| Significant Accounting Policies | NOTE 2
– SIGNIFICANT ACCOUNTING POLICIES:
a. Basis of preparation: The Exchange Agreement is being
treated as a reverse recapitalization of Scoutcam Ltd., for financial accounting and reporting purposes. As such, ScoutCam Ltd.
is treated as the acquirer for accounting and financial reporting purposes while the Company is treated as the acquired entity
for accounting and financial reporting purposes. As a result, the comparative figures that are reflected in the Company’s
financial statements are those of ScoutCam and from the Closing Date, the Company’s assets, liabilities and results of operations
are consolidated with the assets, liabilities and results of operations of ScoutCam. The consolidated financial statements
reflect the group’s financial position, results of operations, changes in shareholders equity (capital deficiency) and cash
flows in accordance with generally accepted accounting principles in the Unites States (“U.S. GAAP”). The accompanying comparative consolidated
financial statements include the historical accounts of ScoutCam as a “Carve-out Business”, a division of Medigus.
Throughout the comparative periods included in these Financial Statements, the Carve-out Business operated as part of Medigus.
Separate financial statements have not historically been prepared for the Carve-out Business. These comparative carve-out financial
statements have been prepared on a standalone basis and are derived from Medigus’s consolidated financial statements and
accounting records. The carve-out comparative financial statements reflect ScoutCam’s financial position, results of operations,
changes in net parent deficit and cash flows in accordance with U.S. GAAP. The financial position, results
of operations, changes in net parent deficit, and cash flows of the Carve-out Business may not be indicative of its results had
it been a separate stand-alone entity during the comparative periods presented. The comparative carve-out financial
statements of the Company include expenses which were allocated from Medigus for certain functions, including general corporate
expenses related to corporate strategy, procurement, Information Technology (“IT”), Human Resources (“HR”)
and legal. These allocation have been made on the basis of direct usage when identifiable, with the remainder allocated on the
basis of headcount. Management believes the expense allocation methodology and results are reasonable and consistently applied
for all comparative periods presented. However, these allocations may not be indicative of the actual expenses that would have
been incurred by an independent company or of the costs to be incurred in the future. The carve-out comparative financial
statements include assets and liabilities specifically attributable to the Carve-out Business. Medigus uses a centralized approach
for managing cash and financing operations. Accordingly, a substantial portion of the cash balances are transferred to Medigus’
cash management accounts regularly and therefore are not included in the financial statements. Transfers of cash between Carve-out
business and Medigus are included within “Net transfers from Parent company” on the Statements of Cash Flows and the
Statements of changes in shareholder’s equity (capital deficiency). As the carve-out comparative financial
statements have been prepared on a carve-out basis, the amounts reflected in Parent Company deficit in the comparative statement
of changes in shareholder’s equity (capital deficiency) refer to net loss for the period attributed to ScoutCam in addition
to transactions between Medigus and ScoutCam. The accounting policies set out
below have, unless otherwise stated, been applied consistently.
b. Use of estimates The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. The Company evaluates on an ongoing basis its assumptions, including
those related to contingencies, deferred taxes, inventory impairment, as well as in estimates used in applying the revenue recognition
policy. Actual results may differ from those estimates.
c. Functional currency A majority of ScoutCam’s revenues
are generated in U.S. dollars. The substantial majority of ScoutCam Ltd.’s costs are incurred in U.S. dollars and New Israeli
Shekels (“NIS”). ScoutCam Ltd.’s management believes that the U.S. dollar is the currency of the primary economic
environment in which ScoutCam Ltd. operates. Thus, the functional currency of ScoutCam Ltd.’s is the U.S. dollar. Transactions and balances originally
denominated in U.S. dollars are presented at their original amounts. Balances in non-dollar currencies are translated into U.S.
dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-U.S. dollar transactions
and other items in the statements of operations (indicated below), the following exchange rates are used: (i) for transactions
exchange rates at transaction dates and (ii) for other items (derived from non-monetary balance sheet items such as depreciation
and amortization) historical exchange rates. Currency transaction gains and losses are presented in financial income or expenses,
as appropriate.
d. Cash and Cash Equivalents The
Company considers as cash equivalents all short-term, highly liquid investments, which include short-term bank deposits with original
maturities of three months or less from the date of purchase that are not restricted as to withdrawal or use and are readily convertible
to known amounts of cash.
e. Accounts receivable Accounts receivable are presented
in the Company’s consolidated balance sheet net of allowance for doubtful accounts. The Company estimates the collectibility
of its accounts receivable balances and adjusts its allowance for doubtful accounts accordingly. When revenue recognition criteria
are not met for a sale transaction that has been billed, the Company does not recognize deferred revenues or the related account
receivable. As of December 31, 2019, no allowance
for doubtful accounts was recorded.
f. Property and equipment Property and equipment is stated
at cost, net of accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated
useful lives: Machinery and equipment –
6-10 years.
g. Severance pay Israeli labor law generally requires
payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. Pursuant
to section 14 of the Severance Compensation Act, 1963 (“Section 14”), all of the Company’s employees in Israel
are entitled to monthly deposits, at a rate of 8.33% of their monthly salary, made in their name with insurance companies. Payments
under Section 14 relieve the Company from any future severance payment obligation with respect to those employees and, as such,
the Company may only utilize the insurance policies for the purpose of disbursement of severance pay. As a result, the Company
does not recognize an asset nor liability for these employees. The asset and the liability for
severance pay presented in the balance sheet reflects employees that began employment prior to Section 14. The severance pay liability of the
Company to its employees that began employment prior to Section 14, based upon the number of years of service and the latest monthly
salary and is partly covered by regular deposits with recognized pension funds and deposits with severance pay funds. Under labor
agreements, these deposits are in the employees’ names and, subject to certain limitations, are the property of the employees.
The liability for employee rights upon retirement covers the severance pay liability of the Company in accordance with labor agreements
in force and based on salary components which, in the opinion of management, create entitlement to severance pay. The Company records
the obligation as if it were payable at each balance sheet date on an undiscounted basis. The Company may only make withdrawals
for the purpose of paying severance.
h. Stock-Based Compensation The Company measures and recognizes
compensation expense for its equity classified stock-based awards, including stock-based option awards exercisable into shares
of common stock of the Parent company under its plan based on estimated fair values on the grant date. The Company calculates the
fair value of stock-based option awards on the grant date using the Black-Scholes option pricing model. The option-pricing model
requires a number of assumptions, of which the most significant are the stock price volatility and the expected option term. For
the years ended December 31, 2019, and 2018, the volatility was based on the historical stock volatility of the Parent Company.
The Company’s expected dividend rate is zero since the Company does not currently pay cash dividends on its stocks and does
not anticipate doing so in the foreseeable future. Each of the above factors requires the Company to use judgment and make estimates
in determining the percentages and time periods used for the calculation. If the Company were to use different percentages or time
periods, the fair value of stock-based option awards could be materially different. The Company recognizes stock-based compensation
cost for option awards on an accelerated basis over the employee’s requisite service period, net of estimated forfeitures.
i. Inventories Inventories include raw materials,
inventory in process and finished products and are valued at the lower of cost or net realizable value. The cost is determined on the basis
of “first in-first out” basis. Cost of purchased raw materials and inventory in process includes costs of design, raw
materials, direct labor, other direct costs and fixed production overheads. Materials and other supplies held for use in the production
of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold
at or above cost. The Company regularly evaluates
its ability to realize the value of inventory based on a combination of factors including the following: forecasted sales or usage,
estimated current and future market values.
j. Revenue recognition
a) Revenue measurement Commencing January 1, 2018, the Company’s
revenues are measured according to the ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). Under
ASC 606, revenues are measured according to the amount of consideration that the Company expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, such as sales taxes.
Revenues are presented net of VAT. Until December 31, 2017 revenues were
measured in accordance with ASC 605, “Revenue recognition”. The implementation of ASC 606 did not have a material effect
on the consolidated financial statements of the Company as the Company’s accounting for revenue recognition remains substantially
identical.
b) Revenue recognition The Company recognizes revenue when
a customer obtains control over promised goods or services. For each performance obligation the Company determines at contract
inception whether it satisfies the performance obligation over time or satisfies the performance obligation at a point in time. Performance obligations are satisfied
over time if one of the following criteria is met: (a) the customer simultaneously receives
and consumes the benefits provided by the Company’s performance; (b) the Company’s performance creates or enhances
an asset that the customer controls as the asset is created or enhanced; or (c) the Company’s performance does not create
an asset with an alternative use to the Company and the Company has an enforceable right to payment for performance completed to
date. If a performance obligation is not
satisfied over time, a Company satisfies the performance obligation at a point in time. The transaction price is allocated
to each distinct performance obligations on a relative standalone selling price (“SSP”) basis and revenue is recognized
for each performance obligation when control has passed. In most cases, the Company is able to establish SSP based on the observable
prices of services sold separately in comparable circumstances to similar customers and for products based on the Company’s
best estimates of the price at which the Company would have sold the product regularly on a stand-alone basis. The Company reassesses
the SSP on a periodic basis or when facts and circumstances change. Product Revenue Revenues from product sales are recognized
when the customer obtains control of the Company’s product, typically upon shipment to the customer. Taxes collected from
customers relating to product sales and remitted to governmental authorities are excluded from revenues. Service Revenue The Company also generates revenues
from development services. Revenue from development services is recognized over the period of the applicable service contract.
There are no long-term payment terms or significant financing components of the Company’s contracts. The Company’s contract payment
terms for product and services vary by customer. The Company assesses collectibility based on several factors, including collection
history.
k. Cost of revenues Cost of revenue consists of products
purchased from sub-contractors, raw materials for in-house assembly line, shipping and handling costs to customers, salary, employee-related
expenses, depreciation and overhead expenses.
l. Research and development costs Research and development costs are
expensed as incurred and includes salaries and employee-related expenses, overhead expenses, material and third-party contractor’s
charges.
m. Income taxes Income taxes are accounted for using
the asset and liability approach under ASC-740, “Income Taxes” (“ASC-740”). The asset and liability approach
require the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future
tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred
tax liabilities and assets is based on provisions of the relevant tax law. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. ASC-740 also clarifies the accounting
and reporting for uncertainties in income tax. ASC-740 prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.
n. Legal contingencies From time to time, the Company becomes
involved in legal proceedings or is subject to claims arising in its ordinary course of business. Such matters are generally subject
to many uncertainties and outcomes are not predictable with assurance. The Company accrues for contingencies when the loss is probable,
and it can reasonably estimate the amount of any such loss. The Company is currently not a party to any material legal or administrative
proceedings and, is not aware of any material pending or threatened material legal or administrative proceedings against the Company.
o. Loss per share Basic loss per share is computed
by dividing net loss attributable to ordinary stockholders of the Company, by the weighted average number of shares of common stock
as described below. In computing the Company’s
diluted earnings per share, the numerator used in the basic earnings per share computation is adjusted for the dilutive effect,
if any, of the Company’s potential shares of common stock. The denominator for diluted earnings per share is a computation
of the weighted-average number of ordinary shares and the potential dilutive shares of common stock outstanding during the period. The loss per share information in
these consolidated financial statements is reflected and calculated as if the Company had existed since January 1, 2018. Accordingly,
loss per share for all periods was calculated based on the number of shares retroactively adjusted for the exchange ratio determined
in the reverse recapitalization (see also note 3).
p. Leases The Company adopted the new accounting
standard Accounting Standards Codification 842 “Leases,” and all the related amendments, on January 1, 2019 and used
the standard’s effective date as the Company’s date of initial application. Consequently, financial information was
not updated and the disclosures required under the new standard are not provided for dates and periods before January 1, 2019.
The new standard also provides practical expedients for an entity’s ongoing accounting. The adoption of this standard did
not have a material effect on the Company’s financial statements. On January 1, 2019, the Company recognized ROU assets of
approximately USD 19 thousand and lease liabilities of approximately USD 19 thousand for its operating leases of real estate and
vehicles. The Company has elected the short-term lease exception for leases with a term of 12 months or less. As part of this election
it will not recognize right-of-use assets and lease liabilities on the balance sheet for leases with terms less than 12 months.
See also note 12.
q. Recently Issued Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU
2016-13 “Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments” that
supersedes the existing impairment model for most financial assets to a model that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 requires
an entity to recognize an impairment allowance equal to its current estimate of all contractual cash flows the entity does not
expect to collect. ASU 2016-13 also requires that credit losses relating to available-for-sale debt securities will be recorded
through an allowance for credit losses. The guidance will be effective for Smaller Reporting Companies (SRCs, as defined
by the SEC) for the fiscal year beginning on January 1, 2023, including interim periods within that year. We are currently
evaluating this guidance to determine the impact it may have on our consolidated financial statements. |
