SEC Form 20-F filed by Check-Cap Ltd.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from _______ to _______

Commission file number 001-36848

Check-Cap Ltd.

(Exact name of the Registrant as specified in its charter)

Israel

(Jurisdiction of incorporation or organization)

29 Abba Hushi Avenue

P.O. Box 1271

Isfiya, 3009000 Mount Carmel, Israel

(Address of principal executive offices)

Saar Levi

Chief Executive Officer

Check-Cap Ltd.

29 Abba Hushi Avenue

P.O. Box 1271

Isfiya, 3009000 Mount Carmel, Israel

Telephone: +972 52-777-2073

Email: [email protected]

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

As of December 31, 2023, the registrant had 5,850,770 ordinary shares outstanding, NIS 48.00 par value per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company.

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of the securities under a plan confirmed by a court.

Yes ☐ No ☐

TABLE OF CONTENTS

EXPLANATORY NOTE

Check-Cap Ltd. is a clinical stage medical diagnostics company with a limited operating history. On June 6, 2023, we announced that after further review of additional data and interaction with the FDA on a revised pivotal study protocol together with the anticipated time and investment necessary to further develop the technology, we were reducing our workforce significantly to reduce cash burn, concentrating our resources on essential research activities, discontinuing our calibration studies, and evaluating and pursuing strategic options. As a result of our evaluation and pursuit of strategic options, on March 25, 2024, we entered into a business combination agreement with Nobul AI Corp. (“Nobul”), a private Ontario corporation (the “Business Combination”). If the Business Combination is consummated, Check-Cap’s ordinary shares will be delisted from Nasdaq and deregistered under the Securities Exchange Act of 1934 and Check-Cap will no longer be required to file periodic reports with the U.S. Securities and Exchange Commission. Given that the Form 20-F provides the financial statements for the fiscal year’s ended December 31, 2023, 2022, and 2021, we have elected to discuss the significant aspects of our historical business as well as the current state of our business.

CERTAIN INFORMATION

Unless otherwise stated, all of our financial information presented in this annual report has been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP.

In this Annual Report on Form 20-F, or the Annual Report, unless the context indicates otherwise, references to “NIS” are to the legal currency of Israel, “U.S. dollars,” “$” or “dollars” are to United States dollars, and the terms “we,” “us,” “our Company,” “our,” and “Check-Cap” refer to Check-Cap Ltd. Unless otherwise indicated, U.S. dollar translation of NIS amounts presented in this Annual Report are translated using the rate of $1.00 = NIS 3.627, the exchange rate published by the Bank of Israel on December 29, 2023, and U.S. dollar translation of Euro amounts presented in this Annual Report are translated using the rate of $1.00 = Euro 0.904, based on the exchange rates published by the Bank of Israel on December 29, 2023.

On August 11, 2022 our shareholders approved a 1-for-20 reverse share split of our ordinary shares, effective as of November 23, 2022. Accordingly, commencing with our annual report for the fiscal year ending December 31, 2022, all share numbers are being presented on a post-reverse stock split basis.

USE OF TRADE NAMES AND TRADEMARKS

Throughout this Annual Report, we refer to various trademarks, service marks and trade names that we use in our business. The “CHECK-CAP” and “C-Scan” trademarks and design logos are the property of Check-Cap Ltd. Other trademarks and service marks appearing in this Annual Report are the property of their respective holders. We do not intend our use or display of other companies’ tradenames, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by these other companies. Solely for convenience, trademarks and trade names referred to in this Annual Report appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.

FORWARD-LOOKING STATEMENTS

This Annual Report contains forward-looking statements, about our expectations, beliefs or intentions regarding, among other things, our ongoing and planned product development and clinical trials and lack thereof; the timing of, and our ability to make, regulatory filings and obtain and maintain regulatory approvals for our product candidates; our intellectual property position; the degree of clinical utility of our products, particularly in specific patient populations; our ability to develop commercial functions; expectations regarding product launch and revenue; our results of operations; cash needs; financial condition, liquidity, prospects, growth and strategies; the industry in which we operate; and the trends that may affect the industry or us. In addition, from time to time, we or our representatives have made or may make forward-looking statements, orally or in writing. Forward-looking statements can be identified by the use of forward-looking words such as “believe,” “expect,” “intend,” “plan,” “may,” “should” or “anticipate” or their negatives or other variations of these words or other comparable words or by the fact that these statements do not relate strictly to historical or current matters. These forward-looking statements may be included in, but are not limited to, various filings made by us with the U.S. Securities and Exchange Commission, or the SEC, press releases or oral statements made by or with the approval of one of our authorized executive officers. Forward-looking statements relate to anticipated or expected events, activities, trends or results as of the date they are made. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements, including, but not limited to, the factors summarized below.

This Annual Report identifies important factors which could cause our actual results to differ materially from those indicated by the forward-looking statements, particularly those set forth under the heading “Risk Factors.” The risk factors included in this Annual Report are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:

All forward-looking statements attributable to us or persons acting on our behalf speak only as of the date of this Annual Report and are expressly qualified in their entirety by the cautionary statements included in this Annual Report. We undertake no obligations to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties.

MARKET AND INDUSTRY DATA

Market data and certain industry data and forecasts used throughout this Annual Report were obtained from internal company surveys, market research, consultant surveys commissioned by the Company, publicly available information, reports of governmental agencies and industry publications and surveys. Industry surveys, publications, consultant surveys commissioned by the Company and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. However, this information may prove to be inaccurate because of the method by which some of the data for the estimates is obtained or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. As a result, the market and industry data and forecasts included or incorporated by reference in this Annual Report, and estimates and beliefs based on that data, may not be reliable. We have relied on certain data from third-party sources, including internal surveys, industry forecasts and market research, which we believe to be reliable based on our management’s knowledge of the industry. However, we have not ascertained the underlying economic assumptions relied upon therein. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not necessarily know what assumptions regarding general economic growth were used in preparing the forecasts we cite. Statements as to our market position are based to the best of our knowledge on the most currently available data. While we are not aware of any misstatements regarding the industry data presented in this Annual Report, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this Annual Report.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A. Directors and Senior Management

Not required.

B. Advisers

Not required.

C. Auditors

Not required.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not required.

ITEM 3. KEY INFORMATION

A. [Reserved.]

B. Capitalization and Indebtedness

Not required.

C. Reasons for the Offer and Use of Proceeds

Not required.

D. Risk factors

In conducting our business, we face many risks that may interfere with our business objectives. Some of these risks could materially and adversely affect our business, financial condition and results of operations. In particular, we are subject to various risks resulting from changing economic, political, industry, regulatory, business and financial conditions. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business operations.

You should carefully consider the following factors and other information in this Annual Report before you decide to invest in our ordinary shares. If any of the risks referred to below occur, our business, financial condition and results of operations could suffer. In any such case, the trading price of our ordinary shares could decline, and you may lose all or part of your investment.

Summary Risk Factors

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this summary. The principal factors and uncertainties that make investing in our ordinary shares risky, include, among others:

Risks Related to Nobul and the Business Combination

Risks Related to Our Financial Position

Risks Related to Our Business

Risks Related to Regulations

Risks Related to Our Intellectual Property

Risks Related to Our Operations in Israel

Risks Related to Ownership of our Ordinary Shares

Risks Related to Taxation

Risks Related to Nobul and the Business Combination

The consummation of the Business Combination is subject to the satisfaction of certain conditions, which may not be satisfied on a timely basis, if at all.

On March 25, 2024, the Company entered into a business combination agreement (the “Nobul BCA”) with Nobul. Pursuant to the Nobul BCA, (a) a wholly owned subsidiary of Nobul, to be formed under the laws of Israel, will merge with and into the Company (the “Merger” or the “Business Combination”), with Check-Cap surviving the Merger as a direct, private, and wholly owned subsidiary of Nobul. At the effective time of the Merger (the “Merger Effective Time”) (a) each Check-Cap ordinary share issued and outstanding immediately prior to the Merger Effective Time (other than treasury, dormant shares or Check-Cap Excluded Shares (as defined in the Nobul BCA)) will automatically convert into a number of common shares in the capital of Nobul (“Nobul Common Shares”) equal to the Nobul Exchange Ratio (as defined below), (b) each Check-Cap option, unvested restricted stock unit (“RSU”) and CLA Warrant (as defined in the Nobul BCA) that is outstanding immediately prior to the Merger Effective Time will automatically expire, (c) each vested Check-Cap RSU that is outstanding and unsettled immediately prior to the Merger Effective Time shall automatically convert into Nobul Common Shares based on the number of Check-Cap ordinary shares underlying the RSUs and the Nobul Exchange Ratio, and (d) any outstanding and unexercised warrants with a change of control redemption feature that are not redeemed in accordance with their terms will be complied with by Nobul in accordance with their terms. The Nobul Exchange Ratio means the ratio of 0.1764 of a Nobul Common Share for each Check-Cap ordinary share, subject to certain adjustments.

The transactions contemplated by the Nobul BCA are subject to approval by our shareholders and shareholders of Nobul, approval by Nasdaq of the listing of Nobul Common Shares to be issued in connection with the Business Combination and other conditions as set forth in the Nobul BCA, which must be satisfied or waived to complete the Business Combination. These conditions are set forth in the Nobul BCA and described in the section entitled “Business Combination Agreement with Nobul” in this report. We cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the contemplated Business Combination will not occur or will be delayed, and we may lose some or all of the intended benefits of the Business Combination.

Failure to consummate the Business Combination may obligate us to pay a termination fee to Nobul. Payment of a termination fee by us could materially and adversely affect our financial condition and termination of the transactions contemplated by the Nobul BCA could have a material adverse effect on the market price of our ordinary shares and negatively affect our future business and operations. See “Risk Factors - Risks Related to Nobul and the Business Combination - If the Business Combination is not completed, and we do not pursue an alternative strategic option or liquidation, we expect that we will require significant additional funding in order to complete the development, scale up manufacturing and commercialization of C-Scan. If additional capital is not available, we may have to cease operations.”

Our shareholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the consummation of the Business Combination.

Under the exchange ratio formula in the Nobul BCA, upon the closing of the transactions contemplated under the Nobul BCA, our shareholders are expected to own approximately 15% of Nobul while Nobul security holders are expected to own approximately 85% of us, on a fully diluted basis and assuming that we meet certain net cash targets. Consequently, our shareholders as a group will have less influence over the management and policies of the combined company after the consummation of the Business Combination.

During the pendency of the Business Combination, we may not be able to enter into a business combination with another party or issue any equity securities, subject to certain exceptions, because of restrictions in the Nobul BCA, which could adversely affect our financial condition and results of operations.

Covenants in the Nobul BCA impede our ability to complete certain other transactions that are not in the ordinary course of business pending consummation of the Business Combination. As a result, if the transactions contemplated by the Nobul BCA are not completed, the parties may be at a disadvantage to their competitors during such period. While the Nobul BCA is in effect, we are generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets, or other business combination outside the ordinary course of business with any third party, subject to certain exceptions relating to fiduciary duties. We may accept a superior offer (“Superior Offer”) at any time prior to the approval of the Business Combination by our shareholders, given such superior offer was not obtained as a result of a breach of the Nobul BCA, is on terms and conditions that our Board determines in good faith are more favorable to our shareholders and provides consideration of 20% or more in excess of the consideration provided for pursuant to the Nobul BCA. We cannot guarantee that any alternative proposal that any individual shareholder may perceive as superior would constitute a Superior Offer. In addition, pursuant to the Nobul BCA, during the pendency of the Business Combination, we may not seek additional funding through the issuance and sale of any capital stock or other securities, which may adversely affect our financial condition and results of operations. See “Additional Information - Material Contracts - Business Combination Agreement with Nobul.”

Given the cross-border nature of the Business Combination, we are and will become subject to a variety of additional risks that may negatively affect the Company’s results of operations and financial condition.

The cross-border nature of the Business Combination subjects us to special considerations and risks, including but not limited to the following:

We may not be able to adequately address these additional risks. If we are unable to do so, our operations might suffer, which may adversely affect our results of operations and financial condition. See “Risk Factors - Risks Related to Our Operations in Israel - Provisions of Israeli law and our amended articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction are favorable to us and our shareholders.”

We are substantially dependent on our remaining key employees to facilitate the consummation of a strategic transaction.

As part of our cash conservation activities, we implemented a significant reduction in workforce plan. Our ability to successfully complete the Business Combination depends in large part on our ability to retain certain personnel. Despite our efforts to retain these employees, one or more may terminate their employment on short notice. The loss of the services of any of these employees could potentially harm our ability to complete the Business Combination, run our day-to-day business operations as well as fulfill our reporting obligations as a public company.

If the Business Combination is not completed, and we do not pursue an alternative strategic option or liquidation, we expect that we will require significant additional funding in order to complete the development, scale up manufacturing and commercialization of C-Scan or any new products and technology. If additional capital is not available, we may have to cease operations.

We are a clinical and development-stage medical diagnostics company with a limited operating history. We have incurred net losses in each fiscal year since we commenced operations in 2009. We incurred net losses of $17.6 million in fiscal 2023, $19.1 million in fiscal 2022, and $17.2 million in fiscal 2021. As of December 31, 2023, our accumulated deficit was $144.9 million. We expect our losses to continue for the foreseeable future. If the Business Combination is not completed, and we do not pursue an alternative strategic option or liquidation, we expect that we will need to raise and spend substantial amounts in order to complete the clinical development, regulatory approval and commercialization of C-Scan or any new products and technology. We may seek additional funding through equity offerings, debt financings, collaborations, licensing arrangements or any other means to conduct clinical trials and develop, manufacture and market C-Scan or for our general corporate purposes. If adequate additional financing on acceptable terms is not available, our ability to continue to support our business growth and to respond to business challenges could be significantly limited and we may have to cease operations. To provide for liquidity, we may issue additional equity securities of the Company, which may dilute ownership of existing shareholders. Any debt financing secured by the Company in the future could involve additional restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities.

Risks Related to Our Financial Position

We have a history of losses, may incur future losses and require additional funding in order to complete the development of our products and technology. If additional capital is not available and we cease the development of our products and technology or are obligated to relinquish rights to our intellectual property, we may not ever achieve profitability and be forced to liquidate.
 

We are a clinical and development-stage medical diagnostics company with a limited operating history and our operations have consumed substantial amounts of cash. We have incurred net losses in each fiscal year since we commenced operations in 2009. We incurred net losses of $17.6 million in 2023 and $19.1 million in 2022. As of December 31, 2023, our accumulated deficit was $144.9 million. On March 21, 2023, we announced that following our internal assessment of the clinical data collected from the calibration studies until such date, we determined that the most recent efficacy results from our calibration studies did not meet the goal to proceed to the powered portion of the U.S. pivotal study and, as such, the initiation of the second part of the U.S. pivotal study that was expected in mid-2023 was also postponed.  On June 6, 2023, we announced that after further review of additional data and interaction with the FDA on a revised pivotal study protocol together with the anticipated time and investment necessary to further develop the technology, we were reducing our workforce significantly to reduce cash burn, concentrating our resources on essential research activities, discontinuing our calibration studies, and evaluating and pursuing strategic options. As a result of our evaluation and pursuit of strategic options, on March 25, 2024, we entered into a business combination agreement with Nobul.

We expect that we will need substantial amounts of cash resources in order to complete the development of the products and technology derived from our intellectual property so that we can find new or alternative ways to redeploy them into other existing or new products and technologies. We intend to use our limited cash resources to support these efforts, including through the Business Combination. See Item 5B “Operating and Financial Review and Prospects - Liquidity and Capital Resources - Sources of Liquidity.”

Moreover, we may seek additional funding through equity offerings, debt financings, collaborations, licensing arrangements or any other means. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our ordinary shares. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our ordinary shares to decline. Alternatively, if we raise funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants, may require us to grant a lender a security interest in our assets or may include other restrictions on our business that could impair our operational flexibility, and could also result in high interest expense. If we raise additional funds through collaborations, licensing arrangements or other structured financing transactions, we may relinquish rights to certain of our technologies or products, grant security interests in our assets or grant licenses to third parties on terms that are unfavorable to us.

Securing additional financing may divert our management’s attention from its day-to-day activities, which may adversely further delay and affect our ability to complete the development of our products and technology and such additional financing may not be available to us on a timely basis or on terms acceptable to us, or at all. Accordingly, the extent of our future operating losses, the timing or even the potential of becoming profitable are highly uncertain, and we may never achieve or sustain profitability. Any of these factors could materially and adversely affect our business, financial condition and results of operations.

Risks Related to Our Business

Although we received FDA approval of our IDE (including our IDE amended application) for our U.S. pivotal study, the most recent efficacy results from our studies did not meet the goal to proceed to the powered portion of the U.S. pivotal study, as such we cannot provide any assurance that we will ever be able to redesign such study or redeploy our technology into other potentially viable products.

We received FDA approval of our IDE and our IDE amended application for our planned U.S. pivotal study. While we initiated the first part of the U.S. pivotal study in May 2022, the initiation of the powered portion of the U.S. pivotal study was dependent upon successful completion of the calibration portion of the U.S. pivotal study. On March 21, 2023, we announced that following our internal assessment of the clinical data collected from the calibration studies until such date, we determined that the most recent efficacy results from our calibration studies did not meet the goal to proceed to the powered portion of the U.S. pivotal study and, as such, the initiation of the second part of the U.S. pivotal study that was expected in mid-2023 was also postponed.  On June 6, 2023, we announced that after further review of additional data and interaction with the FDA on a revised pivotal study protocol together with the anticipated time and investment necessary to further develop the technology, we were reducing our workforce significantly to reduce cash burn, concentrating our resources on essential research activities, discontinuing our calibration studies, and evaluating and pursuing strategic options. As a result of our evaluation and pursuit of strategic options, on March 25, 2024, we entered into a business combination agreement with Nobul. In light of such developments, we cannot provide any timeline or assurance of when, if ever, or whether we will be able to compile an IDE supplement for submission to the FDA. There can be no assurance that the FDA would approve any such an IDE supplement or that we will be ever able to commence or complete the powered portion of the U.S. pivotal study. Furthermore, even if we were able to redesign the study and submit such IDE supplement, the FDA or other regulatory authority may require us to complete additional studies or satisfy other FDA or other regulatory requests, which would further delay any further U.S. pivotal studies.

Moreover, since our announcements in March and June 2023, we have engaged in business combination discussions for the acquisition of our products and technology and entered into agreements with Keystone Dental Holdings, Inc., a Delaware corporation (“Keystone”), and Nobul. For example, on August 16, 2023, we entered into a business combination agreement (the “Keystone BCA”) with Keystone, Capstone Dental PubCo, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Keystone (“PubCo”) and other direct, wholly owned subsidiaries of PubCo. However, the Keystone BCA was not approved by the requisite majority required for approval, under Section 320 of the Israeli Companies Law 5759-1999 and, as such, the Keystone BCA was terminated on December 24, 2023 upon notice from Keystone terminating the Keystone BCA in light of the results. More recently, on March 25, 2024, we entered into the Nobul BCA, pursuant to which a wholly owned subsidiary of Nobul, to be formed under the laws of Israel, will merge with and into us, with Check-Cap surviving as a direct, private, and wholly owned subsidiary of Nobul. See “Risk Factors - Risks Related to Nobul and the Business Combination.”

As a result of the foregoing, our ability to redesign our U.S. studies, complete the development of our products and technology for the redeployment into other potentially viable products is inherently uncertain, and may take significant time to complete, if any such options are ever completed at all.
 

Clinical failure can occur at any stage of clinical development and we may not succeed in completing the development of our product. Any product we advance through clinical trials may require further clinical validation and may not have favorable results in later clinical trials or receive regulatory approval.

Clinical failure can occur at any stage of clinical development and we may not succeed in completing the development of our product. To date, we have performed clinical studies with iterative versions of both scanning and non-scanning capsules, in conjunction with iterative versions of the C-Scan Track, C-Scan View application. The C-Scan system utilizes ultra-low-dose X- rays to scan the inner lining of the colon for precancerous polyps, and other structural abnormalities. In addition, our clinical trials to date were conducted under differing protocols, while using specific inclusion criteria and enrolling both average risk and high-risk patients (e.g., “enriched population”). Therefore, our ability to identify potential problems and/or inefficiencies concerning current and future versions of C-Scan in advance of its use in general and expanded groups of average risk patients has been limited and we cannot assure you that the actual clinical performance will be satisfactory to support proposed indications, obtain regulatory approvals and gain clinical acceptance and adoption, or that its use will not result in unanticipated complications. Although we continuously collect additional clinical data to improve reliability of our products and technology, we cannot provide any assurance that such studies will yield favorable results. For example, we conducted a study in Israel for which we initially enrolled both average risk and high-risk patients and subsequently shifted to enrollment of only average risk patients commencing in May 2022. The purpose of the additional study was to improve calibration of the C-Scan system, in parallel to conducting the first stage of the U.S. pivotal study that was initiated in May 2022. As part of the approved amended IDE, we designed the U.S. pivotal study to include two stages: the first stage, aimed to support our C-Scan calibration among the average risk population, which is intended to include up to 200 patients in the U.S.; and the second stage, which was intended to include up to 800 subjects (400 in the U.S. and 400 in Israel), aimed to compare the performance of C-Scan to traditional colonoscopy through a statistically powered and randomized study. The initiation of the powered portion of the U.S. pivotal study was dependent upon successful completion of the calibration portion of the U.S. pivotal study. Because we determined that the efficacy results from our calibration studies did not meet the goal to proceed to the powered portion of the U.S. pivotal study and discontinued further studies, we reduced our workforce to preserve and concentrate our resources on essential research activities and evaluated and pursued strategic options.

Furthermore, results from laboratory, non-clinical and completed clinical studies, as well as results from any ongoing clinical trials may not always be indicative of final clinical results. As such, any product we advance through clinical trials may require further clinical validation and may not have favorable results in later clinical trials or receive regulatory approval. In addition, the results of clinical trials are subject to human analyses and interpretation of the data accumulated, which could be affected by various errors due to, among others, lack of sufficient clinical experience with C-Scan, assumptions used in the statistical analysis of results, interpretation errors in the analysis of the clinical trials results, including the reconstructed images by C-Scan, or due to uncertainty in the actual efficacy of C-Scan in its current clinical stage. Therefore, the safety and efficacy of C-Scan and the clinical results to date will require further independent professional validation and require further clinical study. If C-Scan does not function as expected over time, we may not be able to develop C-Scan at the rate or to the stage we desire, we could be subject to liability claims, our reputation may be harmed, C-Scan may not achieve regulatory clearances, and C-Scan may not be widely adopted by healthcare providers and patients.
 

We may face a number of challenges with respect to our commercialization efforts and may not succeed in the commercialization of our product, obtain required regulatory approvals or manufacture commercial quantities of C-Scan at an acceptable cost to enable us to generate significant revenues.

Since commencing our operations, we focused on the research and development and limited clinical trials of C-Scan and then reduced investment in research and development activities in anticipation of the initiation of our strategic development plan. Although we received a CE-certificate from our notified body (DEKRA – 0344 or Notified Body) according to the EU Regulation 2017/745 on Medical Devices for the marketing and sale of C-Scan in the European Union, valid until December 1, 2026, we were unable to commence marketing and sales in the European Union and, to extent we are able to redesign any study protocols or C-Scan, additional or new regulatory approval in Member States of the European Union, for instance from the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS) may be required before we are able to launch any such redesigned studies or deploy redesigned products or technology. Furthermore, we may require additional regulatory certifications, registrations and/or approvals from regulatory authorities in European jurisdictions outside the European Union, including with the UK Medicines and Healthcare Products Regulatory Agency and the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra). In Israel, we received approval from the Medical Devices and Accessories Division of the Israeli Ministry of Health, or AMAR, for the marketing and sale of C-Scan in Israel, which is valid until December 31, 2024. We have not received approvals in other jurisdictions, including the United States, and there can be no assurance that we will be able to receive regulatory approvals to commence marketing and sales for C-Scan in the foreseeable future or ever. Our ability to generate revenues and achieve profitability depends on our ability to successfully complete the development of our C-Scan product, demonstrate sufficient clinical evidence, obtain required regulatory approvals and commercial licenses, and manufacture commercial quantities of C-Scan at an acceptable cost to enable us to generate significant revenues.

The future success of our business cannot be determined at this time, and, in light of recent developments, we do not anticipate generating any revenues from product sales for the foreseeable future. In addition, we have no experience in commercializing C-Scan, so even if we are able to redesign such clinical studies, we may face a number of challenges with respect to our commercialization efforts, including, among others, that:

If we are unable to meet any one or more of these challenges successfully, our ability to complete the development of and effectively commercialize C-Scan could be limited, which in turn could have a material adverse effect on our business, financial condition and results of operations.

We have limited manufacturing experience and capabilities and if we are unable to scale up our manufacturing operations to develop our products, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.

We currently have limited resources, facilities and experience in manufacturing. Following the determination to discontinue our clinical studies and conserve our resources, on September 8, 2023, we terminated our sub-lease agreement and service agreement with the sole supplier of the X-ray source used in C-Scan pursuant to which we leased approximately 70 square meters of laboratory production space at the supplier premises and independently produced the X-ray source using our own production employees. See “Information on Our Company – Business – Manufacturing and Suppliers.”

We have in the past, and we may in the future, continue to face technical challenges to obtain, increase or adjust manufacturing capacity, including, among others, equipment design and automation, material procurement and lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and assurance standards, manufacturing commercial quantities of products at an acceptable cost and logistics associated with the handling of radioactive materials, such as was the case in our C-Scan Cap, which have resulted in and could result in delays in our clinical trial and commercialization plans and lost revenue. We may be unable to establish or maintain reliable, high-volume manufacturing capacity. Even if we can establish and maintain this capacity, the cost of doing so may increase the cost of our products and reduce our ability to compete successfully. If we are unable to scale up our manufacturing capabilities to meet market demand, or to achieve adequate product cost, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.

In addition, we received and may receive in the future grants from the Government of the State of Israel through the Innovation Authority of the Ministry of Economy and Industry (the “IIA”) for the financing of a portion of our research and development expenditures and to support the funding of our transition from research and development to manufacturing, pursuant to the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Encouragement of Industrial Research and Development Law 5744-1984), or the Innovation Law. The terms of the IIA grants subject us to certain restrictions relating to (among other things) the transfer of the manufacturing of IIA-funded products outside Israel. See “Risk Factors - Risks Related to Our Operations in Israel - Pursuant to the terms of the Israeli government grants we received for research and development expenditures, we are obligated to pay certain royalties on our revenues to the Israeli government. In addition, the terms of Israeli government grants we received require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.” Such restrictions may impair our ability to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel.
 

Our reliance on sole or single source suppliers could harm our ability to conduct clinical trials and meet demand for our product in a timely manner or within budget.

We have historically depended on sole or single source suppliers for some of the components and materials necessary for the production of C-Scan. If we are required to change the supplier of any of these key components, there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with FDA and other applicable quality standards and with all applicable regulations and guidelines. To the extent we ever are able to redesign the clinical studies for submission to the FDA or other regulatory authorities or redeploy our technology into other potentially viable products, we will be required to find new suppliers, which we may not be able to do in a timely manner. The delays associated with the introduction of a new manufacturer for certain key components or new suppliers for certain materials, could delay our ability to manufacture any redesigned products in a timely manner or within budget. Furthermore, in the event that the manufacturer of a key component of any our products ceases operations or otherwise ceases to do business with us, we may not have access to the information necessary to enable an alternative supplier to manufacture the component. The occurrence of any of these events could harm our ability to complete the development of our products and meet demand in a timely manner or within budget.

The use of any of our C-Scan Cap, C-Scan Track, C-Scan View or any new products and technology could result in product liability or similar claims that could be expensive to defend, damage our reputation and harm our business.

Our business exposes us to an inherent risk of potential product liability or similar claims related to the manufacturing, marketing and sale of medical devices. The medical device industry has historically been litigious, and we face financial exposure to product liability or similar claims if the use of any of our C-Scan Cap, C-Scan Track or C-Scan View were to cause or contribute to injury or death, including, without limitation, harm to the body caused by the procedure or inaccurate diagnoses from the procedure that could affect treatment options. There is also the possibility that defects in the design or manufacture of any of these products or any new products and technology we redesign or redeploy might necessitate a product recall. Although we plan to maintain product liability insurance, the coverage limits of these policies may not be adequate to cover future claims. In the future, we may be unable to maintain product liability insurance on acceptable terms or at reasonable costs and such insurance may not provide us with adequate coverage against potential liabilities. A product liability claim, regardless of merit or ultimate outcome, or any product recall could result in substantial costs to us, damage to our reputation, customer dissatisfaction and frustration, and a substantial diversion of management attention. A successful claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on our business, financial condition and results of operations.

We have historically depended on third parties to manage our clinical studies and trials, perform related data collection and analysis, and to enroll patients for our clinical trials, and, as a result, we may face costs and delays that are beyond our control.

We have historically relied on third parties, such as third-party clinical research organizations, or CROs, clinical investigators, clinical research coordinators, physicians and clinical sites, to manage our clinical trials and perform data collection and analysis, and to enroll patients for our clinical trials. Although we have and expect to continue to have contractual arrangements with these third parties, we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our studies is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on such third parties does not relieve us of our regulatory responsibilities. If such third parties fail to comply with applicable regulatory requirements, the clinical data generated in our clinical trials may be deemed unreliable and regulatory authorities may require us to perform additional clinical trials before approving our marketing applications, which would delay the regulatory approval process. Furthermore, we may not be able to control the amount and timing of resources that these parties devote to our studies and trials or the quality of these resources. In addition, our engagement with clinical centers for conducting our clinical trial in the U.S depends upon site-specific licensing and regulatory requirements associated with the X-ray technology within our C-Scan capsules related to nuclear regulatory compliance.

If these third parties fail to properly manage our studies and trials or enroll patients for our clinical trials, we will be unable to complete them at all or in a satisfactory or timely manner, which could delay or prevent us from obtaining regulatory approvals for, or achieving market acceptance of, our product.

In addition, termination of relationships with third parties may result in delays, inability to enter into arrangements with alternative third parties or do so on commercially reasonable terms. Switching or adding additional clinical sites involves additional cost and requires management time and focus. In addition, there is a natural transition period when a new clinical site commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines.

We currently expect to sell our products mainly in the United States, Europe, Israel and Japan and, if we are unable to manage our operations in these territories, our business, financial condition and results of operations could be materially adversely affected.

Our headquarters and substantially all of our operations and employees are presently located in Israel, but we currently expect to market our products mainly in the United States, Europe, Israel and Japan. Accordingly, we are subject to risks associated with international operations, and our international sales and operations will require significant management attention and financial resources. In addition, our international sales and operations will subject us to risks inherent in international business activities, many of which are beyond our control and include, among others:

If we are unable to manage our international operations effectively, our business, financial condition and results of operations could be materially adversely affected.

We may not be successful in establishing and maintaining strategic partnerships, which could adversely affect our ability to develop and commercialize our products and technology.

A part of our strategy is to evaluate and, as deemed appropriate, enter into partnerships in the future when strategically attractive, including potentially with major medical device companies. We face significant competition in seeking appropriate partners for our products and technology, and the negotiation process is time-consuming and complex. Potential partners must view our products and technologyas economically valuable in markets they determine to be attractive in light of the terms that we are seeking and other available products for licensing by other companies. Even if we are successful in our efforts to establish strategic partnerships, the terms that we agree upon may not be favorable to us, and we may not be able to maintain such strategic partnerships if, for example, development or approval of a product is delayed or sales of an approved product are disappointing. Any delay in entering into strategic partnership agreements for our products and technology could delay the development and commercialization of any product candidates and reduce their competitiveness even if they reach the market.

In addition, our strategic partners may breach any future agreement with us, and we may not be able to adequately protect our rights under these agreements. Furthermore, our strategic partners will likely negotiate for certain rights to control decisions regarding the development and commercialization of our products and technology, and may not conduct those activities in the same manner as we would do so.
 

If we fail to establish and maintain strategic partnerships, we will bear all the risks and costs related to the development and commercialization of our products and technology, and we will need to seek additional significant financing, hire additional employees and otherwise develop expertise which we do not have and for which we have not budgeted.

A security breach or disruption or failure of our computer or communications systems could adversely affect us.

Despite the implementation of security measures, our internal computer systems, and those of our CROs and other third parties on which we rely, are vulnerable to damage from computer viruses, unauthorized access, cyber-attacks, natural disasters, fire, terrorism, war, and telecommunication and electrical failures. If such an event were to occur and interrupt our operations, it could result in a material disruption to our business. To the extent that any disruption or security breach results in a loss of or damage to our data or applications, loss of trade secrets or inappropriate disclosure of confidential or proprietary information, including protected health information or personal data of clinical trial participants or employees or former employees, access to our clinical data, or disruption of the manufacturing process, we could incur liability and the further development of our products and technology could be delayed. We may also be vulnerable to cyber-attacks by hackers or other malfeasance. This type of breach of our cybersecurity may compromise our confidential information and/or our financial information and adversely affect our business or result in legal proceedings. Further, these cybersecurity breaches may inflict reputational harm upon us that may result in decreased market value and erode public trust.

We or the third parties upon whom we depend may be adversely affected by natural disasters and/or health epidemics or pandemics and our business continuity and disaster recovery plans may not adequately protect us from a serious disaster.

Natural disasters could severely disrupt our operations and have a material adverse effect on our business, results of operations, financial condition and prospects. If a natural disaster, power outage or other event occurred that prevented us from using all or a significant portion of our office, manufacturing and/or lab spaces, that damaged critical infrastructure, such as the manufacturing facilities of our third-party contract manufacturers, subcontractors, suppliers, CROs, clinical sites, clinical investigators, clinical coordinators, third parties ongoing activities and schedules or that otherwise disrupted operations, it may be difficult or, in certain cases, impossible for us to continue our plans and business for a substantial period of time (see “Risk Factors - Risks Related to Our Operations in Israel - Our principal offices, research and development facilities our manufacturing sites and some of our suppliers are located in Israel and, therefore, our business, financial condition and results of operation may be adversely affected by political, economic and military instability in Israel.”)

We experienced disruptions to our operations as a result of the COVID-19 pandemic, including disruptions to our clinical studies. Any future spread of global pandemics or the reinstatement of restrictions or other actions that may be required to contain such pandemics or treat its impact could materially adversely impact our operations and workforce, including our research and clinical trials and our ability to continue to raise capital, could affect the operations of key governmental agencies, such as the FDA, which may delay our development plans, and could result in the inability of our suppliers to deliver components or raw materials on a timely basis or at all, each of which in turn could have a material adverse impact on our business, financial condition and results of operations.

The disaster recovery and business continuity plans we have in place may prove inadequate in the event of a serious disaster or similar event. We may incur substantial expenses as a result of the limited nature of our disaster recovery and business continuity plans, which could have a material adverse effect on our business.

Shareholder activism could result in potential operational disruption, divert our resources and management’s attention and have an adverse effect on our business.

Shareholder activism, which may arise in various forms and situations, could divert management’s attention from its current strategies, require us to incur substantial legal, consulting, and public relations fees, and could result in potential operational disruption. For example, on September 29, 2023, Symetryx Corporation, a self-described family office based in Toronto, Canada (“Symetryx”) delivered a letter to Check-Cap in which it demanded that Check-Cap convene an extraordinary general meeting of shareholders, the purpose of which would be to dismiss all five then current members of the Check-Cap Board and to appoint five director nominees as proposed by Symetryx. It then filed with the Haifa District Court (Economic Department) a claim against Check-Cap and its directors, to instruct Check-Cap to comply with the resolutions that shall be adopted at the extraordinary general meeting convened by Symetryx. On November 12, 2023, Check-Cap and Symetryx reached a settlement under which Symetryx cancelled the extraordinary shareholders meeting that it purported to self-convene and Check-Cap converted the extraordinary shareholder meeting Symetryx convened to an annual general meeting of shareholders held on December 18, 2023, where the five director nominees proposed by the shareholder were elected to the Board of the Company.

Perceived uncertainties as to our future direction and control arising from shareholder activism may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified employees, any of which could adversely affect our business and operating results.

Risks Related to Regulations

If we or our future manufacturers or distributors do not obtain and maintain the necessary regulatory clearances or approvals, or equivalent third country approvals in a specific country or region, we or our future distributors will not be able to market and sell C-Scan or future products in that country or region.

To be able to market and sell C-Scan or any future products in a specific country or region, we and/or our distributors must comply with the regulations of that country or region. These regulations, and the time required for regulatory review, vary from country to country. Obtaining regulatory approvals is expensive and time-consuming, and we cannot be certain that we or our distributors will receive regulatory approvals required for C-Scan or any future products in each country or region in which we plan to market such products. With regard to obtaining the CE-certification, we have engaged with Dekra Certification as our Notified Body. If we modify C-Scan or any future products, we or our distributors may need to apply for new regulatory approvals or our Notified Body may need to review the planned changes before we are permitted to sell the respective products. We may not meet the quality and safety standards required to maintain the authorizations that we or our distributors have received. If we or if permitted, our distributors are unable to maintain our authorizations or CE Certificates in a particular country or region, we will no longer be able to sell C-Scan and/or any potential future products in that country or region, and our ability to generate revenues will be materially and adversely affected.

If the indications for use or instructions for use for which the iodinated oral contrast medium is approved are not sufficiently broad to support its use throughout the C-Scan procedure, the FDA or the competent regulatory authorities in the European Union (EU) Member States and other foreign countries may consider that contrast agent is being used off-label.

Ingestion of C-Scan requires the preparatory use of iodinated oral contrast medium to provide a coating for colonic imaging. We cannot be sure that the indications for which iodinated oral contrast medium are approved in the United States, or in other countries is sufficiently broad to cover such use. If the FDA or the competent regulatory authorities in other countries consider that iodinated oral contrast medium is not approved for the purpose for which it is used with the system, we may be considered to promote the off-label use of the iodinated oral contrast medium. Because the promotion of off-label use of drugs or medicinal products is prohibited in the United States, and in other countries, we could face both related issues with the FDA and/or the competent authorities of and/or other countries. In these circumstances, the FDA and/or the competent regulatory authorities and/or other countries may require us to obtain appropriate regulatory approvals for the iodinated oral contrast medium prior to marketing C-Scan with such substances. Under such circumstances, should we fail to obtain approval of the contrast agent for use with C-Scan, in a timely fashion, or at all, this could delay or prevent regulatory clearance or approval of the C-Scan, and our business and financial condition will be adversely affected.

The results of any future clinical trials may not support our product candidate requirements or intended use claims or may result in the discovery of adverse side effects.

Even if future clinical trials are completed, we cannot be certain that their results will support our product requirements or intended use claims, which could inhibit our marketing strategies, or that the FDA, foreign authorities or our Notified Body will agree with our conclusions regarding them. Success in non-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that clinical trials will replicate the results of prior trials. The clinical trial process may fail to demonstrate that C- Scan, or any future products, are safe and effective for the desired or proposed indicated uses, which could cause us to abandon a product and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize C-Scan, or any future products, and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.

Even if C-Scan or future products are cleared or approved by regulatory authorities or after obtaining CE Certificates from our Notified Body, modifications to C-Scan or future products may require new regulatory clearances or approvals, new CE Certificates, or may require us to recall or cease marketing it until the necessary clearances, approvals or CE Certificates are obtained.

Once cleared, approved or marketed, modifications to C-Scan or future products may require new regulatory approvals, clearances, including CE Certificates from our Notified Body, 510(k) clearances or PMAs, or require us to recall or cease marketing the modified devices until these clearances or approvals are obtained. Obtaining clearances and approvals, or new or amended CE Certificates for device modifications can be a time-consuming process, and delays in obtaining required future clearances, approvals, or CE Certificates could adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn could harm our future growth.

Even if C-Scan and future products are cleared or approved by regulatory authorities or after obtaining CE Certificates from our Notified Body, if we or our suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, our products could be subject to restrictions or withdrawal from the market.

The manufacturing processes, reporting requirements, post-approval clinical data and promotional activities associated with any product for which we obtain clearance, approval or CE Certificates, or equivalent third country approval will be subject to continuous regulatory review, oversight and periodic inspections by the FDA other domestic and foreign regulatory authorities and our Notified Body. If any adverse actions relating to the foregoing were to occur, our reputation would be harmed, our product sales and profitability would suffer and we may not be able to generate revenue. Furthermore, our key suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements which could result in our failure to produce our products on a timely basis and in the required quantities, if at all. Even if regulatory clearance or approval of a product is granted, or after obtaining CE Certificates, such clearance or approval, or CE Certificates may be subject to limitations on the intended uses for which the product may be marketed and reduce our potential to successfully commercialize the product and generate revenue from the product.

Our failure to comply with radiation safety or radio frequency regulations in a specific country or region could impair our ability to conduct our clinical trials, or commercially distribute and market C-Scan or any similar product in that country or region.

C-Scan includes a small X-ray source and wireless radio frequency transmitter and receiver, and is therefore subject to equipment authorization requirements in a number of countries and regions. In the United States, the EU and Japan, authorities often require advance clearance of all radiation and radio frequency devices before they can be sold or marketed in these jurisdictions, subject to limited exceptions. Competent authorities for such additional approval requirements include the Swiss National Cooperative for the Disposal of Radioactive Waste (Nagra) and the German Federal Office for Radiation Protection (Bundesamt für Strahlenschutz, BfS). Modifications to the approved C-Scan version design and specifications may require new or further regulatory clearances or approvals before we are permitted to market and sell a modified C-Scan version. If we are unable to obtain any required clearances or approvals from the authorities responsible for the radiation as well as the radio frequency regulations in these and other jurisdictions, the sale or use of C-Scan or any similar product could be prevented in these countries. Any such action could negatively affect our business, financial condition and results of operations.

Our products may in the future be subject to product recalls that could harm our reputation, business and financial results.

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture or a public health/safety issue. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. A government-mandated or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other deficiencies and issues. Once marketed, recalls of any of our products, including C-Scan, would divert managerial and financial resources and have an adverse effect on our business, financial condition and results of operations. FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. Companies are required to maintain certain records of recalls, even if they are not reportable to FDA. We may initiate voluntary recalls involving our products in the future that we determine do not require us to notify the FDA. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action against us based on our failure to report the recalls when they were conducted.

If C-Scan or future products cause or contribute to a death or a serious injury, or malfunction in such a way that causes or contributes to a death or serious injury, we will be subject to medical device reporting regulations, which can result in corrective actions or enforcement actions from regulatory authorities.

We expect that we will be required to conduct post-market testing and surveillance to monitor the safety or effectiveness of our products, which is costly, and we must comply with medical device reporting requirements, including the reporting of adverse events and malfunctions related to our products.

Under FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction of our device (or any similar future product) were to recur. If we fail to investigate and report these events to FDA within the required timeframes, or at all, the FDA could take enforcement action against us.
 

Under the EU MDR we will now have to comply with the increased requirements of medical devices vigilance provisions. In particular, according to Art. 83 MDR, we are required to have a post-market surveillance system in place in a manner that is proportionate to the risk class and appropriate for the type of device, as an integral part of the quality management system. Depending on the devices’ risk class, either a post market surveillance report or a periodic safety update report, or PSUR, must be created and provided to the competent authority upon request. The PSUR also has to be provided to the Notified Body. Furthermore, requirements on vigilance and incident reporting are increased and market surveillance competencies of the authorities are strengthened.

Accordingly, later discovery of previously unknown problems with our products, including unanticipated adverse side effects or adverse side effects of unanticipated severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as the Quality System Regulations, may result in changes to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines, suspension or withdrawal of regulatory approvals or CE Certificates, product seizures, injunctions or the imposition of civil or criminal penalties. If any such adverse event results in legal action taken against us, it will require us to devote sufficient time and capital to the matter, distract management from operating our business, and may harm our reputation. Any such occurrence would adversely affect our business, financial condition and operating results and prospects. 

Our business is subject to complex environmental and health legislation in various jurisdictions that may increase our costs and our risk of noncompliance.
 

Our research and development and manufacturing processes, including through our service providers, involve the handling of potentially harmful radioactive and other hazardous materials. Therefore, we and our service providers may be subject to various environmental, health and safety laws and regulations, including governing the use, shipping, handling, storage and disposal of these materials, and we incur expenses related to compliance with these laws and regulations. If we are found to have violated applicable environmental, health and safety laws, whether as a result of human error, equipment failure or other causes, we could be held liable for damages, penalties and costs of remedial actions and could be subject to work stoppages or delays, which could materially adversely affect our business, financial condition and results of operations. The risk of contamination or injury from these materials cannot be eliminated. If an accident or release of any radioactive or other hazardous material occurs, we could be held liable for resulting damages, including for investigation, remediation and monitoring of the contamination, including the costs of which could be substantial. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to radioactive materials) or contribution claims. In the future, we could be subject to additional environmental requirements or existing environmental laws could become more stringent, which could lead to greater compliance costs and increasing risks and penalties associated with violations. For example, changes to, or restrictions on, permitting requirements or processes, hazardous or radioactive material storage or handling might require an unplanned capital investment or relocation. If we or our service providers fail to comply with existing or new environmental laws or regulations, our business, financial condition and results of operations could be materially adversely affected.

Federal and state privacy laws, and equivalent laws of third countries, may increase our costs of operation and expose us to civil and criminal sanctions.

The Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations that have been issued under it, to which we refer collectively as HIPAA, and similar laws outside the United States, contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. The HIPAA privacy rules prohibit “covered entities,” such as healthcare providers and health plans, from using or disclosing an individual’s protected health information, unless the use or disclosure is authorized by the individual or is specifically required or permitted under the privacy rules. Under the HIPAA security rules, covered entities must establish administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health information maintained or transmitted by them or by others on their behalf. While we do not believe that we are a covered entity under HIPAA, many of our customers may be covered entities subject to HIPAA. Such customers may require us to enter into business associate agreements, which will obligate us to safeguard certain health information we obtain in the course of our relationship with them, restrict the manner in which we use and disclose such information and impose liability on us for failure to meet our contractual obligations.

In addition, under The Health Information Technology for Economic and Clinical Health Act of 2009, or HITECH, which was signed into law as part of the U.S. stimulus package in February 2009, certain of HIPAA’s privacy and security requirements are now also directly applicable to “business associates” of covered entities and subject them to direct governmental enforcement for failure to comply with these requirements. We may be deemed as a “business associate” of some of our customers. As a result, we may be subject as a “business associate” to civil and criminal penalties for failure to comply with applicable privacy and security rule requirements. Moreover, HITECH created a new requirement obligating “business associates” to report any breach of unsecured, individually identifiable health information to their covered entity customers and imposes penalties for failing to do so.

In addition to HIPAA, most U.S. states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many U.S. states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. These U.S. state laws, which may be even more stringent than the HIPAA requirements, are not preempted by the federal requirements, and we are therefore required to comply with them to the extent they are applicable to our operations.

These and other possible changes to HIPAA or other U.S. federal or state laws or regulations, or comparable laws and regulations in countries where we conduct business, could affect our business and the costs of compliance could be significant. Failure by us to comply with any of the standards regarding patient privacy, identity theft prevention and detection, and data security may subject us to penalties, including civil monetary penalties and in some circumstances, criminal penalties. In addition, such failure may damage our reputation and adversely affect our ability to retain customers and attract new customers.
 

The protection of personal data, particularly patient data, is subject to strict laws and regulations in many countries. The collection and use of personal health data in the EU is governed by the General Data Protection Regulation Reg. EU 2016/679, which became applicable on May 25, 2018, or the GDPR. The GDPR imposes a number of requirements, including an obligation to seek the consent of individuals to whom the personal data relate, the information that must be provided to the individuals, notification of data processing obligations to the competent national data protection authorities of individual EU Member States and the security and confidentiality of the personal data. The GDPR also imposes strict rules on the transfer of personal data out of the EU to the U.S. Failure to comply with the requirements of the GDPR and the related national data protection laws of the EU Member States may result in fines and other administrative penalties and harm our business. We may incur extensive costs in ensuring compliance with these laws and regulations, particularly if we are considered to be a data controller within the meaning of the GDPR.
 

If we fail to comply with the U.S. federal Anti-Kickback Statute and similar state and third-country laws, we could be subject to criminal and civil penalties and exclusion from federally funded healthcare programs including the Medicare and Medicaid programs and equivalent third-country programs, which would have a material adverse effect on our business and results of operations.

A provision of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration, directly or indirectly, in cash or in kind, to induce or reward the referring, ordering, leasing, purchasing or arranging for, or recommending the ordering, purchasing or leasing of, items or services payable, in whole or in part, by Medicare, Medicaid or any other federal healthcare program. PPACA, among other things, clarified that a person or entity needs not to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it. Although there are a number of statutory exemptions and regulatory safe harbors to the federal Anti- Kickback Statute protecting certain common business arrangements and activities from prosecution or regulatory sanctions, the exemptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exemption or safe harbor may be subject to scrutiny. The federal Anti-Kickback Statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by existing case law or regulations. In addition, most of the states have adopted laws similar to the federal Anti-Kickback Statute, and some of these laws are even broader than the federal Anti-Kickback Statute in that their prohibitions may apply to items or services reimbursed under Medicaid and other state programs or, in several states, apply regardless of the source of payment. Violations of the federal Anti-Kickback Statute may result in substantial criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal healthcare programs.

All of our financial relationships with healthcare providers, purchasers, and others who provide products or services to federal healthcare program beneficiaries are potentially governed by the federal Anti-Kickback Statute and similar state laws. We believe our operations are in compliance with the federal Anti-Kickback Statute and similar state laws. However, we cannot be certain that we will not be subject to investigations or litigation alleging violations of these laws, which could be time-consuming and costly to us and could divert management’s attention from operating our business, which in turn could have a material adverse effect on our business. In addition, if our arrangements were found to violate the federal Anti- Kickback Statute or similar state laws, the consequences of such violations would likely have a material adverse effect on our business, results of operations and financial condition.
 

There are other federal and state laws that may affect our ability to operate, including the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement material to an obligation to pay money to the government or knowingly concealing or knowingly and improperly avoiding, decreasing, or concealing an obligation to pay money to the federal government. PPACA amended the Social Security Act to provide that the government may assert that a claim including items or services resulting from a violation of the federal Anti- Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act. Moreover, we may be subject to other federal false claim laws, including, among others, federal criminal healthcare fraud and false statement statutes that extend to non-government healthcare benefit programs. Moreover, there are analogous state laws. Violations of these laws can result in substantial criminal, civil or administrative penalties, damages, fines and exclusion from participation in federal healthcare programs.
 

Similar restrictions are imposed by the national legislation of many third countries in which our medical devices will be marketed. Moreover, the provisions of the Foreign Corrupt Practices Act of 1997 and other similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments, foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage. Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more aggressive and frequent investigations and enforcement by both the U.S. Securities and Exchange Commission and the Department of Justice. A determination that our operations or activities violated United States or foreign laws or regulations could result in imposition of substantial fines, interruption of business, loss of supplier, vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. In addition, lawsuits brought by private litigants may also follow as a consequence.
 

Our failure to comply with the necessary regulatory approval regarding the use of radioactive materials could significantly impair our ability to develop, manufacture and/or sell C-Scan or similar products.

The manufacture of C-Scan requires the use and storage of radioactive materials. In order to use such materials in the development and manufacture of C-Scan in Israel, we are required to obtain a permit from the Israeli Commissioner for Environmental Radiation, or the Commissioner, pursuant to the Israeli Pharmaceutical Regulations (Radioactive Elements and By-Products), 5740-1980. Should we fail to comply with the conditions of our currently existing permit, the Commissioner would have authority to cancel our permit. Should the Commissioner determine that our activities or facilities, or the activities or facilities adjacent to our premises, constitute a danger to the health and well-being of a person, the public or the environment, the cancellation or suspension of our permit could be immediate and without prior notice. Furthermore, we cannot guarantee the annual renewal of our permit and/or annual renewal subject to identical conditions, as the approval of an annual application and the conditions thereof are at the discretion of the Commissioner. Similar requirements and regulations may apply to the manufacture of C-Scan or similar products in other countries. Cancellation of or failure to renew our permit could have materially adverse consequences on our ability to manufacture and sell our products and therefore on our ability to continue our business and operations.
 

Environmental, social and corporate governance (ESG) issues, including those related to climate change and sustainability, may have an adverse effect on our business, financial condition and results of operations and damage our reputation.

There is an increasing focus from certain investors, customers, consumers, employees and other stakeholders concerning ESG matters. Additionally, public interest and legislative pressure related to public companies’ ESG practices continue to grow. If our ESG practices fail to meet regulatory requirements or investor, employee or other stakeholders’ evolving expectations and standards for responsible corporate citizenship in areas including environmental stewardship, support for local communities, Board of Director and employee diversity, human capital management, employee health and safety practices, product quality, supply chain management, corporate governance and transparency, our reputation and employee retention may be negatively impacted, and our suppliers may be unwilling to continue to do business with us.
 

Investors and other stakeholders are increasingly focusing on environmental issues, including climate change, energy and water use, plastic waste and other sustainability concerns. Concern over climate change may result in new or increased legal and regulatory requirements to reduce or mitigate impacts to the environment. Increased regulatory requirements may result in increased demands or requirements regarding components of our products and their environmental impact on sustainability. Complying with these demands or requirements could cause us to incur additional manufacturing, operating or product development costs.
 

In addition, new sustainability rules and regulations have been adopted and may continue to be introduced in various states and other jurisdictions. For example, the SEC adopted new rules that would require companies to provide significantly expanded climate-related disclosures in their periodic reporting, which may require us to incur significant additional costs to comply and impose increased oversight obligations on our management and Board of Directors.
 

If we do not adapt to or comply with new regulations, or fail to meet evolving investor, industry or stakeholder expectations and concerns regarding ESG issues, investors may reconsider their capital investment in our Company, which could have a material adverse effect on our business or financial condition.

Risks Related to Our Intellectual Property

If we are unable to protect our intellectual property rights, our competitive position could be harmed.

Our success and ability to compete depends in large part upon our ability to protect our intellectual property. Although we have patents issued in Israel, Europe, United States, Japan, China, India, Hong Kong, Canada, South Korea, Brazil and Australia, we continue to file and prosecute in many of the same countries and additional countries. We face several risks and uncertainties in connection with our intellectual property rights, including, among others:

Consequently, our competitors could develop, manufacture and sell products that directly compete with our products, which could decrease our sales and diminish our ability to compete. In addition, competitors could attempt to develop their own competitive technologies that fall outside of our intellectual property rights. If our intellectual property does not adequately protect us from our competitors’ products and methods, our competitive position could be materially adversely affected.

Because the medical device industry is litigious, we are susceptible to intellectual property suits that could cause us to incur substantial costs or pay substantial damages or prohibit us from selling C-Scan or any similar products we may develop.

There is a substantial amount of litigation over patent and other intellectual property rights in the medical device industry. Whether a product infringes a patent involves complex legal and factual issues, the determination of which is often uncertain. Searches typically performed to identify potentially infringed patents of third parties are often not conclusive and because patent applications can take many years to issue, there may be applications now pending, which may later result in issued patents which our current or future products may infringe. In addition, our competitors or other parties may assert that C-Scan or any similar products we may develop and the methods they employ may be covered by patents held by them. If C-Scan, any similar products we may develop or any of their components infringes a valid patent, we could be prevented from manufacturing or selling it unless we can obtain a license or redesign the product to avoid infringement. Third parties may currently have, or may eventually be issued, patents on which our current or future products or technologies may infringe.

In addition, litigation in which we are accused of infringement may cause negative publicity, adversely impact prospective customers, cause product shipment delays, prohibit us from manufacturing, marketing or selling our current or future products, require us to develop non-infringing technology, make substantial payments to third parties or enter into royalty or license agreements, which may not be available on acceptable terms, or at all. If a successful claim of infringement were made against us and we could not develop non-infringing technology or license the infringed or similar technology in a timely and cost-effective manner, our ability to generate significant revenues may be substantially harmed and we could be exposed to significant liability. A court could enter orders that temporarily, preliminarily or permanently enjoin us, our suppliers, distributors or our customers from making, using, selling, offering to sell or importing our current or future products, or could enter an order mandating that we undertake certain remedial activities. Claims that we have misappropriated the confidential information or trade secrets of third parties can have a similar negative impact on our reputation, business, financial condition or results of operations.

We may also become involved in litigation in connection with our brand name rights. We do not know whether others will assert that our brand name infringes their trademark rights. In addition, names we choose for our products may be claimed to infringe names held by others. If we have to change the names we use, we may experience a loss in goodwill associated with our brand name, customer confusion and a loss of sales. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming to litigate and could divert our management’s attention from operating our business.

The steps we have taken to protect our intellectual property may not be adequate, which could have a material adverse effect on our ability to compete in the market.

In addition to patents, we rely on confidentiality, non-compete, non-disclosure and assignment of inventions provisions, as appropriate, with our employees, consultants, subcontractors, suppliers and clinical investigators to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our intellectual property from unauthorized disclosure, third-party infringement or misappropriation, for the following reasons:

If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it could harm our ability to protect our rights and could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, although our employees and consultants have agreed to assign to us all rights to any intellectual property created in the scope of their employment or engagement with us and most of our current employees and consultants, have agreed to waive their economic rights with respect to our intellectual property, we cannot assure you that such claims will not be brought against us by current or former employees or consultants, despite their contractual representations and obligations toward us, or by any of the medical and/or governmental institutions that employ or engage such consultants, claiming alleged rights to our intellectual property or demanding remuneration in consideration for assigned intellectual property rights, which could result in litigation and adversely affect our business, financial condition and results of operations. See “Risk Factors - Risks Related to Our Operations in Israel - We may become subject to claims for payment of compensation for assigned service inventions by our current or former employees, which could result in litigation and adversely affect our business.”

Third parties may challenge the validity of our issued patents or challenge patent applications in administrative proceedings before various patent offices which, if successful, could negatively affect our future business and financial performance.

Various patent offices, including in the United States and Europe, provide administrative proceedings by which a third party can challenge the validity of an issued patent or challenge an application that is being examined absent any threat of litigation. In some instances, including in the United States, the administrative proceedings provide a more efficient and favorable forum to challenge our patents which may lead to more opportunities for competitors to do so, particularly smaller competitors with limited resources. Moreover, the standards utilized in these administrative proceedings, at least in the United States, provide certain legal advantages versus challenging the validity of a patent in a district court. If a third party is successful in one of these administrative proceedings, the patent will no longer be enforceable in the corresponding jurisdiction. With this loss in patent rights, we will not be able to prevent third parties from offering identical or similar competing products which may result in lower profits and a less substantial market share.

We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.

We rely on patents to protect a portion of our intellectual property and our competitive position. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in the medical device industry are generally uncertain. In order to protect or enforce our patent rights, we may initiate patent and related litigation against third parties, such as infringement suits or interference proceedings. Any lawsuits that we initiate could be expensive, take significant time and divert our management’s attention from other business concerns and the outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable. Litigation also puts our patents and other registered intellectual property at risk of being invalidated or interpreted narrowly and our patent applications at risk of not being issued. In addition, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, including attorney fees, if any, may not be commercially valuable. The occurrence of any of these events could have a material adverse effect on our business, financial condition and results of operations.

We rely on trademark protection to distinguish our products from the products of our competitors; however, if a third party is entitled to use our trademark, we could be forced to rebrand, which could result in loss of brand recognition and our ability to distinguish our products may be impaired, which could adversely affect our business.
 

We rely on trademark protection to distinguish our products from the products of our competitors. In jurisdictions where we have not registered our trademarks and logos and are using them, and as permitted by applicable local law, we rely on common law trademark protection. Third parties may oppose our trademark applications, or otherwise challenge our use of the trademarks, and may be able to use our trademarks in jurisdictions where they are not registered or otherwise protected by law. If our trademarks are successfully challenged or if a third party is using confusingly similar or identical trademarks in particular jurisdictions before we do, we may be prevented from using our brands and/or domain names and/or could be forced to rebrand our products, which could result in loss of brand recognition, and could require us to devote additional resources to marketing new brands. If others are able to use our trademarks, our ability to distinguish our products may be impaired, which could adversely affect our business. Further, we cannot assure you that competitors will not infringe upon our trademarks, or that we will have adequate resources to enforce our trademarks. 

We may not be able to enforce covenants not to compete at all or, we may be unable to enforce them for the duration contemplated in our employment contracts and may, therefore, be unable to prevent competitors from benefiting from the expertise of some of our former employees involved in research and development activities.
 

We historically have entered into non-compete agreements that prohibit our employees, if they cease working for us, from directly competing with us or working for our competitors for a limited period of time following termination of employment. In many jurisdictions, courts are increasingly refusing to enforce restrictions on competition by former employees or have interpreted them narrowly. For example, in Israel, where currently all of our employees reside, courts have required employers seeking to enforce non-compete undertakings of a former employee to demonstrate that the competitive activities of the former employee will harm one of a limited number of material interests of the employer which have been recognized by the courts, such as the secrecy of a company’s confidential commercial information or its intellectual property. If we cannot demonstrate that harm would be caused to us, an Israeli court may refuse to enforce our non-compete restrictions or reduce the contemplated period of non- competition such that we may be unable to prevent our competitors from benefiting from the expertise of our former employees. A growing number of states in the U.S. have refused to enforce non-compete provisions in employment contracts and the federal government has recently done the same. While employees may compete against us, they cannot use our trade secrets and other confidential information. If that were to occur, we would have to prove such activities. Intellectual property litigation is expensive, diverts management time and the results are uncertain.

Risks Related to Our Operations in Israel

Our principal offices, research and development facilities, our manufacturing sites and some of our suppliers are located in Israel and, therefore, our business, financial condition and results of operation may be adversely affected by political, economic and military instability in Israel.
 

Our principal offices are located in Israel. In addition, all of our employees are residents of Israel. Accordingly, political, economic and military conditions in Israel 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 neighboring countries. On October 7, 2023, terrorists from Hamas and other terrorist organizations infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets, including widespread killings and kidnappings. They also launched extensive rocket attacks on the Israeli civilian population. Shortly following the attack, Israel declared war against Hamas. Furthermore, following Hamas’ attack on Israel and Israel’s security cabinet declaration of war against Hamas, the Houthi movement, which controls parts of Yemen, launched a number of attacks on marine vessels traversing the Red Sea, which marine vessels were thought to either be in route towards Israel or to be partly owned by Israeli businessmen. There has also been increased fighting along Israel’s northern border with Lebanon. The south of Lebanon is occupied by Hezbollah, a paramilitary organization backed by Iran. Recently, Iran has directly joined the hostilities against Israel by firing hundreds of drones, ballistic missiles and guided missiles to Israel causing further uncertainty in the region.
 

To date, none of our facilities or infrastructure, including our technology platform and IT system, have been damaged nor have our supply chains been significantly impacted since the war broke out. However, a prolonged war could adversely impact our supply chain and our ability to ship products from Israel, which could disrupt our operations.  Our commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism and the war and terrorism insurance we maintain may not be adequate to cover any losses we may incur associated with armed conflicts and terrorist attacks. 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 or that it will sufficiently cover our potential damages. Any losses or damages incurred by us could have a material adverse effect on our business.

In the past, the State of Israel and Israeli companies have been subjected to economic boycotts. 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. A campaign of boycotts, divestment and sanctions has been undertaken against Israel, which could also adversely impact our business. Parties with whom we may do business could decline to travel to Israel during periods of heightened unrest or tension. In addition, the political and security situation in Israel may result in parties with whom we may 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. In addition, any hostilities involving Israel could have a material adverse effect on our facilities including our corporate office or on the facilities of our local suppliers, in which event all or a portion of our inventory may be damaged, and our ability to deliver products to customers could be materially adversely affected.

In addition, our operations could also be disrupted by the obligations of personnel to perform military service. All our employees and independent contractors are based in Israel. Some of our personnel in Israel may be obligated to perform annual military reserve duty in the Israel Defense Forces, depending on their age and position in the army. Our operations could be disrupted by the absence of one or more of our executive officers or key employees for a significant period due to military service and any significant disruption in our operations could harm our business. The full impact on our workforce or business if some of our executive officers and employees are called upon to perform military service, especially in times of national emergency, is difficult to predict. Our operations could be disrupted by the absence of a significant number of employees related to military service, which could materially adversely affect our business and results of operations.
 

Any hostilities involving Israel, terrorist activities or political instability in the region or the interruption or curtailment of trade between Israel and its present trading partners, or significant downturns in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect our share price.

Furthermore, the Israeli government is currently pursuing extensive changes to Israel’s judicial system. In response to the foregoing developments, individuals, organizations and institutions, both within and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel including due to reluctance of foreign investors to invest or conduct business in Israel, as well as to increased currency fluctuations, downgrades in credit rating, increased interest rates, increased volatility in securities markets, and other changes in macroeconomic conditions. Such proposed changes may also adversely affect the labor market in Israel or lead to political instability or civil unrest. To the extent that any of these negative developments do occur, they may have an adverse effect on our business, our results of operations and our ability to raise additional funds.
 

Pursuant to the terms of the Israeli government grants we received for research and development expenditures, we are obligated to pay certain royalties on our revenues to the Israeli government. In addition, the terms of Israeli government grant we received require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.

Our research and development efforts have been financed, in part, through funding from the IIA and the BIRD Foundation. We have received grants from the Government of the State of Israel through the IIA (formerly the OCS) for the financing of a portion of (i) our research and development expenditures and (ii) a portion of the development of our manufacturing line, pursuant to the Innovation Law and related regulations and guidelines. As of December 31, 2023, we had received funding from the IIA and the BIRD Foundation in the total amount of approximately $5.6 million and $0.11 million, respectively. As of December 31, 2023, we had not paid any royalties to the IIA and had a contingent obligation to the IIA with respect to such funding in the amount of approximately $6.2 million. In addition, in January 2021, we received an IIA grant approval to support the funding of our transition from research and development to manufacturing. The final IIA grant amounted to $620,000 (NIS 2.25 million) (along with a co-investment by us of the same amount), which we are not required to repay to the IIA, subject to the terms and conditions set forth in the grant approval, of which we received approximately $225,000 (NIS 816,075) in February 2023, $82,000 (NIS 297,414) in January 2022 and $349,000 (NIS 1,265,823) in 2021. We may apply for additional IIA grants in the future; however, there is no assurance that such applications will be approved in the amount requested or at all. Furthermore, the funds available for IIA grants out of the annual budget of the State of Israel have been reduced in the past and may be further reduced in the future. We cannot predict whether we will be entitled to any future grants, or the amounts of any such grants.

Under the terms of the Innovation Law as currently in effect, products developed with IIA funding are required to be manufactured in Israel, unless the IIA approved grant program includes a pre-determined portion of manufacturing that may be performed outside Israel (as certain of our IIA approved grants included). The approval of the IIA is required for the transferring of manufacturing outside Israel in excess of such pre-determined portion (however, only a notice to the IIA, as opposed to approval, is required for the transfer outside Israel of up to 10% of the cumulative manufacturing in excess of such pre-approved portion). If manufacturing of IIA-funded products is transferred outside Israel (following IIA approval) in excess of the pre-determined percentage included in the grant approval, then the royalty repayment rate will be increased by 1% with respect to the additional approved percentage to be manufactured outside Israel and the royalty repayment for the entire approved program may be increased to up to three times the amount of the grants received, depending on the percentage manufactured outside Israel (plus accrued interest). We may explore from time to time whether certain other components of C-Scan can be assembled outside of Israel. For example, we may in the future explore whether it would be possible to assemble the capsule without the X-ray source in Israel, and have the X-ray source subsequently manufactured and assembled into C-Scan at a certified radioisotope production facility or at a distribution center outside Israel.

Over the years, we received approval of grant applications that included a certain predetermined percentage of manufacturing to be performed outside of Israel of the X-ray source but additional examination of these approvals and consequent manufacturing is required to determine liabilities to the IIA, if any. IIA prior approval is also required for the transfer of IIA-funded know-how to a third party outside of Israel (including by way of license), which we may not receive (and any such approval would typically be subject to payment of a redemption fee, calculated according to a formula under the Innovation Law, which may be in the amount of up to six times the amount of the grants received less paid royalties, if any, and depreciation, but no less than the total grants received), plus accrued interest. Even following the full repayment of any IIA grants, we must nevertheless continue to comply with the requirements of the Innovation Law and related regulations and guidelines. The foregoing restrictions and requirements for payment may impair our ability to sell our technology assets outside of Israel or to outsource or transfer development or manufacturing activities with respect to any product or technology outside of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of Israel of technology or know-how developed with IIA funding (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to the IIA.

If we fail to comply with any of the conditions and restrictions imposed by the Innovation Law and related regulations and guidelines, or by the specific terms under which we received the grants, we may be required to refund any grants previously received together with interest and penalties, and, in certain circumstances, may be subject to criminal charges.

Your rights and responsibilities as a shareholder are governed by Israeli law, which differ in some material respects from the rights and responsibilities of shareholders of U.S. companies.

The rights and responsibilities of the holders of our ordinary shares are governed by our amended articles of association and by Israeli law. These rights and responsibilities differ in some material respects from the rights and responsibilities of shareholders in U.S. based corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith and in a customary manner in exercising its rights and performing its obligations towards the company and other shareholders, and to refrain from abusing its power in the company, including, among other things, in voting at a general meeting of shareholders on matters such as amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and acquisitions and certain related party transactions requiring shareholder approval under Israeli law. In addition, a controlling shareholder of an Israeli company or a shareholder who is aware that it possesses the power to determine the outcome of a shareholder vote or to appoint or prevent the appointment of a director or executive officer in the company or has other powers towards the company, has a duty of fairness toward the company. There is limited case law available to assist us in understanding the nature of this duty or the implications of these provisions. These provisions may be interpreted to impose additional obligations and liabilities on holders of our ordinary shares that are not typically imposed on shareholders of U.S. corporations.

It may be difficult to enforce a judgment of a U.S. court against us, certain of our officers and directors or the Israeli experts named in this Annual Report in Israel or the United States, to assert U.S. securities laws claims in Israel or to serve process on certain of our officers and directors and these experts.

We are incorporated in Israel. A majority of our executive officers and directors are not residents of the United States, and a substantial portion of our assets 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 be enforced by an Israeli court. It also may be difficult for you to effect service of process on these persons in the United States or to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds 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 must be proven as a fact by 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, you may not be able to collect any damages awarded by either a U.S. or foreign court.

Provisions of Israeli law and our amended articles of association may delay, prevent or otherwise impede a merger with, or an acquisition of, us, even when the terms of such a transaction are favorable to us and our shareholders.

Israeli corporate law regulates mergers, requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders and regulates other matters that may be relevant to such types of transactions. For example, a full tender offer for all of a public company’s issued and outstanding shares can only be completed if the acquirer receives positive responses from the holders of at least 95% of the issued share capital and the approval of a majority of the offerees that do not have a personal interest in the tender offer, unless at least 98% of the company’s outstanding shares are tendered. Furthermore, the shareholders, including those who indicated their acceptance of the tender offer (unless the acquirer stipulated in its tender offer that a shareholder that accepts the offer may not seek appraisal rights), may, at any time within six months following the completion of the tender offer, petition an Israeli court for an appraisal right, to alter the consideration for the acquisition. In addition, a statutory merger may not be consummated unless at least 50 days have passed from the date on which a proposal for approval of the merger was filed by each party with the Israeli Registrar of Companies and at least 30 days have passed from the date on which the merger was approved by the shareholders of each party.

We may become subject to claims for payment of compensation for assigned service inventions by our current or former employees, which could result in litigation and adversely affect our business.
 

Under the Israeli Patents Law, 5727-1967, or the Patents Law, inventions conceived by an employee during the scope of his or her employment are regarded as “service inventions” and are owned by the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. Section 134 of the Patents Law provides that if no agreement between an employer and an employee exists that prescribes whether, to what extent, and on what conditions the employee is entitled to remuneration for his or her service inventions, then such matters may, upon application by the employee, be decided by a government-appointed compensation and royalties committee established under the Patents Law, or the Committee. Although our employees have agreed to assign to us all rights to any intellectual property created in the scope of their employment and most of our current employees, including all those involved in the development of our intellectual property, have agreed to waive their economic rights with respect to service inventions, we cannot assure you that claims will not be brought against us by current or former employees demanding remuneration in consideration for assigned service inventions. If any such claims were filed, we could potentially be required to pay remuneration to our current or former employees for such assigned service inventions, or be forced to litigate such claims, which could negatively affect our business.

Risks Related to Ownership of our Ordinary Shares

We incur and will continue to incur significant costs as a result of operating as a public company in the United States, and our management is required to devote substantial time to compliance initiatives.

As a public company whose securities are traded in the United States, we incur and will continue to incur significant legal, accounting and other expenses. The Sarbanes-Oxley Act of 2002, as well as rules and regulations implemented by the U.S. Securities and Exchange Commission and the Nasdaq Stock Market, impose various requirements on public companies, including requiring the establishment and maintenance of effective disclosure and financial controls. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Changes in the laws, rules and regulations affecting public companies would result in increased costs to us as we respond to their requirements. These rules and regulations could make it more difficult or more expensive for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial costs to obtain or maintain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our Board committees or as executive officers. We cannot predict or estimate the amount or timing of additional costs we may incur in order to comply with such requirements.

If we fail to maintain effective internal control over financial reporting, the price of our ordinary shares may be adversely affected.

Our internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure of which may have an adverse impact on the price of our ordinary shares. We are required to establish and maintain appropriate internal control over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations. In addition, management’s assessment of internal control over financial reporting may identify weaknesses and conditions that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors. In addition, as a “non-accelerated filer,” we are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting. Decreased disclosures in our SEC filings due to our status as a “non-accelerated filer” may make it harder for investors to analyze our results of operations and financial prospects and may make our ordinary shares a less attractive investment. Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or disclosure of management’s assessment of our internal control over financial reporting may have an adverse impact on the price of our ordinary shares.

We may be unable to maintain compliance with the Nasdaq’s continued listing requirements, which could result in the delisting of our ordinary shares from the Nasdaq Capital Market.

Nasdaq has established certain standards for the continued listing of a security on the Nasdaq Capital Market. The standards for continued listing include, inter alia, that the minimum bid price for the listed securities be at least $1.00 per share. Under these rules, a security is considered deficient if it fails to achieve at least a $1.00 closing bid price for a continuous period of 30 business days. We are currently in compliance with Nasdaq’s minimum bid price requirement. However, we cannot guarantee continued satisfaction of the Nasdaq listing requirements and other rules in the future.

If we are delisted from Nasdaq, our ordinary shares may be eligible for trading on an over-the-counter market in the United States. In the event that we are not able to obtain a listing on another U.S. stock exchange or quotation service for our ordinary shares, it may be extremely difficult or impossible for shareholders to sell their ordinary shares in the United States. Moreover, if we are delisted from Nasdaq, but obtain a substitute listing for our ordinary shares in the United States, it will likely be on a market with less liquidity, and therefore, experience potentially more price volatility than experienced on Nasdaq. Shareholders may not be able to sell their ordinary shares on any such substitute U.S. market in the quantities, at the times, or at the prices that could potentially be available on a more liquid trading market. As a result of these factors, if our ordinary shares are delisted from Nasdaq, the price of our ordinary shares is likely to decline. A delisting of our ordinary shares from Nasdaq could also adversely affect our ability to obtain financing for our operations and/or result in a loss of confidence by investors, or employees.

We are a foreign private issuer and, as a result, we are not subject to U.S. proxy rules and are subject to the Securities Exchange Act of 1934 reporting obligations that, to some extent, are more lenient and less frequent than those applicable to a U.S. issuer.

We report under the Securities Exchange Act of 1934, as amended, or the Exchange Act as a foreign private issuer. Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the Exchange Act that are applicable to U.S. public companies, including (i) the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; (ii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iii) the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q containing unaudited financial and other specified information, or current reports on Form 8-K, upon the occurrence of specified significant events. We intend to furnish quarterly reports to the SEC on Form 6-K for so long as we are subject to the reporting requirements of Section 13(g) or 15(d) of the Exchange Act, although the information we furnish may not be the same as the information that is required in quarterly reports on Form 10-Q for U.S. domestic issuers. In addition, while U.S. domestic issuers that are not large accelerated filers or accelerated filers are required to file their annual reports on Form 10-K within 90 days after the end of each fiscal year, foreign private issuers are not required to file their annual report on Form 20-F until 120 days after the end of each fiscal year. Foreign private issuers are also exempt from the Regulation FD (Fair Disclosure), aimed at preventing issuers from making selective disclosures of material information. Although we intend to make interim reports available to our shareholders in a timely manner, you may not have the same protections afforded to shareholders of companies that are not foreign private issuers.

As a foreign private issuer, we are permitted, to follow, and follow certain home country corporate governance practices instead of otherwise applicable Nasdaq requirements, which may result in less protection than is accorded to investors under rules applicable to domestic U.S. issuers.

As a foreign private issuer, we are permitted to follow certain home country corporate governance practices instead of those otherwise required under the listing rules of the Nasdaq Stock Market for domestic U.S. issuers. For instance, we follow home country practice in Israel with regard to, among other things, director nomination procedures, the approval of compensation of officers and quorum requirements at general meetings of our shareholders. In addition, we follow our home country law instead of the listing rules of the Nasdaq Stock Market that require us to obtain shareholder approval for certain dilutive events, such as the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the Company, certain transactions other than a public offering involving issuances of a 20% or greater interest in the Company, and certain acquisitions of the stock or assets of another company. Following our home country governance practices as opposed to the requirements that would otherwise apply to a United States company listed on Nasdaq may provide less protection to you than what is accorded to investors under the listing rules of the Nasdaq Stock Market applicable to domestic U.S. issuers.

If we lose our status as a foreign private issuer under the SEC’s rules, our compliance costs will increase.

We would lose our foreign private issuer status if more than 50 percent of our outstanding voting securities are directly or indirectly held of record by residents of the United States and if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs for us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We would also be required to follow U.S. proxy disclosure requirements, including the requirement to disclose more detailed information about the compensation of our senior executive officers on an individual basis. We may also be required to modify certain of our policies to comply with corporate governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

Exchange rate fluctuations between the U.S. dollar and the NIS and the Euro and inflation may negatively affect our earnings and we may not be able to hedge our currency exchange risks successfully.
 

The dollar is our functional and reporting currency. However, a significant portion of our operating expenses, including personnel and facilities related expenses, are incurred in NIS. As a result, we are exposed to the risks that the NIS may appreciate relative to the U.S. dollar, or, if the NIS instead depreciates relative to the U.S. dollar, that the inflation rate in Israel may exceed such rate of depreciation of the NIS, or that the timing of such depreciation may lag behind inflation in Israel. In any such event, the dollar cost of our operations in Israel would increase and our dollar- denominated results of operations would be adversely affected. In 2023, the NIS depreciated by 3.07% relative to the U.S. dollar compared to a depreciation of 13.2% in year 2022 and an appreciation of 3.40% in year 2021. The rate of inflation in Israeli was 4.21% in 2023, compared to the inflation rate of 4.39% and 1.49% in 2022 and 2021, respectively. Although we do not expect such depreciation and inflation in 2023 to have a material adverse effect on our financial condition into the fiscal 2024, we cannot predict any future trends in the rate of inflation in Israel and whether the NIS will appreciate against the U.S. dollar or vice versa. In addition, we may incur operating expenses denominated in Euros, and therefore, our operating results may also be subject to fluctuations due to changes in the U.S. dollar/Euro exchange rate. We cannot predict any future trends in the rate of inflation in Israel or the rate of devaluation (if any) of the NIS, the Euro and other foreign currencies against the U.S. dollar. Although we engage in currency hedging arrangements from time to time, these measures may not adequately protect us from fluctuations in the exchange rates of the NIS, the Euro and other foreign currencies in relation to the U.S. dollar (and/or from inflation of such foreign currencies), and involve costs and risk of their own.

We have never declared or paid a dividend and currently do not intend to pay cash dividends in the foreseeable future. Any return on investment may be limited to the value of our securities.

We have never declared and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future. Our Board of Directors has discretion to declare and pay dividends on our ordinary shares and will make any determination to do so based on a number of factors, such as our operating results, financial condition, current and anticipated cash needs and other business and economic factors that our Board of Directors may deem relevant. In addition, we are only permitted to pay dividends out of “profits” (as defined by the Israeli Companies Law, 1999, or the Israeli Companies Law), provided that there is no reasonable concern that the dividend distribution will prevent us from meeting our existing and foreseeable obligations, as they become due. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will only occur if the trading price of our securities appreciates. Further, you should not rely on an investment in us if you require dividend income from your investments.

If securities or industry analysts do not publish research or reports about us or our business or publish unfavorable research about us or our business, the price of our securities and their trading volume could decline.

The trading market for our securities will depend in part on the research and reports that securities or industry analysts publish about us or our business. We currently have limited research coverage by securities and industry analysts. If one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. We do not have control over these analysts and we do not have commitments from them to continue to write research reports about us or our business. The price of our ordinary shares could decline if one or more equity research analysts downgrade our ordinary shares or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

Our stock price has and may be subject to fluctuation, and purchasers of our securities could incur substantial losses.

Our stock price has been subject to considerable fluctuation since our initial public offering in February 2015, with the closing price per share having varied from a low of $1.93 to a high of $1,411.22, and may be subject to fluctuation in the future. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their securities at or above the purchase price. The market price for our ordinary shares on the Nasdaq Capital Market may fluctuate as a result of a number of factors, some of which are beyond our control, including, among others:

In addition, the stock market in general, and Nasdaq Stock Market in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of small companies. Broad market and industry factors may negatively affect the market price of our ordinary shares, regardless of our actual operating performance. Further, a systemic decline in the financial markets and related factors beyond our control may cause our share price to decline rapidly and unexpectedly. See “Risk Factors - Risks Related to Ownership of our Ordinary Shares - We may be unable to maintain compliance with the Nasdaq’s continued listing requirements, which could result in the delisting of our ordinary shares from the Nasdaq Capital Market.”
 

The trading market for our ordinary shares is not always active, liquid and orderly, which may inhibit the ability of our shareholders to sell ordinary shares.

Since our initial public offering in February 2015, the trading market for our ordinary shares has not always been active, liquid or orderly. The lack of an active market at times may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares.
 

We have broad discretion in how we use the net proceeds from our financings, and we may not use these proceeds effectively.

Our management has broad discretion as to the application of the net proceeds of our financings. Our shareholders may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Moreover, our management may use the net proceeds for corporate purposes that may not increase our market value.

Our business, operating results and growth rates may be adversely affected by current or future unfavorable economic and market conditions and adverse developments with respect to financial institutions and associated liquidity risk.

Our business depends on the economic health of the global economies. If the conditions in the global economies remain uncertain or continue to be volatile, or if they deteriorate, including as a result of the impact of military conflict, such as the war between Russia and Ukraine, armed conflict in Israel and Gaza, terrorism or other geopolitical events, our business, operating results and financial condition may be materially adversely affected. See “Risk Factors - Risks Related to Our Operations in Israel - Our principal offices, research and development facilities our manufacturing sites and some of our suppliers are located in Israel and, therefore, our business, financial condition and results of operation may be adversely affected by political, economic and military instability in Israel.” Economic weakness, inflation and increases in interest rates, limited availability of credit, liquidity shortages and constrained capital spending could negatively affect our financial condition, results of operations or cash flows. In addition, the military conflict may affect the ability to purchase materials sourced in Russia. For example, one of our suppliers sources the enriched X-ray isotope substance used in C-Scan from Russia. To the extent we continue to use such component in any redesigned or future products, we could experience disruptions in our supply chain in the future if sanctions and export control restrictions on Russian entities and individuals are still imposed, and we may not be able to find alternative sources for such key material in a timely manner.

Increases in inflation raise our costs for commodities, labor, materials and services and other costs required to operate our business, and failure to secure these on reasonable terms may adversely impact our financial condition. Additionally, increases in inflation, geopolitical developments and global supply chain disruptions, have caused, and may in the future cause, global economic uncertainty and uncertainty about the interest rate environment, which may make it more difficult, costly or dilutive for us to secure additional financing. A failure to adequately respond to these risks could have a material adverse impact on our financial condition, results of operations or cash flows.

In addition, adverse developments affecting the financial services industry, such as the closures of SVB and Signature Bank and their placement into receivership with the Federal Deposit Insurance Corporation, other actual events or concerns involving liquidity and defaults or non-performance by financial institutions or transactional counterparties, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Risks Related to Taxation

There is a risk that we could be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes by reason of the transactions related to our acquisition of all of the business operations and substantially all of the assets of Check-Cap LLC on May 31, 2009, or the Reorganization.

Section 7874(b) of the Internal Revenue Code of 1986, as amended, or the Code, generally provides that a foreign corporation (i.e., a corporation created or organized under the laws of a jurisdiction outside of the United States) would be treated as a domestic (U.S.) corporation for U.S. federal income tax purposes if, pursuant to a plan or a series of related transactions, (1) the foreign corporation acquires, directly or indirectly, substantially all of the assets of a domestic corporation (or substantially all of the properties constituting a trade or business of a domestic partnership), (2) after the acquisition, the former shareholders of the acquired corporation by reason of holding shares of the acquired corporation (or, in the case of an acquisition with respect to a domestic partnership, the former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership) own at least 80% of the stock (by vote or value) of the acquiring corporation, and (3) after the acquisition, the expanded affiliated group that includes the acquiring corporation does not have substantial business activities in the foreign country in which, or under the laws of which, the acquiring corporation is created or organized when compared to the total business activities of such expanded affiliated group. On the basis of analysis of the relevant facts and circumstances and the relevant law (including the temporary regulations under Section 7874 applicable at the time of the Reorganization), it was determined that the third condition described in the preceding sentence was not met with respect to the Reorganization and, therefore, that the inversion tax rules of Section 7874(b) would not apply to treat us as a domestic corporation for U.S. federal income tax purposes. However, since this determination was made on the basis of all of the relevant facts and circumstances, and it is not clear which facts and circumstances the Internal Revenue Service, or the IRS, may consider more important than others, this conclusion is not free from doubt.

If Section 7874(b) were to apply to the Reorganization (and we were to be treated as a domestic corporation for U.S. federal income tax purposes), then, among other things, (i) we would be subject to U.S. federal income tax on our worldwide taxable income (if and when we have taxable income); (ii) certain payments (e.g., interest and dividends) that we make (or have made) to our foreign investors may be (or may have been) subject to U.S. withholding taxes; (iii) we may be subject to significant penalties for the failure to file certain tax returns and reports, including reports with respect to our foreign bank accounts; and (iv) the U.S. unitholders of Check-Cap LLC would not have been subject to U.S. federal income tax on royalties that are deemed to be paid to them under Section 367(d) of the Code as a result of the Reorganization. As discussed under Item 5B “Operating and Financial Review and Prospects - Liquidity and Capital Resources - Application of Critical Accounting Policies and Estimates - Royalties provision - Reimbursement liability to Check-Cap LLC unitholders,” as part of the Reorganization, we committed to reimburse the unitholders of Check-Cap LLC for any tax burdens that may be imposed on them due to the Reorganization, including royalties that are deemed to be paid to the U.S. unitholders under Section 367(d) of the Code.

Prospective investors are urged to consult their own advisors on these issues. The balance of this discussion, including the discussion under Item 10E “Additional Information - Taxation - U.S. Federal Income Taxation,” assumes that we will be and have been treated as a foreign corporation for U.S. federal income tax purposes.

We may be eligible for tax benefits from government programs, which require us to meet certain conditions, including regarding the location of our property, plant and equipment and manufacturing in Israel. We can provide no assurance that we would continue to be eligible for such benefits and/or that any such benefits will not be terminated in the future.

Our manufacturing facilities in Israel may qualify as a “Benefited Enterprise” under the Israeli Law for Encouragement of Capital Investments, 5719-1959, which would entitle us to receive certain tax benefits. In order to be eligible for such benefits, we would be required to meet certain conditions, including the making of a minimum capital investment in our productive assets and the carrying on of a required portion of our manufacturing in Israel. The amount of the benefit will be determined in accordance with various conditions, including the location of our property, plant and equipment and the location of certain of our sub-contractors. If we cease to meet the required conditions for eligibility, the tax benefits could be cancelled and we could be required to pay increased taxes or to refund the amounts of the benefits received with interest and penalties. We can provide no assurance as to the amount of future capital investment in our productive assets, our future manufacturing location and the future location of our property, plant and equipment and certain of our sub-contractors, and therefore, we cannot provide assurance that we will be eligible for such tax benefits or assurance as to the amount of such tax benefits. Even if we continue to meet the relevant requirements, the tax benefits that Benefited Enterprises receive may not be continued in the future at their current levels or at all. If these tax benefits were reduced or eliminated, the amount of taxes that we would be required to pay would likely increase, as all of our operations would consequently be subject to corporate tax at the standard rate, which could adversely affect our results of operations. See Item 10E “Additional Information-Taxation-Israeli Tax Considerations and Government Programs-Law for the Encouragement of Capital Investments, 5719-1959” for additional information concerning these tax benefits.

There is a risk that we may be classified as a passive foreign investment company, or PFIC, which could result in adverse U.S. federal income tax consequences to U.S. investors.

In general, we will be treated as a passive foreign investment company, or a PFIC, for any taxable year in which either (1) at least 75% of our gross income (including our pro rata share of the gross income of our 25% or more- owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (including our pro rata share of the assets of our 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or are held for the production of, passive income. Passive income generally includes dividends, interest, rents, royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion thereof) that is included in the holding period of a U.S. Holder (as defined in Item 10E “Additional Information-Taxation-U.S. Federal Income Taxation”) of our securities, the U.S. Holder may be subject to increased U.S. federal income tax liability upon a sale or other disposition of our securities or the receipt of certain excess distributions from us and may be subject to additional reporting requirements. Based on the past and projected composition and classification of our income and assets, we believe that we were a PFIC for the taxable year ended December 31, 2023 and may be a PFIC for the taxable year ending December 31, 2024. Our actual PFIC status for our current taxable year or any subsequent taxable year is uncertain and will not be determinable until after the end of such taxable year. Accordingly, there can be no assurance with respect to our status as a PFIC for our taxable year ending December 31, 2024 or any subsequent taxable year.

U.S. investors are urged to consult their own tax advisors regarding the possible application of the PFIC rules. For more information, see Item 10E “Additional Information-Taxation-U.S. Federal Income Taxation-U.S. Holders-Passive Foreign Investment Company Rules.”

ITEM 4. INFORMATION ON OUR COMPANY

A. History and Development of the Company Our History

Our legal and commercial name is Check-Cap Ltd. We were formed as a company in Israel on April 5, 2009. On May 31, 2009, we acquired all of the business operations and substantially all of the assets of Check-Cap LLC, a Delaware limited liability company formed in December 2004. On May 15, 2015, we formed our wholly-owned subsidiary Check-Cap US, Inc., a Delaware corporation.

On February 24, 2015, we successfully completed an initial public offering in the United States and the listing of our securities on the Nasdaq Capital Market.

On August 16, 2023, we entered into the Keystone BCA with Keystone, PubCo, Capstone Merger Sub Ltd., and Capstone Merger Sub Corp. At our 2023 annual general meeting of shareholders, such business combination transactions did not receive the requisite majority required for approval under Section 320 of the Israeli Companies Law 5759-1999. On December 24, 2023, we received a notice on behalf of Keystone, terminating the Keystone BCA in light of the results.

On March 25, 2024, we entered into the Nobul BCA. Pursuant to the Nobul BCA, (a) a wholly owned subsidiary of Nobul, to be formed under the laws of Israel, will merge with and into the Company, with Check-Cap surviving the Merger as a direct, wholly owned subsidiary of Nobul. Under the exchange ratio formula in the Nobul BCA, upon the closing of the transactions contemplated under the Nobul BCA, Check-Cap security holders are expected to own approximately 15% of Nobul while Nobul security holders are expected to own approximately 85% of Check-Cap, on a fully diluted basis and assuming that Check-Cap meets certain net cash targets. The ownership percentages may be subject to adjustments based on Check-Cap’s net cash at closing. See “Additional Information – Material Contracts.”

We are subject to the provisions of the Israeli Companies Law. Our principal executive offices are located at Check-Cap Building, 29 Abba Hushi Avenue, P.O. Box 1271, Isfiya, 3009000, Israel. Our telephone number is +972-4-8303400 and our website is located at www.check-cap.com (the information contained therein or linked thereto shall not be considered incorporated by reference in this Annual Report). Our U.S. agent is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

We use our website (http://www.check-cap.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. Our filings with the U.S. Securities and Exchange Commission (the “SEC”) are available to you on the SEC’s website at http://www.sec.gov, which contains reports, proxy and information statements, and other information regarding us that we have filed electronically with the SEC. The information on our website is not part of this annual report and is not incorporated by reference herein. Further, references to website URLs are intended to be inactive textual references only.

Principal Capital Expenditures

For a discussion of our capital expenditures, see Item 5 “Operating and Financial Review and Prospects-Liquidity and Capital Resources.”

B. Business

Overview of Our Company

We are a clinical stage medical diagnostics company aiming to redefine CRC screening through the introduction of C-Scan®, a screening test designed to detect polyps before they may transform into cancer to enable early intervention and cancer prevention.

The disruptive capsule-based screening technology aims to increase screening adherence worldwide and enable people to stay healthy. The system utilizes ultra-low-dose X- rays to scan the inner lining of the colon for precancerous polyps, and other structural abnormalities. CRC is the third most commonly diagnosed cancer, with more than 1.9 million new cases identified every year globally. Nearly 935,000 deaths occur annually worldwide as a result of CRC. While approximately 0.5% of the average-risk screening population presents with cancerous polyps in the colon and rectum at any given time, approximately 25% of the same population presents with benign polyps that could potentially turn into cancer over time. It can take up to 10 years before a pre-cancerous polyp develops into invasive cancer. As such, there is a crucial detection window for the prevention of colorectal cancer, through the detection of these benign polyps. While routine screening is recommended by The American Cancer Society for healthy people aged 45 years and older, screening adherence remains low. Currently, colonoscopy is the gold standard for the detection of colorectal polyps, but about 1 in 3 adults among the targeted screening population avoids having a colonoscopy in the U.S., and adherence in other regions of the world such as Europe and Asia is even lower, due to the invasiveness of the procedure and bowel preparation. Most patient-friendly CRC screening tests currently available, or poised to enter the market, such as fecal or liquid biopsy tests, are primarily designed to detect cancer and demonstrate low sensitivity in detecting pre-cancerous polyps. As such, they do not necessarily provide patients with the time window to pre-empt the disease. C-Scan is non-invasive and requires no bowel cleansing or sedation, allowing the patients to continue their daily routine with no interruption as the capsule is propelled through the gastrointestinal tract by natural motility. C-Scan is comprised of three main components: (1) C-Scan Cap, an ingestible X-ray scanning capsule; (2) C-Scan Track, three miniaturized patches worn on the patient’s back for integrated positioning, control and data recording; and (3) C-Scan View, a proprietary software to process and represent 2D and 3D maps of the inner surface of the colon. We believe that this solution has the potential to become an alternative for both physicians and patients and to increase the number of people completing CRC screening.

Our C-Scan Cap is swallowed and propelled by natural motility through the gastrointestinal tract and excreted naturally with no need for retrieval for data collection (currently, during clinical trials in the U.S., the C-Scan capsule is not intended to be disposed of in the sanitary sewer system, and is therefore collected by the patient, and returned to the medical facility administering the device for further decay and disposal). Unlike other existing CRC screening methods, this process should not disrupt a patient’s normal activities or require fasting. Our C-Scan Cap employs ultra-low-dose X-rays, which allow the C-Scan system to scan the interior lining of the colon even when surrounded by intestinal content. As such, we believe that patients using C-Scan will not be required to undergo any prior bowel cleansing.

Our C-Scan Cap is being designed to transmit position, motility and the data it collects to the C-Scan Track that will be attached to the patient’s back. The external data recorder is being designed to enable the download of the data to our C-Scan View application to allow physicians to analyze the data collected by our C-Scan Cap. The C-Scan Track is being designed to provide the physician with localization data to yield a reconstructed image intedned to enable physicians to review the colon’s inner structural information.

Colonic polyps are tissue growths that occur on the lining of the colon. Polyps in the colon are common, and certain types of polyps may become cancerous over time. In the event that polyps are identified by C-Scan, the patient may be advised to undergo a subsequent traditional colonoscopy procedure to examine, remove and biopsy the polyps. For those patients who require a subsequent colonoscopy, concerns regarding pain, discomfort and embarrassment may still remain. We do not, however, believe that these concerns will make the use of C-Scan any less attractive to physicians and patients. Although patients who are initially screened utilizing a traditional colonoscopy could avoid the need for a second colonoscopy if polyps are discovered, we believe that C-Scan will still be attractive option for physicians and patients who object to or cannot undergo a colonoscopy in the first instance, as we believe a large number of these patients if screened will not require a subsequent colonoscopy and those found with suspicious findings, will likely agree to undergo colonoscopy.

We initiated our first clinical studies in 2010, consisting of two single-center feasibility studies with non-scanning (no X-ray source) capsules for the purposes of measuring gastrointestinal tract activity, colon contractions and associated capsule motility, and shortening capsule transit time.

In 2013, we initiated a multi-center prospective clinical feasibility study, designed to allow for the recruitment of 100 subjects, to establish clinical proof of concept, safety and functionality of C-Scan in patients eligible for CRC screening. Analysis conducted on the first 66 capsules swallowed by participants showed that 65 of 66 capsules swallowed were naturally eliminated, without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure was 0.06 ± 0.04 mSv (similar to a single chest radiograph). Both pedunculated and sessile polyps were detected in several patients and validated later by colonoscopy.

In September 2017, we completed a multi-center study of C-Scan in support of CE Mark submission. The objective of the study was to assess safety and the clinical performance of C- Scan in detecting patients with polyps. The three-center trial enrolled 66 patients, with a mean age of 59 years. Following capsule ingestion, subjects swallowed small doses of contrast agent and fiber supplements with each meal throughout capsule passage. Average capsule transit time was 52±32 hours, and the average total X-ray dose was 0.05 mSv (CT colonography effective dose is ~ 6.0 mSv). No bowel preparation, sedation, or change in diet was required. Both confirmatory colonoscopy, performed by an independent investigator, and C-Scan review, performed by a central review group, were blinded to results. The study demonstrated a 44% sensitivity in the 45 subjects included in the analysis for polyps, with specificity (ability to correctly identify lack of polyps) of 89%. Sensitivity strongly correlated (R-squared = 0.98) to the percentage of the colon scanned. Sensitivity was 78% (p<0.05) and 100% (p<0.05) for subjects where greater than 50% and 70% of the colon was scanned, respectively. Specificity was consistent for all subjects.
 

In the fourth quarter of 2017, we initiated an interim clinical study for the purpose of introducing an advanced version of C-Scan, Version 3, which incorporated the then latest algorithms and system optimization and tailored scanning of the colon to the patient’s natural colonic movements to maximize the amount of the colon that is tracked and imaged. In March 2018, we announced results from the interim study. Evaluable results of 21 patients showed average colon imaging coverage of 64%, a 40% improvement over 46% average colon imaging coverage in the multi-center study. Sensitivity was 78% (p<0.05) for subjects with greater than 50% colon imaging coverage and 100% (p<0.05) for subjects with greater than 70% colon imaging coverage. Specificity was consistent at around 89%.

Following our certification to ISO 13485:2016 by our Notified Body, and completion of our multi-center clinical study and achievement of compliance with the requirements of the Medical Devices Directive, in September 2017, we submitted a request for CE marking for the marketing and sale of C-Scan in the European Union. We received the CE Mark certification from our Notified Body on January 9, 2018 and a renewal certificate according to MDR (EU Regulation 2017/745) was granted on January 12, 2022, which is valid until December 1, 2026. In September 2018, we received approval from AMAR for the marketing and sale of C-Scan in Israel. Following the MDR approval we received from our Notified Body according to the EU Regulation 2017/745, the AMAR approval was renewed and is valid until December 31, 2024.

During the first quarter of 2018, we initiated a multi-center, open label, home monitoring, prospective study designed to determine the performance characteristics of C-Scan system Version 3, for detecting pre-cancerous polyps compared with the fecal immunochemical test (FIT), in each case using colonoscopy as the reference method, for the purpose of collecting additional evidence of clinical effectiveness and clinical utility to support market adoption. The study included 90 evaluable patients who either had known polyps or were considered to be of average risk. Each patient ingested a C-Scan capsule and also underwent a FIT and a comparative colonoscopy performed by independent gastroenterologists, who were blinded to the corresponding test’s results. The C-Scan clinical evaluation was obtained using the evaluable patient population implementing a gender-based motility analysis and the results of both C-Scan and FIT were compared to colonoscopy. The primary efficacy endpoint of the study was sensitivity (ability to correctly identify patients with polyps) and specificity (ability to correctly identify patients with lack of polyps) of the C-Scan system compared to FIT in detecting subjects with polyps ≥10 mm. In July 2019, we announced final results from our post-CE approval study. The results demonstrate that C-Scan achieved a sensitivity of 76% (p=0.0005) in patients with polyps ≥10 mm, while FIT achieved a sensitivity of 29% (p=0.005) in patients with polyps ≥10 mm. C- Scan achieved a specificity of 82% in all patients, while FIT achieved a specificity of 96% in all patients. In addition, C-Scan detected all 4 patients (100%) with polyps ≥40 mm, while the FIT detected only 1 of the 4 patients (25%) with polyps ≥40mm. Overall, C-Scan achieved a sensitivity of 66% (p=0.01) in all patients, including patients with polyps <10mm, while FIT achieved a sensitivity of 23% (p<0.0001) in all patients, including patients with polyps <10mm. In total, 142 patients enrolled in the study and after factoring in technical and physiological dropouts and protocol violations, the number of evaluable patients was 90. No serious adverse events, or SAEs, were reported, and the adverse events were mild in severity.

We conducted pre-submission meetings with the FDA during the period of December 2016 and February 2017 for the purpose of receiving feedback on the regulatory pathway for our system in the United States. We also sought feedback on a proposed protocol for a feasibility or pilot study, the primary purposes of which is to establish the safety of the C-Scan system and evaluate user compliance and satisfaction. In December 2018, we received from the FDA conditional approval of our IDE application to initiate a U.S. pilot study of C-Scan and received final approval from the FDA in February 2019.

In April 2019, we initiated the U.S. pilot study of C-Scan. The U.S. pilot study (NCT03735407 ) was a prospective, multi-center, open label, single arm study designed to evaluate the safety, usability and subject compliance of the C-Scan system. The study included 28 evaluable patients, more than two thirds of whom were considered to be of average risk for colorectal cancer. Each patient ingested a C-Scan capsule and also underwent a fecal immunochemical test (FIT) as well as a comparative colonoscopy, which was performed by an independent gastroenterologist who was blinded to the corresponding test results. The study was performed at two sites, the NYU Grossman School of Medicine and Mayo Clinic, Rochester. The primary endpoint of the study was to evaluate the incidence of device or procedure related SAEs. Secondary endpoints included patient compliance, subject satisfaction and device and procedure related performance. Due to sample size, the study was not designed to be powered for statistical significance. In December 2019, we announced the results of the pilot study. No device or procedure related SAEs were reported and all device or procedure related adverse events were mild in severity. In total, 45 patients enrolled in the study, of which 40 patients underwent the study procedure. 39 patients complied with the procedure and completed a questionnaire following the procedure and reported higher satisfaction with the C-Scan System procedure compared to colonoscopy. A total of 28 patients were evaluable after factoring in technical and physiological dropouts and protocol violations. Analysis of the evaluable patient results revealed agreement between C-Scan and colonoscopy in detection of polyps was consistent with data from the post-CE approval study.

In preparation for our U.S. pivotal study, we have continued to optimize C-Scan’s functionality and patient experience by additional clinical data collection in a study in Israel, using advanced C-Scan versions, which incorporate mainly advanced algorithms, improved detection capability and reduced energy consumption. During the current study in Israel, we initially enrolled both average risk and enriched profile patients and in May 2022, shifted to enrollment of only average risk patients, for the purpose of further calibration of the C-Scan system, in parallel to conducting the first stage of the U.S. pivotal study that was initiated in May 2022, as described below.

In November 2020, we finalized our proposed U.S pivotal study design and submitted our IDE application to the FDA and in March 2021, our IDE application was approved by the FDA.

In January 2022, we submitted to the FDA an amended IDE application to amend the U.S. pivotal study design to add a first part to the study that is designed to enable further calibration of the C-Scan system and enhancement of C-Scan algorithms, specifically for the average risk U.S. population and in February 2022, our IDE amended application was approved by the FDA. Following this amended IDE, the U.S. pivotal study consists of two parts. The first part is designed to enable further calibration of the C-Scan system for the average risk U.S. population, and is intended to include up to 200 patients in the U.S. The second part is a statistically powered, randomized study which will compare the performance of C-Scan to traditional colonoscopy, and is intended to include up to 800 patients. The goal of the pivotal study in the United States is to (i) demonstrate device safety as evidenced by a lack of device related SAEs; and (ii) provide efficacy data concerning C- Scan’s performance.

In May 2022, we initiated the first part of the U.S. pivotal study. In December 2022, we submitted an IDE supplement to the FDA to include enrollment of patients at age 45-75 instead of 50-75, which was approved by the FDA in January 2023. To date, we have enrolled more than 300 average risk patients as part of our Israeli study and only 17 average risk patients in the first part of our U.S. pivotal study, mainly as a result of slower than expected U.S. site recruitment pace, due to licensing requirements with local states associated with the X-ray technology within our C-Scan capsule. The initiation of the powered portion of the U.S. pivotal study was dependent upon successful completion of the calibration portion of the U.S. pivotal study. On March 21, 2023, we announced that following our internal assessment of the clinical data collected from the calibration studies until such date, we had determined that the most recent efficacy results from our calibration studies did not meet the goal to proceed to the powered portion of the U.S. pivotal study and, as such, the initiation of the second part of the U.S. pivotal study that was expected in mid-2023 was also temporarily postponed. As a result, we adopted a plan of action that included conducting additional clinical data analysis and approaching the FDA to make amendments to the U.S. pivotal study and a cost reduction plan in order to extend its cash runway to longer than initially planned.

On June 6, 2023, we announced that after further review of additional data and interaction with the FDA on a revised pivotal study protocol together with the anticipated time and investment necessary to further develop the technology, we were reducing our workforce significantly to reduce cash burn, concentrating our resources on essential research activities, discontinuing our calibration studies, and evaluating and pursuing strategic options. As a result of our evaluation and pursuit of strategic options, on March 25, 2024, we entered into a business combination agreement with Nobul.

Since our formation, we have not generated any revenue. We do not anticipate generating any significant revenue for the foreseeable future and we do not yet have any specific launch dates for our product. We incurred net losses of $17.6 million in 2023, $19.1 million in 2022, and $17.2 million in 2021. We expect that we will continue to generate losses from our operations for the foreseeable future. As of December 31, 2023, we had an accumulated deficit of $144.9 million and a total shareholders’ equity of $23.7 million. We have funded our operations to date primarily through equity financings, sales of ordinary shares and warrants, the exercise of warrants and other funding transactions and through grants from the IIA.

Our Solution

CRC screening can reduce the incidence of and mortality from the disease by enabling detection of precancerous polyps in the colon at an earlier, more treatable stage. CRC is one of the few cancers that can be prevented through screening because pre-cancerous polyps, from which colon cancers often develop, can be identified and removed. Today, there is a range of options for CRC screening in the average-risk population, with current technology falling into two general categories: (i) structural exams that enable physicians to visualize the colon for abnormalities, such as optical colonoscopy (which is currently regarded as the “gold standard” for CRC screening), sigmoidoscopy, CTC and optical capsules—all of which require aggressive bowel preparation and are invasive exams; and (ii) stool and serum based tests, such as FOBTs, FITs, stool DNA, and blood tests, which test for blood in stool and irregularities in blood and DNA. Notwithstanding the proven clinical value of screening for CRC, the many CRC screening alternatives and the fact that screening is encouraged by clinicians and insurers, a large portion of the population is still reluctant to perform CRC screening.

C-Scan is designed to enable early detection of precancerous polyps while providing a patient friendly solution without requiring any colon cleansing. The purpose of C-Scan is to detect colorectal polyps in subjects who, based on demographics and medical history factors, are considered average risk for CRC. If polyps are detected, the patient is elevated to high risk for CRC and referred for a colonoscopy. Studies have shown the detection of polyps through C-Scan, increases the likelihood of patients to agree (i.e., “adherence”) to undergo a colonoscopy procedure.

Although C-Scan utilizes X-Ray technology (exposing the patient to approx. 0.05 mSv), we believe that the potential risks associated with such radiation exposure are low compared to the potential risks associated with other procedures such as perforation, bleeding or sedation related effects (optical colonoscopy and sigmoidoscopy) and dehydration and damage to kidneys. Unlike FOBTs, FITs and stool DNA tests, our capsule-based imaging modality generates structural information on the colon, which could assist in the detection of pre-cancerous polyps. We therefore do not believe that the ultra-low-dose radiation in our capsule will make C-Scan less attractive to physicians and patients than other less-effective products that do not employ any radiation.

The Radiation Safety Division of the Soreq Nuclear Research Center found, as set forth in its report of November 2010 that was prepared at our request and based on the information provided by us and the relevant methods and principles known at such time, or the Report, that the radiation dose to the patient in the proposed screening procedure utilizing the scanning device developed by us at that time in routine operation and normal conditions is low relative to the radiation dose involved in conventional imaging procedures using X-rays (such as fluoroscopy and CT) and is also low when compared to the radiation dose involved in established screening procedures such as mammography, all as more fully described in the Report. In addition, Michael S. Gossman, M.S., DABR, FAAPM, FACR, the Chief Medical Physicist in Radiation Oncology and Radiation Safety Officer, Regulation Directive Medical Physics, concluded, as set forth in his report dated November 14, 2018 that was prepared at our request and submitted to the FDA in connection with the IDE application for the U.S. pilot study, following analysis of both normal capsule transit and extreme conditions, that C-Scan is radiation dose safe for medical diagnostics and exposes patients to very low dose radiation during normal operation and that even in extreme and unlikely scenarios, patient exposure to radiation is unlikely to cause severe harm to patients undergoing the C-Scan procedure.

We believe that gastroenterologists will adopt our technology and recommend the use of our capsule. This may increase the number of people undergoing CRC screening and may encourage more people with polyps to undergo a polypectomy - a therapeutic procedure during which polyps are removed.

Our goal is to become a leading supplier of CRC screening technology and to establish our technology as a leading CRC screening method. Key elements of our strategy include:

Our Technology

Our technology is based on an ingestible capsule (C-Scan Cap), which is swallowed by the patient and propelled by natural motility through the gastrointestinal tract. Our capsule transmits information to a receiving device (C-Scan Track) worn on the patient’s body that stores the information for off-line analysis. Our C-Scan Cap consists of an X-ray source and several X- ray detectors. The X-ray source is contained in a rotating radiation shield, enabling the generation of 360-degree angular scans. The collection of successive angular scans is intended to enable the virtual reconstruction of a portion of the colon’s inner surface. During movement of our capsule longitudinally through the colon, successive images of portions of the colon enable the three- dimensional reconstruction of the colon. C-Scan is also intended to enable structural identification of polyps, and masses, which protrude inward into the colon, through the detection of irregularities in the topography of the colon’s inner surface.

C-Scan is intended to be prescribed to patients by physicians. Prior to capsule ingestion, patients will swallow 15ml of iodinated oral contrast medium, three times a day, combined with oral fiber, and continue to do so in order to enhance the contrast of the colon surface. The capsule is propelled by natural motility through the gastrointestinal tract. During transit, information is transmitted to the C-Scan Track, which stores the information for off-line analysis. After our C-Scan Cap is expelled from a patient’s body, the C-Scan Track data will be downloaded into our workstation (C-Scan View) and uploaded to a cloud-based server, through which an expert analyst will perform pre-analysis to be followed by a physician’s final interpretation that includes a findings report and a determination of whether the patient is considered average or elevated risk. Currently, our internal analysts are expected to perform the complete interpretation of the data and prepare a report accordingly. We anticipate that we will begin involving physicians in this process upon the initiation of the statistically powered portion of the U.S pivotal study. Our proprietary software is being designed to process the data and produce a two and three-dimensional visualization of the colon’s inner surface.

C-Scan consists of the following three main subsystems that together enable the generation of high-resolution 3D imaging of the colon’s inner surface, further described below: (i) an ultra- low-dose X-ray based colon scanning capsule (C-Scan Cap); (ii) C-Scan Track; and (iii) a client\server PC-based application (C-Scan-View).

The C-Scan system enables a patient-friendly, preparation free and painless evaluation of colorectal abnormalities. Using the C-Scan system, suspicious findings that may be colorectal polyps can be identified, thus assisting the physician in deciding whether to elevate the patient to high-risk category and refer the patient to a colonoscopy procedure. Studies have shown that the adherence of an elevated-risk patient to undergo a colonoscopy procedure is higher than that of an average risk patient.

The C-Scan system provides information for the physician, enabling him to make a “YES / NO” decision for suspected presence of polyps in the colon, based on the premise that the presence of polyps in the colon is associated with the potential development of CRC. The C-Scan system is intended to be used as a preliminary tool to assist in the detecting of subjects who are at elevated risk for polyps and thus potentially increase the adherence of those subjects to undergo colonoscopy.

The C-Scan system is designed to evaluate the presence of polyps, without the need for fasting and prior bowel cleansing, through identifying suspects in the human colon supported by physiological data, such as measured transit time of the capsule through the GI tract.

The C-Scan system presented in Figure 1 includes three main units, C-Scan Cap, C-Scan Track and C-Scan View. The C-Scan procedure steps are illustrated in Figure 2. The C-Scan Track is attached to the patient’s back, after which, the patient ingests the C-Scan capsule. The capsule starts moving through the patient’s gastrointestinal system until it reaches the colon where it starts scanning the colon walls and transmitting the acquired data to the C-Scan Track. Following the natural excretion of the capsule, the patient returns the C-Scan Track to enable data loading and analysis using C-Scan View. The analysis report includes an indication of either “NO- Average Risk” in cases where no suspicious findings were identified or “YES- Elevated Risk” in cases where suspicious findings were identified. An operational block diagram is presented below in Figure 4.

Figure 1: Illustration of C-Scan system units

Figure 2: Illustration of C-Scan system procedure

C-Scan Cap

C-Scan Cap is an X-ray scanning capsule, which enables detection of suspected polyps. C-Scan Cap is ingested by the patient and propelled by peristalsis, natural motility, it passes through the gastrointestinal tract and is excreted naturally, with either no need for retrieval or required retrieval of the capsule, depending on the local agency guidance (currently, during clinical trials in the U.S., the C-Scan capsule is not intended to be disposed of in the sanitary sewer system, and is therefore collected by the patient, and returned to the medical facility administering the device for further decay and disposal).

C-Scan Cap is designed to measure, collect and transmit structural information, and is comprised of the following components:

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Figure 3: C-Scan Cap 

C-Scan Track

C-Scan Track is a small, disposable system attached to the patient’s back via biocompatible adhesive skin patches. C-Scan Track communicates with the C-Scan Cap and enables data download for analysis purposes. Both the C-Scan Track and C-Scan Capsule are equipped with an electromagnetic capability allowing for capsule position and orientation estimations through the C-Scan Track. A dedicated scan control algorithm (SCA) identifies the C-Scan Cap’s movements in the colon and, accordingly, commands the C-Scan Cap when to perform a scan. C-Scan Track also measures the transit time from capsule ingestion to excretion through radio frequency communication to a non-volatile memory device, and enable data retrieval, to an external processor.

The C-Scan Track is comprised of the following components:

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C-Scan View

The C-Scan View software is a client/server-based application that enables procedure data to be downloaded from the C-Scan Track, data analysis and report generation. The C-Scan View’s main functions are:

The data from the C-Scan Track is loaded and processed to create a reconstruction model of the colon wall, which is displayed in the C-Scan View as structural information of the colon wall, as well as Whole-Gut-Transit-Time (WGTT) data. The data is analyzed by a team that includes expert analysts, who review the structural information to identify suspicious findings that are protruding or bulging on the colon wall. The analysts consider the capsule’s WGTT as part of the analysis process. The gastroenterology physician reviews the analysis in the C-Scan View and generates the final report as to whether the patient is assessed to be at average or at elevated risk, determined through a combined analysis consisting of both structural analysis and transit time analyses.

Figure 4: Conceptual block-diagram of the C-Scan system

C-Scan System Non-Clinical and Clinical History

We have developed and validated our capsule-based imaging modality for providing structural information on colonic polypoid lesions and masses for CRC screening. Below is a summary of the validation tests carried out by us in the laboratory, in phantoms, animals and humans, which were designed to evaluate this new imaging modality’s performance and potential clinical value.

Non-Clinical Testing

Imaging Performance Testing

The C-Scan Cap transmits data as it transits the colon. This data consists of imaged slices perpendicular to the capsule’s longitudinal axis; slices are then reconstructed by the C-Scan View to produce 2D and 3D images of the inner surface of the colon. Following are performance measurements of the capsule imaging.

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For each position of the capsule in the phantom, the mean signal intensity (peak) was measured, the result of which is shown in the right figure below. Resulting line spread function, or LSF, which is the differential of the curve in the left figure below.

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The graphs above demonstrate that the existing design of C-Scan can detect objects of approximately 2-3mm when noise is not taken into account.

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Image Reconstruction

Two main characteristics of C-Scan contribute to the image reconstruction performance:

Based on the laboratory tests performed with a previous version of C-Scan, polyps of 6 mm and larger should be visible and 10 mm polyps and larger are expected to be detected at higher sensitivity. To further enhance the visibility of 6 mm - 9 mm polyps, a new design of the collimator, which is expected to enable 1.5 times the number of photons to be detected by the detectors, was successfully incorporated and tested in our advanced C-Scan Cap. We believe such improved design will enable our recently enhanced algorithm to improve the imaging performance.

Animal Testing and Tissue Equivalent Phantom Image Reconstruction

The physics of our imaging modality was tested in the laboratory on phantoms with tissue equivalent material and in animals to ensure that laboratory conditions mimic real life clinical scenarios.

Following the initial proof of concept, we performed a series of studies in order to evaluate the feasibility and preliminary safety of our technology. All studies were performed in pigs ranging from 60 to 90 kg. Pigs, which are commonly used in gastrointestinal studies, were selected as the animal model for preliminary evaluation of C-Scan based on the resemblance of the porcine colon size and morphology to the human colon. However, there are marked differences between the colon of pigs and that of humans. The pig colon is much longer and has a larger diameter, in addition to other anatomical differences. In the pig model, the pressure waves of peristalsis are believed to be more frequent and shorter than in humans. As a result, we believe that colon content movement is substantially slower and more frequent in pigs than in humans. In these studies, we did not intend to collect statistically significant data; hence, the tests were repeated a limited number of times until adequate data was collected.

The first test was performed to demonstrate imaging proof-of-concept using a wired C-Scan. This technology included all the basic features intended to be included in the clinical C- Scan, but on a larger scale due to the use of off-the-shelf components. The subsequent studies used versions of the C-Scan that integrated most of the imaging components, software and electronics of C-Scan that we used with humans. Since off-the-shelf components were used, the animal capsules were larger and heavier than the version of C-Scan that are used clinically.

Raw data from an animal colon showing a decrease in X-ray florescence, or XRF, photon signals and an increase in Compton backscattering, or CMT, signals corresponding to the position of a polyp that was detected when our C-Scan Cap passed over the polyp is shown in the image below. These two signals are combined in order to form a three dimensional image below.

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The animal studies conducted to date demonstrate that our technology provides sufficient resolution, in these studies, for the detection of 10 mm polyps which is the size of clinically significant polyps. The animal studies also demonstrated that 5 mm polyps can be detected, though with lower resolution than 10 mm polyps in the first animal capsule. Animal health was maintained throughout the studies. No adverse effects related to passage of our capsule were noted.

The capsules evaluated in the animal studies were significantly larger than the capsules that we are using with humans. The differences in anatomy, physiology, and capsules may have several effects on the data compared to use in the human population. Motility of the capsules through the digestive C-Scan was slow due to the specific shape of the porcine gastrointestinal tract. In addition, because of the size of the capsule, it was retained in the stomach for many hours and even days. Accordingly, the animal model required that normal ingestion be replaced by direct insertion of the capsule into the small bowel. In order to simplify the development and animal testing, we used Tungsten radiation source with long half-life (120 days).

Following the success of the animal testing, a series of in-vitro tests were conducted to simulate different clinical scenarios in the laboratory using a miniaturized human capsule. Polyps were created and reconstruction of the laboratory phantoms with a human capsule was generated to assess the ability to detect polyps as the capsule advances in the colon. The in-vitro tests demonstrated the imaging capabilities of our imaging technology. Below is the reconstruction of a laboratory phantom image.

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Polyp Detection Analysis

Laboratory tests were carried out to estimate the capsule’s ability to detect polyps in phantoms and demonstrate sensitivity and specificity of such detection. Below is an example of the reconstruction of a scan composed of three slices: XRF, CMT and a fused (combined) image.

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Receiver Operating Characteristics

Standard receiver operating characteristics, or ROC, curves were generated from phantom data with 8 mm polyp in a 30 mm barrel phantom with 3% iodine concentration mimicking the colon contents. CMT, XRF and fused (combined) data were analyzed based on 2D slices that were generated and standard deviation indicator. There were a few cases where the noise in the phantoms was high enough to generate polyp false positive condition separately for each data type, especially in CMT. However, fusion of CMT and XRF data contributed to noise reduction and enabled to demonstrate 100% true positive and 0% false positive.

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Clinical Trials

We initiated our first clinical study at University Hospital, Hamburg, Germany in 2010. The purpose of this study was to monitor and record the colon contractions and the associated motility of the capsule in the colon. This study was conducted with a passive capsule that contained no X-ray source or detectors. It included several electronic components of C-Scan and had similar dimensions to the current capsule. 63 healthy volunteers were enrolled and no adverse events were reported.

We completed a limited, single-center, feasibility study at Rambam Medical Center, Haifa, Israel to assess the motility of a non-scanning capsule in healthy subjects. The objective of the study was to optimize the daily routine of the subjects in order to shorten the transit time of our capsule. 15 subjects participated and swallowed a capsule with the same weight and dimensions as our current C-Scan capsule. No adverse events were reported and all capsules were retrieved. A structured daily routine determined the timing of the following: capsule ingestion, the subjects’ daily meals, the contrast agent ingestion and one evening dose of 10 mg of Bisacodyl. All subjects continued their regular active lifestyles (such as work and exercise). The average transit time of the capsule in the 15 subjects was approximately 38 ± 19 hours, which is comparable to the average transit time of our capsule in subjects participating in the multi-center feasibility study, in which the participants do not ingest a daily dose of Bisacodyl, and participants are released to their homes and continue their regular lifestyles during the study.

A 10 subject clinical proof-of-concept study, conducted at Tel Aviv Sourasky Medical Center in Israel using a prior version of C-Scan, did not identify any material safety or feasibility issues. The study demonstrated the applicability of C-Scan to the human colon, generating images of the colon without any prior bowel preparation. All subjects ingested the capsule easily with smooth passage within the designated transit time, on average, within 48-72 hours. There were no reported device-related adverse events. Mild effects on bowel movements were noted, which were determined to be related to the contrast agent and passed within one to two days after the capsule excretion. Estimated total radiation exposure was calculated using standard established factors for calculating effective radiation exposure, such as the duration of the capsule inside the body, and was based on the activity of the radiation source inside the C-Scan Cap and radiation energy, both of which were measured for each case study. The average calculated exposure for the entire procedure in the 10-case study, from ingestion of the capsule to excretion, was 0.03 mSv (STD 0.007 mSv). This level of radiation exposure is similar to a single chest X-ray (approximately 0.06mSv) and two orders of magnitude less than a CTC.

The 10-subject study constituted the initial phase of a multi-center, prospective clinical feasibility study to establish the safety, functionality and preliminary efficacy of C-Scan in patients eligible for CRC screening, by comparing results from the clinical feasibility study with those from non-invasive, low-sensitivity FITs, as well as from optical colonoscopies. The feasibility study has been designed to allow for the recruitment of 100 subjects. The study was conducted at multiple centers in Israel. The clinical feasibility study was used to evaluate the image resolution generated by the capsule in a human colon without cathartic preparation, assess polyp imaging in various shapes and in different segments of the colon, evaluate the safety of the device in terms of total and segmental transit time, and analyze the effects of the presence of polyps and variable colon dimensions on these parameters. During the feasibility study we collected data regarding the overall imaging of the colon’s internal surfaces during the passage of the capsule to support the development of a correlation map of polyps identified through our imaging system with polyps imaged by optical colonoscopy and CTC. Additionally, the feasibility study allowed for the measurement of total radiation exposure and the distribution of contrast material within the colon.

Analysis conducted on the first 66 capsules swallowed by participants enrolled in the multi-center, prospective clinical feasibility study showed that 65 of 66 capsules swallowed were naturally eliminated, without major or minor side effects, after 62±40.7 hours. The average calculated radiation exposure was 0.06 ± 0.04 mSv (similar to a single chest radiograph). Image reconstructions allowed 2D/3D views of the colonic wall and lumen with the typical contour of different segments (hepatic flexure, triangular shape of the transverse colon). Both pedunculated and sessile polyps were detected in several patients and validated later by colonoscopy.

In September 2017, we completed a multi-center study of C-Scan in support of CE Mark submission. The objective of the study was to assess safety and the clinical performance of C- Scan in detecting patients with polyps. The three-center trial enrolled 66 patients, with a mean age of 59 years. Following capsule ingestion, subjects swallowed small doses of contrast agent and fiber supplements with each meal throughout capsule passage. Average capsule transit time was 52±32 hours, and the average total X-ray dose was 0.05 mSv (CT colonography effective dose is ~ 6.0 mSv). No bowel preparation, sedation, or change in diet was required. Both confirmatory colonoscopy, performed by an independent investigator, and C-Scan review, performed by a central review group, were blinded to results. The study demonstrated a 44% sensitivity in the 45 subjects included in the analysis for polyps, with specificity (ability to correctly identify lack of polyps) of 89%. Sensitivity strongly correlated (R-squared = 0.98) to the percentage of the colon scanned. Sensitivity was 78% (p<0.05) and 100% (p<0.05) for subjects where greater than 50% and 70% of the colon was scanned, respectively. Specificity was consistent for all subjects.

In the fourth quarter of 2017, we initiated an interim clinical study for the purpose of introducing an advanced C-Scan version, Version 3, which incorporated the then latest algorithms and system optimization and tailored scanning of the colon to the patient’s natural colonic movements to maximize the amount of the colon that is tracked and imaged. In March 2018, we announced results from the interim study. Evaluable results of 21 patients showed average colon imaging coverage of 64%, a 40% improvement over 46% average colon imaging coverage in the multi-center study. Sensitivity was 78% (p<0.05) for subjects with greater than 50% colon imaging coverage and 100% (p<0.05) for subjects with greater than 70% colon imaging coverage. Specificity was consistent at around 89%.

During the first quarter of 2018, we initiated a multi-center, open label, home monitoring, prospective study, designed to determine the performance characteristics of C-Scan Version 3, for detecting pre-cancerous polyps compared with the fecal immunochemical test (FIT), in each case using colonoscopy as the reference method, for the purpose of collecting additional evidence of clinical effectiveness and clinical utility to support market adoption. The study included 90 evaluable patients who either had known polyps or were considered to be of average risk. Each patient ingested a C-Scan capsule and also underwent a FIT and a comparative colonoscopy performed by independent gastroenterologists, who were blinded to the corresponding test’s results. The C-Scan clinical evaluation was obtained using the evaluable patient population implementing a gender-based motility analysis and the results of both C-Scan and FIT were compared to colonoscopy. The primary efficacy endpoint of the study was sensitivity (ability to correctly identify patients with polyps) and specificity (ability to correctly identify patients with lack of polyps) of the C-Scan system compared to FIT in detecting subjects with polyps ≥10 mm. In July 2019, we announced final results from our post-CE approval study. The results demonstrate that C-Scan achieved a sensitivity of 76% (p=0.0005) in patients with polyps ≥10 mm, while FIT achieved a sensitivity of 29% (p=0.005) in patients with polyps ≥10 mm. C-Scan achieved a specificity of 82% in all patients, while FIT achieved a specificity of 96% in all patients. In addition, C-Scan detected all 4 patients (100%) with polyps ≥40 mm, while the FIT detected only 1 of the 4 patients (25%) with polyps ≥40mm. Overall, C-Scan achieved a sensitivity of 66% (p=0.01) in all patients, including patients with polyps <10mm, while FIT achieved a sensitivity of 23% (p<0.0001) in all patients, including patients with polyps <10mm. In total, 142 patients enrolled in the study and after factoring in technical and physiological dropouts and protocol violations, the number of evaluable patients was 90. No SAEs were reported, and the adverse events were mild in severity.

In December 2018, we received from the FDA conditional approval of our IDE application to initiate a U.S. pilot study of the C-Scan Version 3 and received final approval from the FDA in February 2019. In April 2019, we initiated the U.S. pilot study of C-Scan. The U.S. pilot study (NCT03735407) was a prospective, multi-center, open label, single arm study designed to evaluate the safety, usability and subject compliance of the C-Scan. The study included 28 evaluable patients, more than two thirds of whom were considered to be of average risk for colorectal cancer. Each patient ingested a C-Scan capsule and also underwent a fecal immunochemical test (FIT) as well as a comparative colonoscopy, which was performed by an independent gastroenterologist who was blinded to the corresponding test results. The study was performed at two sites, the NYU Grossman School of Medicine and Mayo Clinic, Rochester. The primary endpoint of the study was to evaluate the incidence of device or procedure related SAEs. Secondary endpoints included patient compliance, subject satisfaction and device and procedure related performance. Due to sample size, the study was not designed to be powered for statistical significance. In December 2019, we announced the results of the study. No device or procedure related SAEs were reported and all device or procedure related adverse events were mild in severity. In total, 45 patients enrolled in the study, of which 40 patients underwent the study procedure. 39 patients complied with the procedure and completed a questionnaire following the procedure and reported higher satisfaction with C-Scan procedure compared to colonoscopy. A total of 28 patients were evaluable after factoring in technical and physiological dropouts and protocol violations. Analysis of the evaluable patient results revealed agreement between C-Scan and colonoscopy in detection of polyps was consistent with data from the post-CE approval study.

In preparation of the U.S. pivotal study, we continued to optimize the functionality of our advanced version of C-Scan, which incorporates mainly advanced algorithms, improved detection capability and reduced energy consumption, through additional clinical data collection in a study in Israel (initially on average risk and high-risk patients and in May 2022, shifted to enrollment of only average risk patients), for the purpose of further calibration of the C-Scan system, which we have continued in parallel to conducting the first stage of the U.S. pivotal study that was initiated in May 2022.

In November 2020, we finalized our proposed U.S. pivotal study design and submitted our IDE application to the FDA and in March 2021, our IDE application was approved by the FDA. In January 2022, we submitted a supplement to the FDA to amend the U.S. pivotal study design to add a first part to the study that is designed to enable further device calibration of the C-Scan system and enhancement of C-Scan algorithms, specifically for the average risk U.S. population. In February 2022, we received the FDA’s approval for our IDE supplement. Following this amended IDE, the U.S. pivotal study consists of two parts. The first part is designed to enable further calibration of the C-Scan system for the average risk U.S. population, and is intended to include up to 200 patients in the U.S. The second part is a statistically powered, randomized study which will compare the performance of C-Scan to traditional colonoscopy, and is intended to include up to 800 patients. The goal of the pivotal study in the United States is to (i) demonstrate device safety as evidenced by a lack of device related SAEs; and (ii) provide efficacy data concerning C- Scan’s performance.

In May 2022, we initiated the first part of the U.S. pivotal study, which focuses on device calibration and enhancement of C-Scan algorithm among average risk population, initially at Mayo Clinic Rochester, Minnesota and New York University (NYU) School of Medicine. In addition, we recently added a new site as well as expanded the NYU site.

In January 2023, we obtained approval from the FDA for our protocol amendment to lower the patient age enrollment criteria to 45-75 years (from 50-75 years previously) in the U.S. pivotal study. Our NYU site has already obtained approval of this amendment from its Institutional Review Board (IRB) and begun to implement it to recruit younger patients as part of the first part of our U.S. pivotal study.

To date, we have enrolled more than 300 average risk patients as part of our Israeli study and only 17 average risk patients in the first part of our U.S. pivotal study, mainly as a result of slower than expected U.S. site recruitment pace, due to licensing requirements with local states associated with the X-ray technology within our C-Scan capsule.

The initiation of the powered portion of the U.S. pivotal study was dependent upon successful completion of the calibration portion of the U.S. pivotal study. On March 21, 2023, we announced that following our internal assessment of the clinical data collected from the calibration studies until such date, we had determined that the most recent efficacy results from our calibration studies did not meet the goal to proceed to the powered portion of the U.S. pivotal study and, as such, the initiation of the second part of the U.S. pivotal study that was expected in mid-2023 was also temporarily postponed. As a result, we adopted a plan of action that included conducting additional clinical data analysis and approaching the FDA to make amendments to the U.S. pivotal study and a cost reduction plan in order to extend its cash runway to longer than initially planned.

On June 6, 2023, we announced that after further review of additional data and interaction with the FDA on a revised pivotal study protocol together with the anticipated time and investment necessary to further develop the technology, we were reducing our workforce significantly to reduce cash burn, concentrating our resources on essential research activities, discontinuing our calibration studies, and evaluating and pursuing strategic options. As a result of our evaluation and pursuit of strategic options, on March 25, 2024, we entered into a business combination agreement with Nobul.

Research and Development

Our research and development strategy has been centered on developing C-Scan. On June 6, 2023, we announced that after further review of additional data and interaction with the FDA on a revised pivotal study protocol together with the anticipated time and investment necessary to further develop the technology, we were reducing our workforce significantly to reduce cash burn, concentrating our resources on essential research activities, discontinuing our calibration studies, and evaluating and pursuing strategic options. As a result of our evaluation and pursuit of strategic options, on March 25, 2024, we entered into a business combination agreement with Nobul.

We have received grants from the Government of the State of Israel through the IIA (formerly the OCS) for the financing of a portion of our research and development expenditures and a portion of our expenditures relating to our transition to manufacturing pursuant to the Innovation Law and related regulations and guidelines. As of December 31, 2023, we had received funding from the IIA for research and development of our C-Scan in the aggregate amount of approximately $5.6 million. As of December 31, 2023, we had not paid any royalties to the IIA and had a contingent liability to the IIA with respect to such funding in the amount of approximately $6.2 million. In addition, in January 2021, we received an IIA grant approval to support the funding of our transition from research and development to manufacturing. The final IIA grant amounted to approximately $620,000 (NIS 2.25 million) (along with a co-investment by us of the same amount), which we are not required to repay to the IIA, subject to the terms and conditions set forth in the grant approval, of which we received approximately $225,000 (NIS 816,075) in February 2023, $82,000 (NIS 297,414) in January 2022 and $349,000 (NIS 1,265,823) in 2021. We may apply for additional IIA grants in the future; however, there is no assurance that such applications will be approved in the amount requested or at all. We cannot predict whether we will be entitled to any future grants, or the amounts of any such grants. See “Risk Factors - Risks Related to Our Operations in Israel - Pursuant to the terms of the Israeli government grants we received for research and development expenditures, we are obligated to pay certain royalties on our revenues to the Israeli government. In addition, the terms of Israeli government grants we received require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.”

We incurred approximately $8.3 million, $14.3 million and $12.3 million in research and development expenses, net (after deducting participation by government grants) for the years ended December 31, 2023, 2022, and 2021, respectively. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Financial Operations Overview-Research and Development Expenses, Net.”

Intellectual Property

An important part of our competitive strategy is to seek, when appropriate, protection for our products and proprietary technology through a combination of U.S. and foreign patents, trademarks, trade secrets, non-disclosure and confidentiality, assignment of invention and other contractual arrangements with our employees, consultants and suppliers. These measures, however, may not be adequate to protect our technology from unauthorized disclosure, third-party infringement or misappropriation as these parties may breach these agreements, and we may not have adequate remedies for any such breach. We intend to prosecute and defend our proprietary technology. The primary test for patent protection eligibility includes patentability, novelty, non- obviousness, and utility.

We submit applications under the Patent Cooperation Treaty, or PCT, which is an international patent law treaty that provides a unified procedure for filing a single initial patent application to seek patent protection for an invention simultaneously in each of the member states. Although a PCT application is not itself examined and cannot issue as a patent, it allows the applicant to seek protection in any of the member states through national-phase applications.

As of December 31, 2023, we had 56 granted patents (not including separate validations in Europe) in main world markets, covering various aspects of our technology. In addition, we have 19 additional pending patent applications in the pipeline. We have submitted patent applications covering our technology in the United States, member states of the European Patent Organization, Australia, Brazil, Canada, China, Hong Kong, India, Israel, Japan and South Korea. We have received patent grants for our core patent by the United States Patent and Trademark Office as well as from the European Patent Office, Australia, Brazil, China, Hong Kong, Israel, India, Canada, South Korea and Japan. We also filed patent applications describing the use of our technology in several other medical applications.

Our registered U.S. Patent Number 7,787,926 discloses an ingestible capsule with a radiation source and radiation detectors that, when used in conjunction with a radio opaque contrast agent, is adapted to detect clinically relevant findings in the colon. Utilizing X-ray fluorescence and Compton back scatterings, the capsule is able to measure the distance between the capsule and the colon wall and to distinguish between gas, intestinal contents, and clinically significant findings in the gastrointestinal tract. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for this patent will expire on August 28, 2026.

A PCT patent application (PCT/IL2008/000163), granted in Europe, Israel, United States, Australia, India, China, Canada and Hong Kong, discloses additional features such as a rotating collimator and improved scanning mechanisms, the capability to determine tissue density to differentiate between different types of polyps, as well as the capability to determine capsule movement in the colon. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for all national phases will expire on February 6, 2028, other than the U.S. patent that will expire on April 4, 2030.

Another PCT application (PCT/IL2011/000462), granted in Europe, Israel, United States, Canada, Australia, South Korea and Brazil, discloses a number of alternate fail safe concealment mechanisms that can be utilized in the capsule to ensure that the X-ray source is blocked when the capsule is not scanning and is open when it is scanning, allowing the capsule to image the colon. The fail-safe feature ensures that in the event of power failure, the radiation source is blocked and X-rays do not escape. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non-extended patent term for all national phases will expire on June 9, 2031, other than the U.S. patent that will expire on July 5, 2032.

In another PCT patent application (PCT/IL2008/000765), which was granted in the United States, Europe, Israel and Japan, we disclose an imaging catheter that utilizes X-ray fluorescence, Compton back scattering and electron back scattering. The imaging catheter is designed for use in cardiac applications as well as intra-operative imaging applications such as imaging inside blood vessels where optical imaging cannot be performed because of obscuring circumstances. If the appropriate maintenance, renewal, annuity or other governmental fees are paid, the non- extended patent term for all national phases will expire on June 4, 2028, other than the U.S. patent that will expire on July 28, 2028.

In addition, during the year 2022 we were granted two new patents:

“Position Estimation of Imaging Capsule in Gastrointestinal Tract” granted in Israel, covering C-Scan’s proprietary tracking technology, which enables real time tracking of the capsule and its activation when it moves throughout the colon. This functionality allows for optimal scanning along the gastrointestinal (GI) tract while maintaining low energy consumption during the procedure. The patent also covers the capsule positioning data recording utilized by the C-Scan analysis suite, which enables gastroenterologists to make a clinical decision and generate a report with their diagnosis and recommendations. Corresponding patents were granted in Japan, China, Europe and the United States.

“System and method for polyp detection through capsule dynamics” granted in Japan. This patent was submitted following analysis of hundreds of patients that showed that certain capsule dynamic properties correlate with increased likelihood for the presence of polyps. Corresponding patents were filed in Europe and the United States.

While our policy is to obtain patents by application, to maintain trade secrets and to seek to operate without infringing on the intellectual property rights of third parties, technologies related to our business have been rapidly developing in recent years. Additionally, patent applications that we may file may not result in the issuance of patents, and our issued patents and any issued patents that we may receive in the future may be challenged, invalidated or circumvented. For example, we cannot predict the extent of claims that may be allowed or enforced in our patents nor be certain of the priority of inventions covered by pending third-party patent applications. If third parties prepare and file patent applications that also claim technology or therapeutics to which we have rights, we may have to partake in proceedings to determine priority of invention, which could result in substantial costs to us, even if the eventual outcome is favorable to us. Moreover, because of the extensive time required for clinical development and regulatory review of a product we may develop, it is possible that, before C-Scan can be commercialized, related patents will have expired or will expire a short period following commercialization, thereby reducing the advantage of such patent. Loss or invalidation of certain of our patents, or a finding of unenforceability or limited scope of certain of our intellectual property, could have a material adverse effect on us. See Item 3D “Key Information-Risk Factors-Risks Related to Our Intellectual Property.”

In addition to patent protection, we rely on trade secrets, including unpatented know-how, technology innovation, drawings, technical specifications and other proprietary. We also rely on protection available under trademark laws, and hold the following registered trademarks in the United States and Hong Kong: “CHECK CAP”, CHECK CAP (logo), “C-Scan” and C-Scan (logo) and the following registered trademarks in the European Union: CHECK CAP (logo), “C-Scan” and C-Scan (logo), and the following trademark applications are pending in China: “CHECK CAP”, CHECK CAP (logo), “C-Scan” and C-Scan (logo).

In March 2021, we entered into an exclusive license agreement with the University of Missouri with respect to certain patents held by the University of Missouri that the University of Missouri claimed included background intellectual property in C-Scan. In consideration for the grant of an exclusive license to those patents in the medical field, we agreed to pay royalties ranging from $0.30 to $5.00 per C-Scan unit depending on the number of units sold up to $15,000,000 in the aggregate.

Competition

Competition for C-Scan comes from traditional well-entrenched manufacturers of tests and equipment for CRC screening, such as colonoscopy, sigmoidoscopy, CTC, optical capsule endoscopy, FOBTs and FITs. The principal manufacturers of equipment for optical colonoscopy and sigmoidoscopy include Olympus, Pentax, Hoya and Fuji Film. The principal manufacturers of equipment for CTC include General Electric Healthcare Systems, Siemens Medical Solutions, Philips Healthcare and Toshiba Corporation. The principal manufacturer of equipment for optical capsule endoscopy includes Medtronic plc. All of these companies have substantially greater financial resources than we do, and they have established reputations as well as worldwide distribution channels for providing medical instruments to physicians.

In addition, several companies have developed or are developing non-invasive technologies based on stool, serum (from blood and other bodily fluids), or molecular diagnostics (MDx), tests that are used to indicate the presence of CRC and polyps in the colon. These companies include Exact Sciences, Polymedco, Epigenomics AG, Gene News, EDP Biotech Corporation, Illumina, Inc., Quest Diagnostics, VolitionRx Nu.Q diagnostic, Freenome, Grail, Guardant, Genoscopy and Universal DX. Exact Sciences commenced sales of its Cologuard ®, a non-invasive stool DNA screening test for colorectal cancer in 2015, and is constantly seeking performance improvements through additional studies, alongside commercial expansion. During the past years, there has been an extensive effort on the part of our competitors to utilize molecular biology and advanced computational techniques to develop methods capable of identifying cell-free cancer biomarkers.

In December 2022, Guardant Health released results from ECLIPSE (Evaluation of ctDNA LUNAR Assay In an Average Patient Screening Episode), an over 20,000 patient registrational study evaluating the performance of its blood test for detecting colorectal cancer (CRC) in average-risk adults. The test demonstrated 83% sensitivity in detecting individuals with CRC. Specificity was 90% in both individuals without advanced neoplasia and in those who had a negative colonoscopy result. This test also demonstrated 13% sensitivity in detecting advanced adenomas. In this study, two configurations of a multimodal blood-based screening test were evaluated independently - a cell-free DNA (cfDNA)-only test and a cfDNA test with protein biomarkers. The announced results were derived from the cfDNA-only test, which outperformed the cfDNA test with protein biomarkers. Based on these study results, Guardant Health submitted its PMA application for its blood test for detecting CRC in March 2023. The FDA has scheduled to review the PMA application on May 23, 2024.

In January 2023, Geneoscopy Inc., released results from the CRC-PREVENT trial - a pivotal clinical trial evaluating the efficacy of its noninvasive, stool-based, at-home diagnostic screening test to detect colorectal cancer (CRC) and advanced adenomas (AA) in average-risk individuals. The CRC-PREVENT trial included 8,289 individuals with diverse racial, ethnic, and socioeconomic backgrounds across more than 2,900 zip codes in all lower 48 states, with colonoscopies performed in more than 3,800 endoscopy centers. Efficacy results from the study demonstrated 94% sensitivity for detecting CRC, 45% sensitivity for detecting advanced adenoma (AA), and 88% specificity for no findings on a colonoscopy. The company submitted a PMA application to the FDA in January 2023. In November 2023, Geneoscopy Inc. announced a strategic collaboration with Labcorp to distribute the CRC screening test once approved by the FDA.

These advancement efforts are assisted by large capital investments, supported in turn by claims that certain products may promise the possibility of defeating certain cancers in their early stages.

Procedures for bowel cleansing that are less onerous are constantly being developed, which could make our entry into the market more difficult. For instance, bowel cleansing initiated by the ingestion of pills or food-substitute diet regimes rather than through drinking large amounts of distasteful liquids may be viewed as an improvement to the cleansing process, but other screening methods may be even more palatable to patients.

Sales and Marketing

Our goal is to establish our position as a leading player in the CRC screening market. Although we do not currently generate revenues.

Because our leading product and related technology are still in the clinical and development stage, we are subject to certain challenges, including, among others, that:

Our ability to operate our business and achieve our goals and strategies is subject to numerous risks as described more fully in “Risk Factors.”

Manufacturing and Suppliers

Our manufacturing operations are conducted at our facility located in Isfiya, Israel and in our own X-ray production line in Petach Tikva. On January 26, 2021, we entered into a new lease agreement, as amended (the “Amended Lease Agreement”), according to which, effective as of April 1, 2021, we leased a total of approximately 1,550 square meters at our facility located in Isfiya, Israel. The Amended Lease Agreement expired on December 31, 2023. Monthly rental expenses under the lease agreement are $16,100. Prior to entering into the Amended Lease Agreement, we leased approximately 900 square meters at the same facility under a lease agreement, originally scheduled to expire on May 31, 2022. Following the determination of our Board of Directors on June 6, 2023 to discontinue our clinical studies, we did not extend the Amended Lease Agreement that expired on December 31, 2023. However, on November 11, 2023, we agreed with the lessor to lease part of the premises in Isfiya (the “New Leased Premises”) until February 29, 2024, for a monthly rental fee of $8,300. On April 15, 2024, we and the lessor agreed on extending the lease of the New Leased Premises for a two years period commencing on March 1, 2024, for a monthly rental fee of $8,300. We may terminate such lease upon a 60 days prior notice to the lessor.

On December 30, 2021, we entered into a Sub-lease Agreement (the “Sub-lease Agreement”) with one of our suppliers, according to which we leased approximately 70 square meters laboratory space for the production of certain components, at the supplier’s premises in Petach Tikva, Israel. The Sub-lease Agreement entered into effect on September 21, 2022, after receipt of certain permits including a business license from Petach Tikva municipality. The Sub-lease Agreement was due to expire on January 31, 2025. We had the right to terminate the Sub-lease Agreement at any time, upon at least 90 days prior written notice. The Sub Lease Agreement was part of an amended service agreement with the supplier for certain additional services. Total monthly rental expenses under the Sub-lease Agreement and the payment for such other services was $26,900. As the Sub-lease Agreement is part of a service agreement with the supplier, management was required to evaluate the fair market amount attributed to the lease per month and based on its estimations, the amount allocated to the lease was approximately $2,800 and the portion allocated to monthly services was $24,100. Following the determination of our Board of Directors on June 6, 2023 to discontinue our clinical studies, on June 8, 2023, we terminated the Sub-lease Agreement and such service agreement in Petach Tikva, and the Sub-lease Agreement terminated on September 8, 2023.

On March 1, 2022, we entered into a lease agreement of certain offices in Petach Tikva Israel, according to which, we leased approximately 140 square meters offices, The lease agreement expired on February 28, 2024, and we had an option to extend the lease period for two additional periods of one year each. Total monthly rental expense under the lease agreement was approximately $1,700. In September 2023, the office lease agreement in Petach Tikva was terminated by the parties.

We currently have sufficient space to manufacture C-Scan for the contemplated clinical studies, but have limited resources and facilities in commercially manufacturing large quantities of C-Scan and C-Scan View to meet the demand we expect for our future commercialization efforts. We have faced and expect to face certain technical challenges as we increase manufacturing capacity, including, among others, logistics associated with the handling of radioactive materials, equipment design and automation, material procurement, lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and assurance standards, while maintaining commercially efficient pricing for C-Scan. Our production objective is to establish a scalable capacity in order to meet such expanded demand for C-Scan and market expansion. If we are unable to scale up our manufacturing capabilities to meet our clinical trials needs and future market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.

In July 2016, we entered into an agreement with GE Healthcare to develop and demonstrate proof of principle of the process for high-volume manufacturing for the production of the X- ray source and its assembly into our C-Scan capsule. The agreement was amended in November 2017 in order to further our manufacturing collaboration with GE Healthcare. The agreement involves GE’s final assembly, packaging and shipping of C-Scan capsules. We supplied GE Healthcare with supporting calibration and final assembly methodology and equipment and in August 2019, we announced the completion of manufacturing line transfer implementation and qualification for C-Scan operated by GE Healthcare, primarily to enable the availability of C-Scan for U.S. clinical trials. At present, we intend to ship systems for our U.S. clinical studies directly from our local site in Israel.

In January 2021, we received an IIA grant approval to support the funding of our transition from research and development to manufacturing. The final IIA grant amounted to $620,000 (NIS 2.25 million) including for the purpose of the establishment of our own X-Ray source manufacturing line in Israel. We do not currently have any sales. We are planning to develop a scale-up plan to meet our expected commercial supply needs. During 2022 and 2023, we expanded our manufacturing capacity to support the expected larger clinical volume and subsequent higher volumes expected in the early commercialization stage. We are continuously exploring whether certain components of C-Scan can be assembled outside of Israel. In addition, we are exploring possible alternative sources for the key capsule components. All of the facilities in which manufacturing and assembly of our products will be conducted (including those of sub-contractors) will need to comply with applicable regulations and standards for medical devices.

We currently depend on sole or single source suppliers for some of the components necessary for the production of C-Scan. For example, we currently have a sole supplier for the motor used to rotate the collimated X-ray source in C-Scan, for the customized X-ray detectors and batteries used in C-Scan. There is a limited number of manufacturers worldwide who are capable of manufacturing the motor, the customized X-ray detectors and the batteries that we currently use in C-Scan. In addition, the ASIC residing in C-Scan is currently manufactured for us by a single FAB. However, there are many alternative FABs worldwide and the design of our current ASIC could be adapted in the event it became necessary to use an alternative FAB. Furthermore, we do not currently have contracts with all our sole or single suppliers. While our current suppliers have been able to supply the required quantities of such components to date, if the supply of these components is disrupted or terminated or if our current suppliers are unable to supply required quantities of components now or in the commercialization period, we may not be able to find alternative sources for these key components in a timely manner. Although we are planning to maintain strategic inventory of key components, the inventory may not be sufficient to satisfy the demand for C-Scan if such supply is interrupted, or subject to risk of loss due to catastrophic events such as a global political crisis or war, or a fire at our storage facility. In addition, to partially mitigate the risks of reliance on sole and single source suppliers, we are seeking alternate manufacturers for some of our components, which requires us to dedicate significant resources and investment. In December 2021, we signed the Amended Service Agreement with the sole supplier of the X-ray source used in C-Scan, and we concurrently entered into the Sub-lease Agreement with the supplier, according to which we agreed to lease approximately 70 square meters of laboratory production space at the supplier premises. According to the Amended Service Agreement, we independently produce the X-ray source using our own production employees. The Amended Service Agreement extended the terms of the service agreement we had with the sole supplier until the Sub-lease Agreement entered into effect on September 21, 2022, after receipt of certain certificates, including a business license from the Petach Tikva municipality. Upon successful progress of our clinical studies and available sufficient capital, we plan to continue to expand our own production line for our X-ray source in Israel, however, we cannot assure you that we will commence this effort or succeed in expanding our in house production line and we may be required to find an alternative source for the X-ray source, which we may not be able to do in a timely manner. There can be no assurance that we will be successful in seeking further alternate suppliers or establish our own production line.

As a result of the foregoing, we may be unable to meet our clinical trials timelines and to meet the demand for C-Scan, which could harm our ability to generate revenues, lead to customer dissatisfaction and damage our reputation. If we are required to change the supplier of any of these key components, there may be a significant delay in locating a suitable alternative manufacturer. In addition, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with FDA and other applicable quality standards and with all applicable regulations and guidelines. The delays associated with the introduction of a new manufacturer for certain key components or new suppliers for certain materials, could delay our ability to manufacture C-Scan in a timely manner or within budget. Furthermore, in the event that the manufacturer of a key component of C-Scan ceases operations or otherwise ceases to do business with us, we may not have access to the information necessary to enable an alternative supplier to manufacture the component. The occurrence of any of these events could harm our ability to meet demand for C-Scan in a timely manner or within budget.

Environmental Health and Safety Matters

We are subject to environmental health and safety laws and regulations in Israel, governing, among other things, the use of radioactive materials, including the Israeli Radioactive Elements and their Products, Regulation, 1980, the Hazardous Substances Law, 5753-1993 and regulations thereunder, including the Licensing of Business Regulations (Disposal of Hazardous Substances), 5750-1990, the Israeli Work Safety Regulations (Occupational Safety and Health of Ionizing Radiation Practitioners) 1992-5753 and Women Employment Regulations (Work with Ionizing Radiation), 1979-5739. Our current research and development activities, including our production activities, require (and our currently contemplated commercial activities will require) permits from various governmental authorities including, Israel’s Ministry of Environmental Protection, Israel’s Ministry of Health, local municipal authorities and the NRC and Agreement State regulators. Failure to obtain or maintain any such permits or to comply with their conditions could have a material adverse effect on our business, financial condition and results of operations. The Ministry of Environmental Protection and the Ministry of Health conduct from time to time periodic inspections in order to review and ensure our compliance with the various regulations.

These laws, regulations and permits could potentially require expenditure by us for compliance or remediation. If we fail to comply with such laws, regulations or permits, we may be subject to fines and other civil, administrative or criminal sanctions, including the revocation of permits and licenses necessary to continue our business activities and could be subject to work stoppages or delays. In addition, we may be required to pay damages or civil judgments in respect of third-party claims, including those relating to personal injury (including exposure to radioactive materials) or contribution claims. Some environmental, health and safety laws apply strict, joint and several liability. We may be identified as a responsible party under such laws. Such developments could have a material adverse effect on our business, financial condition and results of operations.

In addition, laws and regulations relating to environmental, health and safety matters are often subject to change. In the event of any changes or new laws or regulations, we could be subject to new compliance measures or to liabilities for activities which were previously permitted.

U.S. Government Regulation

C-Scan is a medical device subject to extensive regulation by the FDA and other U.S. federal and state regulatory bodies. To ensure that medical products distributed in the United States are safe and effective for their intended use, the FDA has promulgated regulations that govern, among other things, the following activities that we or our partners perform and will continue to perform:

FDA’s Premarket Clearance and Approval Requirements

Unless an exemption applies, before we can commercially distribute medical devices in the United States, we must obtain, depending on the type of device, either prior premarket notification, or 510(k) clearance, de novo authorization or approval of a PMA from the FDA. The FDA classifies medical devices into one of three classes:

510(k) Clearance Pathway

To obtain 510(k) clearance, we must submit a premarket notification, or 510(k) notice, demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of PMA applications. By regulation, a premarket notification must be submitted to the FDA at least 90 days before we intend to market a device, and we must receive 510(k) clearance from the FDA before we actually market the device. The Medical Device User Fee Amendments, or the MDUFA, performance goal for a traditional 510(k) clearance is 90 days. As a practical matter, however, the 510(k) clearance pathway may take approximately between 6 to 9 months, but it can take significantly longer. FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.

There are three types of 510(k)s: traditional, special, and abbreviated. Special 510(k)s are typically for devices that have certain technological, design or labelling changes that require a new 510(k) but where the method(s) to evaluate the changes are well established and the results of change evaluation can be sufficiently reviewed in a summary or risk analysis format. Abbreviated 510(k)s are for devices that conform to special controls for the device type or to a recognized standard. The special and abbreviated 510(k)s are intended to streamline review, and the FDA intends to process special 510(k)s within 30 days of receipt.

After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, require PMA. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k), or a PMA, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or PMA is obtained. If the FDA requires us to seek 510(k) clearance or PMA for any modifications to a previously cleared product, we may be required to cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.

De Novo Reclassification

Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. To market low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, a manufacturer may request a de novo down-classification. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. A medical device may be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent or a manufacturer may request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. The FDA is required to classify the device within 120 calendar days following receipt of the de novo application, although in practice, the FDA’s review may take significantly longer. During the pendency of the FDA’s review, the FDA may issue an additional information letter, which places the de novo request on hold and stops the review clock pending receipt of the additional information requested. In the event the de novo requestor does not provide the requested information within 180 calendar days, the FDA will consider the de novo request to be withdrawn. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the de novo request for classification if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. In the event the FDA determines the data and information submitted demonstrate that general controls or general and special controls are adequate to provide reasonable assurance of safety and effectiveness, the FDA will grant the de novo request for classification. When the FDA grants a de novo request for classification, the device is granted marketing authorization and further can serve as a predicate for future devices of that type, through a 510(k) premarket notification.

Alternatively, if a 510(k) clearance is sought and the device is found not substantially equivalent, or NSE, a de novo petition must be filed within 30 days from the receipt of the NSE determination. The request should include a description of the device, labeling for the device, reasons for the recommended classification and information to support the recommendation. The de novo process following an NSE determination has a 60-day review period, although it is typical for the review to take far longer. If the FDA classifies the device into class II, the company will then receive an approval order to market the device. This device type can then be used as a predicate device for future 510(k) submissions. However, if the FDA subsequently determines that the device will remain in the class III category, then the device may not be marketed until the company has obtained an approved PMA.

Our current strategy is to submit a direct de novo reclassification petition for C-Scan. To support a direct de novo reclassification petition, our objective is to demonstrate that the device poses a low to moderate risk to patients. If the FDA determines that C-Scan is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process.

Premarket Approval Pathway

A PMA application must be submitted if the device cannot be cleared through the 510(k) process or is found ineligible for de novo reclassification. PMAs are generally required for Class III devices that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury. The PMA application process is generally more costly and time consuming than the 510(k) process. A PMA application must be supported by extensive data including, but not limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device for its intended use.

After a PMA application is submitted, the FDA has 45 days to determine whether the application is sufficiently complete to permit a substantive review and thus whether the FDA will file the application for review. After a PMA application is sufficiently complete, the FDA will accept the application and begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the “accepted application,” although, generally, review of the application may take at least 12 to 18 months, but it may take significantly longer. During this review period, the FDA may request additional information or clarification of information already provided. Also during the review period, an advisory panel of experts from outside FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. In addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with quality system regulations.

Upon completion of the PMA application review, the FDA may: (i) approve the PMA which authorizes commercial marketing with specific prescribing information for one or more indications, which can be more limited than those originally sought; (ii) issue an approvable letter which indicates the FDA’s belief that the PMA application is approvable and states what additional information the FDA requires, or the post-approval commitments that must be agreed to prior to approval; (iii) issue a not approvable letter which outlines steps required for approval, but which are typically more onerous than those in an approvable letter, and may require additional clinical trials that are often expensive and time consuming and can delay approval for months or even years; or (iv) deny the application. If the FDA issues an approvable or not approvable letter, the applicant has 180 days to respond, after which the FDA’s review clock is reset.

New PMA applications or PMA application supplements are required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling and design. PMA supplements often require the submission of the same type of information as a PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA application and may not require as extensive clinical data or the convening of an advisory panel.

Breakthrough Device Program

The FDA has implemented a Breakthrough Device Program that is intended to provide patients and providers with expedited access to breakthrough medical technologies that have the potential to provide more effective treatment or diagnosis for life-threatening or irreversibly debilitating diseases or conditions by expediting their development, assessment and review while preserving the statutory standards for premarket approval. A device also must meet one of the following criteria: (i) it represents breakthrough technology; (ii) there is no approved or cleared alternative; (iii) it offers significant advantages over existing cleared or approved devices; or (iv) availability of the device is in the best interest of patients. In February 2021, the FDA granted us a Breakthrough Device designation for C-Scan. For further information, see “-Regulatory Pathway for C-Scan.”

Under the program, we are eligible to receive priority review and interactive communications from the FDA regarding device development and clinical trial protocols, all the way through to commercialization decisions. In addition, the Centers for Medicare & Medicaid Services (CMS) has created expedited and special reimbursement pathways and programs based on FDA’s Breakthrough Device designation, for which we may be eligible.

Clinical Trials

Clinical trials are almost always required to support a PMA application or de novo reclassification petition and are sometimes required for a 510(k) premarket notification. If the device presents a “significant risk,” as defined by the FDA, to human health, the FDA requires the device sponsor to file an IDE application with the FDA and obtain IDE approval prior to commencing the human clinical trials. During the trial, the sponsor must comply with the FDA’s IDE requirements for investigator selection, trial monitoring, reporting, and recordkeeping. The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of investigational devices, and comply with all reporting and recordkeeping requirements. Clinical trials for significant risk devices may not begin until the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical trial sites. An IRB is an appropriately constituted group that has been formally designated to review and monitor medical research involving subjects and which has the authority to approve, require modifications in, or disapprove research to protect the rights, safety and welfare of human research subjects. A nonsignificant risk device does not require FDA approval of an IDE; however, the clinical trial must still be conducted in compliance with various requirements of FDA’s IDE regulations and be approved by an IRB at the clinical trials sites. We, the FDA, or the IRB at each site at which a clinical trial is being performed may withdraw approval of a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the benefits or a failure to comply with FDA or IRB requirements. Even if a trial is completed, the results of clinical testing may not demonstrate the safety and effectiveness of the device, may be equivocal or may otherwise not be sufficient to obtain approval or clearance of the product.

Similarly, in Europe the clinical study must be approved by the local ethics committee and in some cases, including studies of high-risk devices, by the Ministry of Health in the applicable country. For further information, see “- Regulation in Europe, Israel, Japan and Other Countries.”

Sponsors of clinical trials of devices are required to register with clinicaltrials.gov, a public database of clinical trial information. Information related to the device, patient population, phase of investigation, study sites and investigators, and other aspects of the clinical trial is made public as part of the registration.

Pervasive and Continuing FDA Regulation

After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:

Quality Systems Regulation Requirements

Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR requires that each manufacturer establish a quality systems program by which the manufacturer monitors the manufacturing process and maintains records that show compliance with FDA regulations and the manufacturer’s written specifications and procedures relating to the devices. The QSR also requires, among other things, maintenance of records and certain documentation, a device master file, device history file, and complaint files. QSR compliance is necessary to receive and maintain FDA clearance or approval to market new and existing products. As a manufacturer, we are subject to periodic scheduled or unscheduled audits or inspections by the FDA. Our failure to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, our manufacturing operations and the recall or seizure of our products, which would have a material adverse effect on our business. The discovery of previously unknown problems with any of our products, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls.

The FDA has broad regulatory compliance and enforcement powers. As manufacturers, we and our third-party manufacturers are subject to announced and unannounced inspections by the FDA to determine our compliance with quality system regulation and other regulations. We have not yet been inspected by the FDA. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:

The FDA can also publish Safety Communications or Letters to Health Care Providers when the agency becomes aware of new issues involving a specific product or, or more broadly, a product family. These communications are posted on the FDA’s website and describe the FDA’s analysis of a current issue and provide specific regulatory approaches and clinical recommendations for patient management.

Regulatory Pathway for C-Scan

We established a clinical and regulatory strategy with our advisors and conducted pre-submission meetings (an informal interaction to facilitate a clearer understanding of FDA’s expectations) with the FDA during the period of December 2016 and February 2017. During this process, we received the FDA’s feedback on our submission and our questions. We also sought feedback on a proposed protocol for a feasibility or pilot study, the primary purposes of which was to establish the safety of the C-Scan system and evaluate user compliance and satisfaction. In December 2018, we received from the FDA conditional approval of our IDE application to initiate a U.S. pilot study of the C-Scan system for establishing the safety of the C-Scan system and evaluating user compliance and satisfaction. We received final approval from the FDA in February 2019. In April 2019, we initiated the U.S. pilot study of C-Scan. In December 2019, we announced the results of the study. No device or procedure related SAEs were reported and all device or procedure related adverse events were mild in severity. In total, 45 patients enrolled in the study, of which 40 patients underwent the study procedure. 39 patients complied with the procedure and completed a questionnaire following the procedure and reported higher satisfaction with C-Scan procedure compared to colonoscopy. A total of 28 patients were evaluable after factoring in technical and physiological dropouts and protocol violations. Analysis of the evaluable patient results revealed agreement between C-Scan and colonoscopy in detection of polyps was consistent with data from the post-CE approval study.

In November 2020, we finalized our proposed U.S. pivotal study design and submitted our IDE application to the FDA and in March 2021, our IDE application was approved by the FDA.

In February 2021, the FDA granted us a Breakthrough Device designation for C-Scan for the indication as stated in the FDA’s Breakthrough Device designation approval, as follows: “C- Scan is intended to identify adult subjects 50 years or older, within the average risk population, who are at elevated risk for polyps larger than or equal to 1 cm. It is intended for adults who are poor candidates for colonoscopy. Polyps have been shown to be associated with the development of colorectal cancer. C-Scan is not intended to replace colonoscopy. A positive C-Scan result should be followed by colonoscopy.”

In January 2022, we submitted to the FDA an amended IDE application to amend the U.S. pivotal study design to add a first part to the study that is designed to enable further calibration of the C-Scan system, specifically for the average risk U.S. population and in February 2022, our IDE amended application was approved by the FDA. Following this amended IDE, the U.S. pivotal study consists of two parts. The first part is designed to enable further calibration of the C-Scan system for the average risk U.S. population, and is intended to include up to 200 patients in the United States. The second part is a statistically powered, randomized study which will compare the performance of C-Scan to traditional colonoscopy, and is intended to include up to 800 patients. The goal of the pivotal study in the United States is to (i) demonstrate device safety as evidenced by a lack of device related SAEs; and (ii) provide efficacy data concerning C- Scan’s performance.

In May 2022, we announced we had initiated the first part of the U.S. pivotal study, among the average risk U.S. population. In December 2022, we submitted an IDE supplement to the FDA to include enrollment of patients at age 45-75 instead of 50-75, which was approved by the FDA in January 2023.

As part of the U.S. pivotal study, we have continued to optimize the functionality and patient experience of our advanced version of C-Scan, which incorporates mainly advanced algorithms, improved detection capability and reduced energy consumption, through additional clinical data collection in a study in Israel (initially on average risk and high-risk patients and starting May 2022, shifted to enrollment of only average risk patients) for the purpose of further calibration of the C-Scan system, in parallel to conducting the first part of the U.S. pivotal study that was initiated in May 2022.

The initiation of the powered portion of the U.S. pivotal study was dependent upon successful completion of the calibration portion of the U.S. pivotal study. On March 21, 2023, we announced that following our internal assessment of the clinical data collected from the calibration studies until such date, we had determined that the most recent efficacy results from our calibration studies did not meet the goal to proceed to the powered portion of the U.S. pivotal study and, as such, the initiation of the second part of the U.S. pivotal study that was expected in mid-2023 was also temporarily postponed. As a result, we adopted a plan of action that included conducting additional clinical data analysis and approaching the FDA to make amendments to the U.S. pivotal study and a cost reduction plan in order to extend its cash runway to longer than initially planned.

On June 6, 2023, we announced that after further review of additional data and interaction with the FDA on a revised pivotal study protocol together with the anticipated time and investment necessary to further develop the technology, we were reducing our workforce significantly to reduce cash burn, concentrating our resources on essential research activities, discontinuing our calibration studies, and evaluating and pursuing strategic options. As a result of our evaluation and pursuit of strategic options, on March 25, 2024, we entered into a business combination agreement with Nobul. See “- Overview of Our Company.”

Following and subject to the successful completion of our U.S. pivotal study and available capital, our current strategy is to submit a direct de novo reclassification petition for our system. Although the FDA could require us to submit a PMA, we believe that the device could be considered for evaluation under the FDA’s de novo reclassification provisions, which allow a novel device to be reclassified into class I or class II. To support this, our objective is to demonstrate that the device poses a low to moderate risk to patients.

We believe that important potential benefits of C-Scan for CRC screening include the elimination of the need for bowel preparation, the elimination of the need for conscious sedation, the minimally invasive, painless nature of the examination, and the ability to pursue normal daily activities immediately following the procedure. Furthermore, the C-Scan system is being designed to generate information from segments of the colon (e.g., cecum and ascending colon) that are difficult to access by conventional optical colonoscopy (i.e., incomplete colonoscopies) without the risks and discomfort of operative examination or other invasive methods. We believe these benefits will be attractive to a large number of patients from the target populations that so far refrained from any screening tests. Thus, we anticipate that our capsule will increase the public compliance to screening recommendation.

If the FDA determines that C-Scan is not a candidate for de novo reclassification, it will require approval of the device for market through the PMA process. Because of the technological characteristics of this device, the non-clinical tests (including lab and animals) and clinical data required may not be significantly different between de novo and PMA regulatory processes. We believe that under both scenarios, we would be required to conduct a multi-center clinical study to establish the safety and efficacy and to demonstrate sensitivity and specificity of C-Scan in several hundreds of patients.
 

FCC Clearance and Regulation

Because C-Scan includes a wireless radio frequency transmitter and receiver, it is subject to equipment authorization requirements in the United States. The U.S. Federal Communications Commission, or FCC, requires authorization of radio frequency devices before they can be sold or marketed in the United States, subject to limited exceptions. The authorization requirements are intended to confirm that the proposed products comply with FCC radio frequency emission, power level standards, and other technical requirements and will not cause interference. Our system is using the same frequency band as other approved capsules. The current design of C-Scan complies with the FCC’s technical requirements and received FCC authorization. We expect that our future advanced design will also comply with the FCC’s technical requirements, so we expect that it will also be authorized by the FCC.
 

Third-Party Coverage and Reimbursement

Coverage of and reimbursement for C-Scan and related procedures, after approval, will be subject to the requirements of various third-party payors, including government-sponsored healthcare payment systems and private third-party payors. Coverage policies and reimbursement methodologies vary significantly from program-to-program and may be subject to federal and state regulations. For example, the Social Security Act requires all items and services to be “reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member” in order to be covered by Medicare. While Medicare might not provide separate reimbursement for a device, it may include payment for the device in the payment to the facility or physician for the related procedure. Third-party payors’ coverage and reimbursement policies, including their interpretations of whether an item or service is “reasonable and necessary” or experimental and/or investigational, and their payment methodologies, are subject to change pursuant to legislation, regulation, or, in the case of private payors, negotiations with industry and providers.

Fraud and Abuse Laws

In the United States, the healthcare industry is subject to extensive federal, state, and local regulation. Both federal and state governmental agencies subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. These laws constrain the sales, marketing and other promotional activities of manufacturers of medical devices, by limiting the kinds of financial arrangements (including sales programs) we may have with hospitals, physicians and other potential purchasers of the medical devices. The laws and regulations that may affect our ability to operate include, but are not limited to:

Violations of any of the laws described above or any other governmental regulations that apply to us, may cause us to be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government-funded healthcare programs, like Medicare and Medicaid, and the curtailment or restructuring of our operations.

Privacy Laws

HIPAA/HITECH and related U.S. federal and state laws protect the confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of that protected information. In particular, the U.S. Department of Health and Human Services promulgated patient privacy rules under HIPAA.

These privacy rules protect medical records and other personal health information by limiting their use and disclosure, giving individuals the right to access, amend and seek accounting of their protected health information and limiting most use and disclosures of health information to the minimum degree reasonably necessary to accomplish the intended purpose. Because, once approved, we intend to sell products to persons and entities subject to HIPAA and are exposed to personally-identifiable health information in the course of our operations, we also may be subject to certain elements of HIPAA, particularly as a business associate to covered entities, as well as similar state laws. HIPAA imposes civil and criminal penalties for violations of its provisions, which could be substantial. State privacy laws have their own penalty provisions with which we would also be expected to comply.

NRC Regulatory Matters

As a manufacturer of a medical device containing a sealed, radioactive source, we are subject to regulation by various governmental authorities that oversee the possession, use, and disposal of radioactive material. These regulations govern, among other things, the design, development, testing, manufacturing, packaging, labeling, distribution, import/export, sale, and marketing and disposal of our product.

The C-Scan capsule contains within the device a radioactive sealed source, which contains a small amount of radioactive material. This material aids in the imaging and scanning capabilities of the device as it passes through the patient. The C-Scan capsule is ingested by the patient, and passes through the patient’s gastrointestinal tract before exiting the human body.

Depending on where we manufacture and distribute the device, various countries’ nuclear regulatory laws and regulations may apply. In Israel, where we manufacture the device, Israeli nuclear regulatory laws apply to the radioactive material in the device. We adhere to the Israeli regulations and guidance for the design, development, testing, manufacturing and packaging, as well as the applicable nuclear regulations in the manufacturing phase.

In the United States, the C-Scan capsule is undergoing clinical trials. The U.S. Nuclear Regulatory Commission, or the NRC, and state nuclear regulatory agencies oversee the use of radioactive materials in the United States. The NRC regulates the use of radioactive materials in medical devices under several parts of its regulations, including 10 C.F.R. Part 20, “Standards for Protection Against Radiation,” 10 C.F.R. Part 30, “Rules of General Applicability to Domestic Licensing of Byproduct Material,” and 10 C.F.R. Part 35, “Medical Use of Byproduct Material.” NRC Agreement States implement similar regulations under a nuclear regulatory framework developed by the state pursuant to authority delegated by the NRC.

In accordance with applicable NRC regulations, and relevant NRC Agreement State requirements, we comply with the radioactive materials safety and handling requirements applicable for our development of our C-Scan technology applicable to clinical trials. The NRC also places conditions and limitations on the disposal of radioactive material in the sanitary sewer. In 2022, after extensive engagement with the NRC, we submitted a petition for rulemaking to the NRC, requesting that the agency amend the NRC regulations at 10 CFR 20.2003(b), which pertains to disposal of radioactive material into the sanitary sewer system, to include the disposal of the C-Scan capsule. Under the NRC’s current interpretation of the 10 CFR 20.2003(b) regulations, disposal of a device like the C-Scan capsule into the sanitary sewer system is not currently permitted. The NRC’s review of the rulemaking request remains ongoing. Therefore, during the U.S. pivotal study, the C-Scan capsule is not intended to be disposed of in the sanitary sewer system, and is instead intended to be collected by the patient and returned to the medical facility administering the device for further storage, decay and disposal. For the collection and disposal phase of the U.S. pivotal study, we have established, through a third party, a decay and disposal process of the C-Scan capsule that is in accordance with the NRC Agreement State requirements.

In the U.S, engagement with various sites to participate in the U.S. pivotal study has been progressing slower than expected, in part due to compliance with, and the need for, the site-specific licensing and compliance with radioactive materials regulatory requirements associated with the X-ray technology contained within our C-Scan capsule.

The future commercial sale of C-Scan will also be subject to extensive nuclear regulations in various jurisdictions around the world where the C-Scan capsule will be used, and we intend to comply with such regulations as they become applicable. We expect the commercial manufacture and distribution of C-Scan will also require us, or a company affiliated with us, to obtain a number of licenses and certifications related to nuclear regulatory compliance. We also expect that in commercialization, clinical centers/hospitals will need to obtain a number of licenses and certifications related to nuclear regulatory compliance.

Regulation in Europe, Israel, Japan and Other Countries

The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Each European Union member state has implemented legislation applying these directives and standards at the national level. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Devices that comply with the requirements of the laws of the relevant member state applying the applicable European Union directive are entitled to bear CE conformity marking and, accordingly, can be commercially distributed throughout the member states of the European Union and other countries that comply with or mirror these directives. The method of assessing conformity varies depending on the type and class of the product, but normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a “Notified Body,” an independent and neutral institution appointed to conduct conformity assessment. This third-party assessment consists of an audit of the manufacturer’s quality system and clinical information, as well as technical review of the manufacturer’s product. An assessment by a Notified Body in one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. In addition, compliance with ISO 13845:2016 on quality systems issued by the International Organization for Standards, among other standards, establishes the presumption of conformity with the essential requirements for a CE marking. In addition, many countries apply requirements in their reimbursement, pricing or health care systems that affect companies’ ability to market products.

On January 9, 2018, we obtained the CE mark of conformity for C-Scan. On December 21, 2021, the European MDR issued a renewal of our CE mark according to the EU Regulation 2017/745 on Medical Devices for the marketing and sale of C-Scan in the European Union, valid until December 1, 2026.

C-Scan and our operations are also subject to regulation by AMAR, which is responsible for the registration of medical devices in Israel, issuance of import licenses and monitoring of marketing of medical equipment. In September 2018, we received approval from AMAR for the marketing and sale of C-Scan in Israel. Following the approval we received from our Notified Body according to the EU Regulation 2017/745, the AMAR approval was renewed and is valid until December 31, 2024.

In Japan, manufacturing and marketing medical devices are regulated by the Pharmaceutical Affairs Law, or PAL. In accordance with the PAL, manufacturers must obtain a license for manufacturing medical devices from the Ministry of Health, Labour and Welfare, or MHLW. A license is required for each manufacturing plant specified by an MHLW Ministerial Ordinance.

A licensed manufacturer is responsible only for manufacturing medical devices. In regard to the marketing of medical devices, the PAL specifies that a Marketing Authorization Holder, or MAH, licensed by MHLW is responsible for putting medical devices into marketplace. Licenses for marketing medical devices are divided into the following 3 types, which correspond to the classifications below:

Generally, the process for obtaining marketing clearance for medical devices in Japan ranges from 12 months (for products with only very minor modifications from previously cleared product versions) to a few years in the case of a completely new device.

In order for us to market our products in countries other than the United States, Israel, the EU and Japan (which were described above), we must obtain regulatory approvals and comply with extensive safety and quality regulations in those countries. These regulations, including the requirements for approvals or clearance and the time required for regulatory review varies from country to country. It is customary that once a product has been cleared for sales in the US and is CE marked in the EU, many other countries will follow. Failure to obtain regulatory approval or clearance in any foreign country in which we plan to market our product may harm our ability to generate revenue and harm our business.

United Kingdom

As of January 1, 2021, the UK is a “third country” with regard to the EU (subject to the terms of the EU UK Trade Agreement) and EU law ceased to apply directly in the UK. However, the UK has retained the EU regulatory regime with certain modifications as standalone UK legislation. Therefore, the UK regulatory regime is currently similar to EU regulations, but under new legislation, the Medicines and Medical Devices Act, the UK may adopt changed regulations that may diverge from the EU legislative regime for medicines and medical devices and their research, development and commercialization. For a two-year period starting January 1, 2021, the UK adopted transitional provisions, which inter alia applied to the importation of medical devices into the UK and the acceptance of CE-certificates until the end of June 2023, subject to certain registrations with the UK Medicines and Healthcare Products Regulatory Agency. From July 1, 2023, certification under the new UK medical device legislation is required to place products on the market in the UK. Medical devices will need to be registered with the MHRA before they are placed in the UK market. Medical device manufacturers based outside the UK that wish to place a device in the UK market, will need to appoint a single UK Responsible Person, who will act on its behalf to carry out specified tasks, such as registration.

Third-Party Reimbursement

Reimbursement in the United States

In the United States, healthcare providers that purchase and/or prescribe medical devices generally rely on third-party payors, such as Medicare, Medicaid, or private health insurance plans, to reimburse all or a portion of the cost of the devices, as well as any related healthcare services utilizing the device.

Coverage is not guaranteed simply because a product has received FDA clearance or approval or has a CPT or HCPCS code that describes the product or service. For example, Medicare’s general definition of a medically necessary service is one that is reasonable and necessary for the diagnosis or treatment of an illness or injury, or that improves the functioning of a malformed body member.

CRC is the fourth most common cancer and the second leading cause of cancer deaths in the United States, and is expected to cause about 52,550 deaths during 2023. It is an important issue for the Medicare and the commercial population. Based on 2016-2018 data, approximately 4.1 percent of men and women will be diagnosed with colorectal cancer at some point during their lifetime. In 2018, there were an estimated 1,365,135 people living with colorectal cancer in the United States. In 2022, the National Institutes of Health (NIH) National Cancer Institute (NCI) estimated that there will be over 151,000 new cases of colon and rectal cancer in the United States with a median age at diagnosis of 66 years. Colorectal cancer is most frequently diagnosed among people aged 6 - 74 years (NIH). The American Cancer Society’s estimates for the number of colorectal cancer cases in the United States for 2023 forecast over 153,000 new cases of colon and rectal cancer. From 2013 to 2019, while incidence rates dropped by about 1% each year, there is a rising incidence among younger adults since at least the mid-1990s. From 2012 through 2016, it increased every year by 2% in people younger than 50 and 1% in people 50 to 64. While the death rate from colorectal cancer has been dropping among both men and women for several decades, deaths from colorectal cancer among people younger than 55 have increased 1% per year from 2008 to 2017.

Among all races, African Americans have the highest death rate. Based on data from SEER 17 2012-2018, the five-year relative survival rate was 65.1%. The earlier CRC is detected, the better chance a person has of surviving five years after being diagnosed. For CRC, 37.2% are diagnosed at the local stage. The 5-year relative survival for localized CRC is 90.9%.

COVID-19 caused an unprecedented disruption in cancer prevention efforts, including CRC screening. In general, CRC screening decreased by 28% to as much as 100% in different countries and at different times after the onset of the COVID-19 pandemic. During this period, completion of colonoscopies requiring examination decreased 65.7%, surveillance colonoscopy decreased 44.6 to 79%, prescription colonoscopy decreased 60 to 81%, and referrals to colonoscopy decreased 43%. In a simulation model by Issaka, et al, COVID-19-related reductions in care utilization resulted in an estimated 1,176,942 to 2,014,164 fewer CRC screenings, 8,346 to 12,894 fewer CRC diagnoses, and 6113 to 9301 fewer early-stage CRC diagnoses between 2020 and 2023. To the extent such behavior trends continue post-pandemic, a significant percentage of eligible adults would remain unscreened and our potential addressable market could be materially and adversely affected.

Since the 1990s, Medicare has covered a number of CRC screening tests from non-invasive fecal based tests to colonoscopy, providing a range of choices for patients to choose the most individually suitable modalities.

The cost-effectiveness of a device (or the service in which a device is used) may be a key factor in obtaining third-party payer reimbursement for such device or service, but is not commonly a factor for Medicare. Medicare covers certain CRC screening tests and procedures for Medicare beneficiaries that meet certain eligibility criteria, as authorized by Sections 1861(s)(2)(R) and 1861(pp) of the Social Security Act and regulations at 42 CFR 410.37. However, Medicare coverage of CRC screening tests as defined under Section 1861(pp)(1)(D) states “Such other tests or procedures, and modifications to tests and procedures under this subsection, with such frequency and payment limits, as the Secretary determines appropriate, in consultation with appropriate organizations.” (emphasis added).

A key factor affecting the cost-effectiveness of CRC screening is patient adherence. Adherence is strongly affected by patients’ willingness to use the device (or service incorporating a device) as a screening tool for CRC.

Several models have been designed to demonstrate the cost effectiveness of optical colonoscopy, CTC, fecal testing and capsule endoscopy. Today, several technologies - FOBT / FIT, Flexible Sigmoidoscopy, Optical Colonoscopy, Barium Enema, and multi-target stool DNA - are covered for Medicare beneficiaries meeting certain eligibility criteria for screening for colorectal cancer, while other technologies including CTC, capsule endoscopy, and liquid biopsy are not currently covered by Medicare for CRC screening.

In 2009, the CMS issued a decision memorandum concluding that the evidence was inadequate to support Medicare coverage of CTC for CRC screening because available evidence indicated that screening with CTC would not necessarily result in cost savings at least at current screening compliance rates. CTC was not seen as a tool which could potentially increase patients’ adherence. This procedure involves bowel preparation, as well as insufflations of the colon and the exposure of patients to very significant amount of radiation. Extracolonic incidental findings on CTC are common, with the percentage of participants with extracolonic findings ranging from 58% to 66%. Further, as CTC potentially detects lesions outside of the colon, CMS has no ability to pay for the evaluation of incidental findings in a patient without signs or symptoms unless specifically directed by Congress to do so.

There are benefits of screening for advanced adenomas. The adenoma detection rate (based on colonoscopies) was inversely associated with the risks of interval colorectal cancer, advanced-stage interval cancer, and fatal interval cancer.

An important European study (C. Hassan et al, “Cost-Effectiveness of Capsule Endoscopy in Screening for Colorectal Cancer,” Endoscopy; 2008 40: 414-421) assessed the potential cost effectiveness of screening with optical capsule endoscopy and compared its cost-effectiveness with optical colonoscopy. Cost-effectiveness of screening was measured in terms of cost per life-year saved through prevention or down staging of CRC. The conclusion was that the cost effectiveness of capsule endoscopy in CRC screening will depend mainly on its ability to improve compliance in the general population.

Third-party payors in the United States began issuing coverage policies for capsule endoscopy in early 2002, subsequent to FDA approval and availability of the technology. Initially, reimbursement policies provided coverage for capsule endoscopy of the small bowel only for the diagnosis of obscure gastrointestinal bleeding. Subsequently, reimbursement coverage has been expanded to include other diagnoses and as of December 31, 2023, approximately 300 million people in the United States have coverage of this technology for a number of capsule endoscopy of the small bowel indications including obscure gastrointestinal bleeding, suspected Crohn’s disease, suspected small bowel tumors, celiac disease and other small bowel pathologies.

Currently, there is no Medicare, Medicaid, or commercial insurance reimbursement for capsule endoscopy of the colon in the United States for CRC screening, despite the availability of CPT code 91113 Gastrointestinal tract imaging, intraluminal (e.g., capsule endoscopy), colon, with interpretation and report, which became effective January 1, 2022.

In February 2020, CMS received a formal request for a national coverage determination from Epigenomics to consider coverage of Epi proColon, one example of a blood-based biomarker screening test for CRC. Over the last several years, blood-based biomarker tests have emerged as another potential non-invasive option for the early detection of CRC. A blood-based biomarker (biological marker in the patient’s blood) is a measurable DNA, RNA or protein component that indicates disease, in this case cancer. Blood-based cancer biomarkers include but are not limited to specific gene mutations, methylation of genes, and antigens. The blood-based biomarker that is measured in a person’s blood can be an indicator of a process, such as disease risk or progression, like progression to CRC, thought to be correlated with a long term outcome, such as mortality. It is typically easier to measure a biomarker than the true outcome of interest, such as mortality from colorectal cancer. However, the biomarker might not be a good surrogate for and not well correlated with the clinical outcome of interest, such as cancer survival or mortality, or it might not identify a patient early enough to alter the clinical course of disease. One example test, Epi proColon, functions as a blood-based CRC screening test by identifying the circulating mSEPT9 (Septin9) gene in cell-free DNA isolated from plasma. CRC tumors have an increased likelihood of exhibiting aberrant methylation at the promoter region of the SEPT9 gene DNA.

In the past CRC screening NCDs, CMS has discussed appropriate test performance criteria such as point sensitivity and specificity compared to colonoscopy. The determination of appropriateness is similar to the consideration of what is appropriate for the device to be, “at least as beneficial as an existing and available medically appropriate alternative.” Through the evaluation of evidence from published studies, the clinical data for the device must reach the threshold for being appropriate. The direct evidence suggests that there is clinical utility in using FOBT and FIT for early detection of CRC because these tests reduce mortality of the disease. Conversely, there is no direct evidence on outcomes such as mortality for blood-based biomarker tests used in screening for colorectal cancer. By comparing the test performance characteristics, defined as sensitivity, specificity, and positive predictive value, of new screening tests to gFOBT or FIT, CMS can assess whether blood-based tests might translate into similar reductions in disease mortality for Medicare beneficiaries. Thus, if the sensitivity and specificity of the new screening tests are as good as or better than the sensitivity and specificity of gFOBT or FIT, then there is indirect evidence suggesting that the new blood-based biomarker tests may reduce colorectal cancer mortality.

In January 2021, CMS updated National Coverage Determination 210.3, stating that, effective for dates of service on or after January 19, 2021, a blood-based biomarker test is covered as an appropriate CRC screening test once every 3 years for Medicare beneficiaries (i) when performed in a Clinical Laboratory Improvement Act (CLIA)-certified laboratory, (ii) when ordered by a treating physician and (iii) when all of the following requirements are met: The patient is: age 50-85 years; and, asymptomatic (no signs or symptoms of colorectal disease including but not limited to lower gastrointestinal pain, blood in stool, positive guaiac fecal occult blood test or fecal immunochemical test); and, at average risk of developing CRC (no personal history of adenomatous polyps, CRC, or inflammatory bowel disease, including Crohn’s Disease and ulcerative colitis; no family history of CRC or adenomatous polyps, familial adenomatous polyposis, or hereditary nonpolyposis CRC). The blood-based biomarker screening test must have all of the following: FDA market authorization with an indication for CRC screening; and, proven test performance characteristics for a blood-based screening test with both sensitivity greater than or equal to 74% and specificity greater than or equal to 90% in the detection of CRC compared to the recognized standard (accepted as colonoscopy at this time), as minimal threshold levels, based on the pivotal studies included in the FDA labeling.

CMS concluded that the published evidence does not show that the available blood-based biomarker CRC screening test improves health outcomes for Medicare beneficiaries. The indirect evidence (comparing a blood-based screening test to another test that has been shown to improve mortality such as screening fecal immunochemical test) does not show that blood- based screening test is equivalent in the detection of large adenomas or early stage cancer. The test performance of the Epi proColon® test does not meet sensitivity and specificity levels established by prior evidence at which the benefits of using the screening test outweigh harms to Medicare patients.

In July 2022, a group of CRC survivors, patient advocates, and life-science professionals met to discuss opportunities for stakeholders to improve access to treatment and screening in the US. Joined by White House Cancer Moonshot Coordinators, the group centered discussion on three initiatives:

In December 2022, Guardant Health released results from ECLIPSE (Evaluation of ctDNA LUNAR Assay In an Average Patient Screening Episode), an over 20,000 patient registrational study evaluating the performance of its blood test for detecting colorectal cancer (CRC) in average-risk adults. The test demonstrated 83% sensitivity in detecting individuals with CRC. Specificity was 90% in both individuals without advanced neoplasia and in those who had a negative colonoscopy result. This test also demonstrated 13% sensitivity in detecting advanced adenomas. In this study, two configurations of a multimodal blood-based screening test were evaluated independently - a cell-free DNA (cfDNA)-only test and a cfDNA test with protein biomarkers. The announced results were derived from the cfDNA-only test, which outperformed the cfDNA test with protein biomarkers. Based on these study results, Guardant Health submitted its PMA application for its blood test for detecting CRC in March 2023. The FDA has scheduled to review the PMA application on May 23, 2024.
 

In January 2023, Geneoscopy Inc., released results from the CRC-PREVENT trial - a pivotal clinical trial evaluating the efficacy of its noninvasive, stool-based, at-home diagnostic screening test to detect colorectal cancer (CRC) and advanced adenomas (AA) in average-risk individuals. The CRC-PREVENT trial included 8,289 individuals with diverse racial, ethnic, and socioeconomic backgrounds across more than 2,900 zip codes in all lower 48 states, with colonoscopies performed in more than 3,800 endoscopy centers. Efficacy results from the study demonstrated 94% sensitivity for detecting CRC, 45% sensitivity for detecting advanced adenoma (AA), and 88% specificity for no findings on a colonoscopy. The company submitted a PMA application to the FDA in January 2023. In November 2023, Geneoscopy Inc. announced a strategic collaboration with Labcorp to distribute the CRC screening test once approved by the FDA.

There can be no assurance that coverage of the C-Scan by Medicare and/or commercial payors will be obtained in the near future or at all. Third-party payors may deny coverage of the C-Scan if they determine that a procedure was not reasonable or necessary as determined by the payor, was experimental, does not improve health outcomes, is not equivalent in the detection of large adenomas or early stage cancers, and/or was used for an unapproved indication (among other factors).

Coverage Outside the United States

In countries outside the United States, coverage for CRC screening may be obtained from various sources, including governmental authorities, private health insurance plans, and labor unions. In some countries, private insurance systems may also offer payments for some therapies. Although not as prevalent as in the United States, health maintenance organizations are emerging in certain European countries. Coverage systems in international markets vary significantly by country and, within some countries, by region. Coverage approvals must be obtained on a country-by- country or region-by-region basis.

C. Organizational Structure

On May 15, 2015, we formed our wholly-owned subsidiary Check-Cap US, Inc., a Delaware corporation.

D. Property, Plants and Equipment

Our manufacturing operations are conducted at our facility located in Isfiya, Israel and in our own X-ray production line in Petach Tikva. On January 26, 2021, we entered into the Amended Lease Agreement, according to which, effective as of April 1, 2021, we leased a total of approximately 1,550 square meters at our facility located in Isfiya, Israel. The Amended Lease Agreement expired on December 31, 2023. Monthly rental expenses under the lease agreement are $16,100. Prior to entering into the Amended Lease Agreement, we leased approximately 900 square meters at the same facility under a lease agreement, originally scheduled to expire on May 31, 2022. Following the determination of our Board of Directors on June 6, 2023 to discontinue our clinical studies, we did not extend the Amended Lease Agreement that expired on December 31, 2023. However, on November 11, 2023, we agreed with the lessor to lease part of the premises in Isfiya until February 29, 2024, for a monthly rental fee of $8,300. On April 15, 2024, we and the lessor agreed on extending the lease of the New Leased Premises for a two years period commencing on March 1, 2024, for a monthly rental fee of $8,300. We may terminate such lease upon a 60 days prior notice to the lessor.

On December 30, 2021, we entered into the Sub-lease Agreement with one of our suppliers, according to which we leased approximately 70 square meters laboratory space for the production of certain components, at the supplier’s premises in Petach Tikva, Israel. The Sub-lease Agreement entered into effect on September 21, 2022, after receipt of certain permits including a business license from Petach Tikva municipality. The Sub-lease Agreement was due to expire on January 31, 2025. We had the right to terminate the Sub-lease Agreement at any time, upon at least 90 days prior written notice. The Sub Lease Agreement was part of an amended service agreement with the supplier for certain additional services. Total monthly rental expenses under the Sub-lease Agreement and the payment for such other services was $26,900. As the Sub-lease Agreement is part of a service agreement with the supplier, management was required to evaluate the fair market amount attributed to the lease per month and based on its estimations, the amount allocated to the lease was approximately $2,800 and the portion allocated to monthly services was $24,100. Following the determination of our Board of Directors on June 6, 2023 to discontinue our clinical studies, on June 8, 2023, we terminated the Sub-lease Agreement and such service agreement in Petach Tikva, and the Sub-lease Agreement terminated on September 8, 2023.

On March 1, 2022, we entered into a lease agreement of certain offices in Petach Tikva Israel, according to which, we leased approximately 140 square meters offices, The lease agreement expired on February 28, 2024, and we had an option to extend the lease period for two additional periods of one year each. Total monthly rental expense under the lease agreement was approximately $1,700. In September 2023, the office lease agreement in Petach Tikva was terminated by the parties.

We currently have sufficient space to manufacture C-Scan for the contemplated clinical studies, but have limited resources and facilities in commercially manufacturing large quantities of C-Scan and C-Scan View to meet the demand we expect for our future commercialization efforts. We have faced and expect to face certain technical challenges as we increase manufacturing capacity, including, among others, logistics associated with the handling of radioactive materials, equipment design and automation, material procurement, lower than expected yields and increased scrap costs, as well as challenges related to maintaining quality control and assurance standards, while maintaining commercially efficient pricing for C-Scan. Our production objective is to establish a scalable capacity in order to meet such expanded demand for C-Scan and market expansion. If we are unable to scale up our manufacturing capabilities to meet our clinical trials needs and future market demand, our growth could be limited and our business, financial condition and results of operations could be materially adversely affected.

We believe that our current facilities are adequate to meet our current needs for the clinical phase of our development. See Item 4B “Information on Our Company - Business Overview - Manufacturing and Suppliers.”

ITEM 4A. Unresolved Staff Comments

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included in this Annual Report beginning on page F-1. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Item 3D “Key Information - Risk factors” and elsewhere in this Annual Report.

Overview

We are a clinical stage medical diagnostics company aiming to redefine CRC screening through the introduction of C-Scan®, a screening test designed to detect polyps before they may transform into cancer to enable early intervention and cancer prevention. The disruptive capsule-based screening technology aims to increase screening adherence worldwide and enable people to stay healthy. The system utilizes ultra-low-dose X-rays to scan the inner lining of the colon for precancerous polyps, and other structural abnormalities. CRC is the third most commonly diagnosed cancer, with more than 1.9 million new cases identified every year globally. Nearly 935,000 deaths occur annually worldwide as a result of CRC. While approximately 0.5% of the average-risk screening population presents with cancerous polyps in the colon and rectum at any given time, approximately 25% of the same population presents with benign polyps that could potentially turn into cancer over time. It can take up to 10 years before a pre-cancerous polyp develops into invasive cancer. As such, there is a crucial detection window for the prevention of colorectal cancer, through the detection of these benign polyps. While routine screening is recommended by The American Cancer Society for healthy people aged 45 years and older, screening adherence remains low. Currently, colonoscopy is the gold standard for the detection of colorectal polyps, but about 1 in 3 adults among the targeted screening population avoids having a colonoscopy in the U.S., and adherence in other regions of the world such as Europe and Asia is even lower, due to the invasiveness of the procedure and bowel preparation. Most patient-friendly CRC screening tests currently available, or poised to enter the market, such as fecal or liquid biopsy tests, are primarily designed to detect cancer and demonstrate low sensitivity in detecting pre-cancerous polyps. As such, they do not necessarily provide patients with the time window to pre-empt the disease. C-Scan is non- invasive and requires no preparation or sedation, allowing the patients to continue their daily routine with no interruption as the capsule is propelled through the gastrointestinal tract by natural motility. C-Scan is comprised of three main components: (1) C-Scan Cap, an ingestible X-ray scanning capsule; (2) C-Scan Track, three miniaturized patches worn on the patient’s back for integrated positioning, control and data recording; and (3) C-Scan View, a proprietary software to process and represent 2D and 3D maps of the inner surface of the colon. We believe that this solution has the potential to become an alternative for both physicians and patients and to increase the number of people completing CRC screening.

Check-Cap LLC was formed in 2004 as a Delaware limited liability company to develop a novel and superior solution for colon cancer screening. In 2009, all of the business operations and substantially all of the assets of Check-Cap LLC were transferred to Check Cap Ltd., a newly-incorporated Israeli company. Our headquarters are located near Haifa, in the northern part of Israel. Our management team includes an experienced group of executives in the business, research, clinical and regulatory fields.

C-Scan is being designed to create a reconstructed three-dimensional representation of the interior surface of the colon and to enable detection of clinically significant polyps with a high degree of sensitivity. Colonic polyps are tissue growths that occur on the lining of the colon. Polyps in the colon are extremely common and certain types of polyps can become cancerous over time.

Since our inception, we have devoted substantially all of our efforts to research and development, clinical trials, recruiting management and technical staff, acquiring assets and raising capital. We are still in the development and clinical stage and have not yet generated revenues. We have generated significant losses to date, and we expect to continue to generate losses for at least the next several years as we continue our investment in research and development and clinical trials in order to complete the development of C-Scan and to attain regulatory approvals, manufacturing scale up, begin the commercialization efforts for our products, increase our marketing and selling expenses, and incur additional costs as a result of being a public company in the United States. We have incurred losses of $17.6 million and $19.1 million for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, we had accumulated deficit of approximately $144.9 million. The extent of our future operating losses and the timing of becoming profitable are highly uncertain, and we may never achieve or sustain profitability.

We have funded our operations to date primarily through equity financings, sales of our ordinary shares and warrants, the exercise of warrants and other funding transactions and through grants from the IIA. Our financing activities are described below under “Liquidity and Capital Resources.”

Additional funding will be required to complete our research and development and clinical trials, to attain regulatory approvals, to establish manufacturing infrastructure and to begin the commercialization efforts of C-Scan. We have not yet commercialized our product. Even if we commercialize our product, we may not become profitable in the foreseeable future. Our ability to achieve profitability depends on a number of factors, including our ability to obtain regulatory approval for our product, successfully reduce the manufacturing cost of our C-Scan product, successfully complete any post-approval regulatory obligations and successfully commercialize our product alone or in partnership.

The initiation of the powered portion of the U.S. pivotal study was dependent upon successful completion of the calibration portion of the U.S. pivotal study. On March 21, 2023, we announced that following our internal assessment of the clinical data collected from the calibration studies until such date, we had determined that the most recent efficacy results from our calibration studies did not meet the goal to proceed to the powered portion of the U.S. pivotal study and, as such, the initiation of the second part of the U.S. pivotal study that was expected in mid-2023 was also temporarily postponed.  On June 6, 2023, we announced that after further review of additional data and interaction with the FDA on a revised pivotal study protocol together with the anticipated time and investment necessary to further develop the technology, we were reducing our workforce significantly to reduce cash burn, concentrating our resources on essential research activities, discontinuing our calibration studies, and evaluating and pursuing strategic options. As a result of our evaluation and pursuit of strategic options, on March 25, 2024, we entered into a business combination agreement with Nobul. In May 2024, we reimbursed Nobul $3,808,815 pursuant to the provisions of the Nobul BCA. If the Business Combination is consummated, Check-Cap’s ordinary shares will be delisted from Nasdaq and deregistered under the Securities Exchange Act of 1934 and Check-Cap will no longer be required to file periodic reports with the U.S. Securities and Exchange Commission.

For a more detailed description of our business and plans, see Item 4B “Information on Our Company - Business Overview.”

A. Operating Results

Financial Operations Overview

Revenue

We have not generated any revenue since our inception. To date, we have funded our operations primarily through equity financings, as well as from grants that we received from the IIA. If our product development efforts result in clinical success, regulatory approval and the successful commercialization, we expect to generate revenue from sales of C-Scan.

Operating Cost and Expenses

Our operating costs and expenses are classified into two categories: research and development expenses and general and administrative expenses. For each category, the largest component is personnel costs, which consists of salaries, employee benefits and share-based compensation. Operating costs and expenses also include allocated overhead costs for depreciation of equipment. Operating costs and expenses are generally recognized as incurred. On March 21, 2023, we announced that following our internal assessment of the clinical data collected from the calibration studies until such date, we had determined that the most recent efficacy results from our calibration studies did not meet the goal to proceed to the powered portion of the U.S. pivotal study and, as such, the initiation of the second part of the U.S. pivotal study that was expected in mid-2023 was also temporarily postponed. On June 6, 2023, we announced that after further review of additional data and interaction with the FDA on a revised pivotal study protocol together with the anticipated time and investment necessary to further develop the technology, we were reducing our workforce significantly to reduce cash burn, concentrating our resources on essential research activities, discontinuing our calibration studies, and evaluating and pursuing strategic options. Despite these measures, we expect personnel costs and operating costs to continue to constitute a significant portion of our expenses.

Research and Development Expenses, Net

Research and development activities have been central to our business model. Our total research and development expenses, net of participations in the years ended December 31, 2023, 2022, and 2021 were approximately $8.3 million, $14.3 million, and $12.3 million, respectively. All research and development expenses are expensed as incurred. In anticipation of the initiation of the strategic development plan, management terminated the majority of our research and development activities. For additional information, see “Information on Our Company - Business - Research and Development.”

Research and development expenses consist primarily of costs incurred for our development activities, including:

Our research and development expenses, net, are net of grants for the research and development for C-Scan and for the transition from research and development to manufacturing that we have received from the Government of Israel through the IIA. Under the terms of the Innovation Law as currently in effect, in exchange for the research and development grants we received, we are required to pay the IIA royalties from our revenues up to an aggregate of 100% (which may be increased under certain circumstances) of the U.S. dollar-linked value of the grant, plus interest at the rate of 12-month LIBOR. Pursuant to regulations under the Innovation Law, the rate of royalty repayment is 3% or 4% of revenues (which may be increased under certain circumstances) from sales of products and services based on know-how funded by the IIA research and development grants we have received. As of December 31, 2023, we had received funding from the IIA for the research and development of C-Scan in the aggregate amount of approximately $5.6 million. As of December 31, 2023, we had not paid any royalties to the IIA and had a contingent obligation to the IIA in respect of such research and development grants in the amount of approximately $6.2 million. In addition, in January 2021, we received an IIA grant approval to support the funding of our transition from research and development to manufacturing. The final IIA grant amounted to $620,000 (NIS 2.25 million) (along with a co- investment by us of the same amount), which we are not required to repay to the IIA, subject to the terms and conditions set forth in the grant approval, of which we received approximately $225,000 (NIS 816,075) in February 2023, $82,000 (NIS 297,414) in January 2022 and $349,000 (NIS 1,265,823) in 2021. For additional information regarding the IIA grants, see Item 10E “Additional Information - Taxation - Israeli Tax Considerations and Government Programs - The Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly the Encouragement of Industrial Research and Development Law, 5744-1984).” There can be no assurance that we will continue to receive grants from the IIA in amounts sufficient for our operations, if at all. See also Item 3D “Key Information - Risk Factors- Risks Related to Our Operations in Israel-Pursuant to the terms of the Israeli government grants we received for research and development expenditures, we are obligated to pay certain royalties on our revenues to the Israeli government. In addition, the terms of the Israeli government grants we received require us to satisfy specified conditions and to make additional payments in addition to repayment of the grants upon certain events.”

General and Administrative Expenses

Our general and administrative expenses consist primarily of salaries and other related costs, including share-based compensation expense, for persons serving as our directors and executives, finance, legal, human resources and administrative personnel, professional service fees, directors’ and officers’ liability insurance and other general corporate expenses, such as communication, office and travel expenses. Based on our current plans, we expect that our general and administrative expenses will slightly decrease in 2024; however, we expect general and administrative expenses to increase in the future, in part due to costs associated with being a public company in the United States, including compliance under the Sarbanes-Oxley Act of 2002 and rules promulgated by the U.S. Securities and Exchange Commission. These public company-related expenses include costs of additional legal fees, accounting and audit fees, directors’ and officers’ liability insurance premiums and costs related to investor relations.

Finance Income, net

Our finance income, net in fiscal year 2023, 2022, and 2021 consists primarily of interest earned on our cash equivalents and short-term bank deposits and changes in provision for royalties.

Foreign currency transactions are translated into U.S. dollars using the exchange rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized to “finance income, net” in the consolidated statement of operations.

Taxes on Income

The standard corporate tax rate in Israel is 23% for the 2018 tax year and thereafter.

We do not generate taxable income in Israel, as we have historically incurred operating losses resulting in carryforward tax losses totaling approximately $27.7 million as of December 31, 2023. We anticipate that we will be able to carry forward these tax losses indefinitely to future tax years. However, a tax loss that can be utilized in a certain tax year cannot be carried forward to future tax years. Accordingly, we do not expect to pay taxes in Israel until we have taxable income after the full utilization of our carry forward tax losses.

Under the Law for the Encouragement of Capital Investments, 5719-1959 and other Israeli legislation, we may be entitled to certain additional tax benefits, including reduced tax rates, accelerated depreciation and amortization rates for tax purposes on certain assets, deduction of public offering expenses in three equal annual installments and amortization of other intangible property rights for tax purposes. See Item 10E “Additional Information - Taxation- Israeli Tax Considerations and Government Programs” for additional information concerning these tax benefits.

Results of Operations

For convenience purposes, the numbers set forth in the management’s discussion and analysis below are, where applicable, rounded up and presented in millions, whereas the numbers in the tables below are presented in thousands. As result, the percentages set forth in the year-over-year comparisons below are based on numbers that have (where applicable) been rounded up to millions, which may slightly differ than the percentages that would result from the corresponding numbers set forth in the table that are presented in thousands.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

Operating Loss. Our operating loss for the year ended December 31, 2023 was approximately $19.3 million, as compared with approximately $20.0 million for the year ended December 31, 2022, a decrease of approximately $0.7 million, or 3.5%. The decrease was primarily attributable to the $6.0 million decrease in research and development expenses, net, for the year ended December 31, 2023, offset in part by the $3.8 million increase in general and administrative expenses and the impairment of fixed assets in the amount of $1.4 million for the year ended December 31, 2023.

Finance Income, net. Our finance income, net for the year ended December 31, 2023 was approximately $1.7 million, as compared to approximately $0.9 million for the year ended December 31, 2022, an increase of approximately $0.6 million. The increase in our finance income, net is primarily due to an increase of $0.7 million of interest income on short-term deposits and other recorded for the year ended December 31, 2023, as compared to the year ended December 31, 2022, offset in part by a $0.2 million decrease in exchange rate differences recorded for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

Net loss. Our net loss for the year ended December 31, 2023 was approximately $17.6 million, as compared to approximately $19.1 million for the year ended December 31, 2022, a decrease of $1.5 million.

Research and Development Expenses, net. Research and development expenses, net for the year ended December 31, 2023 were approximately $8.3 million, as compared with approximately $14.3 million for the year ended December 31, 2022, a decrease of $6 million or 42.0%. The decrease in research and development expenses, net between 2023 and 2022 was primarily due to (i) a decrease of approximately $3.3 million in salary and related expense, mainly as a result of a reduction in head count, (ii) a decrease of approximately $0.6 million in subcontractors and consultants, (iii) a decrease of approximately $0.6 million in share-based compensation, (iv) a decrease of approximately $0.7 million in other research and development expenses, and (iv) a $0.7 million decrease in material expenses.

General and Administrative Expenses. Our general and administrative expenses for the year ended December 31, 2023 were approximately $9.6 million, as compared to approximately $5.8 million for the year ended December 31, 2022, an increase of $3.8 million, or 65.7%. The increase in general and administrative expenses is primarily due to a $3.3 million increase in professional services expenses as a result of the evaluation and pursuing of strategic options, a $0.6 million increase in other general and administrative expenses, mainly associated with directors’ and officers’ liability insurance, and a $0.3 increase in salaries and related expenses, offset in part by a $0.3 million decrease in share-based compensation expenses.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

Operating Loss. Our operating loss for the year ended December 31, 2022 was approximately $20.0 million, as compared with approximately $17.3 million for the year ended December 31, 2021, an increase of approximately $2.7 million, or 15.7%. The increase was as a result of the $1.9 million increase in research and development expenses, net for the year ended December 31, 2022 and the $0.8 million increase in general and administrative expenses for the year ended December 31, 2022, as compared to the year ended December 31, 2021.

Finance Income, net. Our finance income, net for the year ended December 31, 2022 was approximately $926,000, as compared to approximately $119,000 for the year ended December 31, 2021, an increase of approximately $807,000. The change in our finance income, net is primarily due to an increase of $946,000 of interest income on short-term deposits recorded for the year ended December 31, 2022, as compared to the year ended December 31, 2021, offset in part by a $173,000 decrease in fair value of derivatives recorded for the year ended December 31, 2022, as compared to the year ended December 31, 2021.

Net loss. Our net loss for the year ended December 31, 2022 was approximately $19.1 million, as compared to approximately $17.2 million for the year ended December 31, 2021, an increase of $1.9 million.

Research and Development Expenses, net. Research and development expenses, net for the year ended December 31, 2022 were approximately $14.3 million, as compared with approximately $12.3 million for the year ended December 31, 2021 an increase of $1.9 million or 15.6%. The increase in research and development expenses, net between 2022 and 2021 was primarily due to (i) an increase of approximately $0.8 million in salary and related expense, mainly as a result of an expansion in head count that was offset in part by a reduction in bonuses expense in 2022 and by exchange rate fluctuations, (ii) an increase of approximately $0.6 million in subcontractors and consultants including regulatory consultants, (iii) an increase of approximately $0.2 million in share-based compensation, (iv) an increase of approximately $0.8 million in other research and development expenses, including clinical study expenses, and (iv) a $0.2 million decrease in the participation of the IIA in research and development expenses. The increase in research and development expenses, net between 2022 and 2021, was offset in part by a $0.8 million decrease in material expenses.

General and Administrative Expenses. Our general and administrative expenses for the year ended December 31, 2022 were approximately $5.8 million, as compared to approximately $5.0 million for the year ended December 31, 2021, an increase of $0.8 million, or 15.9%. The increase in general and administrative expenses is primarily due to (i) a $0.4 million increase in professional services expenses, (ii) a $0.2 million increase in share-based compensation expenses, and (iii) a $0.4 million increase in other general expenses, mainly associated with directors’ and officers’ liability insurance, offset in part by a $0.3 million decrease in salaries and related expenses, mainly due to a reduction in bonuses expense in 2022.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Operating Loss. Our operating loss for the year ended December 31, 2021 was approximately $17.3 million, as compared with approximately $13.9 million for the year ended December 31, 2020, an increase of approximately $3.4 million, or 24.3%. The increase was as a result of the $2.3 million increase in research and development expenses, net for the year ended December 31, 2021 and the $1.0 million increase in general and administrative expenses for the year ended December 31, 2021, as compared to the year ended December 31, 2020.

Finance Income, net. Our finance income, net for the year ended December 31, 2021 was approximately $119,000, as compared to approximately $86,000 for the year ended December 31, 2020, an increase of approximately $33,000. The change in our finance income, net is primarily due to an increase of $31,000 of interest income on short-term deposits recorded for the year ended December 31, 2021, as compared to the year ended December 31, 2020.

Net loss. Our net loss for the year ended December 31, 2021 was approximately $17.2 million, as compared to approximately $13.8 million for the year ended December 31, 2020, an increase of $3.4 million.

Research and Development Expenses, net. Research and development expenses, net for the year ended December 31, 2021 were approximately $12.3 million, as compared with approximately $10.0 million for the year ended December 31, 2020, an increase of $2.3 million or 23.4%. The increase in research and development, net expenses between 2021 and 2020 was primarily due to (i) an increase of approximately $1.3 million in salary and related expense, mainly as a result of an expansion in head count and currency exchange rate fluctuation, (ii) a $1.2 million increase in material expenses, (iii) an increase of approximately $0.16 million in share-based compensation, and (iv) an increase of approximately $0.4 million in other research and development expenses, including clinical expenses. The increase in research and development expenses, net between 2021 and 2020, was offset in part by a $0.3 million decrease in subcontractors and consultants and a $0.43 million grant received from the IIA, which amount was recorded as a deduction from research and development expenses in 2021.

General and Administrative Expenses. Our general and administrative expenses for the year ended December 31, 2021 were approximately $5.0 million, as compared to approximately $3.9 million for the year ended December 31, 2020, an increase of $1.0 million, or 27%. The increase in general and administrative expenses is primarily due to a $0.3 million increase in salaries and related expenses, a $0.1 million increase in professional services expenses and a $0.6 million increase in other general expenses, mainly associated with directors’ and officers’ liability insurance, offset in part by a $0.1 million decrease in share-based compensation expenses.