Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s
Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of our balance sheets, statements
of comprehensive loss and cash flows for the three and six months ended June 30, 2018. This section should be read in conjunction
with our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the SEC on March 29, 2018 and amended on
June 5, 2018 (the “2017 Form 10-K”) and our accompanying unaudited interim consolidated financial statements and notes
to these financial statements. All amounts are in U.S. dollars and rounded to thousands of U.S dollars, except for share and per
share data.
Forward-Looking
Statement Notice
This
unaudited quarterly report on Form 10-Q contains forward-looking statements, about our expectations, beliefs or intentions regarding,
among other things, our product development efforts, business, financial condition, results of operations, strategies or prospects.
In addition, from time to time, our representatives have made or may make forward-looking statements, orally or in writing. Forward-looking
statements can be identified by the use of forward-looking words such as “believe,” “expect,” “intend,”
“plan,” “may,” “should” or “anticipate” or their negatives or other variations
of these words or other comparable words or by the fact that these statements do not relate strictly to historical or current
matters. These forward-looking statements may be included in, but are not limited to, various filings made by us with the United
States Securities and Exchange Commission, or the SEC, press releases or oral statements made by or with the approval of one of
our authorized executive officers. Forward-looking statements relate to anticipated or expected events, activities, trends or
results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements
are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results
expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially
from the activities and results anticipated in forward-looking statements, including, but not limited to, those set forth in our
2017 Form 10-K.
This
report identifies important factors which could cause our actual results to differ materially from those indicated by the forward-looking
statements, particularly those set forth under Item 1A. “Risk Factors” as disclosed in our 2017 Form 10-K.
Such
risk factors are not necessarily all of the important factors that could cause actual results to differ materially from those
expressed in any of our forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance
on such forward-looking statements.
Factors
that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include,
but are not limited to:
|
●
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we
have substantial debt which may adversely affect us by limiting future sources of financing, interfering with our ability
to pay interest and principal on our indebtedness and subjecting us to additional risks;
|
|
●
|
we need to raise
additional capital to meet our business requirements in the future, and such capital raising may be costly or difficult to
obtain and will dilute current stockholders’ ownership interests;
|
|
●
|
our current pipeline
is based on a single compound known as LO2A (“LO2A”) and on the continuation of our license to commercialize LO2A;
|
|
●
|
our inability to
expand our rights under our LO2A License Agreement may have a detrimental effect on our business;
|
|
●
|
the initiation,
timing, progress and results of our preclinical studies, clinical trials and other product candidate development efforts;
|
|
●
|
our ability to advance
our product candidate into clinical trials or to successfully complete our preclinical studies or clinical trials;
|
|
●
|
our receipt of regulatory
approvals for our product candidate, and the timing of other regulatory filings and approvals;
|
|
●
|
the clinical development, commercialization
and market acceptance of LO2A;
|
|
●
|
our ability to establish and maintain corporate
collaborations;
|
|
●
|
the implementation
of our business model and strategic plans for our business and product candidate;
|
|
●
|
the scope of protection
we are able to establish and maintain for intellectual property rights covering LO2A and our ability to operate our business
without infringing the intellectual property rights of others;
|
|
●
|
estimates of our expenses, future revenues,
and capital requirements;
|
|
●
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competitive companies, technologies and our
industry; and
|
|
●
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statements as to the impact of the political
and security situation in Israel on our business.
|
All
forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this report and are
expressly qualified in their entirety by the cautionary statements included in this report. We undertake no obligations to update
or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence
of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties.
Description
of Business
On
May 21, 2017, we entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”), with Bufiduck
Ltd., a company formed under the laws of the State of Israel and our wholly owned subsidiary (“Merger Sub”) and Wize
Israel, which contemplated the merger of Merger Sub with and into Wize Israel, with Wize Israel continuing as the surviving entity
and becoming our wholly owned subsidiary (the “Merger”). On November 16, 2017, we were renamed “Wize Pharma,
Inc.,” and completed our transaction with Wize Israel in accordance with the terms of the Merger Agreement pursuant to which
Merger Sub merged with and into Wize Israel, with Wize Israel surviving as our wholly owned subsidiary. Prior to the Merger, we
had no active business and were a “shell company” as such term is defined in Rule 12b-2 under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). As a result of the Merger, we have ceased to be a “shell company”
and the business of Wize Israel became our ongoing business.
Wize
Israel was deemed to be the accounting acquirer in the Merger. Accordingly, the historical results of Wize Israel prior to the
Merger are now presented as the historical results of the Company.
We
are a clinical-stage biopharmaceutical company currently focused on the treatment of ophthalmic disorders, including dry eye syndrome
(“DES”). We have in-licensed certain rights to purchase, market, sell and distribute a formula known as LO2A,
a drug developed for the treatment of DES, and other ophthalmological illnesses, including Conjunctivochalasis (“CCH”)
and Sjögren’s syndrome (“Sjögren’s”).
LO2A
is currently registered and marketed by its inventor in Germany and Switzerland for the treatment of DES, in Hungary for the treatment
of DES and CCH and in the Netherlands for the treatment of DES and Sjögren’s.
We
intend to market LO2A as a treatment for DES and other ophthalmic inflammations, including CCH and Sjögren’s in the
United States, Israel, Ukraine and the People’s Republic of China (“China”) in the territories that we have
licensed LO2A, and in additional territories, subject to purchasing the rights to market, sell and distribute LO2A in those additional
territories. We believe that the potential for the most economic success is in marketing LO2A for treating CCH and Sjögren’s.
Currently, we have a distribution agreement for marketing in Israel, where LO2A is approved for the treatment of DES only, a distribution
agreement for marketing in Ukraine, where LO2A is in the approval process for the treatment of DES and CCH, and a distribution
agreement for distribution in China, where the preparation for the registration process commenced in December 2017 by the Chinese
distributor. The registration process in certain countries, including the United States, requires us to conduct additional clinical
trials, in addition to the Phase II and Phase IV clinical trials that we are currently conducting.
We
plan to engage local or multinational distributors to handle the distribution of LO2A. In particular, we intend to engage, subject
to obtaining the requisite rights in LO2A, pharmaceutical companies or distributors around the world with relevant marketing capabilities
in the pharmaceutical field, in order for such pharmaceutical companies to sell LO2A, with us prioritizing those territories where
we may expedite the registration process of LO2A based on existing knowledge and studies previously conducted on LO2A, without
requiring additional studies.
In August 2016, we
commenced the Multi-Center Trial, which is a Phase II randomized, double-blind, placebo-controlled, clinical trial, in parallel
groups which is intended for the repeated confirmation of the effectiveness and safety of LO2A for patients suffering from moderate
to severe CCH. The trial is a multi-center trial in five different medical centers in Israel. As of June 30, 2018, all the 62
patients finished their three months treatment time. We believe that we currently have sufficient funds to complete the Multi-Center
Trial, and expect results by the end of 2018.
In
February 2018, we received Institutional Review Board (IRB) approval for the protocol of our Phase IV Study. The Phase IV Study
will take place in Israel and will evaluate the safety and efficacy of LO2A for symptomatic improvement of DES in 60 adult patients
with Sjögren’s. Enrolled patients will be randomized in a 1:1 ratio to one of two treatment groups, LO2A or Systane
®
Ultra UD. Drops will be administered topically to the eye over a three month period. This Phase IV Study is designed to
support our clinical approval pathway for LO2A for the treatment of DES in patients with Sjögren’s within certain markets
including the U.S., China, Ukraine and Israel. We enrolled our first patient in the Phase IV Study in the end of March 2018. We
currently do not have sufficient funds to complete the Phase IV Study. The completion of such study is contingent upon our ability
to raise additional funds.
We have not generated
any revenues from operations since our inception and although we anticipate generating some immaterial revenue in Israel during
the second half of 2018, we do not currently expect to generate any significant revenues for the foreseeable future, primarily
because LO2A is still in early clinical stage development in the markets and for the indications we are currently targeting. Our
operating expenses have increased from $712,000 in the six months ended June 30, 2017 to $1,805,000 in the six months ended June
30, 2018. We will require significant additional capital and, assuming we will have sufficient liquidity resources, we anticipate
we will incur significantly higher costs in the foreseeable future, in order to finance our current strategic plans, including
the conduct of ongoing and future clinical trials as well as further research and development.
Results
of Operations - Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
(299,000
|
)
|
|
|
(181,000
|
)
|
General and administrative
|
|
|
(1,506,000
|
)
|
|
|
(531,000
|
)
|
Total operating costs
|
|
|
(1,805,000
|
)
|
|
|
(712,000
|
)
|
Financial income (expense), net
|
|
|
832,000
|
|
|
|
(624,000
|
)
|
Net loss
|
|
$
|
(973,000
|
)
|
|
|
(1,336,000
|
)
|
Revenues
We
did not generate any revenues from operations during the six months ended June 30, 2018 and 2017. We had no revenues primarily
because (1) from the time of the Creditors’ Arrangement (as defined below) of Wize Israel in February 2015 until May 2015,
when we (through Wize Israel) entered into the LO2A License Agreement, Wize Israel did not conduct any business operations and
(2) thereafter, currently, Wize Israel is engaged primarily in research and development. Pursuant to the LO2A License Agreement,
Wize Israel is required to pay Resdevco certain royalties for sales in the licensed territories based on an agreed-upon price
per unit of either $0.60, in the United States, Israel and Ukraine, or in the low single digits of US Dollars, in the People’s
Republic of China, payable on a semi-annual basis, subject to making certain minimum royalty payments as set forth in the LO2A
License Agreement.
Operating
Expenses
Research
and development expenses.
Research and development expenses were $299,000 for the six months ended June 30, 2018, compared
to $181,000 for the six months ended June 30, 2017, an increase of $118,000 or 65%. The increase in research and development expenses
is primarily related to additional expenses related to clinical trials.
General and administrative
expenses.
General and administrative expenses were $1,506,000 for the six months ended June 30, 2018, compared to $531,000
for the six months ended June 30, 2017, an increase of $975,000 or 183%. The increase in general and administrative expenses during
these periods is primarily related to increases in investor’s relationship expense of $130,000, increase in professional
and legal services of $97,000, increase in expenses related to issuance of RSU’s to Company’s officers and directors
of $471,000 and stock-based compensation expense of $150,000.
Financial
Income (expense), Net
. Financial income (expense), net was $832,000 for the six months ended June 30, 2018 compared to financial
expense, net of $(624,000) for the six months ended June 30, 2017, a change of $1,456,000 or 133%. The decrease in financial expenses
during this period is primarily related to the change in the fair value of derivative liability for Investment Rights of $246,000
(this change resulted in a financial expense of $246,000 during the three months ended March 31, 2017 compared to no such expense
in 2018) and amortization of premium related to convertible loans of $892,000 which we did not have in the six month period ended
June 30, 2017.
Net Loss
. As
a result of the foregoing, we incurred a net loss of $973,000 for the six months ended June 30, 2018 compared to a net loss of
$1,336,000 for the six months ended June 30, 2017, a decrease in the net loss of $363,000 or 27.2%.
Results
of Operations -Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017
|
|
Three
Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Research and development
|
|
$
|
(89,000
|
)
|
|
|
(100,000
|
)
|
General and administrative
|
|
|
(1,180,000
|
)
|
|
|
(214,000
|
)
|
Total operating costs
|
|
|
(1,269,000
|
)
|
|
|
(314,000
|
)
|
Financial income (expense), net
|
|
|
401,000
|
|
|
|
(348,000
|
)
|
Net loss
|
|
$
|
(868,000
|
)
|
|
|
(662,000
|
)
|
Operating
Expenses
Research
and development expenses.
Research and development expenses were $89,000 for the three months ended June 30, 2018, compared
to $100,000 for the three months ended June 30, 2017, a decrease of $11,000 or 11%. The decrease in research and development expenses
is considered not material.
General and administrative
expenses.
General and administrative expenses were $1,180,000 for the three months ended June 30, 2018, compared to $214,000
for the three months ended June 30, 2017, an increase of $966,000 or 451%. The increase in general and administrative expenses
during these periods is primarily related to increases in professional and legal services, increase in expenses related to issuance
of RSU’s to Company’s officers and directors and share-based compensation expense.
Financial
Income (expense), Net
. Financial income (expense), net was $401,000 for the three months ended June 30, 2018 compared to financial
expense, net of $(348,000) for the three months ended June 30, 2017, a change of $749,000 or 214.6%. The decrease in financial
expenses during this period is primarily related to the amortization of BCF, proceeds allocated to the derivative liability and
debt issuance costs for convertible loans of $361,000 (compared to no such expense in 2018) and amortization of premium related
to convertible loans of $446,000 which we did not have in the three month period ended June 30, 2017.
Net Loss
. As
a result of the foregoing, we incurred a net loss of $868,000 for the three months ended June 30, 2018 compared to a net loss of
$662,000 for the three months ended June 30, 2017, an increase in the net loss of $206,000 or 131.1%.
Liquidity
and Capital Resources
General
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise
operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts
receivable and accounts payable and capital expenditures. Since the court-approved Creditors Arrangement (as defined below) completed
in February 2015, as described below, we financed our operations primarily through equity and convertible debt financings in private
placements, as described below.
Working
Capital and Cash Flows
As
of June 30, 2018 and December 31, 2017, we had $427,000 and $215,000 in cash and cash equivalents, respectively.
As of June 30, 2018
and December 31, 2017, we had $2,339,000 and $3,204,000, respectively, of outstanding loans, including accrued interest and net
of discounts (or premium), all of which relates to convertible loans, as described below. However, the aggregate principal amount
of such loans is $1,353,000 (not including interest).
As of June 30, 2018
and December 31, 2017, we had ($2,272,000) and ($3,103,000) of working capital (deficit), respectively. As of June 30, 2018, we
had an accumulated deficit of $27,399,000. The decrease in working capital deficit was primarily due to the exercise by Ridge Valley
Corporation (“Ridge”), Rimon Gold Assets Ltd. (“Rimon Gold”), Shimshon Fisher (“Fisher”), Simcha
Sadan (“Sadan”) of PIPE Warrants and Investment Rights as more fully described below and due to amortization of premium
related to convertible loans.
The
following table presents the major components of net cash flows (used in) provided by operating, investing and financing activities
for the periods presented:
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(1,014,000
|
)
|
|
$
|
(595,000
|
)
|
Net cash provided by (used in) investing activities
|
|
$
|
169,000
|
|
|
$
|
(2,000
|
)
|
Net cash provided by financing activities
|
|
$
|
1,057,000
|
|
|
$
|
830,000
|
|
Six
Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
For the six months
ended June 30, 2018 and 2017, net cash used in operating activities was $(1,014,000) and $(595,000), respectively. The increase
in net cash used in operating activities was mainly due to a decrease in net loss of $363,000 and an increase in stock-based compensation
of $747,000, which were mitigated by amortization of a premium related to convertible loans of $892,000.
For the six months
ended June 30, 2018 and 2017, net cash used in investing activities was $169,000 and $(2,000), respectively. The increase in net
cash provided by investing activities was mainly due to investment in restricted bank deposit and from proceeds from sale of marketable
equity securities.
For the six months
ended June 30, 2018 and 2017, net cash provided by financing activities was $1,057,000 and $830,000, respectively. Cash was provided
in the six months ended June 30, 2018 by proceeds of $861,000 that were received from the exercise of certain convertible securities
by Ridge, Rimon Gold and Sadan and from receipt on account of stock of $196,000. On March 26, 2018, Rimon Gold exercised a portion
of their 2016 Investment Right (as defined below) and received 217,442 shares of Common Stock in exchange for approximately $284,000.
On March 26, 2018, Ridge exercised a portion of their 2017 Investment Right (as defined below) and received 213,524 shares of
Common Stock in exchange for approximately $284,000. On March 26, 2018, Sadan exercised a portion of his warrants to purchase
(as adjusted based on an exchange ratio of each ordinary share of Wize Israel issued and outstanding converted into 4.1445791236989
shares of the Company’s Common Stock (the “Exchange Ratio”)) an aggregate of 904,036 shares of our Common Stock
at an exercise price of $1.9728 (the “PIPE Warrants”), which PIPE Warrants were granted on November 16, 2017 and was
issued 144,168 shares of our Common Stock in exchange for approximately $0.3 million. On February 22, 2018, we received notices
from certain lenders to exercise 2017 Investment Rights to purchase an aggregate of 213,524 shares of Common Stock for $284,000.
In April and May, 2018, the Company received the aggregate exercise price of approximately $196,000 on account of stock to be
issued. In July 2018, the Company received an additional $88,000 representing the remaining portion of the exercise price related
to the exercise notice discussed above, and issued 213,524 shares of Common stock.
Cash was provided in
the six month period ended June 30, 2017 primarily by net proceeds from issuance of convertible loan, net of issuance costs of
$614,000 and from proceeds on account of shares $134,000.
Outlook
According to management
estimates, liquidity resources as of June 30, 2018 will not be sufficient to maintain our planned level of operations for the
next 12 months. In particular, we intend to seek the agreement of the lenders to convert convertible loans into shares before
the maturity date (on December 31, 2018) and to raise additional funding. However, for a long-term solution, we will need to seek
additional capital for the purpose of implementing our business strategy and managing our business and developing drug candidates.
Conducting clinical trials and commercializing products is expensive and we will need to raise substantial additional funds to
achieve our strategic objectives. We have not yet generated any revenues from our current operations, and therefore we are dependent
upon external sources for financing our operations. We will require significant additional financing in the near future. Additional
financing may not be available on acceptable terms, if at all. Our future capital requirements as well as the ability to obtain
financing will depend on many factors, including those listed under Item 1A - “RISK FACTORS – Risks Related to our
Business,” in our 2017 Form 10-K. As of June 30, 2018, we had an accumulated deficit and a stockholders’ deficit.
In addition, during the six months ended June 30, 2018 and 2017, we reported losses and negative cash flows from operating activities.
Our management considered the significance of such conditions in relation to our ability to meet our current and future obligations
and determined that such conditions raise substantial doubt about each our ability to continue as a going concern.
We
currently have no agreements, arrangements, or understandings with any person to obtain funds through bank loans, lines of credit,
or any other sources. Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through
debt or equity financings, or by out-licensing our distribution rights. We cannot be certain that additional funding will be available
to us on acceptable terms, or at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate
one or more of our commercialization efforts.
We
are addressing our liquidity issues by implementing initiatives to raise additional funds as well as other measures that we believe
will allow us to continue as a going concern. Such initiatives may include monetizing of our assets, including the sale of the
Can-Fite BioPharma Ltd. shares that we currently own that are presented as marketable equity securities in the accompanying unaudited
interim consolidated financial statements.
Principal
Financing Activities.
The following is a summary of the equity and debt financings conducted by Wize Israel since the
Creditors’ Arrangement (as defined below):
In
December 2014, an Israeli court approved a creditors’ arrangement under the Israeli Companies Law between Wize Israel (then
known as Star Night Technologies Ltd.), its creditors and its shareholders (the “Creditors’ Arrangement”), in
which Wize Israel was purchased by a group of investors led by Ridge. Upon the completion of the Creditors’ Arrangement,
all of Wize Israel’s assets, rights and obligations were transferred to the creditors’ arrangement fund, so that Wize
Israel’s equity after the approval of such arrangement was zero and Wize Israel remained a public shell company without
any activity, rights or obligations. The Creditors’ Arrangement was completed in February 2015. In connection with the Creditors’
Arrangement, on February 15, 2015, Wize Israel issued 692,307 ordinary shares of Wize Israel, in the aggregate, to Ridge, Yaakov
Zarachia (“Zarachia”), Avner Arazi (“Arazi”) and Amir Bramli (“Bramli”, and together with
Ridge, Zarachia and Arazi, the “2015 Investors”), in exchange for their purchase of the public shell for NIS 1,800,000
(approximately $463,000). In addition, on April 7, 2015, for no consideration, the 2015 Investors provided Wize Israel with a
capital amount of NIS 4,056,000 (approximately $1,044,000) in cash.
As of June 30, 2018,
we (through Wize Israel) had a total principal and accrued interest balance of approximately $1.4 million of loans outstanding
under the convertible loans described below, of which (1) Ridge extended a principal amount of NIS 1.0 million (approximately
$270,000), (2) Rimon Gold extended a principal amount of NIS 3.0 million (approximately $811,000), and (3) Fisher (not affiliated,
to Wize Israel’s knowledge, with Ridge or Rimon Gold) extended a principal amount of NIS 1.0 million (approximately $270,000).
Below is a summary of the material provisions of these loan agreements.
The
2016 Loan.
On March 20, 2016, Wize Israel entered into a convertible loan (as amended on March 30, 2016 and December
21, 2017, the “2016 Loan Agreement”) with Rimon Gold, whereby Rimon Gold extended a loan in the principal amount of
up to NIS 2 million (approximately $519,000), which bears interest at an annual rate of 4% (the “2016 Loan”). Pursuant
to the 2016 Loan Agreement, as modified by the 2017 Loan Agreement (as defined below) and the 2017 Loan Amendment (as defined
below), both described below, the 2016 Loan has a maturity date of December 31, 2018.
Under
the 2016 Loan Agreement, Rimon Gold had the right, at its sole discretion, to convert any outstanding portion of the 2016 Loan,
but not less than NIS 100,000 (approximately $26,000), into Wize Israel ordinary shares at a conversion price per share of NIS
15.2592 (approximately $3.84), subject to adjustments for stock splits and similar events set forth in the 2016 Loan Agreement.
As a result of the Merger and based on the Exchange Ratio, the conversion price per share for the 2016 Loan was adjusted to NIS
3.60 (approximately $0.96). As a result of the 2017 Loan Amendment (as defined below), the aggregate principal amount of the 2016
Loan is $531,067 and the conversion price per share for the 2016 Loan was adjusted to $0.9768.
In
order to secure its obligations and performance pursuant to the 2016 Loan Agreement, Wize Israel recorded a first priority fixed
charge in favor of Rimon Gold on all of Wize Israel’s rights, including its distribution rights, under the LO2A License
Agreement, and a first priority floating charge on all of Wize Israel’s rights, title and interest in all of its assets,
as they may exist from time to time (the agreements relating to such charges being referred to as the “Security Agreements”).
Rimon
Gold is entitled, under certain circumstances, to demand repayment of the 2016 Loan, including among others: (i) if Wize Israel
breaches or fails to perform or is shown to have made a false statement, under the 2016 Loan Agreement or the Security Agreements;
(ii) any failure of Wize Israel to make a timely payment; (iii) upon the appointment of a receiver; (iv) the imposition of a lien
on a material asset of Wize Israel; (v) if Wize Israel files a motion to stay proceedings; (vi) upon the expiration or termination
of the LO2A License Agreement or if any party is in material breach of the LO2A License Agreement or if any party notifies the
other of its intention to terminate the LO2A License Agreement; (vii) an adverse material change; and (viii) upon the non-performance
of Wize Israel pursuant to the 2017 Loan Agreement (as defined below) described below. We believe that we have complied with the
aforementioned covenants through June 30, 2018.
The
2016 Loan Agreement and the Security Agreements contain a number of other restrictive covenants that limit Wize Israel’s
operating flexibility. These covenants include, among other things, limitations on the creation of liens; on the incurrence of
indebtedness; on dispositions of assets, mergers, acquisitions and other change of control transactions; on changes in the general
nature of Wize Israel’s business; restrictions on payments to related parties; restrictions on conducting rights offerings,
and on the distribution of dividends. We believe that we have complied with the aforementioned covenants through June 30, 2018.
In
addition, under the 2016 Loan Agreement, as modified by the 2017 Loan Agreement (as defined below) and the 2017 Loan Amendment
(as defined below), Rimon Gold has the right, until June 30, 2019, to invest up to $796,601, in the aggregate, at an agreed price
per share, which was adjusted based on the Exchange Ratio from NIS 20.4 (approximately $6.00) to NIS 5.04 (approximately $1.44)
and based on the 2017 Loan Amendment (as defined below), from NIS 5.04 to a fixed price of $1.308 (subject to adjustments in case
of stock splits or similar events) (the “2016 Investment Right”). See
“-December 2017 Loan Amendment
”
below.
The
2017 Loan
. On January 15, 2017, Wize Israel entered into the 2017 Loan Agreement (as amended on December 21, 2017, the “2017
Loan Agreement”) with Ridge, and, by way of entering into assignments and assumption agreements following such date, also
with Rimon Gold and Fisher (together, the “2017 Lenders”), whereby each of the lenders extended a loan in the principal
amount of up to NIS 1 million (approximately $283,000) and in the aggregate principal amount of up to NIS 3 million (approximately
$850,000), which bears interest at an annual rate of 4% (the “2017 Loan”, and together with the 2016 Loan, the “Loans”)).
Pursuant to the 2017 Loan Agreement and the 2017 Loan Amendment, the 2017 Loan has a maturity date of December 31, 2018.
Under
the 2017 Loan Agreement, each of the 2017 Lenders had the right, at its sole discretion, to convert any outstanding portion of
the 2017 Loan, but no less than NIS 100,000 (approximately $28,000), that the lender provided to Wize Israel (each such portion
converted, the into Wize Israel ordinary shares at a conversion price per share equal to the lower of (1) NIS 24 (approximately
$6.72) and (2) the lowest price per share of Wize Israel in any offering made by Wize Israel following the date of the 2017 Loan
Agreement and through the date of such requested conversion, subject to adjustments for stock splits and similar events set forth
in the 2017 Loan Agreement (the “2017 Loan Conversion Price”). As a result of the 2017 PIPE (as defined below), the
2017 Loan Conversion Price for Rimon Gold, Fisher and Ridge was adjusted to NIS 16.80 (approximately $4.80), and as a result of
the Merger, the 2017 Loan Conversion Price of NIS16.80 (approximately $4.80) was adjusted in accordance with the Exchange Ratio
to NIS 4.05 (approximately $1.15). As a result of the 2017 Loan Amendment, the aggregate principal amount of the 2017 Loan is
$822,144 and the 2017 Loan Conversion Price was adjusted to a fixed price of $1.1112. See
“-December 2017 Loan Amendment
”
below.
In
addition, under the 2017 Loan Agreement, as modified by the 2017 Loan Amendment, the 2017 Lenders had the right, until June 30,
2019, to invest up to $1,233,216, in the aggregate, at an agreed price per share equal to 120% of the applicable 2017 Loan Conversion
Price, which was adjusted based on the 2017 Loan Amendment, to a fixed exercise price of $1.332 (subject to adjustments in case
of stock splits or similar events) (the “2017 Investment Right” and, together with the 2016 Investment Right, the
“Investment Rights”). See
“-December 2017 Loan Amendment
” below.
Ridge
is entitled, under certain circumstances, to demand repayment of the 2017 Loan, including: (i) if Wize Israel breaches or fails
to perform or is shown to have made a false statement, under the 2017 Agreement or the Security Agreements; (ii) any failure of
Wize Israel to make a timely payment; (iii) upon the appointment of a receiver; (iv) the imposition of a lien on a material asset
of Wize Israel; (v) if Wize Israel files a motion to freeze proceedings; and (vi) an adverse material change. We believe that
we have complied with the aforementioned covenants through June 30, 2018.
The
2017 Loan contains a number of restrictive covenants that limit Wize Israel’s operating flexibility. These covenants include,
among other things, limitations on the creation of liens; on the incurrence of indebtedness; on dispositions of assets, mergers,
acquisitions and other change of control transactions; on changes in the general nature of Wize Israel’s business; restrictions
on payments to related parties; and on the distribution of dividends. Wize Israel has complied with the aforementioned covenants
through the date of this Quarterly Report.
It
should be noted that, prior to entering into the 2017 Loan Agreement, Ridge provided the following three loans to Wize Israel,
all of which bore interest at an annual rate equal to the interest rates of the Israeli government bonds: (1) NIS 250,000 was
extended in November 2016, (2) NIS 300,000 was extended in December 2016 and (3) NIS 200,000 was extended in February 2017 (together,
the “Ridge Interim Loans”). On March 30, 2017, after Ridge already provided NIS 250,000 under the 2017 Loan Agreement
out of the NIS 1 million committed by Ridge thereunder, Ridge exercised its right to have the Ridge Interim Loans treated as a
portion of the remaining NIS 1 million.
In
addition, as part of the 2017 Loan Agreement, Wize Israel and the other lenders agreed that (1) the security interests made under
the Security Agreements will also serve to secure the loans made by Rimon Gold under the 2017 Loan Agreement, and (2) Rimon Gold
will have the right to be repaid the full 2016 Loan prior to any repayment of the 2017 Loan.
December
2017 Loan Amendment
. On December 21, 2017, we entered into an amendment (the “2017 Loan Amendment”) to the 2016
Loan Agreement and the 2017 Loan Agreement. Pursuant to the 2017 Loan Amendment, (i) the maturity date of the Loans was extended
from December 31, 2017 to December 31, 2018; (ii) the exercise period of the 2016 Investment Right was amended so that it shall
expire on June 30, 2019; (iii) the exercise period of the 2017 Investment Right was amended so that it shall expire, without the
need to first convert the 2017 Loan, on June 30, 2019; and (iv) the below terms of the Loans were amended to be denominated in
U.S. dollars instead of NIS:
|
|
2016
Loan
|
|
|
2017
Loan
|
|
Aggregate Principal Amount
|
|
$
|
531,067
|
|
|
$
|
822,144
|
*
|
Conversion Price Per Wize US Share
|
|
$
|
0.9768
|
|
|
$
|
1.1112
|
|
Aggregate Maximum Investment Right
|
|
$
|
796,601
|
|
|
$
|
1,233,216
|
**
|
Exercise Price of Investment Right
|
|
$
|
1.308
|
|
|
$
|
1.332
|
|
*
|
Principal loan amount
of $274,048 for each of the three 2017 Lenders.
|
**
|
Maximum Investment
Right of $411,072 for each of the three 2017 Lenders.
|
Rimon
Gold and Ridge Consents to the Merger Agreement
. In connection with the Merger Agreement, Wize Israel sought and obtained
the written consents of Rimon Gold and Ridge to the transactions contemplated by the Merger Agreement. The consent provided by
Rimon Gold provided that it is based upon, among other things, the following obligations: (1) following the closing of the Merger
Agreement, we will assist Rimon Gold with its filing requirements, if any, with the SEC with respect to beneficial ownership and
similar reports; and (2) at closing of the Merger Agreement, we will execute and deliver to Rimon Gold an Irrevocable Guaranty
and Undertaking (the “Wize Guaranty”), which we executed and delivered to Rimon Gold.
Under
the Wize Guaranty, we irrevocably guarantee Wize Israel’s obligations to Rimon Gold under certain convertible loans. In
addition, the Wize Guaranty contains a number of restrictive covenants that limit our operating flexibility. These covenants include,
among other things, limitations on the creation of liens; on the incurrence of indebtedness; on dispositions of assets, mergers,
acquisitions and other change of control transactions; on changes in the general nature of our business; and on the distribution
of dividends. Wize Israel has complied with the aforementioned covenants through the date of this Quarterly Report.
2017
PIPE
. On June 23, 2017, Wize Israel entered into a Private Placement Agreement (the “2017 PIPE Agreements”) with
each of Yosef Eliyahu Peretz (“Peretz”), Zarachia, Sadan and Jonathan Brian Rubini (“Rubini”, and together
with Peretz, Zarachia and Sadan, the “2017 PIPE Investors”). Pursuant to the 2017 PIPE Agreements, the 2017 PIPE Investors
invested a total of up to NIS 3.49 million (approximately $1 million) in exchange for a total of 207,739 ordinary shares of Wize
Israel, at a price per share of NIS 16.8 (approximately $4.8), with Peretz investing NIS 490,000 (approximately $139,000) in exchange
for the private placement of 29,167 ordinary shares of Wize Israel (the “Peretz Financing”) and each of Zarachia,
Sadan and Rubini (the “Other Investors”) investing NIS 1 million (approximately $282,000) in exchange for the private
placement of 59,524 ordinary shares of Wize Israel each (together, the “Other Financing”, and together with the Peretz
Financing, the “2017 PIPE”). At the effective time of the Merger, the 207,739 ordinary shares of Wize Israel
that were issued to the 2017 PIPE Investors as part of the 2017 PIPE were automatically cancelled and converted, based on the
Exchange Ratio, into an aggregate of 860,987 shares of our Common Stock.
Subject
to the closing of the Merger, Wize Israel also undertook to cause us to grant PIPE Warrants to each of the 2017 PIPE Investors,
with each PIPE Warrant being exercisable into one share of our Common Stock, with a term of three years from the date of grant.
According to the 2017 PIPE Agreements, the number of PIPE Warrants and the exercise price thereof will reflect, prior to giving
effect to an adjustment based on the Exchange Ratio, (i) 30,625 warrants to Peretz and (ii) 62,500 warrants to each of the Other
Investors, each warrant exercisable into one ordinary share of Wize Israel, at an exercise price of NIS 28.8 per share (approximately
$8.40). Based on the Exchange Ratio, Peretz was granted 126,928 PIPE Warrants and each of the Other Investors was granted 259,036
PIPE Warrants, each at an exercise price of $1.9728. Consistent with the foregoing, we executed and delivered the PIPE Warrants
to the 2017 PIPE Investors on November 16, 2017.
On
June 22, 2017, Ridge provided notice to Wize Israel that it had waived its right to adjust the 2017 Loan Conversion Price in connection
with the Peretz Investment. On July 4, 2017, Wize Israel completed the Peretz Investment. However, Ridge did not waive its right
to adjust the 2017 Loan Conversion Price in connection with the Other Investments. On July 31, 2017, at a general meeting of the
shareholders of Wize Israel, the Other Investments was approved and on August 7, 2017 Wize Israel completed the Other Investments.
Off-Balance
Sheet Arrangements
As
of June 30, 2018 and June 31, 2017, we did not have any off-balance sheet arrangements, as such term is defined under Item 303
of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is
material to investors.
Recently
Issued Accounting Pronouncements
For information with
respect to recent accounting pronouncements, see Note 2w to our consolidated financial statements as of December 31, 2017 included
in our 2017 Form 10-K and Note 2b to Q2 2018 Financial Statements.
Critical
Accounting Policies
Our
critical accounting policies are described in the notes to our consolidated financial statements as of December 31, 2017 included
in our 2017 Form 10-K.