ITEM
1. BUSINESS
Overview
We
are a creator of mobile device measurement solutions that has developed innovative solutions designed to address shortcomings
in multiple verticals, including the e-commerce fashion/apparel, shipping/parcel and do it yourself, or DIY, industries. Utilizing
our sophisticated algorithms within our proprietary technology, we can calculate and record measurements in a variety of novel
ways, and most importantly, increase revenue for businesses across the globe.
Our
solutions can be utilized to accurately take measurements of a variety of items via a mobile device. By downloading the application
to a smartphone, the user is then able to run the mobile device over the surface of an item the user wishes to measure. The information
is then automatically sent to a cloud-based server where the dimensions are calculated through our proprietary algorithms, and
the accurate measurements (+ or - 2 centimeters) are then sent back to the user’s mobile device. We believe that the commercial
applications for this technology are significant in many areas.
Currently,
we are focusing on the following market segments:
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E-commerce
fashion/apparel industry – our main target-market;
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While
we are currently devoting much of our focus on the applications for the e-commerce apparel industry, management believes that
all of the above-mentioned applications will be useful to users, retailers and vendors alike.
Our
Solution
Our
cloud-based software platform provides accurate sizing and measurement with broad applications including the online fashion/apparel
industry, logistics and courier services and home DIY. This proprietary technology is driven by several patented algorithms which
are able to calculate and record measurements in a variety of novel ways. Although specific functionality varies by product, our
core solutions address the need for highly accurate measurements in a variety of consumer friendly, every day uses.
The
following are some select key features:
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Integration
Capability
. We design our solutions to be flexible and configurable, allowing
our clients to match their use of our algorithms and software with their specific business
processes and workflows. Our platform has been organically developed from a common code
base, data structure and user interface, providing a consistent user experience with
powerful features that are easily adaptable to our clients’ needs;
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Intuitive
user experience.
Our intuitive, easy-to-use interface is based on current technology
multiple focus groups and automatically adapts to users’ devices, including mobile
platforms, thereby significantly increasing accessibility of our solutions;
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Big
Data Generation.
While we supply to the user the information he/she requires, we gather certain vital information
such as body measurement and package volume which can be used anonymously to help the retailer acquire predictive size
information on stocking, operations and consumers that may be in between sizes. All this information is being gathered and
stored on our servers where it can be used by retailers;
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White
Label Solution
.
Our solutions can be transformed into white label applications
at an extra cost to any customer that wants to utilize or embed our technology within
their systems; and
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Non-Invasive.
Owing to our unique, non-invasive technology, the smartphone camera is not used
for measurement; all the measurements are recorded by moving the smartphone over the
consumer’s body or package, thus ensuring greater privacy.
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Our
Growth Strategy
We
intend to drive revenue primarily through penetration of the U.S. market in the verticals we are targeting. We intend to pursue
the following growth strategies:
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Sign
Commercial Agreement with Major U.S. Retailer
.
We are in various stages of discussions
with major U.S. retailers for the deployment of our measurement technology with a view
to entering into a commercial agreement. We believe that if we are successful in entering
into a commercial agreement with a major U.S. retailer this will serve as an important
third-party validation of our technology and help accelerate commercial adoption of our
solutions.
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Pursue
a Two-Pronged Commercialization Strategy
.
We are seeking to accelerate adoption
of our solutions both through direct partnerships with e-commerce websites as well as
through third party platform websites. While we seek to directly enter into partnerships
with companies maintaining e-commerce websites in the apparel, courier and DIY markets,
we are also seeking to deploy our solutions on third party platforms. In February 2019,
MySizeID
became available for online retailers utilizing the Shopify platform
and
BoxSizeID
became available on the Honeywell Marketplace.
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Ongoing
Investment in our Technology Platform
.
We intend to continue to invest
in building new software capabilities and extending our platform to bring the power of
accurate measurement to a broader range of applications.
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Grow
our database
. As the usage of our measurement apps increases, our database of
information including user behavior and body measurements generates valuable statistics.
Such data can be used in the big data market for targeted advertising and for blind consumer
data mining.
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The
Markets
The
mass adoption of mobile technologies such as tablets and smartphones has led to a surge of consumer activity online. Tasks that
were once primarily brick-and-mortar – shopping for clothes, shipping a package, or buying supplies for a DIY home renovation
project – have now shifted to digital, as consumers prefer the convenience of shopping anywhere, anytime.
E-commerce’s
meteoric rise has been a boon to retailers who can offer shoppers a simple customer experience through desktop or mobile devices.
According to SaleCycle, in the U.S. e-commerce sales for 2017 were $453.5 billion, an increase of 16% from the year prior. While
many sectors have found ways to increase revenue through e-commerce, e-commerce is still plagued by issues that cut into profits
and negatively impact the bottom line, such as customer returns, low consumer conversion, and associated restocking and shipping costs.
Fashion/Apparel
The
fashion market is one of the fastest growing sectors of online retail – what was already an approximately $332 billion market
in 2016 is projected to increase to over $633 billion in 2021 according to statista. However, conveniences of online shopping,
including simple search filters, the ability to purchase apparel without trying it on, and free returns, have led consumers to
a more free-wheeling buying style that is costing retailers major dollars.
One
of the biggest causes for returns are sizing issues, due in part to a truly universal sizing system that leaves consumers guessing
what size they need or ordering multiple sizes and returning the ones that do not fit, all the retailer’s expense. Research
shows that 30% of all online purchases are returned.
To
address this issue, we have developed an innovative mobile technology for retailers, known as
MySizeID
.
MySizeID
enables
shoppers to generate highly accurate measurements of their body to find proper fitting clothes and accessories, all through the
use of our App on their mobile phone.
MySizeID
syncs the user’s measurement data to a sizing chart integrated through
a retailer’s (or a white labeled) mobile application, and only presents items for purchase that match their measurements
to ensure a correct fit.
MySizeID
is available for license by retailers and download by consumers on both iOS and Android
operating systems.
Shipping/Parcel
According
to Pitney Bowes, parcel revenue in 2017 in 13 major countries around the world was $279 billion or 75 billion parcels with
the number of parcels projected to grow to 100 billion by 2020. In the shipping/parcel industry, the dimensions of a package are
critical. It is not merely the measurement of a package or box – but rather the amount of space that the package or box
will take up on a truck, airplane, or ship that will be transporting the package or box. Far too often, retailers use unfit packaging
for their items, adding additional costs in materials and shipping fees.
To
address this issue for shipping companies, we have developed an innovative mobile technology known as
BoxSizeID
.
BoxSizeID
enables customers to quickly and easily measure the size and volume of a parcel to accurately calculate shipping fees. It
also offers shipping companies a variety of precise logistical data for more efficiently managing their supply chain, providing
them with an accurate way to compare the physical package with what is in the shipping manifest.
BoxSizeID
solution is
available for license on both iOS and Android operating systems.
DIY
Similar
to issues in the apparel and fashion market, big box, hardware, furniture, and DIY stores are plagued by returns due to incorrect
fit and measurements. In an industry where precise measurement for projects is an absolute necessity, e-commerce has not grown
as quickly as in other industries which we believe is due to lack of consumer confidence in measurements at home and buying the
correct item online.
To
address this issue for retailers, we have developed an innovative mobile technology known as
SizeUp
.
SizeUp
is a
digital tape measure that allows users to measure length, width and height of a surface by moving their smartphone from point
to point of an object or space.
SizeUp
is a value-add for DIY and home improvement retailers whose customers struggle to
find the appropriately sized items (like blinds or curtains) for their homes or projects due to inaccurate measurements.
SizeUp
also is designed to replace rulers, tape measures and other measuring tools used for DIY projects.
SizeUp
is available
for consumer download on both iOS and Android operating systems, with more than 1,000,000 consumer downloads to date.
MySizeID
We
have released the
MySizeID
app for both iOS and Android which assists consumers to take highly accurate measurement of
their own body in order to size clothing in the best way possible without the need to try the clothes on before purchasing. The
benefit of our application is that it simplifies the process of purchasing clothes online and significantly reduces the rate of
returns of ill-fitting clothing.
The
application is the result of a research and development effort that combines:
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anthropometric
research – analyses of information pertaining to body measurements derived from
a survey and the subsequent determination of correlations between body parts;
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body
measurement algorithm research – an algorithm created by us to measure body parts;
and
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retailers
size chart analyses – adopting a deep understanding of the size charts of retailers
and the corresponding “body to garment size.”
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MySizeID
allows consumers to create a secure, online profile of their personal measurements, which can then be utilized, with partnered
online retailers, to ensure that no matter the manufacturer or size chart, they will get the right fit.
MySizeID
operates
based on the use of existing sensors in smart phones which enable, through a specific purpose application, the measurement of
the body of any consumer by moving the smartphone phone along his or her body. The
MySizeID
application does not rely on
user photographs or any additional hardware; all a user needs to do is scan their body with their smartphone and the application
records their measurements. The measurements can then be saved in our database in the cloud, enabling the user to search for clothes
in various retailer websites without worrying about size. When a search is made, the retailer will connect to our cloud database,
and then provide results based on the user’s measurements and other parameters as he or she may have defined. This data
is also saved for use when a customer enters a brick and mortar store to help serve the customer more efficiently and to provide
a better shopping experience.
Figure
1: Screenshot of MySizeID on smartphone and e-commerce website
As
part of the integration process, we offer to the retailer three main components:
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Mobile
App
.
MySizeID
comes in the form of a native app or as white label app. Our
native app can be used “as is” integrated into the retailer’s e-commerce
website. Alternatively, it can be white labeled according to the retailer’s needs
in a manner that showcases the retailer brand (colors, logo etc.). The retailer can also
receive the
MySizeID
standard development kit, or SDK, and integrate it into its
own existing application so the retailer’s consumers will not have to have two
separate apps when shopping online.
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Widget
.
When a consumer enters into the retailer’s website and looks for a specific item,
he or she can click on the
MySizeID
widget which will inform the consumer of his
or her recommended size, based on his or her actual measurements, as measured using the
app and the item he or is looking at.
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Figure
2: Screenshot of MySizeID widget on Modelista website
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Back-Office
The back-office system is the place where the retailer inputs all the information regarding its size charts that correlates
to every product in its e-commerce site, and where the retailer can access the information on its users.
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Figure
3: Screenshot of Back-Office System
As
we are licensing the technology, we are currently offering
MySizeID
to retailers on a pay per use basis. In a pay per use
business model, every time the consumer obtains a recommended size, we charge the retailer for the usage.
In
addition, we have developed applications for third party ecommerce platforms so that retailers who use those platforms will find
our application on the platform’s app store and will be able to easily install it in their store. In February 2019,
MySizeID
became available for online retailers utilizing the Shopify platform. Fashion and apparel retailers using Shopify can now
deploy the
MySizeID
turnkey solution through the simple integration of the
MySizeID
widget on their site.
In
November 2016, we introduced a new product called
TrueSize
. TrueSize is a customizable, white-label, mobile application
that empowers retailers to improve the online shopping experience of their customers by matching their true measurements with
the retailer’s offerings. Due to the introduction of
MySizeID
, in June 2019, we plan on ending support for this product.
BoxSizeID
BoxSizeID
is an intuitive parcel measurement application that can provide real-time logistic data on package volumes and transportation,
resulting in improved operational efficiency and reduced operating expenses. In addition,
BoxSizeID
allows customers to
easily measure the size of their parcel with their smartphone, calculate shipping costs and arrange for a convenient pick-up time
for the package. During 2018, we released
BoxSizeID
for Android which has a greater market opportunity since, based on
our experience, most courier companies are using Android based handheld devices. As a result,
BoxSizeID
is available both
on iOS and Android.
Figure
4: Screenshot of BoxSizeID
We
are currently developing Two Shots, an algorithm that is intended to make package measurement even faster through two measurements,
to measure the height, width and depth, of a package rather than three separate measurements.
Agreement
with Katz Delivery Services, LTD
On
November 20, 2015, we entered into an agreement, or the Katz Agreement, with Katz Deliveries, LTD, or Katz, one of the largest
courier services in Israel. Pursuant to the Katz Agreement, the parties have agreed to mutually work together to develop and integrate
MySize technology with the Katz ERP to accurately monitor the volume of all parcels delivered to it for shipment by its clients.
The goal is for Katz to use our technology to help with planning its distribution routes, thus reducing operational costs by adjusting
the distribution vehicles to the volume of the shipments.
KatzID
was developed for Katz and is to be used to measure packages, boxes and pallets at Katz’ logistics center. The app allows
users to scan the barcode of a package and measure the package dimensions using MySize’s
SizeIT
technology (described
below) and then subsequently upload the information directly to Katz’s back office. The technology is being used to control
package volumes and accurately charge Katz’ customers accordingly.
In
September 2018, we entered into a new agreement with Katz pursuant to which we are licensing to Katz on
a software-as-a-service basis
KatzID
for a monthly fee based on the number of packages measured. We have
completed integration of
KatzID
into the Katz ERP system. To date, there have been no material revenues from this
agreement.
SizeUp
We
are working on additional consumer applications. One of these applications is in the category of DIY. This application is a smart
tape measure for the business to consumer market which allows users to utilize their smartphone as a tape measure. The application
provides measurements with an accuracy of plus or minus 2 centimeters. Through the use of this application users will be able
to visualize how an object or a piece of furniture will fit in an existing room in their home or office. As many people have difficulty
with spatial recognition, we hope this will help alleviate the problem. During 2018 we expanded availability of
SizeUp
to more than 45 different iOS and Android smartphone models worldwide. It also added Google Vision for image content analysis,
object detection, and title suggestions. As of March 1, 2019, there have been over 1,000,000 downloads of the SizeUp app.
Currently
the
SizeUp
app for Android and iOS is available for free for the first 30 days, after which a user will be required to
pay a one-time fee of $1.99 to continue using the application. To date, revenues from downloads have been nominal.
SizeIT
We
have developed
SizeIT
, a smart measuring tape SDK for both Android and iOS platforms.
SizeIT
provides users with
the ability to instantly and accurately measure objects with a quick movement of their mobile device.
SizeIT
, the core
technology behind
MySizeID
,
SizeUp
, and
BoxSizeID
applications, can be embedded into any company’s
existing or white label mobile app in a short period of time, offering an efficient solution to the escalating costs associated
with product sizing issues and returns.
SizeIT
enables users to measure objects by moving their mobile device from one
side of an object to another side of the object. Our algorithm utilizes a mobile device’s motion sensors to calculate the
travelled distance.
Research
and Development
Our
research and development team is responsible for the design, development, and testing of all aspects of our measurement platform
technology. We invest in these efforts to continuously improve, innovate, and add new features to our solutions.
We
incurred research and development expenses of $1,105,000 in 2018 and $845,000 in 2017 and $727,000 in 2016, relating to the
development of its applications and technologies. We intend to continue to invest in our research and development
capabilities to extend our platform and bring our measurement technology to a broader range of applications.
Sales
and Marketing
We
recently launched a commercialization strategy that directs our sales efforts toward both sales to e-commerce players in specific
vertical markets such as fashion/apparel and shipping/delivery as well as to e-commerce third party platform providers. As of
March 1, 2019, we have two full-time sales professionals in the United States who lead our efforts to penetrate the U.S. marketplace
through driving market awareness, generating customer leads, building out a sales pipeline, and developing customer relationships.
We
believe an effective method to market our suite of products is for users to actively use and explore its capabilities. We encourage
free trials of one or more of our products in order to successfully convert those accounts to paid subscriptions.
Proprietary
Rights
We
rely on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well
as contractual protections, to protect our proprietary technology.
As
of December 31, 2018, we owned four issued patents one in each of Russia and Japan and two in the U.S., which expire between
January 20, 2033 and May 11, 2035, and we have eighteen additional patent applications in process. As of such date, we
do not have any registered trademarks.
We
cannot provide any assurance that our proprietary rights with respect to our products will be viable or have value in the future
since the validity, enforceability and type of protection of proprietary rights in software-related industries are uncertain and
still evolving.
Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and
use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable
to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem.
In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the
United States, and effective copyright, trademark, trade secret and patent protection may not be available in those jurisdictions.
Our means of protecting our proprietary rights may not be adequate to protect us from the infringement or misappropriation of
such rights by others.
Further,
in recent years, there has been significant litigation in the United States involving patents and other intellectual property
rights, particularly in the software and Internet-related industries. We can become subject to intellectual property infringement
claims as the number of our competitors grows and our products and services overlap with competitive offerings. These claims,
even if not meritorious, could be expensive to defend and could divert management’s attention from operating our business. If
we become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial
award of damages and to develop non-infringing technology, obtain a license or cease selling the products that contain the infringing
intellectual property. We may be unable to develop non-infringing technology or obtain a license on commercially reasonable terms,
if at all.
Government
Regulation
We
are subject to a number foreign and domestic laws and regulations that involve matters central to our business. These laws and
regulations may involve privacy, data protection, intellectual property, or other subjects. Many of the laws and regulations to
which we are subject are still evolving and being tested in courts and could be interpreted in ways that could harm our business.
In addition, the application and interpretation of these laws and regulations often are uncertain, particularly in the new and
rapidly evolving industry in which we operate. Because global laws and regulations have continued to develop and evolve rapidly,
it is possible that we or our products or our platform may not be, or may not have been, compliant with each such applicable law
or regulation.
In
particular, we are subject to a variety of federal, state and international laws and regulations governing the processing of personal
data. Many U.S. states have passed laws requiring notification to data subjects when there is a security breach of personally
identifiable data. There are also a number of legislative proposals pending before the U.S. Congress, various state legislative
bodies and foreign governments concerning data protection. In addition, data protection laws in Europe and other jurisdictions
outside the United States can be more restrictive than those within the United States, and the interpretation and application
of these laws are still uncertain and in flux.
For example, the General Data Protection Regulation, or GDPR, which took effect
on May 25, 2018, enhances data protection obligations for entities that process personal data about individuals, including
obligations to cooperate with European data protection authorities, implement security measures and keep records of personal data
processing activities. Noncompliance with the GDPR can trigger fines equal to the greater of €20 million or 4% of global
annual revenue. Given the breadth and depth of changes in data protection obligations, meeting the requirements of GDPR has required
significant time and resources, including a review of our technology and systems currently in use against the requirements of
GDPR. We have taken various steps to prepare for complying with GDPR however there can be no assurance that these steps are sufficient
to assure compliance. Further, additional EU laws and regulations (and member states’ implementations thereof) further govern
the protection of individuals and of electronic communications. If our efforts to comply with GDPR or other applicable laws and
regulations are not successful, we may be subject to penalties and fines that would adversely impact our business and results
of operations, and our ability to use personal data of individuals could be significantly impaired.
Competition
We
operate in a highly competitive industry that is characterized by constant change and innovation. Changes in the applications
and the programing languages used to develop applications, devices, operating systems, and technology landscape result in evolving
customer requirements. Our competitors include True Fit, Virtusize, EasyMeasure, AR MeasureKit, and Smart Measure.
The
principal competitive factors in our market include the following:
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product
and platform features, architecture, reliability, privacy and security, performance, effectiveness, and supported environments;
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product
extensibility and ability to integrate with other technology infrastructures;
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digital
operations expertise;
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ease
of use of products and platform capabilities;
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total
cost of ownership;
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adherence
to industry standards and certifications;
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strength
of sales and marketing efforts;
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brand
awareness and reputation; and
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focus
on customer success.
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We
believe we generally compete favorably with our competitors on the basis of these factors. We expect competition to increase as
other established and emerging companies enter our markets, as customer requirements evolve, and as new products and technologies
are introduced. We expect this to be particularly true as we are a smartphone-based offering that does not need to utilize the
smartphone’s camera, and our competitors may also seek to repurpose their existing offerings to provide similar solutions.
Many of our competitors have substantially greater financial, technical, and other resources, greater name recognition, larger
sales and marketing budgets, broader distribution, and larger and more mature intellectual property portfolios.
Employees
As
of March 1, 2019, we had a total of 29 employees, of which 21 were full-time employees, including 7 in sales and marketing,
17 in technology and development and 5 in administration and finance. None of our employees are represented by a collective
bargaining agreement, nor have we experienced any work stoppage. We consider our relationship with our employees to be good.
Our future success depends on our continuing ability to attract and retain highly qualified engineers, sales and marketing,
account management, and senior management personnel.
Company
Information
Our
principal executive offices are located at 3 Arava St., P.O. Box 1026, Airport City, Israel 7010000, and our telephone number
is +972-3-600-9030. Our website address is
www.mysizeid.com
. Any information contained on, or that can be accessed
through, our website is not incorporated by reference into, nor is it in any way a part of, this Annual Report on Form 10-K.
We
use our website (www.mysizeid.com) as a channel of distribution of Company information. The information we post through this channel
may be deemed material. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings
and public conference calls and webcasts. The contents of our website are not, however, a part of this Annual Report on Form 10-K.
Corporate
History
We
were incorporated in the State of Delaware on September 20, 1999 under the name Topspin Medical, Inc. In December 2013, we changed
our name to Knowledgetree Ventures Inc. Subsequently, in February 2014, we changed our name to MySize, Inc.
From
inception through 2012, we were engaged in research and development of a medical magnetic resonance imaging, or MRI, technology
for interventional cardiology and in the development of MRI technology for use in the diagnosis and treatment of prostate cancer.
In January 2012, we acquired Metamorefix Ltd., or Metamorefix. Metamorefix was incorporated in 2007, and was engaged in the development
of innovative solutions for the rehabilitation of tissues, particularly skin tissues. By the end of 2012, we ceased operations
and in January 2013, we sold our entire ownership interest in Metamorefix.
In
September 2013, Ronen Luzon, our Chief Executive Officer, acquired control of the Company from Asher Shmuelevitch according to
which Mr. Luzon purchased 1,755,950 shares of common stock from Mr. Shmuelevitch, which shares represented approximately 40% of
the issued and outstanding capital stock of the Company at such time, thus becoming a controlling shareholder of the Company.
In connection with the acquisition, Mr. Luzon reached a settlement with our then creditors pursuant to which the main creditor,
Mr. Shmuelevitch, was paid a total sum of approximately $140,000 in consideration for a full and final waiver of any and all his
claims that he may have relating to any monetary indebtedness of the Company to the creditors.
In
February 2014, My Size Israel 2014 Ltd., our wholly owned subsidiary, entered into a Purchase Agreement, or the Purchase Agreement,
with Shoshana Zigdon, or the Seller, who at the time was a beneficial owner of more than 20% of our outstanding shares, with respect
to the acquisition by us of certain rights related to the collection of data for measurement purposes including rights in the
venture, the method and a patent application that had been filed by the Seller (PCT/IL2013/050056), or the Assets. In consideration
for the sale of the Assets, we agreed to pay to Seller, 18% of our operating profit, directly or indirectly connected with the
Assets together with value-added tax in accordance with the law for a period of seven years from the end of the development period
of the aforementioned venture. In addition to the foregoing, the Purchase Agreement provides that all developments, improvements,
knowledge and know-how developed and/or accumulated by us after the execution of the Purchase Agreement will be owned by us. Further,
the Seller agreed not to compete, directly or indirectly, with us in any matter relating to the Assets for a period of seven years
from the end of the development period of the venture.
The
Purchase Agreement may be terminated by either party in the event of an uncured material breach. The Purchase Agreement
further provides that the Seller is entitled to repurchase the Assets from us upon the occurrence of one or more of the
following events: (a) in the case of liquidation or bankruptcy; or (b) if on the seventh anniversary of the execution of the
Purchase Agreement, the amount of our income, directly and/or indirectly derived from the Assets is less than NIS 3.6 million
(approximately $1 million), each a “Repurchase Event”. If a Repurchase Event occurs, the Seller shall have a 90
day right, subject to delivery of written notice to us of Seller’s intention to exercise such right, to repurchase the
Assets from us. The repurchase price will be based upon a market price to be determined by one or more external appraisers.
Unless the Seller provides written notice of retraction of Seller’s intention to repurchase the Assets, the Seller
shall be obligated to repurchase the Assets within 60 days from the date of receipt of the appraisal. Seller shall have the
right to retract its intention to repurchase the Assets, provided Seller gives written notice to us within 30 days of
receiving the appraisal and subject to the Seller refunding to us the the expenses borne by us in respect of the appraisal.
To date, no material income has been derived from the Assets.
In
September 2005, we commenced trading on the Tel Aviv Stock Exchange, or TASE. Between 2007 and 2012 we reported as a public company
with the SEC. In August 2012, we suspended our reporting obligations. In mid-2015 we resumed reporting as a public company. On
July 25, 2016, our common stock began publicly trading on the Nasdaq Capital Market under the symbol “MYSZ”.
ITEM
1A. RISK FACTORS
An
investment in our common stock involves a high degree of risk. You should carefully consider the following risk factors and the
other information in this Annual Report on Form 10-K before investing in our common stock. Our business and results of operations
could be seriously harmed by any of the following risks. The risks set out below are not the only risks we face. Additional risks
and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results. If any of the following events occur, our business, financial condition
and results of operations could be materially adversely affected. In such case, the value and trading price of our common stock
could decline, and you may lose all or part of your investment.
Risks
Related to Our Financial Position and Capital Requirements
We
have historically incurred significant losses and there can be no assurance when, or if, we will achieve or maintain profitability.
We realized a net loss
of $6.0 million and $5.4 million for the years ended December 31, 2018 and 2017 and had an accumulated deficit of $23.0 million
as at December 31, 2018. Because of the numerous risks and uncertainties associated with the development of our products and business,
we are unable to predict the extent of any future losses or when we will become profitable, if at all. Expected future operating
losses will have an adverse effect on our cash resources, shareholders’ equity and working capital. Our failure to become
and remain profitable could depress the value of our stock and impair our ability to raise capital, expand our business, maintain
our development efforts, or continue our operations. A decline in our value could also cause you to lose all or part of your investment
in us.
Our
limited operating history makes it difficult to evaluate our business and prospects.
We
have only been developing our measurement technology since 2014. Since then, our operating history has been primarily limited
to research and development, pilot studies, raising capital, and limited sales and marketing efforts. Therefore, it may be difficult
to evaluate our business and prospects. We have not yet demonstrated an ability to commercialize our products. Consequently, any
predictions about our future performance may not be accurate, and you may not be able to fully assess our ability to complete
development and/or commercialize our products, and any future products.
We
will need to raise additional capital to meet our business requirements in the future, which is likely to be challenging, could
be highly dilutive and may cause the market price of our common stock to decline.
Based on our projected
cash flows and the cash balances as of the date of this Annual Report on Form 10-K, we believe we have sufficient cash to fund
our obligations for a period which is longer than 12 months from the date of this Annual Report on Form 10-K. However, in order
to meet our business objectives in the future, we will need to raise additional capital, which may not be available on reasonable
terms or at all. Additional capital would be used to accomplish the following:
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finance
our current operating expenses;
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pursue
growth opportunities;
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hire
and retain qualified management and key employees;
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respond
to competitive pressures;
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comply
with regulatory requirements; and
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maintain
compliance with applicable laws.
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Current conditions
in the capital markets are such that traditional sources of capital may not be available to us when needed or may be available
only on unfavorable terms. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets,
economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly,
we cannot assure you that we will be able to successfully raise additional capital at all or on terms that are acceptable to us.
If we cannot raise additional capital when needed, it may have a material adverse effect on our business, results of operations
and financial condition.
To
the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities
could result in substantial dilution for our current stockholders. The terms of any securities issued by us in future capital
transactions may be more favorable to new investors, and may include preferences, superior voting rights and the issuance of warrants
or other derivative securities, which may have a further dilutive effect on the holders of any of our securities then-outstanding.
We may issue additional shares of our common stock or securities convertible into or exchangeable or exercisable for our common
stock in connection with hiring or retaining personnel, option or warrant exercises, future acquisitions or future placements
of our securities for capital-raising or other business purposes. The issuance of additional securities, whether equity or debt,
by us, or the possibility of such issuance, may cause the market price of our common stock to decline and existing stockholders
may not agree with our financing plans or the terms of such financings. In addition, we may incur substantial costs in pursuing
future capital financing, including investment banking fees, legal fees, accounting fees, securities law compliance fees, printing
and distribution expenses and other costs. We may also be required to recognize non-cash expenses in connection with certain securities
we issue, such as convertible notes and warrants, which may adversely impact our financial condition. Furthermore, any additional
debt or equity financing that we may need may not be available on terms favorable to us, or at all. If we are unable to obtain
such additional financing on a timely basis, we may have to curtail our development activities and growth plans and/or be forced
to sell assets, perhaps on unfavorable terms, or we may have to cease our operations, which would have a material adverse effect
on our business, results of operations and financial condition.
Risks
Related to Our Company and Our Business
We
may never successfully develop any products or generate revenues.
We only recently transitioned
into the commercialization phase of our products and have only generated minimal revenues to date. We may be unable to successfully
develop or market any of our current or proposed products or technologies, those products or technologies may not generate any
revenues, and any revenues generated may not be sufficient for us to become profitable or thereafter maintain profitability.
The
market for our measurement technology is new and unproven, may experience limited growth and is highly dependent on U.S. retailers
and online third party resellers adopting our flagship product, MySizeID.
The
market for our measurement technology is relatively new and unproven and is subject to a number of risks and uncertainties. We
believe that our future success will depend in large part on market adoption of our flagship product,
MySizeID
, by U.S.
retailers and online third party resellers. In order to grow our business, we intend to focus on educating retailers and resellers
and other potential customers about the benefits of our measurement technology, expanding the functionality of our products and
bringing new products to market to increase market acceptance and use of our technology. Our ability to develop and expand the
market that our products address depends upon a number of factors, including the cost savings, performance and perceived value
associated with such products. The market for our products could fail to develop or there could be a reduction in interest or
demand for our products as a result of a lack of consumer acceptance, technological challenges, competing products and services,
weakening economic conditions and other causes. We may never successfully commercialize our products and if our products fail
to achieve market acceptance, this would have a material adverse effect on our business, results of operations and financial condition.
Failure
to effectively develop and expand our sales and marketing capabilities could harm our ability to grow our business and achieve
broader market acceptance of our products.
Our
ability to achieve customer adoption, especially among U.S. retailers will depend, in part, on our ability to effectively organize,
focus and train our sales and marketing personnel. We have limited experience selling to U.S. retailers and only recently established
a U.S. sales force. We believe that there is significant competition for experienced sales professionals with the skills and industry
knowledge that we require. Our ability to achieve significant revenue growth in the future will depend, in part, on our ability
to recruit, train and retain a sufficient number of experienced sales professionals, particularly those with experience selling
to U.S. retailers. In addition, even if we are successful in hiring qualified sales personnel, new hires require significant training
and experience before they achieve full productivity, particularly for sales efforts targeted at U.S. retailers and new markets.
Because we only recently started sales efforts, we cannot predict whether, or to what extent, our sales efforts will be successful.
We
expect our sales cycle to be long and unpredictable and require considerable time and expense before executing a customer agreement,
which may make it difficult to project when, if at all, we will obtain new customers and when we will generate revenue from those
customers.
As
we seek adoption of our products by U.S. retailers, we expect to incur higher costs and long sales cycles. In this market segment,
the decision to adopt our products may require the approval of multiple technical and business decision makers, including security,
compliance, procurement, operations and IT. In addition, while U.S. retailers may be willing to deploy our products on a limited
basis, before they will commit to deploying our products at scale, they often require extensive education about our products and
significant customer support time, engage in protracted pricing negotiations and seek to secure readily available development
resources. As a result, it is difficult to predict when we will obtain new customers and begin generating revenue from these customers.
As part of our sales cycle, we may incur significant expenses before executing a definitive agreement with a prospective customer
and before we are able to generate any revenue from such agreement. We have no assurance that the substantial time and money spent
on our sales efforts will generate significant revenue. If conditions in the marketplace generally or with a specific prospective
customer change negatively, it is possible that no definitive agreement will be executed, and we will be unable to recover any
of these expenses. If we are not successful in targeting, supporting and streamlining our sales processes and if revenue expected
to be generated from a prospective customer is not realized in the time period expected or not realized at all, our ability to
grow our business, and our operating results and financial condition may be adversely affected. If our sales cycles lengthen,
our future revenue could be lower than expected, which would have an adverse impact on our operating results and could cause our
stock price to decline.
We
are substantially dependent on assets we purchased from a related party, and if we lose the rights to such assets or the assets
are repurchased for any reason, our ability to develop existing and new applications based upon these assets would be harmed,
and our business, results of operations and financial condition would be materially and adversely affected.
In
February 2014, we entered into a Purchase Agreement with a related party, Shoshana Zigdon, pursuant to which we acquired certain
rights related to the collection of data for measurement purposes. Our business is substantially dependent upon the Assets we
acquired pursuant to the Purchase Agreement. Therefore, our ability to develop and commercialize our applications depends upon
the effectiveness and continuation of the Purchase Agreement. If we lose the rights, including the rights to the patent that comprise
the Assets, our ability to develop existing and new applications would be harmed. In consideration for the sale of the Assets,
we agreed to pay to Ms. Zigdon, 18% of our operating profit, directly or indirectly connected with the Assets together with value-added
tax in accordance with the law for a period of seven years from the end of the development period of the aforementioned venture.
The Purchase Agreement
may be terminated by either party in the event of an uncured material breach. The Purchase Agreement further provides that the
Seller is entitled to repurchase the Assets from us upon the occurrence of one or more of the following events: (a) in the case
of liquidation or bankruptcy; or (b) if on the seventh anniversary of the execution of the Purchase Agreement, the amount of our
income, directly and/or indirectly derived from the Assets is less than NIS 3.6 million (approximately $1 million). To date, we
have only generated limited revenue. If Ms. Zigdon repurchases the Assets, our ability to develop and commercialize our products
would be significantly harmed and we may cease operations.
If
we are not able to enhance our brand and increase market awareness of our company and products, then our business, results of
operations and financial condition may be adversely affected.
We
believe that enhancing the “MySize” brand identity and increasing market awareness of our company and products, particularly
among U.S. retailers, is critical to achieving widespread acceptance of our products. Our ability to successfully develop new
retailers may be adversely affected by a lack of awareness or acceptance of our brand. To the extent that we are unable to foster
name recognition and affinity for our brand, our growth may be significantly delayed or impaired. The successful promotion of
our brand will depend largely on our continued marketing efforts, market adoption of our products, and our ability to successfully
differentiate our products from competing products and services. Our brand promotion may not be successful or result in revenue
generation. Any incident that erodes consumer affinity for our brand could significantly reduce our brand value and damage our
business. If consumers perceive or experience a reduction in quality, or in any way believe we fail to deliver a consistently
positive experience, our brand value could suffer and our business may be adversely affected.
In
particular, adverse weather conditions can impact guest traffic at our retailers, and, in more severe cases, cause temporary retail
closures, sometimes for prolonged periods. Our business is subject to seasonal fluctuations, with retail sales typically higher
during certain months, such as December. Adverse weather conditions during our most favorable months or periods may exacerbate
the effect of adverse weather on consumer traffic and may cause fluctuations in our operating results from quarter-to-quarter
within a fiscal year.
If
we do not develop enhancements to our products and introduce new products that achieve market acceptance, our business, results
of operations and financial condition could be adversely affected.
Our
ability to attract new customers depends in part on our ability to enhance and improve our existing products, increase adoption
and usage of our products and introduce new products. The success of any enhancements or new products depends on several factors,
including timely completion, adequate quality testing, actual performance quality, and overall market acceptance. Enhancements
and new products that we develop may not be introduced in a timely or cost-effective manner, may contain errors or defects, may
have interoperability difficulties with our platform or other products or may not achieve the broad market acceptance necessary
to generate significant revenue. Furthermore, our ability to increase the usage of our products depends, in part, on the development
of new use cases for our products and may be outside of our control. If we are unable to successfully enhance our existing products
to meet evolving customer requirements, increase adoption and usage of our products, develop new products, then our business,
results of operations and financial condition would be adversely affected.
The
mobile technology industry is subject to rapid technological change and, to compete, we must continually enhance our mobile Apps
and custom development services.
We
must continue to enhance and improve the performance, functionality and reliability of our products. The mobile technology industry
is characterized by rapid technological change, changes in user requirements and preferences, frequent new product and services
introductions embodying new technologies and the emergence of new industry standards and practices that could render our products
obsolete. Our success will depend, in part, on our ability to both internally develop and enhance our existing products, develop
new products that address the increasingly sophisticated and varied needs of our customers, and respond to technological advances
and emerging industry standards and practices on a cost-effective and timely basis. The development of our technology involves
significant technical and business risks. We may fail to use new technologies effectively or to adapt our proprietary technology
and systems to customer requirements or emerging industry standards. If we are unable to adapt to changing market conditions,
customer requirements or emerging industry standards, we may not be able to increase our revenue and expand our business
.
Changes
in economic conditions could materially affect our business, financial condition and results of operations.
Because
our primary target customers include U.S. retailers, we, together with the rest of the fashion/apparel industry, will depend upon
consumer discretionary spending. Increases in unemployment rates, reductions in home values, increases in home foreclosures, investment
losses, personal bankruptcies and reductions in access to credit and reduced consumer confidence, may impact consumers’
ability and willingness to spend discretionary dollars. In addition, volatile economic conditions may repress consumer confidence
and discretionary spending. Any of the foregoing may have a material adverse effect on our business, financial condition and results
of operations.
Our
growth depends, in part, on the success of our strategic relationships with third parties.
To
grow our business, we anticipate that we will continue to depend on relationships with third parties, such as Katz Corporation.
Identifying partners, and negotiating and documenting relationships with them, requires significant time and resources. If we
are unsuccessful in establishing or maintaining our relationships with third parties, our ability to compete in the marketplace
or to grow our revenue could be impaired, and our results of operations may suffer. Even if we are successful, we cannot assure
you that these relationships will result in increased customer usage of our products or increased revenue.
We
rely upon third parties to provide distribution for our applications, and disruption in these services could harm our business.
We currently utilize,
and plan on continuing to utilize over the current fiscal year, third-party networking providers and distribution through companies
including, but not limited to, Apple and Google as well as Shopify and Honeywell to distribute our technologies. If disruptions
or capacity constraints occur, we may have no means of replacing these services, on a timely basis or at all. This could
cause a material adverse condition for our operations and financial earnings.
We
rely on third-party hosting and cloud computing providers to operate certain aspects of our business. Any failure, disruption
or significant interruption in our network or hosting and cloud services could adversely impact our operations and harm our business.
Our
technology infrastructure is critical to the performance of our products and customer satisfaction. Our products run on a complex
distributed system, or what is commonly known as cloud computing. We own, operate and maintain elements of this system, but significant
elements of this system are operated by third-parties that we do not control and which would require significant time to replace.
We expect this dependence on third-parties to continue. In particular, a significant portion, if not almost all data storage,
data processing and other computing services and systems is hosted by cloud computing providers. Any disruptions, outages and
other performance problems relating to such services, including infrastructure changes, human or software errors and capacity
constraints, could adversely impact our business, financial condition or results of operations.
Information
technology system failures or breaches of our network security could interrupt our operations and adversely affect our business.
Our
operations depend upon our ability to protect our computer equipment and systems against damage from physical theft, fire, power
loss, telecommunications failure or other catastrophic events, as well as from internal and external security breaches, viruses,
worms and other disruptive problems. Any damage or failure of our computer systems or network infrastructure that causes an interruption
in our operations could have a material adverse effect on our business and subject us to litigation or actions by regulatory authorities.
Although we employ both internal resources and external consultants to conduct auditing and testing for weaknesses in our systems,
controls, firewalls and encryption and intend to maintain and upgrade our security technology and operational procedures to prevent
such damage, breaches or other disruptive problems, there can be no assurance that these security measures will be successful.
Real
or perceived errors, failures, or bugs in our products could adversely affect our operating results and growth prospects.
We
update our products on a frequent basis. Despite efforts to test our updates, errors, failures or bugs may not be found in our
products until after they are deployed to a customer. We have discovered and expect we will continue to discover errors, failures
and bugs in our products and anticipate that certain of these errors, failures and bugs will only be discovered and remediated
after deployment. Real or perceived errors, failures or bugs in our platform could result in negative publicity, government inquiries,
loss of or delay in market acceptance of our products, loss of competitive position, or claims by customers for losses sustained
by them. In such an event, we may be required, or may choose, for customer relations or other reasons, to expend additional resources
in order to help correct the problem.
We
could be harmed by improper disclosure or loss of sensitive or confidential company, employee, or customer data, including personal
data.
In
connection with the operation of our business, we store, process and transmit data, including personal and payment information,
about our employees and customers, a portion of which is confidential and/or personally sensitive. Unauthorized disclosure or loss
of sensitive or confidential data may occur through a variety of methods. These include, but are not limited to, systems failure,
employee negligence, fraud or misappropriation, or unauthorized access to or through our information systems, whether by our employees
or third parties, including a cyberattack by computer programmers, hackers, members of organized crime and/or state-sponsored
organizations, who may develop and deploy viruses, worms or other malicious software programs. Such disclosure, loss or breach
could harm our reputation and subject us to government sanctions and liability under our contracts and laws that protect sensitive
or personal data and confidential information, resulting in increased costs or loss of revenues. It is possible that security
controls over sensitive or confidential data and other practices we and our third-party vendors follow may not prevent the improper
access to, disclosure of, or loss of such information. The potential risk of security breaches and cyberattacks may increase as
we introduce new products and offerings. Further, data privacy is subject to frequently changing rules and regulations, which
sometimes conflict among the various jurisdictions in which we provide services. Any failure or perceived failure to successfully
manage the collection, use, disclosure, or security of personal information or other privacy related matters, or any failure to
comply with changing regulatory requirements in this area, could result in legal liability or impairment to our reputation in
the marketplace.
A
material breach in security relating to our information systems and regulation related to such breaches could adversely affect
us.
Information
security risks have generally increased in recent years, in part because of the proliferation of new technologies and the use
of the Internet, and the increased sophistication and activity of organized crime, hackers, terrorists, activists, cybercriminals
and other external parties, some of which may be linked to terrorist organizations or hostile foreign governments. For example,
a cybercriminal could use cybersecurity threats to gain access to sensitive information about another company or to alter or disrupt
news or information to be distributed by PR Newswire. Cybersecurity attacks are becoming more sophisticated and include malicious
software, ransomware, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions
in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data, substantially
damaging our reputation. Any person who circumvents our security measures could steal proprietary or confidential customer information
or cause interruptions in our operations. We incur significant costs to protect against security breaches, and may incur significant
additional costs to alleviate problems caused by any breaches. Our failure to prevent security breaches, or well-publicized security
breaches affecting the Internet in general, could significantly harm our reputation and business and financial results
.
Our
products and our business are subject to a variety of U.S. and international laws and regulations, including those regarding privacy,
data protection and information security, and our customers may be subject to regulations related to the handling and transfer
of certain types of sensitive and confidential information. Any failure of our products to comply with or enable our customers
to comply with applicable laws and regulations would harm our business, results of operations and financial condition.
We
and our customers that use our products may be subject to privacy- and data protection-related laws and regulations that impose
obligations in connection with the collection, processing and use of personal data, financial data, health or other similar data.
The U.S. federal and various state and foreign governments have adopted or proposed limitations on, or requirements regarding,
the collection, distribution, use, security and storage of personally identifiable information of individuals. The U.S. Federal
Trade Commission and numerous state attorneys general are applying federal and state consumer protection laws to impose standards
on the online collection, use and dissemination of data, and to the security measures applied to such data.
Similarly, many foreign
countries and governmental bodies, including the EU member states, have laws and regulations concerning the collection and use
of personally identifiable information obtained from individuals located in the EU or by businesses operating within their jurisdiction,
which are often more restrictive than those in the United States. Laws and regulations in these jurisdictions apply broadly to
the collection, use, storage, disclosure and security of personally identifiable information that identifies or may be used to
identify an individual, such as names, telephone numbers, email addresses and, in some jurisdictions, IP addresses and other online
identifiers. For example, in April 2016 the EU adopted the General Data Protection Regulation, or GDPR, which took full effect
on May 25, 2018. The GDPR enhances data protection obligations for businesses and requires service providers (data processors)
processing personal data on behalf of customers to cooperate with European data protection authorities, implement security measures
and keep records of personal data processing activities. Noncompliance with the GDPR can trigger fines equal to or greater of €20 million
or 4% of global annual revenues. There are also additional EU laws and regulations (and member states implementations thereof)
which govern the protection of consumers and of electronic communications. If our efforts to comply with GDPR or other applicable
EU laws and regulations are not successful, we may be subject to penalties and fines that would adversely impact our business and
results of operations, and our ability to conduct business in the EU could be significantly impaired.
Additionally,
although we endeavor to have our products comply with applicable laws and regulations, these and other obligations
may be modified, they may be interpreted and applied in an inconsistent manner from one jurisdiction to another, and they may
conflict with one another, other regulatory requirements, contractual commitments or our internal practices. We also may be bound
by contractual obligations relating to our collection, use and disclosure of personal, financial and other data or may find it
necessary or desirable to join industry or other self-regulatory bodies or other privacy- or data protection-related organizations
that require compliance with their rules pertaining to privacy and data protection.
We
expect that there will continue to be new proposed laws, rules of self-regulatory bodies, regulations and industry standards concerning
privacy, data protection and information security in the United States, the European Union and other jurisdictions, and we cannot
yet determine the impact such future laws, rules, regulations and standards may have on our business. Moreover, existing U.S.
federal and various state and foreign privacy- and data protection-related laws and regulations are evolving and subject to potentially
differing interpretations, and various legislative and regulatory bodies may expand current or enact new laws and regulations
regarding privacy- and data protection-related matters. Because global laws, regulations and industry standards concerning privacy
and data security have continued to develop and evolve rapidly, it is possible that we or our products or platform may not be,
or may not have been, compliant with each such applicable law, regulation and industry standard and compliance with such new laws
or to changes to existing laws may impact our business and practices, require us to expend significant resources to adapt to these
changes, or to stop offering our products in certain countries. These developments could adversely affect our business, results
of operations and financial condition.
We
may not be able to adequately protect our intellectual property, which, in turn, could harm the value of our brands and adversely
affect our business.
Our
ability to implement our business plan successfully depends in part on our ability to build brand recognition using
our trademarks, service marks and other proprietary intellectual property, including our names and logos. We currently have
no registered trademarks. While we plan to register a number of our trademarks; however, no assurance can be given that
our trademark applications will be approved. We have been issued four patents, one of each in of Russia, and Japan and two in
the U.S., and have several patent applications in process. No assurance can be
given that our patent applications which are in process will be approved. If
our patent applications are not approved, our ability to
expand or develop our business may be negatively affected.
Third
parties may also oppose our trademark or patent applications, or otherwise challenge our use of the trademarks or patents. In
the event that our trademarks or patents are successfully challenged, we could be forced to rebrand our goods and services or
redesign our technology, which could result in loss of brand recognition, and could require us to devote resources to advertising
and marketing new brands and products.
If
our efforts to register, maintain and protect our intellectual property are inadequate, or if any third party misappropriates,
dilutes or infringes on our intellectual property, the value of our brands may be harmed, which could have a material adverse
effect on our business and might prevent our brands from achieving or maintaining market acceptance. We may also face the risk
of claims that we have infringed third parties’ intellectual property rights. If third parties claim that we infringe upon
their intellectual property rights, our operating profits could be adversely affected. Any claims of intellectual property infringement,
even those without merit, could be expensive and time consuming to defend, require us to rebrand our services, if feasible, divert
management’s attention and resources or require us to enter into royalty or licensing agreements in order to obtain the
right to use a third party’s intellectual property.
Any
royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of
infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements,
or stop the sale of certain products or services, any of which could have a negative impact on our operating profits and harm
our future prospects.
We
may face intense competition and expect competition to increase in the future, which could prohibit us from developing a customer
base and generating revenue.
We
face significant competition in every aspect of our business. Our competitors include True Fit, Virtusize, EasyMeasure, AR MeasureKit,
and Smart Measure. These companies may already have an established market in our industry. Most of these companies have significantly
greater financial and other resources than us and have been developing their products and services longer than we have been developing
ours.
In
addition, some of our larger competitors have substantially broader product offerings and leverage their relationships based on
other products or incorporate functionality into existing products to gain business in a manner that discourages potential customers
from purchasing our products. Potential customers may also prefer to purchase from their existing solution providers rather than
a new solution provider regardless of product performance or features. These larger competitors often have broader product lines
and market focus and will therefore not be as susceptible to downturns in a particular market. Conditions in our market could
change rapidly and significantly as a result of technological advancements, partnering by our competitors or continuing market
consolidation. New start-up companies that innovate and large competitors that are making significant investments in research
and development may invent similar or superior products and technologies that compete with our products. In addition, some of
our competitors may enter into new alliances with each other or may establish or strengthen cooperative relationships. Any such
consolidation, acquisition, alliance or cooperative relationship could lead to pricing pressure and our loss of any future market
share and could result in a competitor with greater financial, technical, marketing, service and other resources, all of which
could harm our ability to compete. Furthermore, organizations may be more willing to incrementally add solutions to their existing
infrastructure from competitors than to replace their existing infrastructure with our products. Any failure to meet and address
these factors could harm our business, results of operations and financial condition.
Our
business operations and future development could be significantly disrupted if we lose key members of our management team.
The
success of our business continues to depend to a significant degree upon the continued contributions of our senior officers and
key employees, both individually and as a group. Our future performance will be substantially dependent in particular on our ability
to retain and motivate Ronen Luzon, our Chief Executive Officer, and certain of our other senior executive officers. The loss
of the services of our Chief Executive Officer, senior officers or other key employees could have a material adverse effect on
our business and plans for future development. We have no reason to believe that we will lose the services of any of these individuals
in the foreseeable future; however, we currently have no effective replacement for any of these individuals due to their experience,
reputation in the industry and special role in our operations. We also do not maintain any key man life insurance policies for
any of our employees.
If
we are able to expand our operations, we may be unable to successfully manage our future growth.
Our
growth may strain our infrastructure and resources. Any such growth could place increased strain on our management, operational,
financial and other resources, and we will need to train, motivate, and manage employees, as well as attract management, sales,
finance and accounting, international, technical, and other professionals. Any failure to expand these areas and implement appropriate
procedures and controls in an efficient manner and at a pace consistent with our business objectives could have a material adverse
effect on our business, results of operations and financial condition.
Our
business operations are conducted in multiple languages and could be disrupted due to miscommunications or translation errors.
The
success of our business continues to depend on our marketing efforts in the United States, Europe and Israel, each of which is
conducted in the local language. Miscommunications or inaccurate foreign language translations could have a material adverse effect
on our business operations and financial conditions. Additionally, contracts, communications and complex technical information
must be accurately translated into foreign languages.
We
will continue to incur costs and be subject to various obligations as a result of being a public company, listed in the United
States and in Israel.
We
will continue to incur significant legal, accounting and other expenses as a result of being a public company, listed in the United
States and in Israel. Although we will incur costs each year associated with being a publicly-traded company, it is possible that
our actual costs of being a publicly-traded company will vary from year to year and may be different than our estimates. In estimating
these costs, we take into account expenses related to insurance, legal, accounting and compliance activities.
Furthermore,
the need to maintain the corporate infrastructure demanded of a public company may divert management’s attention from implementing
our growth strategy, which could prevent us from improving our business, results of operations and financial condition. We have
made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems
to meet our reporting obligations as a U.S. publicly traded company. However, the measures we take may not be sufficient to satisfy
our obligations as a publicly traded company.
Any
future or current litigation could have a material adverse impact on our results of operations, financial condition and liquidity.
From
time to time we may be subject to litigation, including, among others, potential stockholder derivative actions and class actions.
Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain
unknown for significant periods of time. Subject to certain exceptions, our Amended and Restated Certificate of
Incorporation, or Certificate of Incorporation, and Amended and Restated Bylaws, or Bylaws, require us to indemnify and
advance expenses to our officers and directors involved in legal proceedings. To date we have obtained directors and
officers’ liability, or D&O, insurance to cover some of the risk exposure for our directors and
officers.
Such insurance generally pays the expenses (including amounts paid to plaintiffs, fines, and expenses
including attorneys’ fees) of officers and directors who are the subject of a lawsuit as a result of their service to
us. There can be no assurance that we will be able to continue to maintain this insurance at reasonable rates or at all, or
in amounts adequate to cover such expenses should such a lawsuit occur. Without D&O insurance, the amounts we would pay
to indemnify our officers and directors should they be subject to legal action based on their service to us could have a
material adverse effect on our financial condition, results of operations and liquidity. Such lawsuits, and any related
publicity, may result in substantial costs and, among other things, divert the attention of management and our employees. An
unfavorable outcome in any claim or proceeding against us could have a material adverse impact on our financial position and
results of operations for the period in which the unfavorable outcome occurs, and potentially in future periods. Further, any
settlement announced by us may expose us to further claims against us by third parties seeking monetary or other damages
which, even if unsuccessful, would divert management attention from the business and cause us to incur costs, possibly
material, to defend such matters, which could have a material adverse impact on our financial position. See “Legal
Proceedings” on page 19 for more information regarding our involvement in ongoing litigation matters.
Federal,
state and local or Israeli tax rules may adversely impact our results of operations and financial position.
We
are subject to federal, state and local taxes in the U.S., as well as local taxes in Israel in respect to our operations in Israel.
Although we believe our tax estimates are reasonable, if the Internal Revenue Service or other taxing authority disagrees with
the positions we have taken on our tax returns, we could face additional tax liability, including interest and penalties. If material,
payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations
and financial position. In addition, complying with new tax rules, laws or regulations could impact our financial condition, and
increases to federal or state statutory tax rates and other changes in tax laws, rules or regulations may increase our effective
tax rate. Any increase in our effective tax rate could have a material impact on our financial results.
Tax reform may affect
us and our stockholders.
On
December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act”, or the TCJA, that
significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, includes
changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest and restricts
the use of net operating loss carryforwards arising after December 31, 2017, allows for the expensing of capital
expenditures, and implements a modified a territorial tax
system. We do not expect the tax reform to have a material impact to our net operating losses. The impact of this tax reform
on holders of our securities is uncertain. This Annual Report on Form 10-K does not discuss any such tax legislation or the
manner in which it might affect purchasers of our securities. We urge our stockholders to consult with their legal and tax
advisors with respect to such legislation and the potential tax consequences of investing in our securities.
Risks
Related To Our Operations In Israel
Our
headquarters and most of our operations are located in Israel, and therefore, political conditions in Israel may affect our operations
and results.
Our
headquarters and most of our operations are located in central Israel and our key employees, officers and directors are residents
of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our
business. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel
and its Arab neighbors. Any hostilities involving Israel or the interruption or curtailment of trade within Israel or between
Israel and its trading partners could adversely affect our operations and results of operations and could make it more difficult
for us to raise capital. During the winter of 2008, winter of 2012 and the summer of 2014, Israel was engaged in an armed conflict
with Hamas, a militia group and political party operating in 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. Israel faces political tension
with respect to its relationships with Turkey, Iran and certain Arab neighbor countries. In addition, recent conflicts involved
missile strikes against civilian targets in various parts of Israel, and negatively affected business conditions in Israel. Recent
political uprisings and social unrest in various countries in the Middle East and North Africa are affecting the political stability
of those countries. This instability may lead to deterioration of the political relationships that exist between Israel and these
countries, and have raised concerns regarding security in the region and the potential for armed conflict. Any armed conflicts,
terrorist activities or political instability in the region could adversely affect business conditions and could harm our results
of operations. For example, any major escalation in hostilities in the region could result in a portion of our employees and service
providers being called up to perform military duty for an extended period of time. 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 addition, the political and security situation in Israel may result in parties with whom we have agreements involving
performance in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force
majeure provisions in such agreements. Any future deterioration in the political and security situation in Israel will negatively
impact our business.
Our
commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the
Middle East. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist
attacks or acts of war, we cannot assure you that this government coverage will be maintained. Any losses or damages incurred
by us could have a material adverse effect on our business. Any armed conflicts or political instability in the region would likely
negatively affect business conditions and could harm our results of operations.
Further,
in the past, the State of Israel and Israeli companies have been subjected to an economic boycott. Several countries still restrict
business with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on
our operating results, financial condition or the expansion of our business.
Israel’s
economy may become unstable.
From
time to time, Israel’s economy may experience inflation or deflation, low foreign exchange reserves, fluctuations in world
commodity prices, military conflicts and civil unrest. For these and other reasons, the government of Israel has intervened in
the economy employing fiscal and monetary policies, import duties, foreign currency restrictions, controls of wages, prices and
foreign currency exchange rates and regulations regarding the lending limits of Israeli banks to companies considered to be in
an affiliated group. The Israeli government has periodically changed its policies in these areas. Reoccurrence of previous destabilizing
factors could make it more difficult for us to operate its business and could adversely affect its business.
Some
of our employees are obligated to perform military reserve duty in Israel.
Many Israeli citizens,
including our employees are obligated to perform one month, and in some cases more, of annual military reserve duty until they
reach the age of 40 (or older, for reservists with certain occupations) 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 military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups.
Such disruption could materially adversely affect our business, results of operations and financial condition.
It
may be difficult to enforce a non-Israeli judgment against the Company or its officers and directors.
The
operating subsidiary of ours is incorporated in Israel. All of our executive officers and directors are not residents of the United
States, and a substantial portion of our assets and the assets of our executive officers and directors are located outside 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 affect 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.
Our
international operations could expose us to additional risks, including exchange rate fluctuations, legal regulations and political
or economic instability that could harm our business and operating results.
Our
international operations expose us to the following risks which may have a material adverse effect on our business and operating
results:
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devaluations
and fluctuations in currency exchange rates including fluctuations between the U.S. dollar
and the NIS;
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costs
of compliance with local laws, including labor laws and intellectual property laws;
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compliance
with domestic and foreign government policies, including compliance with Israeli securities
laws and TASE;
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changes
in trade regulations and procedures affecting approval, production, pricing, marketing,
reimbursement for and access to, our products;
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compliance
with applicable foreign anti-corruption laws, anti-trust/competition laws, anti-Boycott
Israel law and anti-money laundering laws; and
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economic
and geopolitical developments and conditions, including ongoing instability in global
economies and financial markets, international hostilities, acts of terrorism and governmental
reactions, inflation, and military and political alliances.
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Risks
Related To Our Common Stock
A
more active, liquid trading market for our common stock may not develop, and the price of our common stock may fluctuate significantly.
Although
our common stock is listed on the Nasdaq Capital Market, it has only been traded on the Nasdaq Capital Market since July 25, 2016.
There has been relatively limited trading volume in the market for our common stock, and a more active, liquid public trading
market may not develop or may not be sustained. Limited liquidity in the trading market for our common stock may adversely affect
a stockholder’s ability to sell its shares of common stock at the time it wishes to sell them or at a price that it considers
acceptable. If a more active, liquid public trading market does not develop, we may be limited in our ability to raise capital
by selling shares of common stock and our ability to acquire other companies or assets by using shares of our common stock as
consideration. In addition, if there is a thin trading market or “float” for our stock, the market price for our common
stock may fluctuate significantly more than the stock market as a whole. Without a large float, our common stock would be less
liquid than the stock of companies with broader public ownership and, as a result, the trading prices of our common stock may
be more volatile and it would be harder for you to liquidate any investment in our common stock. Furthermore, the stock market
is subject to significant price and volume fluctuations, and the price of our common stock could fluctuate widely in response
to several factors, including:
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our
quarterly or annual operating results;
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changes
in our earnings estimates;
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investment
recommendations by securities analysts following our business or our industry;
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additions
or departures of key personnel;
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changes
in the business, earnings estimates or market perceptions of our competitors;
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our
failure to achieve operating results consistent with securities analysts’ projections;
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changes
in industry, general market or economic conditions; and
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announcements
of legislative or regulatory changes.
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The
stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted
prices of the securities of many companies. The changes often appear to occur without regard to specific operating performance.
The price of our common stock could fluctuate based upon factors that have little or nothing to do with us and these fluctuations
could materially reduce our stock price.
Concentration
of ownership of our stock may enable one stockholder or a small number of stockholders to significantly influence matters requiring
stockholder approval.
As of March 1, 2019,
members of our management team beneficially own approximately 7.7% of our outstanding common stock. In addition, Shoshana Zigdon
beneficially owns approximately 11.7% of our outstanding common stock. As such, management and Ms. Zigdon own approximately, in
the aggregate, 19.4% of our voting power. As a result, management and Ms. Zigdon may have the ability to control substantially
all matters submitted to our stockholders for approval including:
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election
of our board of directors;
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removal
of any of our directors;
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amendment
of our Certificate of Incorporation or Bylaws; and
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adoption
of measures that could delay or prevent a change in control or impede a merger, takeover
or other business combination involving us.
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In
addition, management’s and the stockholder’s stock ownership may discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders
from realizing a premium over our stock price. Any additional investors will own a minority percentage of our common stock and
will have minority voting rights.
Sales
by our stockholders of a substantial number of shares of our common stock in the public market could adversely affect the market
price of our common stock.
A
substantial portion of our total outstanding shares of common stock may be sold into the market at any time. A substantial portion
of these shares are held by two stockholders, one of which is Ronen Luzon who is also Chief Executive Officer and director. Although
we believe that Mr. Luzon has no current intention to sell a significant number of shares of our stock, we cannot provide any
such assurance. In addition, we cannot provide assurance that the other large stockholder, Ms. Zigdon, has no current intention
to sell a significant number of shares of our stock. If any of the two stockholders were to decide to sell large amounts of stock
over a short period of time (presuming such sales were permitted) such sales could cause the market price of our common stock
to drop significantly, even if our business is doing well. Further, the market price of our common stock could decline as a result
of the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it
more difficult for us to sell equity securities in the future at a time and price that we deem appropriate.
Our
securities are traded on more than one market which may result in price variations
.
Our
securities have been trading on the Nasdaq Capital Market since July 2016 and on TASE since September 2005. Trading in our securities
on such exchanges occurs in different currencies (U.S. dollars on the Nasdaq Capital Market and NIS on the TASE), and at different
times (due to different time zones, trading days and public holidays in the United States and Israel). The trading prices of our
securities on the two exchanges may differ due to the foregoing and other factors. Any decrease in the price of our shares on
the TASE could cause a decrease in the trading price of our shares on the Nasdaq Capital Market and vice versa.
We
are a smaller reporting company and, as a result of the reduced disclosure and governance requirements applicable to such companies,
our common stock may be less attractive to investors.
We
are a smaller reporting company, (i.e. a company with “public float” held by non-affiliates with a market value of
less than $250 million) and we are eligible to take advantage of certain exemptions from various reporting requirements applicable
to other public companies. We have elected to adopt these reduced disclosure requirements. We cannot predict if investors will
find our common stock less attractive as a result of our taking advantage of these exemptions. If some investors find our common
stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock
price may be more volatile.
We
do not expect to pay any cash dividends in the foreseeable future
.
We
have never declared or paid cash dividends on our common stock. We intend to retain our future earnings, if any, in order to reinvest
in the development and growth of our business and, therefore, do not intend to pay dividends on our common stock for the foreseeable
future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial
condition, results of operations, capital requirements, and such other factors as our board of directors deems relevant. Investors
should not purchase our common stock expecting to receive cash dividends. Because we do not pay dividends, and there may be limited
trading, investors may not have any manner to liquidate or receive any payment on their investment. Therefore, our failure to
pay dividends may cause investors to not see any return on investment even if we are successful in our business operations. In
addition, because we do not pay dividends we may have trouble raising additional funds, which could affect our ability to expand
our business operations.
We
can sell additional shares of common stock without consulting stockholders and without offering shares to existing stockholders,
which would result in dilution of shareholders’ interests in the company and could depress our stock price.
Our Certificate
of Incorporation currently authorizes 100,000,000 shares of common stock, of which 29,852,389 are currently outstanding as of
March 1, 2019, and our board of directors is authorized to issue additional shares of our common stock. Although our board of
directors intends to utilize its reasonable business judgment to fulfill its fiduciary obligations to our then existing
stockholders in connection with any future issuance of our capital stock, the future issuance of additional shares of our
capital stock could cause immediate, and potentially substantial, dilution to our existing stockholders, which could also
have a material effect on the market value of the shares. Further, other than certain participation rights that we
have granted in a past offering, our shares do not have preemptive rights, which means we can sell shares of our capital
stock to other persons without offering purchasers in this offering the right to purchase their proportionate share of such
offered shares. Therefore, any additional sales of stock by us could dilute your ownership interest in our Company.
A number of our
outstanding warrants contain anti-dilution provisions that, if triggered, could cause substantial dilution to our then-existing
stockholders and adversely affect our stock price.
A number of our
outstanding warrants contain anti-dilution provisions. As a result, if we, in the future, issue or grant any rights to
purchase any of our common stock or other securities convertible into our common stock, for a per share price less than the
exercise price of certain of our warrants, the exercise price will be reduced, subject to certain exceptions. To the extent
that we issue or are or deemed to have issued securities for consideration that is less than the exercise price of those
warrants, holders of our common stock may experience dilution, which may be substantial and which could lower the
market price of our securities. Further, the potential application of such anti-dilution rights may prevent us from seeking
additional financing, which would adversely affect our ability to finance our operations and continue to support our growth
initiatives.
Our
quarterly operating results may fluctuate significantly
.
We
expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected
by numerous factors, including:
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variations
in the level of expenses related to our research and development;
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any
lawsuits in which we may become involved;
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regulatory
developments affecting our products; and
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our
execution of any collaborative, licensing or sales agreements, and the timing of payments
under these arrangements.
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If
our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock
could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of
our common stock to fluctuate substantially.
If
we fail to comply with the rules under the Sarbanes Oxley Act of 2002 related to accounting controls and procedures, or if we
discover material weaknesses and deficiencies in our internal control and accounting procedures, our stock price could decline
significantly and raising capital could be more difficult.
If
we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we
discover material weaknesses and other deficiencies in our internal control and accounting procedures, our stock price could decline
significantly and raising capital could be more difficult. Section 404 of the Sarbanes-Oxley Act requires annual management assessments
of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing these
assessments. If material weaknesses or significant deficiencies are discovered or if we otherwise fail to achieve and maintain
the adequacy of our internal control, we may not be able to ensure that we can conclude on an ongoing basis that we have effective
internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal
controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we
cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could
lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.
Our
Certificate of Incorporation, Bylaws and Delaware law may have anti-takeover effects that could discourage, delay or prevent a
change in control, which may cause our stock price to decline.
Our
Certificate of Incorporation, Bylaws and Delaware law could make it more difficult for a third party to acquire us, even if closing
such a transaction would be beneficial to our stockholders. Provisions of our Certificate of Incorporation, Bylaws and Delaware
law also could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing
a change in control, including changes a stockholder might consider favorable. Such provisions may also prevent or frustrate attempts
by our stockholders to replace or remove our management. In particular, the Certificate of Incorporation, Bylaws and Delaware
law, as applicable, among other things:
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provide
the board of directors with the ability to alter the Bylaws without stockholder approval;
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place
limitations on the removal of directors;
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provide that vacancies on the board of directors may be filled by a majority of directors in office,
although less than a quorum;
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require that stockholder actions must be effected at a duly called stockholder meeting and generally
prohibiting stockholder actions by written consent;
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eliminate the ability of stockholders to call a special meeting of stockholders; and
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establish advance notice requirements for nominations for election to the board of directors or
for proposing matters that can be acted upon at duly called stockholder meetings.
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We
are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits “business
combinations” between a publicly-held Delaware corporation and an “interested stockholder,” which is generally
defined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for a three-year
period following the date that such stockholder became an interested stockholder. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control
of us to first negotiate with our Board. These provisions may delay or prevent someone from acquiring or merging with us, which
may cause the market price of our common stock and the value of our securities to decline. In addition, rules applicable to TASE
listed companies also limit the terms permitted with respect to a new class of shares and prohibit any such new class of shares
from having superior voting rights to the rights of the class of shares listed on TASE.
If
we fail to comply with the continued listing requirements of the Nasdaq Capital Market, our common stock may be delisted and the
price of our common stock and our ability to access the capital markets could be negatively impacted.
On
January 22, 2019, we were notified by the Nasdaq Stock Market, LLC, or Nasdaq, that we were not in compliance with the minimum
bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market. Nasdaq
Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share, and Nasdaq Listing Rule
5810(c)(3)(A) provides that a failure to meet the minimum bid price requirement exists if the deficiency continues for a period
of 30 consecutive business days. The notification provided that we had 180 calendar days, or until July 22, 2019, to regain compliance
with Nasdaq Listing Rule 5550(a)(2). To regain compliance, the bid price of our common stock must have a closing bid price of
at least $1.00 per share for a minimum of 10 consecutive business days. If we do not regain compliance by July 22, 2019,
an additional 180 days may be granted to regain compliance, so long as we meet the Nasdaq Capital Market continued listing
requirements (except for the bid price requirement) and notify Nasdaq in writing of our intention to cure the
deficiency during the second compliance period. If we do not qualify for the second compliance period or fail to regain compliance
during the second 180-day period, then Nasdaq will notify us of its determination to delist our common stock, at which
point we will have an opportunity to appeal the delisting determination to a Hearings Panel.
In addition, on September 6, 2018, we were notified by Nasdaq that we were not in compliance with the
minimum bid price requirements set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market.
On October 10, 2018, the Nasdaq Staff concluded that we had regained compliance with its Rule 5550(a)(2) based on the closing bid
price of our common stock having been at $1.00 per share or greater from the 10 consecutive business days from September 20, 2018
to October 9, 2018.
Previously,
on September 26, 2017, we were notified by Nasdaq, that we were not in compliance with the minimum bid price requirements set
forth in Nasdaq Listing Rule 5550(a)(2) The notification provided that we had 180 calendar days, or until March 26, 2018, to regain
compliance with Nasdaq Listing Rule 5550(a)(2). In addition, on June 5, 2017, we received written notice from the Nasdaq Listing
Qualifications Department notifying us that for the preceding 30 consecutive business days, our common stock did not maintain
a minimum Market Value of Listed Securities of $35 million as required by Nasdaq Listing Rule 5550(b)(2). The notification
provided that we had 180 calendar days, or until December 4, 2017, to regain compliance with Nasdaq Listing Rule 5550(b)(2). On
December 5, 2017, we received a second written notice from the Listing Qualifications Department of Nasdaq notifying the Company
that our failure to regain compliance with Nasdaq Listing Rule 5550(b)(2) by December 4, 2017 would result in the Company’s
securities being delisted from the Nasdaq Capital Market effective as of the open of business on December 14, 2017 unless the
Company requested an appeal of such determination. We thereafter requested an appeal before the Hearings Panel, thereby staying
the delisting of the Company’s securities pending the Hearings Panel’s decision. On January 22, 2018, the Nasdaq Staff
concluded that we had regained compliance with its Rule 5550(a)(2) based on the closing bid price of the Company’s common
stock having been at $1.00 per share or greater for 10 consecutive business days from January 5, 2018 to January 19, 2018. In
addition, on January 26, 2018, the Nasdaq Hearings Advisor informed us that the Nasdaq Staff had informed them that our Market
Value of Listed Securities deficiency (as set forth in its Rule 5550(b)(2)) had been cured, and that we were in compliance with
all applicable listing standards. As a result, the scheduled hearing before the Hearings Panel was cancelled.
No
assurance can be given that we will continue to meet applicable Nasdaq continued listing standards. Failure to meet applicable
Nasdaq continued listing standards could result in a delisting of our common stock. A delisting of our common stock from Nasdaq
could materially reduce the liquidity of our common stock and result in a corresponding material reduction in the price of our
common stock. In addition, delisting could harm our ability to raise capital through alternative financing sources on terms acceptable
to us, or at all, and may result in the potential loss of confidence by investors, employees and fewer business development opportunities.
The
exercise of outstanding warrants and stock options will have a dilutive effect on the percentage ownership of our capital stock
by existing stockholders.
As of March 1, 2019,
we had outstanding warrants to acquire 2,163,897 shares of our common stock and stock options to purchase 2,441,007 shares of our
common stock, which warrants and options are exercisable for prices ranging between $0.04 and $5.00. The expiration of the term
of such options and warrants range from July 2019 to December 2023 If a significant number of such warrants and stock options are
exercised by the holders, the percentage of our common stock owned by our existing stockholders will be diluted.
Were our common
stock to become subject to the penny stock rules then this could result in U.S. broker-dealers becoming discouraged from effecting
transactions in shares of our common stock.
Rule 15g-9 under the
Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security
that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. If we do not retain a listing on the Nasdaq Capital Market or do not meet certain net tangible asset or average revenue
requirements and if the price of our common stock is less than $5.00, our common stock will be deemed a penny stock. For any transaction
involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions
in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the
identity and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information
and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock,
a disclosure schedule prescribed by the SEC relating to the penny stock market, which: (a) sets forth the basis on which the broker
or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement
from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject
to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause
a decline in the market value of our common stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and
the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in
penny stocks.
Sales
of our currently issued and outstanding stock may become freely tradable pursuant to Rule 144 and may dilute the market for your
shares and have a depressive effect on the price of the shares of our common stock.
A
portion of our outstanding shares of common stock are “restricted securities” within the meaning of Rule 144 under
the Securities Act of 1933, as amended, or the Securities Act. As restricted shares, these shares may be resold only pursuant
to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration
under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that an affiliate
(as such term is defined in Rule 144(a)(1)) of an issuer who has held restricted securities for a period of at least six months
(one year after filing Form 10 information with the SEC for shell companies and former shell companies) may, under certain conditions,
sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a company’s
outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to the sale (the
four calendar week rule does not apply to companies quoted on the OTC Markets). Rule 144 also permits, under certain circumstances,
the sale of securities, without any limitation, by a person who is not an Affiliate of the Company and who has satisfied a one-year
holding period. A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent
registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any
active market that may develop.
We
are a former “shell company” and as such are subject to certain limitations not applicable to other public companies
generally.
Prior
to our suspension of reporting in 2012, we were a public reporting “shell company,” as defined in Rule 12b-2 under
the Exchange Act. Although we are no longer a “shell company,” we are subject to certain restrictions under the Securities
Act for the resale of securities issued by issuers that have been at any time previously a shell company. Specifically, the Rule
144 safe harbor available for the resale of our restricted securities is only available to our stockholders if we have filed all
reports and other materials required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended,
or the Exchange Act, as applicable, during the preceding twelve months, other than current reports on Form 8-K, at the time of
the proposed sale, regardless of whether the restricted securities were initially issued at the time we were a shell company or
subsequent to termination of such status. Accordingly, holders of our “restricted securities” within the meaning of
Rule 144 will be subject to the conditions set forth in Rule 144 with respect to our company. Other reporting companies that are
not former shell companies and have been reporting for more than twelve months are not subject to this same reporting threshold
for non-affiliate reliance on Rule 144. Accordingly, any restricted securities we have sold or sell in the future or issue to
consultants or employees, in consideration for services rendered or for any other purpose, may not be resold unless such securities
are registered with the SEC or the requirements of Rule 144 have been satisfied. As a result, it may be harder for us to fund
our operations and pay our employees and consultants with our securities instead of cash. Furthermore, it may be harder for us
to raise funding through the sale of debt or equity securities unless we agree to register such securities with the SEC, which
could cause us to expend additional resources in the future. Our prior status as a “shell company” could prevent us
in the future from raising additional funds, engaging employees and consultants, and using our securities to pay for any acquisitions,
which could cause the value of our securities, if any, to decline in value or become worthless.