of directors, proceedings of the board of directors, and business combinations require a vote of the holders of 60% of our outstanding ordinary shares entitled to vote and present at a general meeting (excluding abstentions); |
● | our Articles of Association require a vote of the holders of 60% of our outstanding ordinary shares entitled to vote and present at a general meeting (excluding abstentions) for the removal of directors (who are not external directors) prior to the expiration of his or her term of office; |
● | our Articles of Association provide that director vacancies may only be filled by our board of directors; and |
● | our Articles of Association prevent a “business combination” with an “interested shareholder” (as such terms are defined in our Articles of Association) for a period of three years after the date of the transaction in which the person or entity became an interested shareholder, unless the business combination or the transaction which resulted in the shareholder becoming an interested shareholder is approved by the Board of Directors in accordance with our Articles of or other requirements specified in our Articles of Association are satisfied. |
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Our Articles of Association provide for a board of directors consisting of no less than three and no more than seven directors, with all directors (other than the external directors, whose appointment is required under the Israeli Companies Law, 1999 (the “Companies Law”), as described below) divided into three classes with staggered three-year terms with each class of directors to consist, as nearly as possible, of one-third of the total number of directors other than the external directors. This provision may make it more difficult for our shareholders to elect different individuals to our board of directors, even if doing so would be considered to be beneficial by some of our shareholders, may limit the price that investors may be willing to pay in the future for our ordinary shares, and may make it more difficult for a potential acquiror to effect a change of control of our Company or may deter potential acquirors from seeking to effect a change of control.
In addition, under our Articles of Association, as approved by our shareholders on November 29, 2018, GTRIMG Investments Ltd. (“GTRIMG”), our controlling shareholder, has the right, so long it holds at least 5% of our issued and outstanding share capital, conditioned upon a $2.0 million investment by GTRIMG following such date, to appoint a director to the Board who shall also serve as the chairman of the Board, provided that such nominee has the required qualifications under applicable laws, including the stock exchange rules then applicable. In April 2020, following completion of GTRIMG’s $2.0 million investment, GTRIMG appointed Mr. Dov Farkash to serve as a member of our Board as Active Chairman. At the annual general meeting of shareholders held in December 2023, our shareholders approved the re-election of Mr. Farkash as a Class I director, to serve until our annual general meeting of shareholders to be held in 2026.
Furthermore, under an agreement dated October 27, 2021, entered into in connection with a private placement of our securities, certain of the investors, including GTRIMG, Messrs. Leon and Lenny Recanati, Dan Vilenski and Teuza – A Fairchild Technology Venture Ltd. (“Teuza”), have the right to appoint three directors to our Board. Accordingly, Mr. Ofer Greenberger and Mr. David Boas were appointed to our Board as of May 19, 2022. Mr. Boas resigned from our Board as of January 1, 2023, and was replaced by Mr. Keinan Maman, who was appointed as a Class II director as of March 6, 2023. Mr. Ofer Greenberger resigned from our Board as of January 7, 2024.
Further, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders whose country of residence does not have a tax treaty with Israel granting tax relief to such shareholders from Israeli tax. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of various conditions, including a holding period of two years from the date of the transaction during which certain sales and dispositions of shares of the participating companies are restricted. 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 actual disposition of the shares has occurred.
It may be difficult to enforce a judgment of a United States court against us and our officers and directors and the Israeli experts named in this annual report on Form 20-F located in Israel or the United States, 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. Our executive officers and all of our directors 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 for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Additionally, it may be difficult for an investor, or any other person or entity, to initiate an action with respect to United States securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of United States 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 United States law is applicable to the claim. If United States law is found to be applicable, the content of applicable United States law must be proven as a fact by expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, you may not be able to collect any damages awarded by either a United States or foreign court.
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Risks Related to Our Ordinary Shares
Our U.S. investors may suffer adverse tax consequences if we are characterized as a passive foreign investment company.
Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company (“PFIC”), for U.S. federal income tax purposes. We have not determined whether we have been a PFIC for 2023 or any previous year, or whether we will be a PFIC in any future year. Because PFIC status is determined annually based on our income, assets and activities for the entire taxable year, there can be no assurance that we will not be classified as a PFIC in any year. If we were to be characterized as a PFIC for U.S. federal income tax purposes in any taxable year during which a U.S. Investor owns ordinary shares, such U.S. Investor could face adverse U.S. federal income tax consequences, including having gains realized on the sale of our ordinary shares classified as ordinary income, rather than as capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. Investors, and having interest charges apply to distributions by us and the proceeds of share sales. A “qualified electing fund” election may alleviate some of the adverse consequences of PFIC status; however, we do not intend to provide the information necessary for U.S. Investors to make qualified electing fund elections if we are classified as a PFIC.
Your rights and responsibilities as 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 our shareholders are governed by Israeli law and our Articles of Association. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in typical U.S.-based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders and to refrain from abusing its power in the company, including, among other things, in voting at general meetings of shareholders on certain matters, such as an amendment to the company’s articles of association, an increase of the company’s authorized share capital, a merger of the company and approval of related party transactions that require shareholder approval. A shareholder also has a general duty to refrain from discriminating against other shareholders. In addition, a controlling shareholder or a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of an office holder in the company has a duty to act in fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. 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 our shareholders that are not typically imposed on shareholders of U.S. corporations.
We have never paid cash dividends on our share capital, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid cash dividends on our share capital, nor do we anticipate paying any cash dividends on our share capital in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of our ordinary shares will be the investors’ sole source of gain for the foreseeable future. In addition, Israeli law limits our ability to declare and pay dividends and may subject our dividends to Israeli withholding taxes. Furthermore, our payment of dividends (out of tax-exempt income) may retroactively subject us to certain Israeli corporate income taxes, to which we would not otherwise be subject.
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Our major shareholders, directors and officers as a group have significant voting power and may take actions that may not be in the best interest of shareholders.
Our major shareholders, GTRIMG, Messrs. Leon and Lenny Recanati or companies under their control and Teuza, and our directors and officers as a group beneficially owned approximately 84.90% of our outstanding ordinary shares as of May 9, 2024. As a result, they will have the ability to exert substantial influence over all matters requiring approval by our shareholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. Their interests may not be consistent with those of our other shareholders. In addition, due to their share ownership, our major shareholders, the directors appointed by them, our other directors and executive officers could dictate the management of our business and affairs. As of May 9, 2024, GTRIMG beneficially owned in the aggregate approximately 39.42% of our outstanding ordinary shares. This concentration of ownership may discourage third parties from seeking to acquire control of us and could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination that could be favorable to you. This significant concentration of share ownership may also adversely affect the trading price for our ordinary shares, if a public market further develops for such securities, because investors may perceive disadvantages in owning stock in a company with controlling affiliated shareholders.
We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to new compliance initiatives.
We are subject to the requirements to file periodic and annual reports under Section 15(d) of the Exchange Act, and are otherwise subject to laws applicable to public reporting companies in the United States. As a public reporting company, we incur significant legal, accounting, and other expenses. In addition, the Sarbanes-Oxley Act, as amended, and the rules and regulations of the SEC thereunder, have imposed various requirements on public companies. Shareholder activism, the current political environment, and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate. Our management and other personnel need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal and financial compliance costs and will make some activities more time consuming and costly.
We are a “foreign private issuer” and have disclosure obligations that are different from those of U.S. domestic reporting companies.
We are a foreign private issuer and are not subject to the same requirements that are imposed upon U.S. domestic issuers by the SEC. Under the Exchange Act, we are subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. For example, we are not required to issue quarterly reports and proxy statements that comply with the requirements applicable to U.S. domestic reporting companies. Furthermore, although as an Israeli public company listed outside of Israel we are required to disclose the compensation of our five most highly compensated officer holders on an individual basis, this disclosure is not as extensive as that required of U.S. domestic reporting companies. We also have four months after the end of each fiscal year to file our annual reports with the SEC and are not required to file current reports as frequently or promptly as U.S. domestic reporting companies. Furthermore, our officers, directors and principal shareholders are exempt from the requirements to report short-swing profit recovery contained in Section 16 of the Exchange Act. Also, as a “foreign private issuer,” we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. These exemptions and leniencies will reduce the frequency and scope of information and protections available to you in comparison to those applicable to U.S. domestic reporting companies.
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Offers or availability for sale of a substantial number of our ordinary shares may cause the price of our ordinary shares to decline.
If our major shareholders sell substantial amounts of our ordinary shares in the public market (if one develops) or if there is a perception in the market that substantial sales may occur in the future upon the expiration of any statutory holding period, under Rule 144, or upon the exercise of outstanding options held by our directors and officers or warrants held by investors, the market price of our ordinary shares could fall. The occurrence of such substantial sales or the perception that substantial sales of our ordinary shares may occur in the future could put downward pressure on the market price of our ordinary shares and may make it more difficult for us to raise additional financing through the sale of equity or equity related securities in the future at a time and price that we deem reasonable or appropriate.
Furthermore, we issued a significant number of warrants to certain investors, which, if exercised, may have a material dilutive effect on our share capital. For more information see “Item 7 A. Major Shareholders and Related Party Transactions — Major Shareholders”.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of December 31, 2023. If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures are designed to prevent fraud. Our management is required to assess the effectiveness of our internal controls and procedures and disclose changes in these controls on an annual basis. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us of our internal controls and procedures may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting and concluded that our internal control over financial reporting was not effective as of December 31, 2023, and also concluded that our disclosure controls and procedures were not effective as of December 31, 2023, due to material weaknesses in our internal control over financial reporting, all as described in “Item 15 Controls and Procedures” of this annual report. As defined in Regulation 12b-2 under the Exchange Act, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual financial statements will not be prevented or detected on a timely basis.
The material weaknesses in internal control over financial reporting that were identified (among other things) were: (i) significant parts of entity level controls are missing, (ii) lack of segregation of duties, (iii) controls’ effectiveness testing was predominantly not performed, among other things due to nonperformance of controls or absence of evidence for controls’ performance, and (iv) non-remediation of material weaknesses identified in prior years. Based on such assessment, management has concluded that, as of December 31, 2023, our internal control over financial reporting is ineffective based on those criteria.
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We have made, and will continue to make, changes in these and other areas. In any event, the process of determining whether our existing internal controls are compliant with applicable requirements and sufficiently effective will require the investment of substantial time and resources, including by our chief financial officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. In addition, we cannot predict the outcome of this process and whether we will need to implement remedial actions in order to implement effective controls over financial reporting. The determination of whether or not our internal controls are sufficient and any remedial actions required could result in us incurring additional costs that we did not anticipate. We may also fail to complete our evaluation, testing and any required remediation needed to comply with applicable requirements in a timely fashion. Irrespective of compliance with applicable requirements, any additional failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during and after the implementation of these changes. If we are unable to implement any of the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting or results of operations.
Furthermore, if we are unable to certify that our internal control over financial reporting is effective and in compliance with applicable requirements, we may be subject to sanctions or investigations by regulatory authorities, such as the SEC, and we could lose investor confidence in the accuracy and completeness of our financial reports, which could hurt our business and our ability to access the capital markets.
The market price of our ordinary shares may fluctuate significantly.
If a public trading market further develops for our ordinary shares, the market price of the ordinary shares may fluctuate significantly in response to numerous factors, some of which are beyond our control, such as:
● | the announcement of new products or product enhancements by us or our competitors; |
● | developments concerning intellectual property rights and regulatory approvals; |
● | variations in our and our competitors’ results of operations; |
● | changes in earnings estimates or recommendations by securities analysts, if the ordinary shares are covered by analysts; |
● | developments in the nanotechnology and alternative energy industries; |
● | the results of product liability or intellectual property lawsuits; |
● | future issuances of ordinary shares or other securities; |
● | the addition or departure of key personnel; |
● | announcements by us or our competitors of acquisitions, investments or strategic alliances; and |
● | general market conditions and other factors, including factors unrelated to our operating performance, such as natural disasters and political and economic instability, including wars, terrorism, political unrest, results of certain elections and votes, emergence or resurgence of a pandemic or other widespread health emergencies (including for example, a resurgence of the COVID-19 pandemic), boycotts, adoption or expansion of government trade restrictions, and other business restrictions. |
Further, in recent years, the stock market has experienced extreme price and volume fluctuations. Continued or renewed market fluctuations could result in extreme volatility in the price of our ordinary shares, which could cause a decline in the value of the ordinary shares. Price volatility of our ordinary shares might be significant if the trading volume of the ordinary shares is low, which often occurs with respect to securities quoted on the OTCQB or the OTC Pink.
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Because our ordinary shares are traded as a “penny stock,” it may be more difficult for investors to sell our ordinary shares, and the market price of our ordinary shares may be adversely affected.
Our ordinary shares are deemed a “penny stock” since, among other things, the stock price is currently trading below $5.0 per share. Broker-dealers who sell penny stocks must provide purchasers of these stocks with a standardized risk-disclosure document prepared by the SEC. This document provides information about penny stocks and the nature and level of risks involved in investing in the penny-stock market. A broker must also give a purchaser, orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination that the penny stock is a suitable investment for the purchaser and obtain the purchaser’s written agreement to the purchase. Broker-dealers must also provide customers that hold penny stock in their accounts with such broker-dealer a monthly statement containing price and market information relating to the penny stock. If a penny stock is sold to an investor in violation of the penny stock rules, the investor may be able to cancel its purchase and get its money back.
The penny stock rules may make it difficult for investors to sell their ordinary shares. Because of the rules and restrictions applicable to a penny stock, there is less trading in penny stocks and the market price of the ordinary shares may be adversely affected. Also, many brokers choose not to participate in penny stock transactions. Accordingly, investors may not always be able to resell their ordinary shares publicly at times and prices that they feel are appropriate.
ITEM 4. Information on the Company
A. History and development of the company
P.V. Nano Cell Ltd. was incorporated in Israel on June 24, 2009 as a private limited liability company, organized under the laws of State of Israel. We have three wholly-owned subsidiaries, all of which are private companies organized under the laws of the State of Israel: (i) Nano Size Ltd. (“Nano Size”), which we acquired on December 31, 2009; (ii) Digiflex Ltd. (“Digiflex”), which we acquired on December 3, 2017; and (iii) Jet CU P.C.B. Ltd. (“Jet CU”), which we acquired on July 26, 2020. Additionally, Digiflex wholly-owns one subsidiary based in the US: Digiflex Inc., incorporated under the laws of the State of Delaware.
Our Registration Statement on Form F-1 was declared effective by the SEC on September 30, 2015, and a FINRA-registered market maker subsequently filed an application on Form 211 with FINRA to quote our ordinary shares on the OTCQB marketplace (the “OTCQB”). On March 31, 2016, the application on Form 211 with FINRA to make a market in our ordinary shares was approved by FINRA, and on December 15, 2016, quotation of our ordinary shares began on the OTCQB under the ticker symbol “PVNNF”. On December 18, 2019, our ordinary shares began to be quoted on the OTC Pink. However, due to lack of available resources, we were not able to comply in a timely manner with our SEC periodic filing obligations for the years ended December 31, 2020 and 2021. Accordingly, as of September 29, 2021, the public quote for our ordinary shares was removed from the OTC Pink. Depending on market and other conditions and the continued development of our products, we may consider applying to have our ordinary shares quoted on the OTC Pink or OTCQB.
Our principal offices are located at 8 Hamasger Street, Migdal Ha’Emek, Israel 2310102. Our telephone number is (972) 4-654-6881. Our website address is www.pvnanocell.com. This website address is included in this annual report on Form 20-F as an inactive textual reference only. The information and other content appearing on our website are not part of this annual report on Form 20-F. The Company does not have a registered agent in the United States.
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B. Business Overview
We are a conductive paste and ink manufacturing company focused on developing, manufacturing, marketing and commercializing conductive pastes and inks for digital conductive printing applications, mainly screen printing and novel printing technologies for the solar industry. We have developed the Sicrys family of single crystal nano-metric conductive paste and ink, which we believe is a significantly more effective alternative to other current printing processes, such as screen printing, photolithography and etching processes, for photovoltaic heterojunction technology (PV-HJT) and digital printed electronics applications. We adapt our Sicrys paste and ink to specific customer requirements. We currently sell our Sicrys silver-based ink for photovoltaic, digital printed electronics and automotive applications in low volumes and are in the process of seeking to expand our sales efforts to include sales of Sicrys silver-based ink for a wider range of applications, such as solar. We are in the process of developing our Sicrys silver-based paste for solar applications. We are also developing what we believe is the first single crystal copper-based nano-metric paste and ink for mass-production of printed electronics, including for solar applications. We believe that copper inks and pastes represent a significant improvement over silver-based inks and pastes given copper’s significantly lower cost and nearly identical electrical and conductive properties.
Background
Photovoltaic Cell Metallization
PV cells (commonly known as solar cells) are the building blocks of solar module arrays that convert energy from sunlight into electricity. Multiple PV cells in an integrated group, all oriented in one plane, constitute a solar photovoltaic panel or module. An array of connected PV cells can convert solar energy into a usable amount of direct current electricity.
A key part of the PV cells manufacturing process is the metallization of the cell, i.e., laying down metal electrodes (metal lines) to collect the electricity generated by the cell when exposed to sunlight. Typically, the metallization process involves the application of silver paste on the cell using a screen-printing process. The metal lines are then fired (i.e., sintered) at high temperature to improve conductivity.
One of the main challenges of the metallization process is reducing the linewidth of the metal lines to minimize shading losses while maximizing conductivity by denser lines. Extremely fine (narrow) lines are difficult to produce. Furthermore, conductivity of fine lines becomes challenging as the linewidth is similar to the size of the metal particles in the conductive paste (e.g., a line 10um produced by 3um metal particles). This challenge is greater in modern heterojunction (“HJT”) solar cells that, due to their specific structure and materials, do not allow firing. Typical silver pastes require firing at up to 800 °C; well above the upper tolerance of the HJT cells. Therefore, special low temperature silver pastes designed for curing temperature (~200 °C) must be used. Metal lines produced by low temperature silver pastes are less conductive in comparison with fired standard silver paste lines. Therefore, HJT cells require larger amounts of low temperature silver paste (to compensate for the low conductivity) that yield wider lines. Producing high-conductivity low temperature paste is a key bottleneck of the HJT technology.
We believe that our single crystal nanoparticle silver paste can enable the creation of conductive fine lines with superior conductivity compared to current micro-particle-based silver pastes, especially for HJT non-fired processes. Furthermore, by providing superior conductivity, the amount of material could be reduced significantly and further improve the cost-per-watt performance of the PV cells that are produced using our nanoparticles silver paste.
In addition, we are working with several equipment manufacturers that enable non-contact metallization processes that can further improve the cost-per-watt by allowing for thinner PV cell wafers (thus reducing silicon costs).
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Printed Electronics
Digital printed electronics is a set of methodologies by which electrical devices are digitally printed onto various substrates (i.e., base material) by depositing electrically functional inks and pastes (and possibly other additional functional inks and pastes such as insulating materials) on the substrate, creating active or passive devices, such as conductors, capacitors or resistors. The use of digital printed electronics presents an opportunity to facilitate widespread, production of new electronics, more efficient electronics, new electronic designs and customized and personalized electronics.
We believe that the current analog printing and etching methods have inherent limitations when implemented in flexible electronics, 3D (three dimensional) electronics and in customized and small-scale printing. Furthermore, these processes currently utilize expensive materials and produce toxic byproducts which must be disposed of, which increases overall production costs. We believe that a market opportunity exists for inks and pastes, such as ours, that enable digital conductive printing, enabling printing on flexible substrates, on substrates that cannot be fired (post printing sintering at high temperature), to allow three-dimensional printing, customized and optimized small-scale printing.
Digitally printing electronics present advantages over the traditional analog method, including:
● | It is an additive process, with no etching‘ reducing waste, especially dangerous waste; |
● | Digital process may allow printing of passive components (resistors & capacitors) embedded in the layers; |
a. | Free mounting area on the outer surfaces (will allow minimizing the surface area and thickness). |
b. | Saving component mounting costs and complexity. |
While there are quite a few companies that have silver conductive inks and pastes, there are very few companies offering high-metal content silver and copper nano particle dispersions. The Company offers both silver and copper-single crystal nano particle-based inks and is developing pastes.
Our Sicrys Inks and Pastes
Sicrys Inks for Digital Printed Electronics
We currently offer silver-based and copper-based Sicrys inks for use in the production of digital printed electronics utilizing inkjet printing technologies. We believe that inkjet production of digital printed electronics utilizing our Sicrys inks results in the following benefits relative to traditional screen printing and photolithography processes:
● | Applications for flexible and customized electronics and three-dimensional (3D) printed device manufacturing, due to digital (non-contact) printing and the lower sintering temperatures required for nano-based inks; |
● | Significant cost efficiency due to additive manufacturing, flexibility and efficiency of the manufacturing process; and |
● | Low generation of hazardous waste during the manufacturing process. |
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Sicrys Paste for Photovoltaic Cell Metallization
We are developing silver-based and copper-based Sicrys paste, which is a nanoparticle-based paste for screen printing technology and other novel printing technologies for solar applications. We believe that PV HJT utilizing our Sicrys paste has the potential to result in the following benefits relative to traditional screen-printing processes:
● | A more efficient solar cell; |
● | Immediate cost savings due to substantially lower metallization costs and increased cell efficiency (lower sintering temperatures); |
● | Potential future cost savings due to the ability to utilize thinner wafers for PV cells, thus reducing silicon costs and potentially further increasing cell efficiency; |
● | Enhanced performance due to improved conductive properties enabling printing of contact lines that are significantly thinner compared to traditional pastes; |
● | Improve performance of temperature sensitive solar cells (CIGS, CdTe, HTJ, thin films and others); and |
● | Potential additional cost savings with copper-based paste compared to silver-based paste. |
Our Strategy
Our goal is to become a leading producer of conductive pastes and inks for digital printed electronics applications and the solar industry. Our strategy is to concentrate our efforts on mass production application opportunities by selling paste and inks to be used in mass production printing technologies with high throughputs and high consumption of pastes and inks per year. We are currently focusing our efforts on demonstrating the advantages of our Sicrys technology to dedicated customers. We partner with leading printing technology manufacturers to supply our solutions to potential customers. We also intend to further work with our customers to develop the production processes suitable to the relevant applications and their needs (including printing strategy, printing temperature, sintering temperatures and time).
Research and Development
The conductive pastes and inks we manufacture for conductive printing applications are based on either silver or copper. Our research and development efforts are focused primarily on the continuous improvement and optimization of our pastes and inks, including adapting and optimizing the pastes and inks to the different available and emerging printing technologies and applications in the market. In addition, our efforts focus on reducing the sintering temperature, or the process that physically connects between the nano metal particles to produce a continuous conductive layer.
We and our wholly-owned subsidiaries have received grants from the Government of Israel through the IIA for the financing of a portion of our research and development expenditures pursuant to the Innovation Law. As of December 31, 2023, we and our wholly-owned subsidiaries had received funding from the IIA in the aggregate amount of approximately $3.6 million. As of December 31, 2023, we and our wholly-owned subsidiaries had paid royalties to the IIA in the aggregate amount of approximately $1.1 million and had an obligation to the IIA with respect to such funding (including interest) in the amount of approximately $3.2 million (approximately $2.0 million out of such amount are contingent liabilities and therefore, not recorded in our liabilities). We may apply for additional IIA grants in the future; however, there is no assurance that such applications will be approved in the amount requested or at all. We have also received a grant from the MoE for one of our research and development programs. As of December 31, 2023, we had received funding from the MoE in the aggregate amount of approximately NIS 585,119 (approximately $168,574, based on the exchange rate of $1.00 = NIS 3.471 in effect as of December 31, 2013). As of December 31, 2023, we had a contingent obligation to the MoE with respect to such funding (including interest), following the payment of royalties up to that date, in the amount of NIS 554,289 (approximately $152,823). See “Item 3 D. Key Information – Risk Factors – Risks Related to Our Operations in Israel – The Israeli government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously received together with interest and penalties.”
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In addition, we have several development consortiums in the framework of the European Horizon 2020, research and development support programs in Europe and Israel, which provide grants for research and development, including to companies in Israel. The grants are used to expand our know-how and network through research and development that we commit to, the costs of which is reimbursed in part by European Horizon 2020 and local financing entities. One consortium program for the inkjet-based fabrication of multilayer printed circuit boards with embedded printed passive elements was concluded. The following additional projects were approved for financing in 2019 and 2021:
● | RolaFlex – A project financed by the Horizon 2020 framework (approximately $6.5 million total budget, of which $0.5 million was allocated to us, of which 70% is to be funded by the grant). The project’s vision is to combine high-resolution laser printing and laser patterning and new materials with high throughput R-2-R process. The technology will be demonstrated in the high-speed fabrication of OLED and OPV components. The partners in this project are TNO (The Netherlands), Armor (France), Golem (Germany), Seqens (France), FlexEnable (UK), NTUA (Greece), Imperial Collage (UK), Avantama (Switzerland). The project was initially for a period of three years, commencing May 1, 2020, and was extended for an additional six-month period, until October 31, 2023. |
● | Tinker – A project financed by the Horizon 2020 framework (approximately $12 million total budget, of which $0.79 million was allocated to us, all of which is to be funded by the grant). The project’s vision is to provide a new cost and resource-efficient pathway for RADAR and LIDAR sensor package fabrication with high throughput of up to 250 units/min. Partners in this project are: Bosch (Germany), Infineon (Germany), Profactor (Austria), Ibeo (Germany), Marelli (Italy), Leti (France), Notion (Germany), Tiger (Austria), EVG (Austria), Inkron (Finland), Sentech (Germany), Forth (Greece), Austrian Standards (Austria), Besi (The Netherlands), and Amires (Switzerland). The project was initially for a period of three years commencing October 1, 2020, and was extended for an additional six-month period, until March 31, 2024. |
● | Bussard – A project financed by the Solar EraNet (through the Israeli Ministry of Infrastructure) framework (approximately $5 million total budget, of which $0.33 million was allocated to us, of which 62.5% is to be funded by the grant). The project’s vision is to develop solar cell metallization methods that can show substantially narrower patterns than the state of the art. Partners in this project are: Fraunhofer ISE, HighLine, Tempress Janoschka, ContiTech, JB Ecotech, Energetica and KAU (all in Germany). The project was initially for a period of two years commencing February 1, 2021, and was extended for an additional 12-month period, until January 31, 2024. |
Competition
The digital electronic printing and inkjet conductive paste and ink manufacturing industries are extremely competitive. We are currently aware of various existing products in the market and in development that may compete with our products and technologies.
To our knowledge, several other companies are currently developing silver-based pastes and inks for printed electronics and digital electronic inkjet printing applications and paste for solar metallization applications. Some of these companies already sell conductive inkjet inks and pastes for printed electronics and solar applications. We are also aware of companies developing copper-based inks and pastes for inkjet printing.
We believe that our inks have the following competitive advantages, relative to those currently being sold by our competitors, especially when aiming to print on mass production applications and throughputs:
● | Higher metal load at low viscosities, which results in a more cost-efficient printing process; |
● | Higher stability and for a longer period of time (over one year for Sicrys at room temperature as compared to less than six months for our competitors, some of which require their inks to be stored at low temperatures to remain stable for an extended period of time); |
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● | Copper inks with a similar stability profile as our silver inks (including its chemical stability), which is difficult to achieve due to the low oxidation point for copper, which results in certain of our competitors offering copper oxide inks as opposed to pure copper inks; |
● | Low resistivity. (ρ < 2.5 x bulk. Laser and thermal sintering); |
● | Low sintering temperature (< 200 °C); |
● | Silver inks suitable for solar cells metallization which can show higher efficiency due to enhanced electrical properties after firing the cells (low contact resistance and resistivity); and |
● | Compatibility with high throughput industrial printing (high jetting frequencies for long periods of time). |
Based on the advantages of our inks, we are developing a paste for solar applications.
Furthermore, we believe that there is a high barrier to entry for competitors to develop and successfully bring competing inks to market due to the long lead times required to develop nano particles of an appropriate size to formulate inks compatible with inkjet printing and the difficulty in producing nano-based inks in large-scale quantities.
Notwithstanding the foregoing, many of our competitors have substantially greater financial, technical, and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations. Mergers and acquisitions in the conductive ink and paste industry may result in even more resources being concentrated in our competitors. As a result, these companies may be more effective in selling and marketing their products. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in this industry. Our competitors may succeed in developing, acquiring, or licensing on an exclusive basis, products that are more effective or less costly than our current or future products or technologies, or achieve earlier patent protection, product commercialization, and market penetration than we do. Additionally, technologies developed by our competitors may render our existing and potential products and technologies uneconomical or obsolete, and we may not be successful in marketing our products and technologies against competitors.
Intellectual Property
An important part of our business and product development strategy is to seek, when appropriate, protection for our products and proprietary technology through the use of various United States and foreign patents. Our patent application based on PCT/US2011/063459 (WO2012078590). covering silver single crystal particle inks, dispersions and some pastes and dispersions have been granted in several countries, including China, Russia, Japan, India, Israel, Korea, Brazil, Germany, France, UK, Netherlands, the U.S. and the European Union and we currently have additional patent applications pending in the U.S. supporting our silver-based inks, dispersions and some pastes. Our patent application based on PCT/IB2015/051536 (WO2015132719), relating to copper-based ink, has been granted in several countries, including Russia, Europe, the United Kingdom, Belgium, Germany, Finland, France, Ireland, the Netherlands, Israel, Brazil, India and the United States. Additionally, we have patent applications based on PCT/IB2015/051536 (WO2015132719), relating to copper-based ink, which have been submitted to national phase in South Korea, Japan and China.
The silver family main claims are on the concentrated dispersions and inks made of a majority of single crystal Nano silver particles and the method for producing them. Patent applications are in different stages of qualification in additional countries. The single crystal particles are easy to police against infringement. The priority date for the silver family is December 6, 2010.
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The copper family relates to nano-metric copper formulations and stable dispersions containing single-crystal metallic copper particles, and to the method of producing such formulations and dispersions. The priority date for the copper family is March 3, 2014.
We have a granted joint patent with Ramot (Tel Aviv University) for “Conductive Nanowire Films” (WO 2013/128458, US 9,373,515 B2), which Ramot maintains pursuant to the termination settlement of the Magneton Program.
Our wholly-owned subsidiary, Nano Size, has been granted several patents in the field of ultrasonic manufacturing of nano materials (7,157,058 (US); 7,504,075 (US); 144638 (IL); 149932 (IL)).
Digiflex has been granted several patents for inks, primers and primer lamination in the field of graphic arts in several countries, including, but not limited to, the United States, European Union, Canada, China, France, Germany, United Kingdom, Germany, India and Israel. These include: Process for Producing a Photomask on a Photopolymeric Surface; USA 9,513,551 and 12 countries and Process for Dry-coating of Flexographic Surfaces; USA 9,352,544.
We intend to continue to seek patent protection for our products that we may develop in the future. The patenting of technology-related products and processes involves uncertain and complex legal and factual questions. To date, no consistent policy has emerged regarding the breadth of claims of such technology patents. Therefore, there is no assurance that our pending applications will issue, or what scope of protection any issued patents will provide, or whether any such patents ultimately will be upheld as valid by a court of competent jurisdiction in the event of a legal challenge. The costs of such proceedings would be significant, and an unfavorable outcome could result in the loss of rights to the invention at issue in the proceedings. If we fail to obtain patents for our technology and are required to rely on unpatented proprietary technology, there is no assurance that we can protect our rights in such unpatented proprietary technology, or that others will not independently develop substantially equivalent proprietary products and techniques, or otherwise gain access to our proprietary technology.
Competitors have filed applications for, or have been issued patents, and may obtain additional patents and proprietary rights relating to products or processes used in, necessary to, competitive with, or otherwise related to, our patents. The scope and validity of these patents, and the extent to which we may be required to obtain licenses under these patents or under other proprietary rights and the cost and availability of licenses is unknown. This may limit our ability to license our technology. Litigation concerning these or other patents could be protracted and expensive. If suit were brought against us for patent infringement, a challenge in the suit by us as to the validity of the other patent would have to overcome a legal presumption of validity. There can be no assurance that the validity of the patent would not be upheld by the court or that, in such event a license of the patent to us would be available. Moreover, even if a license were available, the payments that would be required are unknown and could materially reduce the value of our interest in the affected products.
We also rely upon unpatented trade secrets. No assurances can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology or that we can meaningfully protect our rights to our unpatented trade secrets. We require our employees, consultants, advisors, and any third parties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements with us, which provide that all confidential information developed or made known to the individual during the course of the relationship is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and consultants, the agreements provide that all inventions conceived by the individual will be our exclusive property or will be assigned to us. There is no assurance, however, that these agreements will provide meaningful protection for our trade secrets and other confidential proprietary information in the event of unauthorized use or disclosure of such information.
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Marketing and Sales
We offer and sell several conductive inks based on either silver or copper, which are sold directly to customers or through distributors, and we also generate leads and sales through our website. We work with our customers in the development of our solutions for their applications as part of our go-to-market strategy.
Seasonality
Our business and operations are generally not affected by seasonal fluctuations or factors.
Raw Materials and Suppliers
We believe that the raw materials that we require to manufacture our pastes and inks are readily available in adequate quantities from multiple sources. In addition, the manufacturing process for our silver-based pastes and inks utilizes a silver salt the price of which is linked to the price of silver. The price of silver as well as the price of other raw materials used in the manufacturing process for our pastes and inks is affected by numerous factors beyond our control, including inflation, fluctuation of the U.S. dollar and foreign currencies, global and regional demand, speculative activities by commodities traders and others and the political and economic conditions of major silver producing countries throughout the world. The volatility of mineral prices represents a substantial risk which no amount of planning or technical expertise can fully eliminate. In the event the prices of silver or other raw materials used in our manufacturing process increase and remain high for prolonged periods of time, we may not be able to produce pastes and inks at a cost effective and competitive price. See “Item 3 D. Key Information — Risk Factors — We are subject to risks resulting from fluctuations in the price of silver and other raw materials.”
Manufacturing
We manufacture our pastes and inks at our Migdal Ha’Emek facilities. We increased our facility’s production capacity during 2023 to support current customer demand, and plan to further increase production capacity in accordance with future customer demand, subject to sufficient available capital. In the event that demand for our pastes and inks outgrows our internal manufacturing capacity, we intend to engage third-party manufacturers to produce additional pastes and inks. There can be no assurance that we will be able to enter into agreements with qualified manufacturers on terms acceptable to us, or at all, or that, once contracted, such manufacturers will perform as expected.
Government Regulation
We are subject to various environmental, health and safety laws, regulations and permitting requirements, including those governing the emission and discharge of hazardous materials into ground, air or water; noise emissions, the generation, storage, use, management and disposal of hazardous waste; the registration of chemicals and in the future also import and export; the clean-up of contaminated sites; and the health and safety of our employees. Under such laws and regulations, we are required to obtain environmental permits from governmental authorities for certain operations. The manufacture of our products requires storing or using certain hazardous materials. Pursuant to the Israeli Dangerous Substances Law - 1993, we are required to (and did) obtain a toxin permit from the Ministry of Environmental Protection. Our permit is valid until May 10, 2025.
If we establish manufacturing operations in other jurisdictions, we expect to become subject to environmental, health and safety laws, regulations and permitting requirements in those jurisdictions, which may be similar to or more onerous than those described above.
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C. Organizational structure
P.V. Nano Cell Ltd. was incorporated in Israel on June 24, 2009, as a private limited liability company, organized under the laws of State of Israel. We have three wholly-owned subsidiaries, all of which are private companies organized under the laws of the State of Israel: (i) Nano Size, which we acquired on December 31, 2009; (ii) Digiflex, which we acquired on December 3, 2017; and (iii) Jet CU, which we acquired on July 26, 2020. Additionally, Digiflex wholly-owns one subsidiary based in the US: Digiflex Inc., incorporated under the laws of the State of Delaware.
D. Property, plants and equipment
We currently lease, through Nano Size, approximately 678 square meters (approximately 7,300 square feet) of space in Migdal Ha’Emek, Israel for our principal offices and manufacturing facilities at a monthly cost of approximately NIS 18,000 (approximately $4,962). This lease agreement expires on June 30, 2025, and we have an option to extend the lease for an additional three years.
Additionally, Digiflex currently leases approximately 110 square meters (approximately 1,200 square feet) of space in Migdal Ha’Emek, Israel for its principal office and laboratory at a monthly cost of approximately NIS 5,500 (approximately $1,516). This lease agreement expires on March 15, 2024, and we have an option to extend the lease for an additional period of one year.
ITEM 4A. Unresolved Staff Comments.
Not applicable.
ITEM 5. Operating and Financial Review and Prospects.
A. Operating results
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this annual report on Form 20-F. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this annual report on Form 20-F, particularly in the sections titled “Item 3 D. Key Information — Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are a conductive paste and ink manufacturing company focused on developing, manufacturing, marketing and commercializing conductive pastes and inks for digital conductive printing applications, mainly screen printing and novel printing technologies for the solar industry. We have developed the Sicrys family of single crystal nano-metric conductive paste and ink, which we believe is a significantly more effective alternative to other current printing processes, such as screen printing, photolithography and etching processes, for photovoltaic heterojunction technology (PV-HJT) and digital printed electronics applications. We adapt our Sicrys paste and ink to specific customer requirements. We currently sell our Sicrys silver-based ink for photovoltaic, digital printed electronics and automotive applications in low volumes and are in the process of seeking to expand our sales efforts to include sales of Sicrys silver-based ink for a wider range of applications, such as solar. We are in the process of developing our Sicrys silver-based paste for solar applications. We are also developing what we believe is the first single crystal copper-based nano-metric paste and ink for mass-production of printed electronics, including for solar applications. We believe that copper inks and pastes represent a significant improvement over silver-based inks and pastes given copper’s significantly lower cost and nearly identical electrical and conductive properties.
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Financial Overview
We have incurred net losses since our inception in 2009, including a net loss of approximately $2.1 million for the year ended December 31, 2023. As of December 31, 2023, we had an accumulated deficit of approximately $42.7 million. We are in default in repayment of our convertible notes which as of December 31, 2023 aggregated to approximately $1.5 million (including principal and interest). We have devoted substantially all of our financial resources to identifying, acquiring, licensing, and developing our products and technologies and providing general and administrative support for these operations. To date, we have financed our operations primarily through the sale of equity and convertible securities and government grants. The amount of our future net losses will depend, in part, on the rate of our future expenditures and our ability to generate significant revenues via commercialization of our products or technologies. We are dependent upon external sources to finance our operations and there can be no assurance that we will succeed in obtaining the necessary financing to continue our operations. As a result, our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern.
Key Components of our Statements of Comprehensive Loss
Revenues
We derive revenues primarily from sales of inks.
Cost of Revenues
Our total cost of revenues includes expenses for the manufacturing of inks and pastes, including: the cost of raw materials; employee-related expenses, including salaries, equity-based compensation and other benefits and related expenses, lease payments, utility payments, depreciation, changes in inventory of finished products, royalties and other manufacturing expenses. These expenses are partially reduced by an allotment of manufacturing costs associated with research and development activities to research and development expenses.
Operating Expenses
Research and Development Expenses, net
Research and development activities are central to our business model. However, we do not believe that it is possible at this time to accurately project total program-specific expenses.
Research and development expenses consist primarily of compensation for employees engaged in research and development activities, including salaries, equity-based compensation, benefits and related expenses, clinical trials, contract research organization sub-contractors, development materials, external advisors and the allotted cost of our manufacturing facility for research and development purposes.
Our research and development expenses, net, are net of grants for the research and development that we have received grants from the government of the State of Israel, through the IIA, pursuant to the Innovation Law, for the financing of a portion of our research and development expenditures. As of December 31, 2023, we and our wholly-owned subsidiaries had received funding from the IIA in the aggregate amount of approximately $3.6 million. As of December 31, 2023, we and our wholly-owned subsidiaries had paid royalties to the IIA in the aggregate amount of approximately $1.1 million and had an obligation to the IIA with respect to such funding (including interest) in the amount of approximately $3.2 million (approximately $2.0 million out of such amount are contingent liabilities and therefore, not recorded in our liabilities). We may apply for additional IIA grants in the future; however, there is no assurance that such applications will be approved in the amount requested or at all.
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We have also received a grant from the MoE for one of our research and development programs. In order to maintain our eligibility for this grant, we must meet specified conditions, including the payment of royalties with respect to the grant received. As of December 31, 2023, we had received funding from the MoE in the aggregate amount of approximately NIS 585,119 (approximately $168,574, based on the exchange rate of $1.00 = NIS 3.471 in effect as of December 31, 2013). As of December 31, 2023, we had a contingent obligation to the MoE with respect to such funding (including interest), following the payment of royalties up to that date, in the amount of NIS 554,289 (approximately $152,823).
For additional information regarding grants from the Israeli government, see “Item 3 D. Key Information – Risk Factors – Risks Related to Our Operations in Israel – The Israeli government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously received together with interest and penalties.”
In addition, from time to time, we participate in several development consortiums European Horizon 2020 and others in which we receive supporting grants which we record as a deduction to the research and development expenses. The grants are used to expand our knowhow and network through research and development that we commit to, the costs of which will be reimbursed in part by European Horizon 2020 and local financing entities.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of compensation expenses for personnel engaged in sales and marketing, including salaries, equity-based compensation and benefits and related expenses, as well as promotion, marketing, market access and sales and distribution activities.
General and Administrative Expenses
General and administrative expenses consist principally of compensation for employees in executive and administrative functions, including salaries, equity-based compensation, benefits and other related expenses, professional consulting services, including legal and audit fees, as well as costs of office and overhead.
Financial Income/Financial Expense
Financial income/expenses includes primarily change in fair value of warrants and capital note presented at fair value, Interest and accretion back in connection with convertible loans and exchange rate differences.
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Results of Operations
The following table sets forth a summary of our operating results:
US $ | Year ended December 31, | |||||||||||
2023 | 2022 | 2021 | ||||||||||
Consolidated Statement of Operations Data: | ||||||||||||
Revenues | $ | 478,584 | $ | 603,359 | $ | 568,704 | ||||||
Cost of Revenues | 331,466 | 375,877 | 271,817 | |||||||||
Amortization of intangible assets | — | 428,431 | 428,431 | |||||||||
Gross loss (profit) | (147,118 | ) | 200,949 | 131,544 | ||||||||
Research and development, net | 280,303 | 268,601 | 467,698 | |||||||||
Sales and marketing | 393,785 | 566,896 | 625,031 | |||||||||
General and administrative | 1,415,632 | 1,893,179 | 1,345,495 | |||||||||
Intangible asset impairment | — | 2,108,117 | — | |||||||||
Total operating expenses | 2,089,720 | 4,836,793 | 2,438,224 | |||||||||
Operating loss | 1,942,602 | 5,037,742 | 2,569,768 | |||||||||
Financial expenses (income), net | 129,395 | (528,195 | ) | (50,904 | ) | |||||||
Net loss | $ | 2,071,997 | $ | 4,509,547 | $ | 2,518,864 |
Year ended December 31, 2023, compared to year ended December 31, 2022:
Revenues
With respect to the years ended December 31, 2023 and December 31, 2022, total revenues amounted to $478,584 and $603,359, respectively, a decrease of $124,775 or 21%. The decrease related primarily to a late purchase order that was received from one of our largest customers and as a result, the related revenue should be recognized in 2024.
Cost of revenues
With respect to the years ended December 31, 2023 and December 31, 2022, total cost of revenues amounted to $331,466 and $375,877, respectively, a decrease of $44,411 or 12%. The decrease corresponds with the decrease in revenue.
Amortization of intangible assets
With respect to the year ended December 31, 2022, we recorded an amortization of intangible assets expense of $428,431 related to technology that we acquired as part of the Digiflex purchase in December 2017. As of December 31, 2022, as we had ceased the marketing activities associated with this technology and expected a negative cash-flow throughout its life, we recorded an impairment charge of $2,108,117, which was equal to the technology, net amount that we recorded as part of the Digiflex purchase in 2017. We did not record an intangible assets impairment expense in 2023.
Gross loss (profit)
For the year ended December 31, 2023, we recorded a gross profit of $147,118 as compared to a gross loss of $200,949 for the year ended December 31, 2022, an increase of $348,067. The increase related to the $428,431 amortization of intangible assets expense that was recorded for the year ended December 31, 2022 (whereas we did not record any such expense in 2023) and the $44,411 decrease in cost of revenues, offset in part by the $124,775 decrease in revenues.
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Research and development expenses, net
With respect to the years ended December 31, 2023 and December 31, 2022, research and development expenses, net were $280,303, net of $405,268 grants recorded, and $268,601, net of $437,045 grants recorded, respectively, an increase of $11,702 or 4%. No significant change year over year.
Sales and marketing expenses
With respect to the years ended December 31, 2023 and December 31, 2022, sales and marketing expenses amounted to $393,785 and $566,896, respectively, a decrease of $173,111 or 31%. The decrease related primarily to a decrease in salary expenses following the departure of our Chief Business Development Officer in February 2023.
General and administrative expenses
With respect to the years ended December 31, 2023 and December 31, 2022, general and administrative expenses amounted to $1,415,632 and $1,893,179, respectively, a decrease of $477,547 or 25%. The decrease related primarily to the decrease in share-based compensation, as well as a decrease in management fees and professional services.
Intangible asset impairment
With respect to the years ended December 31, 2022, we recorded an intangible asset impairment charge of $2,108,117, which was equal to the technology, net amount that we recorded as part of the Digiflex purchase in 2017, as we had ceased the marketing activities associated with this technology and expected a negative cash-flow throughout its life. We did not record any impairment of intangible assets in 2023.
Operating expenses
With respect to the years ended December 31, 2023 and December 31, 2022, operating expenses amounted to $2,089,720 and $4,836,793, respectively, a decrease of $2,747,073 or 57%. The decrease related to the $2,108,117 intangible asset impairment charge that we recorded in 2022 (whereas we did not record any such charge in 2023), the $477,547 decrease in general and administrative expenses and the $173,111 decrease in sales and marketing expenses, offset in part by the $11,702 increase in research and development expenses, net.
Operating loss
With respect to the years ended December 31, 2023 and December 31, 2022, operating loss amounted to $1,942,602 and $5,037,742, respectively, a decrease of $3,095,140 or 61%. The decrease related to the $2,747,073 decrease in operating expenses and the $348,067 increase in gross loss (profit).
Financial expenses (income), net
With respect to the year ended December 31, 2023, we recorded financial expenses, net, of 129,395, as compared to financial income, net of $528,195 for the year ended December 31, 2022, a decrease of $657,590. The decrease in financial expenses (income), net, related primarily to a $331,948 decrease in foreign exchange income, net and a $235,048 increase in interest and change in fair value in connection with convertible loans.
Net loss
With respect to the years ended December 31, 2023 and December 31, 2022, net loss amounted to $2,071,997 and $4,509,547, respectively, a decrease of $2,437,550 or 54%. The decrease in net loss related to the $3,095,140 decrease in operating loss and the $657,590 decrease in financial expenses (income), net.
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Year ended December 31, 2022, compared to year ended December 31, 2021:
Revenues
With respect to the years ended December 31, 2022 and December 31, 2021, total revenues amounted to $603,359 and $568,704, respectively, an increase of $34,655 or 6%. No significant change year over year.
Cost of revenues
With respect to the years ended December 31, 2022 and December 31, 2021, total cost of revenues amounted to $375,877 and $271,817, respectively, an increase of $104,060 or 38%. The increase related primarily to an additional employee who joined and the increase of salary of another employee.
Amortization of intangible assets
With respect to the years ended December 31, 2022 and December 31, 2021, total amortization of intangible assets amounted to an aggregate amount of $428,431 for both years. The amortization of intangible assets expense in both years related to amortization of technology we recorded as part of the Digiflex purchase as of December 3, 2017.
Gross loss
With respect to the years ended December 31, 2022 and December 31, 2021, total gross loss amounted to $200,949 and $131,544, respectively, an increase of $69,405 or 53%. The increase related to an increase of $104,060 in cost of revenues, offset in part by an increase of $34,655 in revenues.
Research and development expenses, net
With respect to the years ended December 31, 2022 and December 31, 2021, net research and development expenses, net were $268,601, net of $437,045 grants recorded and $467,698, net of $315,697 grants recorded, respectively, a decrease of $199,097 or 43%. The decrease in research and development, net related primarily to higher research and development grants recorded in 2022.
Sales and marketing expenses
With respect to the years ended December 31, 2022 and December 31, 2021, sales and marketing expenses amounted to $566,896 and $625,031, respectively, a decrease of $58,135 or 9%. No significant change year over year.
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General and administrative expenses
With respect to the years ended December 31, 2022 and December 31, 2021, general and administrative expenses amounted to $1,893,179 and $1,345,495, respectively, an increase of $547,684 or 41%. The increase related primarily to additional management salaries and fees, professional services fees and legal fees.
Intangible asset impairment
With respect to the years ended December 31, 2022 and December 31, 2021, intangible asset impairment amounted to $2,108,117 and $0, respectively. As of December 31, 2022, we recorded an impairment charge of $2,108,117, which is equal to the technology, net amount that we recorded as part of the Digiflex purchase in 2017. We have ceased the marketing activities associated with this technology and expect a negative cash-flow throughout its life, which led to such impairment charge of the remaining asset, net as of December 31, 2022. We did not record an intangible asset impairment in 2021.
Operating expenses
With respect to the years ended December 31, 2022 and December 31, 2021, operating expenses amounted to $4,836,793 and $2,438,224, respectively, an increase of $2,398,569 or 98%. The increase related to an increase of $2,108,117 and $547,684 in intangible asset impairment and general and administrative expenses, respectively, offset in part by a decrease of $199,097 and $58,135 in research and development, net and sales and marketing expenses, respectively.
Operating loss
With respect to the years ended December 31, 2022 and December 31, 2021, operating loss amounted to $5,037,742 and $2,569,768, respectively, an increase of $2,467,974 or 96%. The increase in operating loss related to an increase of $2,398,569 and $69,405 in operating expenses and gross loss, respectively.
Financial income, net
With respect to the years ended December 31, 2022 and December 31, 2021, financial income, net, amounted to $528,195 and $50,904, respectively, an increase of $477,291 or 938%. The increase in financial income, net, related primarily to a change in interest and accretion back in connection with convertible loans and foreign exchange income, net of $8,059,996 and $398,995, respectively, offset in part by a change in fair value of warrants and capital note presented at fair value of $8,020,602.
Net loss
With respect to the years ended December 31, 2022 and December 31, 2021, net loss amounted to $4,509,547 and $2,518,864, respectively, an increase of $1,990,683 or 79%. The increase in net loss related to an increase of $2,467,974 and $477,291 in operating loss and financial income, net, respectively.
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Share-Based Compensation and Liabilities Presented at Fair Value
Option Valuations
Under U.S. GAAP, we account for share-based compensation for employees and others in accordance with the provisions of the FASB’s ASC Topic 718 “Compensation—Stock Based Compensation,” or ASC 718, which requires us to measure the cost of equity-based awards based on the fair value of the award on the grant date.
We selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value of option awards. The resulting cost of an equity incentive award is recognized as an expense over the requisite service period of the award, which is usually the vesting period. We recognize compensation expense over the vesting period using the straight-line method and classify these amounts in the consolidated financial statements based on the department to which the related employee reports.
The determination of the grant date fair value of options using the Black-Scholes option pricing model is affected by estimates and assumptions regarding a number of complex and subjective variables. These variables are estimated as follows:
● | Fair Value of our Ordinary Shares. Based on the market value of our ordinary shares. |
● | Risk-free Interest Rate. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with a term equivalent to the contractual life of the options. |
● | Volatility. The expected share price volatility derived from sample of similar companies. |
● | Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero. |
● | Expected Life. We used the “simplified” method, meaning the expected life is set as the average of the vesting period for each vested tranche of options and the contractual term for those options. |
If any of the assumptions used in the Black-Scholes option pricing model change significantly, share-based compensation for future awards may differ materially compared with the awards previously granted.
The following table presents the weighted-average assumptions used to estimate the fair value of options granted to employees, officers and consultants during the periods presented.
Year Ended December 31, | ||||||||||||
2023 | 2022 | 2021 | ||||||||||
Dividend yield | 0 | % | 0 | % | 0 | % | ||||||
Expected volatility | 80 | % | 80 | % | 80 | % | ||||||
Risk-free interest | 3.87%-4.80 | % | 3.00 | % | 0.81 | % | ||||||
Expected life (in years) | 5 | 5 | 5 |
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Liabilities Presented at Fair Value
Some of our warrants are classified as liabilities in accordance with ASC No. 815-40, “Distinguishing Liabilities From Equity.” Accordingly, these warrants are required to be marked to market at each reporting date.
We estimated the fair value of these warrants and such conversion feature using a Black-Scholes option pricing model, which is affected by estimates and assumptions regarding a number of complex and subjective variables. These variables are estimated as follows:
● | Fair Value of our Ordinary Shares. Based on the market value of our ordinary shares. |
● | Risk-free Interest Rate. The risk-free interest rate is based on the yield from U.S. Treasury zero-coupon bonds with a term equivalent to the contractual life of the warrants. |
● | Volatility. The expected share price volatility derived from sample of similar companies. |
● | Dividend Yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero. |
In addition, the conversion feature of the capital note issued to a shareholder, is required to be marked to market at each reporting date. We estimated the fair value of the capital note by taking into account the expected occurrence of certain trigger events (such as public offering or mergers and acquisitions), multiplied by the value in a probability that the event will occur (based on our subjective assumptions) and discounting the value in an appropriate discount factor (based on the weighted average cost of capital of the Company) for a period of one year.
Reporting Currency
Our functional currency is the U.S. Dollar, although substantial portion of our costs are incurred in NIS. We finance our operations mainly in U.S. dollars and a substantial portion of our costs and revenues from its primary markets are anticipated to be incurred and generated in U.S. dollars. As such, we believe that the U.S. dollar is the currency of the primary economic environment in which we operate.
Transactions and balances that are denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been re-measured to dollars in accordance with Accounting Standards Codification (“ASC”) No. 830, “Foreign Currency Matters”. All foreign currency transaction gains and losses are reflected in the statements of operations as financial income or expenses, as appropriate.
B. Liquidity and Capital Resources
We currently have limited liquidity. As of December 31, 2023, our cash on hand was $629,957. We are in default in repayment of our convertible notes which, as of December 31, 2023, aggregated to approximately $1.5 million (including principal and interest). In addition, as of December 31, 2023, we had outstanding current liabilities towards the IIA, service providers and suppliers in the aggregate amount of approximately $3.5 million. Based on our current cash burn rate, strategy and operating plan, we believe that our cash reserves as of the date of this report will enable us to operate through July 2024. In order to fund our anticipated liquidity needs beyond such period (or possibly earlier if our current cash burn rate, strategy or operating plan change in a way that accelerates or increases our liquidity needs) and to pay existing and future liabilities, we will need to raise additional capital.
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Significant recent financing activities:
To date, we have financed our operations primarily through the sale of equity and convertible securities as well as through government grants.
● | On September 23, 2021, the Company entered into agreements with the holders of approximately $3,521,748 in principal amount and accrued interest of CLAs for the conversion of the Company’s indebtedness under such CLAs into an aggregate of 57,291,838 Ordinary Shares (at the Price Per Share). Furthermore, all the warrants that were issued previously in connection with those CLAs were cancelled and no longer have any force or effect. |
● | Commencing July 2021 and through July 2022, we and certain existing Company shareholders, namely GTRIMG, Teuza, entities controlled by each of Leon Recanati and Lenny Recanati and Dan Vilenski (collectively, the “Investors”), entered into definitive agreements relating to a private placement of the Company’s ordinary shares for aggregate gross proceeds to the Company of $3.0 million (including approximately $230,000 plus interest thereon upon conversion of CLAs), at a price of $0.07 per ordinary share (the “Price Per Share”). The Company issued to the Investors an aggregate of 42,926,031 ordinary shares in respect of the definitive agreements mentioned above. |
● | Commencing September 2022 and through August 2023, we and the Investors entered into subscription agreements pursuant to which we raised aggregate gross proceeds of $2,681,534 by way of a private placement, under the following terms: |
o | The Company offered, issued and sold to the Investors units of its securities for aggregate gross proceeds to the Company of $1.0 million (the “Initial Offering”), each unit comprised of (each, a “Unit”) (i) one ordinary share, and (ii) a warrant (the “Warrant”) to purchase an additional two ordinary shares, exercisable through the earlier of (a) the closing of a subsequent offering of Company securities by the Company to qualified investors with an effective price per ordinary share of at least $0.20 and (b) the second anniversary of the issuance of the Warrant, in each case at a per share exercise price equal to the Price Per Share, subject to adjustment, at a per Unit purchase price equal to the Price Per Share. The Company issued an aggregate of 14,285,712 ordinary shares and Warrants to purchase an aggregate 28,571,425 ordinary shares to the Investors that participated in the Initial Offering in respect of the $1.0 million raised. |
o | The Company undertook to offer, issue and sell to the Investors, following the closing of the Initial Offering, additional ordinary shares for aggregate gross proceeds to the Company of up to an additional $1.0 million (the “Follow on Offering”), at a price per share equal to the Price Per Share, which offering was subject to the achievement by the Company of certain pre-defined milestones on or before December 31, 2022, subject to a further extension at the discretion of the Company, to a date on or before February 28, 2023. Following the partial fulfillment of the milestones, the Company initially raised from certain of the Investors $705,000 in the Follow on Offering. In April 2023, pursuant to the terms of the subscription agreement, an additional Investor joined the Follow on Offering, as extended, in the amount of $295,000, resulting in aggregate proceeds to the Company of $1.0 million in the Follow-on Offering, which completed the Follow-on Offering. The Company issued an aggregate of 14,285,713 ordinary shares to the Investors that participated in the Follow on Offering in respect of the $1.0 million raised. |
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o | The Company undertook to offer, issue and sell to the Investors, following the initial closing of the Follow on Offering, additional ordinary shares for aggregate gross proceeds to the Company of up to an additional $800,000 (the “Final Offering”), at a price per share equal to the Purchase Price, which offering was subject to the achievement by the Company of a certain additional milestone set forth in the subscription agreements and any additional milestones to be agreed upon in good faith negotiations (the “Second Level Milestones”). According to the terms of the subscription agreements, the Final Offering was to be closed by no later than the close of business on the 30th business day after the delivery of notice by the Company to the Investors that the Second Level Milestones have been achieved. Each of GTRIMG and Insight Capital Ltd. (“Insight”), a company controlled by Leon Recanati, undertook to invest $300,000 in the Final Offering ($600,000 in total), if the Second Level Milestones are achieved. Notwithstanding that the Second Level Milestones had not yet been fulfilled, in April 2023, Teuza waived such condition and pursuant to the terms of the subscription agreement, invested in this round in the amount of $105,000. In April 2023, following the Company’s notice of the fulfillment of the Second Level Milestones, in May 2023, Insight invested $300,000 in this round, and in August 2023, GTRIMG invested $276,534 in this round, resulting in aggregate proceeds to the Company of $681,534 in the Final Offering, which completed the financing round under the October 2022 private placement. The Company issued an aggregate 9,736,201 ordinary shares to the Investors that participated in the Final Offering in respect of the $681,534 million raised. |
● | In September 2023, we and the Investors entered into subscription agreements pursuant to which the Investors undertook to invest an aggregate $1,860,000 in our securities, by way of a private placement, under the following terms. |
o | In an initial offering, to be consummated in one or more closings no later than the close of business on February 29, 2024, the Company offered to issue and sell to the Investors, for aggregate gross proceeds to the Company of up to $1.4 million, units of its securities, each unit comprised of (each, a “Unit” and, collectively, the “Units”) (i) one ordinary share, and (ii) a warrant to purchase an additional one ordinary share, exercisable until the second anniversary of the issuance of such warrant, at a per share exercise price equal to the Price Per Share, subject to adjustment (the “Warrant”), at a per Unit purchase price equal to the Price Per Share. The Warrants will be exercisable immediately upon issuance and will expire two years from issuance. Under the subscription agreements entered into to date with the Investors, the Investors undertook to invest an aggregate $1,100,000 in the Initial Offering, of which we have received an aggregate $1,089,495 as of the date of this annual report on Form 20-F. |
o | In a subsequent offering, to be consummated in one or more closings no later than the close of business on May 31, 2024, the Company undertook to offer, issue and sell to the Investors additional Units for aggregate gross proceeds to the Company of up to an additional $1.4 million (the “Follow-on Offering”). The Follow-on Offering is to be consummated by no later than the close of business on May 31, 2024, at which time the Follow-on Offering will terminate. In the event that the Company shall raise funds from other sources (including grants) prior to May 31, 2024, the Follow-on Offering (all or partially depending on the amount of funds raised) may be postponed to a later date to be determined with the consent of the Investors. Under the subscription agreements entered into to date with the Investors, the Investors undertook to invest an aggregate $760,000 in the Follow-on Offering, of which we have received an aggregate $460,000 as of the date of this annual report on Form 20-F. |
For additional information regarding how we financed our operations, please refer to Note 7, Note 10 and Note 16 to our consolidated financial statements for the year ended December 31, 2023 that appear elsewhere in this annual report on Form 20-F.
We expect to continue to fund our operations through equity or debt financings, strategic collaborations, grants and, to the extent our marketing and commercialization efforts are successful, sales of our products or technologies.
We have incurred cumulative losses of $42.7 million from inception through December 31, 2023. In addition, we have not yet established a stable recurring source of revenues sufficient to cover our operating costs and expect to continue to generate losses for the foreseeable future. There is no assurance that we will be able to obtain an adequate level of financing needed for our near-term requirements or the long-term development and commercialization of our products. These conditions raise substantial doubt about our ability to continue as a “going concern”.
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Cash Flows
The following table summarizes our consolidated statement of cash flows for the periods presented:
US $ | Year ended December 31, | |||||||||||
2023 | 2022 | 2021 | ||||||||||
Consolidated Statement of cash flows: | ||||||||||||
Net cash provided by (used in): | ||||||||||||
Operating activities | (2,211,090 | ) | (2,889,426 | ) | (853,426 | ) | ||||||
Investing activities | (15,916 | ) | (93,168 | ) | (1,869 | ) | ||||||
Financing activities | 2,506,534 | 3,325,123 | 849,032 |
Net cash used in operating activities for the years ended December 31, 2023, 2022 and 2021 was $2,211,090, $2,889,426 and $853,426, respectively, a decrease of $678,336 or 23% (from 2022 to 2023) and an increase of $2,036,000 or 238% (from 2021 to 2022). The decrease in net cash used in operating activities in 2023 relative to 2022 was primarily attributable to the payments of past liabilities in early 2022 which payments were not repeated during 2023. The increase in net cash used in operating activities in 2022 relative to 2021 was primarily attributable to payments of past liabilities in early 2022 and higher operating expenses during 2022.
Net cash used in investing activities for the years ended December 31, 2023, 2022 and 2021, was $15,916, $93,168 and $1,869, respectively, a decrease of $77,252 (from 2022 to 2023) and an increase of $91,299 (from 2021 to 2022). The decrease in net cash used in investing activities in 2023 relative to 2022 was attributable to lower purchase of property and equipment. The increase in net cash used in investing activities in 2022 relative to 2022 was attributable to higher purchase of property and equipment.
Net cash provided by financing activities for the years ended December 31, 2023, 2022 and 2021 was $2,506,534, $3,325,123 and $849,032, respectively, a decrease of $818,589 or 25% (from 2022 to 2023) and an increase of $2,476,091 or 292% (from 2021 to 2022). The decrease in net cash provided by financing activities in 2023 relative to 2022 was primarily attributable to a decrease in proceeds in connection with issuance of ordinary shares. The increase in net cash provided by financing activities in 2022 relative to 2021 was primarily attributable to an increase in proceeds in connection with issuance of ordinary shares.
C. Research and Development, patents and licenses, etc.
For information regarding our research and development activities and expenses, see “Item 4 B. — Business Overview” and “Item 5A. — Operating Results”.
D. Trend Information
We are a development stage company with limited sales, and it is not possible for us to predict with any degree of accuracy the outcome of our research, development or commercialization efforts. As such, we cannot predict with any degree of accuracy any significant trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on our net loss, liquidity or capital resources, or that would cause financial information to not be indicative of future operating results or financial condition. However, to the extent possible, certain trends, uncertainties, demands, commitments and events are described in Item 3D “Key Information—Risk Factors,” Item 4A “Information on the Company” in this “Item 5. Operating and Financial Review and Prospects.”
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E. Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking into account our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.
Our expectations regarding the future are based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations.
When reading our consolidated financial statements, you should consider our selection of critical accounting policies, the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. For summary information regarding these accounting policies, see Note 2 to the audited consolidated financial statements for the year ended December 31, 2023 included elsewhere in this annual report on Form 20-F. We believe the following accounting estimates involve the most significant judgments used in the preparation of our financial statements.
While management believes its judgments, estimates and assumptions are reasonable, they are based on information presently available and actual results may differ significantly from those estimates under different assumptions and conditions. We believe that the following critical accounting estimates involve the most significant judgments used in the preparation of our financial statements.
Going Concern Assessment
We assess liquidity and going concern uncertainty in our consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to us, we consider various scenarios, forecasts, projections, estimates and make certain key assumptions, including timing and nature of projected cash expenditures or programs, our ability to delay or curtail expenditures or programs and our ability to raise additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent we deem it probable that those implementations can be achieved and we have the proper authority to execute them within the look-forward period.
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As of December 31, 2023, we had a cash balance of $629,957. We are in default in repayment of our convertible notes which, as of December 31, 2023, aggregated to approximately $1.5 million (including principal and interest). In addition, as of December 31, 2023, we had outstanding current liabilities towards the IIA, service providers and suppliers in the aggregate amount of approximately $3.5 million. As of the date of this annual report, we had sufficient cash to fund operations as presently maintained through July 2024. We will need to raise additional capital to continue our operations beyond such period and to pay existing and future liabilities.
These factors raise substantial doubt about our ability to continue as a going concern. Our evaluation of the events and conditions and our plans regarding these matters are also described in Note 1.b. to our consolidated financial statements for the year ended December 31, 2023 that appear elsewhere in this annual report on Form 20-F. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Impairment of long-lived assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, we will recognize an impairment loss based on the fair value of the assets, using the expected future discounted cash flows.
Warrant Liabilities
We account for our warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for liability classification under ASC 815, including whether the warrants are indexed to our ordinary shares, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each cut-off end date while the warrants are outstanding.
Some of our warrants meet the criteria as liability classified derivative instruments and are recorded at fair value on the grant date and re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of comprehensive loss. Warrant liabilities are classified on the balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date. Volatility in our ordinary shares may result in significant changes in the value of the warrant liabilities and resulting gains and losses on our consolidated statement of comprehensive loss.
Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements, see Note 2.u. to the audited consolidated financial statements for the year ended December 31, 2023 included elsewhere in this annual report on Form 20-F.
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ITEM 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth information regarding our directors and senior management team as of May 9, 2024.
Name | Age | Position | ||
Dov Farkash | 64 | Active Chairman of the Board; Class I Director | ||
Avi Magid | 63 | Chief Executive Officer and Director | ||
Gil Kerbs | 42 | Class I Director | ||
Ido Lapidot(1)(2) | 60 | External Director | ||
Limor Magen-Telem(1)(2) | 53 | External Director | ||
Keinan Maman(1)(2) | 47 | Class II Director | ||
Dr. Fernando de la Vega(3) | 66 | Chief Technology Officer | ||
Evyatar Cohen | 51 | Chief Financial Officer |
(1) | Member of our Compensation Committee. |
(2) | Member of our Audit Committee. |
(3) | Dr. de la Vega ceased to serve as a director on January 14, 2024. |
The address of each of our directors and executive officers is c/o P.V. Nano Cell Ltd., 8 Hamasger Street Migdal Ha’Emek 2310102, Israel.
Dov Farkash has served as our Active Chairman since April 2020. Mr. Farkash has more than 25 years of experience in business leadership and technology development in the electronics industry. From January 2000 to September 2019, Mr. Farkash served in a range of senior business leadership and technology development positions at Nova Measuring Instruments Ltd., including Senior Vice President Strategic Development, Senior Corporate Vice President Modeling Software Division, Vice President Sales and Vice President Business Development. Prior to joining Nova, Mr. Farkash served as worldwide Sales and Marketing Manager of AFCON Ltd., and AFCON Inc. in the United States. Prior to that, Mr. Farkash served in various software development managerial positions at various hi-tech companies. Mr. Farkash holds a B.Sc. degree in Computer Engineering and an MBA degree from the Technion – Israel Institute of Technology, Haifa, Israel.
Avi Magid has served as our Chief Executive Officer since July 17, 2022 and as a director since March 2, 2023. Mr. Magid has wide and varied managerial experience in the semiconductor and electronics industries in both startups and established companies. From October 2017 to July 2022, Mr. Magid served as president of Pointer and Cellocator, an Israel based company engaged in IOT and telematics, which was acquired in November 2019 by Powerfleet, Inc., a Nasdaq traded company. Mr. Magid oversaw and successfully managed multiple business units and spearheaded M&A activities at Pointer and Cellocator. From January 2016 to September 2017, Mr. Magid was chief executive officer of Micro Point Pro, which operates in the semiconductor marketplace in both the back and front end. At Micro Point, Mr. Magid expanded its business by penetrating strategic accounts and establishing new sales channels. From July 2015 to Dec 2015, Mr. Magid served as Vice President, Industrial Division and Business Development, at Amiad Water Systems. Prior to that position, from August 2014 to June 2016, Mr. Magid served as the chief executive officer and a drector of Goji Ltd., which develops a paradigm-changing RF-based energy delivery technology. From July 2010 to July 2014, Mr. Magid served as the chief executive officer of Margan Ltd., which was engaged in ultrasonic sensing systems, where he transformed a small founder-based company into a business with multi-year contractual engagements. From October 2006 to October 2010, Mr. Magid served as the Executive Vice President Global Business Group at Nova Measuring Instruments Ltd., where he managed 110 employees and led the company from a non-profitable OEM position to a cutting-edge segment leader. From 1993 to 2006, Mr. Magid served as the in various managerial position with Kulick and Soffa Industries in both Israel and the United States. Mr. Magid received his B.Sc. degree in industrial engineering from Pomona Polytechnic University in California in 1992 and graduated the AeA program at Stanford University in 1999.
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Gil Kerbs has served as a director since December 2023. Mr. Kerbs is an entrepreneur and investor, currently heading new investments at Teuza VC fund (TSE: TUZA), where he also serves on the board of directors. Mr. Kerbs is also the founder of Newt, a digital health startup founded in 2019. Active in the healthcare world for the last 15 years, in 2018 Mr. Kerbs completed his role as the value segment business director at Medtronic China where he led a 60-person team selling to the growingly important Chinese lower tier market. Mr. Kerbs to this role, Gil took charge of creating surgical tools tailored for the emerging markets customer needs, at Medtronic. Prior to Medtronic, Mr. Kerbs worked in venture capital in Israel at the Teuza fund, focusing on healthcare, and China-Israel related activities. Mr. Kerbs holds an MBA/MA degree in international relations from the Wharton School of the University of Pennsylvania, and BSc. degree in electrical engineering from the Technion - Israel Institute of Technology.
Ido Lapidot has served as an external director of the Company (within the meaning of the Companies Law) since December 2017. Mr. Lapidot is a systematic innovation consultant and strategic planner, with over two decades of experience in driving innovation and sustainable growth across diverse industries. Ido is a partner at Next Leap Ventures, an investment club comprising former Intel employees, where he is in charge of identifying and nurturing groundbreaking technologies and startups and serving as NextLeap Ventures representative on the boards of directors at Sanolla, Wadis, and Marine Edge. Previously, Mr. Lapidot held several key positions at Intel R&D, Intel Labs, and Intel Corporate Services-EMEA, where he led LEAN manufacturing and TRIZ programs, and served as a strategic technologies’ planner and TRIZ program leader. Mr. Lapidot also served as an external teacher for TRIZ and systematic innovation at Afeka College of Engineering, at Azrieli College of Engineering, and Hadassah Academic College. Mr. Lapidot holds an MA degree in Environmental Science, a BA degree in Chemistry, and a B.A. degree in Atmospheric Science from the Hebrew University of Jerusalem. Mr. Lapidot also holds a TRIZ L3 certification from MA-TRIZ, a testament to his deep understanding of innovation theory and practice.
Limor Magen Telem has served as an external director of the Company (within the meaning of the Companies Law) since December 2023. Ms. Magen Telem is a lawyer and legal advisor with over twenty-five years of experience as a director in Israeli public companies. Ms. Magen Telem served as a member of the Israeli Parliament (Knesset) between June 2021 and November 2022 and was a member of the Knesset’s economic affairs committee and a member of the Knesset’s internal committee for environmental quality and the constitutional and legal committee. Prior to that, Ms. Magen Telem served as legal advisor to the Migdal Ha’Emek Municipality from 2001 until 2021. Ms. Magen Telem has also served as an external director (within the meaning of the Companies Law) in several public companies, including Synel Mll Payway Ltd.; Summit Ltd., where she also served as chairperson of the audit committee; and Poalim Continental Mutual Funds Ltd., where she also served as chairperson of the investment committee. Ms. Magen Telem holds an LLB degree from the College of Management Academic Studies and an LLM degree from the University of Haifa.
Keinan Maman has served as a director since March 2023. Mr. Maman is an experienced executive with proven track record in financial and business performance optimization. Since 2022, Mr. Maman has served as chief financial officer of Keshet-Teamim, an Israeli supermarket chain. Prior to this position, from 2019 to 2022, Mr. Maman is served as chief financial officer of Fibernet, an Israeli company that designs, develops and implements cybersecurity, multimedia and fiber optic-based solutions. Prior thereto, from 2014 to 2019, Mr. Maman served as General Manager of Greenland, an Israeli retail chain. Mr. Maman holds a BA degree in accounting from Haifa University and a M.B.A. degree in business administration from Tel-Aviv University.
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Dr. Fernando de la Vega co-founded PV Nano Cell Ltd. in 2009 and served as a member of our board of directors from our inception until January 2024 (as Chairman of the Board until April 2020), and served as our Chief Executive Officer from our inception until June 2021 and since such time has served as our Chief Technology Officer. Dr. de la Vega has more than 40 years industrial and entrepreneurial experience, having served in managerial positions with responsibility over research and development, quality and operations and has founded or co-founded several businesses in the fields of nano technology and functional materials. From 2001 to early 2009, Dr. de la Vega served as General Manager and a Director of Cima Nanotech Israel, a company focused on the development of innovative technologies in the field of flexible printed electronics. Dr. de la Vega also co-founded and, from 2003 through 2009, served as Chairman of the Nano Functional Materials Consortium, a five-year, $25 million research consortium which built the infrastructure for nanotechnology in the chemical industry and Israeli academia, sponsored by the IIA (the former Office of the Chief Scientist) as part of the MAGNET program, a special program intended to encourage cooperation between industry and academia. Dr. de la Vega has also co-founded six European research and development consortiums and has served on the advisory boards of a few projects. Dr. de la Vega is a co-inventor of more than 11 patent families in the fields of nanomaterials, nanotechnology and digital printing, and author and co-author of many scientific and technical publications (including sections in two books on conductive inks for inkjet printing). Dr. de la Vega holds a Ph.D. in Applied Chemistry from the Casali Institute at the Hebrew University of Jerusalem, as well as a M.Sc. degree in Applied Chemistry and a B.Sc. degree in Chemistry from the Hebrew University of Jerusalem.
Evyatar Cohen has served as our Chief Financial Officer since November 2017. Currently and prior to his appointment as our Chief Financial Officer, Mr. Cohen serves and has served as a Chief Financial Officer and financial consultant for several public companies traded in the United States, Israel and Europe as well as privately held companies. Mr. Cohen worked at PwC in both Tel Aviv and New York. Mr. Cohen has gained vast experience in many industries such as high-tech, biotech, oil and gas, entertainment and media, and venture capital. Mr. Cohen holds a B.A. degree in Business Management from the College of Management and an LLM degree from Bar Ilan University, Israel. Mr. Cohen is a licensed and certified public accountant in both the United States and Israel.
Appointments to the Board
Under our Articles of Association, as approved by our shareholders on November 29, 2018, GTRIMG, our controlling shareholder, has the right, so long it holds at least 5% of our issued and outstanding share capital, to: (i) designate one non-voting observer to our Board, provided that the observer shall not be a competitor of ours, or employed by a competitor of ours; and (ii) conditioned upon a $2.0 million investment by GTRIMG following such date, to appoint a director to the Board who shall also serve as the chairman of the Board, provided that such nominee has the required qualifications under applicable laws, including the stock exchange rules then applicable. In October 2018, Ram Zeevi, the son of Gad Zeevi, who is the controlling shareholder of GTRIMG, was appointed as an observer to our Board. In April 2020, following completion of GTRIMG’s $2.0 million investment, GTRIMG appointed Mr. Dov Farkash to server as a member of our Board as Active Chairman. At the annual general meeting of shareholders held in December 2023, our shareholders approved the re-election of Mr. Farkash as a Class I director, to serve until our annual general meeting of shareholders to be held in 2026.
Under an agreement dated October 27, 2021, entered into in connection with a private placement of our securities, certain of the investors, including GTRIMG, Messrs. Leon and Lenny Recanati, Dan Vilenski and Teuza, have the right to appoint three directors to our Board. Accordingly, Mr. Ofer Greenberger and Mr. David Boas were appointed to our Board as of May 19, 2022. Mr. Boas resigned from our Board as of January 1, 2023, and was replaced by Mr. Keinan Maman, who was appointed as a Class II director as of March 6, 2023. Mr. Ofer Greenberger resigned from our Board as of January 7, 2024.
Mr. Gil Kerbs was nominated for election as a director of our company by our shareholders at our annual general meeting of shareholders held in December 2023, pursuant to an agreement entered into with Teuza in the same month in connection with Teuza’s additional investment in our company in a private placement of our securities.
Family Relationships
There are no family relationships between any members of our executive management and our directors.
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B. Compensation
The table below reflects the compensation granted to our five most highly compensated office holders (as defined in the Companies Law) during or with respect to the year ended December 31, 2023. We refer to the five individuals for whom disclosure is provided herein as our “Covered Executives”. For purposes of the table below, “compensation” includes amounts accrued or paid in connection with salary cost, consultancy fees, bonuses, share-based compensation, retirement or termination payments, benefits and perquisites (as applicable) to provide such compensation. All amounts reported in the table are in terms of cost to the Company, as recognized in our consolidated financial statements for the year ended December 31, 2023, plus compensation accrued or paid to such Covered Executives following the end of the year in respect of services provided during the year.
Individual Covered Executive Compensation Name and Principal Position | Salary(1) | Share-based Compensation(2) | Total | |||||||||
US $ | ||||||||||||
Avi Magid, Chief Executive Officer and Director | $ | 268,137 | $ | 51,948 | $ | 320,085 | ||||||
Fernando de la Vega, Chief Technology Officer and Former Director(3) | 223,488 | — | 223,488 | |||||||||
Evyatar Cohen, Chief Financial Officer | 146,353 | — | 146,353 | |||||||||
Dov Farkash, Active Chairman | 130,092 | 8,974 | 139,066 | |||||||||
Hanan Markovich, Former Chief Business Development Officer(4) | $ | 52,267 | $ | — | $ | 52,267 |
(1) | Salary includes the Covered Executive’s gross salary plus payment of social benefits made by us on behalf of such Covered Executive. Such benefits may include, to the extent applicable to the Covered Executive, payments, contributions and/or allocations for savings funds (e.g., managers’ life insurance policy), education funds (referred to in Hebrew as “keren hishtalmut”), pension, severance, risk insurances (e.g., life, or work disability insurance), payments for social security and tax gross-up payments, vacation, medical insurance and benefits, convalescence or recreation pay and other benefits and perquisites consistent with our policies. |
(2) | Represents the share-based compensation expenses recorded in the Company’s consolidated financial statements for the year ended December 31, 2023, based on the option’s grant date fair value, calculated in accordance with accounting guidance for share-based compensation. |
(3) | Dr. Fernando de la Vega ceased to serve as a director on January 14, 2024. |
(4) | Mr. Markovich ceased to serve as our Chief Business Development Officer on February 22, 2023. |
Compensation of Executive Officers and Directors as a Group
The aggregate compensation paid by us to our executive officers and directors for the year ended December 31, 2023, was approximately $950,572, including share-based compensation expenses of approximately $60,922. This amount includes approximately $61,171 set aside or accrued to provide pension, retirement or similar benefits to officers and directors of the Company for the year ended December 31, 2023. This amount does not include business travel, relocation, professional and business association dues and expenses reimbursed to officers, and other benefits commonly reimbursed or paid by companies in Israel.
From time to time, we grant options to our officers and directors. We granted options to purchase an aggregate 2,164,910 of our ordinary shares to our officers and directors as a group during the year ended December 31, 2023. As of December 31, 2023, a total of options to purchase 17,406,299 of our ordinary shares were held by our directors and executive officers (consisting of 8 persons). For information regarding the beneficial ownership of our ordinary shares by our directors and executive officers, see “Item 7 A. Major Shareholders and Related Party Transactions — Major Shareholders”.
Compensation of Non-Executive Directors
Our non-executive directors, other than our external directors (within the meaning of the Companies Law) and Mr. Keinan Maman, a director who serves as a member of our Audit Committee and Compensation Committee, do not receive any cash compensation.
We pay our external directors an annual fee in the fixed amount and per-meeting fees in the maximum amount payable from time to time for such fees by us under the Israeli Companies Regulations (Rules Regarding Compensation and Expense Reimbursement of External Directors), 2000 (the “Compensation Regulations”). In accordance with the Compensation Regulations, we currently pay our external directors an annual fee of NIS 31,580 (approximately $8,707) as well as a fee of NIS 2,680 (approximately $739) for each board or committee meeting attended in person, NIS 1,608 (approximately $443) for each board or committee meeting via telephone or videoconference and NIS 1,340 (approximately $369) for participation by written consent. We pay Mr. Maman an annual fee and per-meeting fees equal to the minimum amounts payable from time to time for such fees by us under the Compensation Regulations. In accordance with the Compensation Regulations, we currently pay Mr. Maman an annual fee of NIS 23,115 (approximately $6,373) as well as a fee of NIS 670 (approximately $185) for each board or committee meeting attended in person, NIS 402 (approximately $111) for each board or committee meeting attended via telephone or videoconference and NIS 335 (approximately $92) for participation by written consent.
We do not have any written agreements with any director providing benefits upon the termination of such director’s relationship with our company.
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Employment and Service Agreements with Active Chairman and Executive Officers
Our executive officers are employed under the terms and conditions prescribed in personal contracts. These personal contracts provide for notice periods of varying duration for termination of the agreement by us or by the relevant executive officer, during which time the executive officer will continue to receive base salary and benefits. These agreements also contain acceleration provisions upon material events such as a change of control or entry into a material agreement, customary provisions regarding non-competition, confidentiality of information and assignment of inventions. However, the enforceability of provisions regarding non-competition and assignment of inventions may be limited under applicable law. See “Item 3 D. Key Information — Risk Factors — Risks Related to Our Intellectual Property”. Under current Israeli law, we may not be able to enforce office holders’ covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former officer holders.
Dov Farkash. On April 19, 2020, we entered into an Active Chairman Agreement (the “Chairman Agreement”), with Exoro Ltd. (“Exoro”), a company wholly-owned by Mr. Dov Farkash. The Chairman Agreement provided that Exoro, through Mr. Farkash is to provide certain services to us as active chairman, focusing on go-to-market strategy. We agreed to enter into an indemnification agreement with Mr. Farkash and to include him in our directors’ and officers’ liability insurance. Mr. Farkash agreed not to provide any services that would conflict with or complete with ours. We agreed to pay to Exoro a monthly service fee of NIS 40,000 (approximately $11,028) plus Value Added Tax (“VAT”). Exoro was entitled to reimbursement of expenses in connection with the provision of the services and was provided a budget of $10,000/month for travel. The term of the Chairman Agreement was for four months, with our right to renew the agreement for an additional nine months, which was utilized. Either party could terminate upon 45 days prior written notice. The Chairman Agreement could also be terminated by us for Cause (as defined in the Chairman Agreement). Notwithstanding the expiration of the Chairman Agreement, Mr. Farkash has continued to serve as Active Chairman in accordance with the terms thereof. We paid Exoro most (but not all) of the compensation due for Mr. Farkash’s foregoing service as Active Chairman and have recorded a monthly expense for the unpaid balance of the service fee to Exoro as a liability in our balance sheet. At the annual general meeting of our shareholders held in December 21, 2023, our shareholders ratified and approved the extension of the Chairman Agreement between the Company and Exoro, effective as of the expiration of the Chairman Agreement and so long as Mr. Farkash shall serve as Active Chairman of the Board of Directors.
Avi Magid. On November 7, 2022, we entered into an employment agreement with Mr. Magid in connection with his appointment as our Chief Executive Officer, which was in effect through the close of business December 19, 2022 (the “Initial CEO Agreement”), at which time our annual general meeting of shareholders approved the terms and conditions of Mr. Magid’s new employment agreement in such capacity, effective as of such date (the “CEO Agreement”). The primary difference between the Initial CEO Agreement and the CEO Agreement was that under the Initial CEO Agreement, Mr. Magid was entitled to a gross monthly salary in such amount as consistent with an aggregate monthly cost to the Company of NIS 60,000 (approximately $16,542), retroactive to August 1, 2022 (his employment start date), whereas under the CEO Agreement, he is entitled to a gross monthly salary of NIS 60,000 (approximately $16,542). In addition, under the terms of the CEO Agreement, Mr. Magid is entitled to a leased vehicle or, alternatively, at his option, to receive an additional amount equal to the leasing cost as salary, provided that the total payroll will be in accordance with the limitation of our Compensation Policy. Under both agreements, Mr. Magid is also entitled to the following: (i) manager’s insurance under Israeli law to which the Company contributes amounts equal to (a) 8.33% for severance payments, and 6.5%, or up to 7.5% (including disability insurance) designated for premium payment (and Mr. Magid contributes an additional 6%) of each monthly salary payment, and (b) 7.5% of his salary (with Mr. Magid contributing an additional 2.5%) to an education fund, a form of deferred compensation program established under Israeli law. Both employment agreements contain (i) customary confidentiality obligations which are not limited by the term of the agreement, (ii) certain non-compete provisions during the term of the agreement and 12 months thereafter and (iii) certain non-solicitation provisions during the term of the agreement and for one year thereafter. Either party may terminate the CEO Agreement at any time upon one month’s prior written notice.
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Dr. Fernando de la Vega. On September 9, 2009, we entered into a services agreement (the “DBG Services Agreement”), as amended in November 2018, with Dr. de la Vega’s wholly-owned service company, Dolev Bar-Guy Consulting and Management Ltd. (“Dolev” and “DBG Services Agreement”), pursuant to which Dr. de la Vega provided us management services as our Chief Executive Officer through June 1, 2021, at which time he resigned from such position and assumed the position as Chief Technology Officer, under the same terms and conditions according to the DBG Services Agreement. Pursuant to the terms of the DBG Services Agreement, through December 31, 2023, Dr. de la Vega was entitled to a monthly consultancy fee in the amount of NIS 65,000 (approximately $17,921) plus VAT. Under a settlement agreement that we entered into with Dolev and Dr. de la Vega with respect to amounts owed to Dolev under the DBG Services Agreement, effective as of January 1, 2024, the scope of services Dolev shall provide to us through the services of Dr. de la Vega as Chief Technology Officer reduced to 70% (instead of a full-time basis) and Dolev’s monthly fee has reduced to NIS 45,500 (approximately $12,544) plus VAT, and Dr. de la Vega will also be entitled to reimbursement for his actual expenses. For additional information regarding the settlement agreement, see “Item 7 B. Major Shareholders and Related Party Transactions — Related Party Transactions —Settlement Agreement with Dolev and Dr. de la Vega.” Dr. de la Vega is also entitled to a car allowance in the amount of NIS 2,500 (approximately $689) plus VAT per month plus reimbursement for fuel expenses and tolls. Dr. de la Vega may, at any time, terminate the DBG Services Agreement by three months’ prior written notice. If we wish to terminate the DBG Services Agreement, other than as a result of Dr. de la Vega’s breach of his terms of office, we are required to provide six months’ prior written notice (provided that if the termination is up to 12 months following an exit event, 24 months’ prior written notice is required; between 12 and up to 24 months following an exit event, 12 months’ prior written notice is required and between 24 months and up to 36 months following an exit event, 6 months’ prior written notice is required).
In addition, Dr. de la Vega is entitled to receive:
(a) | An annual cash bonus in an amount equivalent to up to four times his monthly service fee, plus VAT, subject to achievement of certain performance targets which are determined by our compensation committee and the board of directors on an annual basis. |
(b) | A special one-time bonus in an amount equivalent to six times his monthly service fee, plus VAT upon the occurrence of an Exit Event (as described below), provided that our pre-money valuation shall be at least $50,000,000 at the closing of such transaction or within 12 months following such closing. |
(c) | An equity-based award upon the occurrence of an Exit Event, in accordance with the following calculation: |
(i) | 0.5% of the Company’s share capital on a fully diluted basis, if the Company’s pre-money valuation shall be equal to or higher than $30,000,000 but less than $40,000,000; |
(ii) | 1.25% of the Company’s share capital on a fully diluted basis, if the Company’s pre-money valuation shall be equal to or higher than $40,000,000 but less than $50,000,000; |
(iii) | 2.0% of the Company’s share capital on a fully diluted basis, if the Company’s pre-money valuation shall be equal to or higher than $50,000,000. |
An ‘Exit Event’ is defined as: (i) the consummation of an initial public offering of ordinary shares of the Company on a recognized stock exchange; or (ii) a sale of all or substantially all of the share capital of the Company to any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, governmental authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity (a “Person”); (iii) a sale, lease, conveyance or disposition of all or substantially all of the assets of the Company; (iv) a merger of the Company with or into another entity in which the shareholders of the Company immediately prior to such merger do not hold a majority of the share capital and voting rights of the surviving entity held by them by virtue of their holdings in the Company prior to the consummation of the transaction or a transaction or series of transactions in which a Person or group of Persons acquire more than 50% of the issued and outstanding share capital of the Company (other than an acquisition of such share capital from the Company); or (v) an up-listing to a higher exchange.
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Evyatar Cohen. On November 12, 2017, we entered into a consultancy agreement with Mr. Cohen to serve as our Chief Financial Officer. Mr. Cohen’s services include, among others, the services of Ms. Moran Cohen as our controller. Pursuant to the terms of the agreement, Mr. Cohen is entitled to a monthly fee of NIS 45,000 (approximately $12,406) plus VAT. Either we or Mr. Cohen may terminate the agreement by providing 45-days prior notice.
We have not paid our Active Chairman and certain executive officers all amounts due to them under their respective agreements due to financial difficulties and have recorded a liability in our consolidated financial statements with respect to such amounts. For information regarding the settlement agreement that we entered into with Dolev and Dr. de la Vega with respect to amounts owed to Dolev under the DBG Services Agreement, see “Item 7 B. Major Shareholders and Related Party Transactions — Related Party Transactions — Settlement Agreement with Dolev and Dr. de la Vega.”
Share Option Plan
During 2010, we adopted the P.V. Nano Cell Ltd. 2010 Option Plan (the “Plan”). The Plan initially had a term of ten years and in 2020, the Plan was extended for an additional ten years, such that it has a total term of 20 years. The purpose of the Plan is to serve as an incentive to attract new employees, directors, consultants and service providers, and to retain persons of training, experience and ability by providing them with opportunities to purchase securities, including shares of the Company, pursuant to the Plan, as approved by the board of directors of the Company.
The Plan is administered by our board of directors, provided that the board of directors may delegate responsibility for the administration of the Plan to a committee designated by the board of directors. The board of directors has authority to designate grantees of awards under the Plan and the terms of any award granted, including the type of securities to be granted, the vesting terms of any securities granted, and any restrictions on transfer of any securities granted under the Plan.
Pursuant to the Plan, the Company may (1) grant awards of securities under the Plan under the capital gains track pursuant to Section 102 of the Israeli Income Tax Ordinance [New Version], 1961 (the “Ordinance”), to our directors, officers and employees who are not holders of 10% or more of our total share capital and are not otherwise controlling shareholders, and (2) grant awards pursuant to Section 3(i) of the Ordinance to non-employee Israeli service providers, consultants and shareholders who hold 10% or more of our total share capital or are otherwise controlling shareholders.
Section 102 of the Ordinance allows employees, directors and officers, who are not controlling shareholders and are considered Israeli residents, to receive favorable tax treatment for compensation in the form of shares or options. Our non-employee Israeli service providers, consultants and controlling shareholders, which includes any shareholder holding 10% or more of the Company’s ordinary shares on a fully diluted basis, may only be granted options under Section 3(i) of the Ordinance, which does not provide for similar tax benefits. Section 102 of the Ordinance includes two alternatives for tax treatment involving the issuance of options or shares to a trustee for the benefit of the grantees and also includes an additional alternative for the issuance of options or shares directly to the grantee. Section 102(b)(2) of the Ordinance, the most favorable tax treatment for grantees, permits the issuance to a trustee under the “capital gains” track. However, under this track we are not allowed to deduct any expense with respect to the issuance of the options or shares. In order to comply with the terms of the capital gains track, all options granted under the Plan pursuant and subject to the provisions of Section 102 of the Ordinance, as well as the ordinary shares issued upon exercise of these options and other shares received subsequently following any realization of rights with respect to such options, such as share dividends and share splits, must be granted to a trustee for the benefit of the relevant employee, director or officer and should be held by the trustee for at least two years after the date of the grant. If such options or shares are sold by the trustee or are transferred to the grantee before the end of the two-year period, then the grantee would be taxed at top marginal rates upon selling the shares.
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Options granted under the Plan will vest in accordance with the vesting dates determined by the board of directors with respect to each grant. Options that are not exercised within seven years of the grant date will expire, unless a shorter or longer term is provided for by the board of directors. Generally, if we terminate a grantee’s employment or services to the Company, all options granted to such grantee that are then vested will be exercisable for a period of six months after the termination date (unless a shorter period is determined by the board of directors) or, if earlier, the expiration date of such options if we terminate a grantee’s employment or service for cause, all of the grantee’s vested and unvested unexercised options will expire and terminate on the date of termination. In case of termination for reasons of disability or death, the grantee or his legal successor may exercise options that have vested prior to termination within a period of twelve months from the date of disability or death.
In the event of a merger or consolidation of our Company subsequent to which we would no longer exist as a legal entity, or a sale of all, or substantially all, of our ordinary shares or assets or other transaction having a similar effect on us, the Company will seek to cause the acquirer in such transaction to substitute all outstanding and unexercised options under the Plan for an appropriate number of the same type of shares or other securities of the successor company as were distributed to the Company or the shareholders in connection with such transaction. If the acquirer refuses to substitute the options, unvested options held by any grantee will vest in accordance with the following formula: X+Y*X/Z, where X = the number of vested options held by the grantee, Y = the number of unvested options held by the grantee, and Z = the number of options held by the grantee.
As of December 31, 2023, a total of options to purchase 22,267,758 ordinary shares, with a weighted average exercise price of $0.11 per share, were outstanding under the Plan. As of December 31, 2023, 11,948,527 ordinary shares were reserved for future issuance under the Plan. The number of ordinary shares reserved for issuance under the Plan may be updated from time to time at the sole discretion of the board of directors under Israeli law.
C. Board Practices
Board of Directors
Under the Companies Law, the management of our business, including strategy and policies, is vested in our board of directors. Our board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders or to management. Our Chief Executive Officer and other executive officers are responsible for our day-to-day management and have responsibilities established by our board of directors. Our Chief Executive Officer is appointed by, and serves at the discretion of, our board of directors, subject to the terms of an employment agreement that we have entered into with him. All other executive officers are appointed by our chief executive officer, and are subject to the terms of any applicable employment agreements that we may enter into with them.
Election and Removal of Directors
Our Articles of Association provide for a board of directors consisting of no less than three and no more than eight directors, with all directors (other than the external directors, whose appointment is required under the Companies Law, and our Chief Executive Officer, who is entitled to serves as an ex-officio member of our Board of Directors under our Articles of Association, as described below) divided into three classes with staggered three-year terms, designated as Class I, Class II and Class III, with each class of directors to consist, as nearly as possible, of one-third of the total number of directors other than the external directors. At each annual general meeting of our shareholders thereafter, the election or re-election of directors following the expiration of the term of office of the directors of that class of directors will be for a term of office that expires on the third annual general meeting following such election or re-election. Each director so elected will hold office until the annual general meeting of our shareholders for the year in which his or her term expires, unless the tenure of such director expires earlier pursuant to the Companies Law or unless he or she is removed from office as described below. Our board of directors is divided among the three classes of directors (except for the external directors) as follows:
● | The Class I directors are Mr. Dov Farkash, our Active Chairman, and Gil Kerbs, for a term expiring at the 2026 annual meeting of shareholders. |
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● | The Class II director is Mr. Keinan Maman, for a term expiring at the 2024 annual general meeting of shareholders. |
● | Following the resignation of Dr. Fernando de la Vega from the Board of Directors effective as of January 14, 2024, there is currently no Class III director. |
Under our Articles of Association our Chief Executive Officer, currently Mr. Avi Magid, serves as an ex-officio member of our Board of Directors. In addition, Mr. Ido Lapidot and Limor Magen-Telem serve as our external directors in accordance with Israeli law, as described further below.
Our Articles of Association allow our board of directors to appoint directors (other than the external directors) to fill vacancies on our board of directors, however created, for a term of office equal to the remaining period of the term of office of the director(s) whose office(s) have been vacated, and to appoint any person to be a Director in addition to the existing Board, so long as the total number of directors shall not at any time exceed the maximum number prescribed by our Articles of Association. Any such director appointed by the Board of Directors shall be placed in a class of directors so that all classes are as nearly equal as possible. A director, appointed by the Board of Directors, shall be deemed, for all intents and purposes, as having been appointed by the Annual General Meeting, and, without derogating from the generality of the aforesaid, shall serve as a director until the expiry of the term of office of the class to which he or she was appointed.
Observer
Under our Articles of Association, as approved by our shareholders on November 29, 2018, GTRIMG, our controlling shareholder, has the right, so long it holds at least 5% of our issued and outstanding share capital, to designate one non-voting observer to our Board, provided that the observer shall not be a competitor of ours or employed by a competitor of ours. In October 2018, Ram Zeevi, the son of Gad Zeevi, who is the controlling shareholder of GTRIMG, was appointed as an observer to our Board.
Chairman of the Board
Under our Articles of Association, as approved by our shareholders on November 29, 2018, GTRIMG, our controlling shareholder, has the right, so long it holds at least 5% of our issued and outstanding share capital, conditioned upon a $2.0 million investment by GTRIMG following such date, to appoint a director to the Board who shall also serve as the chairman of the Board, provided that such nominee has the required qualifications under applicable laws, including the stock exchange rules then applicable. In April 2020, following completion of GTRIMG’s $2.0 million investment, GTRIMG appointed Mr. Dov Farkash to server as a member of our Board as Active Chairman.
Under the Companies Law, the chief executive officer (referred to as a “general manager” under the Companies Law) or a relative of the chief executive officer may not serve as the chairman of the board of directors, and the chairman of the board of directors or a relative of the chairman may not be vested with authorities of the chief executive officer unless approved by our shareholders by a special majority consisting of a majority vote of the shares present and voting at a shareholders meeting, provided that either:
● | at least a majority of the shares of non-controlling shareholders and shareholders that do not have a personal interest in the approval voted at the meeting are voted in favor (disregarding abstentions); or |
● | the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such appointment voting against such appointment does not exceed two percent of the aggregate voting rights in the company. |
A person subordinated, directly or indirectly, to the chief executive officer may not serve as the chairman of the board of directors; the chairman of the board of directors may not be vested with authorities that are granted to those subordinated to the chief executive officer; and the chairman of the board of directors may not serve in any other position in the company or a controlled company, but he or she may serve as a director or chairman of the board of directors of a controlled subsidiary.
There are no family relationships among any of our officers and directors.
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External Directors
Under the Companies Law, companies incorporated under the laws of the State of Israel whose shares are publicly traded are required to appoint at least two external directors who meet the qualification requirements set forth in the Companies Law within three months of the closing of the initial public offering.
At our annual general meeting of shareholders held in December 2023, (i) Mr. Ido Lapidot, who was initially elected to serve as an external director for a three year term in 2017 and was re-elected to serve for a second three year term in December 2020, was re-elected to serve as an external director for an additional term of three years; and (ii) Limor Magen-Telem was elected to serve as an external director for an initial term of three years.
The Companies Law provides for special approval requirements for the election of external directors. External directors must be elected by a majority vote of the shares present and voting at a shareholders meeting, provided that either (which we refer to as the “Special Majority”):
● | such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and do not have a personal interest in such election (other than a personal interest which is not derived from a relationship with a controlling shareholder), present and voting at such meeting, excluding abstainers; or |
● | the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in such election (other than a personal interest which is not derived from a relationship with a controlling shareholder) voting against the election of an external director does not exceed 2% of the aggregate voting rights in the company. |
After an initial term of three years, an external director may be re-elected to serve in that capacity for up to two additional terms of three years each under one of two alternatives. Under the first alternative, the external director may be nominated by the board of directors, and such external director’s re-election is approved by a majority of the shareholders that was required to elect such external director in such director’s initial election. Under the second alternative, the external director may be nominated by a shareholder(s) holding 1% or more of the voting power and at the general meeting of shareholders such re-election is approved by a majority of those shares present and voting that are held by shareholders who are non-controlling shareholders and do not have a personal interest in the re-election, provided that such shares represent at least 2% of the total voting power in the company.
Under the Companies Law, an external director cannot be dismissed from office unless the board of directors has learned there is a concern that: (i) the external director no longer meets the statutory requirements for his appointment as an external director; or (ii) the external director is in breach of his or her duty of loyalty to the company. The board of directors shall discuss the matter no later than in the first board of directors meeting convened after the board becomes aware of such circumstances. In the event the board of directors determines that an external director ceased to comply with the requirements set forth under the Companies Law, or that he or she breached his or her duty of loyalty to the company, the board of directors shall convene a general meeting of the shareholders that shall include on the agenda a resolution for the removal from office of such external director. The removal of an external director from office by the shareholders is subject to the same Special Majority requirements for the appointment of external directors (as described above); provided, however, that the external director has been given the opportunity to present his or her position. In addition, a court of law may determine, upon a request by a director or a shareholder, to dismiss the external director after finding that such external director no longer meets the statutory requirements of an external director set forth in the Companies Law or that the external director is in breach of his or her duty of loyalty to the company.
Any committee of the board of directors that is authorized to exercise powers of the board of directors is required to include at least one external director, and the audit and compensation committees are required to all of such company’s external directors.
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Under the Companies Law, external directors of a company are prohibited from receiving, directly or indirectly, any compensation from the company other than for their services as external directors pursuant to the provisions and limitations set forth in the Compensation Regulations, which compensation is determined prior to their appointment and may not be changed throughout the term of their service as external directors (except for certain exceptions set forth in the regulations).
The Companies Law provides that a person is not qualified to serve as an external director if, as of the appointment date or at any time during the two years preceding his or her appointment, that person or a relative, partner or employer of that person, any person to whom that person is subordinate (whether directly or indirectly), or any entity under that person’s control, had any affiliation or business relationship with the company, any controlling shareholder or relative of a controlling shareholder or an entity that, as of the appointment date is, or at any time during the two years preceding that date was, controlled by the company or by any entity controlling the company.
The term affiliation for this purpose includes (subject to certain exceptions):
● | an employment relationship; |
● | a business or professional relationship maintained on a regular basis; |
● | control; and |
● | service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an external director following the public offering. |
The Companies Law defines the term “office holder” of a company to include a general manager, chief business manager, deputy general manager, vice general manager, any other person assuming the responsibilities of any of these positions regardless of such person’s title, a director and any other manager directly subordinate to the general manager.
The following additional qualifications apply to an external director:
● | a person may not be elected as an external director if he or she is a relative of a controlling shareholder; |
● | if a company does not have a controlling shareholder or a holder of 25% or more of the voting power, then a person may not be elected as an external director if he or she (or his or her relative, partner, employer or any entity under his or her control) has, as of the date of the person’s election to serve as an external director, any affiliation with the then chairman of the board of directors, Chief Executive Officer, a holder of 5% or more of the issued share capital or voting power, or the most senior financial officer of the company; |
● | a person may not serve as an external director if he or she (or his or her relative, partner, employer, a person to whom he or she is subordinated or any entity under his or her control) has business or professional relations with anyone with whom affiliation is prohibited as described above, and even if these relations are not on a regular basis (other than immaterial relations); and |
● | a person may not continue to serve as an external director if he or she accepts, during his or her tenure as an external director, direct or indirect compensation from the company for his or her role as a director, other than the amounts prescribed under the Compensation Regulations, indemnification, the company’s undertaking to indemnify such person and insurance coverage. |
Furthermore, no person may serve as an external director if that person’s professional or other activities create, or may create, a conflict of interest with that person’s responsibilities as a director or otherwise interfere with that person’s ability to serve as an external director or if such person is an employee of the Israel Securities Authority or of an Israeli stock exchange. Following the termination of an external director’s membership on the board of directors, such former external director and his or her spouse and children may not be provided a direct or indirect benefit by the company, its controlling shareholder or any entity under its controlling shareholder’s control, including serving as an executive officer or director of the company or a company controlled by its controlling shareholder and cannot be employed by or provide professional services to the company for pay, either directly or indirectly, including through a corporation controlled by that former external director, for a period of two years (the prohibition also applies to relatives of the former external director who are not his or her spouse or children, but only for a period of one year).
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If at the time an external director is appointed, all members of the board of directors who are not controlling shareholders or their relatives are of the same gender, the external director must be of the other gender. A director of one company may not be appointed as an external director of another company if a director of the other company is acting as an external director of the first company at such time.
In addition, under the Companies Law, our board of directors must determine the minimum number of directors who are required to have financial and accounting expertise and a person may be appointed as an external director only if he or she either has professional qualifications or has accounting and financial expertise, provided, at least one of the external directors must be determined by our board of directors to have accounting and financial expertise. A director with financial and accounting expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. He or she must be able to thoroughly comprehend the financial statements of the company and initiate debate regarding the manner in which financial information is presented. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations.
A director with accounting and financial expertise is a director who, due to his or her education, experience and skills, possesses a high degree of proficiency in, and an understanding of, business-accounting matters and financial statements, such that he or she is able to understand the financial statements of the company, in depth, and initiate a discussion about the manner of presentation of the financial data. A director is deemed to have professional qualifications if he or she has any of (i) an academic degree in economics, business management, accounting, law or public administration, (ii) an academic degree or has completed another form of higher education in the primary field of business of the company or in a field which is relevant to his/her position in the company, or (iii) at least five years of experience serving in one of the following capacities, or at least five years of cumulative experience serving in two or more of the following capacities: (a) a senior business management position in a company with a significant volume of business; (b) a senior position in the company’s primary field of business; or (c) a senior position in public administration or service. Our board of directors is charged with determining whether a director possesses financial and accounting expertise or professional qualifications.
Our board of directors has determined that the minimum number of directors with financial and accounting expertise is one and that Ms. Limor Magen-Telem (an external director) qualifies as such. In addition, our Board has determined that Ms. Limor Magen-Telem qualifies as an audit committee financial expert pursuant to the applicable SEC rules.
Audit Committee
Our Audit Committee is comprised of the following members: Ms. Limor Magen-Telem (external director), Mr. Lapidot (external director) and Mr. Maman. Ms. Limor Magen-Telem serves as the Chair of the Audit Committee.
Pursuant to the Companies Law, the audit committee must be comprised of at least three directors, including all of the external directors, and a majority of its members must be unaffiliated directors. An unaffiliated director is an external director or a director who is appointed or classified as such, and who meets the qualifications of an external director (other than the professional qualifications/accounting and financial expertise requirement), whom the audit committee has confirmed to meet the external director qualifications, and who has not served as a director of the company for more than nine consecutive years (with any period of up to two years during which such person does not serve as a director not being viewed as interrupting a nine-year period).
Such person must meet the non-affiliation requirements as to relationships with the controlling shareholder (and any entity controlled by the controlling shareholder, other than the company and other entities controlled by the company) and must meet the nine-year requirement described above. Following the nine-year period, a director of an Israeli company traded on such foreign stock exchange may continue to be considered an unaffiliated director for unlimited additional periods of three years each, provided the audit committee and the board of directors of the company confirm that, in light of the director’s expertise and special contribution to the work of the board of directors and its committees, the re-election for such additional period is beneficial to the company.
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Under the Companies Law, the audit committee may not include the chairman of the board, any director employed by the company or who regularly provides services to the company (other than as a board member), a controlling shareholder or any relative of the controlling shareholder, as each term is defined in the Companies Law. In addition, the audit committee may not include any director employed by the company’s controlling shareholder or by a company controlled by such controlling shareholder, or who provides services to the company’s controlling shareholder, or a company controlled by such controlling shareholder, on a regular basis, or a director whose main livelihood is from the controlling shareholder. The chairman of the audit committee is required to be an external director.
Audit Committee Role
Our board of directors adopted an audit committee charter that sets forth the responsibilities of the audit committee consistent with the rules of the SEC as well as the requirements for such committee under the Companies Law, including the following:
● | oversight of our independent registered public accounting firm and recommending the engagement, compensation or termination of engagement of our independent registered public accounting firm to the board of directors in accordance with Israeli law; |
● | recommending the engagement or termination of the person filling the office of our internal auditor; and |
● | recommending the terms of audit and non-audit services provided by the independent registered public accounting firm for pre-approval by our board of directors. |
Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent auditors and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent auditors and takes those actions that it deems necessary to satisfy itself that the auditors are independent of management.
Under the Companies Law, our audit committee is responsible for:
● | determining whether there are deficiencies in the business management practices of our company, including in consultation with our internal auditor or the independent auditor, and making recommendations to the board of directors to improve such practices; |
● | determining whether a competitive process must be implemented for the approval of certain transactions with controlling shareholders or its relative or in which a controlling shareholder has a personal interest (whether or not the transaction is an extraordinary transaction), under the supervision of the audit committee or other party determined by the audit committee and in accordance with standards to be determined by the audit committee, or whether a different process determined by the audit committee should be implemented for the approval of such transactions (see “—Fiduciary duties and Approval of Related Party Transactions under Israeli law”); |
● | determining the process for the approval of certain transactions with controlling shareholders or in which a controlling shareholder has a personal interest that the audit committee has determined are not extraordinary transactions but are not immaterial transactions; |
● | where the board of directors approves the working plan of the internal auditor, examining such working plan before its submission to the board of directors and proposing amendments thereto; |
● | examining our internal controls and internal auditor’s performance, including whether the internal auditor has sufficient resources and tools to dispose of its responsibilities; |
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● | examining the scope of our auditor’s work and compensation and submitting a recommendation with respect thereto to our board of directors or shareholders, depending on which of them is considering the appointment of our auditor; and |
● | establishing procedures for the handling of employees’ complaints as to deficiencies in the management of our business and the protection to be provided to such employees. |
Under the Companies Law a quorum of the audit committee for discussion and approval requires the presence of a majority of the committee’s members are present, which majority consists of unaffiliated directors including at least one external director.
Compensation Committee
Our Compensation Committee currently consists of Ms. Limor Magen-Telem (external director), Mr. Lapidot (external director) and Mr. Keinan Maman. Mr. Lapidot serves as the Chairman of the Compensation Committee.
Our board of directors adopted a compensation committee charter that sets forth the responsibilities of the Compensation Committee.
Under the Companies Law, the compensation committee is required to be comprised of at least three directors, including all of the external directors. The additional members of the compensation committee must be directors who receive compensation in accordance with the Compensation Regulations. Under the Companies Law, an external director must serve as the chairman of the compensation committee and the external directors shall constitute a majority of the compensation committee.
Our compensation committee’s duties include, among other things:
● | recommending to the board of directors for its approval (i) a compensation policy; (ii) whether a compensation policy should continue in effect, if the then-current policy has a term of greater than three years (approval of either a new compensation policy or the continuation of an existing compensation policy must in any case occur every three years); and (iii) periodic updates to the compensation policy. See “—Compensation Policy under the Companies Law.” In addition, the compensation committee is required to periodically examine the implementation of the compensation policy; |
● | the approval of the terms of employment and service of office holders (including determining whether the compensation terms of a candidate for chief executive officer of the company need not be brought to approval of the shareholders); and |
● | reviewing and approving grants of options and other incentive awards to persons other than office holders to the extent such authority is delegated by our board of directors, subject to the limitations on such delegation as provided in the Companies Law. |
Compensation Policy under the Companies Law
In general, under the Companies Law, a public company must have a compensation policy that applies to its office holders approved by the board of directors after receiving and considering the recommendations of the compensation committee. In addition, the compensation policy, which must be approved at least once every three years, or five years after a company’s initial public offering, requires the approval of the general meeting of the shareholders. In public companies such as our company, shareholder approval by a majority vote of the ordinary shares present and voting at a meeting of shareholders called for such purpose is required, provided that either: (i) such majority includes the majority of the votes of those shareholders who are non-controlling shareholders and shareholders who do not have a personal interest in the approval of the compensation policy, who voted at the meeting (excluding abstentions) or (ii) the total number of votes against the proposal among the shareholders mentioned in clause (i) does exceed 2% of the voting rights in the company. Under special circumstances, the board of directors may approve the compensation policy despite the objection of the shareholders on the condition that the compensation committee and then the board of directors decide, on the basis of detailed arguments and after discussing again the compensation policy, that approval of the compensation policy, despite the objection of the meeting of shareholders, is in the best interests of the company.
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Our current compensation policy was approved by our shareholders at our annual general meeting held on December 19, 2022.
The compensation policy serves as the basis for decisions concerning the financial terms of employment or engagement of executive officers and directors, including exculpation, insurance, indemnification or any monetary payment or obligation of payment in respect of employment or engagement. The compensation policy relates to certain factors, including advancement of the company’s objectives, the company’s business and its long-term strategy, and creation of appropriate incentives for executives. It also considers, among other things, the Company’s risk management, size and the nature of its operations. The compensation policy furthermore considers the following additional factors:
● | the knowledge, skills, expertise and accomplishments of the relevant director or executive; |
● | the director’s or executive’s roles and responsibilities and prior compensation agreements with him or her; |
● | the ratio between the cost of the terms of employment of an office holder and the cost of the employment of other employees of the company, including employees employed through contractors who provide services to the company, in particular the ratio between such cost, the average and median salary of the employees of the company, as well as the impact of such disparities on the work relationships in the company; |
● | if the terms of employment include variable components — the possibility of reducing variable compensation at the discretion of the board of directors, and the possibility of setting a limit on the exercise value of non-cash variable compensation; and |
● | if the terms of employment include severance compensation — the term of employment or office of the office holder, the terms of his or her compensation during such service period, the Company’s performance during that period of service, the person’s contribution towards the Company’s achievement of its goals and the maximization of its profits, and the circumstances under which the person is leaving the company. |
In addition, in according with the Companies Law, our Compensation Policy includes the following principles:
● | the link between variable compensation (e.g., bonuses) and long-term performance and measurable criteria (i.e., variable compensation must be determined based on long-term performance and measurable criteria). Only “non-material” portion of variable compensation may be determined based on criteria that is not measurable, taking into account office holders’ contribution to the company;; |
● | the ratio of variable to fixed compensation, and the ceiling for the value of variable compensation, which is determined at the time of payment, except that the ceiling for equity-based compensation is determined at the time of grant; |
● | the conditions under which a director or executive would be required to repay compensation paid to him or her if it was later shown that the data upon which such compensation was based was inaccurate and was required to be restated in the company’s financial statements; |
● | the minimum holding or vesting period for variable, equity-based compensation while referring to appropriate a long-term perspective based incentives; and |
● | maximum limits for severance compensation. |
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Compensation of Directors
Under the Companies Law, the compensation of our directors requires the approval of our Compensation Committee, the subsequent approval of the board of directors and, unless exempted under the Compensation Regulations, the approval of the shareholders at a general meeting. Where the director is also a controlling shareholder, the requirements for approval of transactions with controlling shareholders apply, as described below under “—Fiduciary duties and approval of specified related party transactions under Israeli law—Disclosure of Personal Interests of a Controlling Shareholder and Approval of Acts and Transactions.”
The directors are also entitled to be paid reasonable travel, hotel and other expenses expended by them in attending board meetings and performing their functions as directors of the Company, all of which is to be determined by the board of directors.
External directors are entitled to remuneration subject to the provisions and limitations set forth in the Compensation Regulations.
Internal Auditor
Under the Companies Law, the board of directors of an Israeli public company must appoint an internal auditor recommended by the audit committee. The role of the internal auditor is, among other things, to examine our compliance with applicable law and orderly business procedures.
Under the Companies Law, the internal auditor cannot be an interested party or an office holder or a relative of an interested party or an office holder, nor may the internal auditor be the company’s independent auditor or its representative. An “interested party” is defined in the Companies Law as: (i) a holder of 5% or more of the issued share capital or voting power in a company, (ii) any person or entity who has the right to designate one or more directors or to designate the chief executive officer of the company, or (iii) any person who serves as a director or as a chief executive officer of the company. As of the date of this annual report on Form 20-F, the board of directors has not appointed an internal auditor, and the Company is therefore not currently in compliance with the requirements of the Companies Law. Due to such non-compliance with the Companies Law, the Company may be subject to third parties’ and/or shareholders’ claims under the Israeli Torts Ordinance New Version) 5728-1968.
Fiduciary duties and Approval of Related Party Transactions under Israeli law
Fiduciary duties of office holders
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company. Each person listed in the table under “Directors and Senior Management” is an office holder under the Companies Law. The duty of care requires an office holder to act with the level of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means, in light of the circumstances, to (i) obtain information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position and (ii) all other important information pertaining to these actions.
The duty of care includes a duty to use reasonable means to obtain:
● | information on the appropriateness of a given action submitted for his or her approval or performed by virtue of his or her position; and |
● | all other important information pertaining to such action. |
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The duty of loyalty requires an office holder to act in good faith and in the best interests of the company, and includes, among other things, the duty to:
● | refrain from any conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs; |
● | refrain from any activity that is competitive with the business of the company; |
● | refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or others; and |
● | disclose to the company any information or documents relating to the company’s affairs which the office holder received as a result of his or her position as an office holder. |
We may approve an act performed in breach of the duty of loyalty of an office holder provided that the office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses his or her personal interest a sufficient amount of time before the date for discussion of approval of such act.
Disclosure of Personal Interests of an Office Holder and Approval Certain Transactions
The Companies Law requires that an office holder promptly disclose to the company any “personal interest” that he or she may have and all related material information or documents relating to any existing or proposed transaction by the company. An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. A personal interest includes an interest of any person in an act or transaction of a company, including a personal interest of one’s relative or of a corporate body in which such person or a relative of such person is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager, but excluding a personal interest stemming solely from one’s ownership of shares in the company. A personal interest includes the personal interest of a person for whom the office holder holds a voting proxy or the personal interest of the office holder with respect to his or her vote on behalf of a person for whom he or she holds a proxy, discretionary or otherwise, even if such shareholder has no personal interest in the matter. An office holder is not, however, obliged to disclose a personal interest if it derives solely from the personal interest of his or her relative in a transaction that is not considered an extraordinary transaction.
Under the Companies Law, extraordinary transactions that require approval are defined as any of the following: a transaction other than in the ordinary course of business; a transaction that is not on market terms; or a transaction that may have a material impact on a company’s profitability, assets or liabilities.
Generally, a person who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee shall not be present at such a meeting or vote on that matter unless, with respect to an office holder, the chairman of the audit committee or board of directors (as applicable) determines that the office holder should be present during the discussions in order to present the transaction that is subject to approval (provided that the office holder may not vote on the matter). If a majority of the members of the audit committee or the board of directors (as applicable) has a personal interest in the approval of a transaction, then all directors may participate in discussions of the audit committee or the board of directors (as applicable) on such transaction and the voting on approval thereof. If a majority of the members of the board of directors has a personal interest in the approval of a transaction, shareholder approval is also required for such transaction.
The amendment of an existing related-party transaction requires only the approval of the audit committee, provided the committee determines that the amendment is not material in relation to the existing arrangement.
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Approval of Transactions with Officer Holders
If it is determined that an office holder has a personal interest in a transaction that is not an extraordinary transaction, approval by the board of directors is required for the transaction, unless the company’s articles of association provide for a different method of approval. Further, so long as an office holder has disclosed his or her personal interest in a transaction, the board of directors may approve an act by the office holder that would otherwise be deemed a breach of his or her duty of loyalty, provided that the transaction is in the company’s best interest and the office holder acted in good faith. An extraordinary transaction in which an office holder has a personal interest requires approval first by the company’s audit committee and subsequently by the board of directors.
Compensation of Officers Other than the Chief Executive Officer
Pursuant to the Companies Law, compensation arrangements such as insurance, indemnification or exculpation arrangements with office holders (other than the chief executive officer) or directors require approval first by the compensation committee, then by the board of directors, according to the company’s compensation policy.
In special circumstances, the compensation committee and the board of directors may approve compensation arrangements inconsistent with the company’s compensation policy, subject to the approval of a majority vote of the shares present and voting at a shareholders meeting, provided that provided that they have considered the same considerations and matters required for the approval of a compensation policy in accordance with the Companies Law and such arrangement must be approved by a majority vote of the shares present and voting at a shareholders meeting on the matter, provided that either: (a) such majority includes at least a majority of the shares held by all shareholders who are not controlling shareholders and shareholders who do not have a personal interest in such compensation arrangement; or (b) the total number of shares of non-controlling shareholders and shareholders who do not have a personal interest in the compensation arrangement and who vote against the arrangement does not exceed two percent of the company’s aggregate voting rights (“Special Majority Vote for Compensation”). However, if the shareholders of the company do not approve a compensation arrangement with an executive officer that is inconsistent with the company’s compensation policy by the Special Majority Vote for Compensation, the compensation committee and board of directors may, in special circumstances, override the shareholders’ decision if each of the compensation committee and the board of directors discuss the arrangement again, analyze the shareholders’ objection and provide detailed reasons for their decision.
An amendment to an existing arrangement with an office holder (other than the chief executive officer) who is not a director requires only the approval of the compensation committee, if the compensation committee determines that the amendment is not material in comparison to the existing arrangement. However, according to regulations promulgated under the Companies Law, a non-material amendment to an existing arrangement with an office holder (who is not a director) who is subordinate to the chief executive officer shall not require the approval of the compensation committee, if the amendment is approved by the chief executive officer and (i) the company’s compensation policy determines that a non-material amendment to the terms of service of an office holder (other than the chief executive officer) may be approved by the chief executive officer and (ii) the engagement terms are consistent with the company’s compensation policy.
Compensation of Chief Executive Officer
Pursuant to the Companies Law, compensation of a public company’s chief executive officer generally requires the approval of first, the company’s compensation committee, second, the company’s board of directors and third (except for a number of exceptions), the company’s shareholders by the Special Majority for Compensation. Compensation arrangements with the Chief Executive Officer must comply with the company’s compensation policy. However, if the shareholders of the company do not approve a compensation arrangement with a chief executive officer by the Special Majority Vote for Compensation, the compensation committee and the board of directors may in special circumstances, override the shareholders’ decision if each of the compensation committee and the board of directors discuss the arrangement again, analyze the shareholders’ objection and provide detailed reasons for their decision. Notwithstanding the above, the compensation committee is authorized to refrain from submitting a proposed compensation arrangement with a Chief Executive Officer candidate for shareholder approval, if (a) doing so would jeopardize the company’s engagement of the candidate and (b) the proposed arrangement complies with the company’s compensation policy.
According to regulations promulgated under the Companies Law, the renewal or extension of an existing arrangement with a chief executive officer shall not require shareholder approval if (i) the renewal or extension is not beneficial to the chief executive officer as compared to the prior arrangement or there is no substantial change in the terms and other relevant circumstances; and (ii) the engagement terms are consistent with the company’s compensation policy and the prior arrangement was approved by the shareholders by the Special Approval for Compensation.
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Compensation of Directors
Arrangements regarding the compensation of a director require the approval of the compensation committee, board of directors and (except for a number of exceptions) shareholders by ordinary majority, in that order. The approval of the compensation committee and board of directors must be in accordance with the compensation policy. In special circumstances, the compensation committee and board of directors may approve a compensation arrangement that is inconsistent with the company’s compensation policy, provided that they have considered the same considerations and matters required for the approval of a compensation policy in accordance with the Companies Law and that shareholder approval was obtained by the Special Approval for Compensation.
With respect to compensation of an officer (including chief executive officer) or director who is also a controlling shareholder, see “— Disclosure of Personal Interests of Controlling Shareholders and Approval of Certain Transactions.”
Disclosure of Personal Interests of a Controlling Shareholder and Approval of Certain Transactions
Pursuant to the Companies Law, the disclosure requirements regarding personal interests that apply to directors and executive officers also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, and in the context of a transaction involving a shareholder of the company, includes also a shareholder who holds 25% or more of the voting rights in the company if no other shareholder holds more than 50% of the voting rights. For this purpose, the holdings of all shareholders who have a personal interest in the same transaction will be aggregated. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in which a controlling shareholder has a personal interest, and the terms of engagement with a controlling shareholder or a relative thereof, directly or indirectly (including through a corporation controlled by a controlling shareholder), for the provision of services to the company and his or her terms of employment or service as an office holder or employment as other than an office holder, require the approval of each of (i) the audit committee or the compensation committee with respect to the terms of service or employment by the company as an office holder, an employee or service provider; (ii) the board of directors; and (iii) the shareholders, in that order. The shareholder approval requires one of the following:
● | at least a majority of the voting rights in the company held by shareholders who have no personal interest in the transaction and who are present and voting at the general meeting, must be voted in favor of approving the transaction (for this purpose, abstentions are disregarded); or |
● | the voting rights held by shareholders who have no personal interest in the transaction and who are present and voting at the general meeting, and who vote against the transaction, do not exceed 2% of the voting rights in the company. |
Each shareholder voting on the approval of an extraordinary transaction with a controlling shareholder must inform the company prior to voting whether or not he or she has a personal interest in the approval of the transaction, otherwise, the shareholder is not eligible to vote on the proposal and his or her vote will not be counted for purposes of the proposal.
To the extent that any such transaction with a controlling shareholder or his relative is for a period extending beyond three years, shareholder approval is required once every three years, unless, in respect to certain transactions, the audit committee determines that the duration of the transaction is reasonable under the circumstances.
The compensation committee and board approval for arrangements regarding the terms of service or employment of a controlling shareholder must be in accordance with the company’s compensation policy. In special circumstances the compensation committee and board of directors may approve a compensation arrangement that is inconsistent with the company’s compensation policy, provided that they have considered the same considerations and matters required for the approval of a compensation policy in accordance with the Companies Law and that shareholder approval was obtained by the Special Majority Vote for Compensation.
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Pursuant to regulations promulgated under the Companies Law, certain transactions with a controlling shareholder or his or her relative, or with directors, relating to terms of service or employment that would otherwise require approval of a company’s shareholders may be exempt from shareholder approval upon certain determinations of the audit committee and board of directors. In addition, disclosure of a personal interest in a private placement of a public company (including disclosure of any material fact or document) is required by (i) a shareholder holding 5% or more of the company’s issued and outstanding capital or its voting rights whose holdings will increase as result of the private placement and a shareholder who will hold 5% or more of the company’s issued and outstanding capital or its voting rights as a result of the private placement, if 20% or more of the company’s outstanding share capital prior to the private placement is issued in the private placement and the payment for which is not only in cash or listed securities or the transaction is not on market terms; and (ii) a person or entity that will become a controlling shareholder as a result of the private placement.
Duties of Shareholders
Under the Companies Law, a shareholder has a duty to to act in good faith and in a customary manner toward the company and other shareholders and to refrain from abusing its power in the company, including, among other things, voting at general meetings of shareholders on the following matters:
● | an amendment to the company’s articles of association; |
● | an increase in the company’s authorized share capital; |
● | a merger; and |
● | the approval of related party transactions and acts of office holders that require shareholder approval. |
A shareholder also has a general duty to refrain from discriminating against other shareholders.
In addition, certain shareholders have a duty of fairness toward the company, including any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or has another power with respect to a company. The Companies Law does not define the substance of the duty of fairness, except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness.
Exculpation, Insurance and Indemnification of Office Holders
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. A company may exculpate an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of the duty of care but only if a provision authorizing such exculpation is included in its articles of association. Our amended and restated articles of association include such a provision. An Israeli company may not exculpate a director from liability arising out of a breach of the duty of care with respect to a dividend or distribution to shareholders.
Under the Companies Law and the Securities Law, 5738—1968 (the “Securities Law”), a company may indemnify an office holder in respect of the following liabilities, payments and expenses incurred for acts performed as an office holder, either pursuant to an undertaking made in advance of an event or following an event, provided a provision authorizing such indemnification is contained in its articles of association:
● | a financial liability incurred by or imposed on him or her in favor of another person pursuant to a judgment, including a settlement or arbitrator’s award approved by a court. However, if an undertaking to indemnify an office holder with respect to such liability is provided in advance, then such undertaking must be limited to certain events which, in the opinion of the board of directors, can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the foreseen events and described above amount or criteria; |
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● | reasonable litigation expenses, including reasonable attorneys’ fees, incurred by the office holder (1) as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and (2) in connection with a monetary sanction; |
● | expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder, or certain compensation payments made to an injured party imposed on an office holder in connection with an administrative procedure under the Securities Law; and |
● | reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party or in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for an offense that does not require proof of criminal intent. |
Under the Companies Law and the Securities Law, a company may insure an office holder against the following liabilities incurred for acts performed by him or her as an office holder if and to the extent provided in the company’s articles of association:
● | a breach of duty of care to the company or to a third party, to the extent such a breach arises out of the negligent conduct of the office holder; |
● | a breach of duty of loyalty to the company, provided that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company; |
● | a financial liability imposed on the office holder in favor of a third party; |
● | expenses, including reasonable litigation expenses and legal fees, incurred by an office holder in relation to an administrative proceeding instituted against such office holder or certain compensation payments to an injured party imposed on an office holder by an administrative proceeding, pursuant to certain provisions of the Securities Law. |
Under the Companies Law, a company may not indemnify, exculpate or insure an office holder against any of the following:
● | a breach of duty of loyalty, except for indemnification and insurance for a breach of the duty of loyalty to the company to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not harm the company; |
● | a breach of the duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder; |
● | an act or omission committed with intent to derive illegal personal benefit; or |
● | a fine, monetary sanction or forfeit levied against the office holder. |
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Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by the compensation committee and the board of directors and, with respect to certain office holders or under certain circumstances, also by the shareholders. See “— Fiduciary duties and Approval of Related Party Transactions under Israeli law.” However, the insurance of office holders shall not require shareholder approval and may be approved only by the compensation committee, if the engagement terms are determined in the company’s compensation policy and that policy was approved by the shareholders by the Special Approval for Compensation, provided that the policy is on market terms and is not likely to materially impact the company’s profitability, assets or obligations.
Our amended and restated articles of association permit us to exculpate, indemnify and insure our office holders as permitted under the Companies Law and the Israeli Securities Law. Our office holders are currently covered by a directors and officers’ liability insurance policy. As of the date of this annual report on Form 20-F, no claims for directors’ and officers’ liability insurance have been filed under this policy, we are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
We have entered into agreements with each of our current directors and executive officers exculpating them from liability to us for damages caused to us as a result of a breach of duty of care and undertaking to indemnify them, in each case, to the fullest extent permitted by law and our Articles of Association, to the extent that these liabilities are not covered by insurance, all subject to limited exceptions. Indemnification for any monetary liability incurred by or imposed on a director or officer in favor of a third party is limited to certain events that were determined as foreseeable by our Board of Directors based on our operations, as set forth in the indemnification agreements. Under such indemnification agreements, the maximum aggregate amount of indemnification that we may pay to all of our directors and offices together based on such indemnification agreements is $5,000,000. However, in the opinion of the SEC, indemnification of office holders for liabilities arising under the Securities Act is against public policy and therefore unenforceable.
D. Employees
As of December 31, 2023, we had 13 full time employees in PVN and one full time employee in Digiflex, all of whom were located in Israel. As of December 31, 2022, we had 11 full time employees in PVN and one full time employee in Digiflex, all of whom were located in Israel.
Israeli labor laws govern the length of the workday, minimum wages for employees, procedures for hiring and dismissing employees, determination of severance pay, annual leave, sick days, advance notice of termination of employment, equal opportunity and anti-discrimination laws and other conditions of employment of our Israeli employees. Subject to certain exceptions, Israeli law generally requires severance pay upon the retirement, death or dismissal of an employee, and requires us and our employees to make payments to the National Insurance Institute, which is similar to the U.S. Social Security Administration. Our Israeli employees have pension plans in accordance with the applicable Israeli legal requirements.
While none of our employees are party to any collective bargaining agreements, certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to our employees by extension orders issued by the Israeli Ministry of Industry, Trade and Labor. These provisions primarily concern the length of the workday, minimum daily wages for professional workers, pension fund benefits for all employees, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums.
E. Share Ownership
Beneficial Ownership of Directors and Executive Officers
For information regarding beneficial ownership of our ordinary shares by our directors and executive officers, see “Item 7 A. Major Shareholders and Related Party Transactions — Major Shareholders”.
Share Option Plan
For information on our share option plan, see “Item 6 B. Directors, Senior Management and Employees—Compensation — Share Option Plan”.
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F. Disclosure of a Registrant’s Action to Recover Erroneously Awarded Compensation
Not applicable.
ITEM 7. Major Shareholders and Related Party Transactions
A. Major Shareholders.
The following table sets forth certain information regarding the beneficial ownership of our ordinary shares as of May 9, 2024, by:
● | each person (or group of affiliated persons) known by us to be the beneficial owner of more than 5% of the outstanding ordinary shares. |
● | each of our directors and executive officers; |
● | all of our directors and executive officers as a group. |
The beneficial ownership of our ordinary shares is determined in accordance with the rules of the SEC. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or to direct the voting of the security, or investment power, which includes the power to dispose of or to direct the disposition of the security. For purposes of the table below, we deem ordinary shares issuable pursuant to options and warrants that are currently exercisable or exercisable within 60 days as of May 9, 2024, if any, to be outstanding and to be beneficially owned by the person holding the options or warrants for the purposes of computing the percentage ownership of that person, but we do not treat them as outstanding for the purpose of computing the percentage ownership of any other person. The percentage of ordinary shares beneficially owned is based on 193,649,488 ordinary shares outstanding as of May 9, 2024.
Except where otherwise indicated, we believe, based on information furnished to us by such owners and based on public information, that the beneficial owners of the ordinary shares listed below have sole investment and voting power with respect to such shares. In addition, none of our shareholders have different voting rights from other shareholders.
No. of Shares Beneficially Owned | Percentage Owned | |||||||
Holders of more than 5% of our voting securities: | ||||||||
GTRIMG Investments Ltd. | 81,350,931 | (1) | 39.42 | % | ||||
Legov Ltd. | 65,513,136 | (2) | 30.66 | % | ||||
Teuza – A Fairchild Technology Venture Ltd. | 39,123,821 | (3) | 19.31 | % | ||||
Y.T.Y. Lenny Investments Ltd. | 16,552,326 | (4) | 8.24 | % | ||||
Directors and executive officers: | ||||||||
Dov Farkash, Active Chairman of the Board | 969,940 | (5) | * | |||||
Avi Magid, Chief Executive Officer and Director | 3,607,481 | (6) | 1.81 | % | ||||
Gil Kerbs, Director | — | — | ||||||
Ido Lapidot, External Director | 1,439,522 | (7) | * | |||||
Limor Magen-Telem, External Director | 30,776 | (8) | * | |||||
Keinan Maman, Director | 437,026 | (9) | * | |||||
Fernando de la Vega, Chief Technology Officer | 5,893,094 | (10) | 2.97 | % | ||||
Evyatar Cohen, Chief Financial Officer | 1,916,841 | (11) | * | |||||
Directors and executive officers as a group (8 persons) | 14,294,680 | (12) | 7.23 | % |
* | Represents less than 1.0% beneficially held. |
(1) | Includes (i) 68,643,861 ordinary shares beneficially owned by GTRIMG, a company incorporated under the laws of the State of Israel, which is wholly-owned by TRIMG Communication International Ltd., a company incorporated under the laws of the State of Israel, (“GTRIMG Communication”), which itself is wholly-owned by GTRIMG Ltd., a company incorporated under the laws of the British Virgin Islands (“GTRIMG Ltd.” and together with GTRIMG and GTRIMG Communication, the “GTRIMG Entities”), which itself is wholly-owned by GTRIMG Foundation, a foundation incorporated under the laws of the Principality of Liechtenstein, the beneficiaries of which are Messrs. Talia Zeevi, Rami Zeevi, Yael Zeevi Shoer, Michal Zeevi Bender and Gur Zeevi, and (ii) 12,707,070 ordinary shares issuable upon exercise of outstanding warrants held by GTRIMG currently exercisable or exercisable within 60 days of May 9, 2024. |
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(2) | Includes (i) an aggregate 45,513,138 ordinary shares held by Legov Ltd., GlenRock Israel Ltd., Insight Capital Ltd. (collectively, the “LR Entities”) and Leon Recanati, and (ii) 19,999,998 ordinary shares issuable upon exercise of outstanding warrants held by Insight Capital Ltd. currently exercisable or exercisable within 60 days of May 9, 2024. Leon Recanati is the beneficial owner of the ordinary shares held by the LR Entities and underlying the warrants held by Insight Capital Ltd. |
(3) | Includes (i) 30,195,250 ordinary shares beneficially owned, and (ii) 8,928,571 ordinary shares issuable upon exercise of outstanding warrants currently exercisable or exercisable within 60 days of May 9, 2024. |
(4) | Includes (i) an aggregate 9,409,469 ordinary shares held by Y.T.Y. Lenny Investments Ltd. and Sullam Holdings L.R Ltd., and (ii) 7,142,857 ordinary shares issuable upon exercise of outstanding warrants held by Sullam Holdings L.R Ltd. currently exercisable or exercisable within 60 days of May 9, 2024. Lenny Recanati is the beneficial owner of the ordinary shares held by Y.T.Y. Lenny Investments Ltd. and Sullam Holdings L.R Ltd. and the ordinary shares underlying the warrants held by Sullam Holdings L.R. Ltd. |
(5) | Represents options to purchase 969,940 ordinary shares currently exercisable or exercisable within 60 days of May 9, 2024. |
(6) | Represents options to purchase 3,607,481 ordinary shares currently exercisable or exercisable within 60 days of May 9, 2024. |
(7) | Represents options to purchase 1,439,522 ordinary shares currently exercisable or exercisable within 60 days of May 9, 2024. |
(8) | Represents options to purchase 30,776 ordinary shares currently exercisable or exercisable within 60 days of May 9, 2024. |
(9) | Represents options to purchase 437,026 ordinary shares currently exercisable or exercisable within 60 days as of May 9, 2024. |
(10) | Includes (i) 1,336,140 ordinary shares beneficially owned, and (ii) options to purchase 4,556,954 ordinary shares currently exercisable or exercisable within 60 days as of May 9, 2024. |
(11) | Represents options to purchase 1,916,841 ordinary shares currently exercisable or exercisable within 60 days as of May 9, 2024. |
(12) | See footnotes (5)-(11) above. |
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Record Holders
Based on the information provided to us by our transfer agent, as of May 9, 2024, 18 registered holders (holding approximately 3.06% of our ordinary shares) were U.S. domiciled holders (including CEDE & Co. as nominee for the Depository Trust Company, which held approximately 1.80% of our outstanding ordinary shares as of said date).
Significant Changes in Ownership of Major Shareholders
To our knowledge, there were no significant changes in the percentage of beneficial ownership held by our major shareholders during 2023.
To our knowledge, in 2022 (i) each of the following ceased to be the beneficial owner of more than 5% of our outstanding shares: Slobel NV, Terra Venture Partners and Fineline PCB (Cyprus) Ltd.; and (ii) Y.T.Y. Lenny Investments Ltd. became a beneficial owner of more than 5% of our outstanding shares.
To our knowledge, there were no significant changes in the percentage of beneficial ownership held by our major shareholders during 2021.
B. Related Party Transactions
The following is a description of our related party transactions since January 1, 2023:
Employment and Services Agreements. Employment and services agreements entered into with our executive officers and our Active Chairman, as described above under “Item 6 B. Directors, Senior Management and Employees — Compensation — Employment and Service Agreements with Active Chairman and Executive Officers.”
Indemnification and Exculpation Agreements with Directors and Executive Officers. Customary indemnification and exculpation agreements entered into with our directors and executive officers, as described above under “Item 6 C. Directors, Senior Management and Employees — Board Practices — Exculpation, Insurance and Indemnification of Office Holders.”
Option Agreements with Directors and Executive Officers. Agreements entered into with our directors and executive officers in connection with options granted to them under our 2010 Option Plan, as described above under “Item 6 E. Directors, Senior Management and Employees — Share Ownership — Share Option Plan”. For information regarding beneficial ownership of our ordinary shares by our directors and executive officers, see “Item 7 A. Major Shareholders and Related Party Transactions — Major Shareholders”.
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Settlement Agreement with Dolev and Dr. de la Vega. On January 14, 2024, we entered into a settlement agreement with Dolev and Dr. Fernando de la Vega with respect to the aggregate amount owed to Dolev for past services provided to us through Dr. de la Vega under the DBG Services Agreement (the “Settlement Agreement”), pursuant to which (i) effective as of January 1, 2024, the scope of services Dolev shall provide to us through the services of Dr. de la Vega as Chief Technology Officer reduced to 70% (instead of a full-time basis) and Dolev’s monthly fee was reduced to NIS 45,500 (approximately $12,544) plus VAT, and Dr. de la Vega will also be entitled to reimbursement for his actual expenses. (ii) We undertook to pay Dolev a monthly payment of NIS 20,000 (approximately $5,514), as repayment for the debt for past services, until full repayment of the debt (even if Dr. de la Vega retires or his services are terminated). If we shall have financial difficulties resulting in us not making on-going payments to employees, suppliers and service providers, then we may delay the foregoing monthly debt payment until fund raising or until we commence payment to our employees and suppliers and in such case, Dolev will be paid with the first payments that will be made. If no payment is made within nine months from the beginning of such delay, it will be considered a breach of the Settlement Agreement and Dolev may act accordingly. In addition, if any of the officers of the Company commences a claim against us for any debt owed before the aforesaid nine months period, then Dolev may demand immediate payment of the balance of the debt and if not paid, commence a claim for the remaining amount of the debt. (iii) Any outstanding options held by Dr. de la Vega as of the termination of Dolev’s services or Dr. de la Vega’s retirement (whichever is earlier), shall be extended by a period of an additional 36 months from their original expected expiration. (iv) Dolev is entitled to convert all or part of the debt for past services to equity, based on a price per share of $0.07 per share, within the first 18 months following the date of the Settlement Agreement. (v) If we shall raise funds (investors only, excluding grants) exceeding $5.0 million during the first 12 months following the execution of the Settlement Agreement and in any 12-month period thereafter, we will pay Dolev a one-time additional amount on account of the debt for past services equal to 5% for any funds raised exceeding $4 million. (vi) We will pay Dolev the full balance of the debt in any exit event 14 days after such event. The Settlement Agreement will automatically terminate if Dr. de la Vega and/or Dolev files a claim against us for any or all of the debt despite us complying with all terms of the Settlement Agreement.
Investment Agreements with Existing Shareholders. Agreements entered into with certain existing shareholders in connection with private placements of our securities, as described above under “Item 5 B. — Operating and Financial Review and Prospects — Liquidity and Capital Resources”.
For additional information, see Note 12 to our consolidated financial statements for the year ended December 31, 2023, included elsewhere in this annual report on Form 20-F.
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C. Interests of Experts and Counsel.
Not applicable.
ITEM 8. Financial Information.
A. Consolidated Financial Statements and Other Financial Information.
See “Item 18. Financial Statements” for the consolidated financial statements filed as part of this annual report on Form 20-F.
Legal Proceedings
From time to time, we may be involved in various claims and legal proceedings that arise through the normal course of business. As of the date of this filing, we are not a party to any material legal proceedings nor are we aware of any such pending or threatened legal proceedings.
We are not aware of any material legal proceedings in which any of our directors, officers or affiliates is either a party adverse to us or our subsidiaries or has a material interest adverse to ours or our subsidiaries.
For information regarding prior legal proceedings, see Note 8.b. to our consolidated financial statements that appear elsewhere in this annual report on Form 20-F.
Dividend Policy
We have never declared or paid any cash dividends on our ordinary shares and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
Our ability to distribute dividends also may be limited by Israeli law. The Companies Law restricts our ability to declare dividends. Unless otherwise approved by a court, we can distribute dividends only from “profits” (as defined by the Companies Law), and only if there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations as they become due. Payment of dividends may also be subject to Israeli withholding taxes. See “Item 10 B. Additional Information - Memorandum and Articles of Association”.
B. Significant Changes.
Except as disclosed elsewhere in this annual report, there have been no other significant changes since December 31, 2023, until the date of the filing of this annual report.
ITEM 9. The Offer and Listing.
A Offer and Listing Details.
Our ordinary shares were quoted on the OTC Pink under the symbol “PVNNF.” However, due to lack of available resources, we were not able to comply with our SEC periodic filing obligations for the years ended December 31, 2020 and 2021. Accordingly, as of September 29, 2021, the public quote for our ordinary shares was removed from the OTC Pink. Depending on market and other conditions and the continued development of our products, we will consider applying to have our ordinary shares quoted on the OTC Pink.
B. Plan of Distribution.
Not applicable.
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C. Markets.
Not applicable.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. Additional Information.
A. Share Capital.
Not applicable.
B. Memorandum and Articles of Association.
A copy of our amended and restated articles of association is incorporated by reference attached as Exhibit 1.1 to this annual report. As of December 31, 2023, our authorized share capital consists of 1,200,000,000 ordinary shares, par value NIS 0.01 per share, of which 182,942,418 were issued and outstanding. Other than as disclosed below, the information called for by this Item is set forth in Exhibit 2.1 to this annual report and is incorporated by reference into this annual report.
All of our outstanding ordinary shares are validly issued, fully paid and non-assessable. Our ordinary shares do not have any preemptive rights.
Registration Number and Purposes of the Company
Our registration number with the Israeli Companies Registrar is 514287093. Our purpose is set forth in our Articles of Association and includes any lawful activity.
Voting Rights and Conversion
All ordinary shares will have identical voting and other rights in all respects.
Holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote before the shareholders at a general meeting.
Transfer of shares
Our fully paid ordinary shares are issued in registered form and may be freely transferred under our amended and restated articles of association, unless the transfer is restricted or prohibited by another instrument, applicable law or the rules of a stock exchange on which the shares are listed for trade. The ownership or voting of our ordinary shares by non-residents of Israel is not restricted in any way by our amended and restated articles of association or the laws of the State of Israel, except for ownership by nationals of some countries that are, or have been, in a state of war with Israel.
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Board of directors
See “Item 6 C. Directors, Senior Management and Employees — Board Practices.”
Dividend and Liquidation Rights
We have never declared or paid any cash dividends on our ordinary shares and do not anticipate paying any cash dividends in the foreseeable future.
We may declare a dividend to be paid to the holders of our ordinary shares in proportion to their respective shareholdings. Under the Companies Law, dividend distributions are determined by the board of directors and do not require the approval of the shareholders of a company unless the company’s articles of association provide otherwise. Our Articles of Association do not require shareholder approval of a dividend distribution and provide that dividend distributions may be determined by our board of directors.
Pursuant to the Companies Law, the distribution amount is limited to the greater of retained earnings or earnings generated over the two most recent fiscal years, according to our then last reviewed or audited financial statements, provided that the end of the period to which the financial statements relate is not more than six months prior to the date of the distribution. If we do not meet such criteria, then we may distribute dividends only with court approval. In each case, we are only permitted to distribute a dividend if our board of directors and the court, if applicable, determines that there is no reasonable concern that payment of the dividend will prevent us from satisfying our existing and foreseeable obligations as they become due.
In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of our ordinary shares in proportion to their shareholdings. This right, as well as the right to receive dividends, may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.
General Meetings of Shareholders and Shareholder Proposals
Under Israeli law, we are required to hold an annual general meeting of our shareholders once every calendar year that must be held no later than 15 months after the date of the previous annual general meeting. All meetings other than the annual general meeting of shareholders are referred to in the Articles of Association as special general meetings. Our board of directors may call special general meetings whenever it sees fit, at such time and place, within or outside of Israel, as it may determine. In addition, the Companies Law provides that our board of directors is required to convene a special general meeting upon the written request of (i) any two or more of our directors or one-quarter or more of the members of our board of directors or (ii) one or more shareholders holding, in the aggregate, either (a) 5% or more of our outstanding issued shares and 1% or more of our outstanding voting power or (b) 5% or more of our outstanding voting power. Our Articles of Association contain procedural guidelines and disclosure items with respect to the submission of shareholder proposals for shareholder meetings.
Subject to the provisions of the Companies Law and the regulations promulgated thereunder, shareholders entitled to participate and vote at general meetings are the shareholders of record on a date to be decided by the board of directors, which may generally be between four and 21 days prior to the date of the meeting, and in certain circumstances, between four and 60 days prior to the date of the meeting. Furthermore, the Companies Law requires that resolutions regarding the following matters must be passed at a general meeting of our shareholders:
● | amendments to our articles of association; | |
● | appointment or termination of our auditors; |
● | appointment of external directors; | |
● | approval of certain related party transactions; | |
● | increases or reductions of our authorized share capital; | |
● | a merger; and | |
● | the exercise of our board of director’s powers by a general meeting, if our board of directors is unable to exercise its powers and the exercise of any of its powers is required for our proper management. |
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The Companies Law requires that a notice of any annual general meeting or special general meeting be provided to shareholders at least 21 days prior to the meeting and if the agenda of the meeting includes the appointment or removal of directors, the approval of transactions with office holders or interested or related parties, or an approval of a merger, notice must be provided at least 35 days prior to the meeting. Under the Companies Law and our amended and restated articles of association, shareholders are not permitted to take action by way of written consent in lieu of a meeting.
Quorum
Pursuant to our amended and restated articles of association, holders of our ordinary shares have one vote for each ordinary share held on all matters submitted to a vote before the shareholders at a general meeting. The quorum required for our general meetings of shareholders consists of at least two shareholders (not in default in payment of any sum) present in person, by proxy or written ballot who hold or represent between or among them at least 25% of the total our issued share capital. If within thirty minutes from the time appointed for the general meeting the requisite quorum is not present, the meeting shall be dissolved, but shall stand adjourned to the same day in the next week at the same time the following week and at the same place or to a later date, if so specified in advance in the notice of the general meeting. All matters for which the general meeting was summoned shall be discussed at the adjourned meeting, and subject to a limited exception, any number of shareholders present in person or by proxy shall constitute a lawful quorum.
Vote Requirements
Our Articles of Association provide that all resolutions of our shareholders require a simple majority vote, unless otherwise required by the Companies Law or by our amended and restated articles of association. For special majority requirements under the Companies Law see “Item 6 C. Directors, Senior Management and Employees — Board Practices”. Under our Articles of Association, the alteration of the rights, privileges, preferences or obligations of any class of our shares requires a simple majority of the class so affected (or such other percentage of the relevant class that may be set forth in the governing documents relevant to such class), in addition to the ordinary majority vote of all classes of shares voting together as a single class at a shareholder meeting. Our Articles of Association also provide that a change to the provisions related to the committees of our board of directors, the number of directors, the election or removal of any director from office, the proceedings of our board of directors, mergers and business combinations, the winding up of the Company, and the amendment of our Articles of Association, require the vote of at least 60% of our outstanding share capital having the right to vote, voting in person or by proxy at such general meeting.
Access to corporate records
Under the Companies Law, all shareholders generally have the right to review minutes of our general meetings, our shareholder register, including with respect to material shareholders, our articles of association, our financial statements, other documents as provided in the Companies Law, and any document we are required by law to file publicly with the Israeli Companies Registrar or the Israeli Securities Authority. Any shareholder who specifies the purpose of its request may request to review any document in our possession that relates to any action or transaction with a related party which requires shareholder approval under the Companies Law. We may deny a request to review a document if we determine that the request was not made in good faith, that the document contains a commercial secret or a patent or that the document’s disclosure may otherwise impair our interests.
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Exchange Controls
There are currently no Israeli currency control restrictions on remittances of dividends on our ordinary shares, proceeds from the sale of the shares or interest or other payments to non-residents of Israel, except for shareholders who are subjects of countries that are, or have been, in a state of war with Israel.
Acquisitions under Israeli law
Merger
The Companies Law permits merger transactions if approved by each party’s board of directors and, unless certain requirements described under the Companies Law are met, by a majority vote of each party’s shares, and, in the case of the target company, a majority vote of each class of its shares, voted on the proposed merger at a shareholders meeting. The board of directors of a merging company is required pursuant to the Companies Law to discuss and determine whether in its opinion there exists a reasonable concern that as a result of a proposed merger, the surviving company will not be able to satisfy its obligations towards its creditors, such determination taking into account the financial status of the merging companies. If the board of directors has determined that such a concern exists, it may not approve a proposed merger. Following the approval of the board of directors of each of the merging companies, the boards of directors must jointly prepare a merger proposal for submission to the Israeli Registrar of Companies.
For purposes of the shareholder vote, unless a court rules otherwise, the merger will not be deemed approved if a majority of the shares represented at the shareholders meeting that are held by parties other than the other party to the merger, or by any person (or group of persons acting in concert) who holds (or hold, as the case may be) 25% or more of the outstanding shares or the right to appoint 25% or more of the directors of the other party, vote against the merger. If the transaction would have been approved but for the separate approval of each class or the exclusion of the votes of certain shareholders as provided above, a court may still approve the merger upon the request of holders of at least 25% of the voting rights of a company, if the court holds that the merger is fair and reasonable, taking into account the value of the parties to the merger and the consideration offered to the shareholders. Pursuant to the Companies Law, if a merger is with a company’s controlling shareholder or if the controlling shareholder has a personal interest in the merger, then the merger is instead subject to the same special majority approval that governs all extraordinary transactions with controlling shareholders (as described above under “Board Practices — Fiduciary duties and Approval of Related Party Transactions under Israeli law.”).
In addition, under our Articles of Association, the Company shall not engage in any a “business combination” with any “interested shareholder” (as such terms are defined in our Articles of Association) for a period of three years following the time that such shareholder became an interested shareholder, unless (i) prior to such time the Board of Directors approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder; or (ii) upon consummation of the transaction which resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 85% of our outstanding voting shares at the time the transaction commenced.
Under the Companies Law, each merging company must send a copy of the proposed merger plan to its secured creditors. Unsecured creditors are entitled to receive notice of the merger pursuant to regulations promulgated under the Companies Law. Upon the request of a creditor of either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that, as a result of the merger, the surviving company will be unable to satisfy the obligations the target company. The court may further give instructions to secure the rights of creditors.
In addition, a merger may not be completed unless at least fifty days have passed from the date that a proposal for approval of the merger was filed with the Israeli Companies Registrar and thirty days from the date on which the merger was approved by the shareholders of each party.
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Full tender offer
A person wishing to acquire shares of a public Israeli company and who would as a result hold over 90% of the target company’s issued and outstanding share capital, or of a certain class of shares, is required by the Companies Law to make a tender offer to all of the company’s shareholders or the shareholders who holds shares of the same class for the purchase of all of the issued and outstanding shares of the company or of the same class, as applicable.
If the shareholders who do not respond to or accept the offer hold less than 5% of the issued and outstanding share capital of the company or of the applicable class of the shares, and more than half of the shareholders who do not have a personal interest in the offer accept the offer, all of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law. However, a tender offer will also be accepted if the shareholders who do not accept the offer hold less than 2% of the issued and outstanding share capital of the company or of the applicable class of shares.
Upon a successful completion of such a full tender offer, any shareholder that was an offeree in such tender offer, whether the shareholder accepted the tender offer or not, may, within six months from the date of acceptance of the tender offer, petition the Israeli court to determine whether the tender offer was for less than fair value and that the fair value should be paid as determined by the court. However, under certain conditions, the offeror may include in the terms of the tender offer that an offeree who accepted the offer will not be entitled to petition the Israeli court as described above.
If the full tender offer was not accepted in accordance with the above alternatives, the acquirer may not acquire shares of the company that will increase its holdings to more than 90% of the company’s voting rights or issued and outstanding share capital or of the applicable class from shareholders who accepted the tender offer.
Special tender offer
The Companies Law provides that an acquisition of shares of a public Israeli company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a holder of at least 25% of the voting rights in the company. This rule does not apply if there is already another holder of at least 25% of the voting rights in the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of more than 45% of the voting rights in the company, if there is no other shareholder of the company who holds more than 45% of the voting rights in the company, subject to certain exceptions.
A special tender offer must be extended to all shareholders of a company but the offeror is not required to purchase shares representing more than 5% of the voting power attached to the company’s outstanding shares, regardless of how many shares are tendered by shareholders. A special tender offer may be consummated only if (i) at least 5% of the voting power attached to the company’s outstanding shares will be acquired by the offeror and (ii) the number of shares tendered by shareholders who accept the offer exceeds the number of shares whose holders objected to the offer (excluding the purchaser and its controlling shareholders, holders of 25% or more of the voting rights in the company or any person having a personal interest in the acceptance of the tender offer or any other person acting on their behalf, including relatives and entities under such person’s control). If a special tender offer is accepted, then (i) shareholders who did not respond to or that had objected to the offer may accept the offer within four days of the last date set for the acceptance of the offer and they will be considered to have accepted the offer from the first day it was made, and (ii) the purchaser or any person or entity controlling it or under common control with the purchaser or such controlling person or entity may not make a subsequent tender offer for the purchase of shares of the target company and may not enter into a merger with the target company for a period of one year from the date of the offer, unless the purchaser or such person or entity undertook to effect such an offer or merger in the initial special tender offer.
In the event that a special tender offer is made, a company’s board of directors is required to express its opinion on the advisability of the offer, or shall abstain from expressing any opinion if it is unable to do so, provided that it gives the reasons for its abstention. In addition, the board of directors must disclose any personal interest each member of the board of directors has in the offer or stems therefrom. An office holder in a target company who, in his or her capacity as an office holder, performs an action the purpose of which is to cause the failure of an existing or foreseeable special tender offer or is to impair the chances of its acceptance, is liable to the potential purchaser and shareholders for damages resulting from his or her acts, unless such office holder acted in good faith and had reasonable grounds to believe he or she was acting for the benefit of the company. However, office holders of the target company may negotiate with the potential purchaser in order to improve the terms of the special tender offer, and may further negotiate with third parties in order to obtain a competing offer.
Shares purchased in contradiction to the tender offer rules under the Companies Law, as described above, will have no rights and will become dormant shares.
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Borrowing Powers
Pursuant to the Companies Law and our amended articles of association, our board of directors may exercise all powers and take all actions that are not required under law or under our amended articles of association to be exercised or taken by our shareholders, including the power to borrow money for company purposes.
For details regarding the approvals required under the Companies Law for the approval of director compensation, see “Item 6 C “Directors, Senior Management and Employees — Board Practices – Fiduciary Duties and Approval of Related Party Transactions under Israeli Law.”
Changes in Capital
Our amended and restated articles of association enable us to increase or reduce our share capital. Any such changes are subject to Israeli law and must be approved by a resolution duly passed by our shareholders at a general meeting by voting on such change in the capital. In addition, transactions that have the effect of reducing capital, such as the declaration and payment of dividends in the absence of sufficient retained earnings or profits, require the approval of both our board of directors and an Israeli court.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is Vstock Transfer, LLC. Its address is 18 Lafayette Place Woodmere, New York 11598, and its telephone number is (212) 828-8436.
C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described below and in Item 4. “Information on Our Company”, “Item 5 B. — Operating and Financial Review and Prospects — Liquidity and Capital Resources”, “Item 6 B. Directors, Senior Management and Employees— Compensation,” “Item 7B. Major Shareholders and Related Party Transactions — Related Party Transactions” or elsewhere in this annual report.
Convertible Loan Agreements
For information regarding certain convertible loan agreements that we entered into, all of which convertible loans have matured and (to the extent not converted) were not timely repaid by us due to financial difficulties, see Note 7 to our consolidated financial statements for the year ended December 31, 2023 that appear elsewhere in this annual report on Form 20-F.
D. Exchange Controls.
There are no Israeli government laws, decrees or regulations that restrict or that affect our export or import of capital or the remittance of dividends, interest or other payments to non-resident holders of our securities, including the availability of cash and cash equivalents for use by us and our wholly-owned subsidiaries, except for ownership by nationals of certain countries that are, or have been, declared as enemies of Israel.
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E. Taxation
The following description is not intended to constitute a complete analysis of all tax consequences relating to the acquisition, ownership and disposition of our ordinary shares. You should consult your own tax advisor concerning the tax consequences of your particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
Certain Israeli Tax Considerations
The following is a brief summary of the material Israeli income tax laws applicable to us. This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel or investors in securities who are subject to special tax regimes not covered in this discussion. To the extent that the discussion is based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion. This summary is based on laws and regulations in effect as of the date hereof and does not take into account possible future amendments which may be under consideration.
General Corporate Tax Structure in Israel
Israeli resident companies are generally subject to corporate tax. In 2018 and thereafter the corporate tax rate is 23% of their taxable income. However, the effective tax rate payable by a company that derives income from an Approved Enterprise, a Preferred Enterprise, a Beneficiary Enterprise or a Technology Enterprise (as discussed below) may be considerably less.
Capital gains derived by an Israeli resident company are generally subject to corporate tax rate.
Law for the Encouragement of Industry (Taxes), 5729-1969
The Law for the Encouragement of Industry (Taxes), 5729-1969, which we refer to as the Industry Encouragement Law, provides several tax benefits for “Industrial Company,” which is defined as Israeli resident-company incorporated in Israel, of which 90% or more of its income in any tax year, other than income from certain government loans, is derived from an “Industrial Enterprise” that it owns and located in Israel or in the “Area”, in accordance with the definition in section 3a of the Ordinance. An “Industrial Enterprise” is defined as an enterprise which is held by an Industrial Company whose principal activity in a given tax year is industrial production. Eligibility for benefits under the Industry Encouragement Law is not contingent upon approval of any governmental authority.
The following corporate tax benefits, among others, are available to Industrial Companies:
● | amortization over an eight-year period of the cost of purchased patent, rights to use a patent and rights to know-how, which are used for the development or advancement of the Industrial Enterprise, commencing in the year in which such rights were first exercised; |
● | under limited conditions, an election to file consolidated tax returns with related Industrial Companies; and |
● | expenses related to a public offering are deductible in equal amounts over three years commencing on the year of the offering. |
We believe that we currently qualify as an “Industrial Company” within the meaning of the Industry Encouragement Law. There can be no assurance that we will qualify as an industrial company or that the benefits described above will be available in the future.
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Law for the Encouragement of Capital Investments, 5719-1959
The Law for the Encouragement of Capital Investments, 5719-1959, generally referred to as the Investment Law, provides certain incentives for capital investments in production facilities (or other eligible assets). Generally, an investment program that is implemented in accordance with the provisions of the Investment Law, is entitled to benefits. These benefits may include cash grants from the Israeli government and tax benefits, based upon, among other things, the geographic location in Israel of the facility in which the investment and manufacture activity are made. In order to qualify for these incentives, an Approved Enterprise, a Beneficiary Enterprise, a Preferred Enterprise or a Technology Enterprise is required to comply with the requirements of the Investment Law.
The Investment Law was significantly amended effective as of April 1, 2005 (the “2005 Amendment”), as of January 1, 2011 (the “2011 Amendment”) and as of January 1, 2017 (the “2017 Amendment”). Pursuant to the 2005 Amendment, tax benefits granted in accordance with the provisions of the Investment Law prior to its revision by the 2005 Amendment remain in force but any benefits granted subsequently are subject to the provisions of the amended Investment Law. Similarly, the 2011 Amendment introduced new benefits to replace those granted in accordance with the provisions of the Investment Law in effect prior to the 2011 Amendment. However, companies entitled to benefits under the Investment Law as in effect prior to January 1, 2011 were entitled to choose to continue to enjoy such benefits, provided that certain conditions are met, or elect instead, irrevocably, to forego such benefits and have the benefits of the 2011 Amendment apply. The 2017 Amendment introduces new benefits for Technological Enterprises, alongside the existing tax benefits.
The following discussion is a summary of the Investment Law following its recent amendments:
Tax Benefits under the 2011 Amendment
The 2011 Amendment canceled the availability of the benefits granted to Industrial Companies under the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company” through its “Preferred Enterprise” (as such terms are defined in the Investment Law) as of January 1, 2011. The definition of a Preferred Company includes a company incorporated in Israel that is not fully owned by a governmental entity, and that has, among other things, Preferred Enterprise status and is controlled and managed from Israel. Pursuant to the 2011 Amendment, a Preferred Company is entitled to a reduced corporate tax rate of 15% with respect to its income derived by its Preferred Enterprise in 2011 and 2012, unless the Preferred Enterprise is located in a specified development zone, in which case the rate will be 10%. Under the 2011 Amendment, such corporate tax rate was reduced from 15% and 10%, respectively, to 12.5% and 7%, respectively, in 2013, 16% and 9% respectively, in 2014, 2015 and 2016, and 16% and 7.5%, respectively, in 2017 and thereafter. Income derived by a Preferred Company from a “Special Preferred Enterprise” (as such term is defined in the Investment Law) would be entitled, during a benefits period of 10 years, to further reduced tax rates of 8%, or 5% if the Special Preferred Enterprise is located in a certain development zone. As of January 1, 2017, the definition for ’Special Preferred Enterprise’ includes less stringent conditions. The tax benefits under the 2011 Amendment also include accelerated depreciation and amortization for tax purposes.
As of January 1, 2014, dividends distributed from income which is attributed to a “Preferred Enterprise” or to a Special Preferred Enterprise will be subject to withholding tax at source at the following rates: (i) Israeli resident corporations – 0%, (although, if such dividends are subsequently distributed to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate)) (ii) Israeli resident individuals – 20% (iii) non-Israeli residents (individuals and corporations) – 20%, subject to a reduced tax rate under the provisions of an applicable double tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). In 2017-2019 dividends paid out of preferred income attributed to a Special Preferred Enterprise, directly to a foreign parent company, are subject to withholding tax at source at the rate of 5% (temporary provisions).
Currently, we are not entitled to receive the tax benefits described above and there can be no assurance that we will be entitled to receive such benefits at any time in the future. Furthermore, there can be no assurance that even if in the future we meet the relevant requirements for such tax benefits, that such tax benefits will be available to us at all.
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New Tax benefits under the 2017 Amendment that became effective on January 1, 2017
The 2017 Amendment was enacted as part of the Economic Efficiency Law that was published on December 29, 2016 and is effective as of January 1, 2017. The 2017 Amendment provides new tax benefits for two types of “Technology Enterprises”, as described below, and is in addition to the other existing tax beneficial programs under the Investment Law.
The 2017 Amendment provides that a technology company satisfying certain conditions will qualify as a “Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 12% on income that qualifies as “Preferred Technology Income”, as defined in the Investment Law. The tax rate is further reduced to 7.5% for a Preferred Technology Enterprise located in development zone “A”. In addition, a Preferred Technology Company will enjoy a reduced corporate tax rate of 12% on capital gain derived from the sale of certain “Benefitted Intangible Assets” (as defined in the Investment Law) to a related foreign company if the Benefitted Intangible Assets were acquired from a foreign company on or after January 1, 2017 for at least NIS 200 million (approximately $55 million), and the sale receives prior approval from the IIA.
The 2017 Amendment further provides that a technology company satisfying certain conditions will qualify as a “Special Preferred Technology Enterprise” and will thereby enjoy a reduced corporate tax rate of 6% on “Preferred Technology Income” regardless of the company’s geographic location within Israel. In addition, a Special Preferred Technology Enterprise will enjoy a reduced corporate tax rate of 6% on capital gain derived from the sale of certain “Benefitted Intangible Assets” to a related foreign company if the Benefitted Intangible Assets were either developed by the Special Preferred Technology Enterprise or acquired from a foreign company on or after January 1, 2017, and the sale received prior approval from the IIA. A Special Preferred Technology Enterprise that acquires Benefitted Intangible Assets from a foreign company for more than NIS 500 million (approximately $138 million) will be eligible for these benefits for at least ten years, subject to certain approvals as specified in the Investment Law.
Dividends distributed by a Preferred Technology Enterprise or a Special Preferred Technology Enterprise, paid out of Preferred Technology Income, are generally subject to withholding tax at source at the rate of 20% or such lower rate as may be provided in an applicable tax treaty (subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate). However, if such dividends are paid to an Israeli company, no tax is required to be withheld (although, if such dividends are subsequently distributed from such Israeli company to individuals or a non-Israeli company, withholding tax at a rate of 20% or such lower rate as may be provided in an applicable tax treaty will apply). If such dividends are distributed to a foreign company and other conditions are met, the withholding tax rate will be 4% (or a lower rate under a tax treaty, if applicable, subject to the receipt in advance of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
Currently, we are not entitled to receive the tax benefits described above and there can be no assurance that we will be entitled to receive such benefits at any time in the future. Furthermore, there can be no assurance that even if in the future we meet the relevant requirements for such tax benefits, that such tax benefits will be available to us at all.
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders.
Israeli capital gains tax is imposed on the disposal of capital assets by a non-Israeli resident if such assets are either (i) located in Israel; (ii) shares or rights to shares in an Israeli resident company, or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a specific exemption is available or unless a tax treaty between Israel and the seller’s country of residence provides otherwise. Capital gain is generally subject to tax at the corporate tax rate (23% in 2018 and thereafter), if generated by a company, or at the rate of 25% if generated by an individual, or 30% in the case of sale of shares by a Substantial Shareholder (i.e., a person who holds, directly or indirectly, alone or together with such person’s relative or another person who collaborates with such person on a permanent basis, 10% or more of any of the company’s “means of control” (including, among other things, the right to receive profits of the company, voting rights, the right to receive proceeds upon liquidation and the right to appoint a director)) at the time of sale or at any time during the preceding 12-month period. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (a corporate tax rate for a corporation and a marginal tax rate of up to 47% for an individual in 2021) unless the benefiting provisions of an applicable treaty applies.
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Notwithstanding the foregoing, a non-Israeli resident (individual or corporation) who derives capital gains from the sale of shares in an Israeli resident company that were purchased after the company was listed for trading on a recognized stock exchange in Israel or outside of Israel will generally be exempt from Israeli capital gain tax so long as the shares were not held through a permanent establishment that the non-resident maintains in Israel (and with respect to shares listed on a recognized stock exchange outside of Israel, so long as neither the shareholder nor the particular capital gain is otherwise subject to the Israeli Income Tax Law (Inflationary Adjustments) 5745-1985). However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of more than 25% in such non-Israeli corporation or (ii) are the beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly. These provisions dealing with capital gain are not applicable to a person whose gains from selling or otherwise disposing of the shares are deemed to be business income.
Additionally, a sale of shares by a non-Israeli resident may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty. For example, under the United States-Israel Tax Treaty, the sale, exchange or other disposition of shares of an Israeli company by a shareholder who (i) is a U.S. resident (for purposes of the treaty), (ii) holds the shares as a capital asset, and (iii) is entitled to claim the benefits afforded to such person by the treaty, is generally exempt from Israeli capital gains tax. Such exemption will not apply if: (i) the capital gain arising from such sale, exchange or disposition is attributed to real estate located in Israel; (ii) the capital gain arising from such sale, exchange or disposition is attributed to royalties; (iii) the capital gain arising from the sale, exchange or disposition that can be attributed to a permanent establishment of the shareholder that is maintained in Israel under certain terms; (iv) the shareholder holds, directly or indirectly, shares representing 10% or more of the voting rights during any part of the 12-month period preceding such sale exchange or other disposition, subject to certain conditions; or (v) such U.S. resident is an individual and was present in Israel for a period or periods aggregating to 183 days or more during the relevant taxable year. In any such case, the sale, exchange or disposition of our ordinary shares would be subject to Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, a U.S. resident would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations under U.S. law applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to U.S. state or local taxes.
In some instances where our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital gains in order to avoid withholding at source at the time of sale. Specifically, in transactions involving a sale of all of the shares of an Israeli resident company, such as a merger or other transaction, the Israel Tax Authority may require from shareholders who are not liable for Israeli tax to sign declarations in forms specified by that authority or obtain a specific exemption from the Israel Tax Authority to confirm their status as non-Israeli residents, and, in the absence of such declarations or exemptions, may require the purchaser of the shares to withhold taxes at source.
Taxation of Non-Israeli Shareholders on Receipt of Dividends.
Non-Israeli residents (whether individuals or corporations) are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 25% or 30% (if the recipient is a Substantial Shareholder at the time of receiving the dividend or at any time during the preceding 12 months) or 15% if the dividend is distributed from income attributed to a Benefited Enterprise and 20% with respect to a Preferred Enterprise, subject to certain conditions. Such dividends are generally subject to Israeli withholding tax at a rate of 25% so long as the shares are registered with a nominee company (whether the recipient is a Substantial Shareholder or not) and 15% if the dividend is distributed from income attributed to a Benefited Enterprise or 20% if the dividend is distributed from income attributed to an Preferred Enterprise, unless a reduced rate is provided under an applicable tax treaty (subject to the receipt of a valid certificate from the Israel Tax Authority allowing for a reduced tax rate).
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For example, under the United States-Israel Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the United States-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax for dividends not generated by a Benefited Enterprise and paid to a U.S. corporation holding 10% or more of the outstanding voting rights from the start of the tax year preceding the distribution of the dividend through (and including) the distribution of the dividend, is 12.5%, provided that not more than 25% of the gross income for such preceding year consists of certain types of dividends and interest. Notwithstanding the foregoing, a distribution of dividends to non-Israeli residents is subject to withholding tax at source at a rate of 15% if the dividend is distributed from income attributed to a Benefited Enterprise for such U.S. corporation shareholder, provided that the condition related to our gross income for the previous year (as set forth in the previous sentence) is met. U.S. residents who are subject to Israeli withholding tax on a dividend may be entitled to a credit or deduction for United States federal income tax purposes in the amount of the taxes withheld, subject to detailed rules contained in U.S. tax legislation.
If the dividend is attributable partly to income derived from a Benefited Enterprise or a Preferred Enterprise, and partly from other sources of income, the withholding rate will be a blended rate reflecting the relative portions of the two types of income.
Estate and Gift Tax.
Israeli law presently does not impose estate or gift taxes.
Excess Tax.
Beginning on January 1, 2013, an additional tax liability at the rate of 2% was added to the applicable tax rate on the annual taxable income of individuals (whether any such individual is an Israeli resident or non-Israeli resident) exceeding a certain level, including, but not limited to, dividends, interest and capital gain. Such tax rate was increased to 3% in 2017. Such excess tax is payable on annual income exceeding NIS 663,240 in 2022, NIS 698,280 in 2023 and NIS 721,560 in 2024.
U.S. Federal Income Taxation
The following is a description of the material U.S. federal income tax consequences to U.S. Holders (as defined below) of the acquisition, ownership and disposition of our ordinary shares. This description addresses only the U.S. federal income tax consequences to purchasers of our ordinary shares and that will hold such ordinary shares as capital assets. This description does not address tax considerations applicable to holders that may be subject to special tax rules, including, without limitation:
● | banks, financial institutions or insurance companies; |
● | real estate investment trusts, regulated investment companies or grantor trusts; |
● | dealers or traders in securities, commodities or currencies; |
● | tax-exempt entities; |
● | certain former citizens or long-term residents of the United States; |
● | persons that received our ordinary shares as compensation for the performance of services; |
● | persons that will hold our ordinary shares as part of a “hedging,” “integrated” or “conversion” transaction or as a position in a “straddle” for U.S. federal income tax purposes; |
● | partnerships (including entities classified as partnerships for U.S. federal income tax purposes) or other pass-through entities, or holders that will hold our ordinary shares through such an entity; |
● | U.S. Holders (as defined below) whose “functional currency” is not the U.S. dollar; or |
● | holders that own directly, indirectly or through attribution 10.0% or more of the voting power or value of our ordinary shares. |
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Moreover, this description does not address the United States federal estate, gift, alternative minimum tax or net investment income tax consequences, or any state, local or non-U.S. tax consequences, of the acquisition, ownership and disposition of our ordinary shares.
This description is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), existing, proposed and temporary U.S. Treasury Regulations and judicial and administrative interpretations thereof, in each case as in effect and available on the date hereof. Each of the foregoing is subject to change, which change could apply retroactively and could affect the tax consequences described below. There can be no assurances that the U.S. Internal Revenue Service will not take a different position concerning the tax consequences of the acquisition, ownership and disposition of our ordinary shares or that such a position would not be sustained.
For purposes of this description, a “U.S. Holder” is a beneficial owner of our ordinary shares that, for U.S. federal income tax purposes, is:
● | a citizen or resident of the United States; |
● | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States or any state thereof, including the District of Columbia; |
● | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
● | a trust if such trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more U.S. persons have the authority to control all of the substantial decisions of such trust. |
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds ordinary shares, the tax treatment of a partner in such partnership will generally depend on the status of the partner and the activities of the partnership. Such a partner or partnership should consult its tax advisor as to its tax consequences.
You should consult your tax advisor with respect to the U.S. federal, state, local and foreign tax consequences of acquiring, owning and disposing of our ordinary shares.
Distributions
Subject to the discussion below under “— Passive Foreign Investment Company Considerations,” if you are a U.S. Holder, the gross amount of any distribution that we pay you with respect to our ordinary shares before reduction for any non-U.S. taxes withheld therefrom generally will be includible in your income as dividend income to the extent such distribution is paid out of our current or accumulated earnings and profits as determined under U.S. federal income tax principles. To the extent that the amount of any cash distribution exceeds our current and accumulated earnings and profits as determined under U.S. federal income tax principles, it will be treated first as a tax free return of your adjusted tax basis in our ordinary shares and thereafter as capital gain. We do not expect to maintain calculations of our earnings and profits under U.S. federal income tax principles. Therefore, if you are a U.S. Holder, you should expect that the entire amount of any cash distribution generally will be reported as dividend income to you; provided, however, that distributions of ordinary shares to U.S. Holders that are part of a pro rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax. Non-corporate U.S. Holders may qualify for the lower rates of taxation with respect to dividends on ordinary shares applicable to long term capital gains (i.e., gains from the sale of capital assets held for more than one year), provided that certain conditions are met, including certain holding period requirements and the absence of certain risk reduction transactions. Moreover, such reduced rate shall not apply if we are a PFIC for the taxable year in which it pays a dividend or were a PFIC for the preceding taxable year. Dividends will not be eligible for the dividends received deduction generally allowed to corporate U.S. Holders.
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If you are a U.S. Holder, subject to the discussion below, dividends that we pay you with respect to our ordinary shares will be treated as foreign source income, which may be relevant in calculating your foreign tax credit limitation. Subject to certain conditions and limitations, non-U.S. tax withheld on dividends may be deducted from your taxable income or credited against your U.S. federal income tax liability. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends that we distribute generally should constitute “passive category income,” or, in the case of certain U.S. Holders, “general category income.” A foreign tax credit for foreign taxes imposed on distributions may be denied if you do not satisfy certain minimum holding period requirements. The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisor to determine whether and to what extent you will be entitled to this credit.
Although, as discussed above, dividends that we pay to a U.S. Holder will generally be treated as foreign source income, for periods in which we are a “United States-owned foreign corporation,” a portion of dividends paid by us may be treated as U.S. source income solely for purposes of the foreign tax credit. We would be treated as a United States-owned foreign corporation if 50% or more of the total value or total voting power of our stock is owned, directly, indirectly or by attribution, by United States persons. To the extent any portion of our dividends is treated as U.S. source income pursuant to this rule, the ability of a U.S. Holder to claim a foreign tax credit for any Israeli withholding taxes payable in respect of our dividends may be limited. A U.S. Holder entitled to benefits under the United States-Israel Tax Treaty may, however, elect to treat any dividends as foreign source income for foreign tax credit purposes if the dividend income is separated from other income items for purposes of calculating the U.S. Holder’s foreign tax credit. U.S. Holders should consult their own tax advisors about the impact of, and any exception available to, the special sourcing rule described in this paragraph, and the desirability of making, and the method of making, such an election.
The amount of any dividend income paid in NIS will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is converted into U.S. dollars on the date of receipt, you should not be required to recognize exchange gain or loss in respect of the dividend income. You may have exchange gain or loss if the dividend is converted into U.S. dollars after the date of receipt. Exchange gain or loss will be treated as U.S.-source ordinary income or loss.
Sale, Exchange or Other Disposition of Ordinary Shares
Subject to the discussion below under “— Passive Foreign Investment Company Considerations,” if you are a U.S. Holder, you generally will recognize an amount of gain or loss on the sale, exchange or other disposition of our ordinary shares equal to the difference between the amount realized on such sale, exchange or other disposition and your tax basis in our ordinary shares, and such gain or loss will be capital gain or loss. The tax basis in an ordinary share generally will equal the U.S. dollar cost of such ordinary share. If you are a non-corporate U.S. Holder, capital gain from the sale, exchange or other disposition of ordinary shares generally will be eligible for a preferential rate of taxation applicable to capital gains, if your holding period for such ordinary shares exceeds one year. The deductibility of capital losses for U.S. federal income tax purposes is subject to limitations under the Code. Any such gain or loss that a U.S. Holder recognizes generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes.
If an Israeli tax is imposed on the sale or other disposition of our ordinary shares, your amount realized will include the gross amount of the proceeds of the sale or other disposition before deduction of the Israeli tax. Because your gain from the sale or other disposition of our ordinary shares will generally be U.S.-source gain, and you may use foreign tax credits to offset only the portion of U.S. federal income tax liability that is attributable to foreign source income, you may be unable to claim a foreign tax credit with respect to the Israeli tax, if any, on gains. You should consult your tax adviser as to whether the Israeli tax on gains may be creditable against your U.S. federal income tax on foreign-source income from other sources.
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Passive Foreign Investment Company
In general, a non-U.S. corporation will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (i) at least 75% of its gross income is “passive income,” or (ii) on average at least 50% of its 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. Assets that produce or are held for the production of passive income include cash, even if held as working capital or raised in a public offering, marketable securities and other assets that may produce passive income. 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.
A foreign corporation’s PFIC status is an annual determination that is based on tests that are factual in nature, and our status for any year will depend on the corporation’s income, assets, and activities for such year. We have not determined whether we have been a PFIC for 2023 or any previous year. Because PFIC status is determined annually based on our income, assets and activities for the entire taxable year, there can be no assurance that we will not be classified as a PFIC in any taxable year.
U.S. Holders should be aware of certain tax consequences of investing directly or indirectly in us due to our classification as a PFIC. A U.S. Holder is subject to different rules depending on whether the U.S. Holder makes an election to treat us as a “qualified electing fund,” referred to herein as a “QEF election,” for the first taxable year that the U.S. Holder holds ordinary shares makes a “mark-to-market” election with respect to the ordinary shares, or makes neither election.
QEF Election. One way in which certain of the adverse consequences of PFIC status can be mitigated is for a U.S. Holder make a QEF election. Generally, a shareholder making the QEF election is required for each taxable year to include in income a pro rata share of the ordinary earnings and net capital gain of the QEF, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. An election to treat us as a QEF will not be available if we do not provide the information necessary to make such an election. It is not expected that a U.S. Holder will be able to make a QEF election because we do not intend to provide U.S. Holders with the information necessary to make a QEF election.
Mark-to-Market Election. Alternatively, if our ordinary shares are treated as “marketable stock,” a U.S. Holder would be allowed to make a “mark-to-market” election with respect to our ordinary shares, provided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If that election is made, the U.S. Holder generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of our ordinary shares at the end of the taxable year over such holder’s adjusted tax basis in such ordinary shares. The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjusted tax basis in our ordinary shares over their fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s tax basis in our ordinary shares would be adjusted to reflect any such income or loss amount. Gain realized on the sale, exchange or other disposition of our ordinary shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of our ordinary shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included in income by the U.S. Holder, and any loss in excess of such amount will be treated as capital loss. Amounts treated as ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains.
A mark-to-market election will not apply to our ordinary shares held by a U.S. Holder for any taxable year during which we are not a PFIC, but will remain in effect with respect to any subsequent taxable year in which we become a PFIC. Such election will not apply to any PFIC subsidiary that we own.
Generally, stock will be considered marketable stock if it is “regularly traded” on a “qualified exchange” within the meaning of applicable Treasury Regulations. A class of stock is regularly traded on an exchange during any calendar year during which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. To be marketable stock, our ordinary shares must be regularly traded on a qualifying exchange (i) in the United States that is registered with the SEC or a national market system established pursuant to the Exchange Act or (ii) outside the United States that is properly regulated and meets certain trading, listing, financial disclosure and other requirements. Since our ordinary shares are quoted only on the OTC Pink, they may not currently qualify as marketable stock for purposes of the election and therefore the election may not be available to a U.S. Holder. U.S. Holders should consult their own tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to our ordinary shares under their particular circumstances.
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Each U.S. Holder should consult its own tax adviser with respect to the applicability of the “net investment income tax” (discussed below) where a mark-to-market election is in effect.
Default PFIC Rules. A U.S. Holder who does not make a timely QEF election (we do not currently intend to prepare or provide the information that would enable a U.S. Holder to make a QEF election) or a mark-to-market election, referred to in this summary as a “Non-Electing U.S. Holder,” will be subject to special rules with respect to (i) any “excess distribution” (generally, the portion of any distributions received by the Non-Electing U.S. Holder on the ordinary shares in a taxable year in excess of 125% of the average annual distributions received by the Non-Electing U.S. Holder in the three preceding taxable years, or, if shorter, the Non-Electing U.S. Holder’s holding period for the ordinary shares), and (ii) any gain realized on the sale or other disposition of such ordinary shares. Under these rules:
● | the excess distribution or gain would be allocated ratably over the Non-Electing U.S. Holder’s holding period for such ordinary shares; |
● | the amount allocated to the current taxable year and any year prior to us becoming a PFIC would be taxed as ordinary income; and |
● | 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. |
If a Non-Electing U.S. Holder who is an individual dies while owning our ordinary shares, the Non-Electing U.S. Holder’s successor would be ineligible to receive a step-up in tax basis of such ordinary shares. Non-Electing U.S. Holders should consult their tax advisors regarding the application of the “net investment income tax” (described below) to their specific situation.
To the extent a distribution on our ordinary shares does not constitute an excess distribution to a Non-Electing U.S. Holder, such Non-Electing U.S. Holder generally will be required to include the amount of such distribution in gross income as a dividend to the extent of our current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) that are not allocated to excess distributions. Each U.S. Holder is encouraged to consult its own tax advisor with respect to the appropriate U.S. federal income tax treatment of any distribution on our ordinary shares.
If we are treated as a PFIC for any taxable year during the holding period of a Non-Electing U.S. Holder, we will continue to be treated as a PFIC for all succeeding years during which the Non-Electing U.S. Holder is treated as a direct or indirect Non-Electing U.S. Holder even if we are not a PFIC for such years. A U.S. Holder is encouraged to consult its tax advisor with respect to any available elections that may be applicable in such a situation, including the “deemed sale” election of Code Section 1298(b)(1) (which will be taxed under the adverse tax rules described above).
We may invest in the equity of foreign corporations that are PFICs or may own subsidiaries that own PFICs. If we are classified as a PFIC, under attribution rules, U.S. Holders will be subject to the PFIC rules with respect to their indirect ownership interests in such PFICs, such that a disposition of the ordinary shares of the PFIC or receipt by us of a distribution from the PFIC generally will be treated as a deemed disposition of such ordinary shares or the deemed receipt of such distribution by the U.S. Holder, subject to taxation under the PFIC rules. There can be no assurance that a U.S. Holder will be able to make a QEF election, and a U.S. Holder may not make a mark-to-market election, with respect to PFICs in which we invest. Each U.S. Holder is encouraged to consult its own tax advisor with respect to tax consequences of an investment by us in a corporation that is a PFIC.
In addition, U.S. Holders should consult their tax advisors regarding the IRS information reporting and filing obligations that may arise as a result of the ownership of ordinary shares in a PFIC, including IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.
The U.S. federal income tax rules relating to PFICs elections are complex. U.S. Holders are urged to consult their own tax advisors with respect to the purchase, ownership and disposition of our ordinary shares, any elections available with respect to such ordinary shares and the IRS information reporting obligations with respect to the purchase, ownership and disposition of our ordinary shares.
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Certain Reporting Requirements
Certain U.S. Investors are required to file IRS Form 926, Return by U.S. Transferor of Property to a Foreign Corporation, and certain U.S. Investors may be required to file IRS Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, reporting transfers of cash or other property to us and information relating to the U.S. Investor and us. Substantial penalties may be imposed upon a U.S. Investor that fails to comply.
In addition, certain U.S. Investors are required to report information on IRS Form 8938 with respect to their investments in certain “foreign financial assets,” which would include an investment in our ordinary shares, to the IRS.
Investors who fail to report required information could become subject to substantial civil and criminal penalties. U.S. Investors should consult their tax advisors regarding the possible implications of these reporting requirements and any other applicable reporting requirement with respect to their investment in and ownership of our ordinary shares.
Disclosure of Reportable Transactions
If a U.S. Investor sells or disposes of the ordinary shares at a loss or otherwise incurs certain losses that meet certain thresholds, such U.S. Investor may be required to file a disclosure statement with the IRS. Failure to comply with these and other reporting requirements could result in the imposition of significant penalties.
Backup Withholding Tax and Information Reporting Requirements
U.S. backup withholding tax and information reporting requirements may apply to certain payments to certain holders of stock. Information reporting generally will apply to payments of dividends on, and to proceeds from the sale, exchange or redemption of, our ordinary shares made within the United States, or by a United States payor or United States middleman, to a holder of our ordinary shares, other than an exempt recipient (including a payee that is not a United States person that provides an appropriate certification and certain other persons). Payments made (and sales or other dispositions effected at an office) outside the U.S. will be subject to information reporting in limited circumstances. A payor will be required to withhold backup withholding tax from any payments of dividends on, or the proceeds from the sale or redemption of, ordinary shares within the United States, or by a United States payor or United States middleman, to a holder, other than an exempt recipient, if such holder fails to furnish its correct taxpayer identification number or otherwise fails to comply with, or establish an exemption from, such backup withholding tax requirements, or to report dividends required to be shown on the holder’s U.S. federal income tax returns. Back up withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a credit against the beneficial owner’s U.S. federal income tax liability, if any, and any excess amounts withheld under the backup withholding rules may be refunded, provided that the required information is timely furnished to the IRS.
Medicare Tax on Investment Income
Certain U.S. persons, including individuals, estates and trusts, will be subject to an additional 3.8% Medicare tax, or “net investment income tax,” on unearned income. For individuals, the additional net investment income tax applies to the lesser of (i) “net investment income” or (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000 if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally equals the taxpayer’s gross investment income reduced by the deductions that are allocable to such income. Investment income generally includes passive income such as interest, dividends, annuities, royalties, rents, and capital gains. U.S. Investors are urged to consult their own tax advisors regarding the implications of the additional net investment income tax resulting from their ownership and disposition of our ordinary shares.
THIS SUMMARY OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES IS NOT TAX ADVICE. THE DETERMINATION OF THE ACTUAL TAX CONSEQUENCES FOR A U.S. HOLDER WILL DEPEND ON THE U.S. HOLDER’S SPECIFIC SITUATION. U.S. HOLDERS OF ORDINARY SHARES SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF THE ALTERNATIVE MINIMUM TAX AND ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND OF CHANGES IN THOSE LAWS.
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F. Dividends and Paying Agents.
Not applicable.
G. Statements by Experts.
Not applicable.
H. Documents on Display.
We are subject to the informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information with the SEC, including annual reports on Form 20-F and reports on Form 6-K. As a foreign private issuer, we are exempt from the rules 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. Furthermore, as a foreign private issuer, we are also not subject to the requirements of Regulation FD (Fair Disclosure) promulgated under the Exchange Act. In addition, we are not required under the Exchange Act to file annual or other reports and consolidated financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. Instead, we must file with the SEC, within 120 days after the end of each fiscal year an annual report on Form 20-F containing consolidated financial statements audited by an independent registered public accounting firm. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding registrants like us that file electronically with the SEC. You can also inspect this annual report on such website.
We maintain a corporate website at www.pvnanocell.com. Information contained on, or that can be accessed through, our website does not constitute a part of this annual report on Form 20-F. We have included our website address in this annual report on Form 20-F solely as an inactive textual reference.
I. Subsidiary Information.
Not applicable.
J. Annual Report to Security Holders.
Not applicable.
ITEM 11. Quantitative and Qualitative Disclosures about Market Risk.
Quantitative and Qualitative Disclosure about Market Risk
We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial market prices and rates, including interest rates and foreign exchange rates, of financial instruments.
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Foreign Currency Exchange Risk
Our foreign currency exposures give rise to market risk associated with exchange rate movements of the NIS mainly against the U.S. dollar because a large portion of our expenses are denominated in NIS. Our NIS expenses consist principally of payments made to employees, sub-contractors, professional services, other research and development activities and general and administrative activities. We anticipate that a large portion of our expenses will continue to be denominated in currencies other than the U.S. dollar. Our financial position, results of operations and cash flow are, therefore, subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. The majority of our expenses are denominated in NIS. In addition, we may incur operating expenses denominated in Euros, and therefore, our operating results may also be subject to fluctuations due to changes in the U.S. dollar/Euro exchange rate. We cannot predict any future trends in the rate of inflation in Israel or the rate of depreciation (if any) of the NIS, the Euro and other foreign currencies against the U.S. dollar. Given our general lack of currency hedging arrangements to protect us from fluctuations in the exchange rates of the NIS and Euro and other foreign currencies in relation to the U.S. dollar (and/or from inflation of such foreign currencies), we may be exposed to adverse effects from such movements. The rate of inflation in Israel or Europe or in currency exchange rates may materially change and we might not be able to effectively mitigate these risks.
To date, we have not engaged in hedging our foreign currency exchange risk. In the future, we may enter into formal currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of our principal operating currencies. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations.
Interest Rate Risk
Our exposure to interest rate risk for changes in interest rates relates primarily to the interest income generated by excess cash invested in bank deposits. We have not used any derivative financial instruments in our investment portfolio or for cash management purposes. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates. However, our future interest income may fall short of expectations due to changes in interest rates.
ITEM 12. Description of Securities Other Than Equity Securities
A. Debt Securities.
Not applicable.
B. Warrants and Rights.
Not applicable.
C. Other Securities.
Not applicable.
D. American Depositary Shares.
Not applicable.
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PART II
ITEM 13. Defaults, Dividend Arrearages and Delinquencies.
Certain convertible loans that we received from certain lenders during 2017 and onwards matured in accordance with their respective terms and such lenders did not exercise their conversion rights in full prior to their maturity date and therefore, such loans became repayable by us in cash at such time. We did not timely repay such loans due to financial difficulties and therefore, we are currently in default under those convertible loan agreements. As of December 31, 2023, we have recorded a liability in the amount of approximately $1.5 million (including principal and interest) with respect to such convertible loans. For additional information, see Note 7 to the audited consolidated financial statements for the year ended December 31, 2023 included elsewhere in this annual report on Form 20-F.
ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.
Not applicable.
ITEM 15. Controls and Procedures
(a) Disclosure Controls and Procedures. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023, pursuant to Rule 13a-15 under the Exchange Act. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2023 as a result of the material weaknesses identified in our internal control over financial reporting. These material weaknesses are discussed in “Report of Management on Internal Control over Financial Reporting” below. Our management considers our internal control over financial reporting to be an integral part of our disclosure controls and procedures.
(b) Report of Management on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2023. In making our assessment, our management used the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A material weakness, as defined by SEC rules, is a control deficiency, or combination of control deficiencies, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Based on such assessment, management has concluded that, as of December 31, 2023, our internal control over financial reporting is ineffective due to (among other things) the following material weaknesses : (i) significant parts of entity level controls have not been properly designed or implemented, (ii) lack of segregation of duties, (iii) controls’ effectiveness testing was predominantly not performed, among other things due to nonperformance of controls or absence of evidence for controls’ performance, and (iv) non-remediation of material weaknesses identified in prior years.
Due to lack of resources, during 2023, as in previous years, we were unable to implement in any material respect our remediation plans for the material weaknesses identified in prior years. We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies, provided that we have the resources to implement them.
(c) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16. [RESERVED]
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ITEM 16A. Audit Committee Financial Expert.
Our board has determined that Ms. Limor Magen-Telem, who serves as the chair of our audit committee, is an audit committee financial expert, as defined by the SEC rules. Ms. Magen-Telem is an independent director as such term is defined in Rule 10A-3(b)(1) under the Exchange Act. For Ms. Magen-Telem’s relevant experience, see “Item 6 A. Directors, Senior Management and Employees — Directors and Senior Management”.
ITEM 16B. Code of Ethics.
We have adopted a Code of Business Conduct and Ethics applicable to all of our directors and employees, including our Chief Executive Officer, Chief Technology Officer, Chief Financial Officer, controller or principal accounting officer or other persons performing similar functions, which is intended to meet the definition of a “code of ethics” as defined in Item 16B of Form 20-F promulgated by the SEC. Section 406(c) of the Sarbanes-Oxley Act provides that a “code of ethics” means such standards as are reasonably necessary to promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in the periodic reports required to be filed by the issuer; and (iii) compliance with applicable governmental rules and regulation.
Our Code of Business Conduct and Ethics is available on our website at www.pvnanocell.com. Information contained on, or that can be accessed through, our website does not constitute a part of this annual report on Form 20-F and is not incorporated by reference herein. We will provide a copy of our Code of Business Conduct and Ethics without charge upon request by mail or by telephone. If we make any amendment to the Code of Business Conduct and Ethics or grant any waivers, including any implicit waiver, from a provision of the Code of Business Conduct and Ethics, we will disclose the nature of such amendment or waiver on our website to the extent required by the rules and regulations of the SEC.
ITEM 16C. Principal Accountant Fees and Services.
The consolidated financial statements of P.V. Nano Cell Ltd. as of December 31, 2023 and 2022, and for each of the three years in the period ended December 31, 2023, appearing in this Annual Report, have been audited by Ziv Haft (BDO Member Firm) (“BDO”), independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The following table presents the aggregate fees, by categories specified below, for professional services rendered to us by BDO for the years ended December 31, 2023 and 2022.
Year ended December 31, | ||||||||
2023 | 2022 | |||||||
Audit Fees | $ | 180,000 | $ | 135,000 | ||||
Tax fees | 20,000 | 20,000 | ||||||
Total | $ | 200,000 | $ | 155,000 |
Audit fees. Consist of aggregate fees for the audit of our annual consolidated financial statements. This category also includes services that the independent accountant generally provides, such as consents, assistance with, and review of documents filed with the SEC (as applicable).
Tax fees. Consist of aggregate fees for professional services to be rendered by our independent registered public accounting firm for tax compliance and tax advice on actual or contemplated transactions.
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Audit Committee Pre-Approval Policies and Procedures
Our audit committee provides assistance to our board of directors in fulfilling its legal and fiduciary obligations in matters involving our accounting, auditing, financial reporting, internal control and legal compliance functions by pre-approving the services performed by our independent accountants and reviewing their reports regarding our accounting practices and systems of internal control over financial reporting. Our audit committee also oversees the audit efforts of our independent accountants and takes those actions that it deems necessary to satisfy itself that the accountants are independent of management. Our audit committee pre-approved all auditing and non-auditing services provided to us by BDO for the years ended December 31, 2023 and 2022 and the fees for such services.
ITEM 16D. Exemptions from the Listing Standards for Audit Committees.
Not applicable.
ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
Not applicable.
ITEM 16F. Change in Registrant’s Certifying Accountant.
Not applicable.
ITEM 16G. Corporate Governance.
Not applicable.
ITEM 16H. Mine Safety Disclosure.
Not applicable.
ITEM 16I. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections.
Not applicable.
ITEM 16J. Insider Trading Policies.
Not applicable.
Item 16K. Cybersecurity.
As of the date of this report, we do not believe that any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect our business strategy, results of operations or financial condition. However, our business and operations may be materially adversely affected in the event of computer system failures or security or breaches due to cyber-attacks or cyber intrusions, including ransomware, phishing attacks and other malicious intrusions. See Item 3D “Key Information—Risk Factors—Risks Related to Our Business — Significant disruptions of our information technology systems or breaches of our data security could adversely affect our business.”
Due to lack of resources, to date we have not invested in processes for management of cybersecurity risks; however, we intend to take appropriate and reasonable steps to implement cybersecurity risk management processes, provided that we have sufficient resources.
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PART III
ITEM 17. Financial Statements.
Not Applicable.
ITEM 18. Financial Statements.
Please refer to the consolidated financial statements beginning on page F-1. The following consolidated financial statements, its schedules and related notes are filed as part of this annual report on Form 20-F.
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P.V. NANO CELL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2023
IN U.S. DOLLARS
INDEX
- - - - - - - - - - - - - -
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
P.V. Nano Cell Ltd,
Migdal Ha’Emek, Israel.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of P.V. Nano Cell Ltd. (the “Group”) as of December 31, 2023 and 2022 and the related consolidated statements of comprehensive loss, stockholders’ deficit, and cash flows for each of the three years in the period ended December 31, 2023 and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt About the Group’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Group will continue as a going concern. As described in Note 1.b to the consolidated financial statements, the Group has suffered recurring losses, negative cash flows from operations since inception and is in default in repayments of its convertible notes and does not have sufficient capital to repay such obligations which are currently due. These factors raise substantial doubt about the Group’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1.b. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
Basis for Opinion
These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Group Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ |
Certified Public Accountants (Isr.)
We have served as the Group’s auditor since 2023.
PCAOB
ID
May 9, 2024
F-2
P.V. NANO CELL LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
U.S. dollars
December 31, | ||||||||
2023 | 2022 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash | $ | $ | ||||||
Restricted cash | ||||||||
Accounts receivables | ||||||||
Other current assets | ||||||||
Inventory, net | ||||||||
Total current assets | ||||||||
NON-CURRENT ASSETS: | ||||||||
Property and equipment, net | ||||||||
Goodwill | ||||||||
Right of use asset | ||||||||
Total non-current assets |