| State of Israel | 5 Shacham Street | |
| (Jurisdiction of incorporation or organization) | North Industrial Park, Caesarea | |
| 3088900 Israel | ||
| (Address of principal executive offices) | ||
Sharon Levita
Chief Financial Officer
+972-4-618-7101
Sharon.Levita@MazorRobotics.com
5 Shacham Street
North Industrial Park, Caesarea
3088900 Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Chief Financial Officer
+972-4-618-7101
Sharon.Levita@MazorRobotics.com
5 Shacham Street
North Industrial Park, Caesarea
3088900 Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of each class: | Name of each exchange on which registered or to be | |
| American Depository Shares each representing 2 | registered: | |
| Ordinary Shares, par value NIS 0.01 per share(1) | NASDAQ Global Market | |
| Ordinary Shares, par value NIS 0.01 per share(2) |
| (1) | Evidenced by American Depositary Receipts. |
| (2) | Not for trading, but only in connection with the listing of the American Depositary Shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Exchange Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Exchange Act: None
Number of outstanding shares of each of the issuer’s classes of capital or common stock as of April 2, 2014: 2741,844,177, 2017: 48,092,933 ordinary shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨☒ No x☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
Yes ¨☐ No x☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.
Yes ¨☐ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or, a non-accelerated filer.filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer ☒ | Non-accelerated filer ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.
U.S. GAAP ¨☐
International Financial Reporting Standards as issued by the International Accounting Standards Board x☒
Other ¨☐
If “Other”"Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company.
2
TABLE OF CONTENTS
| Page | |||
| 5 | |||
| 5 | |||
| 6 | |||
| 7 | |||
| 7 | |||
| 7 | |||
| 8 | |||
| A. | Selected Financial Data. | 8 | |
| B. | Capitalization and Indebtedness. | 9 | |
| C. | Reasons for the Offer and Use of Proceeds. | 9 | |
| D. | Risk Factors. | 9 | |
| 47 | |||
| A. | History and Development of the Company. | 47 | |
| B. | Business Overview. | 47 | |
| C. | Organizational Structure. | 74 | |
| D. | Property, Plants and Equipment. | 75 | |
| 75 | |||
| 75 | |||
| A. | Operating Results. | 75 | |
| B. | Liquidity and Capital Resources. | 84 | |
| C. | Research and Development, Patents and Licenses, Etc. | 86 | |
| D. | Trend Information. | 86 | |
| E. | Off-Balance Sheet Arrangements. | 87 | |
| F. | Tabular Disclosure of Contractual Obligations. | 88 | |
| 88 | |||
| A. | Directors and Senior Management. | 88 | |
| B. | Compensation. | 91 | |
| C. | Board Practices. | 93 | |
| D. | Employees. | 106 | |
| E. | Share Ownership. | 107 | |
| 110 | |||
| A. | Major Shareholders. | 110 | |
| B. | Related Party Transactions. | 111 | |
| C. | Interests of Experts and Counsel. | 111 | |
| 111 | |||
| A. | Consolidated Statements and Other Financial Information. | 111 | |
| B. | Significant Changes. | 112 | |
| 113 | |||
| A. | Offer and Listing Details. | 113 | |
| B. | Plan of Distribution. | 114 | |
Markets. | 114 | ||
| D. | Selling Shareholders. | 114 | |
| E. | Dilution. | 114 | |
| F. | Expenses of the Issue. | 114 | |
| 115 | |||
| A. | Share Capital. | 115 | |
| B. | Memorandum and Articles of | 115 | |
| C. | Material Contracts. | 115 | |
| D. | Exchange Controls. | 116 | |
3
| E. | Taxation. | 116 | |
| F. | |||
| Dividends and Paying Agents. | 127 | ||
| G. | Statement by Experts. | 127 | |
| H. | Documents on Display. | 128 | |
| I. | Subsidiary Information. | 128 | |
| 128 | |||
| 130 | |||
| A. | Debt Securities. | 130 | |
| B. | Warrants and Rights. | 130 | |
| C. | Other Securities. | 130 | |
| D. | American Depositary Shares. | 130 | |
| 131 | |||
| 131 | |||
| 131 | |||
| 131 | |||
| 132 | |||
| 132 | |||
| 132 | |||
| 133 | |||
| 133 | |||
| 133 | |||
| 133 | |||
| 135 | |||
| 135 | |||
| 135 | |||
| 135 | |||
| 136 | |||
| 138 | |||
4
Mazor Robotics, is an Israeli company thatCompany, is a leading innovator that has pioneered surgical guidance systems and complementary products in the spine surgical markets thatwhich we believe may provide a safer surgical environment for patients, surgeons and operating room staff. We engage in the development, production and marketing of innovative medical devices for supporting surgical procedures in the fieldfields of orthopedics and neurosurgery. We operate in the fieldfields of image guided surgery and computer assistedcomputer-assisted surgery that enablesenabling the use of surgical instruments with high precision and minimal invasiveness that aimand aiming to simplify complex and minimal invasiveminimally-invasive surgical procedures. We believe that our flagship product,portfolio of products, including the Renaissancerecently launched Mazor X Surgical Guidance System, or Mazor X, and the Renaissance® Surgical Guidance System, or Renaissance, isare transforming spine surgery from freehand procedures to highly accurate, state-of-the-art, guided procedures that raise the standard of care with better clinical results. OurThe Mazor X, Renaissance and SpineAssist (our predecessor to the Renaissance) systems have been used to perform thousands ofover 24,000 procedures worldwide (over 45,000170,000 implants) in a wide variety of spinal procedures, many of which would not have been attempted without this technology. In 2014 we introduced the Renaissance for brain surgery and in 2015 we introduced the PRO (Predictable Renaissance Operation) product line, which currently includes three solutions designed to support brain procedures, as well as, trauma and lateral spine procedures. We are continuing the development of the Renaissance platform for additional spine and brain surgery applicationsprocedures. In July 2016, we unveiled the Mazor X system, a transformative guidance platform for spine surgeries and in October 2016, we commercially launched the Mazor X system. The Mazor X was developed with the goal of enhancing predictability and patient benefit, through the combination of analytical tools, multiple-source data, precision guidance, optical tracking, intra-op verification, and connectivity technologies. The Mazor X platform was designed to expand the field of precision guided spine surgery beyond trajectory guidance. In April 2017, we received 510(k) clearance from the FDA for the Mazor X Align™ software, a spinal deformity correction planning software for the Mazor X system. We intend to commercially release the Mazor X Align in 2017. We are developingcontinuing the system to enable it to be useddevelopment of the Mazor X platform for brain surgery.
additional spine surgery procedures.
additional spine surgery procedures.
We were incorporated under the laws of the State of Israel on September 12, 2000. Our ordinary shares are listed on the Tel Aviv Stock Exchange, or TASE, under the symbol “MZOR”. In May 2013, our American Depositary Shares, or ADSs, representing our Ordinary Shares, commenced trading on the NASDAQ Capital Market under the trading symbol “MZOR” and are currently traded on the NASDAQ Global Market. Each ADS represents two of our Ordinary Shares.
Unless the context otherwise indicates or requires, “Mazor Robotics”"Mazor Robotics", “Mazor,”"Mazor," the Mazor Robotics logo and all product names and trade names used by us in this annual report, including Renaissance™ and Mazor X™, are our proprietary trademarks and service marks. These trademarks and service marks are important to our business. Although we have omitted the “®”"®" and “TM”"TM" trademark designations for such marks in this annual report, all rights to such trademarks and service marks are nevertheless reserved.
Unless derived from our financial statements or otherwise indicated, U.S. dollar translations of NIS amounts presented in this annual report are translated using a rate of NIS 4.00 to USD 1.00.
Certain information included or incorporated by reference in this annual report may be deemed to be “forward-looking statements”"forward-looking statements". Forward-looking statements are often characterized by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue,” “believe,” “should,” “intend,” “project”"may," "will," "expect," "anticipate," "estimate," "continue," "believe," "should," "intend," "project" or other similar words, but are not the only way these statements are identified.
These forward-looking statements may include, but are not limited to, statements relating to our objectives, plans and strategies, statements that contain projections of results of operations or of financial condition, statements relating to the research, development and use of our products, and all statements (other than statements of historical facts) that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future.
5
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties. We have based these forward-looking statements on assumptions and assessments made by our management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.
Important factors that could cause actual results, developments and business decisions to differ materially from those anticipated in these forward-looking statements include, among other things:
the |
| ● | our ability to promote the new Mazor X System; |
| the impact of competition and new technologies; |
| general market, political and economic conditions in the countries in which we operate; |
| projected capital expenditures and liquidity; |
| changes in our strategy; |
| government regulations and approvals; |
| changes in |
| litigation and regulatory proceedings; and |
| ● | the overall global economic environment; and |
| those factors referred to in |
Readers are urged to carefully review and consider the various disclosures made throughout this annual report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
In addition, the section of this annual report on entitled” Itementitled "Item 4. Information on the Company”Company" contains information obtained from independent industry and other sources that we have not independently verified. You should not put undue reliance on any forward-looking statements. Any forward-looking statements in this annual report are made as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In this Form 20-F, unless the context otherwise requires, references to:
| ● | "ADSs" are to our American Depositary Shares, each representing two of our Ordinary Shares; |
| ● | "Dollars", "U.S. dollars", "U.S. $" and "$" are to United States Dollars; |
| ● | "Exchange Act" are to the United States Securities Exchange Act of 1934, as amended; |
6
| ● | "FDA" are to the United States Food and Drug Administration; |
| ● | "IRS" are to the United States Internal Revenue Service; |
| ● | "NASDAQ" are to the NASDAQ Global Market; |
| ● | "IIA" are to The Israel Innovation Authority, formerly known as the Office of the Chief Scientist of the Ministry of Economy ("OCS"); |
| ● | "Ordinary |
| ● | ||
| ● | ||
| amended; |
| ● | "Subsidiaries" are to the |
| ● | ||
| ● | ||
| ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicableapplicable.
Not applicable.
7
The selected consolidated financial data for the fiscal years set forth in the table below have been derived from our consolidated financial statements and notes thereto. The selected consolidated statement of operationsincome data data for fiscal years 2013, 20122016, 2015 and 2011,2014, and the selected consolidated statement of financial position data as of December 31, 20132016 and 2012,2015, have been derived from our audited consolidated financial statements and notes thereto set forth elsewhere in this Form 20-F. The selected consolidated statement of operationsprofit or loss data for fiscal year 2010years 2013 and 2009,2012, and the selected consolidated statement of financial position data at December 31, 2011 and 2010 have been derived from other audited consolidated financial statements not included herein. The selected consolidated statement of financial position data as of December 31, 20092014, 2013, and 2012, respectively, has been derived from other non-auditedaudited consolidated financial statements not included herein. The selected financial data should be read in conjunction with our consolidated financial statements, and are qualified entirely by reference to such consolidated financial statements. Additionally, and as explained in Note 2B to the December 31, 20132016 consolidated financial statements, we determined that our functional currency had changed in September 2012 from New Israeli Shekels tois U.S. dollars.
| (in thousands except net loss per share data) | ||||||||||||||||||||
| Years Ended December 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Statement of Income Data | ||||||||||||||||||||
Revenues | $ | 36,379 | $ | 26,096 | $ | 21,208 | $ | 19,983 | $ | 12,175 | ||||||||||
Cost of sales | $ | 10,330 | $ | 5,827 | $ | 4,396 | $ | 4,280 | $ | 2,893 | ||||||||||
Gross profit | $ | 26,049 | $ | 20,269 | $ | 16,812 | $ | 15,703 | $ | 9,282 | ||||||||||
| Operating costs and expenses: | ||||||||||||||||||||
Research and development expenses, net (1) | $ | 5,736 | $ | 6,324 | $ | 5,776 | $ | 4,174 | $ | 2,760 | ||||||||||
| Selling and marketing expenses | $ | 33,637 | $ | 24,947 | $ | 21,352 | $ | 15,692 | $ | 8,887 | ||||||||||
| General and administrative expenses | $ | 5,697 | $ | 4,305 | $ | 4,392 | $ | 2,766 | $ | 1,845 | ||||||||||
| Total operating costs and expenses | $ | 45,070 | $ | 35,576 | $ | 31,520 | $ | 22,632 | $ | 13,492 | ||||||||||
Operating loss | $ | (19,021 | ) | $ | (15,307 | ) | $ | (14,708 | ) | $ | (6,929 | ) | $ | (4,210 | ) | |||||
| Net loss | $ | (18,668 | ) | $ | (15,385 | ) | $ | (15,272 | ) | $ | (20,529 | ) | $ | (7,064 | ) | |||||
| Loss per share – Basic and diluted | $ | (0.42 | ) | $ | (0.36 | ) | $ | (0.37 | ) | $ | (0.57 | ) | $ | (0.29 | ) | |||||
| Weighted average number of ordinary shares used to calculate basic and diluted loss per share | 44,881 | 42,284 | 41,808 | 35,781 | 24,011 | |||||||||||||||
| (1) | Net of development costs capitalized to intangible assets, in the amount of $2,332 thousand for 2016. |
| (in thousands except net loss per share data) | Years Ended December 31, | |||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Statements of Operations data | ||||||||||||||||||||
| Revenues | $ | 19,983 | $ | 12,175 | $ | 5,904 | $ | 3,973 | $ | 1,363 | ||||||||||
| Cost of sales | $ | 4,280 | $ | 2,893 | $ | 1,879 | $ | 961 | $ | 473 | ||||||||||
| Gross profit | 15,703 | 9,282 | 4,025 | 3,012 | 890 | |||||||||||||||
| Operating costs and expenses: | ||||||||||||||||||||
| Research and development expenses, net | $ | 4,174 | $ | 2,760 | $ | 3,062 | $ | 2,292 | $ | 1,382 | ||||||||||
| Selling and marketing expenses | $ | 15,692 | $ | 8,887 | $ | 6,990 | $ | 4,592 | $ | 2,461 | ||||||||||
| General and administrative expenses | $ | 2,766 | $ | 1,845 | $ | 1,639 | $ | 1,424 | $ | 1,184 | �� | |||||||||
| Total operating costs and expenses | $ | 22,632 | $ | 13,492 | $ | 11,691 | $ | 8,308 | $ | 5,027 | ||||||||||
| Operating loss | $ | (6,929 | ) | $ | (4,210 | ) | $ | (7,666 | ) | $ | (5,296 | ) | $ | (4,137 | ) | |||||
| Loss for the year | $ | (20,529 | ) | $ | (7,064 | ) | $ | (7,782 | ) | $ | (5,773 | ) | $ | (4,340 | ) | |||||
| Net loss attributable to ordinary shareholders | $ | (20,529 | ) | $ | (7,064 | ) | $ | (7,782 | ) | $ | (5,773 | ) | $ | (4,340 | ) | |||||
| Loss per share – Basic and diluted | $ | (0.57 | ) | $ | (0.29 | ) | $ | (0.36 | ) | $ | (0.29 | ) | $ | (0.28 | ) | |||||
Weighted average number of ordinary shares used to calculate basic and diluted loss per share | 35,781 | 24,011 | 21,815 | 19,717 | 15,280 | |||||||||||||||
8
| (in thousands) | As of December 31, | |||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Statement of Financial Position Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 14,954 | $ | 13,519 | $ | 22,255 | $ | 19,803 | $ | 12,797 | ||||||||||
Short-term investments | $ | 37,862 | $ | 21,687 | $ | 24,507 | $ | 45,014 | $ | 4,156 | ||||||||||
Long-term investments | $ | 9,017 | $ | 5,023 | $ | 5,473 | $ | — | $ | — | ||||||||||
Total assets | $ | 82,725 | $ | 50,970 | $ | 60,686 | $ | 70,889 | $ | 21,334 | ||||||||||
Total non-current liabilities | $ | 325 | $ | 299 | $ | 278 | $ | 332 | $ | 4,490 | ||||||||||
Accumulated loss | $ | (121,860 | ) | $ | (103,192 | ) | $ | (87,807 | ) | $ | (72,535 | ) | $ | (52,006 | ) | |||||
Total equity | $ | 64,889 | $ | 42,400 | $ | 54,267 | $ | 64,093 | $ | 12,820 | ||||||||||
| (in thousands) | As of December 31, | |||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||
| Statement of financial position data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 19,803 | $ | 12,797 | $ | 1,655 | $ | 4,802 | $ | 3,537 | ||||||||||
| Short-term investments | $ | 45,014 | $ | 4,156 | $ | 14,455 | $ | 13,335 | $ | 18,419 | ||||||||||
| Total assets | $ | 70,889 | $ | 21,334 | $ | 20,424 | $ | 21,773 | $ | 23,936 | ||||||||||
| Total non-current liabilities | $ | 332 | $ | 4,490 | $ | 616 | $ | 4,233 | $ | 3,573 | ||||||||||
| Accumulated loss | $ | (72,535 | ) | $ | (52,006 | ) | $ | (44,942 | ) | $ | (37,160 | ) | $ | (31,387 | ) | |||||
| Total equity | $ | 64,093 | $ | 12,820 | $ | 13,484 | $ | 15,145 | $ | 19,350 | ||||||||||
Not applicable.
Not applicable.
You should carefully consider the risks described below, together with all of the other information in this Form 20-F. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business operations. If any of these risks actually occurs, our business and financial condition could suffer and the price of our shares could decline.
9
Risks Related to Our Business
We are a smallan emerging growth company, and we have incurred significant losses since our inception.
We are a smallan emerging growth company. The future success of our business depends on our ability to continue to develop and obtain regulatory clearances or approvals for innovative and commercially successful products in our field, which we may be unable to do in a timely manner, or at all. Our success and ability to generate revenue or be profitable also depends on our ability to establish our sales and marketing force, generate product sales and control costs, all of which we may be unable to do. Our limited operating history also limits your ability to make a comparative evaluation of us, our products and our prospects.
We have sustained net losses in every fiscal year since our inception in 2000, including a net loss of $20.5$18.7 million for the year ended December 31, 2013.2016. As of December 31, 2013,2016, we had total shareholders’shareholders' equity of $64.1$64.9 million and cash and cash equivalents, and short term investmentinvestments and long term investments of approximately $64.8$61.8 million. Our accumulated deficit as of December 31, 20132016 was $72.5$121.9 million. We anticipate that we will continue to incur substantial net losses for at least the next two years12 months as we expand our sales and marketing capabilities in the spine and neurosurgery products market, continue our commercialization of Mazor X system and the Renaissance, expand its adoption and clinical implementation, and continue to develop the corporate infrastructure required to sell and market our products and invest in product development. Our losses have had and will continue to have an adverse effect on our shareholders’shareholders' equity and working capital. Any failure to achieve and maintain profitability would continue to have an adverse effect on our shareholders’shareholders' equity and working capital and could result in a decline in our share price or cause us to cease operations.
We cannot assure investors that our existing cash and short-term investment balances will be sufficient to meet our future capital requirements.
We believe our existing cash, cash equivalents, short-term investment balances, and interest income we earn on these balances, if any, will be sufficient to meet our anticipated cash requirements through at least the foreseeable future.next 12 months. To the extent our available cash, cash equivalents and short-term investment balances are insufficient to satisfy our operating requirements or other strategic needs, we will either need to seek additional sources of funds, including selling additional equity or debt securities or entering into a credit facility. However, we may be unable to obtain additional financing. As a result, we may be required to reduce the scope of, or delay or eliminate, some or all of our current and planned research, development and commercialization activities. We also may have to reduce marketing, customer service or other resources devoted to our products. Any of these actions could materially harm our business and results of operations. Even if we are able to continue to finance our business, the sale of additional equity and debt securities may result in dilution to our current shareholders or may require us to grant a security interest in our assets. If we raise additional funds through the issuance of debt securities, these securities may have rights senior to those of our Ordinary Shares and could contain covenants that could restrict our operations. We may require additional capital beyond our currently forecasted amounts. Any such required additional capital may not be available on reasonable terms, or at all.
In May 2016 we entered into a strategic, two-phase Exclusive Lead Sharing and Distribution Agreement and a Purchase Agreement with Medtronic plc and certain of its affiliates (Medtronic plc together with its affiliates referred to herein as "Medtronic"). If certain milestones defined in the agreements are achieved and the parties elect to proceed, the agreements will enter a second phase. If these milestones are not achieved or if the parties choose not to proceed to the second phase, this could have substantial impact on our business.
The Exclusive Lead Sharing and Distribution Agreement with Medtronic provides for commercial cooperation in promotion of the Mazor X System and co-development activities in the spine field, and the Purchase Agreement provides for a three-tranche equity investment in Mazor (of which the first two tranches were completed during 2016). We believe that the agreements with Medtronic created a lot of visibility for our company and product offerings, as well as helping to validate the vision of guided spine surgery. Through the size of the Medtronic sales force, scope of training programs, marketing campaigns and other activities, Mazor has a strengthened channel to the spine market. Should Medtronic and Mazor not advance their relationship to the second phase of the commercial agreement, it could have a substantial negative impact on our business.
10
We face competition from large, well-established medical device companies that are likely to launch new navigation and/or robotic–based products, as well as new techniques and devices for minimally invasive approaches in spine surgeries.
Large, well-established medical device companies, such as Zimmer Biomet Holdings Inc., Globus Medical Inc. and Brainlab AG, have robotics products for spine surgeries in different phases of development and/or commercialization. In July 2016, Zimmer Biomet acquired the majority of the outstanding share capital of MedTech SA, developer of the FDA-cleared and CE marked ROSA™ robot. Globus published that it received CE clearance and expects to receive FDA clearance for its surgical robotic positioning platform for spine, brain and trauma markets in the first half of 2017. Brainlab has presented a prototype of an electro-mechanical surgical support arm in some of the major spine conferences in 2016. There have been some scientific reports on performance in cervical spine surgeries by TINAVI Medical Technologies Co., Ltd., a Beijing, China-based medical device company, which offers surgical robotic systems to assist orthopedic surgeons in open and minimally invasive surgeries. The Switzerland-based medical device company, KB Medical, has announced its first clinical case with its AQrate robot. Additionally, there are companies with robotic products that have expressed interest or experimented in spine surgery guidance, such as Stryker Corporation with the Mako system, and Intuitive Surgical Inc. with its da Vinci system. There are also navigation systems that have been marketed over the past two decades in the spine market, though these have gained relatively low market share. These technologies have shown clinical value and could be further developed and marketed with greater success. These companies and many others are actively innovating in the field and some offer their robotic, or navigation systems with intra-operative 3-dimensional imaging systems that are often valuable to hospitals and physicians beyond spine surgeries but also in fields such as trauma, ear, nose and throat, and brain surgeries. Thus, unlike previously, when Mazor Robotics had the only marketable product in the field of spinal guided surgery, there are currently several other players in direct competition, with others competing in a less direct way. Thus, a surgeon interested in computer assisted spine surgery currently has a choice between at least 3 different products with regulatory clearances for spine surgery and several additional guidance systems in advanced development, as well as the “older” navigation systems. We cannot assure that a surgeon will prefer our product over the current and evolving competition.
Many of Mazor's competitors enjoy competitive advantages, including:
| ● | significantly greater name recognition; |
| ● | longer operating histories; |
| ● | established exclusive relationships with healthcare professionals, customers and third-party payors; |
| ● | established distribution networks; |
| ● | a more compelling technology with greater clinical value; |
| ● | competitive pricing; |
| ● | additional lines of products and the ability to offer rebates or bundle products to offer higher discounts or incentives to gain a competitive advantage; |
| ● | greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory clearance for products and marketing approved products; and |
| ● | greater financial and human resources for product development, sales and marketing and patent litigation. |
There can be no assurance that we will be able to compete successfully against current or future competitors or that competition will not have a material adverse effect on our future revenues and, consequently, on our business, operating results and financial condition.
11
We depend on the success of one producttwo main products for our revenue, which could impair our ability to achieve profitability.
We expect to derive most of our revenuefuture revenues from sales of the Mazor X system and Renaissance, or our Surgical Guidance Systems, recurring sales of disposable products required to use Renaissancethe Surgical Guidance Systems in each surgical procedure, and service plans that are sold with Renaissance.our Surgical Guidance Systems. Our future growth and success is dependent on successfully increasing the commercialization of Renaissanceour Surgical Guidance Systems and the adoption of Renaissanceour Surgical Guidance Systems by the end users. If we are unable to achieve increased commercial adoption of Renaissance,our Surgical Guidance Systems, are unable to obtain regulatory clearances or approvals for future products, or experience a decrease in the utilization of our product line or procedure volume, our revenue would be adversely affected and we would not become profitable. If adverse economic, industry or regulatory events or changes occur, we may have to write off inventory as obsolete, which could negatively impact our business and revenue.
If surgeons and hospitals do not broadly adopt the concept of computer assisted spine surgeries and do not perceive such technology and related products as valuable and having significant advantages over the current “freehand”"freehand" standard-of-care procedures, patients will be less likely to accept or be offered surgery with Renaissance,our Surgical Guidance Systems, and we will fail to meet our business objectives.
If our current and future Renaissancesurgical solutions fail to achieve increased market acceptance for any of these or other reasons or if we are not successful in enforcing the contractual commitment to purchase disposable products exclusively from us, we will not be able to generate the revenue necessary to develop a sustainable profitable business.
We depend on key employees, and if we fail to attract and retain employees with the expertise required for our business and to provide for the succession of senior management, we cannot grow or achieve profitability.
We are dependent on members of our senior management, in particular Ori Hadomi and Eliyahu Zehavi. Our future success will depend in part on our ability to retain our management and scientific teams, to identify, hire and retain additional qualified personnel with expertise in research and development and sales and marketing, and to effectively provide for the succession of senior management. Competition for qualified personnel in the medical device industry is intense and finding and retaining qualified personnel with experience in our industry is very difficult. We believe that there are only a limited number of individuals with the requisite skills to serve in many of our key positions, particularly in Israel, and we compete for key personnel with other medical equipment and software manufacturers and technology companies, as well as research institutions. It is often difficult to hire and retain these persons, and we may be unable to replace key persons if they leave or to fill new positions requiring key persons with appropriate experience. A significant portion of our compensation to our key employees is in the form of stock option grants. A prolonged depression in our stock price could make it difficult for us to retain our employees and recruit additional qualified personnel.
We do not maintain life insurance on any of our personnel. The loss of key employees, the failure of any key employee to perform or our inability to attract and retain skilled employees, as needed, or an inability to effectively plan for and implement a succession plan for key employees could harm our business.
Adverse changes in economic conditions and reduced spending on innovative medical technology may adversely impact our business.
The purchase of Renaissanceour Surgical Guidance Systems is discretionary and requires our customers to make significant initial commitments of capital and other resources. In addition, purchase of Renaissanceour Surgical Guidance Systems requires a commitment to purchase exclusively from us other products and services, including our single-use disposable components. Continuing weak economic conditions or a reduction in healthcare technology spending, even if economic conditions improve, could adversely impact our business, operating results and financial condition in a number of ways, including by causing longer sales cycles, lower prices for our products and services and reduced unit sales.
12
Fluctuations in credit and financial market conditions could delay or prevent our customers from obtaining financing to purchase or lease a Renaissance system,our Surgical Guidance Systems, which would adversely affect our business, financial condition and results of operations.
Due to the continued tightening offluctuations in credit markets in the recent past and concerns regarding the availability of credit, both domestically and abroad,currency exchange rates, our customers and overseas distributors may be delayed in obtaining, or may not be able to obtain, necessary financing for their purchases or leases of Renaissance. These delays mayour Surgical Guidance Systems. Shifts in the world economy that have systemic or local impact might in some instances lead to our customers or overseas distributors postponing ordering of a Renaissance systemour Surgical Guidance Systems or the shipment and installation of previously ordered systems, cancelling their system orders, or cancelling their agreements with us. An increase in delays and order cancellations of this nature could adversely affect our product sales and revenues and, therefore, harm our business and results of operations.
In addition, some of our suppliers may require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time, which can be up to six months, may require us to place orders far in advance of the time when certain products will be offered for sale, thereby also making it difficult for us to accurately forecast demand for our products, exposing us to risks relating to shifts in consumer demand and trends and adversely affecting our operating results.
Because of the numerous risks and uncertainties associated with the development of medical devices, including future versions of Renaissance,products, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of our products and successfully deliver commercial products to the market.
Our future capital requirements will depend on many factors, including but not limited to the following:
| ● | the revenue generated by sales of our current and future products; |
| ● | our ability to manage our inventory; |
| ● | the expenses we incur in selling and marketing our products and supporting our growth; |
| ● | the costs and timing of regulatory clearance or approvals for new products or upgrades or changes to our current products; |
| ● | the rate of progress, cost, and success or failure of on-going development activities; |
| ● | the emergence of competing or complementary technological developments; |
| ● | the costs of filing, prosecuting, defending and enforcing any patent or license claims and other intellectual property rights, or participating in litigation related activities; |
| ● | the terms and timing of any collaborative, licensing, or other arrangements that we may establish; |
| ● | the acquisition of businesses, products and technologies; and |
| ● | general economic conditions and interest rates, including the continuing weak conditions. |
13
Our reliance on third-party suppliers, including single source suppliers, for most of the components of Renaissancesurgical guidance systems could harm our ability to meet demand for our products in a timely and cost effective manner.
We rely on third-party suppliers to manufacture and supply almost all of the components used in Renaissance,our Surgical Guidance Systems, including a number of single source suppliers to provide us with manyseveral of the major components of Renaissance.our Surgical Guidance Systems. We currently do not have long-term contracts with most of our suppliers. As a result, some of our suppliers are not required to provide us with any guaranteed minimum production levels, and we cannot guarantee that we will be able to obtain sufficient quantities of key components in the future. In addition, our reliance on third-party suppliers involves a number of risks, including, among other things:
| ● |
| ● |
| ● |
| ● |
| ● |
| ● |
| ● |
| ● |
| ● |
| ● |
| ● |
If any of these risks materialize, costs could significantly increase and our ability to meet demand for our products could be impacted. If we are unable to satisfy commercial demand for Renaissanceour Surgical Guidance Systems or for our single-use disposable components in a timely manner, our ability to generate revenue would be impaired, market acceptance of our products could be adversely affected, and customers may instead purchase or use alternative products. In addition, we could be forced to secure new or alternative components through a replacement supplier. Securing a replacement supplier could be difficult, especially for complex components such as Renaissanceour Surgical Guidance Systems' components that are manufactured in accordance with our custom specifications. The introduction of new or alternative components may require design changes to our system that aremay be subject to FDA and other regulatory clearances or approvals. We may also be required to assess the new manufacturer’smanufacturer's compliance with all applicable regulations and guidelines, which could further impede our ability to manufacture our products in a timely manner. As a result, we could incur increased production costs, experience delays in deliveries of our products, suffer damage to our reputation and experience an adverse effect on our business and financial results.
14
The overall size and risk of turnover in our capital and clinical sales and marketing experience and capabilities, which couldteams might impair our ability to achieve profitability.generate revenues.
To reach our revenue targets, we need to expand and strengthen our U.S. direct sales force and our foreign sales channels. Developing a sales and marketing infrastructure is expensive and time consuming and an inability to develop such an organization in a timely manner could delay the successful adoption of our products. Additionally, any sales and marketing organization that we develop may be competing against the experienced and well-funded sales and marketing infrastructure of some of our competitors. We will face significant challenges and risks in developing our sales and marketing organization, including, among others:
| ● | our ability to recruit, train and retain adequate numbers of qualified sales and marketing personnel; |
| ● | the ability of sales personnel to obtain access to surgeons and persuade adequate numbers of hospitals to purchase our products; |
| ● | the uncertainty involved with the future of the relationship with Medtronic, the profile and structure of our team might change and for a period of transition; |
| ● | costs associated with hiring, maintaining and expanding a sales and marketing organization; and |
| ● | government scrutiny with respect to promotional activities in the healthcare industry both domestically and abroad. |
We believe that to sell and market our products effectively, we must establish a compelling clinical and commercial offering with our products. However, potential customers (e.g., surgeons and hospitals) sometimes have long-standing relationships with large, better known companies that dominate the medical devices industry through collaborative research programs and other relationships. Because of these existing relationships, some of which may be contractually enforced, surgeons and hospitals may be reluctant to adopt Renaissance,our technology, particularly if it competes with or has the potential to compete with or diminish the need/utilization of products supported through their own collaborative research program or by these existing relationships. Even if these surgeons and hospitals purchase Renaissance,our Surgical Guidance Systems, they may be unwilling to enter into collaborative relationships with us to promote joint marketing programs or to provide us with clinical and financial data.
Medical device development is costly and involves continual technological change, which may render our current or future products obsolete.
Innovation is rapid and continuous in the medical device industry, and our competitors in the medical device industry make significant investments in research and development. If new products or technologies emerge that provide the same or superior benefits as our products at equal or lower cost, they could render our products obsolete or unmarketable. Because our products can have long development and regulatory clearance or approval cycles, we must anticipate changes in the marketplace and the direction of technological innovation and customer demands. In addition, we face increasing competition from well-financed medical device companies in our attempts to acquire such new technologies, products and businesses. As a result, we cannot be certain that our products will be competitive with current or future products and technologies.
Our success depends, in part, on our ability to enter the brain-surgery market, and this market has significant barriers to entry.
Computer-assisted surgeries are the accepted standard-of-care in brain procedures, and stereotactic frames and frameless navigation devices have dominated this market for almost two decades. In recent years, newThere are currently two other dominant robotic devices such as Medtech’s Rosa™for brain have been used in brain surgerysurgeries, which are Medtech's ROSA™ robot and are gaining acceptance, though still not prevalent and in very early stages. SomeRenishaw's Neuromate©. These products will compete directly with Renaissance.our Surgical Guidance Systems. As a result, we cannot be certain that surgeons will use our products or that our products will be competitive with current or future products and technologies. If we are unable to penetrate the brain-surgery market, we may not be able to generate the revenue necessary to develop a sustainable profitable business.
15
We may encounter problems or delays in the assembly of our products or fail to meet certain regulatory requirements.
The current and intended future versions of Renaissanceour surgical guidance systems are complex and require the integration of a number of separate components and processes. To become profitable, we must assemble and test Renaissanceour Surgical Guidance Systems in commercial quantities in compliance with regulatory requirements and at an acceptable cost. Increasing our capacity to assemble and test our products on a commercial scale will require us to improve internal efficiencies. We may encounter a number of difficulties in increasing our assembly and testing capacity, including:
| ● | managing production yields; |
| ● | maintaining quality control and assurance; |
| ● | providing component and service availability; |
| ● | managing subcontractors; |
| ● | hiring and retaining qualified personnel; and |
| ● | complying with state, federal and foreign regulations. |
If we are unable to satisfy commercial demand for our Renaissance systemSurgical Guidance Systems due to our inability to assemble and test the system in compliance with applicable regulations, our business and financial results, including our ability to generate revenue, would be impaired, market acceptance of our products could be materially adversely affected and customers may instead purchase or use competing products.
Any failure in our efforts to train surgeons or hospital staff adequately could result in lower than expected product sales and potential liabilities.
A critical component of our sales and marketing efforts is the training of surgeons and operating room staff to properly use Renaissance.our Surgical Guidance Systems. We rely on surgeons and hospital staff to devote adequate time to learn to use our products. Convincing surgeons and hospital staff to dedicate the time and energy necessary for adequate training in the use of our system is challenging, and we cannot assure that we will be successful in these efforts. If surgeons or hospital staffs are not properly trained, they may misuse or ineffectively use our products. If nurses or other members of the hospital staff are not adequately trained to assist in using our Renaissance system,Surgical Guidance System, surgeons may be unable to use our products. Insufficient training may result in reduced system use, unsatisfactory patient outcomes, patient injury and related liability or negative publicity, which could have an adverse effect on our product sales or create substantial potential liabilities.
We will likely continue to experience extended and variable sales cycles, which could cause significant variability in our results of operations for any given quarter.
Our Renaissance system has aSurgical Guidance Systems have lengthy sales cyclecycles because it isthey are a major piece of capital equipment, the purchase of which will generally require the approval of senior management at hospitals, inclusion in the hospitals’hospitals' budget process for capital expenditures and, in some instances, a certificate of need from the state or other regulatory clearance. As a result, a relatively small number of units are currently installed each quarter. We estimate that the sales cycle of Renaissanceour Surgical Guidance Systems will continue to take betweenan average of nine and eighteen months from the point of initial identification and contact with a qualified surgeon until closing of the purchase with the hospital. In addition, the introduction of new Mazor products and competitive products could adversely impact our sales cycle as customers take additional time to assess them. Because of the lengthy sales cycle, the unit price of Renaissanceour Surgical Guidance Systems and the relatively small number of systems installed each quarter, each installation of a Renaissance systemour Surgical Guidance Systems can represent a significant component of our revenue for a particular quarter, particularly in the near term and during any other periods in which our sales volume is relatively low.
16
Certain factors that may contribute to variability in our operating results may include:
| ● | delays in shipments due, for example, to natural disasters or labor disturbances; |
| ● | delays or unexpected difficulties in the manufacturing processes of our suppliers or in our assembly process; |
| ● | timing of the announcement, introduction and delivery of new products or product upgrades by us and by our competitors; |
| ● | timing and level of expenditures associated with expansion of sales and marketing activities and our overall operations; |
| ● | changes in third-party coverage and reimbursement, changes in government regulation, or a change in a |
| ● | hospitals' tendency to group purchases at the beginning of their budgetary cycle, which is different among hospitals. |
These factors are difficult to forecast and may contribute to substantial fluctuations in our quarterly revenue and substantial variation from our projections, particularly during the periods in which our sales volume is low. Moreover, many of our expenses, such as office leases and most personnel costs, are relatively fixed. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in revenue may cause significant variation in operating results in any quarter. Based on the above factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. These and other potential fluctuations also mean that you will not be able to rely upon our operating results in any particular period as an indication of future performance.
We may be subjectfail to respond to cost containment efforts by our customers, which could have an adverse impact on our sales, financial condition and results of operations.
Some of our customers and potential customers have joined group purchasing organizations in an effort to contain costs; these group purchasing organizations negotiate pricing arrangements with medical supply manufacturers and distributors and make these negotiated prices available to the group purchasing organization’sorganization's affiliated hospitals and other members. If we fail to respond to the cost containment efforts of our customers and potential customers, we may lose sales or face downward pricing pressure, which could result in an adverse impact on our financial condition and results of operations.
If we receive a significant number of warranty claims or our RenaissanceSurgical Guidance Systems and specifically the Mazor X, a newly launched system, units require significant amounts of service after sale, our costs will increase and our business and financial results will be adversely affected.
Sales of the our Renaissance systemSurgical Guidance Systems generally include a warranty and maintenance obligation on our part for services for a period of twelve months from the date Renaissancea system is installed at a customer’scustomer's facility. We also provide technical and other services to customers beyond the warranty period pursuant to a supplemental service plan sold with each system. If product returns or warranty claims are significant or exceed our expectations, we could incur unanticipated reductions in sales or additional expenditures for parts and service. In addition, our reputation could be damaged and our products may not achieve market acceptance.
17
Software defects may be discovered in our products.
Our Renaissance system incorporatesSurgical Guidance Systems incorporate sophisticated computer software. Complex software frequently contains errors, especially when first introduced. Because our products are designed to be used to perform complex surgical procedures, we expect that physicians and hospitals will have an increased sensitivity to the potential for software defects. We cannot assure you that our software will not experience errors or performance problems in the future. If we experience software errors or performance problems, we would likely also experience:
| ● | loss of revenue; |
| ● | delay in market acceptance of our products; |
| ● | damage to our reputation; |
| ● | additional regulatory filings; |
| ● | product recalls; |
| ● | increased service or warranty costs; and |
| ● | product liability claims relating to the software defects. |
We may be subject to product liability claims, product actions, including product recalls, and other field or regulatory actions that could be expensive, divert management’smanagement's attention and harm our business.
Our business exposes us to potential liability risks, product actions and other field or regulatory actions that are inherent in the manufacturing, marketing and sale of medical device products, particularly those used in surgery. We may be held liable if our products cause injury or death or are found otherwise unsuitable or defective during usage. RenaissanceOur Surgical Guidance Systems incorporates mechanical and electrical parts, complex computer software and other sophisticated components, any of which can contain errors or failures. Complex computer software is particularly vulnerable to errors and failures, especially when first introduced. In addition, new products or enhancements to our existing products may contain undetected errors or performance problems that, despite testing, are discovered only after installation.
If any of our products are defective, whether due to design or manufacturing defects, improper use of the product or other reasons, we may voluntarily or involuntarily undertake an action to remove, repair, or replace the product at our expense. In some circumstances we will be required to notify regulatory authorities of an action pursuant to a product failure. We are also required to submit a Medical Device Report, or MDR, to the FDA for any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury.
A required notification to a regulatory authority or a failure to make a timely required notification could result in an investigation by regulatory authorities of our products, which could in turn result in field corrective actions, restrictions on the sale of the products, and civil or criminal penalties. In addition, because our products are designed to perform complex surgical procedures, defects could result in a number of complications, some of which could be serious and could cause significant harm to the patient or even cause death. The adverse publicity resulting from any of these events could cause surgeons or hospitals to review and potentially terminate their relationships with us.
The medical device industry has historically been subject to extensive litigation over product liability claims. We anticipate that as part of our ordinary course of business we will be subject to product liability claims alleging defects in the design, manufacture or labeling of our products. A product liability claim, regardless of its merit or eventual outcome, could result in significant legal defense costs and high punitive damage payments. Although we maintain product liability insurance, the coverage is subject to deductibles and limitations, and may not be adequate to cover future claims. Additionally, we may be unable to maintain our existing product liability insurance in the future at satisfactory rates or adequate amounts.
18
If coverage or reimbursement from third-party payors for procedures in which Renaissance isour Surgical Guidance Systems are used, namely spinal fusions, is decreased or limited, hospitals may not purchase RenaissanceSurgical Guidance Systems and surgeons may perform fewer spinal fusions, which would harm our business and financial results.
Our ability to successfully commercialize Renaissanceour Surgical Guidance Systems depends significantly on the availability of coverage and reimbursement for thoracic-lumbar spinal fusion procedures from third-party payors, including governmental programs such as Medicare and Medicaid, as well as private insurance and private health plans. Reimbursement is a significant factor considered by hospitals in determining whether to acquire new capital equipment such as our technology. Although our customers have been successful in obtaining coverage and reimbursement for procedures using our products, we cannot be assured that procedures using our technology will be covered or reimbursed by third-party payors in the future or that such reimbursements will not be reduced to the extent that they will adversely affect capital allocations for purchase of our Renaissance system.Surgical Guidance Systems.
As part of healthcare reform and other cost containment initiatives, the U.S. Congress, or the Congress, may pass legislation impacting coverage and reimbursement for healthcare services, including Medicare reimbursement to physicians and hospitals. Many private third-party payors look to Medicare’sMedicare's coverage and reimbursement policies in setting their coverage policies and reimbursement amounts. If the Centers for Medicare & Medicaid Services, or CMS, the federal agency that administers the Medicare program, or Medicare contractors limit payments to hospitals or surgeons for thoracic-lumbar spinal fusion surgeries, private payors may similarly limit payments. In addition, state legislatures may enact laws limiting or otherwise affecting the level of Medicaid reimbursements. As a result, hospitals may not purchase Renaissanceour Surgical Guidance Systems and surgeons may choose to decrease their volume of thoracic-lumbar spinal fusions, and, as a result, our business and financial results would be adversely affected.
Because hospitals receive a fixed reimbursement amount from Medicare for specified procedures or conditions, a hospital must absorb the cost of our products as part of the reimbursement payment it receives, which makes the hospital’shospital's purchasing decisions more risky, particularly those related to expensive capital equipment.
Medicare pays acute care hospitals a prospectively determined amount for inpatient operating costs under the Medicare hospital inpatient prospective payment system, or PPS. Under the Medicare PPS, the prospective payment for a patient’spatient's stay in an acute care hospital is determined by the patient’spatient's condition and other patient data and procedures performed during the inpatient stay using a classification system known as diagnosis related groups, or DRGs. CMS implemented a revised version of the DRG system that uses Medicare Severity DRGs, or MS-DRGs, instead of the DRGs which Medicare used previously. The MS-DRGs are intended to more accurately account for the patient’spatient's severity of illness when assigning each patient’spatient's stay to a payment classification. Medicare pays a fixed amount to the hospital based on the MS-DRG into which the patient’spatient's stay is assigned, regardless of the actual cost to the hospital of furnishing the procedures, items and services provided. Accordingly, acute care hospitals generally do not receive direct Medicare reimbursement under the PPS for the specific costs incurred in purchasing medical devices, except under limited circumstances. Rather, reimbursement for these costs is deemed to be included within the MS-DRG based payments made to hospitals for the services furnished to Medicare eligible inpatients in which the devices are utilized. Accordingly, a hospital must absorb the cost of our products as part of the payment it receives for the procedure in which the device is used. In addition, physicians that perform procedures in hospitals are paid a set amount by Medicare for performing such services under the Medicare Physician Fee Schedule. Medicare payment rates for both systems are established annually.
At this time, we do not know the extent to which hospitals and physicians would consider third-party reimbursement levels adequate to cover the cost of our products. Failure by hospitals and surgeons to receive an amount that they consider to be adequate reimbursement for procedures in which our products are used could deter them from purchasing or using our products and limit our sales growth. In addition, pre-determined MS-DRG payments or Medicare Physician Fee Schedule payments may decline over time, which could deter hospitals from purchasing our products or physicians from using them. If hospitals are unable to justify the costs of our products or physicians are not adequately compensated for procedures in which our products are utilized, they may refuse to purchase or use them, which would significantly harm our business.
Notwithstanding current or future FDA clearances, if granted, third-party payors may deny coverage and reimbursement if the payor determines that a therapeutic medical device is unnecessary, inappropriate, not cost-effective or experimental, or is used for a non-approved indication. Although we are not aware of any potential customer that has declined to purchase our Renaissance systemSurgical Guidance Systems based upon third-party payors’payors' coverage and reimbursement policies, cost control measures adopted by third-party payors may have a significant effect on surgeries performed using Renaissanceour Surgical Guidance Systems or as to the levels of reimbursement.
19
Broad-based domestic and international government initiatives to reduce spending, particularly those related to healthcare costs, may reduce reimbursement rates for spinal surgery procedures, which will reduce the cost-effectiveness of our products.
Healthcare reforms, changes in healthcare policies and changes to third-party coverage and reimbursement, including recently enacted legislation reforming the U.S. healthcare system, may affect demand for our products and may have a material adverse effect on our financial condition and results of operations. There can be no assurance that current levels of reimbursement will not be decreased in the future, or that future legislation, regulation, or reimbursement policies of third-party payors will not adversely affect the demand for our products or our ability to sell products on a profitable basis.
The Patient Protection and Affordable Care Act, or PPACA, adopted in the United States in March 2010 and related regulations include new taxes impacting certain health-related industries, including medical device manufacturers. The legislation imposes significant new taxes on medical device makers in the form of a 2.3% excise tax on all U.S. medical device sales beginning in 2013. This excise tax applies to our medical devices. This increase in The Consolidated Appropriations Act, 2016, signed into law on December 18, 2015, includes a two-year suspension on the medical device excise tax. Thus, the medical device excise tax burden on our industry could have a material, negative impact on our results of operations and our cash flows. The adoption of significant changesdoes not apply to the healthcare system insale of a taxable medical device by the United States could limitmanufacturer, producer, or importer of the prices we are abledevice during the period beginning on January 1, 2016, and ending on December 31, 2017. However, there is no guarantee that the excise tax will continue to chargebe suspended by congressional action after this two-year period ends, and absent further congressional action, the excise tax will be reinstated for our products or the amounts of reimbursement available for our products, could limit the acceptance and availability of our products, reduce medical procedure volumes and increase operational and other costs. This could materially adversely affect our business and results of operations.device sales beginning January 1, 2018.
Other significant measures contained in PPACA include initiatives to revise Medicare payment methodologies, initiatives to promote quality indicators in payment methodologies, initiatives related to the coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, and annual reporting requirements related to payments to physicians and teaching hospitals.
In addition, other legislative changes have been proposed and adopted since the PPACA was enacted. On August 2, 2011, the President of the United States, or the President, signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, triggering the legislation’slegislation's automatic reduction to several government programs. This includes reductions to Medicare payments to providers of 2% per fiscal year. On January 2, 2013, the President Obama signed into law the American Taxpayer Relief Act of 2012, or the ATRA, which delayed for another two months the budget cuts mandated by these sequestration provisions of the Budget Control Act of 2011. On March 1, 2013, the President signed an executive order implementing sequestration, and on April 1, 2013, the 2% Medicare payment reductions went into effect. The ATRA also, among other things, reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or internationally, or the effect any future legislation or regulation will have on us. The taxes imposed by PPACA and the expansion of government’s role in the U.S. healthcare industry may result in decreased profitsadditional losses to us, lower reimbursements by third-party payors for surgeries in which our products are used, and reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations, possibly materially.
20
Changing models for the provision of healthcare may affect the cost-effectiveness of Renaissance.our Surgical Guidance Systems.
All third-party payors, whether governmental or private, whether insidewithin the United States or outside,abroad, are developing increasingly sophisticated methods of controlling healthcare costs. These cost control methods include prospective payment systems,PPSs, capitated rates, benefit redesigns, pre-authorization or second opinion requirements prior to major surgery, an emphasis on wellness and healthier lifestyle interventions and an exploration of other cost-effective methods of delivering healthcare. These cost control methods also potentially limit the amount which healthcare providers may be willing to pay for medical technology which could, as a result, adversely affect our business and financial results. In addition, no uniform policy of coverage and reimbursement for medical technology exists among all these payors. Therefore, coverage and reimbursement for medical technology can differ significantly from payor to payor, and country to country.
We may attempt to acquire new products or technologies, and if we are unable to successfully complete these acquisitions or to integrate acquired businesses, products, technologies or employees, we may fail to realize expected growth.
Our success will depend, in part, on our ability to expand our product offerings and continue to offer the advanced computer assisted solutions for spine and brain surgery and grow our business in response to changing technologies, customer demands and competitive pressures. In some circumstances, we may determine to do so through the acquisition of complementary businesses, products or technologies rather than through internal development. Successful acquisitions present a number of hurdles and risk, including:
| ● |
| ● |
| ● |
If we do not effectively manage our growth, we may be unable to successfully develop, market and sell our products.
In order to achieve our business objectives, we must continue to grow. Continued growth presents numerous challenges, including:
| ● | implementing appropriate operational and financial systems and controls; |
| ● | expanding manufacturing and assembly capacity and increasing production; |
| ● | developing our sales and marketing infrastructure and capabilities; |
| ● | identifying, attracting and retaining qualified personnel in our areas of activity; |
| ● | hiring, training, managing and supervising our personnel; and |
| ● | continuous compliance with regulatory and quality assurance requirements. |
We cannot be certain that our systems, controls, infrastructure and personnel will be adequate to support our future operations. Any failure to effectively manage our growth could impede our ability to successfully develop, market and sell our products and our business will be harmed.
21
If we are successful in our efforts to market and sell Renaissanceour Surgical Guidance Systems outside of the United States, we will be subject to various risks relating to our international activities, which could adversely affect our business and financial results.
We are continuing to pursue international markets for the sale of our products and, as of December 31, 2013,2016, there were 6350 SpineAssist and Renaissance systems installed in the United States, Europe, Asia and Asia.Australia. As a result of these efforts and sales, we are exposed to risks separate and distinct from those we face in our U.S. operations. Our international business may be adversely affected by changing economic conditions in foreign countries. In addition, because international sales would most likelymay be denominated in the functional currency of the country where the product is being shipped, increases or decreases in the value of the U.S. dollar relative to foreign currencies could affect our results of operations. Engaging in international business inherently involves a number of other difficulties and risks, including:
| ● | approval of product submissions with healthcare systems outside the United States; |
| ● | gathering the clinical data that may be required for product submissions with healthcare systems outside the United States; |
| ● | import restrictions and controls and other government regulation relating to technology; |
| ● | pricing pressures that we may experience internationally; |
| ● | the availability and level of reimbursement within prevailing foreign healthcare payment systems; |
| ● | compliance with existing and changing applicable foreign regulatory laws and requirements, including but not limited to the European Medical Device Directive (Council Directive 93/42/EEC), the U.S. Foreign Corrupt Practices Act of 1977, or FCPA, |
| ● | foreign laws and business practices favoring local companies; |
| ● | longer payment cycles; and |
| ● | shipping delays. |
Our exposure to each of these risks may increase our costs, impair our ability to market and sell our products and require significant management attention, resulting in harm to our business and financial results.
Our Renaissance system isSurgical Guidance Systems are used mainly for vertebral fixation procedures during thoracic-lumbar spinal fusion surgeries. Should the standard of care change and these procedures be abandoned as the treatment of choice for the current indications, it might negatively affect our business.
According to the Orthopedic Network News report dated October 2013,2015, an estimated 380,000409,400 thoracic-lumbar fusion surgeries werewill be performed in the United States during 2013.2015. These surgeries are the standard of care in several common spinal pathologies. However, new treatment methods continue to be innovated, such as motion preserving techniques and devices that might not be benefitted bybenefit from the use of Mazor X and Renaissance during such surgical procedures. In such a case, the appeal to surgeons in using Mazor X and Renaissance could be diminished and have a negative effect on our business performance.
We unveiled the Mazor X, a new guidance system for spine surgeries in July 2016 and commercially launched the Mazor X in October 2016. Mazor X is the culmination of a very substantial investment by us over the past few years. Like any new system it could suffer from performance issues and its appeal to potential customers, or perceived value might not justify purchases. Such outcomes might negatively affect our business.
While great care was invested in capturing the "voice of the customer" and many industry inputs from a variety of sources, it is possible that the Mazor X will disappoint surgeons in its performance and/or value-proposition. In a market with new robotic systems with different unique selling propositions and advantages, our new product may not capture the attention we expect. While we strive to remain the commercial leader of the market segment based on innovation leadership and quality processes, our success is not guaranteed.
22
We may face both reputational and SEC enforcement risks with respect to conflict minerals obligations.
We are subject to disclosure requirements under section 102 of the Dodd-Frank Wall Street Reform and Consumer Protection Act regarding the source of certain minerals for which such conflict minerals are necessary to the functionality or production of a product manufactured, or contracted to be manufactured which are mined from the Democratic Republic of Congo, and adjoining countries, including: Sudan, Uganda,Angola, Burundi, UnitedCentral African Republic, the Republic of the Congo, Rwanda, South Sudan, Tanzania, Zambia, Angola,Uganda, and Central African Republic.Zambia. These rules require reporting companies to file a conflict minerals report as an exhibit to a Form SD report with the SEC. The conflict minerals report is required to set out the due diligence efforts and procedures exercised on the source and chain of custody of such conflict minerals, in accordance with internationally recognized due diligence framework, and a description of the our products containing such conflict minerals. Although we expect that we will be able to comply with the requirements of anySEC rules promulgated by the SEC and timely file our firstnext annual report, by May 31, 2014, as required, in preparing to do so we are dependent upon the implementation of new systems and processes and information supplied by certain suppliers of products that contain, or potentially contain, conflict minerals. Such preparation may be costly. To the extent that the information that we receive from our suppliers is inaccurate or inadequate or our processes in obtaining that information do not fulfill the SEC'sSEC’s requirements, we could face both reputational and SEC enforcement risks.
Risks Related to Our Intellectual Property
If we, or the other parties from whom we license intellectual property, are unable to secure and maintain patent or other intellectual property protection for the intellectual property used in our products, our ability to compete will be harmed.
Our commercial success depends, in part, on obtaining and maintaining patent and other intellectual property protection for the technologies used in our products. The patent positions of medical device companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions. Furthermore, we presently license intellectual property from other parties, and we might in the future opt to license additional intellectual property from other parties. If we, or the other parties from whom we licenseelicense or would license intellectual property, fail to obtain and maintain adequate patent or other intellectual property protection for intellectual property used in our products, or if any protection is reduced or eliminated, others could use the intellectual property used in our products, resulting in harm to our competitive business position. In addition, patent and other intellectual property protection may not provide us with a competitive advantage against competitors that devise ways of making competitive products without infringing any patents that we own or have rights to.
U.S. patents and patent applications may be subject to interference proceedings, and U.S. patents may be subject to re-examination proceedings in the U.S. Patent and Trademark Office. Foreign patents may be subject to opposition or comparable proceedings in the corresponding foreign patent offices. Any of these proceedings could result in loss of the patent or denial of the patent application, or loss or reduction in the scope of one or more of the claims of the patent or patent application. Changes in either patent laws or in interpretations of patent laws may also diminish the value of our intellectual property or narrow the scope of our protection. Interference, re-examination and opposition proceedings may be costly and time consuming, and we, or the other parties from whom we might potentially license intellectual property, may be unsuccessful in defending against such proceedings. Thus, any patents that we own or might license may provide limited or no protection against competitors. In addition, our pending patent applications and those we may file in the future may have claims narrowed during prosecution or may not result in patents being issued. Even if any of our pending or future applications are issued, they may not provide us with adequate protection or any competitive advantages. Our ability to develop additional patentable technology is also uncertain.
Non-payment or delay in payment of patent fees or annuities, whether intentional or unintentional, may also result in the loss of patents or patent rights important to our business. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to other parties. In addition, many countries limit the enforceability of patents against other parties, including government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. In addition, the laws of some foreign countries do not protecthave different rules of protecting intellectual property rights, to the same extent as do the laws of the United States, particularly in the field of medical products and procedures. Among these countries is China where we have sales pursuant to a distribution agreement with a local distributor.
23
If we are unable to prevent unauthorized use or disclosure of our proprietary trade secrets and unpatented know-how, our ability to compete will be harmed.
Proprietary trade secrets, copyrights, trademarks and unpatented know-how are also very important to our business. We rely on a combination of trade secrets, copyrights, trademarks, confidentiality agreements and other contractual provisions and technical security measures to protect certain aspects of our technology, especially where we do not believe that patent protection is appropriate or obtainable. We require our employees and consultants to execute confidentiality agreements in connection with their employment or consulting relationships with us. We also require our employees and consultants to disclose and assign to us all inventions conceived during the term of their employment or engagement while using our property or which relate to our business. We also have taken precautions to initiate reasonable safeguards to protect our information technology systems. However, these measures may not be adequate to safeguard our proprietary intellectual property and conflicts may, nonetheless, arise regarding ownership of inventions. Such conflicts may lead to the loss or impairment of our intellectual property or to expensive litigation to defend our rights against competitors, who may be better funded and have superior resources. Our employees, consultants, contractors, outside clinical collaborators and other advisors may unintentionally or willfully disclose our confidential information to competitors. In addition, confidentiality agreements may be unenforceable or may not provide an adequate remedy in the event of unauthorized disclosure. Enforcing a claim, that a third party illegally obtained and is using our trade secrets, is expensive and time consuming, and the outcome is unpredictable. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. As a result, other parties may be able to use our proprietary technology or information, and our ability to compete in the market would be harmed.
We could become subject to patent and other intellectual property litigation that could be costly, result in the diversion of management’smanagement's attention, require us to pay damages and force us to discontinue selling our products.
The medical device industry is characterized by competing intellectual property and a substantial amount of litigation over patent and other intellectual property rights. In particular, the fields of orthopedic implants, computer-assisted surgery, or CAS, systems, and robotics are well established and crowded with the intellectual property of competitors and others. A number of companies in our market, as well as universities and research institutions, have been issued patents and have filed patent applications which relate to the use of CAS.
Determining whether a product infringes a patent involves complex legal and factual issues, and the outcome of a patent litigation action is often uncertain. We have not conducted an extensive search of patents issued or assigned to other parties, including our competitors, and no assurance can be given that patents containing claims covering our products, parts of our products, technology or methods do not exist, have not been filed or could not be filed or issued. Because of the number of patents issued and patent applications filed in our technical areas, our competitors or other parties may assert that our products and the methods we employ in the use of our products are covered by U.S. or foreign patents held by them. In addition, because patent applications can take many years to issue and because publication schedules for pending applications vary by jurisdiction, there may be applications now pending of which we are unaware and which may result in issued patents which our current or future products infringe. Also, because the claims of published patent applications can change between publication and patent grant, there may be published patent applications that may ultimately issue with claims that we infringe. There could also be existing patents that one or more of our products or parts may infringe and of which we are unaware. As the number of competitors in the market for computer and robotic-assisted surgery grows, and as the number of patents issued in this area grows, the possibility of patent infringement claims against us increases. In certain situations, we may determine that it is in our best interests or their best interests to voluntarily challenge a party’sparty's products or patents in litigation or other proceedings, including patent interferences or re-examinations. As a result, we may become involved in litigation that could be costly, result in diversion of management’smanagement's attention, require us to pay damages and force us to discontinue selling our products.
24
Infringement actions and other intellectual property claims and proceedings brought against or by us, whether with or without merit, may cause us to incur substantial costs and could place a significant strain on our financial resources, divert the attention of management from our business and harm our reputation. Some of our competitors may be able to sustain the costs of complex patent or intellectual property litigation more effectively than we can because they have substantially greater resources.
We cannot be certain that we will successfully defend against allegations of infringement of patents and intellectual property rights of others. In the event that we become subject to a patent infringement or other intellectual property lawsuit and if the other party’sparty's patents or other intellectual property were to be upheld as valid and enforceable and we were to be found to infringe the other party’sparty's patents or violate the terms of a license to which we are a party, we could be required to pay damages. We could also be prevented from selling our products unless we could obtain a license to use technology or processes covered by such patents or were able to redesign the product to avoid infringement. A license may not be available at all or on commercially reasonable terms or we may not be able to redesign our products to avoid infringement. Modification of our products or development of new products could require us to conduct clinical trials and to revise our filings with the FDA and other regulatory bodies, which would be time consuming and expensive. In these circumstances, we may be unable to sell our products at competitive prices or at all, and our business and operating results could be harmed.
Our product development is limited by existing intellectual property owned by other companies. Our development of new generations of our products might depend on licensing of such intellectual property.
As we enhance our current product offerings and develop new ones, we may find it advisable or necessary to seek licenses from other parties who hold patents covering technology or methods necessary for the development of our products. If we cannot obtain these licenses, we could be forced to design around those patents at additional cost or abandon the product altogether. As a result, our ability to grow our business and compete in the market may be harmed.
We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees were previously employed at universities or other medical device companies, including our competitors or potential competitors. We could in the future be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are essential to our products, if such technologies or features are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. An inability to incorporate technologies or features that are important or essential to our products would have a material adverse effect on our business, and may prevent us from selling our products. In addition, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and be a distraction to management. Incurring such costs could have a material adverse effect on our financial condition, results of operations and cash flow.
We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
We enter into agreements with our employees pursuant to which such individuals grant us all rights to any inventions created in the scope of their employment or engagement with us. A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israel Patents Law, 5727-1967, or the Patent Law, inventions conceived by an employee during the scope of his or her employment with a company are regarded as "service inventions," which belong to the employer, absent a specific agreement between employee and employer giving the employee service invention rights. The Patent Law also provides that in the absence of an agreement between an employer and an employee regarding compensation for service inventions, the Israeli Compensation and Royalties Committee, or the Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for their inventions. Recent decisions by the Committee have created uncertainty in this area, as it held that employees may be entitled to remuneration for their service inventions despite having specifically waived any such rights. Further, the Committee has not yet determined the method for calculating this Committee-enforced remuneration. Although our employees have agreed to assign to us invention ownership rights, we may face claims demanding remuneration in consideration for assigned inventions. As a consequence of such claims, we could be required to pay additional remuneration or royalties to our current and/or former employees, or be forced to litigate such claims, which could otherwise negatively affect our business.
25
Risks Related to Regulatory Compliance
If we fail to comply with the extensive government regulations relating to our business, we may be subject to fines, injunctions and other penalties that could harm our business.
Our medical device products and operations are subject to extensive regulation by the FDA, pursuant to the Federal Food, Drug, and Cosmetic Act, or FDCA, and various other federal, state and foreign governmental authorities. Government regulations and requirements specific to medical devices are wide ranging and govern, among other things:
| ● | design, development and manufacturing; |
| ● | testing, labeling and storage; |
| ● | clinical trials; |
| ● | product safety; |
| ● | marketing, sales and distribution; |
| ● | premarket clearance or approval; |
| ● | record keeping procedures; |
| ● | advertising and promotions; |
| ● | recalls and field corrective actions; |
| ● | post-market surveillance, including reporting of deaths or serious injuries and malfunctions that, if they were to recur, could lead to death or serious injury; and |
| ● | product import and export. |
In the United States, before we can market a new medical device, or a new use of, or claim for, or significant modification to, an existing product, we must first receive either premarket clearance under Section 510(k) of the FDCA, or approval of aPremarket Approval, or PMA, from the FDA, unless an exemption applies. In the 510(k) marketing clearance process, the FDA must determine that a proposed device is “substantially equivalent”"substantially equivalent" to a legally marketed device, known as a “predicate”"predicate" device, with respect to intended use, technology and safety and effectiveness, in order to clear the proposed device for marketing. Bench tests, pre-clinical and/or clinical data are sometimes required to support substantial equivalence. The PMA approval pathway requires an applicant to demonstrate the safety and effectiveness of the device based, in part, on data obtained in clinical trials. Both of these processes can be expensive and lengthy and entail significant fees, unless exempt. The FDA’sFDA's 510(k) marketing clearance process usually takes from three to 12 months, but it can last longer. The process of obtaining PMA approval is much more costly and uncertain than the 510(k) marketing clearance process. It generally takes from one to three years, or even longer, from the time the PMA application is submitted to the FDA, until an approval is obtained. There is no assurance that we will be able to obtain FDA clearance or approval for any of our new products on a timely basis, or at all.
In the United States, our currently commercialized products have received pre-market clearance under Section 510(k) of the FDCA. If the FDA requires us to go through a lengthier, more rigorous examination for future products or modifications to existing products than we had expected, our product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the more costly, lengthy and uncertain PMA process. Although we do not currently market any devices under PMA, the FDA may demand that we obtain a PMA prior to marketing certain of our future products.
26
In addition, the FDA may change its clearance and approval policies, adopt additional regulations or revise existing regulations, or take other actions which may prevent or delay approval or clearance of our products under development or impact our ability to modify our currently cleared products on a timely basis. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the program, and in January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices. The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as bolster patient safety. In addition, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical"Medical Device Regulatory Improvements”Improvements" and miscellaneous reforms which are further intended to clarify and improve medical device regulation both pre- and post-approval.
Even after we have obtained the proper regulatory clearance or approval to market a product, we have ongoing responsibilities under FDA regulations. The failure to comply with applicable regulations could jeopardize our ability to sell our products and result in enforcement actions such as:
| ● | warning letters; |
| ● | fines; |
| ● | injunctions; |
| ● | civil penalties; |
| ● | termination of distribution; |
| ● | recalls or seizures of products; |
| ● | delays in the introduction of products into the market; |
| ● | total or partial suspension of production; |
| ● | refusal to grant future clearances or approvals; |
| ● | withdrawals or suspensions of current clearances or approvals, resulting in prohibitions on sales of our products; and |
| ● | in the most serious cases, criminal penalties. |
Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, results of operations and financial condition.
27
Modifications to our currently FDA-cleared products or the introduction of new products may require new regulatory clearances or approvals or require us to recall or cease marketing of our current products until clearances or approvals are obtained.
Our Renaissance system hasSurgical Guidance Systems have received marketing clearance from the FDA based on 510(k) applications. See “Item"Item 4. Information on the Company –- B. Business Overview –- Regulatory Requirements of the U.S. Food and Drug Administration.”" We have not been required by the FDA to obtain PMA nor to conduct any clinical trials in support of these applications. Modifications to our products, however, may require new regulatory approvals or clearances or require us to recall or cease marketing the modified products until these clearances or approvals are obtained. Any modification to one of our 510(k) cleared products that would constitute a major change in its intended use, or any change that could significantly affect the safety or effectiveness of the device would require us to obtain a new 510(k) marketing clearance and may even, in some circumstances, require the submission of a PMA application, if the change raises complex or novel scientific issues or the product has a new intended use. The FDA requires every manufacturer to make the determination regarding the need for a new 510(k) submission in the first instance, but the FDA may review any manufacturer’smanufacturer's decision. The latest 510(k) marketing clearance for Renaissance expands the indication for use of Renaissance to brain surgeries, an application which has not yet been commercially released.surgeries. We may continue to make additional modifications in the future to Renaissance without seeking additional clearances or approvals if we believe such clearances or approvals are not necessary. It is expected that the FDA will introduce stringent new changes to existing policy and practices regarding the assessment of whether a new 510(k) is required for changes or modifications to existing devices. For example, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the program, and in January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices. Most recently, on July 9, 2012, FDASIA was enacted which, among other requirements, obligates the FDA to prepare a report for Congress on the FDA’sFDA's approach for determining when a new 510(k) will be required for modifications or changes to a previously cleared device. After submitting this report, the FDA is expected to issue revised guidance to assist device manufacturers in making this determination. Until then, manufacturers may continue to adhere to the FDA’sFDA's 1997 guidance on this topic when making a determination as to whether or not a new 510(k) is required for a change or modification to a device, but the practical impact of the FDA’sFDA's continuing scrutiny of these issues remains unclear. If the FDA disagrees with our past or future decisions not to seek a new 510(k) for changes or modifications to existing devices and requires new clearances or approvals, we may be required to recall and stop marketing our products as modified, which could require us to redesign our products, conduct clinical trials to support any modifications, and pay significant regulatory fines or penalties. In addition, the FDA may not approve or clear our products for the indications that are necessary or desirable for successful commercialization or could require clinical trials to support any modifications. Any delay or failure in obtaining required clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our future growth. Any of these actions would harm our operating results.
Moreover, clearances and approvals are subject to continual review, and the later discovery of previously unknown problems can result in product labeling restrictions or withdrawal of the product from the market. The loss of previously received approvals or clearances, or the failure to comply with existing or future regulatory requirements could reduce our sales profitability and future growth prospects.
We are currently required by the FDA to refrain from using certain terms to label and market our products, which could harm our ability to market and commercialize our current or future products.
The FDA’sFDA's 510(k) clearances include a specification of a product’sproduct's indication for use, and also authorize specific labeling and marketing claims and language in promotional materials for the U.S. market. Failure to conform with the specific cleared labeling of our productproducts or the use of the term Robot"Robot" in our product or corporate promotional material would be considered mislabeling or off-label promotion which might lead to:
| ● | untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
| ● | customer notifications, refunds, detention or seizure of our products; |
| ● | refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products; |
| ● | withdrawing 510(k) marketing clearances |
| ● | refusing to provide Certificates for Foreign Government; |
| ● | refusing to grant export approval for our products; or |
| ● | pursuing criminal prosecution. |
Any of these sanctions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’customers' demands. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and financial condition.
28
We may inadvertently breach government and contractual privacy laws and obligations.
In the course of performing our business, we obtain certain confidential patient health information, such as patient names and dates of Renaissancesurgical procedures. In the event of an inadvertent disclosure, we could be subject to enforcement measures, including civil and criminal penalties and fines for violations of the privacy or security standards, such as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, and their respective implementing regulations, including the final omnibus rule published on January 25, 2013, or subject to violation of contractual claims of customers.
Failure to obtain regulatory approval in additional foreign jurisdictions will prevent us from expanding the commercialization of our products abroad.
To be able to market and sell our products in most countries other than the United States, we must obtain regulatory approvals and comply with the regulations of those countries. These regulations, including the requirements for approvals and the time required for regulatory review, vary from country to country. Clearance or approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA clearance or approval. Obtaining and maintaining foreign regulatory approvals are expensive, and we cannot be certain that we will receive regulatory approvals in any foreign country in which we plan to market our products, on a timely basis, if at all. If we fail to obtain or maintain regulatory approval in any foreign country in which we plan to market our products on a timely basis, or at all, our ability to generate revenue will be harmed.
As we modify existing products or develop new products in the future, including new accessories, we apply for permission to affix to such products a European Union CE mark, which is a legal requirement for medical devices intended for sale in the European Union. In addition, we will be subject to annual regulatory audits in order to maintain those CE mark permissions. We do not know whether we will be able to continue to affix the CE mark for new or modified products or that we will continue to meet the quality and safety standards required to maintain the permissions we have already received. If we are unable to maintain permission to affix the CE mark to our products, we will no longer be able to sell our products in member countries of the European Union or other areas of the world that require CE marking for the marketing and distribution of medical devices.
If we or our third-party manufacturers or suppliers fail to comply with the FDA’sFDA's Quality System Regulation, our manufacturing operations could be interrupted and our product sales and operating results could suffer.
We and some of our third-party manufacturers and suppliers are required to comply with the FDA’sFDA's Quality System Regulation, or QSR, which covers the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. We and our manufacturers and suppliers are also subject to the regulations of foreign jurisdictions regarding the manufacturing process if we or our distributors market our products abroad. We continue to monitor our quality management in order to improve our overall level of compliance. Our facilities are subject to periodic and unannounced inspection by U.S. and foreign regulatory agencies, including notified bodies, to audit compliance with the QSR and comparable foreign regulations. If our facilities or those of our manufacturers or suppliers are found to be in violation of applicable laws and regulations, or if we or our manufacturers or suppliers fail to take satisfactory corrective action in response to an adverse inspection, the regulatory authority could take enforcement action, including any of the following sanctions:
| ● | untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
| ● | customer notifications or repair, replacement, refunds, detention or seizure of our products; |
| ● | operating restrictions or partial suspension or total shutdown of production; |
| ● | refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products; |
| ● | withdrawing 510(k) marketing clearances that have already been granted, or PMA approvals that |
| ● | refusing to provide Certificates for Foreign Government; |
| ● | refusing to grant export approval for our products; or |
| ● | pursuing criminal prosecution. |
Any of these sanctions could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’customers' demands, and could have a material adverse effect on our reputation, business, results of operations and financial condition. We may also be required to bear other costs or take other actions that may have a negative impact on our future sales and our ability to generate profits.
Our products may in the future be subject to product actions that could harm our reputation, business operations and financial results.
Manufacturers may, on their own initiative, initiate actions, including a non-reportable market withdrawal or a reportable product recall, for the purpose of correcting a material deficiency, improving device performance, or other reasons. Additionally, the FDA and similar foreign health or governmental authorities have the authority to require an involuntary recall of commercialized products in the event of material deficiencies or defects in design, manufacturing or labeling or in the event that a product poses an unacceptable risk to health. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that a device intended for human use would cause serious, adverse health consequences or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Product actions involving any of our products would divert managerial and financial resources and have an adverse effect on our financial condition and results of operations.
Companies are required to maintain certain records of actions, even if they determine such actions are not reportable to the FDA. If we determine that certain actions do not require notification of the FDA, the FDA may disagree with our determinations and require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were conducted or failing to timely report or initiate a reportable product action.
Depending on the corrective action we take to redress a product’sproduct's deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties orand civil or criminal fines.
If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under FDA regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. In addition, all manufacturers placing medical devices in European Union markets are legally bound to report any serious or potentially serious incidents involving devices they produce or sell to the relevant authority in whose jurisdiction the incident occurred. We anticipate that in the future it is likely that we may experience events that would require reporting to the FDA pursuant to the MDR regulations. Any adverse event involving our products could result in future voluntary corrective actions, such as product actions or customer notifications, or agency actions, such as inspection, mandatory recall or other enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.
In addition, as the frequency of use of Renaissanceour Surgical Guidance Systems increases and our business continues to grow, we may experience an increase in the number of incidents that could lead to MDR reports which we might need to file. The decision to file an MDR involves a judgment by us as the manufacturer. We have made decisions that certain types of events are not reportable under the MDR regulations; however, there can be no assurance that the FDA will agree with our decisions. If we fail to report MDRs to the FDA within the required timeframes, or at all, or if the FDA disagrees with any of our determinations regarding the reportability of certain events, the FDA could take enforcement actions against us, which could have an adverse impact on our reputation and financial results.
30
We may be subject to fines, penalties or injunctions if we are determined to be promoting the use of our products for unapproved or “off-label”"off-label" uses, resulting in damage to our reputation and business.
Our promotional materials and training methods must comply with FDA and other applicable laws and regulations, including the prohibition of the promotion of a medical device for a use that has not been cleared or approved by FDA. Use of a device outside its cleared or approved indications is known as “off-label”"off-label" use. Physicians may use our products off-label, as the FDA does not restrict or regulate a physician’sphysician's choice of treatment within the practice of medicine. If the FDA determines that our promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, which could have an adverse impact on our reputation and financial results. In addition, any FDA action could trigger scrutiny by other federal and state regulatory agencies. Such scrutiny could also occur, regardless of FDA action.
We may be subject to fines, penalties, or licensure requirements, or legal liability, if it is determined that our Renaissance clinical sales representatives and other employees are practicing medicine without a license.
State laws prohibit the practice of medicine without a license. Our clinical sales representatives, or CSRs, provide preoperative and intraoperative clinical and technical support to our customers, including assistance setting up the equipment, participation in the preoperative planning process, and facilitation of the surgeon’ssurgeon's use of Renaissanceour Surgical Guidance Systems during surgery. We do not believe that ourOur CSRs are not engaged in the practice of medicine, but rather are assisting our customers in the safe and proper usage of our equipment and products. Nevertheless, a governmental authority or individual actor could allege the activities of our CSRs to constitute the practice of medicine. A state may seek to have us discontinue the services provided by our CSRs or subject us to fine, penalties or licensure requirements. Any determination that our CSRs are practicing medicine without a license may result in significant liability to us.
The application of state certificate of need regulations could substantially limit our ability to sell our products and grow our business.
Some states require healthcare providers to obtain a certificate of need or similar regulatory approval prior to the acquisition of high-cost capital equipment such as Renaissance.our Surgical Guidance Systems. In some states, the process required of our customers to obtain this certificate is lengthy and could result in a longer sales cycle for Renaissance.our Surgical Guidance Systems. Further, in many cases, only a limited number of these certificates are available. As a result, our customers may be unable to obtain a certificate of need for the purchase of our Renaissance systemour Surgical Guidance Systems, which could cause our sales to decline.
Federal regulatory reforms may adversely affect our ability to sell our products profitably.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a medical device. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.
Without limiting the generality of the foregoing, Congress has enacted, and the President signed into law, the Food and Drug Administration Amendments Act of 2007, or the Amendments. This law requires, among other things, that the FDA propose, and ultimately implement, regulations that will require manufacturers to label medical devices with unique identifiers unless a waiver is received from the FDA. Once implemented, compliance with those regulations may require us to take additional steps in the manufacture of our products and labeling. These steps may require additional resources and could be costly. In addition, the Amendments will require us to, among other things, pay annual establishment registration fees to the FDA for each of our FDA registered facilities and certify to the clinical trial reporting provisions contained in the Amendments.
31
We may be subject, directly or indirectly, to federal and state healthcare regulations and could face substantial penalties if we are unable to fully comply with such regulations and laws.
While we do not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, many healthcare laws and regulations apply to our business. For example, we could be subject to patient privacy regulation and enforcement by both the federal government and the states in which we conduct our business. There are multiple healthcare laws and regulations that may affect our ability to operate. New laws and regulations are being continually proposed.proposed and adopted. For example, the PPACA imposes new tracking reporting and disclosure requirements on device manufacturers for any “transfer"transfer of value”value" made or distributed to physicians and teaching hospitals. Device manufacturers were required to begin collecting data on August 1, 2013, register with CMS by March 31, 2014 and will beare required to submit certain reports to CMS by May 30, 2014 (anddisclosing payments and transfers of value made to physicians and teaching hospitals in the preceding calendar year on or before the 90th day of each subsequent calendar year). The implementation of the infrastructure to comply with these bills and regulations could be costly and anyyear. Any failure to provide the required information may result in civil monetary penalties. There are also a number of states that require the establishment of healthcare compliance programs or reporting of certain compensation or benefits provided to healthcare professionals. See “Item"Item 4. Information on the Company –- B. Business Overview –- Fraud and Abuse Laws - Anti-Kickback Statutes and Federal False Claims Act.”"
The Sunshine Act has imposed newimposes reporting and disclosure requirements for drug and device manufacturers with regard to payments or other transfers of value made to certain practitioners (including physicians, dentists and teaching hospitals), and for such manufacturers and for group purchasing organizations, with regard to certain ownership interests held by physicians in the reporting entity. On February 1, 2013, CMS releasedor before the final rule to implement the Sunshine Act. Under this rule, data collection activities began on August 1, 2013, and first disclosure reports were due by March 31, 2014 for the period August 1, 2013 through December 31, 2013. As required90th day of each calendar year, manufacturers covered under the Sunshine Act will be required to submit a report disclosing payments and transfers of value made in the preceding calendar year, and CMS then will publish information from these reportsthe reported data on a publicly available website, including amounts transferred and physician, dentist and teaching hospital identities, which accordingor before June 30 of the reporting year. In addition, medical device companies are also required to CMS will be availablereport payments to the public by September 30, 2014.government on an annual basis.
Additionally, we have already started our initial registration with CMS, our compliance withimplemented a series of policies and procedures for employees involved in the new final rule imposes additional costsdata collection process, and have systems in place to capture the necessary data. We have also established policies and procedures to ensure that data was reported completely, in the correct format, and on us.time. Despite these policies and procedures, we cannot assure you that we will collect and report all data accurately and in a timely manner. If we fail to accurately or timely report this information, we could suffer severe penalties, including fines.
If we fail to comply with federal or state anti-kickback laws, we could be subject to criminal and civil penalties, loss of licenses and exclusion from Medicare, Medicaid and other federal and state healthcare programs, which could have a material adverse effect on our business, financial condition and results of operations.
Section 1128B(b) of the Social Security Act, or the SSA, commonly referred to as the “Anti-Kickback"Anti-Kickback Statute,”" prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or services payable by the Medicare and Medicaid programs or any other federally funded healthcare program. The Anti-Kickback Statute is very broad in scope, and many of its provisions have not been uniformly or definitively interpreted by courts or regulations.
We have arrangements with surgeons, hospitals and other entities which may be subject to scrutiny. For example, we have consulting agreements with spine surgeons and neurosurgeons using or considering the use of our present and future Renaissance system,Surgical Guidance Systems, for assistance in product development, and professional training and education, among other things. Payment for some of these consulting services has been in the form of stock options rather than per hour or per diem amounts that would require verification of time worked. We may continue in the future to make payment for these consulting services in the form of royalties or also possibly in the form of part-time employment. In addition, various agencies may view these arrangements with our customers, including the provision of marketing grants to customers for the purposes of training surgeons and the provision of accessories at no charge or discounted prices with the purchase of our Renaissance systemSurgical Guidance Systems, as not fully complying with federal and state fraud and abuse laws. To the extent we are found to not be in compliance, we could face potentially significant fines and penalties in addition to other more significant sanctions and we may be required to restructure our operations.
32
Violations of the Anti-Kickback Statute and similar state laws may result in significant fines, imprisonment and exclusion from the Medicare, Medicaid and other federal or state healthcare programs. Such fines and exclusion could have a material adverse effect on our business, financial condition and results of operations. While we believe that our arrangements with physician consultants in product development and product training and education do not violate the law, there can be no assurance that federal or state regulatory authorities will not challenge these arrangements under anti-kickback laws. See “Item"Item 4. Information on the Company B. Business Overview – Fraud and Abuse Laws - Anti-Kickback Statutes and Federal False Claims Act.”"
The orthopedic medical device industry is, and in recent years has been, under heightened scrutiny.
The orthopedic medical device industry is, and in recent years has been, under heightened scrutiny as the subject of government investigations and enforcement actions involving manufacturers who allegedly offered unlawful inducements to potential or existing customers in an attempt to procure their business, specifically including arrangements with physician consultants.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us, including anti bribery laws such as the FCPA, the Israeli Penal Code, and the domestic implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, we may be subject to penalties, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of our operations. Any penalties, damages, fines, exclusions, curtailment or restructuring of our operations could adversely affect our ability to operate our business and our financial results. The risk of our being found in violation of these laws is increased by the fact that many of these laws are broad and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’smanagement's attention from the operation of our business. If the surgeons or other providers or entities with whomwhich we do business are found to be non-compliant with applicable laws, they may be subject to sanctions, which could also have a negative impact on our business.
Risks Relating Primarily to Our Location in Israel
Our headquarters and other significant operations are located in Israel and, therefore, our results may be adversely affected by military instability in Israel.
Our executive offices are located in Israel. In addition, the majority of our officers and directors are residents of Israel. Accordingly, geopolitical and/or military conditions in Israel and its region may directly or indirectly affect our business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its neighboring countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its trading partners could adversely affect our operations and results of operations. During the summer of 2014 and in November 2012, Israel was engaged in an armed conflictconflicts with a militia group and political party, which controls the Gaza Strip, and during the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party. These conflicts involved missile strikes against civilian targets in various parts of northern Israel, including areas in which our employees and consultants are located, and negatively affected business conditions in Israel. An escalation in tension and violence between Israel and the militant Hamas movement (which controls the Gaza Strip) and other Palestinian Arab groups, culminated with Israel’sIsrael's military campaign in Gaza in December 2008, November 2012 and again in November 2012the summer of 2014 in an endeavor to prevent continued rocket attacks against Israel’sIsrael's southern towns. In addition, Israel faces threats from more distant neighbors, in particular, Iran, an ally of Hezbollah and Hamas. The United States has threatened Syria, another ally of Iran, with military action and there is a risk that as a result of such military confrontation, Israel will be attacked.
Popular uprisings in various countries in the Middle East and North Africa are affecting the political stability of those countries. Such instability may lead to deterioration in the political and trade relationships that exist between the State of Israel and these countries. Furthermore, several countries, principally in the Middle East, restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in the region continue or intensify. Such restrictions may seriously limit our ability to sell our products to customers in those countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturns in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us. Similarly, Israeli corporations are limited in conducting business with entities from several countries. For example, in 2008, the Israeli legislature provided a law forbidding any investments in entities that transact business with Iran.
33
Any armed conflicts, terrorist activities or political instability in the region could adversely affect business conditions, and could harm our results of operations and could make it more difficult for us to raise capital. Parties with whom we do business have sometimes declined to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary in order to meet our business partners face to face.
Our commercial insurance does not cover losses that may occur as a result of an event associated with the security situation in the Middle East. Although the Israeli government is currently committed to covering the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure that this government coverage will be maintained, or if maintained, will be sufficient to compensate us fully for damages incurred. Any losses or damages incurred by us could have a material adverse effect on our business.
Our operations may be disrupted as a result of the obligation of management or key personnel to perform military service.
Our male employees and consultants in Israel, including members of our senior management, may be obligated to perform up to one month, and in some cases longer periods, of annual military reserve duty until they reach the age of 4540 (or older, for citizens who hold certain positions in the Israeli armed forces reserves), and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be similar large-scale military reserve duty call-ups in the future. Our operations could be disrupted by the absence of a significant number of our officers, employees and consultants. Such disruption could materially adversely affect our business and operations.
Exchange rate fluctuations between the U.S. dollar and the NIS currencies may negatively affect our earnings.
We incur expenses both in U.S. dollars and NIS, but our financial statements are denominated in U.S. dollars. As a result, we are exposed to the risks that the NIS may appreciate relative to the U.S. dollar, or the NIS instead devalues relative to the U.S. dollar, and the inflation rate in Israel may exceed such rate of devaluation of the NIS, or that the timing of such devaluation may lag behind inflation in Israel. In any such event, the U.S. dollar cost of our operations in Israel would increase and our U.S. dollar-denominated results of operations would be adversely affected. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS against the U.S. dollar.
Our operations also could be adversely affected if we are unable to effectively hedgeprotect ourselves against currency fluctuations in the future. We engage in short-term currency hedging activities. These measures, however, may not adequately protect us from material adverse effects due to the impact of inflation in Israel and United States or from fluctuations in the relative values of the dollar and foreign currencies in which we transact business, and may result in a financial loss. For further information, see Item 5 “Operating"Operating and Financial Review and Prospects”Prospects" elsewhere in this annual report.
We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
Our investment program in Israel has been granted “Beneficiary Enterprise”"Beneficiary Enterprise" status and we are therefore eligible for significant tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959, or the Investment Law, which was significantly amended by an amendment effective April 1, 2005, or the 2005 Amendment, and further amended by an amendment effective January 1, 2011, or the 2011 Amendment.
For example, once we arereach profitability for tax purposes, we will be exempt from corporate tax for a period of two years and arewill be subject to a reduced corporate tax rate of between 10% and 25% for the remainder of the benefits period, depending on the level of foreign investment in our Company in each year.year and on the period of when profitability is reached.
In order to remain eligible for the tax benefits of an investment program that is implemented in accordance with the provisions of the Investment Law, referred to as an "Approved Enterprise", and Beneficiary Enterprise,or a "Beneficiary Enterprise", we must continue to meet certain conditions stipulated in the Investment Law and its regulations. If we do not meet these requirements, we may not be eligible to receive tax benefits and we could be required to refund any tax benefits that we may receive in the future, in whole or in part, with interest. Furthermore, the tax benefits available under the Investment Law may be terminated or reduced in the future. If these tax benefits are terminated, our Israeli taxable income would be subject to regular Israeli corporate tax rates. The standard corporate tax rate for Israeli companies in 20132016 was 25% and as of January 1, 2014 it is 26.5%. See “Item"Item 10. Additional Information –- E. Taxation.”"
Additionally, if we increase our activities outside of Israel (for example, through acquisitions) our expanded activities might not be eligible for inclusion in future Israeli tax benefit programs. Finally, in the event of a distribution of a dividend from the income that will be tax exempt under the Investment Law, in addition to withholding tax at a rate of 15% (or a reduced rate under an applicable double tax treaty), we will be subject to tax at the corporate tax rate applicable to our Approved Enterprise’sEnterprise's and Beneficiary Enterprise’sEnterprise's income on the amount distributed in accordance with the reduced corporate tax applicable to such profits. See “Item"Item 10. Additional Information —- E. Taxation.”"
Government authorities may question our tax positions or transfer pricing policies or change their laws in a manner that could increase our effective tax rate or otherwise harm our business.
We conduct operations with our SubsidiarySubsidiaries pursuant to transfer pricing arrangements. Transfer prices are prices that one company in a group of related companies charges to another member of the group for goods, services or the use of property. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that transfer prices be the same as those between unrelated companies dealing at arms’arms' length and that contemporaneous documentation is maintained to support the transfer prices. While we believe we have proper transfer pricing arrangements, our transfer pricing procedures are not binding on applicable tax authorities. Tax laws are continually changing and are subject to the interpretation of government agencies, which from time to time review and audit our business in the jurisdictions in which we conduct business throughout the world. If regulators challenge our tax positions, corporate structure, transfer pricing arrangements or intercompany transfers, we may be subject to fines and payment of back taxes, our effective tax rate may increase and our financial condition, results of operations and cash flow could be materially adversely affected.
In the past, we received Israeli government grants for certain of our research and development activities. The terms of those grants may require us, in addition to payment of royalties, to satisfy specified conditions in order to manufacture products and transfer technologies outside of Israel. We may be required to pay penalties in addition to repayment of the grants.
Our research and development efforts, during the period between 2003 through 2010 were financed in part through royalty-bearing grants, in an amount of $1.3 million that we received from the OCS.IIA. With respect to such grants we are committed to paypaid royalties at a rate of 3% to 3.5% on sales proceeds up to the total amount of grants received, linked to the dollar and bearing interest at an annual rate of LIBOR applicable to dollar deposits. Even after paymentthough we have repaid in full of these amounts, we will still be required to comply with the requirements of the Israeli Encouragement of Industrial Research and Development Law, 1984, or the R&D Law, and related regulations, with respect to those past grants. When a company develops know-how, technology or products using OCSIIA grants, the terms of these grants and the R&D Law restrict the transfer outside of Israel of such know-how, and the manufacturing or manufacturing rights of such products, technologies or know-how, without the prior approval of the OCS.IIA. Therefore, if aspects of our technologies are deemed to have been developed with OCSIIA funding, the discretionary approval of an OCSIIA committee would be required for any transfer to third parties outside of Israel of know how or manufacturing or manufacturing rights related to those aspects of such technologies. Furthermore, the OCSIIA may impose certain conditions on any arrangement under which it permits us to transfer technology or development out of Israel or may not grant such approvals at all.
35
The transfer of OCS-supportedIIA-supported technology or know-how outside of Israel may involve the payment of significant amounts, depending upon the value of the transferred technology or know-how, the amount of OCSIIA support, the time of completion of the OCS-supportedIIA-supported research project and other factors. These restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with OCSIIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the OCS.IIA.
Provisions of Israeli law may delay, prevent or otherwise impede a merger with, or an acquisition of, our company, which could prevent a change of control, even when the terms of such a transaction are favorable to us and our shareholders.
Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a merger may not be consummated unless at least 50 days have passed from the date on which a merger proposal is filed by each merging company with the Israel Registrar of Companies and at least 30 days have passed from the date on which the shareholders of both merging companies have approved the merger. In addition, a majority of each class of securities of the target company must approve a merger. Moreover, a tender offer for all of a company’scompany's issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital. Completion of the tender offer also requires approval of a majority of the offerees that do not have a personal interest in the tender offer, unless, following consummation of the tender offer, the acquirer would hold at least 98% of the company’scompany's outstanding shares. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer, may, at any time within six months following the completion of the tender offer, petition an Israeli court to alter the consideration for the acquisition, unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek such appraisal rights.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to a shareholder whose country of residence does not have a tax treaty with Israel exempting such shareholder from Israeli tax. For example, Israeli tax law does not recognize tax-free share exchanges to the same extent as U.S. tax law. With respect to mergers, Israeli tax law allows for tax deferral in certain circumstances but makes the deferral contingent on the fulfillment of a number of conditions, including, in some cases, a holding period of two years from the date of the transaction during which sales and dispositions of shares of the participating companies are subject to certain restrictions. Moreover, with respect to certain share swap transactions, the tax deferral is limited in time, and when such time expires, the tax becomes payable even if no disposition of the shares has occurred.
These and other similar provisions could delay, prevent or impede an acquisition of us or our merger with another company, even if such an acquisition or merger would be beneficial to us or to our shareholders.
It may be difficult to enforce a judgment of a U.S. court against us and our officers and directors and the Israeli experts named in this annual report in Israel or the U.S., to assert United States securities laws claims in Israel or to serve process on our officers and directors and these experts.
We were incorporated in Israel. Substantially all of our executive officers and directors currently reside outside of the United States, and all of our assets and most of the assets of these persons are located outside of the United States. Therefore, a judgment obtained against us, or any of these persons, including a judgment based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not necessarily be enforced by an Israeli court. It also may be difficult to effectaffect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Additionally, it may be difficult for an investor, or any other person or entity, to initiate an action with respect to U.S. securities laws in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws reasoning that Israel is not the most appropriate forum in which to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law often involves the testimony of expert witnesses, which can be a time consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel that addresses the matters described above. As a result of the difficulty associated with enforcing a judgment against us in Israel, it may be impossible to collect any damages awarded by either a U.S. or foreign court.
36
The rights and responsibilities of a shareholder will be governed by Israeli law which differs in some material respects from the rights and responsibilities of shareholders of U.S. companies.
The rights and responsibilities of the holders of our Ordinary Shares are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders typical corporations incorporated in the United States. In particular, a shareholder of an Israeli company has certain duties to act in good faith and fairness towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at the general meeting of shareholders on matters such as amendments to a company’scompany's articles of association, increases in a company’scompany's authorized share capital, mergers and acquisitions and related party transactions requiring shareholder approval. In addition, a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our Ordinary Shares that are not typically imposed on shareholders of U.S. corporations.
Risks Related to an Investment in Our Shares and ADSs
We may be a “passive"passive foreign investment company”company", or PFIC, for U.S. federal income tax purposes in the current taxable year or may become one in any subsequent taxable year. There generally would be negative tax consequences for U.S. taxpayers that are holders of our Ordinary Shares or ADSs if we are or were to become a PFIC.
We will be treated as a PFIC for U.S. federal income tax purposes in any taxable year in which either (1) at least 75% of our gross income is “passive income”"passive income" or (2) on average at least 50% of our assets by value produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, certain dividends, interest, royalties, rents and gains from commodities and securities transactions and from the sale or exchange of property that gives rise to passive income. Passive income also includes amounts derived by reason of the temporary investment of funds, including those raised in a public offering. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account. We believe that we will not be a PFIC for our current taxable year and do not expect to become a PFIC in the foreseeable future. The tests for determining PFIC status are applied annually, and it is difficult to make accurate projections of future income and assets which are relevant to this determination. In addition, our PFIC status may depend in part on the market value of our Ordinary Shares. Accordingly, there can be no assurance that we currently are not or will not become a PFIC in the future. If we are a PFIC in any taxable year during which a U.S. taxpayer holds our Ordinary Shares or ADSs, such U.S. taxpayer would be subject to certain adverse U.S. federal income tax rules. In particular, if the U.S. taxpayer did not make an election to treat us as a “qualified"qualified electing fund,”" or QEF, or make a “mark-to-market”"mark-to-market" election, then “excess distributions”"excess distributions" to the U.S. taxpayer, and any gain realized on the sale or other disposition of our Ordinary Shares or ADSs by the U.S. taxpayer: (1) would be allocated ratably over the U.S. taxpayer’staxpayer's holding period for the Ordinary Shares (or ADSs, as the case may be); (2) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. In addition, if the IRS determines that we are a PFIC for a year with respect to which we have determined that we were not a PFIC, it may be too late for a U.S. taxpayer to make a timely QEF or mark-to-market election. U.S. taxpayers that have held our Ordinary Shares or ADSs during a period when we were a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC in subsequent years, subject to exceptions for U.S. taxpayer who made a timely QEF or mark-to-market election. A U.S. taxpayer can make a QEF election by completing the relevant portions of and filing IRS Form 8621 in accordance with the instructions thereto. Although we have no obligation to do so, we intend to notify U.S. taxpayers that hold our Ordinary Shares or ADSs if we believe we will be treated as a PFIC for any taxable year in order to enable U.S. taxpayers to consider whether to make a QEF election. In addition, we intend to furnish such U.S. taxpayers annually with information needed in order to complete IRS Form 8621 and to make and maintain a valid QEF election for any year in which we or any of our subsidiariesSubsidiaries are a PFIC. U.S. taxpayers that hold our Ordinary Shares or ADSs are strongly urged to consult their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner, and consequences to them of making a QEF or mark-to-market election with respect to our Ordinary Shares or ADSs in the event that we are a PFIC. See “Item"Item 10. Additional Information –- E. Taxation —U.S.- U.S. Federal Income Tax Considerations”Considerations" for additional information.
The market prices of our Ordinary Shares and ADSs are subject to fluctuation, which could result in substantial losses by our investors.
The stock market in general and the market prices of our Ordinary Shares on the TASE and our ADSs on NASDAQ, in particular, are subject to fluctuation, and changes in these prices may be unrelated to our operating performance. The market price of our Ordinary Shares and ADSs are subject to a number of factors, including:
| ● | announcements of technological innovations or new products by us or others; |
| ● | announcements by us of significant acquisitions, strategic partnerships, in-licensing, out-licensing, joint ventures or capital commitments; |
| ● | expiration or terminations of licenses, research contracts or other collaboration agreements; |
| ● | public concern as to the safety of our equipment we sell; |
| ● | general market conditions; |
| ● | the volatility of market prices for shares of medical devices companies generally; |
| ● | success or failure of research and development projects; |
| ● | departure of key personnel; |
| ● | developments concerning intellectual property rights; |
| ● | developments concerning regulatory approvals; |
| ● | developments concerning standard-of-care in spine surgeries; |
| ● | variations in our and our |
| ● | changes in revenues, gross profits and earnings announced by the |
| ● | changes in estimates or recommendations by securities analysts, if our Ordinary Shares or the ADSs are covered by analysts; |
| ● | changes in government regulations or patent decisions; and |
| ● | general market conditions and other factors, including factors unrelated to our operating performance. |
These factors may materially and adversely affect the market price of our Ordinary Shares and the ADSs and result in substantial losses by our investors.
38
We do not know whether a market for our ADSs will be sustained or what the trading price of our ADSs will be and as a result it may be difficult for you to sell your ADSs.
Although our ADSs now trade on NASDAQ, an active trading market for our ADSs may not be sustained. It may be difficult for you to sell your ADSs without depressing the market price for the ADSs or at all. As a result of these and other factors, you may not be able to sell your ADSs at or above the offeringyour purchase price or at all. Further, an inactive market may also impair our ability to raise capital by selling ADSs and Ordinary Shares and may impair our ability to enter into strategic partnerships or acquire companies or products by using our Ordinary Shares as consideration.
Future sales of our Ordinary Shares or ADSs could reduce the market price of our Ordinary Shares and ADSs.
Substantial sales of our Ordinary Shares or ADSs, either on the TASE or on NASDAQ may cause the market price of our Ordinary Shares or ADSs to decline. All of our outstanding Ordinary Shares are registered and available for sale in Israel. Sales by us or our security holders of substantial amounts of our Ordinary Shares or ADSs, or the perception that these sales may occur in the future, could cause a reduction in the market price of our Ordinary Shares or ADSs.
The issuance of any additional Ordinary Shares, any additional ADSs, or any securities that are exercisable for or convertible into our Ordinary Shares or ADSs, may have an adverse effect on the market price of our Ordinary Shares and ADSs and will have a dilutive effect on our existing shareholders and holders of ADSs.
We do not intend to pay any cash dividends on our Ordinary Shares in the foreseeable future and, therefore, any return on your investment in our Ordinary Shares or ADSs must come from increases in the value and trading price of our Ordinary Shares and ADSs.
We have never declared or paid cash dividends on our Ordinary Shares and do not anticipate that we will pay any cash dividends on our Ordinary Shares in the foreseeable future; therefore, any return on your investment in our Ordinary Shares or ADSs must come from increases in the value and trading price of our Ordinary Shares and ADSs.
We intend to retain our earnings to finance the development and expenses of our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our board of directors may deem relevant.
You may not receive the same distributions or dividends as those we make to the holders of our Ordinary Shares, and, in some limited circumstances, you may not receive dividends or other distributions on our Ordinary Shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
The depositary for the ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities underlying the ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act, but that are not properly registered or distributed under an applicable exemption from registration. In addition, conversion into U.S. dollars from foreign currency that was part of a dividend made in respect of deposited Ordinary Shares may require the approval or license of, or a filing with, any government or agency thereof, which may be unobtainable. In these cases, the depositary may determine not to distribute such property and hold it as “deposited securities”"deposited securities" or may seek to effect a substitute dividend or distribution, including net cash proceeds from the sale of the dividends that the depositary deems an equitable and practicable substitute. We have no obligation to register under U.S. securities laws any ADSs, Ordinary Shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, Ordinary Shares, rights or anything else to holders of ADSs. In addition, the depositary may withhold from such dividends or distributions its fees and an amount on account of taxes or other governmental charges to the extent the depositary believes it is required to make such withholding. This means that you may not receive the same distributions or dividends as those we make to the holders of our Ordinary Shares, and, in some limited circumstances, you may not receive any value for such distributions or dividends if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.
39
Holders of ADSs must act through the depositary to exercise their rights as shareholders of our company.
Holders of our ADSs do not have the same rights of our shareholders and may only exercise the voting rights with respect to the underlying Ordinary Shares in accordance with the provisions of the deposit agreement for the ADSs. Under Israeli law, the minimum notice period required to convene a shareholders meeting is no less than 35 or 21 calendar days, depending on the proposals on the agenda for the shareholders meeting. When a shareholder meeting is convened, holders of our ADSs may not receive sufficient notice of a shareholders’shareholders' meeting to permit them to withdraw their Ordinary Shares to allow them to cast their vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to holders of our ADSs or carry out their voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to holders of our ADSs in a timely manner, but we cannot assure holders that they will receive the voting materials in time to ensure that they can instruct the depositary to vote their ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, holders of our ADSs may not be able to exercise their right to vote and they may lack recourse if their ADSs are not voted as they requested. In addition, in the capacity as a holder of ADSs, they will not be able to call a shareholders’shareholders' meeting.
Raising additional capital by issuing securities may cause dilution to existing shareholders.
We may need to raise substantial future capital to continue to complete commercialization of our products and the research and development and clinical and regulatory activities necessary to develop new products. Our future capital requirements will depend on many factors, including:
| ● |
| ● |
| ● |
| ● |
| ● |
| ● |
| ● |
| ● | the terms and timing of any collaborative, licensing, or other arrangements that we |
| ● | the acquisition of businesses, products |
| ● |
If we raise additional funds by issuing equity or convertible debt securities, we will reduce the percentage ownership of our then-existing shareholders, and these securities may have rights, preferences or privileges senior to those of our existing shareholders.
40
We are an “emerging"emerging growth company,”" and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
We are an “emerging"emerging growth company,”" as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and may remain an emerging growth company for up to five years.years from our initial public offering in the United States which occurred in 2013. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’sauditor's report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved, to the extent applicable. In this annual report, we have included certain information about executive compensation related information that is not required by an emerging growth company. We cannot predict whether investors will find our Ordinary Shares or ADSs less attractive if we rely on these exemptions. If some investors find our Ordinary Shares or ADSs less attractive as a result, there may be a less active trading market for our Ordinary Shares or the ADSs and the price of our Ordinary Shares or the ADSs may be more volatile.
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We chose to “opt out”"opt out" of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period is irrevocable.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
The trading market for our Ordinary Shares and ADSs depends on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us, or provide favorable coverage. If one or more analysts downgrade our stock or negatively change their opinion of our Ordinary Shares and ADSs, the price of our Ordinary Shares and ADSs would likely decline. In addition, if one or more analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Risks Associated with the NASDAQ Listing of the ADSs
Our Ordinary Shares and ADSs are traded on different markets and this may result in price variations.
Our Ordinary Shares have been traded on the TASE since August 2007. The ADSs have been traded on the NASDAQ Capital Market since May 2013 and are currently traded on the NASDAQ Global Market. Trading in those securities on those markets takes place in different currencies (dollars on NASDAQ and NIS on the TASE), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Israel). The trading prices of our securities on these two markets may differ due to these and other factors. Any decrease in the price of our securities on one of these markets could cause a decrease in the trading price of our securities on the other market.
We will incur additional increased costs as a result of the listing of our ADSs for trading on NASDAQ, and our management is required to devote substantial time to new compliance initiatives and reporting requirements.
As a public company in the United States, we incur significant accounting, legal and other expenses as a result of the listingtrading of the ADSs on NASDAQ in May 2013.NASDAQ. These include costs associated with corporate governance requirements of the SEC and NASDAQ rules, as well as requirements under Section 404 and other provisions of the Sarbanes-Oxley Act. These rules and regulations have increased ourgenerate legal and financial compliance costs, introduced new costs such as investor relations costs, stock exchange listing fees and shareholder reporting costs, and made some activities more time consuming and costly. Any future changes in the laws and regulations affecting public companies in the United States and Israel, including Section 404 and other provisions of the Sarbanes-Oxley Act, the rules and regulations adopted by the SEC and the rules of NASDAQ, as well as applicable Israeli reporting requirements, for so long as they apply to us, will result in increased costs to us as we respond to such changes. These laws, rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.
41
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of applicable SEC and NASDAQ requirements, which may result in less protection than is accorded to investors under rules applicable to domestic issuers.
As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the rules of NASDAQ for domestic issuers. For instance, we may follow home country practice in Israel with regard to, among other things, composition of the board of directors, director nomination procedures, approval of compensation of officers, and quorum at shareholders’shareholders' meetings. In addition, we will expect to follow our home country law, instead of the rules of NASDAQ which require that we obtain shareholder approval, for certain dilutive events, such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company,Company, certain transactions other than a public offering involving issuances of a 20% or more interest in the companyCompany and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a U.S. company listed on NASDAQ may provide less protection than is accorded to investors under the rules of NASDAQ applicable to domestic issuers.
In addition, as a foreign private issuer, we are exempt from the rules and regulations under the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as domestic companies whose securities are registered under the Exchange Act.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
We are a “foreign"foreign private issuer,”" as such term is defined in Rule 405 under the Securities Act, and therefore, we are not required to comply with all the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations. Under Rule 405, the determination of foreign private issuer status is made annually on the last business day of an issuer’sissuer's most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 30, 2014.2017.
In the future, we would lose our foreign private issuer status if a majority of our shareholders, directors or management areis comprised of U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC which are more detailed, more extensive and extensiveare subject to more demanding deadlines than the forms available to a foreign private issuer. For example, the annual report on Form 10-K requires domestic issuers to disclose executive compensation information on an individual basis with specific disclosure regarding the domestic compensation philosophy, objectives, annual total compensation (base salary, bonus, equity compensation) and potential payments in connection with change in control, retirement, death or disability, while the SEC forms applicable to foreign private issuers permit them to disclose compensation information on an aggregate basis if executive compensation disclosure on an individual basis is not required or otherwise has not been provided in the issuer’s home jurisdiction. We disclose individual compensation information, but this disclosure is not as comprehensive as that required of U.S. domestic issuers since we are not required to disclose more detailed information in Israel. We intend to continue this practice as long as it is permitted under the SEC’s rules and Israel’s rules do not require more detailed disclosure. WeIf we lose our foreign private issuer status, we will have to file quarterly reports on Form 10-Q and we will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. We may also be required to modify certain of our policies to comply with good governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on NASDAQ that are available to foreign private issuers.
42
If we are unable to continue to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, once they apply to us, or our internal control over financial reporting is not effective, the reliability of our financial statements may be questioned and the price of our Ordinary Shares and the ADSs may suffer.
Section 404 of the Sarbanes-Oxley Act requires a company subject to the reporting requirements of the U.S. securities laws to do aan annual comprehensive evaluation of its and its subsidiaries’subsidiaries' internal control over financial reporting. To comply with this statute, we will beare required to document and test our internal control procedures; our management will beis required to assess and issue a report concerning our internal control over financial reporting. In addition, our independent registered public accounting firm may be required to issue an opinion on the effectiveness of our internal control over financial reporting at a later date.
The continuous process of strengthening our internal controls and complying with Section 404 is complicated and time-consuming. Furthermore, as our business continues to grow both domestically and internationally, our internal controls will become more complex and will require significantly more resources and attention to ensure our internal controls remain effective overall. During the course of its testing, our management may identify material weaknesses or significant deficiencies, which may not be remedied in a timely manner. If our management cannot favorably assess the effectiveness of our internal control over financial reporting, or if our independent registered public accounting firm identifies material weaknesses in our internal control, investor confidence in our financial results may weaken, and the market price of our securities may suffer.
Our legal and commercial name is Mazor Robotics Ltd. We were incorporated in the State of Israel on September 12, 2000. In July 2003, we changed our name from Masor Surgical Technologies Ltd. to Mazor Surgical Technologies Ltd., and in 2010 we changed our name back to Mazor Robotics Ltd. In August 2007, we completed our initial public offering in Israel, and our ordinary shares have since been traded on the TASE, under the symbol “MZOR.” In May 2013, ADSs representing our Ordinary Shares commenced trading on the NASDAQ Capital Market under the trading symbol “MZOR” and are currently traded on the NASDAQ Global Market. Each ADS represents two of our Ordinary Shares.
We are a public limited liability company and operate under the provisions of the Companies Law. Our registered office and principal place of business are located at 7 Haeshel St.,5 Shacham Street, North Industrial Park, Caesarea, Park South 3088900, Israel. Our telephone number in Israel is +972 -4-618 7100.+972-4-618-7100. Our website address is www.mazorrobotics.com.www.mazorrobotics.com. The information contained on our website or available through our website is not incorporated by reference into and should not be considered a part of this annual report and the reference to our website in this annual report is an inactive textual reference only.
In August 2004, we formed a wholly owned subsidiary in the State of Delaware under the name Mazor Surgical Technologies Inc. In October 2010, the U.S. Subsidiary changed its name to Mazor Robotics Inc. The U.S. Subsidiary has been appointed as our agent in the United States, and its registered office is located at 2711 Centerville Rd., Suite 400, Wilmington,, New Castle, DE 19808.
In August 2014, we formed a wholly owned subsidiary in Singapore under the name Mazor Robotics Pte. Ltd and its registered office is located at 10 Anson Road, #26-04 International Plaza, Singapore 079903. This Singaporean subsidiary has been established to accommodate the clinical service activities we provide to our surgical systems sites in the Asia-Pacific region.
We engage in the development, production, marketing and servicing of innovative medical devices for supporting surgical procedures in the field of orthopedics and neurosurgery. We are a leading innovator in spine and brain surgery and pioneered cutting-edge surgical guidance systems and complementary products in the spine and brain surgery market. These products may provide a safer surgical environment for patients, surgeons and operating room staff.
We operate in the field of image-guidedcomputer assisted surgery (also known as CAS) that enables the use of surgical instruments with high precision and minimal invasiveness and that contributes to the safety of a wide range of surgical procedures. Our flagship product,Mazor Robotic’s core precision guidance technology that is implemented in the the Renaissance system and the Mazor X System is transforming spine surgery from freehand procedures to highly accurate, state-of-the-art, guided procedures that raise the standard of care with better clinical results. Our Renaissance system hasSurgical Guidance Systems have been used to perform thousands ofover 24,000 procedures worldwide (with over 45,000170,000 implants placed in those procedures) in a wide variety of spinal procedures, many of which would not have been attempted without this technology. We are continuing the development of the RenaissanceSurgical Guidance Systems platform for additional spine and brain surgery applications.
43
On May 18, 2016, we entered into two strategic agreements with Medtronic. One agreement is a two-phase, Exclusive Lead Sharing and Distribution Agreement which provides for co-promotion, co-development and, upon meeting certain milestones, potential global distribution of the Mazor X System, or the Distribution Agreement. The second agreement is a Purchase Agreement which provides for an equity investment by Medtronic, in Mazor. The Exclusive Lead Sharing and Distribution Agreement and the Purchase Agreement, or collectively, the Medtronic Agreements are aimed at accelerating our growth and market reach by leveraging the strategic partnership for commercialization of the Mazor X System and development of synergistic products. With the combined expertise and experience of our two companies, we believe we can transform spine surgery for the benefit of more patients and those who treat them.
On July 12, 2016, we unveiled the Mazor X system, followed by the commercial launch of the system in October 2016. The Mazor X system was developed with the goal of enhancing predictability and patient benefit, through the combination of analytical tools, multiple-source data, precision guidance, optical tracking, intra-op verification and connectivity technologies. The Mazor X platform is designed to expand the field of precision-guided spine surgery beyond trajectory guidance.
Principal Capital Expenditures
We had capital expenditures of approximately $343,000$4,263,000 in 2013, $459,0002016, $702,000 in 20122015 and $465,000$503,000 in 2011.2014. Our capital expenditures consisted mainly of the purchase of machinery and equipment, computersdevelopment costs capitalized to intangible asset, systems used for training and capitalized development costs.demonstration and leasehold improvements. We have financed our capital expenditures from our available cash and short term investment and equity offerings, and expect to continue to finance our capital expenditures in a similar manner in 2014. There are no significant2017. We expect our capital expenditures in progress by us.2017 will be approximately $1,000,000 and will include amounts expended towards manufacturing infrastructure.
| B. | Business Overview |
We are a medical device company developing and marketing innovative surgical guidance systems and complementary products. Our expertise is computerized and imaging-based systems, primarily in the field of spine surgery. Our Renaissance Surgical Guidance System, enablesSystems enable surgeons to advance from freehand surgical procedures to accurate, pre-planned, state-of-the-art, precision guided procedures. Our FDA-cleared and CE-marked Renaissance system isSurgical Guidance Systems are used in multiple types of spine surgeries, whether open or minimally invasive, for a variety of clinical indications. Our Mazor X System, our Renaissance system and its predecessor have been used in over 7,00024,000 spine surgeries, including fusion, correction of spinal deformities, biopsy collection, tumor excision and cement augmentations. Our Renaissance system hasSurgical Guidance Systems have the ability to improve clinical outcomes for patients, and may provide a safer surgical environment for surgeons and operating room staff by possible reduction of exposure to radiation.
The key elements of the Renaissance system include our RBT Device, which is a portable, computer-controlled Stewart platform that spatially positions and orients surgical tools, our Renaissance Work Station, a mobile workstation that houses our proprietary software, and several mounting platforms we have designed to serve as an interface between the patient and the RBT Device. OurThe core guidance technology implemented in the Renaissance system enables surgeons to perform procedures with a higher degree of accuracy and precision.precision compared to the current freehand standard of care. A pre-operative plan for each patient is developed by the surgeon using our proprietary software based on a standard three-dimensional, or 3D, computed tomography, or CT, image. The surgeon performs the procedure using surgical tools attached to the RBT Device and is guided by the RBT Device to a precise location and trajectory along the spine or in the brain in accordance with the pre-operative plan. At the beginning of the surgical procedure, an automatic 3D synchronization process independently registers the location of the system relative to the position of the patient’spatient's spine or in his brain and the pre-operative plan. Unlike conventional robotic surgery, where the robot performs the procedure guided by the surgeon, the Renaissance system guides the surgeon who performs the procedure in accordance with the pre-operative plan.
The Renaissance system is FDA–cleared, CE–marked and has regulatory clearances in several other markets, including China, Taiwan, South Korea,Thailand, Canada, Russia, IndiaSingapore, Israel and Australia.
The Mazor Robotics’X platform builds on the core technology of the Renaissance and the cumulative experience in the operating room, with expanded features and capabilities. Key features of the Mazor X are sophisticated 3D planning software and advanced algorithms running on a workstation and a guidance system. The guidance system includes a surgical arm, an integrated 3D camera with spatial tracking and a surgeon control panel in the sterile area. The Mazor X system's platform integrates three processes: pre-op analytics, intra-op guidance, and intra-op verification. Pre-op analytics are performed using cutting-edge anatomy recognition abilities for surgical visualization and imaging-based 3D implant and trajectory placement planning. The planning may take place prior to the surgery or during the surgery using scan & plan, if a 3D image system is available in the operating room. Intra-op guidance utilizes precision mechanics and the surgical arm to guide tools and implants according to the surgical plan. Before instrumenting, the Mazor X eye camera provides intra-op verification of the surgical arm trajectory and position. Once verification is complete, the surgical arm and drill guide keep tools and implants on target for each trajectory. This process continues until all trajectories have been reached and implants are inserted safely and accurately into their planned position.
In September 2015, we received 510(k) clearance from the FDA for the Mazor X system and we are pursuing CE clearance which we expect to receive in 2017.
In April 2017, we received 510(k) clearance from the FDA for the Mazor X Align software, a spinal deformity correction planning software for the Mazor X system.
Mazor Robotics' products are currently active in eleven15 countries, with 1312 distributors representing us in 1918 countries.
Industry Overview - Spine
Spine Disorder Market Overview
Spine disorders are a leading driver of healthcare costs worldwide. Spinal disorders also are a leading cause of disability among people aged between 19 and 45 in the United States, and are the most common cause of job-related disability. Spine disorders afflict women and men equally and are the second most common neurological ailment in the United States —- only headaches are more common. In the United States, according to the Orthopedic Network News, there are approximately 1.251.48 million spinal operations performed annually.
We believe the spine disorder market will continue to grow as a result of a growing, aging and more active population and rising obesity rates, which all are expected to be key drivers in the continued growth of incidence of spine disorders. The U.S. Census Bureau projects that the 65 and older age group in the U.S. will almost double from 38.648 million in 20102015 to 6588 million in 2030.2050. In addition, improvements in healthcare have led to increasing life expectancies worldwide and the opportunity to lead more active lifestyles at advanced ages. These trends are expected to generate increased demand for spine surgeries.
45
Overview of Spine Disorders
Spine disorders range in severity, causing symptoms ranging from mild pain and loss of feeling to extreme pain and paralysis. These disorders are primarily caused by degenerative disc diseases, stenosis, deformity, osteoporosis, tumors and trauma.
| Degenerative disc disease describes the most common type of spine disorder which primarily results from repetitive stresses experienced during the normal aging process. Disc degeneration occurs as the outer layer starts to shear and the inner cores of intervertebral discs lose elasticity and shrink. Over time, these changes can cause the discs to lose their normal height and shock-absorbing characteristics, which leads to back pain and reduced flexibility. Herniated discs are a common form of degenerative disc disease. |
| Lumbar stenosis is a condition whereby either the spinal canal or vertebral foramen becomes narrowed in the lower back impinging the nerves in the lumbar spine. This condition is often caused by the degenerative processes in the spine and the resulting compression can lead to back and leg pain. If the narrowing is substantial, it causes compression of the nerves and the painful symptoms of lumbar spinal stenosis. |
| Spine deformity is a term used to describe any variation in the natural curvature of the spine. Natural curves help the upper body maintain proper balance and alignment over the pelvis. Common forms of deformity include scoliosis, which is a lateral or side-to-side curvature of the spine, and kyphosis, which is an abnormal concave curvature leading to a rounded (humped) back. |
| Vertebral compression fractures are fractures of the vertebrae that result in the collapse of the vertebral body. These fractures, which can be very painful to the patient, are often the result of osteoporosis, which causes the vertebrae to weaken and become brittle, or spine tumors, but can also result from trauma. |
| Primary spine tumors are relatively rare. Benign tumors are typically removed surgically while malignant tumors are more difficult to treat and are often metastases which originate from tumors in other organs. |
Current Treatments for Spine Disorders
Treatment alternatives for spine disorders range from non-operative conservative therapies to surgical interventions. Conservative therapies include bed rest, medication and physical therapy. Surgical treatments for spine disorders can be instrumented, which include the use of implants, or non-instrumented, which forego the use of any such implants. The most common instrumented treatment is spinal fusion, where two or more adjacent vertebrae are fused together with implants to restore disc height and provide stability.
Introduction of Minimally Invasive Surgery
Over the past 30 years, minimally invasive surgical techniques have transformed many surgical procedures. Compared to traditional open surgical techniques, minimally invasive techniques potentially offer benefits for patients, surgeons and hospitals. For patients, these techniques can result in significantly reduced trauma, risk of infections, faster convalescence and better aesthetic outcomes. For the surgeon, these techniques can reduce procedure-related complications and have the potential to reduce risks associated with more invasive procedures. For the hospital, these procedures can result in reduced hospital stays due to faster recovery times, lower rates of complications and a higher level of patient satisfaction.
Despite the potential benefits of minimally invasive spinal surgery techniques, they can also present several notable limitations, including the need for additional training for the surgeon, increased intraoperative use of X-ray radiation, and longer operations, and have been shown in some studies to lower the accuracy of implant placement. As a result, while minimally invasive approaches have seen substantial adoption in various surgical fields where procedures can be performed within existing anatomical cavities, they are currently used in only 10-15% of spinal fusion procedures which are currently performed in a minimally invasive approach, according to the SRS database (Hamilton et al. Spine 2011) and the Orthopedic Network News report from October 2013.2015.
46
Robot Assisted Surgery
We believe that the application of robotics technologies in minimally invasive surgical procedures represents the next generation in the evolution of the surgical technique. These technologies are being developed to provide surgeons with a more precise, repeatable and controlled ability to perform complex procedures. With the assistance of robotic technology, an increasing number of surgeons have been able to perform procedures previously limited to a small subset of highly-skilled surgeons. In addition, robotic technology has enabled these procedures to be performed in a more minimally invasive manner, requiring only small incisions, which result in reduced procedure related trauma, fewer infections and post-procedure complications, and reduced recovery and hospitalization times.
The Limitations of Current Spine Procedures
Although minimally invasive techniques have been widely adopted in many fields of surgery, they have had limited adoption in spine surgery. We believe that the principal barriers to the adoption of minimally invasive techniques for spine surgery are:
| restricted or even no line-of-sight at the anatomical site; |
| cumbersome handling of surgical instruments, limiting the procedure; |
| dependence on two-dimensional imaging for three-dimensional surroundings; and |
| intra-operative exposure to radiation. |
As a result, the majority of spine surgeries are performed freehand. According to a recent review of over 108,000 cases (Hamilton et al., Spine 2011) only 13.2% of spine surgeries are performed in a minimally invasive manner. This was echoed in a report by the Orthopedic Research Network reporting that 13% of spine implants sold in 2013 were designedcannulated pedicle screws (designed and used for minimally invasive access.spine surgeries) have hovered between 9-15% since 2008. Although freehand surgery allows for direct visualization of the anatomy, open freehand surgeries may result in:
| increased procedure-related blood loss, pain and scarring at the incision site; |
| increased likelihood of complications, such as infections; |
| slower recovery times and longer post-operative hospital stays; and |
| undesirable aesthetic outcomes. |
Industry Overview - Brain
Neurosurgical Market Overview
It is estimated that 50 million Americans suffer from neurological illnesses, at an annual cost of over $450 billion in direct and indirect costs. Only a fraction of them are candidates for neurosurgical treatments, and in 2010, 585,700 direct (open) intra-cranial neurosurgical procedures were performed, of which over half were shunt placements.
In 2016, there were about 35,000 stereotactic brain surgeries performed globally, in about 2,800 medical centers, almost half of them in the United States. Currently, three procedures, namely Deep Brain Stimulation (DBS), Stereoelectroencephalography (sEEG), and in 2011 it was forecasted thatStereotactic Brain Biopsies, account for over 95% of the market would grow at a 2.7% annual growth rate from the estimated $577 million spent in 2010.stereotactic brain surgeries market.
Overview of Brain Biopsies
The incidence of primary brain tumors for 2013 is estimated by the American Brain Tumor Association at almost 70,000 cases. Of these cases, almost 25,000 cases are malignancies and over 45,000 are benign. The majority of brain tumors are metastases from malignancies in other organs (mainly lung and breast), but statistics for brain metastases are not readily available. Therefore, the incidence of primary and secondary brain tumors is estimated at more than 140,000 cases annually.
47
In some of the cases, the CT- or Magnetic Resonance Imaging (MRI) generated images are insufficient for the determination of the appropriate treatment option. In such cases a biopsy is usually indicated. It is estimated by MedTech Insight that in 2010, 19,700 biopsies were performed and that the incidence of this procedure is slightly declining at about 1.4% annual rate.
Overview of Deep Brain Stimulation (DBS) Electrode Placement Surgeries
The FDA approved DBS as a treatment for essential tremor in 1997, later adding further indications, including Parkinson's Disease (2002), dystonia (2003) and Obsessive Compulsive Disorder (OCD) (2008)(2009). Several other indications are in various phases of research, like chronic pain, various affective disorders, including major depression, and other neurological disorders, mainly in severe cases and/or refractory to medication or other treatments. It
In 2015, there were over 16,000 DBS surgeries globally, of which over 9,000 were performed in the United States. Parkinson's disease accounts for about 75-80% of the DBS surgeries, even though of the 1% of people over the age of 60 who are affected by Parkinson's disease, only 1 to 10% are eligible for DBS according to treatment guidelines. The DBS market was estimated at $493 million in 2014 and expected to grow at about 7% CAGR to $692 million in 2019.
Overview of Stereoelectroencephalography (sEEG)
Introduced in March 2009, by MedTech Insight, 2011,surgeons at the Cleveland Clinic, the objective of sEEG is to locate the epileptic focus/foci (point of origin) in cases refractory to conservative treatment that 7,900 DBSnecessitate surgical intervention. The patients are frequently under 10 years old and remain hospitalized for monitoring for 1-2 weeks following the sEEG procedure. It is estimated that there are about 5,000 sEEG procedures wereannually, of which about 3,000 are performed in the United States, in about 300 medical centers. Medtech SA, which was recently purchased by Zimmer Biomet Holdings Inc., is considered the market leader in this procedure, with an expected 5.1% annual growth rate. The most common indication was movement disorders, mainly Parkinson’s Disease which has an annual incidence estimated between 50,000-60,000 cases.
systems in 35 medical centers performing sEEG currently.Current Neurosurgical Options
Treatment options for neurological illnesses range widely by diagnosis and disease state from “watchful waiting”"watchful waiting" to non-operative conservative therapies (e.g., medications), External Beam Radiation Therapy, and a number of surgical interventions.
When neurosurgical procedures are indicated, much care is taken to avoid damage to neighboring regions of the brain and the vascular system, as well as along the surgical pathway to the lesion. Careful planning of the surgical approach is based on advanced imaging modalities. Execution of the required precise spatial localization according to the surgical plan is performed using intra-operative guidance systems, which are generally categorized as either frame-based or frameless systems. Frame-based systems, or standard sterotaxy,stereotaxy, are considered a more accurate option but, among their limitations are that they cumbersome to use, difficult to modify trajectories during surgery, and uncomfortable for the patient. Frameless trackable/fiducial marker-based systems use image guided navigation or patient-specific, custom-made mounts to improve accuracy.
The clinical benefits of Image Guided Surgery (IGS) include:
| precision in lesion localization; |
| ● | enhanced ability to execute the surgical plan; and |
| ● | allowing for less invasive surgical approaches. |
According to MedTech Insight in 2011, the U.S. market for computer-assisted IGS intraoperative navigation systems (including hardware and software) was approximately $273.8 million in 2010, of which cranial/neurosurgery-attributable revenues were estimated at $76.7 million, with an estimated compound annual growth rate of 3.5%, reaching an estimated $91.0 million in 2015, reflecting the maturity and saturation of this market segment.
48
Of the 19,700 biopsies performed in 2010, about 17,000 were performed with a frame-based system and about 2,700 used a frameless system. It was estimated in 2011 that by 2015 frameless systems will be used more frequently in these procedures, from 13.7% of the cases to over 20%.
Of the 7,900 DBS procedures in 2010, about 5,200 were frameless procedures and 2,700 were frame-based. It was estimated in 2011 that by 2015 frameless systems will be used more frequently in these procedures, from 66% of the cases to over 75% by 2015.
The Limitations of Current Neurosurgical Procedures
Frame-based systems limit the surgeon’ssurgeon's movement and are difficult to redirect intra-operatively. The rigid frames are cumbersome for the patients and the complex set-up can make operating times longer.
Navigation based systems (e.g. Brainlab AG's VectorVision) depend on direct line of sight between thean infra-red camera and specialized, reflective markers. These systems are considered to be less accurate by surgeons than frame-based systems. Their online representation of spatial location in real-time does not represent the actual location of the surgical instruments but rather the system’ssystem's perception of the location of the instruments. The representation of the instruments in 3 planes can lengthen the learning curve of these systems as the surgeon needs to correct the position in a single plainplane in a three dimensional world.
The Mazor Robotics Solution
Our Renaissance system enablesSurgical Guidance Systems enable surgeons to advance from freehand surgical procedures to accurate, state-of-the-art, precision guided procedures. It has the ability to improve clinical outcomes for patients, may provide a safer surgical environment for surgeons and operating room staff by possibly reducing exposure to radiation, and deliver economic value to hospitals and payors. We believe our Mazor X and Renaissance system offerssystems offer the following benefits to patients, surgeons and hospitals:
Potential Reduction in Surgical Complications and Revision Surgeries. Preliminary findings from a four-center, prospective, controlled study which were presented in professional spine conferences during 2016 have shown a statistically significant reduction in both complications and revisions. The data compares lumbar fusion surgeries of one to three levels in a minimally invasive (MIS) approach using the Renaissance system for guidance or fluoroscopy based-guidance. These findings have been echoed in a retrospective, comparative study by four surgeons who also found a statistically significant reduction in surgical complications and revisions. When they compared 403 fusion surgeries in which Renaissance was used in a MIS approach to similar procedures performed in a MIS approach with fluoroscopy-guidance in 228 patients and 78 case freehand in an open approach, the authors saw that the odds ratio of a surgical complication were 3.0 and 3.1, respectively. In other words, the risk of a complication was 3 times higher in the fluoroscopy and freehand arms of the study. When comparing surgical revision rates, the odds ratio for a revision was 3.8 times higher in the fluoroscopy-guided MIS group compared to the Renaissance-guided MIS procedures. These data have also been presented in professional spine conferences and are being prepared for publication in peer-review literature.
Reproducible Precision and Accuracy. TheClinical studies performed with the Renaissance system significantly increases the levelhave shown very high levels of instrument placement accuracy, over freehand surgery. A 14-center study involving 635 patients published in Spine demonstrated 98.3% placement accuracy of the spinal implants guided with our technology. Whilemost ranging between 98.5-100% accurately placed implants. By contrast, the scientific literature on accuracy of freehand implant placement accuracy varies, by comparisonvaries; however, a meta-analysis of 12,299 thoracolumbar screws, published in Spine, demonstrated 90.3% placement accuracyof implants were placed accurately in freehand surgeries.
Use in a Variety of Procedures. While the Renaissance system is often used for conventional or routine spinal surgeries, the system isOur Surgical Guidance Systems are particularly advantageous in complex spinal procedures, such as the correction of scoliosis and other spinal deformities, long fusions and repeat/revision surgery. Precision and planning is of particular importance in complex procedures where accuracy and precision are a challenge for even the most experienced surgeons.
49
Possible Reduced Exposure to Radiation. Spine surgeries, particularly minimally invasive surgeries, require the use of high levels of X-ray imaging, and exposes surgeons and patients to harmful radiation. The use of our Renaissance systemSurgical Guidance systems may significantly reduce the need for X-ray imaging during the surgery and providesprovide for a safersafe overall surgical environment.
Ease of Use. The Renaissance system leveragesOur Surgical Guidance Systems leverage and complementscomplement the surgical skills and techniques already familiar to the surgeon. This familiarity in approach combined with greater accuracy and precision accelerates the learning curve, making it usable by surgeons with a broad range of training and skills.
Reduced Costs. We believe the use of the Renaissance system resultsour Surgical Guidance Systems result in shorter hospital stays due to faster recovery times, lower rates of complications and a higher level of patient satisfaction.
Clinical Differentiation. We believe the benefits mentioned above will help surgeons and hospitals differentiate themselves, attracting more patients to seek medical care from them, over competitors offering less innovative and precise alternatives.
Our Strategy
Our goal is to continue to drive sales of our Renaissance systemSurgical Guidance Systems and generate recurring revenues through sales of disposable products and service contracts by establishing our Renaissance systemSurgical Guidance Systems as the standard-of-care in the eyes of surgeons, patients and medical facilities. We believe that we can achieve this objective by working with hospitals to demonstrate the key benefits of ourthe Mazor X and Renaissance system.systems. Our strategy includes the following key elements:
Continue to commercialize our |
Drive utilization of our installed base of |
Demonstrate the clinical and financial value proposition of our |
50
Invest in research and development. We will continue to make significant investments in research and development including investments to upgrade the hardware and software components of our |
| ● | Explore new ways to accelerate adoption of our products. We intend to achieve this by striving for partnerships with strategic players and to gain the benefits associated with the synergy between Mazor and potential partners. |
| ● | Explore new ways to utilize our core knowledge and intellectual property to enter new applications. We intend to achieve this by our continued effort of our research and development team and potentially with synergy between Mazor and potential partners in areas out of spine surgery. |
Our Products
Components of the Mazor X system - A surgical assurance platform for spine surgery, integrating data sources, analytical tools, guidance and imaging technologies to maximize procedure predictability and patient benefit. The Mazor X system, which is based on the same core guidance technology as the Renaissance, expands beyond trajectory guidance to address additional needs of spine surgeons and their patients.
The Mazor X Platform includes:
| · | Mazor X Guidance system including the following key components: |
| o | A precision Surgical Arm - The Surgical Arm comprises a set of links, joints and motors. With its unique design and innovative structure, the device has six joints, each with its own range of motion enabling the arm to reach a wide variety of trajectories. The Surgical Arm is controlled by the Mazor X Workstation computer and a Central Control Unit. Arm movement is as a result of the surgical plan (described below) and is monitored in a closed loop controlling process. |
| o | An integrated 3D camera with spatial tracking – The Mazor X-Eye camera provides positioning verification and enables tracking functionality. The surgeon activates the tracking features using on-screen controls. |
| o | A surgeon control panel in the sterile area – The surgeon's screen is a table-type LCD mounted on a movable screen arm located at the top of the surgical system. Use of this multi-touch screen provides the surgeon with a close and convenient method of interaction with the system. Information displayed on the surgeon's screen and Workstation monitor is dynamically updated in real-time, simultaneously. |
| · | Mazor X Workstation running sophisticated software and algorithms and including a large touch screen serving as a surgeon control panel, hardware components and storage for the Guidance System when not in use. The Workstation is the main console from which the user interacts with the Mazor X system. The Workstation is a compact, fully-portable unit that facilitates easy mounting of the Surgical Arm onto an operating room table in preparation for an operation. |
| · | Specialized applications that will run on the Mazor X platform (under development). |
| · | Mazor X Spine Disposables. Mazor X disposable kits are designed to easily adapt the surgical arm to a multitude of surgical applications and for the different mounting platforms utilized by the surgeon. |
| · | Mazor X Spine Accessories. Mazor X accessories include trays of reusable surgical tools. |
51
Surgical Workflow using Mazor X system
Surgical workflow using Mazor X involves the following basic 3D Planning and Intra-Operative steps:
| ● | 3D Planning |
| ● | Pre-Op Analytics – 3D Planning is performed using cutting-edge anatomy recognition and vertebral segmentation algorithms for surgical visualization based on a patient's images. The resulting Surgical Plan includes implant and trajectory placement planning. The Surgical Plan may be created prior to the surgery or during the surgery using Scan & Plan. |
 |  |
| Automated Anatomy Recognition | Vertebral Segmentation |
| · | Scan & Plan– Utilizes 3D intra-operative imaging systems, such as a Medtronic O-Arm system, to perform a patient scan that is then used to create the surgical plan instead of a pre-op CT. Scan & Plan is especially useful in trauma cases or when a pre-op CT is not available. |
| · | Intra Operative Procedure steps: |
| o | Import the Pre-Op Analytics plan into the Mazor X Workstation |
| o | Attachment of Hardware - The mounting platform is rigidly attached to the patient's spine or skull to ensure that maximum accuracy is maintained throughout the surgical procedure, even if patient movement occurs |
| o | Perform a 3Define Scan – This reconstructs the 3D volume to assess the working area for the surgeon |
| o | 3D synchronization - To execute the surgical plan, it is necessary to match the CT-based plan with the patient's spine and the mounting platform through CT-to-fluoro registration. The mounting platform's spatial location is marked by a proprietary 3D Marker which is attached to it. Two fluoroscopic images of the 3D marker and the spine are taken (anterior-posterior and oblique views). Mazor X software then automatically matches the vertebrae seen in the fluoroscopic images to those in the pre-operative CT. This automatic registration process is critical for the software to identify the location of the mounting platform relative to the patient's spine. It allows the software to calculate the motion necessary for the RBT Device. The accuracy of the 3D synchronization process is confirmed by the surgeon after visual verification for each vertebra |
 |
| o | Intra-operative verification - Before instrumenting, the Mazor X Eye camera provides intra-op verification of the surgical arm trajectory and position |
| o | Intra-operative guidance for surgical execution- Utilizes precision mechanics and the surgical arm to guide tools and implants at the right trajectory and position according to the surgical plan in the surgical field. |
53
| o | Perform surgical procedure |
| · | Mazor X Align software – An advanced application that will run on the Mazor X platform. X Align will use advanced measurement and visualization tools to create a simulation of the overall spinal alignment before surgery. Mazor X Align leverages the Mazor technology experience with tools for placement and trajectory planning, for predictable planning of the entire spine alignment. |
In April 2017, we received 510(k) clearance from the FDA for the Mazor X Align™ software, a spinal deformity correction planning software for the Mazor X system. We intend to commercially release the Mazor X Align in 2017.
| · | Specialized applications (under development) |
| o | ArcAid – The ArcAid custom bends rods on-site for personalized patient spinal correction. ArcAid bends according to a personalized rod bending blueprint, derived from the Mazor X-align, to provide the best fit to the desired corrected spinal alignment. |
| o | Co-development applications with Medtronic – Mazor and Medtronic have defined a joint 2017 roadmap for co-development whose goals include integration of Medtronic's implant and imaging technology for Mazor X compatibility. |
54
Components of the Renaissance system
RBT Device. Our RBT Device is a portable, computer-controlled Stewart platform that spatially positions and orients surgical tools intra-operatively in accordance with the planned surgical blueprint. All RBT Device movements are a result of the pre-operative plan and are monitored by a closed-loop control process.
Renaissance Workstation. The RBT Device is housed in our Renaissance Workstation, a mobile workstation that houses our proprietary software which also contains the controllers for the RBT Device, image processing unit, electronics, computer and graphical user interface software. It is equipped with a control panel, including a multi-touch screen monitor. The Renaissance Workstation is used both for pre-operative planning of the procedure, as well as for intra-operative control of the system to implement the pre-operative plan.
Mounting platforms. There are several different mounting platforms that serve as an interface and reference frame between the patient and the RBT Device. All are rigidly attached to the patient’spatient's spine or skull to maintain accuracy, despite breathing and other minor patient movements. The mounting platforms are selected by the surgeon for each procedure based on the surgical approach and surgeon’ssurgeon's preference.
Renaissance Spine Disposables. Renaissance disposable kits are designed to easily adapt the RBT Device to a multitude of surgical applications and for the different mounting platforms utilized by the surgeon.
Renaissance Spine Accessories. Renaissance accessories include trays of reusable surgical tools.
Surgical Workflow using Renaissance for Spine procedures
Surgical workflow using Renaissance involves four basic steps:
| 3D synchronization; and |
Pre-operative planning. A CT scan of the patient’spatient's spine is uploaded to Renaissance software to create a detailed 3D model of the patient’spatient's spine. This stage enables accurate visualization of the patient’spatient's spinal anatomy and condition, and enables the creation of a customized surgical plan in a virtual 3D environment. In addition, pre-operative planning provides better preparation for each surgery, identifies anatomical challenges, and predefines trajectories for the implants. The surgeon selects implant sizes optimized for achieving the best surgical outcome. All pre-operative planning can be performed on a personal computer with our proprietary software. To enhance safety, the pre-operative “blueprint”"blueprint" can be reviewed in a virtual video mode in our planning software, which provides a slice-by-slice image display in all three surgical planes, as well as a full 3D review of the surgical blueprint (Fig. 1).
 |  |
Figure 1: Planning Software and 3D visualization of planning
55
Attachment of hardware. In the operating room, one of a few Renaissance mounting options is selected in accordance with the clinical indication and surgeon’ssurgeon's preference. The mounting platform is rigidly attached to the patient’spatient's spine or skull to ensure that maximum accuracy is maintained throughout the surgical procedure, even if patient movement occurs.
Three-dimensional (3D) synchronization. To execute the surgical blueprint, it is necessary to match the CT-based plan with the patient’spatient's spine and the mounting platform. The mounting platform’splatform's spatial location is marked by a proprietary 3D Marker which is attached to it. Two fluoroscopic images of the 3D marker and the spine are taken (anterior-posterior and oblique views). Renaissance software then automatically matches the vertebrae seen in the fluoroscopic images to those in the pre-operative CT. This automatic registration process is critical for the software to identify the location of the mounting platform relative to the patient’spatient's spine. It allows the software to calculate the motion necessary for the RBT Device. The accuracy of the 3D synchronization process is confirmed by the surgeon after visual verification for each vertebrae.
vertebra. |  |  |
Figure 2: 3D Marker; C-arm in 2 positions taking registration images for 3D Synchronization process
Surgical execution. Once the 3D Synchronization is completed, the RBT Device is attached to the mounting platform based on instructions that are defined by the software after processing registration data with the pre-operative planning. Upon activation by the surgeon, the RBT Device moves an arm that is attached to it, and positions it at the location so that its trajectory is precisely aligned with the pre-operative plan. A cannula which is passed through the arm, along the line of the trajectory, is used by the surgeon to guide the surgical tools and drills used in the surgery. This process is repeated for each vertebrae until the surgeon completes the instrumentation according to the pre-operative plan and intraoperative clinical judgment.
Figure 3: RBT Device (with an arm connected to it) on Clamp Mount ready to guide the surgeon
Mazor's "PRO" Solutions
In October 2015, we launched the ‘PRO’ (Predictable Renaissance® Operation) Solutions at the annual meeting of the North American Spine Society (NASS) which was held in Chicago, IL. The PRO Solutions are designed to support Renaissance procedures and Pipeline Applicationsinclude:
PROceph Brain Procedures
We have developed the Renaissance Brain Module, a new application of our Renaissance system intended to provide precise control over the insertion of surgical instruments (drills, cannulas, electrodes, needles, etc.) during brain surgery. The Renaissance Brain Module can be used for guiding brain biopsies, the novel insertion of Deep Brain Stimulation, or DBS, electrodes into the brain and other procedures that depend on a high accuracy linear trajectory into the brain. Our head-mounted Renaissance Brain Module was cleared by the FDA in July 2012 and CE-marked in August 2012. We intend to launchinitially launched the Renaissance Brain Module at the annual meeting of the American Association of Neurological Surgeons in April 2014.
The Renaissance Brain Module utilizes a small, frameless platform with three points of fixation to the skull to provide highly accurate access to the areas of the brain where surgical intervention is needed. This helps to minimize incisions and scarring while providing surgeons with high versatility in their surgical approach as well as facilitating intra-operative changes of trajectories.
Surgical workflow using the Renaissance Brain Module for brain surgery involves four basic steps:
Pre-operative planning: A Renaissance brain procedure usually begins with a pre-operative MRI scan of the patient. The scan is uploaded into Renaissance’sRenaissance's pre-operative 3D software for surgeons to plan the optimal trajectories prior to the procedure. Sometimes other imaging studies are loaded and fused together to provide additional layers of information such as Magnetic Resonance Angiography, CT, Diffusion Tensor Imaging and Positron Emission Tomography.
Figure 4: Planning Software
Attachment of hardware:A small platform is mounted to the skull using local anesthesia. This can be a less-invasive and faster approach compared to the larger frames that are traditionally used during these procedures. The Renaissance Brain Module's smaller platform may also improve patient comfort and increase freedom of movement. It also enables trajectories that are beyond the working volume of other guidance systems.
Figure 5: Mounting of the platform to the skull
Synchronization: A proprietary Star Marker is attached to the platform and a CT scan is taken. The CT scan is then fused with the pre-operative plan created by the surgeon with the Renaissance software. This correlates the virtual plan with the physical location of the patient and the attached mounting platform. Based on this information, the software controls the kinematics of the RBT Device to provide the surgeon with the desired trajectories above the patient’spatient's skull.
Figure 6: Star Marker attached to the mounting platform on the patient’spatient's head, while a CT scan is taken for the synchronization with the pre-operative plan.
Surgical executionexecution: : After the scans are synchronized, the RBT Device is attached to the mounting platform based on instructions that are defined by the software after processing registration data with the pre-operative planning. Upon activation by the surgeon, the RBT Device moves an arm that is attached to it, and positions it at the location so that its trajectory is precisely aligned with the pre-operative plan.
Figure 7: RBT Device (with an arm connected to it) mounted ready to guide the surgeon.
This potential application is designed to obviate the need for a pre-operative CT scan by using an available intra-operative 3D imaging system (fluoroscopy- or CT-based). This 3D scan is performed after placingattaching the selected Renaissance mounting system onto the patient. When using this application, there is no need to correlate the plan with the patient’spatient's location relative to the RBT Device, as the 3D synchronization process is inherent to the image acquisition process. Once the 3D images are acquired, the surgeon utilizes them to plan the operation based on these images in the operating room. While this application has been cleared by the FDA, it is currently used clinically in a selective manner.
PROlat Posterior guided instrumentation in the lateral position
PROlat™ enables placement of pedicle screws posteriorly while the patient is in the lateral decubitus position. By maintaining the patient in the lateral position, it is possible to shorten the surgery time and reduce the potential for unnecessary risks to the patient.
Other Potential Applications
We believe that with further research and development of our technology, we can develop applications for other areas of the body or for additional applications within brain and spine surgeries. Should we elect to develop and commercialize additional potential applications of Renaissance and Mazor X within or outside of the brain and spine surgery markets, we will need to seek the appropriate marketing clearance from the FDA and any other required regulatory approvals for such applications.
Sales and Marketing
We are continuing to develop a sales and marketing organization that consists of a capital sales team, a clinical sales team and a marketing team. Our sales and marketing team is comprised of executives with experience from major surgical robotic technology companies including Intuitive Surgical Inc., Johnson and Johnson, Hansen Medical Inc., Stereotaxis Inc. and Medtronic Inc.others. The capital sales team drives capital equipment sales of Renaissance and Mazor X and the associated applications, while the clinical sales team focuses on the further penetration of existing clients through education marketing activities and training.
As of December 31, 2013,2016, our U.S. sales team had a total of 5089 employees, 20 of whom 14 handle capital sales, including thea Vice President of Capital Sales of United States, and 2 senior7 sales directors. Eight employees out of the capital sales team are former sales executives from major surgical robotic technology companies. The U.S. clinical sales team includes 2558 representatives, a Vice President of Clinical Sales of United States, 8 regional managers and 62 regional managers.directors. The international sales team includes the Vice President for Sales, and two2 capital sales managers.managers, 1 clinical sales director and 2 clinical sales representatives. The international sales team sells mainly through distributors covering five9 countries in Europe and nine8 countries in Asia-Pacific. Together with the marketing team, they are responsible for defining and executing our global commercialization strategy. The
Our marketing team includes eight11 members and one part-time employee, including 4 members in the SeniorU.S. based team. In addition, we have a training team, in charge of coordinating and providing training to new and existing customers, which includes a Vice President, a training director and 3 team members.
As part of America & Global Marketing. We intendthe Medtronic Agreements, in the first phase of lead sharing, Medtronic’s sales team are responsible for generating awareness for and interest in the Mazor X System for spine applications, bringing surgeons to continuelabs and generate qualified leads, before handing the leads to increaseour capital sales team to close the numbersales. Mazor’s capital sales team is also responsible for generating leads – for the Renaissance system and Mazor X System, in addition to the leads generated by Medtronic’s team. To date we have trained over 100 Medtronic sales team leaders on the Mazor X System and they are tasked with sharing their knowledge with the hundreds of sales and marketing personnel as we expand our business.
reps Medtronic has dedicated to the effort.
59
Our sales and marketing goals are to continue to drive capital equipment sales of the Renaissance systemour Surgical Guidance Systems and associated applications and to generate recurring revenue through sales of disposable products and service contracts. To achieve these goals, we must continue to promote adoption of the Mazor X and Renaissance by surgeons and hospitals and build demand for the procedure among patients through the following sales and marketing strategy:
Actively target hospitals with a significant spine practice. We believe that successful adoption depends on the routine implementation of |
Facilitate independent clinical research by surgeons. We collaborate with surgeons to conduct research on the implementation, clinical outcomes, radiation exposure and other variables which are inherent to, or derived from, the adoption and utilization of |
Encourage medical facilities to embark on a marketing program that would promote and publicize their |
Training and Education. We train and educate through a variety of activities such as observing |
The generation of recurring revenues through sales of our disposable products and service contracts is an important part of the Renaissanceour Surgical Guidance Systems business model. We anticipate that recurring revenues as we leverage each new installation of our Renaissance systemSurgical Guidance Systems to generate recurring sales of disposable products.products our recurring revenues will grow. Because of ourthe technical design and programming of our Renaissance system,Surgical Guidance Systems, the system only works with Mazor's proprietary disposable kits. We also offer annual service contracts that provide maintenance and support services related to Renaissanceour Surgical Guidance Systems beyond the basic one-year warranty period.
We provide training to surgeons and hospital staff on the use of our Renaissance system.Surgical Guidance Systems. Through training we are increasing familiarity with the Renaissance systemour Surgical Guidance Systems and helping ensure safe and proper usage of our equipment and products by surgeons and hospitals, which we hope enables seamless adoption of our Renaissance system.Surgical Guidance Systems. The presence of our representatives in the hospitals also provides us with immediate feedback and understanding of our customers’customers' preferences and requirements in clinical conditions.
Seasonality of Business
While our business is growing and changing rapidly, we believe it is subject to quarterly seasonal fluctuations because of customary capital expenditure trends by hospitals due to various hospital budget considerations which are not in our control. Hospitals tend to group purchases at the beginning of their budgetary cycle, which is different among hospitals. Therefore, it is hard to predict results of a certain quarter and some quarters may be weaker than others. For the year ended December 31, 2013,2016, no single hospital customer accounted for more than ten percent of our total revenue and the loss of any single hospital customer is not expected to have a material adverse effect on us.
Intellectual Property
We seek patent protection for our products and technologies in the United States and internationally. Our policy is to pursue, maintain and defend patent rights developed internally and to protect the technology, inventions and improvements that are commercially important to the development of our business.
We own ninesixteen U.S. patents,patents. In addition, we also have three further applications in which claims were allowed and have had claims allowed for the grant of an additional U.S. patent.issue is awaited. In addition, we have filed in the United States eight additional patent applications and foureight provisional patent applications. A provisional patent application is a preliminary application that can be filed less formally than a non-provisional application, and establishes a priority date for the patenting process for the invention disclosed therein.
We have also licensed twofive U.S. patents. In addition, we own twenty-seventhirty-four patents, grouped in fiveseven families of separate inventions that were granted in other countries. We also have fourteenone further application in which claims were allowed and grant is awaited. We also have sixteen pending patent applications outside of United States, grouped in eightten families of separate inventions. We also have three PCT (Patent Cooperation Treaty) international patent applications. A PCT application is an application made in multiple countries, which ultimately needs converting into National Phases in separate countries. All of our patents and patent applications are in the areas of computer-assisted surgery, robotics, imaging and implants. Our patents expire between the years 2021 and 2029.2033. Certain of our in-licensed patents have royalty obligations.
We cannot be sure that any patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future. There is also a significant risk that any issued patents will have substantially narrower claims than those that are currently sought.
We cannot be sure that any of our patents will be commercially useful in protecting our technology. We also rely on trade secrets to protect our product candidates. Our commercial success also depends in part on our non-infringement of the patents or proprietary rights of third parties. For a more comprehensive discussion of the risks related to our intellectual property, please see “Item"Item 3. Key Information – D. Risk Factors – Risks Related to Our Intellectual Property.”"
We also protect our proprietary technology and processes, in part, by confidentiality and invention assignment agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. We also rely on trade secrets to protect our product candidates. However, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants, scientific advisors or other contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
On May 18, 2016, Mazor entered into two strategic agreements with Medtronic. One agreement is a two- phase Exclusive Lead Sharing and Distribution Agreement which provides for co-promotion, co-development and, upon meeting certain milestones, potential global distribution of the Mazor X System. The second agreement is a Purchase Agreement which provides for an equity investment by Medtronic in Mazor.
Exclusive Lead Sharing and Distribution Agreement
The Exclusive Lead Sharing and Distribution Agreement is a commercial agreement which has an initial U.S.-based co-promotion phase. Subject to meeting certain milestones defined in the agreement, and the parties' mutual decision to proceed, the relationship will enter a second phase. During the second phase, Medtronic will assume exclusive global sales and distribution rights for the Mazor X system. The second phase includes annual minimum sales amounts with a cumulative potential of hundreds of Mazor X systems over a four-year period. The commercial agreement relates to Mazor X systems and applications for the spine surgery market. Under the agreement, Medtronic placed an order for 15 Mazor X Systems during 2016, of which nine systems were supplied by December 31, 2016 and the remaining six systems were supplied in the first quarter of 2017.
61
The agreement also provides for collaboration in the following main areas:
| · | Marketing activities – Medtronic is committed to actively marketing the Mazor X system. Mazor and Medtronic are working on joint efforts to create market awareness of the Mazor X System. |
| · | Sales Activities – In the first phase of the agreement, Medtronic's sales team is responsible for generating awareness for and interest in the Mazor X System for Spine applications. This involves bringing surgeons to labs and generating qualified leads, before providing the leads to Mazor's capital sales team to close the sales. If triggered, in the second phase of the agreement Medtronic would assume responsibility for global distribution of the Mazor X System for spine applications. |
| · | Co-development activities – Mazor and Medtronic will co-develop synergistic products and applications for spine surgery. This activity has already commenced. |
| · | Revenue sharing – Mazor will pay a lead sharing fee to Medtronic for Qualified leads Medtronic delivers to Mazor. Medtronic will pay a synergy fee to Mazor for every case where a Mazor X system is used in association with Medtronic implants. Under certain circumstances, Medtronic will pay a synergy fee to Mazor regarding Renaissance usage with Medtronic implants. |
Purchase Agreement
The Purchase Agreement provides for a three-tranche equity investment in Mazor. In the first tranche, which closed in May 2016, Medtronic purchased from Mazor newly issued securities representing four percent of Mazor's issued and outstanding share capital on a fully diluted basis, at a price per ADS of $11.42, which was equal to the trailing 20-day volume weighted average price of the shares, or a total of $11.9 million. In the second tranche, which closed in August 2016, upon the achievement by Mazor of certain operational milestones, Medtronic purchased newly issued securities representing 4.1 percent of Mazor's issued and outstanding securities. This investment brought Medtronic to a total holding of 8.4 percent of Mazor’s issued and outstanding securities, or 7.3 percent of Mazor’s issued and outstanding securities on a fully diluted basis. The price per ADS in the second tranche was $21.84, which was the average price per share during the 20 trading days following the occurrence of the above-mentioned milestones.
In April 2008, we entered into a setpotential third tranche, Mazor will have the right to require Medtronic to consummate the purchase of strategic agreementsMazor securities such that after the investment they will own up to cooperate withfifteen percent of Mazor's outstanding ordinary shares on a fully diluted basis. Consummation of this tranche is subject to consummation of the Cleveland Clinic Foundation, or CCF, pursuant to whichsecond tranche as well as the parties intended to jointly develop a groupcommencement of products for the fixationsecond phase of spinal vertebrae while using our guidance technology. The procedure developed by us under the CCF licensed technology was named GO-LIF (Guided Lumbar Inter-body Fusion)Exclusive Lead Sharing and was aimedDistribution Agreement, and, provided certain other conditions are met, will be solely at utilizing Renaissance to place implants percutaneously. Under these agreements, we received an exclusive worldwide license under two patents owned by CCF for the development of unique spinal fixation implants. We agreed to pay CCF an upfront payment and certain milestone payments that are not material. In addition, we undertook to pay royaltiesMazor's discretion, at a decreasing rate, inper-share price equal to the low-trailing 20-day volume weighted average price prior to mid-single digits, on net sales (as defined in the agreement) of any licensed products. Our obligation to pay royalties continues on a country-by-country basis until expirationMazor's exercise of the last to expire licensed patent, or, for licensed products covered by one ofoption. Medtronic, at its sole discretion, may cap the licensed patents, 15 years after receipt of an FDA approval of such licensed products, if earlier. We must also pay to CCF an agreed portion of revenues derived from our sub-licensing of the CCF licensed technology, if any. Under the terms of the agreement, we must achieve certain diligence milestone events by specified dates. If we do not meet these targets, CCF may convert our exclusive license into a non-exclusive license or terminate the agreement. Either we or CCF may terminate the agreement for the other party’s uncured material breach of the agreement, and we may terminate the agreement, on a country-by-country and licensed product-by-licensed product basis, for our convenience. In 2011 we decided to discontinue our investment in developing products based on the patents licensed from CCF.third tranche at $20 million.
Competition
We believe that the principal competitive factors in our market include:
| the safety and efficacy of the procedure and product offerings, as documented through published studies and other clinical reports; |
| product benefits, including the ability to offer spine surgeons a complete solution for posterior |
62
| the cost of product offerings and their clinical value within the |
| the strength of acceptance and adoption by spine surgeons and hospitals; |
| the ability to deliver new product offerings and enhanced technology to expand or improve upon existing applications through continued research and development; |
| the quality of training, services and clinical support provided to surgeons and hospitals; |
| the ability to provide proprietary products protected by strong intellectual property rights; and |
| the ability to offer products that are intuitive and easy to learn and use. |
Competitors
The competitive exhibitors at NASS seem to be in the most advanced stages of commercialization, yet are not awarealone in the spine market. Several other companies are in various development phases of any well-knowndevelopment. Two examples are TINAVI Medical Technologies Co., Ltd., a Beijing, China,-based medical device company, which offers surgical robotic systems to assist orthopedic surgeons in open and minimally invasive surgeries. The other is Switzerland-based medical device company, KB Medical, which announced their first clinical case with their AQrate robot.
Additional companies that broadly offer robotic technologies in combinationcould choose to enter this market include Stryker Corporation, potentially adapting the Mako system to spine surgeries, and Intuitive Surgical Inc. with CASits da Vinci system which has been used clinically for spine surgeries. There are alternative CAS systems, but these are infrared-based opticalseveral specific spinal indications.
In previous years, Mazor considered the navigation systems, that do not have a robotic component. These CAS systems are soldsuch as those offered by large companies that are well-known in the surgical market in general and in spine in particular, including Medtronic, Inc., Stryker Corporation and Brainlab AG.AG, as its main competitors. While these CAS systems have not seen wide adoptiongained relatively low market share in spine, surgeries, they are applicablethese technologies have been gaining traction in many other anatomies, increasing their utilityrecent years, especially due to hospitals.the growing availability of 3-dimensional intra-operative imaging systems such as Medtronic's O-arm, which is conditional for these systems (as well as for the new robotic systems that have entered the market).
We believe that surgeons are likely to adopt robotic-based technologies for spine and brain surgeries and view this as the main competitive field for our products. Large, well-known companies, however, have the ability to acquire and/or develop robotic technologies that may compete with our products. We are aware of certain companies developing robotic applications in orthopedics and spine such as Mako Surgical Corp., Globus (that recently acquired Excelsius Surgical, LLC) and Intuitive Surgical Inc. Even if these companies currently do not have an established presence in the field of spine surgery, they may attempt to apply their robotic technologies to this field and compete directly with us.
We intend to compete and drive increased adoption of our Renaissance systemand newly launched Mazor X systems based on thetheir benefits, of the Renaissance system, including the safety and efficacy of our procedure, the ability to expand or improve upon existing applications through continued research and development and the ability to offer products that are intuitive and easy to learn and use.
Regulatory Requirements of the U.S. Food and Drug Administration
Our research, development and clinical programs, as well as our manufacturing and marketing operations, are subject to extensive regulation in the United States and other countries. Most notably, all of our products sold in the U.S. are subject to regulation as medical devices under the FDCA, as implemented and enforced by the FDA. The FDA governs the following activities that we perform or that are performed on our behalf, to ensure that medical products we manufacture, promote and distribute domestically or export internationally are safe and effective for their intended uses:
| product design, preclinical and clinical development and manufacture; |
| product premarket clearance and approval; |
| product safety, testing, labeling, advertising, promotion and storage; |
| record keeping procedures; |
| product marketing, sales and distribution; |
| quality system requirements; |
| recalls and field safety corrective actions; |
| post-market approval studies; |
| product import and export; and |
| post-marketing surveillance, complaint handling, medical device reporting, reporting of deaths, serious injuries or device malfunctions and repair or recall of products. |
FDA Premarket Clearance and Approval Requirements
Unless an exemption applies, each medical device we wish to commercially distribute in the United States will require either premarket notification or 510(k)(510(k)) marketing clearance or approval of a PMA from the FDA. The FDA classifies medical devices into one of three classes. Class I devices, considered to have the lowest risk, are those for which safety and effectiveness can be assured by adherence to the FDA’sFDA's general regulatory controls for medical devices, which include compliance with the applicable portions of the QSR, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials (General Controls). Class II devices are subject to the FDA’sFDA's General Controls, and any other special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device (Special Controls). Manufacturers of most class II and some class I devices are required to submit to the FDA a premarket notification under Section 510(k) of the FDCA requesting permission to commercially distribute the device. This process is generally known as 510(k) marketing clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in class III, requiring approval of a PMA.
64
510(k) Marketing Clearance Pathway
The 510(k) clearance process is the regulatory process applicable to our current, marketed products. To obtain 510(k) marketing clearance, we must submit a premarket notification demonstrating that the proposed device is “substantially equivalent”"substantially equivalent" to a legally marketed “predicate device”"predicate device" that is either in class I or class II, or to a class III device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of a PMA. A Special 510(k) is an abbreviated 510(k) application which can be used to obtain clearance for certain types of device modification such as modifications that do not affect the intended use of the device or alter the device’sdevice's fundamental scientific technology. A Special 510(k) generally requires less information and data than a complete, or Traditional 510(k). In addition, a Special 510(k) application often takes a shorter period of time, which could be as short as 30 days, than a Traditional 510(k) marketing clearance application. An abbreviated 510(k) is another type of 510(k) that is intended to streamline the review of data in a 510(k) through the reliance on one or more FDA-recognized consensus standards, special controls established by regulation, or FDA guidance documents. In most cases, an abbreviated 510(k) includes one or more declarations of conformity to an FDA-recognized consensus standard. The FDA’sFDA's 510(k) marketing clearance pathway usually takes from three to twelve months, but may take significantly longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence. There is no guarantee that the FDA will grant 510(k) marketing clearance for our future products and failure to obtain necessary clearances for our future products would adversely affect our ability to grow our business.
The FDA is currently considering proposals to reform its 510(k) marketing clearance process and such proposals could include increased requirements for clinical data and a longer review period. In response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the 510(k) program, and in January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices. The FDA intends these reform actions to improve the efficiency and transparency of the clearance process, as well as bolster patient safety. For example, in July 2011, the FDA issued a draft guidance document entitled “510(k)"510(k) Device Modifications: Deciding When to Submit a 510(k) for a Change to an Existing Device,”" which was intended to assist manufacturers in deciding whether to submit a new 510(k) for changes or modifications made to the manufacturer’smanufacturer's previously cleared device. While this draft guidance was subsequently withdrawn, the FDA is expected to replace the 1997 guidance document on the same topic. As part of FDASIA, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical"Medical Device Regulatory Improvements”Improvements" and miscellaneous reforms which are further intended to clarify and improve medical device regulation both pre- and post-approval. One of these provisions obligates the FDA to prepare a report for Congress on the FDA’sFDA's approach for determining when a new 510(k) will be required for modifications or changes to a previously cleared device. After submitting this report, the FDA is expected to issue revised guidance to assist device manufacturers in making this determination. Until then, manufacturers may continue to adhere to the FDA’sFDA's 1997 guidance on this topic when making a determination as to whether or not a new 510(k) is required for a change or modification to a device, but the practical impact of the FDA’sFDA's continuing scrutiny of these issues remains unclear. It is possible that any new guidance will make substantive changes to existing policy and practice regarding the assessment of whether a new 510(k) is required for changes or modifications to existing devices. Specifically, industry has interpreted the withdrawn draft guidance to take a more conservative approach in requiring a new 510(k) for certain changes or modifications to existing, cleared devices that might not have triggered a new 510(k) under the 1997 guidance. We cannot predict which of the 510(k) marketing clearance reforms currently being discussed and/or proposed might be enacted, finalized or implemented by the FDA and whether the FDA will propose additional modifications to the regulations governing medical devices in the future. Any such modification could have a material adverse effect on our ability to commercialize our products.
65
Medical devices can be marketed only for the indications for which they are cleared or approved. After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) marketing clearance or, depending on the modification, PMA approval. The FDA requires each manufacturer to determine whether the proposed changes requires submission of a 510(k) or a PMA, but the FDA can review any such decision and can disagree with a manufacturer’smanufacturer's determination. If the FDA disagrees with a manufacturer’smanufacturer's determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) marketing clearance or PMA approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties. We have made and plan to continue to make additional product enhancements to the Renaissance system and Mazor X system and other products that we believe do not require new 510(k) marketing clearances. We cannot be assured that the FDA would agree with any of our decisions not to seek 510(k) marketing clearance or PMA approval.
For risks related to 510(k) marketing clearance, see “Item"Item 3. Key Information – D. Risk Factors – Risks Related to Regulatory Compliance.”"
PMA Approval Pathway
A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process or is class III (although the FDA has discretion to continue to allow certain pre-amendment class III devices to use the 510(k) process). A PMA must generally be supported by, among other things, extensive data, including, but not limited to, technical, preclinical and clinical data, and manufacturing and labeling information, to demonstrate to the FDA’sFDA's satisfaction the safety and effectiveness of the device for its intended use. After a pre-market approval application is submitted and filed, the FDA begins an in-depth review of the submitted information, which typically takes between one and three years, but may take significantly longer. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendationsresponses to specific questions that the FDA asks of them related to the FDA as to thesupportive data and approvability of the device. The FDA may or may not accept the panel’s recommendation.panel's responses. In addition, the FDA will generally conduct a pre-approval inspection of the applicant or its third-party manufacturers’manufacturers' or suppliers’suppliers' manufacturing facility or facilities to ensure compliance with the QSR.
The FDA may also conduct a Bioresearch Monitoring Program, or BIMO inspection of the Sponsor and/or Contract Research Organization, or CRO and/or the clinical facilities involved in the clinical study supporting the PMA.
New PMAs or PMA supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’sdevice's indication for use, manufacturing process, labeling and design. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. None of our products are currently approved under a PMA approval. However, we may in the future develop devices which will require the approval of a PMA. There is no guarantee that the FDA will grant PMA approval of our future products and failure to obtain necessary approvals for our future products would adversely affect our ability to grow our business.
The Food and Drug Administration Modernization Act of 1997 added the “De Novo”"De Novo" classification option as an alternative pathway to classify new devices that had automatically been placed in Class III due to the lack of a predicate device. The De Novo process applies to low and moderate risk devices that have been classified as Class III, because they were found not substantially equivalent to existing devices. At this time, we do not intend to use the De Novo process but, if we do for any future modifications that might otherwise require a PMA, there is no guarantee it will be successful and we could be required to submit a PMA.
66
Clinical Trials
Clinical trials are generally required to support a PMA application and are sometimes required for 510(k) marketing clearance. Such trials generally require submission of an investigational device exemption application, or IDE, to the FDA for a specified number of patients and study sites, unless the product is deemed a non-significant risk device eligible for more abbreviated IDE requirements. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. If an IDE is required, the FDA will review the submission and it must become effective,be approved, and the appropriate institutional review boards, or IRBs, at the clinical sites must approve the study, before clinical trials may begin. Clinical trials are subject to extensive monitoring, recordkeeping and reporting requirements. Clinical trials must be conducted under the oversight of an IRB, for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. To conduct a clinical trial, we are also required to obtain the patient’spatient's informed consent in form and substance that complies with both FDA requirements and state and federal privacy and human subject protection regulations. We, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance or approval to market the product in the United States. Similarly, in Europe the clinical study must be approved by a local ethics committee and in some cases, including studies with high-risk devices, by the ministry of health in the applicable country.
Post-Market Studies
To date, none of our submissions to the FDA has required the submission of clinical data and all of our clinical studies to date have been post-market studies.
Pervasive and Continuing Regulation
After a device is placed on the market, numerous regulatory requirements continue to apply. These include:
| product listing and establishment registration; |
| QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all phases of the design and manufacturing process; |
| labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label use or indication; |
| clearance or approval of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use of one of our cleared devices; |
| post-approval restrictions or conditions, including post-approval study commitments; |
| post-market surveillance regulations, including |
| the |
| notices of corrections or removals. |
We must also obtain all necessary state permits or licenses to operate our business. As a manufacturer, we are subject to announced and unannounced inspections by the FDA to determine our compliance with FDA’sFDA's QSR and other regulations.
67
Failure to comply with applicable regulatory requirements, including delays in or failures to report incidents to the FDA as required under the MDR regulations, can result in enforcement action by the FDA, which may include any of the following sanctions:
| warning letters, untitled letters fines, injunctions, consent decrees and civil penalties; |
| customer notifications or repair, replacement, refunds, recall, administrative detention or seizure of our products; |
| operating restrictions or partial suspension or total shutdown of production; |
| refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products; |
| withdrawing 510(k) marketing clearances or PMA approvals that have already been granted; |
| refusal to grant export approval for our products; or |
| criminal prosecution. |
We cannot be assured that we have adequately complied with all regulatory requirements or that one or more of the referenced sanctions will not be applied to us as a result of a failure to comply.
Marketing Approvals Outside the United States
Sales of medical devices outside the United States are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA clearance or approval, and the requirements may differ.
In the European Economic Area, or the EEA (which is comprised of the 28 Member States of the EU plus Norway, Iceland and Liechtenstein), medical devices must comply with the essential requirements of the EU Medical Devices Directive (Council Directive 93/42/EEC). Other countries, such as Switzerland and Turkey, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices compliance with the essential requirements of the EU Medical Devices Directive, isas a prerequisite to be able to affix the CE mark of conformity, without which medical devices cannot be marketed or sold in the EEA.these countries. To demonstrate compliance with the essential requirements medical devices manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the essential requirements, a conformity assessment procedure requires the intervention of a Notified Body, a third party organization designated by competent authorities of an EEA country to conduct conformity assessments. The Notified Body would typically audit and examine the products’products' Technical File and the quality system for the manufacture, design and final inspection of the devices before issuing a CE Certificate of Conformity demonstrating compliance with the relevant essential requirements of the Medical Devices Directive. In addition, compliance with ISO 13845 on quality systems issued by the International Organization for Standards, among other standards, establishes the presumption of conformity with the quality management system requirements of the Medical Devices Directive. In addition, many countries apply requirements in their reimbursement, pricing or health care systems that affect companies’companies' ability to market products.
Third-Party Coverage and Reimbursement
In the United States and elsewhere, health care providers that perform surgical procedures using medical devices such as ours generally rely on third-party payors, including governmental payors such as Medicare and Medicaid and private payors, to cover and reimburse the associated medical and surgical costs. Consequently, sales of medical devices are dependent in part on the availability of reimbursement to the customer from third-party payors. The manner in which reimbursement is sought and obtained varies based upon the type of payor involved and the setting in which the product is furnished and utilized. In general, third-party payors will provide coverage and reimbursement for medically reasonable and necessary procedures and tests that utilize medical devices and may provide separate payments for the implanted or disposable devices themselves. Most payors, however, will not pay separately for capital equipment, such as for the Renaissance system.our Surgical Guidance Systems. Instead, payment for the cost of using the capital equipment is considered to be covered as part of payments received for performing the procedure. In determining payment rates, third-party payors are increasingly scrutinizing the prices charged for medical products and services in comparison to other therapies. The procedures in which our products are used may not be reimbursed by these third-party payors at rates sufficient to allow us to sell our products on a competitive and profitable basis.
68
In addition, in many foreign markets, including the countries in the European Union, pricing of medical devices is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to limit payments by governmental payors for medical devices, and the procedures in which medical devices are used.
In March 2010, comprehensive health care reform legislation was enacted through the passage of PPACA. Significant measures contained in the PPACA include initiatives to revise Medicare payment methodologies, initiatives to promote quality indicators in payment methodologies (including the bundling of hospital and physician payments), initiatives related to the coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, and annual reporting requirements related to payments to physicians and teaching hospitals. At this time it is not possible to predict whether these initiatives will have a positive or negative impact on us. The PPACA also includes new taxes impacting certain health-related industries, including medical device manufacturers. Beginning in 2013, each medical device manufacturer or importer is required to pay an excise tax (or sales tax) in an amount equal to 2.3% of the price for which such manufacturer sells its medical devices. We believe that thisThis excise tax applies to our medical devices. However, the Consolidated Appropriations Act, 2016, signed into law on December 18, 2015, includes a two year moratorium on the medical device excise tax. Thus, the medical device excise tax does not apply to the sale of a taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on January 1, 2016, and ending on December 31, 2017. Absent further congressional action, the excise tax will apply to our products. be reinstated for medical device sales beginning January 1, 2018.
In addition to PPACA, various healthcare reform proposals have also emerged at the state level. We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or internationally, or the effect any future legislation or regulation will have on us. The taxes imposed by the PPACA and the expansion in government’sgovernment's role in the U.S. healthcare industry may result in decreased profits to us, lower reimbursements by payors for our products, and reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations, possibly materially.
Medicare and Medicaid
The Medicare program is a federal health benefit program administered by the CMS, that covers and pays for certain medical care items and services for eligible elderly (age>65), blind and disabled individuals, and individuals with end stage renal disease. The Medicaid program is a federal-state partnership under which states receive matching federal payments to fund healthcare services for the poor. Because about 40% of patients undergoing spine surgery are Medicare beneficiaries, and because some private commercial health insurers and some state Medicaid programs may follow the coverage and payment policies for Medicare, Medicare’sMedicare's coverage and payment policies are significant to our business.
Medicare coverage for procedures using our technology currently exists in the hospital inpatient setting, which falls under Part A of the Medicare program. Under Medicare Part A, Medicare reimburses acute care hospitals a flat prospectively determined payment amount for beneficiaries receiving covered inpatient services in an acute care hospital. This method of payment is known as the PPS. Under PPS, the prospective payment for a patient’spatient's stay in an acute care hospital is determined by the patient’spatient's condition and other patient data and procedures performed during the inpatient stay using a classification system known as DRGs. CMS has implemented a revised version of the DRG system that uses MS-DRGs, instead of the DRGs Medicare previously used. The MS-DRGs are intended to more accurately account for the patient’spatient's severity of illness when assigning each patient’spatient's stay to a payment classification. Medicare pays a fixed amount to the hospital based on the MS-DRG into which the patient’spatient's stay is classified, regardless of the actual cost to the hospital of furnishing the procedures, items and services that the patient’spatient's condition requires, except under limited circumstances. Accordingly, acute care hospitals generally do not receive direct Medicare reimbursement under PPS for the specific costs incurred in purchasing medical devices. Rather, reimbursement for these costs is deemed to be included within the MS-DRG based payments made to hospitals for the services furnished to Medicare eligible inpatients in which the devices are utilized. For cases involving unusually high costs, a hospital may receive additional “outlier”"outlier" payments above the pre-determined amount. In addition, there is a mechanism by which new technology services can apply to Medicare for additional payments above the pre-determined amount, although such requests have not been granted frequently.
69
Because PPS payments are based on predetermined rates and may be less than a hospital’shospital's actual costs in furnishing care, acute care hospitals have incentives to lower their inpatient operating costs by utilizing products, devices and supplies that will reduce the length of inpatient stays, decrease labor or otherwise lower their costs. For each MS-DRG, a relative weight is calculated representing the average resources required to care for cases grouped in that particular MS-DRG relative to the average resources used to treat cases in all MS-DRGs. MS-DRG relative weights are recalculated every year to reflect changes in technology and medical practice in a budget neutral manner. Under the MS-DRG payment system, there can be significant delays in obtaining adequate reimbursement amounts for hospitals for new technologies such that reimbursement may be insufficient to permit broad acceptance by hospitals.
In addition to payments to hospitals for procedures using our technology, Medicare makes separate payments to physicians for their professional services. The American Medical Association, or AMA, has developed a coding system known as the Current Procedural Terminology, or CPT, codes, which have been adopted by the Medicare program to describe and develop payment amounts for certain physician services. The Medicare Physician Fee Schedule uses CPT codes (and other codes) as part of the determination of allowable payment amounts to physicians. In determining appropriate payment amounts for surgeons, CMS receives guidance from the AMA regarding the relative technical skill level, level of resources used, and complexity of a new surgical procedure. Generally, the FDA approval of a new product is necessary, but not necessarily sufficient, for the designation of a new procedure code for a new surgical procedure using that product. Codes are assigned by either the AMA (for CPT codes) or CMS (for Medicare specific codes) and new codes usually become effective on January 1st of each year. Physicians placing pedicle screws in posterior spinal fixation procedures submit bills under various CPT codes. These codes are separate from the arthrodesis codes (for the fusion procedure) and other intraoperative procedures such as bone grafting.
Commercial Insurers
In addition to the Medicare program, many private payors look to CMS policies as a guideline in setting their coverage policies and payment amounts. The current coverage policies of these private payors may differ from the Medicare program, and the payment rates they make may be higher, lower, or the same as the Medicare program. A decrease of, or limitation on, reimbursement payments for doctors and hospitals by CMS or other agencies may affect coverage and reimbursement determinations by many private payors. Additionally, some private payors do not follow the Medicare guidelines, and those payors may reimburse only a portion of the costs associated with the use of our products, or not at all.
Fraud and Abuse Laws
Because of the significant federal funding involved in Medicare and Medicaid, Congress and the states have enacted, and actively enforce, a number of laws whose purpose is to eliminate fraud and abuse in federal health care programs. Our business is subject to compliance with these laws.
Anti-Kickback Statutes and Federal False Claims Act
The federal healthcare programs’programs' Anti-Kickback Statute prohibits persons from soliciting, offering, receiving or providing remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing or arranging for a good or service, for which payment may be made under a federal healthcare program such as Medicare or Medicaid. The definition of “remuneration”"remuneration" has been broadly interpreted to include anything of value, including for example gifts, certain discounts, the furnishing of free supplies, equipment or services, credit arrangements, payments of cash and waivers of payments. The PPACA amended the intent requirement of the Anti-Kickback Statute. A person or entity no longer needs to have actual knowledge of the Anti-Kickback Statute or specific intent in order to violate it. Penalties for violations include criminal penalties and civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. In addition, the PPACA provides that the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act or federal civil money penalties statute, discussed in more detail below.
The Anti-Kickback Statute is broad and prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. Recognizing that the Anti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements, Congress authorized the Office of Inspector General of the U.S. Department of Health and Human Services, or OIG, to issue a series of regulations, known as “safe"safe harbors.”" These safe harbors, issued by the OIG beginning in July 1991, set forth provisions that, if all their applicable requirements are met, will assure healthcare providers and other parties that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG.
Many states have adopted laws similar to the Anti-Kickback Statute. Some of these state prohibitions apply to referral of patients for healthcare items or services reimbursed by any source, not only the Medicare and Medicaid programs.
Government officials have focused their enforcement efforts on marketing of healthcare services and products, among other activities, and recently have brought cases against companies, and certain sales, marketing and executive personnel, for allegedly offering unlawful inducements to potential or existing customers in an attempt to procure their business.
Another development affecting the healthcare industry is the increased use of the federal Civil False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower”Act's "whistleblower" or “qui tam”"qui tam" provisions. The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has submitted a false claim to the federal government, and to share in any monetary recovery. In recent years, the number of suits brought against healthcare providers by private individuals has increased dramatically. In addition, various states have enacted false claim laws analogous to the Civil False Claims Act, although many of these state laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare program.
When an entity is determined to have violated the False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties of betweenfrom $5,500 to $11,000 for each separate false claim. There are many potential bases for liability under the False Claims Act. Liability arises, primarily, when an entity knowingly submits, or causes another to submit, a false claim for reimbursement to the federal government. The False Claims Act has been used to assert liability on the basis of inadequate care, kickbacks and other improper referrals, and improper use of Medicare numbers when detailing the provider of services, in addition to the more predictable allegations as to misrepresentations with respect to the services rendered. In addition, companies have been prosecuted under the False Claims Act in connection with alleged off-label promotion of products. Our future activities relating to the reporting of wholesale or estimated retail prices for our products, the reporting of discount and rebate information and other information affecting federal, state and third-party reimbursement of our products, and the sale and marketing of our products, may be subject to scrutiny under these laws.
71
Additionally, several bills have been passed or are pending, at both the state and federal levels that expand the anti-kickback laws to require, among other things, extensive tracking and maintenance of databases regarding relationships to physicians and healthcare providers. The PPACA imposes new reporting and disclosure requirements on device manufacturers for any “transfer"transfer of value”value" made or distributed to physicians and teaching hospitals, otherwise known as the Physician Payment Sunshine Act. Device manufacturers were required to begin collecting data on August 1, 2013, and will be required to submit reports toregister with CMS by March 31, 2014 (andand are required to submit certain reports to CMS disclosing payments and transfers of value made to physicians and teaching hospitals in the preceding calendar year on or before the 90th day of each subsequent calendar year). year.
In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians. Some states, such as California, Massachusetts and Nevada, mandate implementation of commercial compliance programs, while certain states, such as Massachusetts and Vermont, impose restrictions on device manufacturer marketing practices and tracking and reporting of gifts, compensation and other remuneration to physicians. The implementation of the infrastructure to comply with these bills and regulations could be costly and any failure to provide the required information may result in civil monetary penalties.
We believe our current consulting agreements with physicians represent legitimate compensation for needed documented services actually furnished to us. However, engagement of physician consultants by orthopedic medical device manufacturers has recently been subject to heightened scrutiny, and has resulted in four of the major orthopedic medical device implant manufacturers entering deferred prosecution agreements with the federal government and agreeing to pay substantial amounts to the federal government in settlement of Anti-Kickback Statute allegations, and all such companies submitting to supervision by a court appointed monitor throughout the term of the eighteen month agreements. In this environment, our engagement of physician consultants in product development and product training and education could subject us to similar scrutiny. We are unable to predict whether we would be subject to actions under the Anti-Kickback Statute or False Claims Act or any similar state law, or the impact of such actions.
It is possible that regulatory agencies may view our physician and customer arrangements as prohibited arrangements that must be restructured, or discontinued, or for which we could be subject to other significant penalties. We would be materially and adversely affected if regulatory agencies interpret our financial relationships with spine surgeons, hospitals or other customers who order our products to be in violation of applicable laws. In addition, various agencies may view these arrangements with our customers, including the provision of marketing grants to customers for the purposes of training surgeons and the provision of accessories at no charge or discounted prices with the purchase of the Renaissance systemour Surgical Guidance Systems, as not fully complying with federal and state fraud and abuse laws. To the extent we are found to not be in compliance, we could face potentially significant fines and penalties in addition to other more significant sanctions and we may be required to restructure our operations. This could subject us to monetary penalties for non-compliance, the cost of which could be substantial. The costs of defending such claims, as well as any sanctions imposed or negative public perceptions resulting therefrom could have a material adverse effect on our financial performance.
HIPAA and Other Fraud and Privacy Regulations
Among other things, HIPAA created two new federal crimes: healthcare fraud and false statements relating to healthcare matters. The HIPAA health care fraud statute prohibits, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private payors. A violation of this statute is a felony and may result in fines, imprisonment and/or exclusion from government sponsored programs. The HIPAA false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation in connection with the delivery of or payment for healthcare benefits, items or services. A violation of this statute is a felony and may result in fines and/or imprisonment.
72
In addition to creating the two new federal healthcare crimes, regulations implementing HIPAA also establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the security and privacy of individually identifiable health information maintained or transmitted by healthcare providers, health plans and healthcare clearinghouses, which are referred to as “covered"covered entities.”" Three standards have been promulgated under HIPAA’sHIPAA's regulations: the Standards for Privacy of Individually Identifiable Health Information, which restrict the use and disclosure of certain individually identifiable health information, the Standards for Electronic Transactions, which establish standards for common healthcare transactions, such as claims information, plan eligibility, payment information and the use of electronic signatures, and the Security Standards, which require covered entities to implement and maintain certain security measures to safeguard certain electronic health information, including the adoption of administrative, physical and technical safeguards to protect such information.
In 2009, Congress passed the American Recovery and Reinvestment Act of 2009, or ARRA, which included sweeping changes to HIPAA, including an expansion of HIPAA’sHIPAA's privacy and security standards. ARRA includes HITECH, which, among other things, made HIPAA’sHIPAA's privacy and security standards directly applicable to “business associates”"business associates" of covered entities effective February 17, 2010. A business associate is a person or entity that performs certain functions or activities on behalf of a covered entity that involve the use or disclosure of protected health information in connection with recognized health care operations activities. As a result, business associates are now subject to significant civil and criminal penalties for failure to comply with applicable standards. Moreover, HITECH creates a new requirement to report certain breaches of unsecured, individually identifiable health information and imposes penalties on entities that fail to do so. HITECH also increased the civil and criminal penalties that may be imposed against covered entities, business associates and possibly other persons and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions. The final omnibus rule modifies the breach reporting standard in a manner that will likely make more data security incidents qualify as reportable breaches. We believe that we are neither a covered entity nor, as of February 17, 2010, a business associate of our hospital customers. As such, we believe that we are not directly subject to these HIPAA standards; however, there is no guarantee that the government will agree with our determination. If the government determines that we are a business associate, we could be subject to enforcement measures, including civil and criminal penalties and fines for violations of the privacy or security standards. For the purpose of avoiding risk associated with our exposure to individually identifiable health information, we have voluntarily adopted and trained our personnel on an internal policy addressing the fundamentals of HIPAA compliance. While the government intended this legislation to reduce administrative expenses and burdens for the healthcare industry, our compliance with certain provisions of these standards entails significant costs for us.
In addition to federal regulations issued under HIPAA, some states have enacted privacy and security statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to modify our planned operations and procedures to comply with the more stringent state laws. If we fail to comply with applicable state laws and regulations, we could be subject to additional sanctions.
Anti-Bribery Laws
Compliance with complex foreign and U.S. laws and regulations that apply to our international operations increases our cost of doing business in international jurisdictions and could expose us or our employees to fines and penalties in the U.S. and abroad. These numerous and sometimes conflicting laws and regulations include the FCPA. The FCPA prohibits U.S. companies, companies whose securities are listed for trading in the United States and other entities, and their officers, directors, employees, shareholders acting on their behalf and agents from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad or otherwise obtaining favorable treatment. The FCPA also requires companies to maintain records that fairly and accurately reflect transactions and maintain internal accounting controls. In many countries, hospitals are government-owned and healthcare professionals employed by such hospitals, with whom we regularly interact, may meet the definition of a foreign official for purposes of the FCPA. Additionally, recently enacted U.S. legislation increases the monetary reward available to whistleblowers who report violations of federal securities laws, including the FCPA, which may result in increased scrutiny and allegations of violations of these laws and regulations. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business, and damage to our reputation.
73
Manufacturing and Assembly
We outsource manufacturing of the Mazor X System and the Renaissance system andSystem, as well as most of the product's sub-assemblies which are assembled by subcontractors according to work plans and designs prepared by us. We believe that outsourcing allows us to carry lower inventory levels and maintain fixed unit costs with minimal infrastructure and without incurring significant capital expenditures and rely on the economy of scale of the subcontractors. We have non-disclosure agreements with our subcontractors. The manufacturing plan is based on our sales forecast, and we believe that at this stage, by using our current subcontractors, we are able to meet demand level and increase production quantities if necessary.
We believe that our subcontractors’subcontractors' manufacturing processes are in compliance with pertinent U.S. and/or international quality and safety standards, such as ISO 9001, ISO 13485, or the FDA’sFDA's QSR.
We conduct in-house prototype development and present detailed manufacturing documentation to our subcontractors, who then purchase most of the necessary components and manufacture the product or subassemblies. These manufacturing subcontractors provide us fully assembled, or “turn-key,”"turn-key," services.
We control and monitor the quality of our products by testing each product and through extensive involvement in the production process in house and at the facilities of our subcontractors. To the best of our knowledge, our subcontractors have no significant manufacturing limitation in reference to our manufacturing needs.
As of the date hereof, fivesix of our subcontractors are single sources subcontractors. Replacement of threetwo of suchthese single source subcontractors may take between three to four months, while replacement of the other twofour single source subcontractors who are key suppliers, may take between six to eight months. One of these key supplier single source subcontractors is MPS Micro Precision Systems AG, or MPS, manufacturesmanufacturer of the RBT Device whilefor the other single source subcontractor, Tamuz F.T.K Solutions Ltd., or Tamuz, assembles the Renaissance workstation.Renaissance. Due to their nature, certain components must be ordered up to six months in advance, resulting in substantial lead time for certain production runs. In the event that such limited source suppliers are unable to meet our requirements in a timely manner, we may experience an interruption in production until we can obtain an alternate source of supply. See “Item"Item 3. Key Information –- D. Risk Factors –- Risks Related to Our Business–Business - Our reliance on third-party suppliers, including single source suppliers, for most of the components of the Mazor X and certain components of the Renaissance system could harm our ability to meet demand for our products in a timely and cost effective manner.”" In order to mitigate this risk, we provide our suppliers with a purchasing planblanket purchase orders and a three to nine month estimate of future orders. In addition, our agreements with such single source subcontractors provide, among other things, that should the subcontractor wish to terminate our agreement, it must provide us with a long prior notice with respect thereof. We engaged with Sanmina - SCI Israel Medical Systems Ltd., or Sanmina, during 2014.
Starting in 2016, Sanmina is our main subcontractor for the manufacturing of the Mazor X. With respect to MPS,Sanmina, our agreement requires a prior notice of eighteennine months for termination. Our agreements with Tamuz,termination by Sanmina and MPS are currently scheduled to expire in January 2015.30 days by Mazor. Furthermore, to mitigate the risk of loss of our suppliers, we constantly hold safety inventory stock of complete units of the Mazor X System and the Renaissance system.
We currently have onetwo wholly owned subsidiary:subsidiaries: Mazor Robotics, Inc., which is incorporated in Delaware, United States.States and Mazor Robotics Pte. Ltd., which is incorporated in Singapore.
74
Our offices and research and development facility are located at 7 Haeshel St.,5 Shacham Street, North Industrial Park, Caesarea Park South 3088900, Israel, where we occupy approximately 9533,123 square meters. We lease this facility, and our lease ends on December 31, 2014.June 30, 2021 and we have an option to extend the lease term for an additional five years. Our monthly rent payment pursuant to the lease for our offices and research and development facility as of December 201331, 2016 was NIS 38,459, partially180,000 linked to the Israeli CPI (approximately $11,080)$45,000).
Our U.S. headquarters are located in Orlando, Florida, where we occupy approximately 6,445 square feet. We lease our U.S. headquarters, and suchthis lease ends on May 11, 2016.in April 2018. We have a right to renew the lease for two twelve month terms.until December 31, 2018. Our monthly rent payment pursuant to the lease for our U.S. headquarters as of December 2013 was $11,813 escalating by 3% for each of the second31, 2016 is $12,911 and third lease years.will be updated to $13,299 starting May 1, 2017.
Not applicable.
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included in this annual report. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties, including those identified in “Cautionary"Cautionary Note Regarding Forward-Looking Statements”Statements" and in “Item"Item 3. Key Information –- D. Risk Factors”Factors".
Overview
We are a medical device company developing and marketing innovative surgical guidance systems and complementary products. Our expertise is in robotic, computerized and imaging-based systems, primarily in the field of spine surgery. Our Renaissance Surgical Guidance System enablesSystems enable surgeons to advance from freehand surgical procedures to accurate, state-of-the-art, precision guided procedures. Our FDA-cleared and CE-marked Renaissance system is used in multiple types of spine surgeries, whether open or minimally invasive, for a variety of clinical indications. Our Renaissance system and its predecessor have been used in over 7,00024,000 spine surgeries, including fusion, correction of spinal deformities, biopsy collection, tumor excision and cement augmentations. Our Renaissance system has the ability to improve clinical outcomes for patients, may provide a safer surgical environment for surgeons and operating room staff by reducing exposure to radiation, and deliver economic value to hospitals and payors. In October 2016, we commercially launched the FDA-cleared Mazor X system, and to date the Mazor X system was used for over 300 surgeries.
We have incurred net losses in each year since our inception in 2000 and, as of December 31, 2013,2016, we had an accumulated deficit of $72,535,000.$121,860,000. We expect to continue to incur significant operating losses as we increase our sales and marketing activities associated with the growing commercialization of the Renaissance systemour Surgical Guidance Systems in the United States, Europe, Asia and new markets in Asia,Australia, and otherwise continue to invest capital in the development and expansion of our products and our business generally. We also expect our research and development expenses to increase as we continue to expand our research and development activities, including the support of existing products and the research and development of potential future products. We also intend to continue to research and publish the clinical value proposition of the Renaissance system. In the event that we will enter into the second phase of the Medtronic Agreements we expect to have a significant reduction in our sales and marketing activities as Medtronic will assume full global responsibility to market and sell the Mazor X system for spine surgery.
Recent business events and key milestones in the development of our business include the following:
| ● |
75
| ● | retain high utilization rates, as the annual average number of procedures for U.S. installed systems in use for more than 12 months was 80 procedures per system. |
| ● |
| ● |
| ● |
We believe that the key to the continuing growth of our business is expanding the acceptance of the Renaissance systemour Surgical Guidance Systems for both spinal and brain surgery, and introducing other potential future applications.
The preparation of financial statements in conformity with International Financial Reporting Standards, or IFRS, requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
The accounting estimates used in the preparation of our financial statements require management to make assumptions regarding circumstances and events that involve considerable uncertainty. Management prepares the estimates on the basis of past experience, various facts, external circumstances, and reasonable assumptions according to the pertinent circumstances of each estimate.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any affected future periods.
Our significant accounting policies are more fully described in Note 3 to our consolidated financial statements as of December 31, 20132016 included elsewhere in this annual report. However, certain of our accounting policies are particularly important to the description of our financial position and results of operations. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. Those estimates are based on our historical experience, the terms of existing contracts, our observation of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. These estimates are subject to an inherent degree of uncertainty. Our critical accounting policies include:
Revenue Recognition
Revenue is generated from three main components: (1) sales of our Renaissance system,Surgical Guidance Systems, including installation services and training; (2) sales of disposable components and accessories; and (3) warranty and maintenance services related to the systems sold, which includes replacement parts, software updates, preventive maintenance and on-call support as detailed in the agreement.
The allocation of consideration from a revenue arrangement to its separate units of account is based on the relative fair values of each unit. If the fair value of the delivered item is not reliably measurable, then revenue is allocated based on the difference between the total arrangement consideration and the fair value of the undelivered item. We usually determine the fair value of the warranty and maintenance services component based on the renewal quote offered in the agreement. Warranties granted to customers are considered an additional element in the sale of the system, because they include training, service, the provision of spare parts, telephone support, on-site support and a positive representation that the product will either perform according to certain specifications or that we will repair or replace the product if it ceases to work properly. Therefore, we consider such warranty as a separate element of the system sale.
We recognize revenue from the above mentioned components in accordance with International Accounting Standards No.18, “Revenue Recognition,”No. 18, "Revenue", including provisions related to recognition of revenue from multiple-component transactions, when the significant risks and rewards of ownership of the goods transferred to the customer; it is probable that the economic benefits associated with the transaction will flow to us; the costs incurred or to be incurred in respect of the transaction can be measured reliably; we retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; and the amount of revenue can be measured reliably.
The revenue from sales of systems is recognized at the time of transfer of the significant risks and rewards of ownership as follows:
Revenue from the disposable components sales is recognized at the time of the transfer of the significant risks and rewards of ownership as follows:
Revenue from warranty and maintenance services is recognized proportionately over the period of rendering of the service and subject to the other conditions for revenue recognition specified above.
For system sales, where a commitment for future trade-in exists, we examine whether the transaction meets all revenue recognition criteria. If one or more of the revenue recognition criteria are not met, revenue is deferred and the system is presented in inventory until the earliest of trade-in commitment is fulfilled, or trade-in option expire.
In rare circumstances, we may bill a customer for a product and retain physical possession of the product until it is transferred to the customer at a point in time in the future. If such delivery is delayed at the customer’s request and the customer assumes title and accepts billing, revenue is recognized when the buyer takes title, provided that:
| ● | it is probable that the delivery will be made; |
| ● | the item is on hand, identified and ready for delivery to the customer at the time the sale is recognized; |
| ● | the customer specifically acknowledges the deferred delivery instructions, and |
| ● | the usual payment terms apply. |
Functional Currency
77
Share-Based Compensation
We account for share-based compensation arrangements in accordance with the provisions of International Financial Reporting Standard 2, or IFRS2. IFRS2 requires us to recognize share-based compensation expense for awards of equity instruments based on the grant-date fair value of those awards. The cost is recognized as compensation expense, based upon the grant-date fair value of the equity or liability instruments issued. The fair value of our option grants is computed as of the grant date based on the binominal model, using the standard parameters established in that model including estimates relating to the share price on the measurement date, exercise price of the instrument, expected volatility (based on the historichistorical volatility), an early exercise coefficient,the expected life span of the options, and the risk-free interest rate (based on government debentures) and share price on the measurement date.. As our stock is publicly traded on the TASE, we do not need to estimate the fair market value of our shares. Rather, we use the actual closing market price of our ordinary shares on the date of grant, as reported by the TASE. The value of the transactions, measured as described above, is recognized as an expense over the vesting period.
Capitalization of Development Costs
We capitalize development expenditure in accordance with International Accounting Standard No. 38 "Intangible Assets", or IAS 38, only if development costs can be measured reliably; the product or process is technically and commercially feasible; future economic benefits are probable and we intend to and have sufficient resources to complete development and to use or sell the asset.
We capitalize development costs based on our judgment regarding technological and economic feasibility, which generally exists when a product development project reaches a defined milestone, or when we enter into a transaction to sell the know-how that was derived from the development. In regards to our products, technological feasibility usually occur only whenafter the clinical trials succeed and following receipt of approval from the FDA.
Inventory Valuation
Inventory is measured at the lower of cost and net realizable value. Inventory costs include direct materials and direct labor. We review our inventory periodically to determine net realizable value and the necessity of provisions for obsolescence, which may result from excess, slow-moving or obsolete inventories. We write down inventory, if required, based on forecasted demand and technological obsolescence. These factors are impacted by market and economic conditions, technology changes and new product introductions and require estimates that may include uncertain elements.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposures and make an assessment of temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities. Changes to these estimates may result in a significant increase or decrease to our tax provision in the current or subsequent period.
We recognize deferred tax assets for unused tax losses, tax benefits, and deductible temporary differences to the extent that it is probable that future taxable profitsincome will be available against which that can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. A provision for uncertain tax positions, or reduction in deferredincluding additional tax asset,and interest expenses, is recognized when it is more probable than not that the GroupCompany will have to use its economic resources to pay the obligation.
The calculation of our tax liabilities or reduction in deferred tax asset involves dealing with uncertainties in the application of complex tax regulations and estimates of future taxable income in different geographical jurisdictions. We recognize liabilities for uncertain tax positions if it is probable to be realized. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax positions on a periodical basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effective settlement of audit issues, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.
Comparison of year ended December 31, 20132016 and year ended December 31, 20122015
Revenue
The following table presents our total revenues by geographic area and by line of product for the fiscal years indicated (in thousands of U.S. dollars and as a percentage of total revenues):
| For the Year Ended December 31, | ||||||||||||||||
| 2013 | 2012 | |||||||||||||||
United States | $ | 15,021 | 75 | % | $ | 9,474 | 78 | % | ||||||||
International | 4,962 | 25 | % | 2,701 | 22 | % | ||||||||||
Total | $ | 19,983 | 100 | % | $ | 12,175 | 100 | % | ||||||||
| For the Year Ended December 31, | ||||||||||||||
| 2016 | 2015 | |||||||||||||
| United States | $ | 30,716 | 84 | % | $ | 20,271 | 78 | % | ||||||
| International | $ | 5,663 | 16 | % | $ | 5,825 | 22 | % | ||||||
| Total | $ | 36,379 | 100 | % | $ | 26,096 | 100 | % | ||||||
| 2016 | 2015 | |||||||||||||
| Systems | $ | 19,624 | 54 | % | $ | 13,373 | 51 | % | ||||||
| Sale of disposables | $ | 10,295 | 28 | % | $ | 7,648 | 29 | % | ||||||
| Services and other | $ | 6,460 | 18 | % | $ | 5,075 | 20 | % | ||||||
| Total | $ | 36,379 | 100 | % | $ | 26,096 | 100 | % | ||||||
| 2013 | 2012 | |||||||||||||||
Systems | $ | 13,527 | 68 | % | $ | 8,656 | 71 | % | ||||||||
Sale of disposables | 3,505 | 17 | % | 1,918 | 16 | % | ||||||||||
Services and other | 2,951 | 15 | % | 1,601 | 13 | % | ||||||||||
Total | $ | 19,983 | 100 | % | $ | 12,175 | 100 | % | ||||||||
Total revenue was $19,983,000$36,379,000 for the year ended December 31, 2013,2016, compared to $12,175,000$26,096,000 for the year ended December 31, 2012.2015. The increase in revenue of $7,808,000,$10,283,000, or 64%39%, was due to a $4,870,000,$6,251,000, or 56%47%, increase in Renaissance system revenue,sales of systems, a $1,586,000,$2,647,000, or 83%35%, increase in disposables revenue, and a $1,350,000,an $1,385,000, or 85%27%, increase in service and other revenue.
The increase in sales of our Renaissance systemsSurgical Guidance Systems during the year ended December 31, 20132016 compared to the year ended December 31, 20122015 was attributabledue to the sales of 23revenue recognition from 41 units of our Renaissance system and one system upgrade during the year ended December 31, 2013, compared to 15 unitsSurgical Guidance Systems sold during the year ended December 31, 2012.2016, compared to 23 units of our Renaissance system, one system upgrade sold and 2 Renaissance system placements during the year ended December 31, 2015. The increase in the number of systems sold was as a result of the successful launch of our Mazor X system and the collaboration with Medtronic that started from May 2016.
The increase in disposables revenue during the year ended December 31, 20132016 compared to the year ended December 31, 20122015 was primarily due to the continued adoption and usage of Renaissance, driven by the growth of our commercial installed base worldwide.
The increase in service and other revenue during the year ended December 31, 20132016 compared to the year ended December 31, 20122015 was attributable to an increase in the installed base of Renaissance systems covered under warranty and maintenance contracts.contracts, mainly in the United States.
The increase in revenue derived from the United States of $5,547,000,$10,445,000, or 59%52%, was primarily due to the 15 commercial Renaissance system sales and one system upgrade duringincrease in revenues from the sale of Surgical Guidance Systems, as we recognized revenues from 30 systems sold in the year ended December 31, 2013,2016, compared to 11 commercial sales during16 Renaissance systems sold and 2 Renaissance system placements in the year ended December 31, 2012.2015. The increase is also attributed to the increase in disposables, service and others. The decrease in international revenue of $2,261,000,$162,000, or 84%3%, was primarily due to the eight international sales of our Renaissance system during the year ended December 31, 2013, compared to four international commercial sale of our Renaissance system during the year ended December 31, 2012.a slight decrease in revenues from disposables, offset by a slight increase in revenues from service and others.
79
Cost of Sales
Cost of sales was $4,280,000$10,330,000 for the year ended December 31, 2013,2016, compared to $2,893,000$5,827,000 for the year ended December 31, 2012.2015. The increase in cost of sales of $1,387,000,$4,503,000, or 48%77%, wasis primarily dueattributed to an increase in cost of materials, reflecting recognition of the costs from sales of our Renaissance system. The increased costs were due to costs associated with 24 unit sales (including one upgrade) recognized during the year ended December 31, 2013, compared to costs associated with 15 unit sales recognized during the year ended December 31, 2012, and thesales. In addition, there was an increase in costsalaries and related expenses associated with the incremental number of employees added in the operations department.department and an increase in intangible asset amortization.
Gross Profit
Gross profit was $15,703,000$26,049,000 for the year ended December 31, 2013,2016, or 78.6%71.6% of revenues, compared to $9,282,000,$20,269,000, or 76.2%77.7% of revenues, for the year ended December 31, 2012.2015. The increasedecrease in gross profitmargin is mainly attributed to the reduced sales price to Medtronic of $6,421,000, or 69%,the Mazor X and higher manufacturing costs of the gross margin as a percentage of sales was primarily due the increase in sales volume in the period. In addition, the volume of fixed expenses did not increase by the same rate as the 64% increase in sales in the year ended December 31, 2013Mazor X system, compared to the corresponding period of 2012.Renaissance system.
Operating Expenses
| For the year Ended December 31, | ||||||||||||||||
| (in thousands) | Increase in | |||||||||||||||
| 2013 | 2012 | dollars | % | |||||||||||||
Research and development, net | $ | 4,174 | $ | 2,760 | 1,414 | 51 | ||||||||||
Selling and marketing | $ | 15,692 | $ | 8,887 | 6,805 | 77 | ||||||||||
General and administrative | $ | 2,766 | $ | 1,845 | 921 | 50 | ||||||||||
Total operating expenses | $ | 22,632 | $ | 13,492 | 9,140 | 68 | ||||||||||
| For the Year Ended December 31, | ||||||||||||||||
Increase (decrease) in | ||||||||||||||||
| 2016 | 2015 | Dollars | % | |||||||||||||
| (in thousands) | ||||||||||||||||
Research and development, net | $ | 5,736 | $ | 6,324 | (588 | ) | (9 | ) | ||||||||
Selling and marketing | $ | 33,637 | $ | 24,947 | 8,690 | 35 | ||||||||||
General and administrative | $ | 5,697 | $ | 4,305 | 1,392 | 32 | ||||||||||
Total operating expenses | $ | 45,070 | $ | 35,576 | 9,494 | 27 | ||||||||||
Research and Development Cost, NetExpenses
Research and development cost, net was $4,174,000expenses were $5,736,000 for the year ended December 31, 2013,2016, compared to $2,760,000$6,324,000 for the year ended December 31, 2012.2015. The increasedecrease of $1,414,000,$588,000, or 51%9%, was primarily due to capitalization of development costs in the amount of $2,332,000 as intangible asset in year ended December 31, 2016. This decrease was offset by an increase in total research and development costs, primarily due to an increase in salaries and related expenses associated with the incremental number of employees added in the research and development department, to support our continuous efforts in developing additional applications and new products.
Selling and Marketing Expenses
Selling and marketing expenses were $15,692,000$33,637,000 for the year ended December 31, 2013,2016, compared to $8,887,000$24,947,000 for the year ended December 31, 2012.2015. The increase of $6,805,000,$8,690,000, or 77%35%, was primarily due to the expansion of efforts to further penetrate to the U.S. market and the efforts to penetrate the Asian market.markets. Such efforts included, among other things, recruitment of additional sales personnel in the United States, and expansion of marketing activities, including participatingsuch as participation in exhibitions, holding cadaver labs and continued introduction activities offor both our Mazor X system and our Renaissance system. In addition, this increase is attributable to increase in commissions paid to the sales force due to higher volume of sales. Selling and marketing expenses for the year ended December 31, 20132015 also included an excise tax fee in the amount of $241,000 resulting from$308,000 as a result of certain healthcare legislation. See “Itemlegislation that was previously suspended for a period of two years, beginning January 1, 2016. For further information, see "Item 10. Additional Information –- E. Taxation –- Medical Devices Excise Tax.”"
General and Administrative Expenses
General and administrative expenses were $2,766,000$5,697,000 for the year ended December 31, 2013,2016, compared to $1,845,000$4,305,000 for the year ended December 31, 2012.2015. The increase is mostly due to recruiting new employees and thean increase in professional consulting needed to supportsalaries and related expenses in the expansion of our activitiesgeneral and listing of our ADSs on the NASDAQ Capital Market.administrative departments.
80
Taxes on Income
We recorded a tax expense of $167,000$44,000 for the year ended December 31, 2013,2016, compared to an expense of $23,000$213,000 for the year ended December 31, 2012. We incur tax expense only in the U.S.2015. The increase in tax expenses in the year ended December 31, 2013decrease is mainly due to taxable income beforedeductions utilized in 2016. We incur tax expense mainly in the Subsidiary following an increase in income from U.S. activity.United States.
Loss and Loss per Share
Loss was $20,529,000,$18,668,000, or $0.57$0.42 per share, for the year ended December 31, 2013,2016, compared to loss of $7,064,000,$15,385,000, or $0.29$0.36 per share, for the year ended December 31, 2012.2015.
Revenue
The following tables presenttable presents our total revenues by geographic area and by line of product and by geographic area for the fiscal years indicated (in thousands of U.S. dollars and as a percentage of total revenues):
| For the Year Ended December 31, | ||||||||||||||||
| 2012 | 2011 | |||||||||||||||
| United States | $ | 9,474 | 78 | % | $ | 3,067 | 52 | % | ||||||||
| Western Europe | 632 | 5 | % | 2,040 | 35 | % | ||||||||||
| Eastern Europe | 51 | 0 | % | 188 | 3 | % | ||||||||||
| Asia | 2,018 | 17 | % | 609 | 10 | % | ||||||||||
| Total | $ | 12,175 | 100 | % | $ | 5,904 | 100 | % | ||||||||
| For the Year Ended December 31, | ||||||||||||||||||||||||||||||||
| 2015 | 2014 | |||||||||||||||||||||||||||||||
United States | $ | 20,271 | 78 | % | $ | 15,486 | 73 | % | ||||||||||||||||||||||||
International | $ | 5,825 | 22 | % | $ | 5,722 | 27 | % | ||||||||||||||||||||||||
Total | $ | 26,096 | 100 | % | $ | 21,208 | 100 | % | ||||||||||||||||||||||||
| 2012 | 2011 | 2015 | 2014 | |||||||||||||||||||||||||||||
| Systems | $ | 8,656 | 71 | % | $ | 4,114 | 70 | % | $ | 13,373 | 51 | % | $ | 12,040 | 57 | % | ||||||||||||||||
| Sale of Disposables | 1,918 | 16 | % | 954 | 16 | % | ||||||||||||||||||||||||||
Sale of disposables | $ | 7,648 | 29 | % | $ | 4,916 | 23 | % | ||||||||||||||||||||||||
| Services and other | 1,601 | 13 | % | 836 | 14 | % | $ | 5,075 | 20 | % | $ | 4,252 | 20 | % | ||||||||||||||||||
| Total | $ | 12,175 | 100 | % | $ | 5,904 | 100 | % | $ | 26,096 | 100 | % | $ | 21,208 | 100 | % | ||||||||||||||||
Total revenue was $12,175,000$26,096,000 for the year ended December 31, 2012,2015, compared to $5,904,000$21,208,000 for the year ended December 31, 2011.2014. The increase in revenue of $6,271,000,$4,888,000, or 106%23%, was due to a $4,542,000,$2,732,000, or 110%56%, increase in disposables revenue, a $1,333,000, or 11%, increase in Renaissance system revenue, a $964,000,and by $823,000, or 101%19%, increase in disposables revenue and a $765,000, or 92%, increase in servicesservice and other revenues.revenue.
The increase in Renaissance system revenue was attributable to the commercial sales of 15 units of our Renaissance systemsystems during the year ended December 31, 2012, as2015 compared to 11 unitthe year ended December 31, 2014 was due to the sales of 23 units of our Renaissance system, one system upgrade sold and 2 placements during the year ended December 31, 2011, and due2015, compared to an increase in20 units sold during the system’s average selling price with the introduction of the Renaissance system in 2011 (which replaced the earlier SpineAssist system).year ended December 31, 2014.
The increase in disposables revenue during the year ended December 31, 2012,2015 compared to the year ended December 31, 2011,2014 was primarily due to the continued adoption and usage of Renaissance, driven by the growth of our commercial installed base, and relatively incremental average increase in utilization per commercial systemmainly in the United States with a focus on complex spine and minimally-invasive surgery markets.States.
The increase in service and other revenue during the year ended December 31, 2015 compared to the year ended December 31, 2014 was attributable to an increase in the installed base of Renaissance systems covered under warranty and maintenance duringcontracts, mainly in the year ended December 31, 2012, compared to the year ended December 31, 2011.
United States.
The increase in revenue inderived from the United States of $6,407,000,$4,785,000, or 209%31%, was primarily due to the sale of elevenincrease in revenues from commercial Renaissance systems in the United Statessystem sales during the year ended December 31, 2012,2015 compared to four commercialRenaissance system sales in the United States during the year ended December 31, 2011. The decline2014, as well as an increase in international sales is mainly a result of slowdown of activities in Europe offset by the increaseutilization of the activityinstalled base, reflected in Asia. The decline in our sales in east and west Europe is mainly due to zero Renaissance systems sold during the year ended December 31, 2012, compared to six Renaissance systems sold during the year ended December 31, 2011. The increase in our activity in Asia is due to entrance to new markets resulting inrevenues from sales of four Renaissance systems during the year ended December 31, 2012, compared to zero Renaissance systems sold during the year ended December 31, 2011.disposables, service and others.
Cost of Sales
Cost of sales was $2,893,000$5,827,000 for the year ended December 31, 2012,2015, compared to $1,879,000$4,396,000 for the year ended December 31, 2011.2014. The increase in cost of sales of $1,014,000,$1,431,000, or 54%33%, werewas primarily due to costs associated with 15 units sales recognized during the year ended December 31, 2012, compared to costs associated with 11 units sales recognized during the year ended December 31, 2011, the incremental per unit costan increase in recognition of the Renaissance system comparedcosts from sales. Additionally, increased costs were in respect to the SpineAssist system, and thean increase in costsalaries and related expenses associated with the incremental number of employees added in the operations department.department to support growth in our activities.
81
Gross Profit
Gross profit was $9,282,000$20,269,000 for the year ended December 31, 2012,2015, or 76%77.7% of revenues, compared to $4,025,000,$16,812,000, or 68%79.3% of revenues, for the year ended December 31, 2011.2014. The decrease in gross profit margin was 1.6% due to increase in costs. The increase in gross profit of $5,257,000,$3,457,000, or 130%20.6%, and the gross margin as a percentage of sales was primarilymainly due to the increase in revenuessales volume in the period and realizing economies of scale. In addition, the increase in gross margin is due to an increase in the average price of our Renaissance system in 2012 compared to 2011, due to the move from a combination of sales of Renaissance systems and the SpineAssist systems in the year ended December 31, 2011, to sales of solely Renaissance systems during year ended December 31, 2012. In addition, the incremental revenues covered a higher portion of the overhead expense.
period.
Operating Expenses
For the Year Ended December 31, | ||||||||||||||||
| Increase (decrease) in | ||||||||||||||||
| 2015 | 2014 | Dollars | % | |||||||||||||
| (in thousands) | ||||||||||||||||
Research and development | $ | 6,324 | $ | 5,776 | 548 | 9 | ||||||||||
Selling and marketing | $ | 24,947 | $ | 21,352 | 3,595 | 17 | ||||||||||
General and administrative | $ | 4,305 | $ | 4,392 | (87 | ) | (2 | ) | ||||||||
Total operating expenses | $ | 35,576 | $ | 31,520 | 4,056 | 13 | ||||||||||
| For the Year Ended December 31, | ||||||||||||||||
| (in,000s) | Increase (decrease) in | |||||||||||||||
| 2012 | 2011 | dollars | % | |||||||||||||
| Research and development | $ | 2,760 | $ | 3,062 | (302) | (10) | ||||||||||
| Selling and marketing | $ | 8,887 | $ | 6,990 | 1,897 | 27 | ||||||||||
| General and administrative | $ | 1,845 | $ | 1,639 | 206 | 13 | ||||||||||
| Total operating expenses | $ | 13,492 | $ | 11,691 | 1,801 | 15 | ||||||||||
Research and Development Cost, Net
| For the Year Ended December 31 | ||||||||
| 2012 | 2011 | |||||||
| Research and Development cost | $ | 2,760 | $ | 3,076 | ||||
| Less: | ||||||||
| Participation of the European Union | $ | - | (14) | |||||
| Research and Development Expenses, Net | $ | 2,760 | $ | 3,062 | ||||
Research and development cost net was $2,760,000$6,324,000 for the year ended December 31, 2012,2015, compared to $3,062,000$5,776,000 for the year ended December 31, 2011.2014. The decreaseincrease of $302,000,$548,000, or 10%9%, was primarily due the completion of the development of the Renaissance systemto our continuous efforts in 2011 (the Renaissance system was launcheddeveloping additional applications and new products, mainly resulting in June 2011), which resulted in a decrease in our raw materials and subcontractor expenses, patent and registration expenses and otheradditional purchasing for current research and development expenses, partially offset by an increase in salaries, wages and related expenses and depreciation expenses. Ourprojects, as well as recruitment of research and development expenses after the launch of the Renaissance system relate mainly to continued improvement of our Renaissance system, development of additional applications, such as the brain application, and development of future products.personnel.
Selling and Marketing Expenses
Selling and marketing expenses were $8,887,000$24,947,000 for the year ended December 31, 2012,2015, compared to $6,990,000$21,352,000 for the year ended December 31, 2011.2014. The increase of $1,897,000,$3,595,000, or 27%17%, resulted from an increase in salaries, wages and related expenses, advertising, demonstrations and exhibitions expenses, and foreign travel expenses,was primarily due to the expansion of efforts to further penetrate to the U.S. market and the efforts to penetrate the Asian market.markets. Such efforts included, among other things, recruitment of additional sales personnel in the United States expansion of marketing activities including participating in exhibitions and continued introduction activities for our Renaissance system. Selling and marketing expenses for the year ended December 31, 2015 also included an excise tax fee in the amount of the Renaissance product.$308,000; this amount is a result of certain healthcare legislation. For further information see "Item 10. Additional Information - E. Taxation - Medical Devices Excise Tax."
General and Administrative Expenses
General and administrative expenses remained generally at the same level as 2014, and were $1,845,000$4,305,000 for the year ended December 31, 2012,2015, compared to $1,639,000$4,392,000 for the year ended December 31, 2011. The increase of $206,000, or 13%, resulted from an increase in salaries, wages and related expenses and professional services expenses, primarily due to expenses relating to hiring a consultant and other professional services, such as legal services, investors relationship services, auditors, and tax consultants that supported our organizational growth.2014.
Taxes on Income
We recorded ana tax expense of $23,000$213,000 for the year ended December 31, 2012,2015, compared to an income tax benefitexpense of $68,000$145,000 for the year ended December 31, 2011. The income2014. We incur tax benefitexpense mainly in 2011 was due to recognition of deferred tax assets for net operating losses of the Subsidiary.United States.
Loss and Loss per Share
82
Effective Corporate Tax Rate
Our effective consolidated tax rate in 2013, 20122016, 2015 and 20112014 was close to zero percent primarily due to the tax losses we accrued in Israel since our inception.inception, for which deferred tax assets were not recognized. We expect to continue to accrue losses for tax purposes in Israel in the coming years and to increase our profits for tax purposes in our U.S. Subsidiary, derived from our expected revenues in the coming years in the United States, which would increase our effective consolidated tax rate in the coming years.
Impact of Inflation, Devaluation and Fluctuation in Currencies on Results of Operations, Liabilities and Assets
We have recently begun generatinggenerate a majority of our revenues in U.S. dollars, which is our functional currency as of September 27, 2012, while some of our revenues are generated in other currencies, such as the Euro and NIS. As a result, some of our financial assets are denominated in these currencies, and fluctuations in these currencies could adversely affect our financial results. A considerable amount of our expenses are generated in dollars, but a significant portion of our expenses such as salaries are generated in other currencies such as NIS. In addition to our operations in Israel, we are expanding our international operations. Accordingly, we incur and expect to continue to incur additional expenses in non-dollar currencies, such as the Euro. As a result, some of our financial liabilities are denominated in these non-dollar currencies. Most of the time,Usually, our non-dollar assets are not fully offset by our non-dollar liabilities. Due to the foregoing and the fact that our financial results are measured in dollars, our results could be adversely affected as a result of a strengthening or weakening of the dollar compared to these other currencies. Until September 27, 2012, our functional currency was NISDuring 2016, 2015 and therefore the impact of the fluctuation of the NIS against other non-NIS denominated currencies created an impact on our assets and liabilities valuation. During 2013, 2012 and 2011,2014, we incurred net currency loss of $10,000, $113,000 and $107,000, respectively. During 2016, 2015 and 2014, we incurred net gain of $109,000, a gain of $317,000$39,000 and a$3,000 and net loss of $16,000,$408,000 from hedging transactions, respectively.
Some portions of our expenses, primarily expenses associated with employee compensation, are denominated in NIS unlinked to the U.S. dollar. A devaluation of the NIS in relation to the U.S. dollar has the effect of decreasing the U.S. dollar value of any asset of ours that consists of NIS or receivables payable in NIS, unless such receivables are linked to the U.S. dollar. Such devaluation also has the effect of reducing the U.S. dollar amount of any of our expenses or liabilities which are payable in NIS, unless such expenses or payables are linked to the U.S. dollar. Conversely, any increase in the value of the NIS in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any of our unlinked NIS assets and the U.S. dollar amounts of any of our unlinked NIS liabilities and expenses. In addition, some of our expenses such as salaries for our Israeli based employees, are linked to some extent to the rate of inflation in Israel. An increase in the rate of inflation in Israel that is not offset by a devaluation of the NIS relative to the U.S. dollar can cause the dollar amount of our expenses to increase. We believe that inflation in Israel has not had a material effect on our results of operations but that the recent depreciation of the U.S. dollar against the NIS has a material effect on our results of operations.
We engage in currency hedging activities. These measures, however, may not adequately protect us from material adverse effects due to the impact of inflation in Israel or from fluctuations in the relative values of the dollar and foreign currencies in which we transact business, and may result in a financial loss. See further discussion under “Item 11."Item 11 - Quantitative and Qualitative Disclosures about Market Risk”Risk" below.
83
We have incurred net losses and negative cash flow from operating activities for each year since our inception in September 2000. As of December 31, 2013,2016, we had an accumulated loss of $72,535,000$121,860,000 and have financed our operations principally through the sale of our products, disposables and other services, sale of our equity securities (including ADSs, Ordinary Shares and warrants), issuance of convertible debentures and grants from the OCS.IIA.
As of December 31, 2013,2016, we had $64,817,000$61,833,000 in cash, cash equivalents, short-term investments and short-termlong-term investments. Our cash and short term investment balances are held mainly in bank deposits, in accordance with directives of our board of directors as further described below.
As of December 31, 2013, approximately2016, more than 50% of our expenses are in U.S. dollars and the rest are mainly in NIS or Euros. We are engagingengage in derivative instrumentscurrency hedging transactions, such as options and forward contracts, for the purposes of hedging our NIS payments to local suppliers and for salaries in Israel. Our currency hedging transactions are aimed to decrease a certain portion of the financial exposure risk of fluctuations in the exchange rates of our operating currency, which is the U.S. dollar against the NIS.
Our board of directors periodicperiodically examines the financial exposure of our balance sheet, as set forth above. As part of this approach, we carry out financial activities to reduce our exposure to risk. The Audit Committee and the board of directors held discussions concerning our exposure to risk from the currencies other than the U.S. dollar, and decided that we shall maintain sufficient cash for our activities, including those in other currencies.
Net Cash Used in Operating Activities
Net cash used in operating activities primarily reflects the net loss for those periods, which was adjusted, mainly by non-cash items, such as depreciation and amortization, stock-based compensation and non-cash finance income and expenses and is also affected by changes in operating assets and liabilities.
Net cash used in operating activities for the year ended December 31, 20122016 was $1,820,000$10,102,000 compared to $6,853,000$11,572,000 for the year ended December 31, 2011.2015. The decrease of $5,033,000,$1,470,000, or 276%13%, in cash used forin operating activities was mainly due to a reduction of $3,456,000 in loss from operations infor the year ended December 31, 2012, compared2016 was mainly due to higher collection from customers, as a result of higher sales in 2016. The decrease was offset by higher losses, higher payments to suppliers, as a result of higher investments in developing additional applications and new products and the expansion of efforts to further penetrate to the lossU.S. and the Asian markets.
Net cash used in operating activities for the year ended December 31, 2011.2015 was $11,572,000 compared to $14,290,000 for the year ended December 31, 2014. The decrease of $2,718,000, or 19%, in cash used in operating activities for the year ended December 31, 2015 was mainly due to an increase in accounts payable, realizing inventory and non-cash expenses. This is a result of higher investments in developing additional applications and new products and the expansion of efforts to further penetrate to the U.S. and the Asian markets. The decrease was offset by the increase in cash used in operating activities from trade and other account receivables of approximately $1,112,000, as a result of higher sales in 2015.
Net Cash Provided by (Used in) Investing Activities
Net cash used in investing activities for the year ended December 31, 2013,2016, was $41,092,000, primarily$24,432,000, attributable to proceedsnet purchase of $40,820,000 from acquisitionshort-term investments of deposits$11,094,000 and investmentto purchase of long-term investments in marketable securitiesthe amount of $9,823,000, capitalization of cash-paid development costs in the amount of $1,902,000 and purchasepurchases of fixed assets such as computers, machinery and leasing improvements of $272,000.$2,361,000. The cash used in investment activities was offset by proceeds from long-term investments in an amount of $748,000.
Net cash provided by investing activities for the year ended December 31, 2012,2015, was $9,577,000, primarily$2,568,000, attributable to net proceeds of $9,949,000 from maturities of shortshort-term investments of $9,816,000 and to proceeds from the sale of long-term investments in the amount of $992,000 offset by the purchase of $7,538,000 of long term investments offset by purchaseand purchases of fixed assets such as computers, machinery and leasing improvements of $372,000.$702,000.
Net cash used inprovided by investing activities for the year ended December 31, 20112014 was $2,488,000,$14,531,000, attributable to proceeds from short-term investments in the amount of $22,271,000, the purchase of $2,213,000$7,237,000 of shortlong term investments and purchases of fixed assets of $275,000.$503,000.
Net Cash fromProvided by Financing Activities
Net cash flow from financing activities in the year ended December 31, 20132016 was $53,048,000.$35,997,000. The net cash from financing activities in 20132016 is mainly attributable toderived from the proceeds from the exercise of warrants and the sale of our ADSsADS issuances to Medtronic in an amount of $53,198,000 and proceeds from$31,416,000, net of issuance costs, the exercise of share options by employees and service providers for the amount of $479,000. The proceeds were offset by repayment of loans to the OCS for the amount of $629,000.
Net cash flow from financing activities in the year ended December 31, 20112015 was $6,210,000, compared to $212,000 in the year ended December 31, 2010.$370,000. The net cash from financing activities in 20102015 is derived from the exercise of share options by employees and consultants in the amount of $370,000.
Net cash flow from financing activities in the year ended December 31, 2014 was $2,424,000. The net cash from financing activities in 2014 is mainly from grants we receivedthe exercise of share options by employees and consultants in the amount of $3,042,000, offset by repayment of loans to the IIA of $324,000 and costs related to the ADSs offering from the OCS.2013 of $294,000, that were paid in 2014.
Operating Capital and Capital Expenditure Requirements
To date, we have not achieved profitability and have sustained net losses in every fiscal year since our inception in 2000, including a net loss of $20.5$18.7 million for the year ended December 31, 2013.2016. We anticipate that we will continue to incur substantial net losses for at least the next two years12 months, as we expand our sales and marketing capabilities in the spine market,and brain markets, continue to marketinvest in marketing activities for our Surgical Guidance Systems in the U.S. and sell our Renaissance system,Asia-Pacific market, continue research and development of existing and future products, and continue development of the corporate infrastructure required to sell and market our products and support operations. We also expect to experience increased cash requirements for inventory to meet increased demand of our Renaissance system.Surgical Guidance Systems. We believe that our current cash, cash equivalents and investment balances, and interest income we earn on these balances will be sufficient to meet our anticipated cash requirements at least for the foreseeable future.next 12 months. To the extent our available cash, cash equivalents and investment balances are insufficient to satisfy our operating requirements, we will need to seek additional sources of funds, including selling additional equity, debt or other securities or entering into a credit facility, or modify our current business plan. The sale of additional equity may result in dilution to our current shareholders. If we raise additional funds through the issuance of debt securities, these securities may have rights senior to those of our ordinary shares and could contain covenants that could restrict our operations and ability to issue dividends. We may also require additional capital beyond our currently forecasted amounts. Any required additional capital, whether forecasted or not, may not be available on reasonable terms, or at all. If we are unable to obtain additional financing, we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could materially harm our business and results of operations.
Because of the numerous risks and uncertainties associated with the development of medical devices and the current economic situation, we are unable to estimate the exact amounts of capital outlays and operating expenditures necessary to complete the development of our products and successfully deliver commercial products to the market. Our future capital requirements will depend on many factors, including but not limited to the following:
● the revenue generated by sales of our current and future products;
| ● |
85
| ● | the expenses we incur in selling and marketing our products and supporting our growth; |
| ● | the costs and timing of regulatory clearance or approvals for new products or upgrades or changes to our current products; |
| ● |
| the rate of progress, cost, and success or failure of on-going development activities; |
| ● | the emergence of competing or complementary technological developments; |
| ● | the costs of filing, prosecuting, defending and enforcing any patent or license claims and other intellectual property rights, or participating in litigation related activities; |
| ● |
| the terms and timing of any collaborative, licensing, or other arrangements that we may establish; |
| ● |
| the acquisition of businesses, products and technologies; and |
● general economic conditions and interest rates, including the continuing weak conditions
| C. | Research and Development, Patents and Licenses, Etc. |
Our research and development activities are focused on the development of surgical guidance systems and complementary products in the spine and brain surgical markets as well as development of additional applications using the core technology.markets.
As of December 31, 2013,2016, our research and development team consisted of 2237 people, mostly engineers in the fields of which 20 full-time employees engaged in researchmechanics, biomedical sciences, electronics and development, as well as two part time employees primarily working on our research and development program.software. In addition, we work with subcontractors for the development and design when needed. We have assembled an experienced team with recognized expertise in robotics, mechanical and electrical engineering, software, control algorithms and systems integration, as well as significant clinical knowledge and expertise.expertise and vast clinical experience.
Our research and development efforts are focused on continuous improvement of the Renaissance systemour Surgical Guidance Systems, including adding new applications for the spine market and the development of the Brainbrain application as well as investment in future products.products for new applications.
We invest resources in the protection of our intellectual property. For this purpose, we file from time to time applications for patent registration in the certain countries in which we are active and in other countries which we consider as potential markets.
From our inception, we have entered into research and clinical alliances in order to substantiate the knowledge which is at the basis of the products developed and marketed thereby, as well as for the innovative and ongoing development of such products. We use such research to gain recognition in the medical community and for scientific publications. We are currently involved in research activity conducted in several centers in Israel, the United States, as well as supporting to different degrees clinical studies in Europe and Germany.Asia.
We finance our research and development activities mainly through sale of our products and capital raising, grants received from the OCS and grants received from the European Union.raises.
For a description of the amount spent during each of the last three fiscal years on company-sponsored research and development activities, see “Item"Item 5. Operating and Financial Review and Prospects –- A. Operating Results.”"
The following is a description of factors that may influence our future results of operations, including significant trends and challenges that we believe are important to an understanding of our business and results of operations.
86
We generate revenues from: (1) Renaissancesurgical guidance system sales; (2) sales of disposable kits and accessories to the Renaissance system;our surgical guidance systems; and (3) sales of warranty and maintenance services on the Renaissance systemsurgical guidance systems and accessories.related products. The level of our future revenues is hard to predict and depends on many factors which are not in our control. For instance, future revenues from the sale of Renaissance systemsour Surgical Guidance Systems may be adversely affected by current general economic conditions and the resulting tightening of hospital budgets, which may cause purchasing decisions to be delayed or our customers to have difficulty securing adequate funding to buy our products. In addition, revenue growth depends on the acceptance of our technology in the market. Sales of our disposable accessories depend on the adoption of our technology by hospitals. We continue to encourage use of the Renaissance systemsurgical guidance systems by our U.S. clinical sales team and expect to see growth in our recurring revenues; however, we anticipate that quarterly results will be variable because our sales cycle generally varies from three to sixaverages nine months, and since we are dependent on hospital purchasing decisions which in turn are affected by quarterly and other variations in the hospital budgeting process.
We sell our products and services in the United States through our direct sales force, from mid-2016 with the assistance of Medtronic, and in most other territories we sell our products using third-party distributors. In 2012, we entered into distribution agreements to sell our products in Japan, China, India, Singapore, Thailand and Vietnam and during 20132014 we entered into a distribution agreement in Australia. WeHong Kong, in 2015 we entered into distribution agreements in Thailand and in 2016, we entered into distribution agreements in Vietnam and Poland. Additionally, we currently have existing distribution agreements with distributorsdistribution partners in Australia and New-Zealand, China, Japan, South Korea, Taiwan, Italy, Russia, the Netherlands, TurkeySwitzerland and Germany. While we plan to continue to expand our indirect sales efforts outside of the United States, we expect that most of our growth over the next two years will be driven by the U.S. market. Our sales in Europe, once the primary market of our sales, decreased materially in 2012.the last few years. Considering the current economic situation in Europe, we expect only moderate growth in our activities in this region.
Assuming that factors outside of our control will not adversely affect us, we believe that we will be able to continue to grow our business in the foreseeable future, which would result in an increase in our revenues. However, such increase will require our continued commitment of substantial resources toward our sales and marketing operations, mainly in the United States. We expect continuous growth of headcount of our direct sales force, to support both system and disposables sales. In addition, since the launch of our Renaissance system in June 2011, our business has benefitted from research and development expenses that have been comparatively low. However, this trend is beginning to change; we plan to increase our expenditures on research and development to improve existing productsthe Mazor X and accelerate the creation ofRenaissance and to create new productssolutions to allow for spineexpanded features and brain surgery.benefits in spine. We are also exploring additional applications where our technology can be leveraged and where there is a market need. In connection with the expansion of our research and development activities, we expect to retainrecruit additional personnel for our research and development team. We believe that our general and administrative expenses will increase as we grow our business and as a result of listing our securities being listed for trading in the United States.States and in Israel.
For at least the next two years,year, we expect that the potential increases in revenue will not necessarily reduce our losses due to the increase in our planned expenditures, most of which we expect to be related to sales and marketing and research and development activities. An additional item of expense is the cost of manufacturing the Renaissance system,surgical guidance systems, related accessories, spare parts and disposable accessories products.kits. Such expense includes manufacturing overhead costs, freight, amortization of intangible assets, and the cost of service. We expect to increase our expenditures on manufacturing and service overhead to accommodate the anticipated growth of our installed base.
On May 18, 2016 we entered into an Exclusive Lead Sharing and Distribution Agreement with Medtronic. The Agreement has 2 phases. The first is an initial U.S.-based co-promotion phase of the Mazor X system. Subject to meeting certain milestones defined in the agreement, and the parties’ mutual decision to proceed, the relationship will enter a second phase. During the second phase, Medtronic will assume exclusive global sales and distribution rights for the Mazor X systems and applications for the spine surgery market. In case we enter into the second phase of the Agreement, the Company’s investment in direct sales and marketing activities may be reduced.
| E. | Off-Balance Sheet Arrangements |
We currently do not have any off-balance sheet arrangements.
87
| F. | Tabular Disclosure of Contractual Obligations |
The following table summarizes our known contractual obligations and commitments as of December 31, 2013:2016:
| (in thousands) | Payment Due by Period | |||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | more than 5 years | ||||||||||||||||
| Contractual Obligations | ||||||||||||||||||||
Premises leasing obligations | $ | 2,942 | $ | 903 | $ | 1,196 | $ | 843 | $ | - | ||||||||||
Car leasing obligations | $ | 572 | $ | 282 | $ | 290 | $ | - | $ | - | ||||||||||
Purchase commitments and obligations | $ | 5,590 | $ | 5,590 | $ | - | $ | - | $ | - | ||||||||||
Total | $ | 9,104 | $ | 6,775 | $ | 1,486 | $ | 843 | $ | - | ||||||||||
| (in thousands) | Payment Due by Period | |||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | more than 5 years | ||||||||||||||||
| Contractual Obligations | ||||||||||||||||||||
| Royalty obligations* | $ | 309 | $ | 309 | $ | - | $ | - | $ | - | ||||||||||
| Premises leasing obligations | $ | 534 | $ | 278 | $ | 256 | $ | - | $ | - | ||||||||||
| Car leasing obligations | $ | 410 | $ | 217 | $ | 193 | $ | - | $ | - | ||||||||||
| Purchase commitments and obligations | $ | 525 | $ | 525 | $ | - | $ | - | $ | - | ||||||||||
| Total | $ | 1,778 | $ | 1,329 | $ | 450 | $ | - | $ | - | ||||||||||
* Undiscounted amount.amounts.
| A. | Directors and Senior Management |
The following table lists the names and ages of our directors:directors, as of April 27, 2017:
| Name | Age | Position | ||
| Jonathan Adereth | Chairman of the Board of Directors | |||
| Ori Hadomi | Director and Chief Executive Officer | |||
| Gil Bianco | External Director | |||
| External Director | ||||
| Sarit Soccary Ben-Yochanan | Director | |||
| Michael Berman | Director |
| Name | Age | Position | ||
| Sharon Levita | Chief Financial Officer, Corporate Secretary | |||
| Moshe Shoham | Chief Technology Officer | |||
| Eliyahu Zehavi | ||||
| 46 | Vice President, | |||
| Doron Dinstein | Chief Medical Officer | |||
| Anat Kaphan | 47 | Vice President, Product | ||
| Christopher Prentice |
Jonathan Adereth, Chairman of the Board of Directors
Mr. Adereth has been serving as the chairman of our board of directors since December 2007. Since May 2009, Mr. Adereth has been serving as the chairman of Medic Vision Imaging Solutions Ltd., an Israeli company in the field of resolution recovery and dose reduction in Computed Tomography. FromSince October 2004, Mr. Adereth has been serving as a board member of UltraSPECT Ltd., an Israeli company in the field of resolution recovery and dose reduction in Nuclear Medicine. From February 2012 Mr. Adereth has been serving as a director and later as a chairman of UCCare Ltd., an Israeli company in the field of prostate cancer detection and treatment. From 1994 to 1998, Mr. Adereth served as the President and Chief Executive Officer of Elscint Ltd. (NYSE: ELT), a global developer and manufacturer of CT, MRI and NMMedical Imaging systems. Mr. Adereth holds a B.Sc. degree in Physics from the Technion –- Israel Institute of Technology.
Gil Bianco, External Director
Mr. Bianco has been serving as an external director since 2007. Since April 2010, Mr. Bianco has been serving as a director of Intec Pharma Ltd., an Israeli public company. Mr. Bianco serves as a director of Fischer Pharmaceuticals Ltd., Clear Cut Ltd., Pi-Cardia Ltd., Turquoise GEI Ltd. and Gil Bianco Ltd. From 2001 to 2003, heMr. Bianco served as chief executive officer toChief Executive Officer of pharmaceutical manufacturer, Agis Industries Ltd., most notably taking part in the company’scompany's listing on the TASE and its global expansion. Mr. Bianco is serving as a director of Fischer pharmaceuticals ltd, IntekPharma Ltd., Clear Cut Ltd., Gil Bianco Ltd., and Turquoise GEI Ltd. In the past five years heMr. Bianco had also served as a director of several private companies in the fields of biotech and medical devices: Healor Ltd., Solgel Technologies Ltd., BioKanselBioCancell Inc., Top Spin Ltd., Kolbar Ltd., BioLineRx Ltd., DPharm Ltd., and Optima Ltd., and the Tel Aviv Stock Exchange Ltd. Mr. Bianco holds a B.A. in Economics and Accounting from the Tel-Aviv University, and is a certified public accountant.
Mr. SchlachetYanai has been serving as an external director since November 2007. From 1990 to 1995,2016. Mr. Schlachet servedYanai also serves as Vice Presidentan external director of FinanceCheck-Cap Ltd., an Israeli company whose shares are listed on the NASDAQ Global Market. Mr. Yanai also serves as an external director of Medical Compression Systems (D.B.N) Ltd. and AdministrationClal Biotechnology, Israeli companies whose shares are listed on the Tel Aviv Stock Exchange. Mr. Yanai also serves as an external director of the Weizmann InstituteHadassah Medical Center, as an external director of Science. From November 2005 to May 2007, Mr. Schlachet served as the chief executive officer of Syneron Medical Ltd. (NASDAQ: ELOS), after having served as its chief financial officer from July 2004 to November 2005. Since 2005, Mr. Schlachet has been servingStandard & Poors Maalot and as a director of Ezchip SemiconductorCompulab Ltd. (NASDAQ: EZCH), and since 2007,Efranat Ltd. Mr. Yanai also acts as a directorthe Chairman of Syneron.Endobetix Ltd. and as the chairman of the Israeli Fund for UNICEF. From November 2008 to NovemberSeptember 2005 until March 2014, Mr. Yanai served as Given Imaging's Chief Financial Officer and from October 2012 until June 2014, Mr. SchlachetYanai served as a director of the Tel Aviv Stock ExchangeCitycon Oyj and Macrocure Ltd., as the chairman of the audit committee of the Tel Aviv Stock Exchange Ltd., and as a director and audit committee member of the Tel Aviv Stock Exchange Clearing House Ltd. In addition, since 1992, Mr. Schlachet has been serving as a director of Taya Investments Ltd., an Israeli public company, and since October 2010, as a director of BioCancell Therapeutics Inc., an Israeli public company. Mr. SchlachetYanai holds a B.Sc. degree in chemical engineeringAccounting and an M.B.A. with specialization in financeEconomics from Tel-Aviv University.
Sarit Soccary Ben-Yochanan, Director
Mrs. Soccary has been serving as a director since October 2006. Since July 2013, Mrs. Soccary has been serving as the vice president of strategy and business development for Syneron Medical Ltd. (NASDAQ: ELOS). Until July 2013, Mrs. Soccary had been servingserved as the chief executive officerChief Executive Officer of Gefen Biomed Investments Ltd., an Israeli publicpublicly traded company. Mrs. Soccary also served as a director of Proteologics Ltd., an Israeli public biotech company, and as a director of several private companies in the fieldsfield of technology and healthcare. Mrs. Soccary holds a B.A. and an M.A. in economics from Tel Aviv University.
Michael Berman, Director
Mr. Berman has been serving as a director since February 2014. Mr. Berman is a medical device entrepreneur and investor. He is a co-founder of eight medical device companies and is currently an active board member of several early stage health care companies.companies including Inspire-MD, PulmOne, ClearCut Medical, PharmaCentra LLC, Endospan Ltd. and Rebiotix Inc. Michael Berman was co-founder and Chairman of BridgePoint Medical from 2005 until 2012 and served as a Director of Lutonix and UltraShape inc.Inc. until 2011. From 1995 to 2000 Mr. Berman was the Presidentpresident of the cardiology business of Boston Scientific. Mr. Berman received his B.S.B.Sc. and M.B.A. degrees from Cornell University.
Ori Hadomi, Director and Chief Executive Officer
Mr. Hadomi has been serving as our Chief Executive Officer and a member of our board of directors since January 2003. Prior to joining the Company,us, Mr. Hadomi served as the chief financial officer and vice president of business development of Image Navigation Ltd. (formerly known as DenX Medical Software Systems Ltd.). Mr. Hadomi holds a B.A. in chemistry with a minor in economics, as well as ana M.Sc. in industrial chemistry and business administration from the Hebrew University, Jerusalem.
89
Sharon Levita, Chief Financial Officer
Mrs. Levita has servedbeen serving as our Chief Financial Officer and Corporate Secretary since February 2008. Prior to joining Mazor, from 1999 to 2008, Mrs. Levita held various senior positions at Lumenis Ltd. (NASDAQ: LMNS), a medical lasers and light-based technology company, including Director of Business Development, Executive Vice President of Finance, and Corporate Controller. She holds an M.A. in Business Administration, specializing in finance from Bar-Ilan University, and received her B.A. in Economics and Accounting from Haifa University. Mrs. Levita is a certified public accountant.
Professor Moshe Shoham, Chief Technology Officer
Professor Shoham, one of our co-founders, has servedbeen serving as our Chief Technology Officer since 2003. From 2001 to 2011, Professor Shoham served as one of our directors. From 2005 to 2010, Professor Shoham served as the Head of the Center for Manufacturing Systems and Robotics of the Technion-Israel Institute of Technology.Technology, or Technion. Since 1990, Professor Shoham has been serving as a faculty member of the Technion, and since 2005, as an endowed Chaired Professor at the Department of Mechanical Engineering of the Technion and also serves as a director at Microbot Medical Ltd. Professor Shoham holds a B.Sc. degree in Aeronautical Engineering, an M.Sc. degree and a Ph.D. in Mechanical Engineering, all degrees from the Technion.
Mr. Shoham is also a Foreign Member of the U.S. National Academy of Engineering.Eliyahu Zehavi, Chief Operating OfficerExecutive Vice President, Research & Development
Mr. Zehavi has been serving as our Chief Operating Officer,Executive Vice President, Research & Development, responsible for our research and development department and operation since 2001. From June 1998 to January 2001, Mr. Zehavi served as the vice president of engineering of Elscint, Ltd. Mr. Zehavi holds a B.Sc. in Computer and Electrical Engineering from Ben-Gurion University, and an M.B.A. from the Interdisciplinary Center, Herzliya, Israel.
Quality Assurance & Regulatory Affiars
Doron Dinstein, MD, Chief Medical Officer
Dr. Dinstein has servedbeen serving as our Chief Medical Officer since December 2012. From 2009 to 2012, Dr. Dinstein served as our Vice President of Marketing and Business Development. From 2004 to 2009, Dr. Dinstein served as the Manager of Cardiovascular Applications at Itamar Medical, Ltd., an Israeli public company. Dr. Dinstein holds a joint Executive M.B.A degree from Northwestern University and Tel Aviv University. Dr. Dinstein received a B.M.Sc. and an M.D. from Tel-Aviv University School of Medicine.
Anat Kaphan, Vice President, Product
Mrs. Kaphan has been serving as our Vice President, Product since July 2015. Ms. Kaphan has previously held several product, marketing and business development positions in leading medical device companies, such as from April 2011 to February 2014 at Philips Medical Systems and from December 2001 to April 2011 at Lumenis Ltd. Mrs. Kaphan holds a Bachelor's degree in Economics and Accounting from Haifa University and an M.B.A in International Marketing from Tel-Aviv University.
Christopher Prentice, Senior Vice President of AmericaChief Executive Officer, Mazor Robotics Inc. & Global MarketingCommercial Leader
Mr. Prentice has served as the Chief Executive Officer of our U.S. Subsidiary, Mazor Robotics Inc., since October 2014 and as the Company's Commercial Leader, in charge of the Global Sales Team, since July 2016. From September 2013 until October 2014, Mr. Prentice served as our Senior Vice President of America & Global Marketing since September 2013. Mr. Prentice was ourand as Vice President of Marketing from July 2012 until September 2013. From 2010 to July 2012, Mr. Prentice served as our sales director for the Southeast region in the United States. Prior to joining Mazor, Mr. Prentice served on the leadership team of Tampa General Hospital. Mr. Prentice graduated from the United States Military Academy at West Point, holds an M.B.A degree from Western New England University, and a Master of Health Administration from the University of South Florida.
Family Relationships
There are no family relationships between any members of our executive management and our directors.
90
Arrangements for Election of Directors and Members of Management
Except as required by thean agreement entered into in 2012 with a group of investors led by Oracle Associates, LLC, or the Oracle Investors, there are no arrangements or understandings with major shareholders, customers, suppliers or others pursuant to which any of our executive management or our directors were selected. Pursuant to the agreement with the Oracle Investors, our board of directors was required to appoint one director on behalf of the Oracle Investors, pursuant to a written notice to be provided by the Oracle Investors within 60 days after the closing of the agreement with the Oracle Investors and subject to the full exercise of warrants issued to the Oracle Warrants in full.Investors. The Oracle Investors did not exercise this right. In the event that at the time of appointment our board of directors consists of seven members or more, which is not currently the case, the Oracle Investors may appoint one additional director on their behalf to our board of directors. The appointment of any such director by the Oracle Investors shall be in effect only until the first general meeting of our shareholders following such appointment. Thereafter, the appointment of any such director nominated by the Oracle Investors shall be subject to election at the shareholders’shareholders' general meeting. If the appointment of such director nominee is not approved by the shareholders' general meeting, then for as long as the Oracle Investors hold together 10% of our issued and outstanding share capital, they will have the right to appoint an observer to our board of directors. For a description of the agreement with the Oracle Investors, see “Item 10. Additional Information – C. Material Contracts.” To date, the Oracle Investors have not appointed any directors.
Director Compensation
Under the Companies Law and the rules and regulations promulgated thereunder, external directors are entitled to fixed annual compensation and to an additional payment for each meeting attended. We currently pay our external and independent directors, Mr. Gil Bianco, Mr. Yuval Yanai, Mrs. Soccary Ben-Yochanan and David SchlachetMr. Michael Berman, an annual fee of NIS 110,000 (approximately $27,500), and a per-meeting fee of NIS 3,100 (approximately $775). Until November 2016, Mr. Bianco's and Mrs. Soccary Ben-Yochanan's remuneration was an annual fee of NIS 100,000 (approximately $28,810),$25,000) and a per meetingper-meeting fee of NIS 2,500 (approximately $720)$625). In 2007, each of Gil Bianco and David Schlachet received a grant of 40,000 options to purchase our ordinary shares atMr. Berman's remuneration was an exercise priceannual fee of NIS 12.4060,000 (approximately $3.57) per share, which options were subject to shareholder approval which was duly obtained.$15,000) and a per-meeting fee of NIS 2,500 (approximately $625). In addition, in November 2013, the General Meeting of Shareholders2016, our shareholders approved an additionala grant of 40,000 options to purchase our ordinary shares to each of GilMr. Bianco, Mr. Yanai, Mrs. Soccary Ben-Yochanan and David Schlachet, whichMr. Berman at an exercise price of NIS 45.17 (approximately $11.29) per share. These options wereare subject to a three (3)3 year vesting schedule, commencing on the date of grant, so that upon the lapse of twelve (12)12 months from the date of grant, thirty four percent (34%)34% of the shares underlying the Optionsoptions shall vest, and thereafter, upon the lapse of each calendar quarter, eight point twenty five percent (8.25%)8.25% of the shares underlying the Optionsoptions shall vest. The exercise price of the Options will be the higher of (i) the average of the closing price per share in the TASE during the 30 days preceding the date of grant, or (ii) the closing price per share on the day prior the date of grant. The compensation of our external directors is determined at the time of their election.
Since December 2007, Mr. Jonathan Adereth has been the Chairman of our board of directors, or the Chairman. We currently pay the Chairman for providing us with management services a monthly fee of NIS 38,500 (approximately $9,625) Until November 2016, Mr. Adereth's monthly fee was NIS 35,000 (approximately $10,000)$8,750). The saidThis amount includes social benefits, comprised of paid vacation, recreation allowance and severance pay as providedrequired by law. In November 2007, the Chairman was granted options to purchase 40,000 of2016, our shares at an exercise price of NIS 12.40 (approximately $3.30) per share. In addition, in November 2013 Mr. Jonathan Adereth receivedshareholders approved a grant of 80,000 options to purchase our ordinary shares to Mr. Adereth at an exercise price of NIS 32.4645.17 (approximately $9.35)$11.29) per share, whichshare. These options wereare subject to shareholder approval which was duly obtained.a 3 year vesting schedule, commencing on the date of grant, so that upon the lapse of 12 months from the date of grant, 34% of the shares underlying the options shall vest, and thereafter, upon the lapse of each calendar quarter, 8.25% of the shares underlying the options shall vest.
On November 26, 2016, Mr. David Schlachet's term as external director ended. In 2016, Mr. Schlachet was entitled to an annual fee of NIS 100,000 (approximately $25,000), and a per-meeting fee of NIS 2,500 (approximately $625).
The following table presents all compensation we paid, or accrued, duringincurred for the year ended December 31, 2013,2016, to all persons who served as directors at any time during the year. The table does not include any amounts we paid to reimburse any of these persons for costs incurred in providing us with services during this period.
Salary and Related Benefits | Pension, Retirement and other similar benefits accrued | Total | Salary, director fees and related benefits | Share-based compensation | Total | |||||||||||||||||||
| Directors | ||||||||||||||||||||||||
| Jonathan Adereth | $ | 135,898 | $ | 5,903 | $ | 141,801 | $ | 117,124 | $ | 81,801 | $ | 198,925 | ||||||||||||
| Compensation to directors not employed by us | $ | 105,621 | — | $ | 105,621 | $ | 159,269 | $ | 194,619 | $ | 353,888 | |||||||||||||
91
Amounts denominated in NIS were translated using the rate of NIS 3.8406 to USD 1.00, the average exchange rate reported by the Bank of Israel for 2016.
Employment Agreements
We have entered into written employment agreements with each of our executive officers. All of these agreements contain customary provisions regarding noncompetition, confidentiality of information and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under applicable law. In addition, we have entered into agreements with each executive officer and director pursuant to which we have agreed to indemnify each of them to the fullest extent permitted by law to the extent that these liabilities are not covered by directors and officers insurance. Members of our senior management are eligible for bonuses each year. The bonuses are payable upon meeting certain objectives and targets that are set by our chief executive officer and approved annually by our compensation committee and subsequently by our board of directors, that also set the bonus targets for, and approve the annual bonus, to our chief executive officer.
For a description of the terms of our options and option plans, see "Item 6. Directors, Senior Management and Employees - E. Share Ownership" below.
Annual compensation
The following table presents all compensation we paid, or accrued, duringincurred for the year ended December 31, 20132016 to the top six senior executivesfive highest paid officers in U.S. dollars. The table does not include any amounts we paid to reimburse any of these persons for costs incurred in providing us with services during this period:
| Annual Compensation | ||||||||||||||||||||
| Executive Officer | Base Salary and Related Benefits (1) | Bonus | Retirement and Other Similar Benefits | Share Based Compensation* | Total | |||||||||||||||
Ori Hadomi | $ | 392,792 | $ | 359,319 | $ | 1,950 | $ | 709,804 | $ | 1,463,865 | ||||||||||
Eliyahu Zehavi | $ | 294,771 | $ | 111,441 | $ | 22,062 | $ | 189,950 | $ | 618,224 | ||||||||||
Christopher Prentice | $ | 298,788 | $ | 75,500 | $ | 10,600 | $ | 222,133 | $ | 607,021 | ||||||||||
Sharon Levita | $ | 287,077 | $ | 109,358 | $ | 12,682 | $ | 189,950 | $ | 599,067 | ||||||||||
| Anat Kaphan | $ | 262,889 | $ | 19,138 | $ | 16,956 | $ | 194,125 | $ | 493,108 | ||||||||||
| Annual Compensation | Long Term Compensation Share Based Compensation* | |||||||||||||||
| Executive Officer | Salary and Related Benefits | Pension, Retirement and Other Similar Benefits | Total | |||||||||||||
| Ori Hadomi | $ | 548,322 | (1) | $ | 55,542 | $ | 158,886 | $ | 798,750 | |||||||
| Eli Zehavi | $ | 299,083 | (2) | $ | 19,778 | $ | 20,259 | $ | 339,119 | |||||||
| Avi Posen | $ | 298,378 | (3) | $ | 6,452 | $ | 19,883 | $ | 324,713 | |||||||
| Sharon Levita | $ | 388,946 | (2) | $ | 6,909 | $ | 38,305 | $ | 434,160 | |||||||
| Christopher Prentice | $ | 325,934 | (4) | $ | - | $ | 42,176 | $ | 368,110 | |||||||
Amounts denominated in NIS were translated using the rate of NIS3.5781NIS 3.8406 to U.S.$USD 1.00, the average exchange rate reported by the Bank of Israel for 2013.
2016.(*) The fair value ofThis amount represents expenses recorded in our option grants is computed as offinancial statements for the grant date based on the binominal model, using the standard parameters established in that model including estimates relatingyear ended December 31, 2016, with respect to exercise price of the instrument, expected volatility (based on the historic volatility), an early exercise coefficient, the risk-free interest rate (based on government debentures) and share price on the measurement date. The value of the transactions, measured as described above, is recognized as an expense over the vesting period.all options granted to such executive officers.
(1) Includes reimbursement of expenses, social benefits, bonus, and car allowances
92
C.Board Practices
Introduction
Our board of directors presently consists of six members, including at least two external directors, as generally required to be appointed under the Companies Law. Our articles of association provide that the number of board of directorsdirectors' members (including external directors) shall be set by the general meeting of the shareholders provided that it will consist of not less than five and not more than nine members. Pursuant to the Companies Law, the management of our business 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 executive officers are responsible for our day-to-day management and have individual 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 employment agreement that we have entered into with him. All other executive officers are also appointed by our Chief Executive Officer. Their terms of employment are subject to the approval of the board of directors' compensation committee and of the board of directors, and are subject to the terms of any applicable employment agreements that we may enter into with them.them; provided, however, that if the terms of employment are not in compliance with our compensation policy, the terms of employment may only be approved by the board of directors' compensation committee and by the board of directors for special reasons to be noted, and with regards to our Chief Executive Officer the terms of employment shall also require the shareholders' approval. An immaterial change in the terms of employment of an executive, other than the Chief Executive Officer, may be approved by the Chief Executive Officer, provided that the amended terms of employment are in accordance with our compensation policy. If the terms of employment of the Chief Executive Officer are immaterially non-compliant with his compensation arrangement and are in compliance with our compensation policy, the approval of the compensation committee is sufficient.
Each director, except the external directors, will hold office until the annual general meeting of our shareholders for the year in which his or her term expires, unless he or she is removed by a majority vote of our shareholders at a general meeting of our shareholders or upon the occurrence of certain events, in accordance with the Companies Law and our articles of association.
In addition, our articles of association allow our board of directors to appoint directors to fill vacancies on our board of directors or in addition to the acting directors (subject to the limitation on the number of directors), until the next annual general meeting or special general meeting in which directors may be appointed or terminated. External directors may be elected for up to two additional three-year terms after their initial three-year term under the circumstances described below, with certain exceptions as described in "External Directors" below. External directors may be removed from office only under the limited circumstances set forth in the Companies Law. See “—"—External Directors”Directors" below.
Under the Companies Law nominations for directors may be made by any shareholder holding at least one percent of our outstanding voting power. However, any such shareholder may make such a nomination only if a written notice of such shareholder’sshareholder's intent to make such nomination has been given to our board of directors. Any such notice must include certain information, the consent of the proposed director nominee(s) to serve as our director(s) if elected and a declaration signed by the nominee(s) declaring that there is no limitation under the Companies Law preventing their election and that all of the information that is required to be provided to us in connection with such election under the Companies Law has been provided.
Under the Companies Law, our board of directors must determine the minimum number of directors who are required to have accounting and financial expertise. In determining the number of directors required to have such expertise, our board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that the minimum number of directors of our company who are required to have accounting and financial expertise is one.
Pursuant to the Companies Law and our articles of association, a resolution proposed at any meeting of the board of directors, at which a quorum is present, is adopted if approved by a vote of at least a majority of the directors present at the meeting. A quorum of the board of directors (or any committee thereof, other than the audit committee) is at least a majority of the directors then in office who are lawfully entitled to participate in the meeting (until otherwise unanimously decided by the directors). Minutes of the meetings are recorded and kept at our offices.
93
The board of directors may elect one director to serve as the chairman of the board of directors to preside at the meetings of the board of directors, and may also remove that director as chairman. Pursuant to the Companies Law, neither the chief executive officer nor any of his or her relatives is permitted to serve as the chairman of the board of directors, and a company may not vest the chairman or any of his or her relatives with the chief executive officer’sofficer's authorities. In addition, a person who reports, directly or indirectly, to the chief executive officer may not serve as the chairman of the board of directors; the chairman may not be vested with authorities of a person who reports, directly or indirectly, to the chief executive officer; and the chairman 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 a controlled company. However, the Companies Law permits a company's shareholders to determine, for a period not exceeding three years from each such determination, that the chairman or his or her relative may serve as chief executive officer or be vested with the chief executive officer’sofficer's authorities, and that the chief executive officer or his or her relative may serve as chairman or be vested with the chairman's authorities. Such determination of a company's shareholders requires either: (1) the approval of at least two-thirds of the shares of those shareholders present and voting on the matter (other than controlling shareholders and those having a personal interest in the determination); or (2) that the total number of shares opposing such determination does not exceed 2% of the total voting power in the company.
The board of directors may, subject to the provisions of the Companies Law, delegate any or all of its powers to committees each consisting of one or more directors (except the audit committee, as described below),board, and it may, from time to time, revoke such delegation or alter the composition of any such committees.committees, subject to certain limitations. Unless otherwise expressly provided by the board of directors, the committees shall not be empowered to further delegate such powers. The composition and duties of our audit committee, financial statement examination committee and compensation committee are described below. Any committee exercising the powers of the board of directors must contain at least one external director.
The board of directors oversees how management monitors compliance with our risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by us. The board of directors is assisted in its oversight role by an internal auditor. The internal auditor undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to our audit committee.
External Directors
Under the Companies Law, an Israeli company whose shares have been offered to the public or whose shares are listed for trading on a stock exchange in or outside of Israel is required to appoint at least two external directors to serve on its board of directors. However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as NASDAQ, and who do not have a shareholder holding 25% or more of the company's share capital, do not have to meet this requirement; provided, however, that the audit and compensation committees meets other Companies Law appointment requirements, as well as appointment of independent directors and composition requirements thereof of the jurisdiction where the company's securities are traded. Our external directors are Mr. Gil Bianco and Mr. David Schlachet.Yuval Yanai. At least one of the external directors is required to have “financial"financial and accounting expertise,”" unless another member of the audit committee, who is an independent director under the NASDAQ Stock Market rules, has “financial"financial and accounting expertise,”" and the other external director or directors are required to have “professional expertise”"professional expertise". An external director may not be appointed to an additional term unless: (1) such director has “accounting"accounting and financial expertise;”" or (2) he or she has “professional"professional expertise,”" and on the date of appointment for another term there is another external director who has “accounting"accounting and financial expertise”expertise" and the number of “accounting"accounting and financial experts”experts" on the board of directors is at least equal to the minimum number determined appropriate by the board of directors.
A director has “professional expertise”"professional expertise" if he or she satisfies one of the following:
| ● | the director holds an academic degree in one of these areas: economics, business administration, accounting, law or public administration; |
| ● | the director holds an academic degree or has other higher education, all in the main business sector of the company or in a relevant area for the board position; or |
94
| ● | the director has at least five |
A director with “financial"financial and accounting expertise”expertise" is a person that due to his or her education, experience and skills has high skills and understanding of business-accounting issues and financial reports which allow him to deeply understand the financial reports of the company and hold a discussion relating to the presentation of financial information. The company’scompany's board of directors will take into consideration in determining whether a director has “accounting"accounting and financial expertise”expertise", among other things, his or her education, experience and knowledge in any of the following:
| ● | accounting issues and accounting control issues characteristic to the segment in which the company operates and to companies of the size and complexity of the company; |
| ● | the functions of the external auditor and the obligations imposed on such auditor; and |
| ● | preparation of financial reports and their approval in accordance with the Companies Law and the securities law. |
A person may not serve as an external director if the person is a relative of a controlling shareholder or if at the date of the person’sperson's appointment or within the prior two years the person, or his or her relatives, partners, employers or entities under the person’sperson's control, or someone to whom he or she is subordinate, whether directly or indirectly, have or had any affiliation with any of: (1) us, (2) any entity controlling us, (3) a relative of the controlling shareholder on the date of such appointment, or (4) any entity controlled, on the date of such appointment or within the preceding two years, by us or by our controlling shareholder. If there is no controlling shareholder or no one shareholder holding 25% or more of voting rights in the company, a person may not serve as an external director if the person has any affiliation with any person who, as of the date of the person’sperson's appointment, was the chairman of the board of directors, the general manager (chief executive officer), any shareholder holding 5% or more of the company’scompany's shares or voting rights, or the senior financial officer. We refer to each of the relationships set forth in this paragraph as an Affiliated Party.
Under the Companies Law, “affiliation”"affiliation" includes:
| ● | 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 of 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 initial public offering. |
A “relative”"relative" is defined as a spouse, sibling, parent, grandparent, descendant, and a descendant, sibling or parent or the spouse of each of the foregoing.
An “office holder”"office holder" is defined as a general manager, chief operating officer, executive vice president, vice president, director or manager directly subordinate to the general manager or any other person assuming the responsibilities of any of these positions regardless of that person’sperson's title. Each person listed in the table under “Item"Item 6. Directors, Senior Management and Employees – A. Directors and Senior Management”Management" is an office holder.
A person may not serve as an external director if that person or that person’sperson's relative, partner, employer, a person to whom such person is subordinate (directly or indirectly) or any entity under the person’sperson's control has a business or professional relationship with any entity that has an affiliation with any Affiliated Party, even if such relationship is intermittent (excluding insignificant relationships). Additionally, any person who has received compensation in breach of the Companies Law (excluding compensation from insignificant relationships) other than compensation permitted under the Companies Law may not continue to serve as an external director.
95
A person may not serve as an external director if that person’sperson's position or other business activities create, or may create, a conflict of interest with the person’sperson's service as a director or may otherwise interfere with the person’sperson's ability to serve as a director. If at the time any external director is appointed, all members of the board who are neither controlling shareholders nor relatives of controlling shareholders are the same gender, then the external director to be appointed must be of the other gender. A director of a company shall not be appointed as an external director of another company if at such time a director of the other company is acting as an external director of the first company.
Mr. Yanai is currently serving as an external director of Hadassah Medical Center ("Hadassah"). The Company has business relations with Hadassah for about ten years. The total scope of the Company's business with Hadassah in the last year and in the last five years does not exceed US$ 150,000 and US$ 550,000, respectively. The Companies Regulations (Matters That Do Not Constitute Linkage), 5767-2006 (the "Linkage Regulations") provide that if a company's audit committee resolves that there are negligible business or professional connections between such company and a person who is a candidate to be an external director in such company, then such connections shall not be considered a forbidden link between such company and such candidate. In accordance with the Linkage Regulations and based on the facts presented to it, the Company's audit committee has resolved on October 18, 2016, that the transactions between the Company and Hadassah are negligible and therefore do not constitute a forbidden linkage between the Company and Mr. Yanai.
Until the lapse of two years from the termination of office, none of the company in which such external director served, its controlling shareholder or any entity under the control of such controlling shareholder may, either directly or indirectly, grant such former external director, or his or her spouse or child, any benefit, including via (1) the appointment of such former director or his or her spouse or his child as an office holder in the company or in an entity controlled by the company's controlling shareholder, (2) the employment of such former director and (3) the engagement, either directly or indirectly, of such former director as a provider of professional services for compensation, including through an entity under his or her control. The same restrictions above apply to relatives other than a spouse or a child, but such limitations shall only apply for one year from the date such external director ceased to be engaged in such capacity. However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as NASDAQ, and who do not have a shareholder holding 25% or more of the company's share capital, do not have to meet these requirements; provided, however, that the audit committee meets other Companies Law requirements, as well as independent directors appointment requirements of the jurisdiction where the company's securities are traded. External directors are elected by a majority vote at a shareholders’shareholders' meeting, so long as either:
| ● | at least a majority of the shares held by shareholders who are not controlling shareholders and do not have personal interest in the appointment (excluding a personal interest that did not result from the |
| ● | the total number of shares of such shareholders voted against the election of the external director does not exceed 2% of the aggregate voting rights of our company. |
The Companies Law provides for an initial three-year term for an external director .Thereafter,director. Thereafter, an external director may be reelected by shareholders to serve in that capacity for up to two additional three-year terms, with certain exceptions as explained below, provided that either:
| (i) | his or her service for each such additional term is recommended by one or more shareholders holding at least one percent of the |
"Interested shareholder or a competitor " – a shareholder who recommended the appointment for each such additional term or a substantial shareholder, if at the time of appointment, it, its controlling shareholder or a company controlled by any of them, has business relations with the company or any of them are competitors of the company.; or
96
| (ii) | his or her service for each such additional term is recommended by the board of directors and is approved at a shareholders meeting by the same disinterested majority required for the initial election of an external director (as described above). |
| (iii) | the external director offered his or her service for each such additional term and was approved in accordance with the provisions of section (i) above. |
The term of office for external directors for Israeli companies traded on certain foreign stock exchanges, including the NASDAQ Global Market, may be extended indefinitely in increments of additional up to three-year terms, in each case provided that the audit committee and the board of directors of the company confirm that, in light of the external director’sdirector's expertise and special contribution to the work of the board of directors and its committees, the reelection for such additional period(s) is beneficial to the company, and provided that the external director is reelected subject to the same shareholder vote requirements as if elected for the first time (as described above). Prior to the approval of the reelection of the external director at a general shareholders meeting, the company’scompany's shareholders must be informed of the term previously served by him or her and of the reasons why the board of directors and audit committee recommended the extension of his or her term.
Mr. Bianco has been serving as an external director in the Company since November 2007. On October 16, 2016, our audit committee and board of directors have discussed Bianco's experience, expertise, qualifications and contribution to the Company over the years, and determined that in light of the above, it is in our best interest to re-appoint Mr. Bianco as an external director until the next annual general meeting or until his successor has been duly appointed, and proposed his re-election to the general meeting held on November 28, 2016.
External directors may be removed only by the same special majority of shareholders required for their election or by a court, and in both cases only if the external directors cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to our company. In the event of a vacancy created by an external director which causes the company to have fewer than two external directors, the board of directors is required under the Companies Law to call a shareholders meeting as soon as possible to appoint such number of new external directors in order that the company thereafter has two external directors.
External directors may be compensated only in accordance with regulations adopted under the Companies 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.
The duty of care requires an office holder to act with the level of skill with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care of an office holder includes a duty to use reasonable means to obtain:
| information on the advisability of a given action brought for his approval or performed by him by virtue of his position; and |
| all other important information pertaining to these actions. |
The duty of loyalty of an office holder requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:
| refrain from any conflict of interest between the performance of his duties in the company and his performance of his other duties or personal affairs; |
| refrain from any action that constitutes competition with the |
| refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and |
97
| disclose to the company any information or documents relating to the |
Approval of Related Party Transactions under Israeli Law
General. Under the Companies Law, we may approve an action by an office holder from which the office holder would otherwise have to refrain, as described above, if:
| the office holder acts in good faith and the act or its approval does not cause harm to the company; and |
| the office holder disclosed the nature of his or her interest in the transaction (including any significant fact or document) to the company at a reasonable time before the |
Disclosure of Personal Interests of an Office Holder
The Companies Law requires that an office holder disclose to the company, promptly, and, in any event, not later than the board meeting at which the transaction is first discussed, any direct or indirect personal interest that he or she may have and all related material information known to him or her relating to any existing or proposed transaction by the company. If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by:
| the office |
| any corporation in which the office holder or his or her relatives holds 5% or more of the shares or voting rights, serves as a director or general manager or has the right to appoint at least one director or the general manager. |
Under the Companies Law, an extraordinary transaction is a transaction:
| not in the ordinary course of business; |
| not on market terms; or |
| that is likely to have a material |
The Companies Law does not specify to whom within us nor the manner in which required disclosures are to be made. We require our office holders to make such disclosures to our board of directors.
98
Under the Companies Law, once an office holder complies with the above disclosure requirement, the board of directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest, unless the articles of association provide otherwise and provided that the transaction is not detrimental to the company’scompany's interest. If the transaction is an extraordinary transaction, first the audit committee and then the board of directors, in that order, must approve the transaction. Under specific circumstances, shareholder approval may also be required. A director who has a personal interest in an extraordinary transaction, which is considered at a meeting of the board of directors or the audit committee, may not be present at this meeting or vote on this matter, unless a majority of the board of directors or the audit committee, as the case may be, has a personal interest. If a majority of the board of directors has a personal interest, then shareholder approval is generally also required.
Under the Companies Law, all arrangements as to compensation of office holders require approval of the compensation committee and board of directors, and compensation of office holders who are directors must be also approved, subject to certain exceptions, by the shareholders, in that order.
Disclosure of Personal Interests of a Controlling Shareholder
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. 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, as well as transactions for the provision of services whether directly or indirectly by a controlling shareholder or his or her relative, or a company such controlling shareholder controls, and transactions concerning the terms of engagement of a controlling shareholder or a controlling shareholder’sshareholder's relative, whether as an office holder or an employee, require the approval of the audit committee or the compensation committee, as the case may be, the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’shareholders' meeting. In addition, the shareholder approval must fulfill one of the following requirements:
| at least a majority of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or |
| the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than 2% of the voting rights in the company. |
The Companies Law requires that every shareholder that participates, in person, by proxy or by voting instrument, in a vote regarding a transaction with a controlling shareholder, must indicate in advance or in the ballot whether or not that shareholder has a personal interest in the vote in question. Failure to so indicate will result in the invalidation of that shareholder's vote.
Duties of Shareholders
Under the Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner in exercising its rights and performing its obligations to the company and other shareholders, including, among other things, voting at general meetings of shareholders on the following matters:
| ● | ||
| ● | ||
| the approval of related party transactions and acts of office holders that require shareholder approval. |
99
A shareholder also has a general duty to refrain from discriminating againstoppressing other shareholders.
The remedies generally available upon a breach of contract will also apply to a breach of the above mentioned duties, and in the event of discrimination againstoppression of other shareholders, additional remedies are available to the injured shareholder.
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under a company’scompany'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, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty 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, taking the shareholder’sshareholder's position in the company into account.
Committees of the Board of Directors
Our board of directors has established three standing committees, the audit committee, the compensation committee and the Financial Statement Examination Committee.
Audit Committee
Under the Companies Law, the board of directors of any public company must establish an audit committee. The audit committee must consist of at least three directors and must include all of the external directors. However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as NASDAQ, and who do not have a shareholder holding 25% or more of the company's share capital, do not have to meet this requirement; provided, however, that the audit committee meets other Companies Law composition requirements, as well as independent directors appointment requirements of the jurisdiction where the company's securities are traded . Under the NASDAQ Stock Market rules, we are required to maintain an audit committee of at least three members, all of whom must be independent directors as defined therein. The NASDAQ Stock Market rules also require that at least one member of the audit committee be a financial expert.
Under the Companies Law, the majority of members of the audit committee, as well as a majority of members present at audit committee meetings, must be an unaffiliated directors (as defined below), and the audit committee chairman shall be an external director. In addition, the following are disqualified from serving as members of the audit committee: the chairman of the board, a controlling shareholder and his relatives, any director employed by the company or by its controlling shareholder or by an entity controlled by the controlling shareholder, a director who regularly provides services to the company or to its controlling shareholder or to an entity controlled by the controlling shareholder, and any director who derives the majority of his or her income from the controlling shareholder. Any persons disqualified from serving as a member of the audit committee may not be present at the audit committee meetings, unless the chairman of the audit committee has determined that the presence of such person is required to present a matter to the meeting or if such person qualifies under an available exemption in the Companies Law. However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as NASDAQ, and who do not have a shareholder holding 25% or more of the company's share capital, do not have to meet the above requirements; provided, however, that the audit committee meets other Companies Law composition requirements, as well as independent directors appointment requirements of the jurisdiction where the company's securities are traded .
An “unaffiliated director”"unaffiliated director" is defined under the Companies Law as an external director or a director who meets the following conditions: (1) satisfies the conditions for appointment as an external director (as described above) except for (a) the requirement that the director be an Israeli resident (which does not apply to companies such as ours whose securities have been offered outside of Israel or are listed outside of Israel) and (b) the requirement for accounting and financial expertise or professional qualifications and the audit committee has determined that such conditions have been met and (2) he or she has not served as a director of the company for more than nine consecutive years, with any interruption of up to two years in his or her service not being deemed a disruption in the continuity of such service. In companies such as ours whose securities have been offered outside of Israel or are listed outside of Israel the term of nine years may be extended by the audit committee and by the board of directors in increments up to three years, provided that the audit committee and thereafter the board of directors have approved that in light of such director's expertise and special contribution to the work of board of directors and its committees, the appointment to another term is for the good of the company. On October 16, 2016, our audit committee and board of directors approved that in light of Mrs. Soccary Ben-Yochanan's knowledge and experience with financial reporting and the medical device industry, as well as her unique contribution to our board of directors and its committees, her appointment to another term as an unaffiliated director is in the best interest of the Company, and proposed her re-election to the general meeting held on November 28, 2016.
100
Our audit committee, acting pursuant to a written charter, is comprised of Mr. Bianco, Mrs. Soccary Ben-Yochanan, and Mr. Schlachet.Yanai.
Our audit committee acts as a committee for review of our financial statements as required under the Companies Law, and in such capacity oversees and monitors our accounting; financial reporting processes and controls; audits of the financial statements; compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; the independent registered public accounting firm’sfirm's qualifications, independence and performance; and provide the board of directors with the results of the foregoing.
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 |
| · | determining whether certain actions of office holders in breach of their fiduciary duties are material or not and whether certain transactions with office holders or in which office holders have a personal interest are extraordinary or ordinary for their approval under the Companies Law. |
| · | determining whether transaction with controlling shareholders, even if they are not extraordinary, the duty to employ a competitive process concerning thereto, to be supervised by the audit committee or whoever it will appoint in accordance with criteria determined by it. The audit committee may determine such criteria one a year in advance for the whole year. |
| · | determining whether to approve certain related party transactions (including transactions in which an office holder has a personal interest and whether such transaction is extraordinary or material under Companies Law) (see |
| · | determining the approval process of non-negligible transactions. For the matter "non-negligible transactions" shall mean transactions with controlling shareholders which the audit committee had defined as not extraordinary and not negligible. The audit committee may determine such criteria one a year in advance for the whole year. |
| · | where the board of directors approves the |
| · | examining our internal controls and internal |
| · | examining the scope of our |
| · | establishing procedures for the handling of |
Our audit committee may not conduct any discussions or approve any actions requiring its approval (see “—Approval"Approval of Related Party Transactions under Israeli law”law"), unless at the time of the approval a majority of the committee’scommittee's members are present, which majority consists of unaffiliated directors including at least one external director.
101
NASDAQ Stock Market Requirements for Audit Committee
Under the NASDAQ Stock Market rules, we are required to maintain an audit committee consisting of at least three members, all of whom are independent and are financially literate and one of whom has accounting or related financial management expertise.
In accordance with the Sarbanes-Oxley Act of 2002 and the NASDAQ Stock Market rules, the audit committee is directly responsible for the appointment, compensation and performance of our independent auditors. In addition, the audit committee is responsible for assisting the board of directors in reviewing our annual financial statements, the adequacy of our internal controls and our compliance with legal and regulatory requirements. The audit committee also oversees our major financial risk exposures and policies for managing such potential risks, discusses with management and our independent auditor significant risks or exposure and assesses the steps management has taken to minimize such risk.
As noted above, the members of our audit committee include Mr. Bianco, Mrs. Soccary Ben-Yochan,Ben-Yochanan, and Mr. Schlachet,Yanai, each of whom is "independent," as such term is defined in under NASDAQ Stock Market rules. Mr. Bianco serves as the chairman of our audit committee. All members of our audit committee meet the requirements for financial literacy under the NASDAQ Stock Market rules. Our board of directors has determined that each member of our audit committee is an audit committee financial expert as defined by the SEC rules and has the requisite financial experience as defined by the NASDAQ Stock Market rules.
Financial Statement Examination Committee
Under the Companies Law, the board of directors of a public company in Israel must appoint a financial statement examination committee, which consists of members with accounting and financial expertise or the ability to read and understand financial statements. According to a resolution of our board of directors, the audit committee has been assigned the responsibilities and duties of a financial statements examination committee, as permitted under relevant regulations promulgated under the Companies Law. From time to time as necessary and required to approve our financial statements, the audit committee holds separate meetings, prior to the scheduled meetings of the entire board of directors regarding financial statement approval. The function of a financial statements examination committee is to discuss and provide recommendations to its board of directors (including the report of any deficiency found) with respect to the following issues: (1) estimations and assessments made in connection with the preparation of financial statements; (2) internal controls related to the financial statements; (3) completeness and propriety of the disclosure in the financial statements; (4) the accounting policies adopted and the accounting treatments implemented in material matters of the company; (5) value evaluations, including the assumptions and assessments on which evaluations are based and the supporting data in the financial statements. Our independent registered public accounting firm and our internal auditors are invited to attend all meetings of the audit committee when it is acting in the role of the financial statements examination committee.
Compensation Committee
Under a recent amendment to the Companies Law, the board of directors of any public company must establish a compensation committee. The compensation committee must be comprised of at least three directors, including all of the external directors, who must constitute a majority of the members of the compensation committee. However, subject to certain exceptions, Israeli companies whose securities are traded on stock exchanges such as NASDAQ, and who do not have a shareholder holding 25% or more of the company’scompany's share capital, do not have to meet this majority requirement; provided, however, that the compensation committee meets other Companies Law composition requirements, as well as theindependent directors appointment requirements of the jurisdiction where the company’scompany's securities are traded. Each compensation committee member that is not an external director must be a director whose compensation does not exceed an amount that may be paid to an external director. The compensation committee is subject to the same Companies Law restrictions as the audit committee as to (a) who may not be a member of the committee and (b) who may not be present during committee deliberations as described above.
Our compensation committee is acting pursuant to a written charter, and consists of Mr. Bianco, Mrs. Ben-YochananMr. Yanai and Mr. Schlachet,Berman, each of whom is "independent," as such term is defined under the NASDAQ Stock Market rules. Our compensation committee complies with the provisions of the Companies Law, the regulations promulgated thereunder, and the Articles, on all aspects referring to its independence, authorities and practice. Our compensation committee follows home country practice as opposed to complying with the compensation committee membership and charter requirements prescribed under the NASDAQ Stock Market rules.
102
Our compensation committee reviews and recommends to our board of directors: (1) the annual base compensation of our executive officers and directors; (2) annual incentive bonus, including the specific goals and amount; (3) equity compensation; (4) employment agreements, severance arrangements, and change in control agreements/provisions; and (5) retirement grants and/or retirement bonuses (6) any other benefits, compensation, compensation policies or arrangements.
The duties of the compensation committee include the recommendation to the company’scompany's board of directors of a policy regarding the terms of engagement of office holders, to which we refer as a compensation policy. That policy must be adopted by the company’scompany's board of directors, after considering the recommendations of the compensation committee. The compensation policy is then brought for approval by our shareholders. On January 21, 2014,November 28, 2016, our shareholders approved our current compensation policy.
The compensation policy must serve 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 must relate to certain factors, including advancement of the company’scompany's objectives, the company’scompany's business and its long-term strategy, and creation of appropriate incentives for executives. It must also consider, among other things, the company’scompany's risk management, size and the nature of its operations. The compensation policy must furthermore consider the following additional factors:
| the knowledge, skills, expertise and accomplishments of the relevant director or executive; |
| the |
| the relationship between the terms offered and the average and median compensation of the other employees of the company, including those employed through manpower companies; |
| the impact of disparities in salary upon work relationships in the company; |
| 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 |
| as to severance compensation, the period of service of the director or executive, the terms of his or her compensation during such service period, the |
The compensation policy must also include the following principles:
| the link between variable compensation and long-term performance and measurable criteria; |
| the relationship between variable and fixed compensation, and the ceiling for the value of variable compensation; |
| 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 |
| the minimum holding or vesting period for variable, equity-based compensation; and |
| maximum limits for severance compensation. |
The compensation policy must also consider appropriate incentives from a long-term perspective and maximum limits for severance compensation.
103
The compensation committee is responsible for (a) recommending the compensation policy to a company’scompany's board of directors for its approval (and subsequent approval by our shareholders) and (b) duties related to the compensation policy and to the compensation of a company’scompany's office holders as well as functions previously fulfilled by a company’scompany's audit committee with respect to matters related to approval of the terms of engagement of office holders, including:
| recommending 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); |
| recommending to the board of directors periodic updates to the compensation policy; |
| assessing implementation of the compensation policy; and |
| determining whether the compensation terms of the chief executive officer of the company need not be brought to approval of the shareholders. |
Internal Auditor
Under the Companies Law, the board of directors must also appoint an internal auditor nominated by the audit committee. Our internal auditor is Doron Cohen, CPA (Israel), a partner at Fahn Kanne Control Management Ltd., Grant Thornton Israel. The role of the internal auditor is to examine whether a company’scompany's actions comply with the law and proper business procedure. The internal auditor may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of the company’scompany's independent accounting firm or its representative. The Companies Law defines an interested party as a holder of 5% or more of the shares or voting rights of a company, any person or entity that has the right to nominate or appoint at least one director or the general manager of the company or any person who serves as a director or as the general manager of a company. Our internal auditor is not our employee, but the managing partner of an accounting firm which specializes in internal auditing.
Remuneration of Directors
Under the Companies Law, remuneration of directors is subject to the approval of the compensation committee, (until recently of the audit committee), thereafter by the board of directors and thereafter by the general meeting of the shareholders. In case the remuneration of the directors is in accordance with regulation applicable to remuneration of the external directors then such remuneration shall be exempt from the approval of the general meeting.
Insurance
Under the Companies Law, a company may obtain insurance for any of its office holders for:
| ● | a breach of his or her duty of care to the company or to another person; |
| ● | a breach of his or her duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice the |
| ● | a financial liability imposed upon him or her in favor of another person concerning an act performed by such office holder in his or her capacity as an officer holder. |
We currently have directors’directors' and officers’officers' liability insurance providing total coverage of $17.5$35 million for the benefit of all of our directors and officers, in respect of which we paid a twelve-month premium of approximately $80,000,$160,000, which expires MayJuly 26, 2014.2017. This insurance policy was updated May 27, 2013in July 2016 and our coverage was increased from $11$30 million following the listing of the ADSs on the NASDAQ Capital Marketincrease in our market capitalization to include additional coverage for our officers and directors.
On November 26, 2013,28, 2016, our shareholders approved the extension of our current directors and officers liability insurance coverage and the engagementfollowing limits for future directors and officers liability insurance coverage with respect to all officers of us and our Subsidiary,U.S. Subsidiary: (a) the premium for theeach policy period commencing on May 28, 2014 and ending upon the lapse of up to three annual insurance periods, in the aggregate, as shall be determined bynot more than $250,000 and (b) the Board of Directors; provided, however, that themaximum aggregate limit of liability underpursuant to the policies shall be not more than $60 million for each insurance period. Notwithstanding the above, the Compensation Committee shall be authorized to increase the coverage purchased, and/or the premium paid for such policypolicies, by up to 20% in any year, as compared to the previous year, or cumulatively for a number of years provided that the coverage purchased shall not exceed $ 35,000,000 and thatbe less than 10% of the annual premium for each such policy shall not exceed $200,000.Company's market value based on the volume weighted average of the closing price of the Company ADSs, as quoted on the NASDAQ over the 30 trading days ending immediately prior to compensation committee's resolution date, without an additional shareholders' approval to the extent permitted under the Companies Law.
104
Indemnification
The Companies Law provides that a company may indemnify an office holder against:
| ● | a financial liability imposed on him or her in favor of another person by any judgment concerning an act performed in his or her capacity as an office holder; |
| ● | reasonable litigation expenses, including |
| ● | reasonable litigation expenses, including |
Our articles of association allow us to indemnify our office holders to the fullest extent permitted by law. The Companies Law also permits a company to undertake in advance to indemnify an office holder, provided that if such indemnification relates to financial liability imposed on him or her, as described above, then the undertaking should be limited:
| ● | to categories of events that the board of directors determines are likely to occur in light of the operations of the company at the time that the undertaking to indemnify is made; and |
| ● | in amount or criterion determined by the board of directors, at the time of the giving of such undertaking to indemnify, to be reasonable under the circumstances. |
We have entered into indemnification agreements with all of our directors and with certain members of our senior management. Each such indemnification agreement provides the office holder with the maximum indemnification permitted under applicable.applicable law, and limits the total sum to be paid to all such directors and senior management members to 25% of the our shareholders' equity according to our last financial statements prior to the actual payment of any indemnification in addition to any sums received, if received from our D&O insurance.
Exculpation
Under the Companies Law, an Israeli company may not exculpate an office holder from liability for a breach of his or her duty of loyalty, but may exculpate in advance an office holder from his or her liability to the company, in whole or in part, for a breach of his or her duty of care (other than in relation to distributions). Our articles of association provide that we may exculpate any office holder from liability to us to the fullest extent permitted by law. Under the indemnification agreements, we exculpate and release our office holders from any and all liability to us related to any breach by them of their duty of care to us to the fullest extent permitted by law.
Limitations
The Companies Law provides that we may not exculpate or indemnify an office holder nor enter into an insurance contract that would provide coverage for any liability incurred as a result of any of the following: (a) a breach by the office holder of his or her duty of loyalty unless (in the case of indemnity or insurance only, but not exculpation) the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice us; (b) a breach by the office holder of his or her duty of care if the breach was carried out intentionally or recklessly (as opposed to merely negligently); (c) any action taken with the intent to derive an illegal personal benefit; or (d) any fine levied against the office holder.
105
The foregoing descriptions are general summaries only, and are qualified entirely by reference to the full text of the Companies Law, as well as of our articles of association and our form of indemnification agreement, which are exhibits to this annual report and are incorporated herein by reference.
There are no service contracts between us or our U.S. Subsidiary, on the one hand, and our directors in their capacity as directors, on the other hand, providing for benefits upon termination of service.
The following table sets forth certain data concerning our workforce (excluding temporary employees), as of the end of each of the last three fiscal years:
| As of December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Numbers of employees by category of activity | ||||||||||||
Management and administrative | 28 | 24 | 21 | |||||||||
Research and development | 37 | 27 | 26 | |||||||||
Operations | 21 | 17 | 16 | |||||||||
Sales and marketing | 118 | 86 | 79 | |||||||||
Total workforce | 204 | 154 | 142 | |||||||||
| Numbers of employees by geographic location | ||||||||||||
Israel | 91 | 74 | 67 | |||||||||
| United States | 112 | 79 | 74 | |||||||||
Other | 1 | 1 | 1 | |||||||||
Total workforce | 204 | 154 | 142 | |||||||||
| As of December 31, | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
| Numbers of employees by category of activity | ||||||||||||
| Management and administrative | 16 | 10 | 10 | |||||||||
| Research and development | 22 | 16 | 14 | |||||||||
| Operations | 12 | 13 | 6 | |||||||||
| Sales and marketing | 63 | 41 | 26 | |||||||||
| Total workforce | 113 | 80 | 56 | |||||||||
| Numbers of employees by geographic location | ||||||||||||
| Israel | 57 | 44 | 42 | |||||||||
| United States | 56 | 36 | 14 | |||||||||
| Total workforce | 113 | 80 | 56 | |||||||||
During the years covered by the above table, we did not employ a significant number of temporary employees.
The increase in the size of our workforce in 2013, 20122016, 2015 and 20112014 was primarily the result of the expansion of our sales, marketing and service activities in the United States, expansion of our Research and Development department and an increase in headcount in the finance department and in the operation department in Israel to support the companyour growth.
We are subject to Israeli labor laws and regulations with respect to our employees located in Israel. These laws principally concern matters such as pensions, paid annual vacation, paid sick days, length of the workday and work week, minimum wages, overtime pay, insurance for work-related accidents, severance pay and other conditions of employment. Our employees are not represented by a labor union. We consider our relationship with our employees to be good. To date, we have not experienced any work stoppages.
The employees of our SubsidiarySubsidiaries are subject to local labor laws and regulations.
E. Share Ownership.
The following table lists as of April 2, 2014,27, 2017, the number of our shares owned, and stock options held, by each of our directors, our CEO and others members of our senior management as a group:
Number of Ordinary Shares Beneficially Owned(1) | Percent of Class(2) | |||||||
Directors | ||||||||
Jonathan Adereth (3) | 80,000 | * | ||||||
Ori Hadomi (4) | 103,125 | * | ||||||
Gil Bianco (5) | 36,700 | * | ||||||
Yuval Yanai (6) | - | - | ||||||
Sarit Soccary Ben-Yochanan (7) | 9,900 | * | ||||||
Michael Berman (8) | 44,700 | * | ||||||
Executive Officers | ||||||||
Sharon Levita (9) | 44,557 | * | ||||||
Moshe Shoham (10) | 410,037 | * | ||||||
Eliyahu Zehavi (11) | 65,725 | * | ||||||
Doron Dinstein (12) | 137,013 | * | ||||||
Christopher Prentice (13) | 188,473 | * | ||||||
| Anat Kaphan (14) | - | - | ||||||
Inbal Azar (15) | - | - | ||||||
All directors and executive officers as a group (13 persons) | 1,120,500 | 2.30 | % | |||||
Number of Ordinary Shares Beneficially Owned(1) | Percent of Class (2) | |||||||
| Directors | ||||||||
| Jonathan Adereth (3) | 40,000 | * | ||||||
| Ori Hadomi (4) | 177,503 | * | ||||||
| Gil Bianco | - | - | ||||||
| David Schlachet (5) | 40,000 | * | ||||||
| Sarit Soccary Ben-Yochanan (6) | 23,500 | * | ||||||
| Michael Berman | - | - | ||||||
| Executive Officers | ||||||||
| Sharon Levita (7) | 61,882 | * | ||||||
| Moshe Shoham (8) | 501,750 | 1.2% | ||||||
| Eliyahu Zehavi (9) | 312,608 | * | ||||||
| Avi Posen (10) | 17,625 | * | ||||||
| Doron Dinstein (11) | 88,450 | * | ||||||
| Christopher Prentice (12) | 80,250 | * | ||||||
| All directors and executive officers as a group (12 persons) | 1,346,468 | 3.2% | ||||||
| * | Less than 1%. |
| (1) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. |
| (2) | The percentages shown are based on |
107
| (3) | Consists of |
| (4) | Consists of 103,125 ordinary shares issuable upon exercise of outstanding options within 60 days of April 27, 2017. The exercise price of these options is NIS 26.62 ($6.66) per share. These options expire in July 2021. Does not include 493,449 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of April 27, 2017. The exercise price of these options ranges between NIS 22.23 ($5.56) and NIS 26.99 ($6.75) per share, and the options expire between July 2021 and May 2023. |
| (5) | Consists of 36,700 ordinary shares issuable upon exercise of outstanding options within 60 days of April 27, 2017. The exercise price of these options is NIS 27.67 ($6.92) and the options expire in July 2021. Does not include 43,300 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of April 27, 2017. The exercise price of these options ranges between NIS 27.67 ($6.92) and NIS 45.17 ($11.29) per share, and the options expire between July 2021 and October 2023. |
| (6) | Does not include 40,000 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of April 27, 2017. The exercise price of these options is NIS 45.17 ($11.29) and expire in November 2023. |
| (7) | Consists of 9,900 ordinary shares issuable upon exercise of outstanding options within 60 days of April 27, 2017. The exercise price of these options is NIS 27.67 ($6.92) and the options expire in July 2021. Does not include 43,300 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of April 27, 2017. The exercise price of these options ranges between NIS 27.67 ($6.92) and NIS 45.17 ($11.29) per share, and the options expire between July 2021 and October 2023. |
| (8) | Includes |
| (9) | Includes 26,632 shares and 17,925 ordinary shares issuable upon exercise of outstanding options within 60 days of April |
| (10) | Includes 367,206 shares and 42,831 ordinary shares issuable upon exercise of outstanding options within 60 days of April 27, 2017. The exercise price of these options is NIS 26.62 ($6.66) and the options expire in July 2021. Does not include 84,469 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of April 27, 2017. The exercise price of these options ranges between NIS 22.23 ($5.56) and NIS 26.99 ($6.75) and the options expire between July 2021 and May 2023. |
| (11) | Includes 65,725 ordinary shares issuable upon exercise of outstanding options within 60 days of April 27, 2017. The exercise price of these options is NIS 26.62 ($6.66) and the options expire in July 2021. Does not include 158,720 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of April 27, 2017. The exercise price of these options ranges between NIS 22.23 ($5.56) and NIS 26.99 ($6.75) and the options expire between July 2021 and May 2023. |
| (12) | Includes 137,013 ordinary shares issuable upon exercise of outstanding options within 60 days of April 27, 2017, these options have an exercise price that ranges between NIS 8.29 ($2.07) and 26.62 NIS ($6.66) per share. These options expire between December 2017 and July 2021. Does not include 130,100 ordinary shares issuable upon exercise of outstanding options that are not exercisable within 60 days of April 27, 2017. The exercise price of these options ranges between NIS 22.23 ($5.56) and NIS 26.99 ($6.75) and the options expire between July 2021 and May 2023. |
| (13) | Consists of | |
| (14) | Does not include | |
| (15) | Does not include | |
Stock Option Plans
The following sets forth certain information with respect to our current share option plans. The following description is only a summary of the plans and is qualified in its entirety by reference to the full text of the plans, which are exhibits to this annual report and are incorporated herein by reference.
All of our share option plans are administered by our board of directors. Upon the expiration of the plans, no further grants may be made thereunder, although any existing awards will continue in full force in accordance with the terms under which they were granted. Options granted under any of the plans may not expire later than ten years from the date of grant, although, in recent years, options grants have generally provided for an expiration date of seven years from the grant date. Unvested awards that are cancelled and/or forfeited go back into the respective plan.
2003 Stock Option Plan
In July 2003, we adopted our 2003 Share Option Plan, or the 2003 Plan, which expired in November 2010. Accordingly no further grants may be made under the 2003 Plan, although any existing awards continue in full force in accordance with the terms under which they were granted. Our directors, officers, employees and certain consultants and dealers were eligible to participate in this plan. As of December 31, 2013,2016, there were 1,426,17178,500 ordinary shares issuable upon the exercise of outstanding options under the 2003 Plan.
Israeli grantees who were our directors, officers and employees could be granted options under the 2003 Plan that would qualify for special tax treatment under the “capital"capital gains route”route" provisions of Section 102(b)(2) of the Israeli Income Tax Ordinance, to which we refer as the Ordinance. Pursuant to such Section 102(b)(2), qualifying options and shares issued upon exercise of such options are held in trust and registered in the name of a trustee selected by the board of directors. The trustee may not release these options or shares to the holders thereof before the second anniversary of the registration of the options in the name of the trustee. The Israeli Tax Authority, or the ITA, approved this plan as required by applicable law. The 2003 Plan also permitted the grant to Israeli grantees of options that do not qualify under Section 102(b)(2). The 2003 Plan also provided for the grant of options to U.S. resident employees that are “qualified”"qualified", i.e., incentive stock options, under the U.S. Internal Revenue Code of 1986, as amended, and options that are not qualified. In addition to the grant of awards under the relevant tax regimes of the United States and Israel, the 2003 Plan allowed for the grant of awards to grantees in other jurisdictions.
2011 Share Option Plan
In May 2011, our board of directors approved and adopted our 2011 Share Option Plan, or the 2011 Plan, which expires in June 2021. As of December 31, 2013,2016, the number of shares reserved for the exercise of options granted under the plan is 3,262,529.9,262,529. Our employees, directors, officer, consultants, advisors, suppliers and any other person or entity whose services are considered valuable to us are eligible to participate in this plan. The 2011 Plan provides for the grant of awards consisting of stock options. As of December 31, 2013,2016, there were 2,146,1516,589,941 ordinary shares issuable upon the exercise of outstanding options under the 2011 Plan.
The 2011 Plan provides for the grant to residents of Israel of options that qualify under the provisions of Section 102 of the Ordinance (see “2003"2003 Stock Option Plan”Plan" above), as well as for the grant of options that do not qualify under such provisions. The 2011 Plan has been approved by the ITA. The 2011 Plan also provides for the grant of options to U.S. resident employees that are “qualified”"qualified", i.e., incentive stock options, under the U.S. Internal Revenue Code of 1986, as amended, or the Code, and options that are not qualified. In addition to the grant of awards under the relevant tax regimes of the United States and Israel, the 2011 Plan allows for the grant of awards to grantees in other jurisdictions, with respect to which our board of directors is empowered to make the requisite adjustments in the plan.
Both the 2003 Plan and the 2011 Plan are administered by our board of directors or a committee appointed thereby. Subject to the 2003 Plan, the 2011 Plan and applicable law, the board of directors has the authority to make all determinations deemed necessary or advisable for the administration of such plans, including to whom options may be granted, the time and the extent to which the options may be exercised, the exercise price of shares covered by each option, the type of options and how to interpret such plans.
109
The following table presents certain option data information for the above-described plans as of April 2, 2014:
| Plan | Total Ordinary Shares Reserved for Option Grants | Aggregate Number of Options Exercised | Shares Available for Future Grants | Aggregate Number of Options Outstanding | Weighted Average Exercise Price of Options | |||||||||||||||
| 2003 plan | 3,000,000 | 1,405,376 | - | 617,530 | $ | 2.49 | ||||||||||||||
| 2011 plan | 3,262,529 | 316,056 | 807,822 | 2,138,651 | $ | 3.23 | ||||||||||||||
| 6,262,529 | 1,721,432 | 807,822 | 2,756,181 | $ | 3.07 | |||||||||||||||
December 31, 2016:
| Plan | Total Ordinary Shares Reserved for Option Grants | Aggregate Number of Options Exercised | Shares Available for Future Grants | Aggregate Number of Options Outstanding | Weighted Average Exercise Price of Options | |||||||||||||||
2003 plan | 3,000,000 | 1,834,961 | — | 78,500 | $ | 2.04 | ||||||||||||||
2011 plan | 9,262,529 | 1,610,101 | 1,062,487 | 6,589,941 | $ | 6.50 | ||||||||||||||
| 12,262,529 | 3,445,062 | 1,062,487 | 6,668,441 | $ | 6.45 | |||||||||||||||
Ownership by Major Shareholders
The following table presents as of April 2, 201427, 2017 (unless otherwise noted below) the beneficial ownership of our ordinary shares by each person who is known by us to be the beneficial owner of 5% or more of our outstanding ordinary shares (to whom we refer as our Major Shareholders). The data presented is based on information provided to us by the holders or disclosed in public regulatory filings.
Except where otherwise indicated, and except pursuant to community property laws, we believe, based on information furnished by such owners, that the beneficial owners of the shares listed below have sole investment and voting power with respect to, and the sole right to receive the economic benefit of ownership of, such shares. The shareholders listed below do not have any different voting rights from any of our other shareholders. We know of no arrangements that would, at a subsequent date, result in a change of control of us.
| Name | Number of Ordinary Shares Beneficially Owned(1) | Percent of Class(2) | ||||||
Oracle Associates, LLC (3) | 6,426,549 | 15.4% | ||||||
| Jack Schuler | 2,811,615 | 6.7% | ||||||
| Name | Number of Ordinary Shares Beneficially Owned(1) | Percent of Class(2) | ||||||
Larry Feinberg (3) | 4,942,756 | 10.28 | % | |||||
Jack Schuler (4) | 2,811,615 | 5.85 | % | |||||
Migdal Insurance & Financial Holdings LTD (5) | 2,996,893 | 6.23 | % | |||||
Medtronic plc (6) | 3,917,368 | 8.15 | % | |||||
| (1) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. |
| 2) | |
The percentages shown are based on | |
| (3) | Based solely on a Schedule 13D/A filed with the SEC on April 25, 2017, and which reflects holdings as of April 20, 2017. Mr. Feinberg may be deemed to beneficially own 4,942,756 ordinary shares due to his relationship with Oracle Associates, LLC, Oracle Partners, LP, Oracle Institutional Partners, LP, Oracle Ten Master, LP, Oracle Investment Management, Inc., Oracle Investment Management, Inc. Employees’ Retirement Plan and The Feinberg Family Foundation. |
110
| (4) | Based solely on data held by the Company at the date of issuing Mr. Schuler ordinary shares. |
| (5) | Based solely on a Schedule 13G filed with the SEC on January 26, 2017, and which reflects holdings as of December 31, 2016. |
| (6) | Based solely on a Schedule 13G filed with the SEC on August 22, 2016, and which reflects holdings as of August 11, 2016. |
Changes in Percentage Ownership by Major Shareholders
Under the agreement with the Oracle Investors, or the OracleMedtronic Agreement the Oracle Investors initially invested an amounts in May 2016, Medtronic purchased from Mazor newly issued securities representing four percent of $7.5 million,Mazor's issued and agreed that, upon the fulfillment of certain conditions as specified in the Oracle Agreement, the Oracle Investors would invest an additional amount of up to $7.5 million. In connection with the Oracle Agreement we issued to the Oracle Investors an aggregate of 7,053,529 Ordinary Shares, or the Oracle Shares, for an aggregate amount of $7.5 million, or the Invested Amount, reflectingoutstanding securities on a fully diluted basis, at a price per Oracle ShareADS of NIS 4.25 (based on the exchange rate of August 8, 2012, of NIS 3.997 to $1, or the Rate of Exchange). In addition, we issued$11.42, which was equal to the Oracle Investors, for no additional consideration, warrants, to purchase an aggregate of up to 7,053,529 Ordinary Shares, or the Oracle Warrants and the Oracle Warrant Shares, respectively, and in total for all the Oracle Investors, Oracle Warrant Shares for an aggregate exercisetrailing 20-day volume weighted average price of up to $7.5 million, calculated pursuant to the Rate of Exchange,shares, or the Total Warrant Consideration. The Oracle Warrants were exercisable for a periodtotal purchase price of 36 months from September 27, 2012.$11.9 million.
In August 2016, following the achievement by Mazor of certain operational milestones, Medtronic purchased newly issued securities representing 4.1 percent of Mazor's issued and outstanding securities. This investment brought Medtronic to a total holding of 7.3 percent of Mazor’s issued and outstanding securities on a fully diluted basis. The exercise price per each Oracle Warrant ShareADS was the lower of: (a) NIS 6; and (b)$21.84, which was the average price of our Ordinary Shares onper share during the TASE in the 1020 trading days preceding exercise (according tofollowing the Rate of Exchange), provided, however, that if the price under (b) above was lower than NIS 4.25, each Oracle Investor would be entitled to exercise only up to 50% of its portionoccurrence of the Total Warrant Consideration at NIS 4.25, and any exercise with respect the balance of the Oracle Warrant would be at an exerciseabove-mentioned milestones, for a total purchase price of NIS 6.00. The investment under the Oracle Agreement closed on September 27, 2012. On May 28, 2013, we provided the Oracle Investors with a notice of mandatory exercise, pursuant to which the Oracle Investors were required to exercise such warrants for total consideration of $7,500,000 ($6,966,000, net of issuance expenses in the amount of $534,000) into a fixed number of 4,996,251 Ordinary Shares as determined as of May 28, 2013. The proceeds were paid to us through July 2, 2013.$20 million.
For a detailed description of the OracleMedtronic Agreements, see “Item 10. Additional Information – C. Material Contracts.”
Record Holders
Based upon a review of the information provided to us by our transfer agent,TASE, as of September 15, 2013,March 1, 2017, there were 4,5505,830 holders of record of our ordinary shares, of which 20106 record holders holding 11,623,12730,272,361 shares, or approximately 28.8%62.9%, of our outstanding shares had registered addresses in the United States and there was one holder of record of the ADSs. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside, since many of these shares were held of record by brokers or other nominees.
We are not controlled by another corporation, by any foreign government or by any natural or legal persons except as set forth herein, and here are no arrangements known to us which would result in a change in control of us at a subsequent date.
| B. | Related Party Transactions |
Not applicable.
| C. | Interests of Experts and Counsel |
Not applicable.
See “Item"Item 18. Financial Statements.”"
111
Export Sales
The following table presents total export sales for each of the fiscal years indicated (in thousands):
| For the year ended December 31, | For the year ended December 31, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2016 | 2015 | 2014 | |||||||||||||||||||
| Total export sales* | $ | 19,597 | $ | 12,043 | $ | 5,634 | $ | 36,165 | $ | 25,859 | $ | 20,766 | ||||||||||||
| as a percentage of total revenues | 98% | 99% | 95% | 99 | % | 99 | % | 98 | % | |||||||||||||||
* Export sales, as presented, are defined as sales to customers located outside of Israel.
Legal Proceedings
From time to time, we are involved in various routine legal proceedings incidental to the ordinary course of our business. We do not believe that the outcomes of these legal proceedings have had in the recent past, or will have (with respect to any pending proceedings), significant effects on our financial position or profitability.
Dividends
We have never declared or paid cash dividends on our Ordinary Shares and do not anticipate that we will pay any cash dividends on our Ordinary Shares or ADSs in the foreseeable future.
We intend to retain our earnings to finance the development and expenses of our business. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on a number of factors, including future earnings, our financial condition, operating results, contractual restrictions, capital requirements, business prospects, applicable Israeli law and other factors our board of directors may deem relevant.
Pursuant to our articles of association, dividends may be declared by our board of directors. Dividends must be paid out of our profits and other surplus funds, as defined in the Companies Law, as of the end of the most recent year or as accrued over a period of the most recent two years, whichever amount is greater, provided that there is no reasonable concern that payment of a dividend will prevent us from satisfying our existing and foreseeable obligations as they become due. In addition, because we have received certain benefits under the Israeli law relating to approved enterprises and privileged enterprises, our payment of dividends may subject us to certain Israeli taxes to which we would not otherwise be subject. In the event that we declare cash dividends, we may pay those dividends in NIS. See “Item"Item 3. Key Information – D. Risk Factors—We do not intend to pay any cash dividends on our Ordinary Shares in the foreseeable future and, therefore, any return on your investment in our Ordinary Shares or the ADSs must come from increases in the value and trading price of our Ordinary Shares and the ADSs.”"
No significant change, other than as otherwise described in this annual report, has occurred in our operations since the date of our consolidated financial statements included in this annual report.
| A. | Offer and Listing Details |
Our Ordinary Shares have been trading on the TASE under the symbol “MZOR”"MZOR" since August 2007.
The following table sets forth, for the periods indicated, the reported high and low closing sale prices of our Ordinary Shares on the TASE in NIS and U.S. dollars. U.S. dollar per Ordinary Share amounts are calculated using the U.S. dollar representative rate of exchange on the date to which the high or low market price is applicable, as reported by the Bank of Israel.
| NIS | U.S.$ | |||||||||||||||
| Price Per | Price Per | |||||||||||||||
| Ordinary Share | Ordinary Share | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| Annual: | ||||||||||||||||
| 2014 (through April 2, 2014) | 44.92 | 34.54 | 12.87 | 9.95 | ||||||||||||
| 2013 | 40.10 | 8.28 | 11.26 | 2.21 | ||||||||||||
| 2012 | 9.00 | 3.46 | 2.38 | 0.88 | ||||||||||||
| 2011 | 10.80 | 2.82 | 2.99 | 0.76 | ||||||||||||
| 2010 | 12.00 | 7.29 | 3.18 | 1.93 | ||||||||||||
| 2009 | 10.06 | 4.33 | 2.57 | 1.04 | ||||||||||||
| Quarterly: | ||||||||||||||||
| Second Quarter 2014 (through April 2, 2014) | 37.91 | 35.50 | 10.91 | 10.21 | ||||||||||||
| First Quarter 2014 | 44.92 | 34.54 | 12.87 | 9.95 | ||||||||||||
| Fourth Quarter 2013 | 40.10 | 26.68 | 11.26 | 7.57 | ||||||||||||
| Third Quarter 2013 | 30.32 | 21.01 | 8.41 | 5.88 | ||||||||||||
| Second Quarter 2013 | 26.97 | 14.85 | 7.48 | 4.10 | ||||||||||||
| First Quarter 2013 | 15.59 | 8.28 | 4.27 | 2.21 | ||||||||||||
| Fourth Quarter 2012 | 9.00 | 5.89 | 2.38 | 1.51 | ||||||||||||
| Third Quarter 2012 | 5.85 | 4.08 | 1.49 | 1.03 | ||||||||||||
| Second Quarter 2012 | 4.67 | 3.46 | 1.24 | 0.88 | ||||||||||||
| First Quarter 2012 | 4.38 | 3.55 | 1.14 | 0.95 | ||||||||||||
| Most Recent Six Months: | ||||||||||||||||
| Second Quarter 2014 (through April 2, 2014) | 37.91 | 35.50 | 10.91 | 10.21 | ||||||||||||
| March 2014 | 43.60 | 35.93 | 12.50 | 10.30 | ||||||||||||
| February 2014 | 44.64 | 41.87 | 12.68 | 11.88 | ||||||||||||
| January 2014 | 44.92 | 34.54 | 12.87 | 9.95 | ||||||||||||
| December 2013 | 35.07 | 26.68 | 9.97 | 7.57 | ||||||||||||
| November 2013 | 34.43 | 27.60 | 9.74 | 7.81 | ||||||||||||
NIS Price Per Ordinary Share High | Low | U.S.$ Price Per Ordinary Share High | Low | |||||||||||||
| Annual: | ||||||||||||||||
2017 (through April 26, 2017) | 66.49 | 40.07 | 18.06 | 10.59 | ||||||||||||
2016 | 46.42 | 16.88 | 12.26 | 4.34 | ||||||||||||
2015 | 28.21 | 16.40 | 7.38 | 4.25 | ||||||||||||
2014 | 44.92 | 18.66 | 12.87 | 4.83 | ||||||||||||
2013 | 40.10 | 8.28 | 11.26 | 2.21 | ||||||||||||
2012 | 9.00 | 3.46 | 2.38 | 0.88 | ||||||||||||
| Quarterly: | ||||||||||||||||
Second Quarter 2017 (through April 26, 2017) | 66.49 | 51.15 | 18.06 | 14.02 | ||||||||||||
| First Quarter 2017 | 53.49 | 40.07 | 14.80 | 10.59 | ||||||||||||
Fourth Quarter 2016 | 46.42 | 39.50 | 12.24 | 10.28 | ||||||||||||
Third Quarter 2016 | 46.08 | 35.48 | 12.26 | 9.23 | ||||||||||||
Second Quarter 2016 | 35.91 | 20.08 | 9.31 | 5.33 | ||||||||||||
First Quarter 2016 | 23.14 | 16.88 | 6.05 | 4.34 | ||||||||||||
Fourth Quarter 2015 | 23.80 | 16.40 | 6.17 | 4.25 | ||||||||||||
Third Quarter 2015 | 28.21 | 21.30 | 7.38 | 5.43 | ||||||||||||
Second Quarter 2015 | 26.99 | 21.67 | 7.16 | 5.50 | ||||||||||||
First Quarter 2015 | 25.48 | 20.06 | 6.40 | 5.06 | ||||||||||||
| Most Recent Six Months: | ||||||||||||||||
| 66.49 | 51.15 | 18.06 | 14.02 | |||||||||||||
April 2017 (through April 26, 2017) | 53.49 | 41.32 | 14.80 | 11.29 | ||||||||||||
| March 2017 | 44.50 | 43.01 | 12.07 | 11.70 | ||||||||||||
February 2017 | 43.58 | 40.76 | 11.63 | 10.88 | ||||||||||||
January 2017 | 47.18 | 40.07 | 12.25 | 10.59 | ||||||||||||
December 2016 | 44.80 | 40.35 | 11.69 | 10.46 | ||||||||||||
November 2016 | 45.10 | 39.50 | 11.75 | 10.28 | ||||||||||||
October 2016 | 46.42 | 42.58 | 12.24 | 11.22 | ||||||||||||
| PRICE RANGE OF OUR ADSs |
The ADSs have been trading under the symbol “MZOR”"MZOR" on the NASDAQ Capital Market since May 2013 and the NASDAQ Global Market since January 16, 2014.
The following table sets forth, for the periods indicated, the reported high and low closing sale prices of the ADSs on NASDAQ in U.S. dollars.
U.S.$ Price Per ADSs | |||||
| High | Low | ||||
| Quarterly: | |||||
| Second Quarter 2014 (through April 2, 2014) | 21.94 | 20.49 | |||
| First Quarter 2014 | 25.34 | 20.44 | |||
Fourth Quarter 2013 | 21.85 | 15.56 | |||
Third Quarter 2013 | 17.14 | 11.76 | |||
Second Quarter 2013 (since May 28, 2013) | 15.01 | 10.40 | |||
| Most Recent Six Months: | |||||
| April 2014 (through April 2, 2014) | 21.94 | 20.49 | |||
| March 2014 | 24.92 | 20.44 | |||
February 2014 | 25.09 | 23.46 | |||
January 2014 | 25.34 | 20.67 | |||
December 2013 | 19.94 | 16.25 | |||
November 2013 | 19.29 | 15.56 | |||
U.S.$ Price Per ADSs | ||||||||
| High | Low | |||||||
| Annual: | ||||||||
2017 (through April 26, 2017) | 35.68 | 20.83 | ||||||
2016 | 25.89 | 8.79 | ||||||
2015 | 14.90 | 8.86 | ||||||
2014 | 25.34 | 9.90 | ||||||
2013 (since May 28, 2013) | 21.85 | 10.40 | ||||||
| Quarterly: | ||||||||
Second Quarter 2017 (through April 26, 2017) | 35.68 | 27.82 | ||||||
First Quarter 2017 | 29.87 | 20.83 | ||||||
Fourth Quarter 2016 | 25.89 | 20.34 | ||||||
Third Quarter 2016 | 25.87 | 18.32 | ||||||
Second Quarter 2016 | 19.14 | 10.10 | ||||||
First Quarter 2016 | 11.42 | 8.79 | ||||||
Fourth Quarter 2015 | 12.08 | 8.86 | ||||||
Third Quarter 2015 | 14.90 | 10.66 | ||||||
Second Quarter 2015 | 14.72 | 11.23 | ||||||
| First Quarter 2015 | 12.74 | 10.16 | ||||||
| Most Recent Six Months: | ||||||||
April 2017 (through April 26, 2017) | 35.68 | 27.82 | ||||||
March 2017 | 29.87 | 22.47 | ||||||
February 2017 | 23.69 | 21.52 | ||||||
January 2017 | 24.59 | 20.83 | ||||||
December 2016 | 23.26 | 20.72 | ||||||
November 2016 | 23.44 | 20.34 | ||||||
| October 2016 | 25.89 | 21.83 | ||||||
B. Plan of Distribution
Not applicable.
Our Ordinary Shares are listed and traded on the TASE. Our ADSs are traded on the NASDAQ Global Market.
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
114
Not applicable.
B. Memorandum and Articles of Association
This information is incorporated by reference into this annual report on Form 20-F from our registration statement on Form F-1 filed with the SEC on October 18, 2013.
Except as set forth below, we have not entered into any material contract within the two years prior to the date of this annual report, other than contracts entered into in the ordinary course of business, or as otherwise described herein in “Item"Item 4. Information on the Company –- A. History and Development of the Company”Company" above, “Item"Item 4. Information on the Company –- B. Business Overview”Overview" above, or “Item"Item 7. Major Shareholders and Related Party Transactions –- A. Major Shareholders”Shareholders" above.
Exclusive Lead Sharing and Distribution Agreement and Purchase Agreement with Medtronic.
On May 18, 2016, Mazor entered into two strategic agreements with Medtronic. One agreement is a two- phase Exclusive Lead Sharing and Distribution Agreement which provides for co-promotion, co-development and, upon meeting certain milestones, potential global distribution of the Mazor X System. The second agreement is a Purchase Agreement which provides for an equity investment by Medtronic in Mazor.
Exclusive Lead Sharing and Distribution Agreement
The Exclusive Lead Sharing and Distribution Agreement is a commercial agreement which has an initial U.S.-based co-promotion phase. Subject to meeting certain milestones defined in the agreement, and the parties' mutual decision to proceed, the relationship will enter a second phase. During the second phase, Medtronic will assume exclusive global sales and distribution rights for the Mazor X system. The second phase includes annual minimum sales amounts with a cumulative potential of hundreds of Mazor X systems over a four-year period. The commercial agreement relates to Mazor X systems and applications for the spine surgery market. Under the agreement, Medtronic placed an order for 15 Mazor X Systems during 2016, of which nine systems were supplied by December 31, 2016 and the remaining six systems were supplied in the first quarter of 2017.
The agreement also provides for collaboration in the following main areas:
| · | Marketing activities – Medtronic is committed to actively marketing the Mazor X system. Mazor and Medtronic are working on joint efforts to create market awareness of the Mazor X System. |
| · | Sales Activities – In the first phase of the agreement, Medtronic's sales team is responsible for generating awareness for and interest in the Mazor X System for Spine applications. This involves bringing surgeons to labs and generating qualified leads, before providing the leads to Mazor's capital sales team to close the sales. If triggered, in the second phase of the agreement Medtronic would assume responsibility for global distribution of the Mazor X System for spine applications. |
| · | Co-development activities – Mazor and Medtronic will co-develop synergistic products and applications for spine surgery. This activity has already commenced. |
| · | Revenue sharing – Mazor will pay a lead sharing fee to Medtronic for Qualified leads Medtronic delivers to Mazor. Medtronic will pay a synergy fee to Mazor for every case where a Mazor X system is used in association with Medtronic implants. Under certain circumstances, Medtronic will pay a synergy fee to Mazor regarding Renaissance usage with Medtronic implants. |
115
Purchase Agreement
The Purchase Agreement provides for a three-tranche equity investment in Mazor. In the Oracle Agreement entered intofirst tranche, which closed in August 2012, the Oracle Investors initially invested an amountMay 2016, Medtronic purchased from Mazor newly issued securities representing four percent of $7.5 million,Mazor's issued and agreed that, upon the fulfillment of certain conditions as specified in the Oracle Agreement, the Oracle Investors would invest an additional amount of up to $7.5 million. In connection with the Oracle Agreement we issued to the Oracle Investors an aggregate of 7,053,529 Ordinary Shares, or the Oracle Shares, for an aggregate amount of $7.5 million, or the Invested Amount, reflectingoutstanding share capital on a fully diluted basis, at a price per Oracle ShareADS of NIS 4.25 (based on the exchange rate of August 8, 2012, of NIS 3.997 to $1, or the Rate of Exchange). In addition, we issued$11.42, which was equal to the Oracle Investors, for no additional consideration, warrants, to purchase an aggregate of up to 7,053,529 Ordinary Shares, or the Oracle Warrants and the Oracle Warrant Shares, respectively, and in total for all the Oracle Investors, Oracle Warrant Shares for an aggregate exercisetrailing 20-day volume weighted average price of upthe shares, or a total of $11.9 million. In the second tranche, which closed in August 2016, upon the achievement by Mazor of certain operational milestones, Medtronic purchased newly issued securities representing 4.1 percent of Mazor's issued and outstanding securities. This investment brought Medtronic to $7.5 million, calculated pursuant to the Ratea total holding of Exchange,8.4 percent of Mazor’s issued and outstanding securities, or the Total Warrant Consideration.7.3 percent of Mazor’s issued and outstanding securities on a fully diluted basis. The Oracle Warrants are exercisable for a period of 36 months from September 27, 2012. The exercise price per each Oracle Warrant Share isADS in the lower of: (a) NIS 6; and (b)second tranche was $21.84, which was the average price of our Ordinary Shares onper share during the TASE in the 1020 trading days preceding exercise (accordingfollowing the occurrence of the above-mentioned milestones.
In a potential third tranche, Mazor will have the right to require Medtronic to consummate the purchase of Mazor securities such that after the investment they will own up to fifteen percent of Mazor's outstanding ordinary shares on a fully diluted basis. Consummation of this tranche is subject to consummation of the second tranche as well as the commencement of the second phase of the Exclusive Lead Sharing and Distribution Agreement, and, provided certain other conditions are met, will be solely at Mazor's discretion, at a per-share price equal to the Rate of Exchange), provided, however, that if thetrailing 20-day volume weighted average price under (b) above is lower than NIS 4.25, each Oracle Investor will be entitledprior to exercise only up to 50% of its portion of the Total Warrant Consideration at NIS 4.25, and any exercise with respect the balance of the Oracle Warrant shall be at an exercise price of NIS 6.00. The investment under the Oracle Agreement closed on September 27, 2012. On May 28, 2013, in accordance with the Oracle Agreement, we provided the Oracle Investors with a notice of mandatory exercise, pursuant to which the Oracle Investors were required within 30 days to exercise the Oracle Warrants. In connection with theMazor's exercise of the Oracle Warrants, we issued 4,996,251 Ordinary Shares tooption. Medtronic, at its sole discretion, may cap the Oracle Investors for a Total Warrant Consideration of $7,500,000.
| D. Exchange Controls |
There are currently no Israeli currency control restrictions on payments of dividends or other distributions with respect to our ordinary sharesOrdinary Shares or ADSs or the proceeds from the sale of the shares,our Ordinary Shares or ADSs, except for the obligation of Israeli residents to file reports with the Bank of Israel regarding certain transactions. However, legislation remains in effect pursuant to which currency controls can be imposed by administrative action at any time.
The ownership or voting of our ordinary sharesOrdinary Shares or ADSs by non-residents of Israel, except with respect to citizens of countries that are in a state of war with Israel, is not restricted in any way by our memorandum of association or articles of association or by the laws of the State of Israel.
E. Taxation.
Israeli Tax Considerations
The following is a description of the material Israeli income tax consequences of the ownership of our ordinary shares. The following also contains a description of material relevant provisions of the current Israeli income tax structure applicable to companies in Israel, with special reference to its effect on us. To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, there can be no assurance that the tax authorities will accept the views expressed in the discussion in question. The discussion is not intended, and should not be taken, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
The following description is not intended to constitute a complete analysis of all tax consequences relating to the ownership or disposition of our Ordinary Shares and ADSs. Shareholders should consult their own tax advisors concerning the tax consequences of their particular situation, as well as any tax consequences that may arise under the laws of any state, local, foreign or other taxing jurisdiction.
116
On August 5, 2013January 4, 2016 the Knesset plenum passed the Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013 and 2014) – 2013,Amendment of the Income Tax Ordinance (Amendment 216) - 2016, by which, inter alia, the corporate tax rate would be raisedreduced by 1.5% to a rate of 26.5%25% as from 2014.January 1, 2016.
Furthermore, on December 22, 2016 the Knesset plenum passed the Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) - 2016, by which, inter alia, the corporate tax rate would be reduced from 25% to 23% in two steps. The first step will be to a rate of 24% as from January 2017 and the second step will be to a rate of 23% as from January 2018.
The Israeli Law for the Encouragement of Capital Investments, 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) by “Industrial Enterprises”"Industrial Enterprises" (as defined under the Investment Law).
The Investment Law was significantly amended effective April 1, 2005, or the 2005 Amendment, and further amended as of January 1, 2011, or the 2011 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 2005 Amendment. 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.
Tax Benefits Prior to the 2005 Amendment. An investment program that is implemented in accordance with the provisions of the Investment Law prior to the 2005 Amendment, referred to as an “Approved"Approved Enterprise,”" is entitled to certain benefits. A company that wished to receive benefits as an Approved Enterprise must have received approval from the Investment Center of the Israeli Ministry of Industry, Trade and Labor,Economy, or the Investment Center. Each certificate of approval for an Approved Enterprise relates to a specific investment program in the Approved Enterprise, delineated both by the financial scope of the investment and by the physical characteristics of the facility or the asset.
In general, an Approved Enterprise is entitled to receive a grant from the Government of Israel and certain tax benefits under the “Grant Track”"Grant Track" or an alternative package of tax benefits under the Alternative Track."Alternative Track". The tax benefits from any certificate of approval relate only to taxable profitsincome attributable to the specific Approved Enterprise. Income derived from activity that is not approved by the Investment Center or not integral to the activity of the Approved Enterprise does not enjoy tax benefits.
The tax benefits include a tax exemption for at least the first two years of the benefit period (depending on the geographic location of the Approved Enterprise facility within Israel) and the taxation of income generated from an Approved Enterprise at a reduced corporate tax rate of up to 25% for the remainder of the benefit period. The benefit period is ordinarily seven years commencing with the year in which the Approved Enterprise first generates taxable income. The benefit period is limited to 12 years from the operational year as determined by the Investment Center or 14 years from the start of the tax year in which approval of the Approved Enterprise is obtained, whichever is earlier.
A company that has an Approved Enterprise program is eligible for further tax benefits if it qualifies as a Foreign Investors’Investors' Company, or a FIC, which is a company with a level of foreign investment, as defined in the Investment Law, of more than 25%. The level of foreign investment is measured as the percentage of rights in the company (in terms of shares, rights to profits, voting and appointment of directors), and of combined share and loan capital, that are owned, directly or indirectly, by persons who are not residents of Israel. The determination as to whether a company qualifies as a FIC is made on an annual basis. A company that qualifies as a FIC and has an Approved Enterprise program is eligible for an extended ten-year benefit period. As specified above, depending on the geographic location of the Approved Enterprise within Israel, income derived from the Approved Enterprise program may be exempt from tax on its undistributed income for a period of between two to ten years, and will be subject to a reduced tax rate for the remainder of the benefit period. The tax rate for the remainder of the benefits period will be 25%, unless the level of foreign investment exceeds 49%, in which case the tax rate will be 20% if the foreign investment is more than 49% and less than 74%; 15% if more than 74% and less than 90%; and 10% if 90% or more.
117
If a company elects the Alternative Track and distributes a dividend, out of the exempt earnings, it maywill be required to recapture the deferred corporate income tax applicable to the gross amount of distributed dividend that is derived from the portion of the company’scompany's facilities that has been granted Approved Enterprise status during the tax exemption period at the applicable rate of 10%-25%. In addition, dividends paid out of income attributed to an Approved Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
The Investment Law also provides that an Approved Enterprise is entitled to accelerated depreciation on its property and equipment that are included in an Approved Enterprise program during the first five years in which the equipment is used.
The benefits available to an Approved Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations and the criteria in the specific certificate of approval. If a company does not meet these conditions, it wouldmay be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest. In April 2004 we were granted an Approved Enterprise status with respect to a plan to construct a plant in Caesarea for the manufacture of systems for assisting and guiding complex surgical procedures.
Tax Benefits Subsequent to the 2005 Amendment. The 2005 Amendment changed certain provisions of the Investment Law. As a result of the 2005 Amendment, a company was no longer obliged to obtain Approved Enterprise status in order to receive the tax benefits previously available under the Alternative Track, and therefore generally there was no need to apply to the Investment Center for this purpose (Approved Enterprise status remains mandatory for companies seeking cash grants). Rather, we may claim the tax benefits offered by the Investment Law directly in itsour tax returns by notifying the Israeli Tax Authority within 12 months ofafter the end of that year, provided that its facilities meet the criteria for tax benefits set out by the 2005 Amendment. A company is also granted a right to approach the Israeli Tax Authority for a pre-ruling regarding its eligibility for benefits under the 2005 Amendment.
118
The 2005 Amendment applies to new investment programs and investment programs with an election year commencing after 2004, but does not apply to investment programs approved prior to April 1, 2005. The 2005 Amendment provides that terms and benefits included in any certificate of approval that was granted before the 2005 Amendment became effective (April 1, 2005) will remain subject to the provisions of the Investment Law as in effect on the date of such approval.
Tax benefits are available under the 2005 Amendment to production facilities (or other eligible facilities), which are generally required to derive more than 25% of their business income from exportsales to territories with over 14 million inhabitants and meet additional criteria stipulate in the amendment. This is referred to as a “Beneficiary Enterprise”"Beneficiary Enterprise". In order to receive the tax benefits, the 2005 Amendment states that a company must make an investment which meets all of the conditions, including exceeding a minimum investment amount specified in the Investment Law. Such investment may be made over a period of no more than three years ending at the end of the year in which the company requested to have the tax benefits apply to its Beneficiary Enterprise.
The extent of the tax benefits available under the 2005 Amendment to qualifying income of a Beneficiary Enterprise depend on, among other things, the geographic location in Israel of the Beneficiary Enterprise. The geographic location of the company at the year of election will also determine the period for which tax benefits are available. Such tax benefits include an exemption from corporate tax on undistributed income for a period of between two to ten years, depending on the geographic location of the Beneficiary Enterprise in Israel, and a reduced corporate tax rate of between 10% to 25% for the remainder of the benefits period, depending on the level of foreign investment in the company in each year if it is a qualified FIC. A company qualifying for tax benefits under the 2005 Amendment which pays a dividend out of income derived by its Beneficiary Enterprise during the tax exemption period will be subject to corporate tax in respect of the gross amount of the dividend at the otherwise applicable rate of 10%-25%. Dividends paid out of income attributed to a Beneficiary Enterprise are generally subject to withholding tax at source at the rate of 15% or such lower rate as may be provided in an applicable tax treaty.
The benefits available to a Beneficiary Enterprise are subject to the fulfillment of conditions stipulated in the Investment Law and its regulations. If a company does not meet these conditions, it may be required to refund the amount of tax benefits, as adjusted by the Israeli consumer price index, and interest, or other monetary penalties.
In February 2007, our aforementioned Approved Enterprise status was revoked at our request, and in respect of an expansion of itsour plant in the Caesarea industrial park it was granted a Beneficiary Enterprise status. In accordance with this status, we will be entitled to the tax benefits provided by the Encouragement Law with respect to income of the Beneficiary Enterprise from productive activity. Income of the Beneficiary Enterprise from productive activity will be exempt from tax for two years from the year in which we first hashave taxable income, and will be subject to tax of 25%, but will not exceed the normal tax rate, in the following 5 years, providing that 12 years have not passed from the beginning of the year of election (i.e., 2005).
In July 2009, we submitted a declaration to the Israeli tax authority that 2008 shall be the “base”"base" year for our beneficiary enterprise status, and hence the tax benefits described above will apply to the increase in revenues compared to that base year. In addition, in the event of a change in the field of activity and/or business model and/or a significant reduction in production levels or in product variety, the tax benefits will become void.
In 2013 we notified the tax authorities that 2012 tax year is the year of election.
Tax Benefits Under the 2011 Amendment
The 2011 Amendment canceled the availability of the benefits granted to companies under the Investment Law prior to 2011 and, instead, introduced new benefits for income generated by a “Preferred Company”"Preferred Company" through its “Preferred Enterprise”"Preferred Enterprise" (as such terms are defined in the Investment Law) as of January 1, 2011. 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 will be reduced from 15% and 10%, respectively, to 12.5% and 7%, respectively, in 2013 and 2014will increase to 16% and to 12% and 6%9% in 20152014 and thereafter, respectively.
119
Dividends paid out of income attributed to a Preferred Enterprise are generally subject to withholding tax at the rate of 15% or such lower rate as may be provided in an applicable tax treaty. However, if such dividends are paid to an Israeli company, no tax is required to be withheld (however, if afterward distributed to individuals or non-Israeli companycompanies a withholding of 15%20% or such lower rate as may be provided in an applicable tax treaty, will apply).
The 2011 Amendment also provided transitional provisions to address companies already enjoying existing tax benefits under the Investment Law. These transitional provisions provide, among other things, that unless an irrevocable request is made to apply the provisions of the Investment Law as amended in 2011 with respect to income to be derived as of January 1, 2011: (i) the terms and benefits included in any certificate of approval that was granted to an Approved Enterprise which chose to receive grants and certain tax benefits under the Grant Track before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, and subject to certain conditions; and (ii) terms and benefits included in any certificate of approval that was granted to an Approved Enterprise under the Alternative Track before the 2011 Amendment became effective will remain subject to the provisions of the Investment Law as in effect on the date of such approval, provided that certain conditions are met; and (iii) a Beneficiary Enterprise can elect to continue to benefit from the benefits provided to it before the 2011 Amendment came into effect, provided that certain conditions are met.
We have reviewed and evaluated the implications and effect of the benefits under the 2011 Amendment, and, while potentially eligible for such benefits, we have not yet chosen to be subject to the tax benefits introduced by the 2011 Amendment. From time to time, the Israeli Government has discussed reducing the benefits available to companies under the Investment Law. The termination or substantial reduction of any of the benefits available under the Investment Law could materially increase our tax liabilities in the future.
Grants under the R&D Law
Under the R&D Law research and development programs which meet specified criteria and are approved by a governmental committee of the Office of the Chief Scientist, or OCS,IIA, are eligible for grants of up to 50% of the project’sproject's expenditure, as determined by the research committee, in exchange for the payment of royalties from the revenues generated from the sale of products and related services developed, in whole or in part pursuant to, or as a result of, a research and development program funded by the OCS.IIA. The royalties are generally at a range of 3.0% to 5.0% of revenues until the entire OCSIIA grant is repaid, together with an annual interest generally equal to the 12 month London Interbank Offered Rate applicable to dollar deposits that is published on the first business day of each calendar year.
The terms of the R&D Law also require that the manufacture of products developed with government grants be performed in Israel. The transfer of manufacturing activity outside Israel may be subject to the prior approval of the OCS.IIA. Under the regulations of the R&D Law, assuming we receive approval from the Chief ScientistIIA to manufacture our OCS-fundedIIA-funded products outside Israel, we may be required to pay increased royalties. The increase in royalties depends upon the manufacturing volume that is performed outside of Israel as follows:
| Manufacturing Volume Outside of Israel | Royalties to the Percentage of Grant | |||
Up to 50% | 120 | % | ||
between 50% and 90% | 150 | % | ||
90% and more | 300 | % | ||
120
If the manufacturing is performed outside of Israel by us, the rate of royalties payable by us on revenues from the sale of products manufactured outside of Israel will increase by 1% over the regular rates. If the manufacturing is performed outside of Israel by a third party, the rate of royalties payable by us on those revenues will be equal to the ratio obtained by dividing the amount of the grants received from the Office of the Chief ScientistIIA and our total investment in the project that was funded by these grants. The transfer of no more than 10% of the manufacturing capacity in the aggregate outside of Israel is exempt under the R&D Law from obtaining the prior approval of the OCS.IIA. A company requesting funds from the OCSIIA also has the option of declaring in its OCSIIA grant application an intention to perform part of its manufacturing outside Israel, thus avoiding the need to obtain additional approval. On January 6, 2011, the R&D Law was amended to clarify that the potential increased royalties specified in the table above will apply even in those cases where the OCSIIA approval for transfer of manufacturing outside of Israel is not required, namely when the volume of the transferred manufacturing capacity is less than 10% of total capacity or when the company received an advance approval to manufacture abroad in the framework of its OCSIIA grant application.
The know-how developed within the framework of the Chief ScientistIIA plan may not be transferred to third parties outside Israel without the prior approval of a governmental committee charted under the R&D Law. The approval, however, is not required for the export of any products developed using grants received from the Chief Scientist.IIA. The OCSIIA approval to transfer know-how created, in whole or in part, in connection with an OCS-fundedIIA-funded project to a third party outside Israel where the transferring company remains an operating Israeli entity is subject to payment of a redemption fee to the OCSIIA calculated according to a formula provided under the R&D Law that is based, in general, on the ratio between the aggregate OCSIIA grants to the company’scompany's aggregate investments in the project that was funded by these OCSIIA grants, multiplied by the transaction consideration. The transfer of such know-how to a party outside Israel where the transferring company ceases to exist as an Israeli entity is subject to a redemption fee formula that is based, in general, on the ratio between the aggregate OCSIIA grants to the total financial investments in the company, multiplied by the transaction consideration. According to the January 2011 amendment, the redemption fee in case of transfer of know-how to a party outside Israel will be based on the ratio between the aggregate OCSIIA grants received by the company and the company’scompany's aggregate R&D expenses, multiplied by the transaction consideration. According to regulations promulgated following the 2011 amendment, the maximum amount payable to the OCSIIA in case of transfer of know how outside Israel shall not exceed 6 times the value of the grants received plus interest, and in the event that the receiver of the grants ceases to be an Israeli corporation such payment shall not exceed 6 times the value of the grants received plus interest, with a possibility to reduce such payment to up to 3 times the value of the grants received plus interest if the R&D activity remains in Israel for a period of three years after payment to the OCS.IIA.
Transfer of know-how within Israel is subject to an undertaking of the recipient Israeli entity to comply with the provisions of the R&D Law and related regulations, including the restrictions on the transfer of know-how and the obligation to pay royalties, as further described in the R&D Law and related regulations.
These restrictions may impair our ability to outsource manufacturing, engage in change of control transactions or otherwise transfer our know-how outside Israel and may require us to obtain the approval orof the OCSIIA for certain actions and transactions and pay additional royalties to the OCS.IIA. In particular, any change of control and any change of ownership of our ordinary shares that would make a non-Israeli citizen or resident an “interested"interested party,”" as defined in the R&D Law, requires a prior written notice to the OCSIIA in addition to any payment that may be required of us for transfer of manufacturing or know-how outside Israel. If we fail to comply with the R&D Law, we may be subject to criminal charges.
Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969
According to the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, an Industrial Company is a company resident in Israel, at least 90% of the income of which, in a given tax year, determined in Israeli currency (exclusive of income from some government loans, capital gains, interest and dividends), is derived from an Industrial Enterprise owned by it. An “Industrial Enterprise”"Industrial Enterprise" is defined as an enterprise whose major activity in a given tax year is industrial production activity.
121
Under the Industry Encouragement Law, industrial companies are entitled to the following preferred corporate tax benefits:
| amortization of purchases of know-how and patents over an eight-year period for tax purposes; |
| deductions over a three-year period of expenses involved with the issuance and listing of shares on a stock market; and |
| the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli Industrial | ||
Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
We believe that we currently qualify as an Industrial Company within the definition of the Industry Encouragement Law. We cannot assure you that we will continue to qualify as an Industrial Company or that the benefits described above will be available to us in the future.
Israeli Transfer Pricing Regulations
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the “TP Regulations”"TP Regulations"). Section 85A of the Tax Ordinance and the TP Regulations generally require that all cross-border transactions carried out between related parties will be conducted on an arm’sarm's length principle basis and will be taxed accordingly.
Taxation of our Shareholders
Capital Gains Taxes Applicable to Non-Israeli Resident Shareholders. A non-Israeli resident 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 stock exchange outside of Israel will be exempt from Israeli tax so long as the shares were not held through a permanent establishment that the non-resident maintains in Israel. However, non-Israeli corporations will not be entitled to the foregoing exemption if Israeli residents: (i) have a controlling interest of 25% or more 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. Additionally, such exemption is 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 securities 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 disposition of shares by a shareholder who is a United States resident (for purposes of the treaty) holding the shares as a capital asset is generally exempt from Israeli capital gains tax unless, among other things, (i) the capital gain arising from the disposition is attributed to business income derived by a permanent establishment of the shareholder in Israel; or (ii) such U.S. resident is an individual and was present in Israel for 183 days or more during the relevant taxable year.
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.
122
Taxation of Non-Israeli Shareholders on Receipt of Dividends. Non-Israeli residents generally will be subject to Israeli income tax on the receipt of dividends paid on our Ordinary Shares at the rate of 25%, which tax will be withheld at source, unless relief is provided in a treaty between Israel and the shareholder’sshareholder's country of residence. With respect to a person who is a “substantial shareholder”"substantial shareholder" at the time of receiving the dividend or on any time during the preceding twelve months, the applicable tax rate is 30%. A “substantial shareholder”"substantial shareholder" is generally a person who alone or together with such person’sperson's relative or another person who collaborates with such person on a permanent basis, holds, directly or indirectly, at least 10% of any of the “means"means of control”control" of the corporation. “Means"Means of control”control" generally include the right to vote, receive profits, nominate a director or an executive officer, receive assets upon liquidation, or order someone who holds any of the aforesaid rights how to act, regardless of the source of such right. However, 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 an Approved Enterprise or a Preferred Enterprise orEnterprise. When the dividend is distributed by a Beneficiary Enterprise, the withholding rate is 20%, unless a reduced tax rate is provided under an applicable tax treaty. In this regard, 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 United States resident (for purposes of the United States-Israel Tax Treaty) is 25%. Consequently, distributions to U.S. residents of income attributed to an Approved Enterprise, a Preferred Enterprise or a Beneficiary Enterprise will be subject to withholding tax at a rate of 15%., or 20%, as explained above. However, generally, the maximum rate of withholding tax on dividends, not generated by an Approved Enterprise, a Preferred Enterprise or a Beneficiary Enterprise, that are paid to a United States corporation holding 10% or more of the outstanding voting capital throughout the tax year in which the dividend is distributed as well as during the previous tax year, 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. We cannot assure you that we will designate the profits that we may distribute in a way that will reduce shareholders’shareholders' tax liability.
Taxation of the U.S. Subsidiary in the United States
The corporate tax applicable to the U.S. Subsidiary incorporated in the United States is at graduated rates of up to 35%34% plus state tax of 4.63%up to 9.99% (according to the tax rates in the states in which the U.S. Subsidiary operates). Furthermore, certain states in which the U.S. Subsidiary operates have a minimum tax rate.
Israel and the United States have a double tax prevention treaty. According to the treaty, dividends and interest paid to us by our U.S. Subsidiary are generally subject to withholding tax of 12.5% and 17.5%, respectively.
U.S. Tax Considerations
U.S. Federal Income Tax Considerations
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSIDERED TO BE, LEGAL OR TAX ADVICE. EACH U.S. HOLDER SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO THE PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF ORDINARY SHARES AND AMERICAN DEPOSITORY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
123
Subject to the limitations described in the next paragraph, the following discussion summarizes the material U.S. federal income tax consequences to a “U.S. Holder”"U.S. Holder" arising from the purchase, ownership and sale of the ordinary shares and ADSs. For this purpose, a “U.S. Holder”"U.S. Holder" is a holder of ordinary shares or ADSs that is: (1) an individual citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under U.S. federal income tax laws; (2) a corporation (or entity treated as a corporation for U.S. federal income tax purposes) or a partnership (other than a partnership that is not treated as a U.S. person under any applicable U.S. Treasury regulations) created or organized under the laws of the United States or the District of Columbia or any political subdivision thereof; (3) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of source; (4) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust; or (5) a trust that has a valid election in effect to be treated as a U.S. person to the extent provided in U.S. Treasury regulations.
This summary is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations that may be relevant to a decision to purchase our ordinary shares or ADSs. This summary generally considers only U.S. Holders that will own our ordinary shares or ADSs as capital assets. Except to the limited extent discussed below, this summary does not consider the U.S. federal tax consequences to a person that is not a U.S. Holder, nor does it describe the rules applicable to determine a taxpayer’staxpayer's status as a U.S. Holder. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, or the Code, final, temporary and proposed U.S. Treasury regulations promulgated thereunder, administrative and judicial interpretations thereof, and the U.S./Israel Income Tax Treaty, all as in effect as of the date hereof and all of which are subject to change, possibly on a retroactive basis, and all of which are open to differing interpretations. We will not seek a ruling from the U.S. Internal Revenue Service, or IRS with regard to the U.S. federal income tax treatment of an investment in our ordinary shares or ADSs by U.S. Holders and, therefore, can provide no assurances that the IRS will agree with the conclusions set forth below.
This discussion does not address all of the aspects of U.S. federal income taxation that may be relevant to a particular U.S. holder based on such holder’sholder's particular circumstances and in particular does not discuss any estate, gift, generation-skipping, transfer, state, local, excise or foreign tax considerations. In addition, this discussion does not address the U.S. federal income tax treatment of a U.S. Holder who is: (1) a bank, life insurance company, regulated investment company, or other financial institution or “financial"financial services entity”entity"; (2) a broker or dealer in securities or foreign currency; (3) a person who acquired our ordinary shares or ADSs in connection with employment or other performance of services; (4) a U.S. Holder that is subject to the U.S. alternative minimum tax; (5) a U.S. Holder that holds our ordinary shares or ADSs as a hedge or as part of a hedging, straddle, conversion or constructive sale transaction or other risk-reduction transaction for U.S. federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment trusts; (8) a U.S. Holder that expatriates out of the United States or a former long-term resident of the United States; or (9) a person having a functional currency other than the U.S. dollar. This discussion does not address the U.S. federal income tax treatment of a U.S. Holder that owns, directly or constructively, at any time, ordinary shares or ADSs representing 10% or more of our voting power. Additionally, the U.S. federal income tax treatment of persons who hold ordinary shares or ADSs through a partnership or other pass-through entity are not considered.
Each prospective investor is advised to consult his or her own tax adviser for the specific tax consequences to that investor of purchasing, holding or disposing of our ordinary shares or ADSs, including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.
Taxation of Dividends Paid on Ordinary Shares or ADSs
We do not intend to pay dividends in the foreseeable future. In the event that we do pay dividends, and subject to the discussion under the heading “Passive"Passive Foreign Investment Companies”Companies" below, a U.S. Holder will be required to include in gross income as ordinary income the amount of any distribution paid on ordinary shares or ADSs (including the amount of any Israeli tax withheld on the date of the distribution), to the extent that such distribution does not exceed our current and accumulated earnings and profits, as determined for U.S. federal income tax purposes. The amount of a distribution which exceeds our earnings and profits will be treated first as a non-taxable return of capital, reducing the U.S. Holder’sHolder's tax basis for the ordinary shares to the extent thereof, and then capital gain. Corporate holders generally will not be allowed a deduction for dividends received.
124
In general, preferential tax rates for “qualified"qualified dividend income”income" and long-term capital gains are applicable for U.S. Holders that are individuals, estates or trusts. For this purpose, “qualified"qualified dividend income”income" means, inter alia, dividends received from a “qualified"qualified foreign corporation.”" A “qualified"qualified foreign corporation”corporation" is a corporation that is entitled to the benefits of a comprehensive tax treaty with the United States which includes an exchange of information program. The IRS has stated that the Israel/U.S. Tax Treaty satisfies this requirement and we believe we are eligible for the benefits of that treaty.
In addition, our dividends will be qualified dividend income if our ordinary shares or ADSs are readily tradable on the NASDAQ or another established securities market in the United States. Dividends will not qualify for the preferential rate if we are treated, in the year the dividend is paid or in the prior year, as a passive foreign investment company, or PFIC, as described below under “Passive"Passive Foreign Investment Companies”Companies". A U.S. Holder will not be entitled to the preferential rate: (1) if the U.S. Holder has not held our ordinary shares or ADSs for at least 61 days of the 121 day period beginning on the date which is 60 days before the ex-dividend date, or (2) to the extent the U.S. Holder is under an obligation to make related payments on substantially similar property. Any days during which the U.S. Holder has diminished its risk of loss on our ordinary shares or ADSs are not counted towards meeting the 61-day holding period. Finally, U.S. Holders who elect to treat the dividend income as “investment income”"investment income" pursuant to Code section 163(d)(4) will not be eligible for the preferential rate of taxation.
The amount of a distribution with respect to our ordinary shares or ADSs will be measured by the amount of the fair market value of any property distributed, and for U.S. federal income tax purposes, the amount of any Israeli taxes withheld therefrom. Cash distributions paid by us in NIS will be included in the income of U.S. Holders at a U.S. dollar amount based upon the spot rate of exchange in effect on the date the dividend is includible in the income of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS for U.S. federal income tax purposes equal to such U.S. dollar value. If the U.S. Holder subsequently converts the NIS into U.S. dollars or otherwise disposes of it, any subsequent gain or loss in respect of such NIS arising from exchange rate fluctuations will be U.S. source ordinary exchange gain or loss.
Distributions paid by us will generally be foreign source income for U.S. foreign tax credit purposes and will generally be considered passive category income for such purposes. Subject to the limitations set forth in the Code, U.S. Holders may elect to claim a foreign tax credit against their U.S. federal income tax liability for Israeli income tax withheld from distributions received in respect of the Ordinary Shares or ADSs. The rules relating to the determination of the U.S. foreign tax credit are complex, and U.S. Holders should consult with their own tax advisors to determine whether, and to what extent, they are entitled to such credit. U.S. Holders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income taxes withheld, provided such U.S. Holders itemize their deductions.
Taxation of the Disposition of Ordinary Shares or ADSs
Except as provided under the PFIC rules described below under “Passive"Passive Foreign Investment Companies", upon the sale, exchange or other disposition of our ordinary shares or ADSs, a U.S. Holder will recognize capital gain or loss in an amount equal to the difference between such U.S. Holder’sHolder's tax basis for the ordinary shares or ADSs in U.S. dollars and the amount realized on the disposition in U.S. dollar (or its U.S. dollar equivalent determined by reference to the spot rate of exchange on the date of disposition, if the amount realized is denominated in a foreign currency). The gain or loss realized on the sale, exchange or other disposition of ordinary shares or ADSs will be long-term capital gain or loss if the U.S. Holder has a holding period of more than one year at the time of the disposition.
Gain realized by a U.S. Holder on a sale, exchange or other disposition of ordinary shares or ADSs will generally be treated as U.S. source income for U.S. foreign tax credit purposes. A loss realized by a U.S. Holder on the sale, exchange or other disposition of ordinary shares or ADSs is generally allocated to U.S. source income. The deductibility of a loss realized on the sale, exchange or other disposition of ordinary shares or ADSs is subject to limitations.
125
Passive Foreign Investment Companies
Special U.S. federal income tax laws apply to U.S. taxpayers who own shares of a corporation that is a PFIC. We will be treated as a PFIC for U.S. federal income tax purposes for any taxable year that either:
| ● | 75% or more of our gross income (including our pro rata share of gross income for any company, in which we are considered to own 25% or more of the shares by value), in a taxable year is passive; or |
| ● | At least 50% of our assets, averaged over the year and generally determined based upon fair market value (including our pro rata share of the assets of any company in which we are considered to own 25% or more of the shares by value) are held for the production of, or produce, passive income. |
For this purpose, passive income generally consists of dividends, interest, rents, royalties, annuities and income from certain commodities transactions and from notional principal contracts. Cash is treated as generating passive income.
We believe that we will not be a PFIC for the current taxable year and do not expect to become a PFIC in the foreseeable future. The tests for determining PFIC status are applied annually, and it is difficult to make accurate projections of future income and assets which are relevant to this determination. In addition, our PFIC status may depend in part on the market value of our Ordinary Shares. Accordingly, there can be no assurance that we currently are not or will not become a PFICPFIC.
If we currently are or become a PFIC, each U.S. Holder who has not elected to treat us as a qualified electing fund by making a “QEF election”"QEF election", or who has not elected to mark the shares to market (as discussed below), would, upon receipt of certain distributions by us and upon disposition of our ordinary shares or ADSs at a gain: (1) have such distribution or gain allocated ratably over the U.S. Holder’sHolder's holding period for the Ordinary Shares or ADSs, as the case may be; (2) the amount allocated to the current taxable year and any period prior to the first day of the first taxable year in which we were a PFIC would be taxed as ordinary income; and (3) the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.year. In addition, when shares of a PFIC are acquired by reason of death from a decedent that was a U.S. Holder, the tax basis of such shares would not receive a step-up to fair market value as of the date of the decedent’sdecedent's death, but instead would be equal to the decedent’sdecedent's basis if lower, unless all gain were recognized by the decedent. Indirect investments in a PFIC may also be subject to these special U.S. federal income tax rules.
The PFIC rules described above would not apply to a U.S. Holder who makes a QEF election for all taxable years that such U.S. Holder has held the ordinary shares or ADSs while we are a PFIC, provided that we comply with specified reporting requirements. Instead, each U.S. Holder who has made such a QEF election is required for each taxable year that we are a PFIC to include in income such U.S. Holder’sHolder's pro rata share of our ordinary earnings as ordinary income and such U.S. Holder’sHolder's pro rata share of our net capital gains as long-term capital gain, regardless of whether we make any distributions of such earnings or gain. In general, a QEF election is effective only if we make available certain required information. The QEF election is made on a shareholder-by-shareholder basis and generally may be revoked only with the consent of the IRS. Although we have no obligation to do so, we intend to notify U.S. Holders if we believe we will be treated as a PFIC for any tax year in order to enable U.S. Holders to consider whether to make a QEF election. In addition, we intend to furnish U.S. Holders annually with information needed in order to complete IRS Form 8621 and to make and maintain a valid QEF election for any year in which we or any of our subsidiariesSubsidiaries are a PFIC. U.S. Holders should consult with their own tax advisors regarding eligibility, manner and advisability of making a QEF election if we are treated as a PFIC.
In addition, the PFIC rules described above would not apply if we were a PFIC and a U.S. Holder made a mark-to-market election. A U.S. Holder of our Ordinary Shares or ADSs which are regularly traded on a qualifying exchange, including Nasdaq, can elect to mark the Ordinary Shares or ADSs to market annually, recognizing as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market value of the Ordinary Shares or ADSs and the U.S. Holder’sHolder's adjusted tax basis in the Ordinary Shares or ADSs. Losses are allowed only to the extent of net mark-to-market gain previously included income by the U.S. Holder under the election for prior taxable years.
126
U.S. Holders who hold our Ordinary Shares or ADSs during a period when we are a PFIC will be subject to the foregoing rules, even if we cease to be a PFIC. U.S. Holders are strongly urged to consult their tax advisors about the PFIC rules, including tax return filing requirements and the eligibility, manner, and consequences to them of making a QEF or mark-to-market election with respect to our Ordinary Shares or ADSs in the event that we are a PFIC.
New Tax on Investment Income
For taxable years beginning after December 31, 2013, U.S. Holders who are individuals, estates or trusts will generally be required to pay a new 3.8% Medicare tax on their net investment income (including dividends on and gains from the sale or other disposition of our ordinary shares or ADSs), or in the case of estates and trusts on their net investment income that is not distributed. In each case, the 3.8% Medicare tax applies only to the extent the U.S. Holder’sHolder's total adjusted income exceeds applicable thresholds.
Tax Consequences for Non-U.S. Holders of Ordinary Shares or ADSs
Except as provided below, an individual, corporation, estate or trust that is not a U.S. Holder referred to below as a non-U.S. Holder, generally will not be subject to U.S. federal income or withholding tax on the payment of dividends on, and the proceeds from the disposition of, our Ordinary Shares or ADSs.
A non-U.S. Holder may be subject to U.S. federal income tax on a dividend paid on our Ordinary Shares or ADSs or gain from the disposition of our Ordinary Shares or ADSs if: (1) such item is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States and, if required by an applicable income tax treaty is attributable to a permanent establishment or fixed place of business in the United States; (2) in the case of a disposition of our Ordinary Shares or ADSs, the individual non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the disposition and other specified conditions are met.
In general, non-U.S. Holders will not be subject to backup withholding with respect to the payment of dividends on our ordinary shares or ADSs if payment is made through a paying agent, or office of a foreign broker outside the United States. However, if payment is made in the United States or by a U.S. related person, non-U.S. Holders may be subject to backup withholding, unless the non-U.S. Holder provides an applicable IRS Form W-8 (or a substantially similar form) certifying its foreign status, or otherwise establishes an exemption.
The amount of any backup withholding from a payment to a non-U.S. Holder will be allowed as a credit against such holder’sholder's U.S. federal income tax liability and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.
Information Reporting and Withholding
A U.S. Holder may be subject to backup withholding at a rate of 28% with respect to cash dividends and proceeds from a disposition of ordinary shares or ADSs. In general, backup withholding will apply only if a U.S. Holder fails to comply with specified identification procedures. Backup withholding will not apply with respect to payments made to designated exempt recipients, such as corporations and tax-exempt organizations. Backup withholding is not an additional tax and may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, provided that the required information is timely furnished to the IRS.
Pursuant to recently enacted legislation, a U.S. Holder with interests in “specified"specified foreign financial assets”assets" (including, among other assets, our Ordinary Shares or ADSs, unless such Ordinary Shares or ADSs are held on such U.S. Holder’sHolder's behalf through a financial institution) may be required to file an information report with the IRS if the aggregate value of all such assets exceeds $50,000 on the last day of the taxable year or $75,000 at any time during the taxable year (or such higher dollar amount as may be prescribed by applicable IRS guidance); and may be required to file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year. You should consult your own tax advisor as to the possible obligation to file such information report.
Medical Devices Excise Tax
The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010 imposes significant new taxes on medical device makers in the form of a 2.3% excise tax on U.S. medical device sales, with certain exemptions, beginning in January 2013. InThe Consolidated Appropriations Act, 2016, signed into law on December 18, 2015, includes a two year suspension on the fiscal year 2013 we paid anmedical device excise tax. Thus, the medical device excise tax fee indoes not apply to the amountsale of $241,000, whicha taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on January 1, 2016, and ending on December 31, 2017. However, there is included withinno guarantee that the excise tax will continue to be suspended by congressional action after this two-year period ends, and absent further congressional action, the excise tax will be reinstated for medical device sales and marketing expense, net in our Consolidated Statement of Profit or Loss and Other Comprehensive Income.beginning January 1, 2018.
| Not applicable. |
Not applicable.
127
| H. | Documents on Display |
We are subject to the information reporting requirements of the Exchange Act, applicable to foreign private issuers and under those requirements will file reports with the SEC. 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. In addition, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. However, we file with the SEC, within 120 days after the end of each fiscal year, or such applicable time as required by the SEC, an annual report on Form 20-F containing financial statements audited by an independent registered public accounting firm, and will submit to the SEC, on a Form 6-K, unaudited quarterly financial information.
You may read and copy any document we file with the SEC at its public reference facilities at 100 F Street, NE, Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, NE, Washington, D.C. 20549. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of this website is http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.
In addition, since our ordinary shares are traded on the TASE, we have filed Hebrew language periodic and immediate reports with, and furnish information to, the TASE and the Israel Securities Authority, or the ISA, as required under Chapter Six of the Israel Securities Law, 1968. Copies of our filings with the ISA can be retrieved electronically through the MAGNA distribution site of the ISA (www.magna.isa.gov.il) and the TASE website (www.maya.tase.co.il).
We maintain a corporate website at www.mazorrobotics.com. Information contained on, or that can be accessed through, our website does not constitute a part of this annual report. We have included our website address in this annual report solely as an inactive textual reference.
Not applicable.
| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position, results of operations or cash flows.
Risk of Interest Rate Fluctuation
We do not currently anticipate undertaking any significant long-term borrowings. In November 2012, we paid the full amount of Series A debentures in the amount of NIS 15,825,000 (approximately $4,132,000) including interest at a fixed rate of 5.5% per annum. Currently, our investments consist primarily of cash and cash equivalents and bank deposits. We follow an investment policy that was set by our board of directors whose primary objectives are to preserve principal while maximizing the income that we receive from our investments without significantly increasing risk and loss. Our investments are exposed to market risk due to fluctuation in interest rates, which may affect our interest income and the fair market value of our investments, provided, however, that given the low levels of interest rates worldwide, our interest income is not material and a further reduction in interest rates would not cause us a significant reduction in the absolute amounts of interest income to us. We manage this exposure by performing ongoing evaluations of our investments. Due to the short-term maturitiesOur investment balances are comprised mainly of our investments to date, theirbank deposits. The carrying value has always approximatedof the investment balances usually approximates their fair value. It is be our current policy to hold investments to maturity in order to limit our exposure to interest rate fluctuations.
128
Foreign Currency Exchange Risk
Our functional and reporting currency from September 27, 2012 is the U.S. dollar. Although the U.S. dollar is our functional currency, a significant portion of our expenses are denominated in both NIS and Euros and currently most of our revenues are denominated in U.S. dollars. Therefore, our foreign currency exposures give rise to market risk associated with exchange rate movements of the U.S. dollar, mainly against the NIS and the Euro. Our NIS and Euro expenses consist principally of payroll to our employees in Israel, payments made to subcontractors for purchasing components to our products, research and development activities and marketing and sales activities. We anticipate that a sizable portion of our expenses will continue to be denominated in currencies other than the U.S. dollar. If the U.S. dollar fluctuates significantly against either the NIS or the Euro, it may have a negative impact on our results of operations. To date, fluctuations in the exchange rates have not materially affected our results of operations or financial condition.
Due to the fact that exchange rates between the U.S. dollar and the NIS (as well as between the U.S. dollar and other currencies) fluctuate continuously, such fluctuations have an impact on our results and period-to-period comparisons of our results. The effects of foreign currency re-measurements are reported in our consolidated statements of operations. We engage in short-term currency hedging activities in order to reduce some of this currency exposure. These measures, however, may not adequately protect us from the material adverse effects of such fluctuations.
As of December 31, 2013,2016, we have open currency hedging transactions in the amount of 4,305,0004,000,000 NIS (approximately $1,240,000)$1,039,000). All transactions were settled or expected to be settled in 2014.
the first quarter of 2017. We will continue to monitor exposure to currency fluctuations. Instruments that may be used to hedge future risks may include foreign currency forward, options and swap contracts. These instruments may be used to selectively manage risks, but there can be no assurance that we will be fully protected against foreign currency fluctuations.
In addition, we have balance sheet exposure arising from assets and liabilities denominated in currencies other than U.S. dollar, mainly in NIS and Euros. Any change of the conversion rates between the U.S. dollar and these currencies may create financial gain or loss.
The tables below provide information as of December 31, 20132016 regarding our foreign currency-denominated monetary assets and liabilities.
| Foreign currency denominated monetary assets and liabilities. |
Position as of December 31, 2016 | ||||
(U.S. $ in thousands) | ||||
| Current Assets: | ||||
Shekels | ||||
Euros | ||||
Total | ||||
| Long term Assets: | ||||
Shekels | ||||
Total | ||||
| Current Liabilities: | ||||
Shekels | ||||
Euros | ||||
Total | ||||
| Long term Liabilities: | ||||
Shekels | - | |||
Total | - | |||
129
| A. | Debt Securities. |
Not applicable.
Not applicable.
Not applicable.
Fees and Expenses
The following table shows the fees and expenses that a holder of our ADSs may have to pay, either directly or indirectly:
Persons depositing or withdrawing shares or ADS holders must pay: | For: | ||
| $5.00 (or less) per 100 ADSs (or portion of 100 ADSs). | ● | Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property. | |
| ● | Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates. | ||
| $.05 (or less) per ADS. | ● | Any cash distribution to ADS holders. | |
| A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs. | ● | Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADS holders. | |
| $.05 (or less) per ADSs per calendar year. | ● | Depositary services. | |
| Registration or transfer fees. | ● | Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares. | |
| Expenses of the depositary. | ● | Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement). | |
| ● | Converting foreign currency to U.S. dollars. |
| Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes. | ● | As necessary. | |
| Any charges incurred by the depositary or its agents for servicing the deposited securities. | ● | As necessary. |
130
The Bank of New York Mellon, as depositary, collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. The depositary may collect any of its fees by deduction from any cash distributions made to ADS holders that are obligated to pay those fees.
From time to time, the depositary may make payments to us to reimburse and/or share revenue from the fees collected from ADS holders, or waive fees and expenses for services provided, generally relating to costs and expenses arising out of establishment and maintenance of the ADS program. In performing its duties under the deposit agreement, the depositary may use brokers, dealers or other service providers that are affiliates of the depositary and that may earn or share fees or commissions.
| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
None.
| (a) | Evaluation of Disclosure Controls and Procedures |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2013, or the Evaluation Date. end of the period covered by this Annual Report on Form 20-F.
Based on such evaluation, those officersour Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date,December 31, 2016, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be included in periodic filings under the Exchange Act and that such information is accumulated and communicated to management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.
| (b) | Management's Annual Report on Internal Control over Financial Reporting |
131
| (c) | Attestation Report of the Registered Public Accounting Firm |
| (d) | Changes in Internal Control over Financial Reporting |
During the year ended December 31, 2013,2016, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| (e) | Limitations on Effectiveness of Controls and Procedures |
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
The board of directors has determined that Gil Bianco David Schlachet and Sarit Soccary Ben-YochananYuval Yanai are the financial experts serving on our audit committee and that these individuals along with Sarit Soccary Ben-Yochanan are independent as that term "audit committee financial expert" is defined under the rules under the Exchange Act, and are independent in accordance with applicable Exchange Act rules and the NASDAQ Stock Market rules.
We have adopted a code of business conduct and ethics applicable to our employees in all locations. The code of business conduct and ethics is available on our website, www.mazorrobotics.com.
The following table sets forth fees for professional audit services renderedwere billed by Somekh Chaikin, a member firm of KPMG International, and affiliated firms, for the audit of our financial statementsprofessional services rendered thereby for the years ended December 31, 20132016 and 2012, and fees billed for other services rendered by Somekh Chaikin:
2015:| 2016 | 2015 | |||||||
| (In Thousands) | ||||||||
Audit Fees (1) | $ | 171 | $ | 176 | ||||
| Audit-Related Fees | $ | - | $ | - | ||||
| Tax Fees (2) | $ | 14 | $ | 13 | ||||
| All Other Fees | $ | 10 | $ | - | ||||
Total | $ | 195 | $ | 189 | ||||
| 2013 | 2012 | |||||||
| (In Thousands) | ||||||||
Audit fees (1) | $ | 230 | $ | 240 | ||||
Tax fees (2) | 9 | 10 | ||||||
| Total | $ | 239 | $ | 250 | ||||
| (1) | Includes audit fee for registration |
| (2) |
Not applicable.
Not applicable.
| ITEM 16G. | CORPORATE GOVERNANCE |
We are required to comply with the Listing Rules of the NASDAQ Stock Market. Under those Listing Rules, we may elect to follow certain corporate governance practices permitted under the Companies Law in lieu of compliance with corresponding corporate governance requirements otherwise imposed by the Listing Rules of the NASDAQ Stock Market for U.S. domestic issuers.
In accordance with Israeli law and practice and subject to the exemption set forth in Rule 5615 of the Listing Rules of the NASDAQ Stock Market, we have elected to follow the provisions of the Companies Law, rather than the Listing Rules of the NASDAQ Stock Market, with respect to the following requirements:
| ● | Distribution of periodic reports to shareholders; proxy solicitation. As opposed to the Listing Rules of the NASDAQ Stock Market, which require listed issuers to make such reports available to shareholders in one of a number of specific manners, Israeli law does not require us to distribute periodic reports directly to shareholders, and the generally accepted business practice in Israel is not to distribute such reports to shareholders but to make such reports available through a public website. In addition to making such reports available on a public website, we currently make our audited financial statements available to our shareholders at our offices and will only mail such reports to shareholders upon request. As a foreign private issuer, we are generally exempt from the SEC's proxy solicitation rules. |
| ● | Quorum. While the Listing Rules of the NASDAQ Stock Market require that the quorum for purposes of any meeting of the holders of a listed |
| ● | Nomination of our directors. With the exception of our external directors and directors elected by our board of directors, |
| ● | Compensation of officers. Israeli law and our amended and restated articles of association do not require that the independent members of our board of directors (or a compensation committee composed solely of independent members of our board of directors) determine an executive |
Instead, compensation of executive officers is determined and approved by our compensation committee and our board of directors, and in certain circumstances by our shareholders, either in consistency with our office holder compensation policy or, in special circumstances in deviation therefrom, taking into account certain considerations stated in the Companies Law.
133
Shareholder approval is generally required for officer compensation in the event (i) approval by our board of directors and our compensation committee is not consistent with our office holders compensation policy, or (ii) compensation required to be approved is that of our chief executive officer who is not a director or an executive officer who is also the controlling shareholder of our company (including an affiliate thereof). Such shareholder approval shall require a majority vote of the shares present and voting at a shareholders meeting, provided either (i) such majority includes a majority of the shares held by non-controlling shareholders who do not otherwise have a personal interest in the compensation arrangement that are voted at the meeting, excluding for such purpose any abstentions disinterested majority, or (ii) the total shares held by non-controlling and disinterested shareholders voted against the arrangement does not exceed two percent (2%) of the voting rights in our company.
Additionally, approval of the compensation of an executive officer, who is also a director, shall generally require a simple majority vote of the shares present and voting at a shareholders meeting, if consistent with our office holders compensation policy. Our compensation committee and board of directors may, in special circumstances, approve the compensation of an executive officer (other than a director, a chief executive officer or a controlling shareholder) or approve the compensation policy despite shareholders’shareholders' objection, based on specified arguments and taking shareholders’shareholders' objection into account. Our compensation committee may further exempt an engagement with a nominee for the position of chief executive officer, who meets the non-affiliation requirements set forth for an external director, from requiring shareholders’shareholders' approval, if such engagement is consistent with our office holders compensation policy and our compensation committee determines based on specified arguments that presentation of such engagement to shareholders’shareholders' approval is likely to prevent such engagement. To the extent that any such transaction with a controlling shareholder is for a period extending beyondexceeding three years, approval is required once every three years.
A director or executive officer may not be present when the board of directors of a company discusses or votes upon the termsa transaction in which he or she has a personal interest, except in case of his or her compensation,ordinary transactions, unless the chairman of the board of directors determines that he or she should be present to present the transaction that is subject to approval.
| ● | Independent directors. Israeli law does not require that a majority of the directors serving on our board of directors be "independent," as defined under NASDAQ Listing Rule 5605(a)(2), and rather requires we have at least two external directors who meet the requirements of the Companies Law, as described above under "Management—Board Practices—External Directors." We are required, however, to ensure that all members of our Audit Committee are "independent" under the applicable NASDAQ and SEC criteria for independence (as we cannot exempt ourselves from compliance with that SEC independence requirement, despite our status as a foreign private issuer), and we must also ensure that a majority of the members of our Audit Committee are "unaffiliated directors" as defined in the Companies Law. Furthermore, Israeli law does not require, nor do our independent directors conduct, regularly scheduled meetings at which only they are present, which the NASDAQ Listing Rules otherwise require. |
| ● | Shareholder approval. We will seek shareholder approval for all corporate actions requiring such approval under the requirements of the Companies Law, rather than seeking approval for corporation actions in accordance with NASDAQ Listing Rule 5635. In particular, under this NASDAQ rule, shareholder approval is generally required for: (i) an acquisition of shares/assets of another company that involves the issuance of 20% or more of the acquirer's shares or voting rights or if a director, officer or 5% shareholder has greater than a 5% interest in the target company or the consideration to be received; (ii) the issuance of shares leading to a change of control; (iii) adoption/amendment of equity compensation |
134
| ● | Approval of Related Party Transactions. All related party transactions are approved in accordance with the requirements and procedures for approval of interested party acts and transactions, set forth in sections 268 to 275 of the Companies Law, and the regulations promulgated thereunder, which require the approval of the audit committee, or the compensation committee, as the case may be, the board of directors and shareholders, as may be applicable, for specified transactions, rather than approval by the audit committee or other independent body of our board of directors as required under the Listing Rules of the NASDAQ Stock Market. |
Not applicable.
We have elected to provide financial statements and related information pursuant to Item 18.
The consolidated financial statements and the related notes required by this Item are included in this annual report beginning on page F-1.
135
MAZOR ROBOTICS LTD.
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2016
Mazor Robotics Ltd.
Consolidated Financial Statements as of December 31, 2013
2016
| Contents | |
Page | |
| F - 2 | |
| Consolidated Financial Statements | |
| F - 3 - F - 4 | |
| F - 5 | |
| F - 6 | |
| F - 7 | |
| F - |
The Board of Directors and Shareholders
Mazor Robotics Ltd.
We have audited the accompanying consolidated statements of financial position of Mazor Robotics Ltd. (hereinafter – “the Company”) and its subsidiarysubsidiaries as of December 31, 20132016 and 20122015 and the related consolidated statements of comprehensive income, changes in equity and cash flows, for each of the years in the three-year period ended December 31, 2013.2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiarysubsidiaries as of December 31, 20132016 and 20122015 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2013,2016 in conformity with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).
/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
Member firm of KPMG International
May 1, 2017
F - 2
Mazor Robotics Ltd.
| 2016 | 2015 | ||||||||||
| Note | USD thousands | USD thousands | |||||||||
Assets | |||||||||||
| Cash and cash equivalents | 4 | 14,954 | 13,519 | ||||||||
| Short-term investments | 5 | 37,862 | 21,687 | ||||||||
| Trade receivables | 8,225 | 5,002 | |||||||||
| Other current assets | 6 | 1,728 | 1,420 | ||||||||
| Inventory | 7 | 4,715 | 2,777 | ||||||||
| Total current assets | 67,484 | 44,405 | |||||||||
| Long-term investments | 5 | 9,017 | 5,023 | ||||||||
| Property and equipment, net | 8 | 3,615 | 1,432 | ||||||||
| Intangible assets, net | 9 | 2,258 | - | ||||||||
| Other non-current assets | 12D,13B | 351 | 110 | ||||||||
| Total non-current assets | 15,241 | 6,565 | |||||||||
| Total assets | 82,725 | 50,970 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 3
Mazor Robotics Ltd.
| 2016 | 2015 | |||||||||||
| Note | USD thousands | USD thousands | ||||||||||
| Liabilities | ||||||||||||
| Trade payables | 5,018 | 2,219 | ||||||||||
| Deferred revenue | 10A | 4,031 | 1,221 | |||||||||
| Other current liabilities | B10 | 8,462 | 4,831 | |||||||||
| Total current liabilities | 17,511 | 8,271 | ||||||||||
| Non-current liabilities - Employee benefits | 11 | 325 | 299 | |||||||||
| Total liabilities | 17,836 | 8,570 | ||||||||||
| Equity | 22 | |||||||||||
| Share capital | 124 | 110 | ||||||||||
| Share premium | 174,647 | 136,107 | ||||||||||
| Amounts allocated to share options | - | 77 | ||||||||||
| Capital reserve for share-based payment transactions | 9,859 | 7,179 | ||||||||||
| Foreign currency translation reserve | 2,119 | 2,119 | ||||||||||
| Accumulated loss | (121,860 | ) | (103,192 | ) | ||||||||
| Total equity | 64,889 | 42,400 | ||||||||||
| Total liabilities and equity | 82,725 | 50,970 | ||||||||||
| /s/ Jonathan Adereth | /s/ Ori Hadomi | /s/ Sharon Levita | ||
| Chairman of the Board of Directors | CEO | CFO |
Date of approval of the financial statements: May 1, 2017.
The accompanying notes are an integral part of these consolidated financial statements.
F - 4
Mazor Robotics Ltd.
2013 | 2012 | |||||||||||
Note | USD thousands | USD thousands | ||||||||||
| Assets | ||||||||||||
| Cash and cash equivalents | 4 | 19,803 | 12,797 | |||||||||
| Short-term investments | 5 | 45,014 | 4,156 | |||||||||
| Trade receivables | 6 | 1,974 | 1,147 | |||||||||
| Other accounts receivable | 7 | 655 | 680 | |||||||||
| Inventory | 8 | 2,480 | 1,257 | |||||||||
| Total current assets | 69,926 | 20,037 | ||||||||||
| Prepaid lease fees | 9, 18B | 78 | 64 | |||||||||
| Deferred tax assets, net | 17 | - | 80 | |||||||||
| Property and equipment, net | 10 | 792 | 766 | |||||||||
| Intangible assets, net | 11 | 93 | 387 | |||||||||
| Total non-current assets | 963 | 1,297 | ||||||||||
| Total assets | 70,889 | 21,334 | ||||||||||
| 2016 | 2015 | 2014 | ||||||||||||||
| Note | USD thousands | USD thousands | USD thousands | |||||||||||||
| Revenues | 14 | 36,379 | 26,096 | 21,208 | ||||||||||||
| Cost of sales | 16 | 10,330 | 5,827 | 4,396 | ||||||||||||
| Gross profit | 26,049 | 20,269 | 16,812 | |||||||||||||
| Research and development expenses, net | 17 | 5,736 | 6,324 | 5,776 | ||||||||||||
| Selling and marketing expenses | 18 | 33,637 | 24,947 | 21,352 | ||||||||||||
| General and administrative expenses | 19 | 5,697 | 4,305 | 4,392 | ||||||||||||
| Operating loss | (19,021 | ) | (15,307 | ) | (14,708 | ) | ||||||||||
| Financing income | 20 | 438 | 272 | 134 | ||||||||||||
| Financing expenses | 20 | (41 | ) | (137 | ) | (553 | ) | |||||||||
| Financing income (expenses), net | 397 | 135 | (419 | ) | ||||||||||||
| Loss before taxes on income | (18,624 | ) | (15,172 | ) | (15,127 | ) | ||||||||||
Income tax expense | 12 | 44 | 213 | 145 | ||||||||||||
| Net loss | (18,668 | ) | (15,385 | ) | (15,272 | ) | ||||||||||
| Net loss per share | ||||||||||||||||
| Basic and diluted loss per share (in USD) | 24 | (0.42 | ) | (0.36 | ) | (0.37 | ) | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 5
Mazor Robotics Ltd.
Capital | ||||||||||||||||||||||||||||
| Amounts | reserve for | Foreign | ||||||||||||||||||||||||||
| allocated | share-based | currency | ||||||||||||||||||||||||||
| Share | Share | to share | payment | translation | Accumulated | Total | ||||||||||||||||||||||
| Capital | premium | options | transactions | reserve | loss | Equity | ||||||||||||||||||||||
| USD thousands | ||||||||||||||||||||||||||||
| For the year ended | ||||||||||||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||
| January 1, 2016 | 110 | 136,107 | 77 | 7,179 | 2,119 | (103,192 | ) | 42,400 | ||||||||||||||||||||
| Loss for the year | - | - | - | - | - | (18,668 | ) | (18,668 | ) | |||||||||||||||||||
| Issuance of shares, see note 22C(2) | 11 | 31,386 | - | - | - | - | 31,397 | |||||||||||||||||||||
| Exercise of share options | 3 | 6,549 | - | (2,142 | ) | - | - | 4,410 | ||||||||||||||||||||
| Exercise of warrants | - | 558 | (77 | ) | - | - | - | 481 | ||||||||||||||||||||
| Expiration of share options | - | 47 | - | (47 | ) | - | - | - | ||||||||||||||||||||
| Share-based payments | - | - | - | 4,869 | - | - | 4,869 | |||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||
| December 31, 2016 | 124 | 174,647 | - | 9,859 | 2,119 | (121,860 | ) | 64,889 | ||||||||||||||||||||
| For the year ended | ||||||||||||||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||
| January 1, 2015 | 110 | 135,182 | 77 | 4,586 | 2,119 | (87,807 | ) | 54,267 | ||||||||||||||||||||
| Loss for the year | - | - | - | - | - | (15,385 | ) | (15,385 | ) | |||||||||||||||||||
| Exercise of share options | *- | 904 | - | (477 | ) | - | - | 427 | ||||||||||||||||||||
| Expiration of share options | - | �� | 21 | - | (21 | ) | - | - | - | |||||||||||||||||||
| Share-based payments | - | - | - | 3,091 | - | - | 3,091 | |||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||
| December 31, 2015 | 110 | 136,107 | 77 | 7,179 | 2,119 | (103,192 | ) | 42,400 | ||||||||||||||||||||
| For the year ended | ||||||||||||||||||||||||||||
| December 31, 2014 | ||||||||||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||
| January 1, 2014 | 106 | 130,472 | 77 | 3,854 | 2,119 | (72,535 | ) | 64,093 | ||||||||||||||||||||
| Loss for the year | - | - | - | - | - | (15,272 | ) | (15,272 | ) | |||||||||||||||||||
| Exercise of share options | 4 | 4,635 | - | (1,350 | ) | - | - | 3,289 | ||||||||||||||||||||
| Expiration of share options | - | 75 | - | (75 | ) | - | - | - | ||||||||||||||||||||
| Share-based payments | - | - | - | 2,157 | - | - | 2,157 | |||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||
| December 31, 2014 | 110 | 135,182 | 77 | 4,586 | 2,119 | (87,807 | ) | 54,267 | ||||||||||||||||||||
*) Represents an amount less than USD 1 thousand.
The accompanying notes are an integral part of these consolidated financial statements.
F - 36
Mazor Robotics Ltd.
2013 | 2012 | |||||||||||
Note | USD thousands | USD thousands | ||||||||||
| Current liabilities | ||||||||||||
| Trade payables | 12 | 1,899 | 1,318 | |||||||||
| Other accounts payable | 13 | 4,565 | 2,706 | |||||||||
| Total current liabilities | 6,464 | 4,024 | ||||||||||
| Employee benefits | 14 | 311 | 199 | |||||||||
| Liabilities to the OCS | 15 | - | 301 | |||||||||
| Derivative liabilities on account of warrants | 16 | - | 3,990 | |||||||||
| Deferred tax liability | 17 | 21 | - | |||||||||
| Total non-current liabilities | 332 | 4,490 | ||||||||||
| Total liabilities | 6,796 | 8,514 | ||||||||||
| Equity | 27 | |||||||||||
| Share capital | 106 | 73 | ||||||||||
| Share premium | 130,472 | 58,910 | ||||||||||
| Amounts allocated to share options | 77 | 554 | ||||||||||
| Capital reserve for share-based payment transactions | 3,854 | 3,170 | ||||||||||
| Foreign currency translation reserve | 2,119 | 2,119 | ||||||||||
| Accumulated loss | (72,535 | ) | (52,006 | ) | ||||||||
| Total equity | 64,093 | 12,820 | ||||||||||
| Total liabilities and equity | 70,889 | 21,334 | ||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| USD thousands | USD thousands | USD thousands | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Loss for the year | (18,668 | ) | (15,385 | ) | (15,272 | ) | ||||||
| Adjustments: | ||||||||||||
| Depreciation and amortization | 822 | 527 | 540 | |||||||||
| Financing (income) expenses, net | (275 | ) | (207 | ) | 278 | |||||||
| Gain on sale of property and equipment | (6 | ) | - | - | ||||||||
| Share-based expenses | 4,439 | 3,091 | 2,157 | |||||||||
| Income tax expense | 44 | 213 | 145 | |||||||||
| 5,024 | 3,624 | 3,120 | ||||||||||
| Change in inventory | (1,938 | ) | 273 | (980 | ) | |||||||
| Change in trade and other accounts receivable | (3,512 | ) | (2,408 | ) | (1,296 | ) | ||||||
| Change in prepaid lease fees | (20 | ) | 6 | (1 | ) | |||||||
| Change in trade and other accounts payable | 8,723 | 2,217 | 138 | |||||||||
| Change in employee benefits | 26 | 21 | (33 | ) | ||||||||
| 3,279 | 109 | (2,172 | ) | |||||||||
| Interest received | 301 | 194 | 85 | |||||||||
| Income tax paid | (38 | ) | (114 | ) | (51 | ) | ||||||
| 263 | 80 | 34 | ||||||||||
| Net cash used in operating activities | (10,102 | ) | (11,572 | ) | (14,290 | ) | ||||||
| Cash flows from investing activities | ||||||||||||
| Proceeds from (purchase of) short-term investments, net | (11,094 | ) | 9,816 | 22,271 | ||||||||
| Purchase of long-term investments | (9,823 | ) | (7,538 | ) | (7,237 | ) | ||||||
| Proceeds from sale of long-term investments | 748 | 992 | - | |||||||||
| Capitalization of development costs | (1,902 | ) | - | - | ||||||||
| Purchase of property and equipment | (2,361 | ) | (702 | ) | (503 | ) | ||||||
| Net cash provided by (used in) investing activities | (24,432 | ) | 2,568 | 14,531 | ||||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from issuance of ADR's, net | 31,416 | - | (294 | ) | ||||||||
| Proceeds from exercise of share options by | ||||||||||||
| employees and service providers | 4,100 | 370 | 3,042 | |||||||||
| Proceeds from exercise of warrants by investors | 481 | - | - | |||||||||
| Repayment of loans to the Chief Scientist | - | - | (324 | ) | ||||||||
| Net cash provided by financing activities | 35,997 | 370 | 2,424 | |||||||||
| Net (decrease) increase in cash and cash equivalents | 1,463 | (8,634 | ) | 2,665 | ||||||||
| Cash and cash equivalents at the beginning of the year | 13,519 | 22,255 | 19,803 | |||||||||
Effect of exchange rate differences on | ||||||||||||
| cash and cash equivalents | (28 | ) | (102 | ) | (213 | ) | ||||||
| Cash and cash equivalents at the end of the year | 14,954 | 13,519 | 22,255 | |||||||||
| Supplementary cash flows information: | ||||||||||||
| Transfer of inventory to property and equipment | - | - | 410 | |||||||||
| Purchase of property and equipment on credit | (566 | ) | - | - | ||||||||
| Issuance costs on credit | (19 | ) | - | - | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F - 47
2013 | 2012 | 2011 | ||||||||||||||
Note | USD thousands | USD thousands | USD thousands | |||||||||||||
| Revenues | 19 | 19,983 | 12,175 | 5,904 | ||||||||||||
| Cost of sales | 21 | 4,280 | 2,893 | 1,879 | ||||||||||||
| Gross profit | 15,703 | 9,282 | 4,025 | |||||||||||||
| Research and development expenses, net | 22 | 4,174 | 2,760 | 3,062 | ||||||||||||
| Selling and marketing expenses | 23 | 15,692 | 8,887 | 6,990 | ||||||||||||
| General and administrative expenses | 24 | 2,766 | 1,845 | 1,639 | ||||||||||||
| Operating loss | (6,929 | ) | (4,210 | ) | (7,666 | ) | ||||||||||
| Financing income | 25 | 214 | 925 | 764 | ||||||||||||
| Financing expenses | 25 | (13,647 | ) | (3,756 | ) | (948 | ) | |||||||||
| Financing expenses, net | (13,433 | ) | (2,831 | ) | (184 | ) | ||||||||||
| Loss before taxes on income | (20,362 | ) | (7,041 | ) | (7,850 | ) | ||||||||||
Income tax (benefit) expense | 17 | 167 | 23 | (68 | ) | |||||||||||
| Loss for the year | (20,529 | ) | (7,064 | ) | (7,782 | ) | ||||||||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Foreign currency translation differences | - | (281 | ) | (950 | ) | |||||||||||
| Total comprehensive loss for the year | (20,529 | ) | (7,345 | ) | (8,732 | ) | ||||||||||
| Loss per share | ||||||||||||||||
| Basic and diluted loss per share (in USD) | 29 | (0.57 | ) | (0.29 | ) | (0.36 | ) | |||||||||
| Capital | ||||||||||||||||||||||||||||||||
| Amounts | reserve for | Foreign | ||||||||||||||||||||||||||||||
| Amounts | allocated to | share-based | currency | |||||||||||||||||||||||||||||
| Share | Share | allocated | conversion | payment | translation | Accumulated | Total | |||||||||||||||||||||||||
Capital | premium | to options | option | transactions | reserve | loss | Equity | |||||||||||||||||||||||||
USD thousands | ||||||||||||||||||||||||||||||||
| For the year ended | ||||||||||||||||||||||||||||||||
| December 31, 2013 | ||||||||||||||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||||||
| January 1, 2013 | 73 | 58,910 | 554 | - | 3,170 | 2,119 | (52,006 | ) | 12,820 | |||||||||||||||||||||||
| Total comprehensive loss | ||||||||||||||||||||||||||||||||
| for the year | - | - | - | - | - | - | (20,529 | ) | (20,529 | ) | ||||||||||||||||||||||
Issuance of shares(1) | 16 | 42,604 | - | - | - | - | - | 42,620 | ||||||||||||||||||||||||
| Exercise of share options | 17 | 28,948 | (17,977 | ) | - | (325 | ) | - | - | 10,663 | ||||||||||||||||||||||
| Expiration of share options | - | 10 | - | - | (10 | ) | - | - | - | |||||||||||||||||||||||
| Share-based payments | - | - | - | - | 1,019 | - | - | 1,019 | ||||||||||||||||||||||||
| Classification of derivative | ||||||||||||||||||||||||||||||||
| liability on account of warrants | ||||||||||||||||||||||||||||||||
| to equity (note 16A) | - | - | 17,500 | - | - | - | - | 17,500 | ||||||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||||||
| December 31, 2013 | 106 | 130,472 | 77 | - | 3,854 | 2,119 | (72,535 | ) | 64,093 | |||||||||||||||||||||||
| For the year ended | ||||||||||||||||||||||||||||||||
| December 31, 2012 | ||||||||||||||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||||||
| January 1, 2012 | 55 | 51,122 | 1,267 | 795 | 2,787 | 2,400 | (44,942 | ) | 13,484 | |||||||||||||||||||||||
| Total comprehensive loss | ||||||||||||||||||||||||||||||||
| for the year | ||||||||||||||||||||||||||||||||
| Loss for the year | - | - | - | - | - | - | (7,064 | ) | (7,064 | ) | ||||||||||||||||||||||
| Other comprehensive loss | ||||||||||||||||||||||||||||||||
| for the year, net of tax | - | - | - | - | - | (281 | ) | - | (281 | ) | ||||||||||||||||||||||
| Total comprehensive loss | ||||||||||||||||||||||||||||||||
| for the year | - | - | - | - | - | (281 | ) | (7,064 | ) | (7,345 | ) | |||||||||||||||||||||
| Issuance of share options | ||||||||||||||||||||||||||||||||
| and shares | 18 | 6,105 | - | - | - | - | - | 6,123 | ||||||||||||||||||||||||
| Exercise of share options | (2) - | 3 | - | - | - | - | - | 3 | ||||||||||||||||||||||||
| Expiration of share options | - | 885 | (713 | ) | - | (172 | ) | - | - | - | ||||||||||||||||||||||
| Share-based payments | - | - | - | - | 555 | - | 555 | |||||||||||||||||||||||||
| Expiration of conversion | ||||||||||||||||||||||||||||||||
| Options | - | 795 | - | (795 | ) | - | - | - | - | |||||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||||||
| December 31, 2012 | 73 | 58,910 | 554 | - | 3,170 | 2,119 | (52,006 | ) | 12,820 | |||||||||||||||||||||||
| Capital | ||||||||||||||||||||||||||||||||
| Amounts | reserve for | Foreign | ||||||||||||||||||||||||||||||
| Amounts | allocated to | share-based | currency | |||||||||||||||||||||||||||||
| Share | Share | allocated | conversion | payment | translation | Accumulated | Total | |||||||||||||||||||||||||
Capital | premium | to options | option | transactions | reserve | loss | Equity | |||||||||||||||||||||||||
USD thousands | ||||||||||||||||||||||||||||||||
| For the year ended | ||||||||||||||||||||||||||||||||
| December 31, 2011 | ||||||||||||||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||||||
| January 1, 2011 | 48 | 43,097 | 2,850 | 795 | 2,165 | 3,350 | (37,160 | ) | 15,145 | |||||||||||||||||||||||
| Total comprehensive income | ||||||||||||||||||||||||||||||||
| for the year | ||||||||||||||||||||||||||||||||
| Loss for the year | - | - | - | - | - | - | (7,782 | ) | (7,782 | ) | ||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||
| for the year, net of tax | - | - | - | - | - | (950 | ) | - | (950 | ) | ||||||||||||||||||||||
| Total comprehensive income | ||||||||||||||||||||||||||||||||
| for the year | - | - | - | - | - | (950 | ) | (7,782 | ) | (8,732 | ) | |||||||||||||||||||||
| Issuance of share options | ||||||||||||||||||||||||||||||||
| and shares | 7 | 5,554 | 825 | - | - | - | - | 6,386 | ||||||||||||||||||||||||
| Exercise of share options | (1) - | 65 | (2 | ) | - | (10 | ) | - | - | 53 | ||||||||||||||||||||||
| Expiration of share options | - | 2,406 | (2,406 | ) | - | - | - | - | - | |||||||||||||||||||||||
| Share-based payments | - | - | - | - | 632 | - | - | 632 | ||||||||||||||||||||||||
| Balance as of | ||||||||||||||||||||||||||||||||
| December 31, 2011 | 55 | 51,122 | 1,267 | 795 | 2,787 | 2,400 | (44,942 | ) | 13,484 | |||||||||||||||||||||||
2013 | 2012 | 2011 | ||||||||||
USD thousands | USD thousands | USD thousands | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Loss for the year | (20,529 | ) | (7,064 | ) | (7,782 | ) | ||||||
| Adjustments: | ||||||||||||
| Depreciation and amortization | 611 | 545 | 451 | |||||||||
| Financing expenses, net | 13,400 | 2,938 | 205 | |||||||||
| Share-based payment transactions | 1,019 | 555 | 632 | |||||||||
| Income tax (benefit) expense | 167 | 23 | (68 | ) | ||||||||
| 15,197 | 4,061 | 1,220 | ||||||||||
| Change in inventory | (1,223 | ) | (51 | ) | (448 | ) | ||||||
| Change in trade and other accounts receivable | (899 | ) | (218 | ) | (623 | ) | ||||||
| Change in prepaid lease fees | (14 | ) | (9 | ) | (12 | ) | ||||||
| Change in trade and other accounts payable | 2,254 | 1,194 | 407 | |||||||||
| Change in employee benefits | 112 | 12 | 48 | |||||||||
| 230 | 928 | (628 | ) | |||||||||
| Interest received | 78 | 470 | 574 | |||||||||
| Interest paid | - | (215 | ) | (218 | ) | |||||||
| Income tax received | - | - | - | |||||||||
| Income tax paid | (26 | ) | - | (19 | ) | |||||||
| 52 | 255 | 337 | ||||||||||
| Net cash used in operating activities | (5,050 | ) | (1,820 | ) | (6,853 | ) | ||||||
| Cash flows from investing activities | ||||||||||||
| Proceeds from sale (acquisition) of deposits and | ||||||||||||
| investment in marketable securities, net | (40,820 | ) | 9,949 | (2,213 | ) | |||||||
| Acquisition of property and equipment | (272 | ) | (372 | ) | (275 | ) | ||||||
| Net cash from (used in) investing activities | (41,092 | ) | 9,577 | (2,488 | ) | |||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from warrants and shares issue, net | 53,198 | 7,298 | 6,386 | |||||||||
| Proceeds from exercise of share options to | ||||||||||||
| employees and service providers | 479 | 3 | 53 | |||||||||
Repayment of convertible debentures | - | (3,916 | ) | - | ||||||||
| Repayment of loans to the OCS | (629 | ) | (317 | ) | (229 | ) | ||||||
| Net cash from financing activities | 53,048 | 3,068 | 6,210 | |||||||||
| Net increase (decrease) in cash and cash equivalents | 6,906 | 10,825 | (3,131 | ) | ||||||||
| Cash and cash equivalents at the beginning of the year | 12,797 | 1,655 | 4,802 | |||||||||
Exchange rate differences on | ||||||||||||
| cash and cash equivalents | 100 | 317 | (16 | ) | ||||||||
| Cash and cash equivalents at the end of the year | 19,803 | 12,797 | 1,655 | |||||||||
| Supplementary cash flows information: | ||||||||||||
| Transfer of inventory to property and equipment | 67 | 87 | 190 | |||||||||
Note 1 - Reporting Entity
| A. | Mazor Robotics Ltd. and are currently traded on the NASDAQ Global Market. |
| B. | Definitions |
In these financial statements –-
| (1) |
| (2) | The |
| (3) |
Related party |
| C. | Material events in the reporting period |
Exclusive Lead Sharing and Distribution Agreement and Purchase Agreement with Medtronic.
On May 18, 2016, Mazor entered into two strategic agreements with Medtronic. One agreement is a two-phase Exclusive Lead Sharing and Distribution Agreement which provides for co-promotion, co-development and, upon meeting certain milestones, potential global distribution of the Mazor X System, a transformative guidance platform for spine surgeries. The second agreement is a Purchase Agreement which provides for an equity investment by Medtronic in Mazor.
Exclusive Lead Sharing and Distribution Agreement
The Exclusive Lead Sharing and Distribution Agreement is a commercial agreement which has an initial U.S.-based co-promotion phase. Subject to meeting certain milestones defined in the agreement, and the parties’ mutual decision to proceed, the relationship will enter a second phase. During the second phase, Medtronic will assume exclusive global sales and distribution rights for the Mazor X system. The second phase includes annual minimum sales amounts with a cumulative potential of hundreds of Mazor X systems over a four-year period. The commercial agreement relates to Mazor X systems and applications for the spine surgery market.
F - 98
Mazor Robotics Ltd.
Notes to the Consolidated Financial Statements
| C. | Material events in the reporting period (cont'd) |
Purchase Agreement
The Purchase Agreement provides for a three-tranche equity investment in Mazor. In the first tranche, which closed in May 2016, Medtronic purchased from Mazor newly issued securities representing four percent of Mazor's issued and outstanding share capital on a fully diluted basis, at a price per ADS of $11.42, which was equal to the trailing 20-day volume weighted average price of the shares, or a total of $11.9 million. In the second tranche, which closed in August 2016, upon the achievement by Mazor of certain operational milestones, Medtronic purchased newly issued securities representing 4.1 percent of Mazor's issued and outstanding securities. This investment brought Medtronic to a total holding of 8.4 percent of Mazor’s issued and outstanding securities, or 7.3 percent of Mazor’s issued and outstanding securities on a fully diluted basis. The price per ADS in the second tranche was $21.84, which was the average price per share during the 20 trading days following the occurrence of the above-mentioned milestones.
In a potential third tranche, Mazor will have the right to require Medtronic to consummate the purchase of Mazor securities such that after the investment they will own up to fifteen percent of Mazor's outstanding ordinary shares on a fully diluted basis. Consummation of this tranche is subject to consummation of the second tranche as well as the commencement of the second phase of the Exclusive Lead Sharing and Distribution Agreement, and, provided certain other conditions are met, will be solely at December 31, 2013
Note 2 - Basis of Preparation
| A. | Statement of compliance |
| B. | Reporting and functional currency |
| C. | Basis of measurement |
The financial statements have been prepared on the historical cost basis except for short-termcertain investments and derivative instruments measured at fair value through profit or loss, inventory (measured at the lower of cost or net realizable value), deferred tax assets and liabilities and assets and liabilities for employee benefits. For further information regarding the measurement of these assets and liabilities see Note 3 regarding significant accounting policies.
F - 9
Mazor Robotics Ltd.
Notes to the Consolidated Financial Statements
Note 2 - Basis of Preparation (cont'd)
| D. | Use of estimates and judgments |
| Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any affected future periods. |
Presented hereunder is information with respect to material assumptions and estimates, which were made by the Group’sGroup's management while implementing Group accounting policies and have a significant risk of resulting in a material adjustment to the financial statements in the future:policies:
.
Capitalization of development costs - Development costs are capitalized and recognized as an intangible asset according to the accounting policy described in Note 3E. The capitalization of the costs is based among others on management’smanagement's judgment regarding technological and economic feasibility, which generally exists when a product development project reaches a defined milestone, or whenmilestone. In assessing the Company enters into a transaction to sell the know-how that was derived from the development. In determining therecoverable amount to be capitalized,of an intangible assets, management makes assumptions as to the future anticipated cash inflows from the assets.
Recognition of deferred tax assets and liabilities in respect of tax losses - Management of the Company evaluates whether it is probable that in the foreseeable future there will be taxable profits against which losses can be utilized and quantify the portion of tax losses that are more likely than not to be allowable under applicable tax laws, and accordingly it recognizes (or does not recognize) deferred tax assets and liabilities.assets. For further information on losses for which a deferred tax asset was recognized, see Note 1712 regarding taxes on income.
Fair value measurement of share-based payment transactions - The Group grants share basedshare-based payment to directors, employees and consultants. The fair value of the share options is measured at grant date on the basis of accepted valuation models and assumptions regarding unobservable inputs used in the valuation models. The value of the transactions, measured as described above, is recognized as an expense over the vesting period. Concurrently with the periodic recognition of an expense, an increase is recognized in a capital reserve, within the Group’sGroup's equity.
| E. | New standards and interpretations not yet adopted |
| (1) | IFRS 16, Leases ("IFRS 16") |
F - 1110
Mazor Robotics Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2013
Note 2 - Basis of Preparation (cont’d)(cont'd)
| E. | New standards and interpretations |
| IFRS 16, Leases ("IFRS 16") (cont'd) |
IFRS 16 will become effective for annual periods as of January 1, 2019, with the possibility of early adoption, so long as the Company has also early adopted IFRS 15 - Revenue from contracts with customers. IFRS 16 includes various alternative transitional provisions, so that companies can choose between one of the following alternatives at initial application: full retrospective application or application (with the possibility of certain practical expedients) as from the mandatory effective date, with an adjustment to the balance of retained earnings at that date.
The Company is examining the effects of IFRS 16 on the financial statements with no plans for early adoption.
| IFRS 15, Revenue from Contracts with Customers ("IFRS 15") |
IFRS 15 replaces the current guidance regarding recognition of revenues and presents a new model for recognizing revenue from contracts with customers. IFRS 15 provides two approaches for recognizing revenue: at a point in time or over time. The model includes five steps for analyzing transactions so as to determine when to recognize revenue and at what amount. Furthermore, IFRS 15 provides new and more extensive disclosure requirements than those that exist under current guidance.
IFRS 15 is applicable for annual periods beginning on or after January 1, 2018 and earlier application is permitted. IFRS 15 includes various alternative transitional provisions, so that companies can choose between one of the following alternatives at initial application: full retrospective application, full retrospective application with practical expedients, or application as from the mandatory effective date, with an adjustment to the balance of retained earnings at that date in respect of transactions that are not yet complete.
The Company began its IFRS 15 implementation assessment by reviewing its current revenue recognition policy, contract with customers and its sales processes. The Company has not identified any major changes compared to the treatment currently applied under IAS 18, although the Company has not yet completed its assessment. In general the Company’s performance obligation is the transfer of goods to the customer and related activities occurring on or around the delivery. In a limited number of cases, certain activities that the Company performs for the customer after delivery may qualify as a separate performance obligation while the fair value of such secondary services are deemed to be immaterial and the realization of such services usually occurs at same point of time as the transfer of the main performance obligation. The Company will complete its examination during 2017.
| (3) | IFRS 9 (2014), Financial Instruments ("IFRS 9 (2014)") |
IFRS 9 (2014) replaces the current guidance in IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 (2014) includes revised guidance on the classification and measurement of financial instruments, a new 'expected credit loss' model for calculating impairment for most financial assets, and new guidance and requirements with respect to hedge accounting.
IFRS 9 (2014) is effective for annual periods beginning on or after January 1, 2018 with early adoption being permitted.
The Group has examined the effects of applying IFRS 9 (2014), and in its opinion the effect on the financial statements will be immaterial.
F - 1211
Mazor Robotics Ltd.
Notes to the Consolidated Financial Statements as at December 31, 2013
Note 2 - Basis of Preparation (cont'd)
| E. | New standards and interpretations not yet adopted (cont'd) |
| (4) | Amendment to IAS 12, Income Taxes: Recognition of Deferred Tax Assets for Unrealised Losses |
The Amendment clarifies that for purposes of recognizing a deferred tax asset, the effect of reversal of deductible temporary differences should be excluded when assessing future taxable profit. This assessment should be made separately for different types of deductible temporary differences if tax laws contain restrictions on the types of taxable profit from which losses can be deducted. Moreover, the Amendment provides that probable future profits may include profits from the recovery of assets at more than their carrying value, if there is sufficient supporting evidence.
The Amendment is applicable retrospectively for annual periods beginning on or after January 1, 2017 with early adoption being permitted.
The Group has examined the effects on the financial statements of applying the Amendment for IAS 12 and is of the opinion the effect on the financial statements will be immaterial.
Note 3 - Significant Accounting Policies
The accounting policies set out below have been applied consistently for all periods presented in these consolidated financial statements, and have been applied consistently by Group entities.statements.
| A. | Basis of consolidation |
| (1) | Subsidiaries |
Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group.
| (2) | Transactions eliminated on consolidation |
Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
| B. | Foreign currency transactions |
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the reporting period. Foreign currency differences arising on translation are recognized in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
F - 12
Mazor Robotics Ltd.
Notes to the Consolidated Financial Statements
Note 3 - Significant Accounting Policies (cont'd)
| C. | Financial instruments |
| (1) | Non-derivative financial assets |
Initial recognition of financial assets
The Group initially recognizes loans and receivables and deposits on the date that they are originated. All other financial assets acquired in a regular way purchase, including assets designated at fair value through profit or loss, are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument (i.e., on the date the Group undertook to purchase or sell the asset). Non-derivative financial instruments comprise investments in marketable securities, deposits, trade and other receivables, and cash and cash equivalents.
Financial assets are derecognizedde-recognized when the Group’sGroup's contractual rights to the cash flows from the asset expire, or when the Group transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.
Regular way sales of financial assets are recognized on the trade date, which is the date that the Company undertook to sell the asset.
See (2) hereunder regarding the offset of financial assets and financial liabilities.
The Group classifies its financial assets according to the following categories:
Financial assets at fair value through profit or loss
A financial asset is classified at fair value through profit or loss if it is classified as held for trading. Attributable transaction costs are recognized in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss.
Financial assets held for trading comprise investments in marketable securities.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any direct attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade receivables, deposits, other accounts receivable and cash and cash equivalents.
Cash and cash equivalents comprise cash balances available for immediate use and call deposits. Cash equivalents comprise short-term highly liquid investments (with original maturities of three months or less) that are readily convertible into known amounts of cash and are not exposed to significant risks of change in value.
| (2) | Non-derivative financial liabilities |
Financial liabilities are recognized initially at fair value plusless any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortized cost using the effective interest method. Non-derivative financial liabilities comprise convertible debentures, liability to the OCS,of, trade and other accounts payable.
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
F - 13
Mazor Robotics Ltd.
Notes to the Consolidated Financial Statements
Note 3 - Significant Accounting Policies (cont'd)
| C. | Financial instruments (cont'd) |
| (3) | CPI-linked assets and liabilities that are not measured at fair value |
The value of CPI-linked financial assets and liabilities, which are not measured at fair value, is revalued every period in accordance with the actual increase/decrease in the CPI.
| (4) | Share capital |
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity.
| (5) | Share options |
| Receipts in respect of share options are classified as equity |
| D. | Property and Equipment |
| (1) | Recognition and measurement |
Property and equipment are measured at cost less accumulated depreciation and accumulated impairment losses.
| Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the assets to a working condition for their intended use. |
Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. Spare parts, servicing equipment and stand-by equipment are to be classified as fixed assets when they meet the definition of fixed assets in IAS 16, and are otherwise to be classified as inventory.
Gains and losses on disposal of property and equipment are determined by comparing the net proceeds from disposal with the carrying amount of the asset, and are recognized net within the relevant line item in profit or loss.
| (2) | Subsequent costs |
Depreciation is a systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of the asset, or other amount substituted for cost. Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of the property and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful lives for the current and comparative periods are as follows:
F - 14 Mazor Robotics Ltd. Notes to the Consolidated Financial Statements Note 3 - Significant Accounting Policies (cont'd)
Depreciation methods and useful lives are reviewed at each financial year-end and adjusted if appropriate.
Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognized in profit or loss when incurred. Development activities involve plans or design for the production of new or substantially improved products and processes. Development expenditure is capitalized only if:
Any capitalized expenditure includes the cost of materials, direct labor and other related costs that are directly attributable to developing the asset for its intended use. Other development expenditures are recognized in profit or loss as incurred. Capitalized development expenditure is measured at cost less accumulated amortization and accumulated impairment losses. During 2016, the Company reached technological and commercial feasibility regarding one of its projects according to the conditions listed above, see note 9.
Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated brands, is recognized in profit or loss as incurred.
Amortization methods and useful lives are reviewed at each reporting date and adjusted if appropriate. F - 15 Mazor Robotics Ltd. Notes to the Consolidated Financial Statements Note 3 - Significant Accounting Policies (cont'd)
Inventory is measured at the lower of cost and net realizable value. The cost of inventory is based on the moving average method, and includes expenditure incurred in acquiring the inventory and the costs incurred in bringing it to its existing location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Management regularly evaluates the necessity of provisions for obsolescence, which may result from excess, slow-moving or obsolete inventories.
A financial asset not carried at fair value through profit or loss is tested for impairment when objective evidence indicates that one or more events had a negative effect on the estimated future cash flows of the asset. Objective evidence that financial assets are impaired can include: Default by a debtor; Indications that a debtor or issuer will enter bankruptcy; Observable data indicating a measurable decrease in the cash flow expected from a group of financial assets. An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. All individually significant financial assets are assessed for specific impairment, and all impairment losses are recognized in profit or loss and reflected in a provision for loss against the balance of the financial asset measured at amortized cost. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the recognition of the impairment loss. For financial assets measured at amortized cost the reversal is recognized in profit or loss.
The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its net selling price (fair value less costs to sell). In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash-generating unit, for which the estimated future cash flows from the asset or cash-generating unit were not adjusted. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of cash-generating units are allocated to reduce the carrying amounts of the assets in the cash-generating unit on a pro rata basis. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. F - 16 Mazor Robotics Ltd. Notes to the Consolidated Financial Statements Note 3 - Significant Accounting Policies
Most of the Defined contribution plans Obligations for contributions to defined contribution pension plans are recognized as an expense in profit or loss in the periods during which services are rendered by employees.
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is A liability is recognized for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. The employee benefits are classified as short-term benefits or as other long-term benefits depending on when the Company expects the benefits to be wholly settled. Long-term benefits are presented on a discounted basis and are immaterial to the financial statements.
The fair value of share-based payment, measured on the grant date, granted to employees is recognized as a salary expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the awards. The amount recognized as an expense in respect of share-based payment awards that are conditional upon meeting service and non-market performance conditions, is adjusted to reflect the number of awards that are expected to vest.
A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
General
F - 17 Mazor Robotics Ltd. Notes to the Consolidated Financial Statements Note 3 - Significant Accounting Policies (cont'd)
The revenue from sales in the ordinary course of business is measured according to the fair value of the consideration received or receivable, which is based on the selling price of each component, net of discounts.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||