NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
1 - GENERAL:
|
|
a.
|
General
Medigus Ltd. (the “Company”) or with its subsidiary (the “Group”) was incorporated in Israel on December
9, 1999 and is resident in Israel. The address of its registered office is P.O. Box 3030, Omer, 8496500.
|
The
Group is a medical device group specializing in developing innovative endoscopic procedures and devices. To date most of the Group’s
research and development activities have been focused in developing and manufacturing of the MUSE endoscopy system (hereinafter
- “MUSE”), a FDA approved system, for the treatment of gastroesophageal reflux disease (GERD). In addition, the Group
uses the technological platform it developed for the purpose of additional special systems and products that are suitable for
both medical and industrial applications.
To
date, the Company continues negotiations to market the MUSE endoscopy system, together with marketing and selling miniature cameras
and related equipment.
The
Company’s shares are listed on the Tel Aviv Stock Exchange Ltd. (“TASE”) and as of May 20, 2015, the Company’s
American Depository Shares (ADSs) evidenced by American Depositary Receipts (ADRs) are listed on the NASDAQ Capital Market.
|
|
b.
|
During
the six months period ended June 30, 2017, the Group incurred a total comprehensive loss of USD 1.2 million and negative cash
flows from operating activities of USD 2.6 million. As of June 30, 2017, the Group had accumulated losses of USD 54.6 million.
Based on the projected cash flows and its cash balances as of June 30, 2017, the Group’s Management is of the opinion that
without further fund raising it will not have sufficient resources to enable it to continue its operating activities including
the development, manufacturing and marketing of its products for a period of at least 12 months from the date of approval
of these financial statements. As a result, there is substantial doubt about the Group’s ability to continue as a going
concern.
|
Management’s
plans include the continued commercialization of their products and securing sufficient financing through the sale of additional
equity securities, debt or capital inflows from strategic partnerships. There are no assurances however, that the Group will be
successful in obtaining the level of financing needed for its operations. If the Group is unsuccessful in commercializing its
products and securing sufficient financing, it may need to reduce activities, curtail or cease operations.
The
financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and the
amounts and classification of liabilities that might be necessary should the Group be unable to continue as a going concern.
NOTE
2 - BASIS FOR PREPARATION OF THE CONDENSED FINANCIAL STATEMENTS:
|
|
a.
|
The
Group’s condensed consolidated financial information as of June 30, 2017, and for the six-month and three-month interim
period ended on that date (hereinafter-“the interim financial information”) has been prepared in accordance with
the guidance of IAS 34 ‘Interim Financial Reporting’ (hereafter – “IAS 34”). The interim financial
information does not include all of the information and disclosures required in annual financial statements. These financial
statements are unaudited but in the opinion of management reflect all adjustments that are of a normal recurring nature that
are considered necessary for a fair statement of the result of operations. The interim financial information should be read
in conjunction with the 2016 annual financial statements and its accompanying notes, which are in compliance with International
Financial Reporting Standards (hereinafter – “IFRS”), which are standards and interpretations issued by
the International Accounting Standards Board. Interim results are not indicative of future or full year results. The financial
statements were approved on September 17, 2017.
|
The
preparation of interim financial statements requires the Group’s management to exercise judgment and also requires use of
accounting estimates and assumptions that affect the application of the Group’s accounting policies and the reported amounts
of assets, liabilities, revenues and expenses. Actual results could differ from those estimates.
In
the preparation of these interim financial statements, the significant judgments exercised by management in the application of
the Group’s accounting policies and the uncertainty involved in the key sources of those estimates were identical to the
ones used in the Group’s annual financial statements for the year ended December 31, 2016.
MEDIGUS
LTD.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
2 - BASIS FOR PREPARATION OF THE CONDENSED FINANCIAL STATEMENTS
(continued)
:
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|
c.
|
New
international financial reporting standards, amendments to standards and new interpretations:
|
|
|
|
|
|
|
|
Standards,
amendments and interpretations to existing standards which are not yet effective and have not been early adopted by the Group:
|
|
|
a.
|
International
Financial Reporting Standard 15 “Revenues from Contracts with Customers” (hereinafter – IFRS 15).
|
IFRS
15 will replace, on its first implementation, the directives on the subject of recognizing revenues existing today under International
Financial Reporting Standards.
The
core principle of IFRS 15 is that revenues from contracts with customers must be recognized in a way that reflects the transfer
of control of goods or services supplied to customers in the framework of the contracts by amounts which reflect the proceeds
that the entity expects that it will be entitled to receive for those goods or services.
IFRS
15 sets forth a single model for recognizing revenues, according to which the entity will recognize revenues according to the
said core principle by implementing five stages:
|
|
(1)
|
Identifying
the contract(s) with the customer.
|
|
|
(2)
|
Identifying
the separate performance obligations in the contract.
|
|
|
(3)
|
Determining
the transaction price.
|
|
|
(4)
|
Allocating
the transaction price to separate performance obligations in the contract.
|
|
|
(5)
|
Recognizing
revenue when (or as) each of the performance obligations is satisfied.
|
The
Standard will be implemented as from annual periods starting January 1, 2018. According to the provisions of IFRS 15 it may
be implemented earlier. The Group is still assessing the impact of the adoption of the new revenue standards on its consolidated
financial statements.
MEDIGUS
LTD.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
3 - SIGNIFICANT ACCOUNTING POLICIES
The
accounting policies adopted in the preparation of the interim financial information are consistent with those followed in the
preparation of the Group’s annual financial statements for the year ended December 31, 2016.
NOTE
4 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
Estimates
of fair value:
The
following is an analysis of the financial instruments measured at fair value, according to valuation methods. Inputs for the asset
or liability that are not based on observable market data (unobservable inputs) (Level 3).
The
following table presents the group’s financial liabilities measured at fair value, net of unrecognized Day 1 Loss:
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
USD in thousands
|
|
|
|
Fair value of warrants
|
|
|
2,138
|
|
|
|
237
|
|
|
|
Unrecognized Day 1 Loss
|
|
|
(617
|
)
|
|
|
-
|
|
|
|
Warrants, net
|
|
|
1,521
|
|
|
|
237
|
|
NOTE
5 - INVENTORY:
Composed
as follows:
|
|
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
USD in thousands
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
Work in progress
|
|
|
189
|
|
|
|
128
|
|
|
|
Finished goods
|
|
|
16
|
|
|
|
70
|
|
|
|
|
|
|
205
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
|
|
Raw materials and supplies
|
|
|
666
|
|
|
|
829
|
|
|
|
Work in progress
|
|
|
125
|
|
|
|
66
|
|
|
|
Finished goods
|
|
|
37
|
|
|
|
39
|
|
|
|
Provision for impairment
|
|
|
(297
|
)
|
|
|
|
|
|
|
|
|
|
531
|
|
|
|
934
|
|
MEDIGUS
LTD.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
6 – EARNING PER SHARE:
Basic
net income (loss) per share is computed by dividing net income (loss) attributable to ordinary shareholders of Medigus Ltd. by
the weighted average number of shares outstanding for the reporting periods.
Diluted
net income (loss) per share is computed by dividing the basic net income (loss) per share including adjustment of the dilutive
effect of the Company’s revaluation of warrants, by the weighted-average number of ordinary shares and the potential dilutive
ordinary shares outstanding during the period. Diluted shares outstanding include the dilutive effect of in-the-money options
using the treasury stock method and presumed share settlement of the Company’s deferred payments liability.
The
following table presents the numerator and denominator of the basic and diluted net income (loss) per share computations for the
three and six months ended June 30, 2017 and 2016:
|
|
|
|
Six months ended
|
|
|
Three months ended
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
USD in thousands, except per share amounts
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Medigus Ltd. for basic loss per share
|
|
|
(1,225
|
)
|
|
|
(5,530
|
)
|
|
|
788
|
|
|
|
(2,783
|
)
|
|
|
Adjustment of revaluation of warrants issued to investors
|
|
|
(501
|
)
|
|
|
-
|
|
|
|
(501
|
)
|
|
|
-
|
|
|
|
Net loss attributable to Medigus Ltd. for diluted income (loss)
|
|
|
(1,726
|
)
|
|
|
(5,530
|
)
|
|
|
287
|
|
|
|
(2,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares – denominator for basic net loss per share
|
|
|
92,356
|
|
|
|
32,047
|
|
|
|
137,672
|
|
|
|
32,047
|
|
|
|
Shares settlement presumed for warrants issued to investors
|
|
|
7,655
|
|
|
|
-
|
|
|
|
13,608
|
|
|
|
-
|
|
|
|
Denominator for diluted loss per share
|
|
|
100,011
|
|
|
|
32,047
|
|
|
|
151,280
|
|
|
|
32,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Medigus Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.01
|
)
|
|
|
(0.17
|
)
|
|
|
0.01
|
|
|
|
(0.09
|
)
|
|
|
Diluted
|
|
|
(0.02
|
)
|
|
|
(0.17
|
)
|
|
|
0.00
|
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEDIGUS
LTD.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
7 - TRANSACTIONS WITH RELATED PARTIES:
Compensation
to key management personnel for employment services which were provided to the Group (including stock based compensation) in the
six-month and three-month period ended June 30, 2017 was USD 265 thousand and USD 188 thousand, respectively (in the six-month
and three-month period ended June 30, 2016 - USD 67 thousand and USD 33 thousand).
NOTE
8 - EQUITY:
|
|
a)
|
On
March 15, 2017, the Group effected a change in the ratio of ordinary shares per ADS from 5 ordinary shares per ADS to 50 ordinary
shares per ADS. The change in the ordinary shares ratio for the ADSs had the same effect as a 1-for-10 reverse stock split
of the ADSs.
|
|
|
b)
|
On
March 28, 2017, the Company allotted in a public issue, a total of 48,985,700 ordinary shares of the Company, a total of 2,142,858
warrants (Series A) for the purchase of an additional 107,142,900 shares and a total 1,163,144 warrants (Series B) for the
purchase of an additional 58,157,200 shares for total cash consideration of approximately USD 7.5 million. Each warrant (Series
A) is exercisable into 50 ordinary shares of the Company at an exercise price of USD 3.50 per warrant during the five years
following the allotment. Each warrant (Series B) is exercisable into 50 ordinary shares of the Company at an exercise price
of USD 0.01 per warrant during the five years following the allotment.
|
Series
A warrants and Series B warrants may, under certain circumstances, also be exercised via a cashless exercise mechanism, whereby
the number of shares the value of which equals the exercise premium in cash will be deducted from the number of shares to be issued
upon exercise of the warrant. In addition, the number of warrants outstanding will be adjusted for certain events specified
in the warrant agreement.
To
the placement agent on this offering the Company issued 150,000 warrants. Each warrant is exercisable into 50 shares in consideration
for an exercise price of USD 4.375 per warrant during the 5 years following the allotment. The warrants may, under certain circumstances,
also be exercised via a cashless exercise mechanism.
These
warrants are classified as financial liabilities measured at fair value through profit or loss at each reporting period, as the
warrants may be net share settled. The warrants are initially recognized at fair value adjusted to defer the difference between
the fair value at initial recognition and the transaction price (“Day 1 profit or loss”), as the Company uses valuation
techniques that incorporate data not obtained from observable markets. Transaction costs allocated to the warrants are recognized
immediately in profit or loss.
Unrecognized
Day 1 profit or loss is amortized over the life of the instrument. Any unrecognized Day 1 profit or loss is immediately recognized
in income statement if fair value of the financial instrument in question can be determined either by using only market observable
model inputs or by reference to a quoted price for the same product in an active market.
Upon
exercise, the carrying amount of the warrants (which is presented net of the related unrecognized Day 1 profit or loss, if any)
is reclassified to equity with no impact on profit or loss.
Net
proceeds from the issuance, net of cash issuance expenses, amounted to approximately USD 6.5 million. Issuance expenses were attributed
to equity and liability in proportion with the allocation of the proceeds.
The
warrants are presented as non-current liabilities, as cash settlement is not required.
During
March 2017, 130,000 warrants (Series B) were exercised. Accordingly, 6,500,000 ordinary shares of the Company were allotted.
During
the second quarter of 2017, 929,155 warrants (Series B) were exercised. Accordingly, 46,455,750 ordinary shares of the Company
were allotted.
Medigus Ltd.
Operating and Financial Review as of June
30, 2017, and for the Three Months then Ended
The information
contained in this section should be read in conjunction with (1) our unaudited condensed consolidated interim financial statements
as of June 30, 2017, and for the six months and three months then ended and related notes included in this report and (2) our audited
consolidated financial statements and related notes for the year ended December 31, 2016, which appears in our Form 20-F filed
with the Securities and Exchange Commission on March 31, 2017, or the annual report, and the other information contained in such
annual report. Factors that could cause our actual results in the future to differ from our expectations or projections include
the risks and uncertainties relating to our business described in our annual report under the heading “Risk Factors.”
Revenues for the three months ended June
30, 2017, were USD 82 thousand, a decrease of USD 16 thousand, or 16%, compared to USD 98 thousand for the three months ended
June 30, 2016. This decrease was primarily due to a decrease in sales to National Aeronautics and Space Administration (NASA)
in the amount of approximately USD 34 thousand during the three months period ended June 30, 2017. Revenues for the six month
ended June 30, 2017, were USD 196 thousand, a decrease of USD 164 thousand, or 46%, compared to USD 360 thousand for the six
months ended June 30, 2016. This decrease was primarily due to a decrease in sales to National Aeronautics and Space
Administration (NASA) in the amount of approximately USD 144 thousand and to one of Israel's leading industrial companies in
the amount of approximately USD 118 thousand during the six months period ended June 30, 2017.
Gross profit for the three months ended June
30, 2017, was USD 53 thousand, a decrease of USD 15 thousand, compared to USD 68 thousand gross profit for the three months ended
June 30, 2016. This decrease was primarily due to the decrease in the company revenues during the three months ended June 30, 2017.
Gross loss for the six months ended June 30, 2017, was USD 177 thousand, a decrease of USD 416 thousand, compared to USD 239 thousand
gross profit for the six months ended June 30, 2016. This decrease was primarily due to an inventory impairment of USD 297 thousand
and a decrease on revenues as described above.
Research and development expenses for the three
months ended June 30, 2017, were USD 615 thousand, a decrease of USD 488 thousand, or 44%, compared to USD 1,103 thousand for the
three months ended June 30, 2016. This decrease was primarily due to a cost reduction program which was implemented by the Company
since the third quarter of 2016. Research and development expenses for the six months ended June 30, 2017, were USD 1,090 thousand,
a decrease of USD 1,223 thousand, or 53%, compared to USD 2,313 thousand for the six months ended June 30, 2016. The reason for
the decrease is similar to the one discussed above in the three-month comparison.
Sales and marketing expenses for the three
months ended June 30, 2017, were USD 236 thousand, a decrease of USD 512 thousand, or 68%, compared to USD 748 thousand for the
three months ended June 30, 2016. This decrease was primarily due to a cost reduction program which was implemented by the Company
since the third quarter of 2016. Sales and marketing expenses for the six months ended June 30, 2017, were USD 382 thousand, a
decrease of USD 1,114 thousand, or 75%, compared to USD 1,496 thousand for the six months ended June 30, 2016. The reason for the
decrease is similar to the one discussed above in the three-month comparison.
General and administrative expenses for the
three months ended June 30, 2017, were USD 550 thousand, decrease of USD 353 thousand, or 39%, compared to USD 903 thousand for
the three months ended June 30, 2016. This decrease resulted primarily due to a decrease in professional fees expenses and the
cost reduction program which was implemented by the Company since the third quarter of 2016. General and administrative expenses
for the six months ended June 30, 2017, were USD 1,939 thousand, a decrease of USD 84 thousand, or 4%, compared to USD 2,023 thousand
for the six months ended June 30, 2016. The reason for the decrease is similar to the one discussed above in the three-month comparison.
Operating loss for the three months ended June
30, 2017, was USD 1,348 thousand, compared to USD 2,686 thousand in the three months ended June 30, 2016. The decrease in operating
loss was due to all of the reasons described above.
Operating loss for the six months ended June
30, 2016, was USD 3,588 thousand, compared to USD 5,593 thousand in the six months ended June 30, 2016. The decrease in operating
loss was due to all of the reasons described above.
Profit from changes in fair value
of warrants issued to investors for the three months ended June 30, 2017, were USD 2,137 thousand, an increase of USD
2,136 thousands compared to the three months ended June 30, 2016. This increase resulted primarily due to the changes in
warrants fair value as of June 30, 2017. Profit from changes in fair value of warrants issued to investors for the six months
ended June 30, 2017, were USD 2,334 thousand, an increase of USD 2,325, compared to the six months ended June 30, 2016. The
reason for the increase is similar to the one discussed above in the three-month comparison.
The Company held USD 7.0 million in cash and
cash equivalents as of June 30, 2017.
Net cash used in operating activities was
USD 1.4 million for the three months ended June 30, 2017, compared to net cash used in operating activities of USD 2.9
million for the corresponding 2016 period. The USD 1.5 million decrease in net cash used in operating activities was
primarily due to a cost reduction program which was implemented by the Company since the third quarter of 2016. Net cash used
in operating activities was USD 2.6 million for the six months ended June 30, 2017, compared to net cash used in operating
activities of USD 5.9 million for the corresponding 2016 period. The USD 3.3 million decrease in net cash used in operating
activities during the six-month period in 2017, compared to the six-month period in 2016 is similar to the one discussed
above in the three-month comparison.