Item 1. Business
Item
1. Business
Overview
Our
Mission
We
are a pioneer in the development, production, and marketing of innovative Predictive Maintenance (PdM) and Condition Based Monitoring
(CBM) technologies, providing visual sensing and AI-based video analytics solutions for critical systems in the aviation, maritime, industrial
non-destructing-testing industries, transportation, and energy industries. Some of our products utilize our unique micro visualization
technology in medical devices for complex and minimally invasive medical procedures. Our technology includes proven video technologies
and products amalgamated into a first-of-its-kind, FDA-cleared minimally invasive surgical device. At the present time, we derive a substantial
portion of our revenue from applications of our micro visualization technology within the medical field.
Our
Business Model
Our
unique video-based sensors, embedded software, and AI algorithms are being deployed in hard-to-reach locations and harsh
environments across a variety of PdM and CBM use cases. Our solution allows maintenance and operations teams visibility into areas
which are inaccessible under normal circumstances, or where the operating ambience otherwise is not suitable for continuous
real-time monitoring, and has various applications which have relevancy in a wide range of industry segments that utilize
complicated mechanics requiring ongoing monitoring and predictive maintenance applications. Our current business model is a
business-to-business (B2B) approach in which we seek to identify target businesses interested in integrating our micro visualization
technology or commissioning individual projects using our technology. We have several successful proof of concepts in airborne
platforms of various OEM’s in aerospace and have completed a successful demonstration project for a top global elevator
systems manufacturer. As provided above, we are developing additional applications for our visual solutions portfolio (composed of
image acquisition, data collection, and storage and image processing), including PdM and CBM (we refer to these applications and
sectors as Industry 4.0, or I4.0), which generate a number of potential benefits for our customers.
The
following graphic demonstrates ScoutCam’s value proposition, starting with increased safety and reduced down time due to our ability
to visually analyze any failure occurrence in real time, and including more sophisticated benefits like big data analytics that provide
predictive insights regarding to an entire system life cycle, spare parts management and smart prediction regrading system performance.
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Who
we are: History and Background
We
were incorporated as a corporation under the laws of the State of Nevada on March 22, 2013, under the name Intellisense Solutions Inc.
We were initially engaged in the business of developing web portals to allow companies and individuals to engage in the purchase and
sale of vegetarian food products over the Internet. However, we were unable to execute our original business plan, develop significant
operations or achieve commercial sales.
We
received initial funding in March 2014 in the aggregate amount of $19,980 through the sale of common stock to two of our former officers
and directors, who purchased in the aggregate 1,998,000 shares of our common stock at $0.01 per share.
On
January 10, 2019, we formed Canna Patch Ltd., or Canna Patch, an Israeli corporation, of which 90% was initially owned by our Company,
and the remaining 10% owned by Rafael Ezra, Canna Patch’s Chief Technology Officer. Canna Patch did not have any operations and
on December 4, 2019, we sold 100% of our holdings in Canna Patch.
On
September 16, 2019, Intellisense and Medigus Ltd., an Israeli company traded on the Nasdaq Capital Market, entered into an Exchange Agreement
(as defined herein).
On
December 30, 2019, we acquired ScoutCam Ltd. As a result of our acquisition of ScoutCam Ltd., we now own all of ScoutCam Ltd.’s
issued and outstanding share capital and have integrated and adopted ScoutCam Ltd.’s business into our Company as our primary business
activity.
ScoutCam
Ltd. was formed in the State of Israel on January 3, 2019, as a wholly-owned subsidiary of Medigus and commenced operations on March 1,
2019. ScoutCam Ltd. was incorporated as part of a reorganization of Medigus, which was designed to distinguish ScoutCam Ltd.’s
miniaturized imaging business, or the micro ScoutCam™ portfolio, from Medigus’ other operations and to enable Medigus to
form a separate business unit with dedicated resources focused on the promotion of such technology. On December 1, 2019, Medigus and
ScoutCam Ltd. consummated a certain Amended and Restated Asset Transfer Agreement, which transferred and assigned certain assets and
intellectual property rights related to its miniaturized imaging business. On May 18, 2020, in connection with the Arkin Transaction
(as defined below), the Company and Medigus entered into a certain Side Letter Agreement (the “Letter Agreement”), whereby
the parties agreed to amend certain terms of the Amended and Restated Asset Transfer Agreement and the License Agreement.
On
April 20, 2020, ScoutCam Ltd. entered into an Amended and Restated Intercompany Services Agreement with Medigus (the “Intercompany
Services Agreement”), which effectively amended and restated an intercompany services agreement dated May 30, 2019.
For
additional information about the Exchange Agreement, the Amended and Restated Asset Transfer Agreement, the Letter Agreement and the
Intercompany Services Agreement, refer to – “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE”
below.
Sales
and Marketing
ScoutCam’s
vision is to become a leading provider of video analytics based, PdM solutions for the aerospace, other industry and medical critical
system markets.
We
engage companies seeking to add video visualization to their existing or new product(s) or considering the development of new products
that include micro video visualization. Our approach to the medical market is ordinarily conducted in two phases. During the first phase,
we conduct the research and development that is required in order to specify, design, develop, and produce the designated visualization
apparatus, for an agreed-upon compensation amount (e.g., a non-recurrent engineering fee). During the second phase, we manufacture the
apparatus and offer it to the customer for an agreed-upon transfer price.
In
the I4.0 domain, which target PdM and CBM applications, we engage with companies that wish to increase the monitoring capabilities of
different elements of a device using our visual monitoring solutions (these include build of image acquisition, data collection and storage,
and image processing capabilities based on AI, ML, cloud, and additional algorithm concepts). Based on our product portfolio with customized
solutions as needed, this will allow our customers to receive real time alerts on anomalies and failures of monitored components, analyze
and track trends and development of the anomaly, and predict any impending failure of the component as a result of such anomaly over
time and usage. As a result, we expect customers to benefit from a reduction in downtime, lower maintenance expenses, and increased safety
of their monitored equipment, using the prediction capabilities of the platform to efficiently plan maintenance work on future faulty
components. Another outcome we expect is more cost effective management of resources, since components will only need to be replaced
as a result of their actual condition rather than a strict maintenance schedule.
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The
use of an image based platform in the fields of PdM and CBM provides richer and more informative data and insights than traditional sensing
methods. Together with the AI and ML models customized for the relevant use cases, we expect this will provide customers with a clearer
view of the status of their equipment, increasing revenues by saving on direct expenses, and increasing the uptime of their equipment.
On
February 6, 2023, we announced the completion of a major development stage in equipping Elbit Systems Ltd.’s leading defense UAS
aerial platforms with our real time video monitoring system. Through the program, our unique video-based sensors, embedded software,
machine vision and algorithms support a variety of predictive maintenance and condition-based monitoring use cases for unmanned aerial
vehicles in harsh environments and hard-to-reach locations, as it features a modular open system architecture, enabling seamless integration
with advanced unmanned aerial platforms.
In
order to engage new customers, we employ various marketing strategies. We employ several professional experienced managers in relevant
fields of expertise, in addition to a team of consultants who analyze global trends and designated geographical territories to assist
us in targeting potential customers.
Our
marketing efforts include, but are not limited to, the following:
●
engaging
third party companies and local consultants as territorial representatives in key markets and leading companies in relevant industries;
●
initiating
business engagements based on leads received through our marketing efforts, through active interaction with key industry influencers,
providing financed proof of concept in order to generate tailored product orders, or via other methods or means;
●
conducting
proof of concept demonstrations in order to evaluate the feasibility of integration for monitoring their systems and to demonstrate
the significant value proposition of our technology to customers;
●
networking
through personal contacts in the aerospace, critical industry, transportation, maritime, medical, and defense industries; and
●
participating
in major aerospace, maritime, and vision technology exhibitions as well as industry 4.0 specific events.
In
addition to our business development efforts that are mainly based on currently existing or future customer needs, we aim to identify
new market opportunities. These efforts include systematic analysis of various industrial and medical fields and procedures to identify
where visualization solutions, including image analysis, might add value. When a potential opportunity is identified, we seek to protect
our rights by establishing relevant intellectual property safeguards, developing prototypes for the required application. In the medical
domain, we currently sell our system to a fortune 500 corporation; in this respect, we seek to partner with additional relevant companies
to progress our technology into prototypes which, in turn, will be developed into market-ready products.
In
January 2022, we entered into a patent cross-licensing arrangement with Japan-based Sumita Optical Glass, Inc. (Sumita), a specialty
optical fiber technology company, pursuant to which we granted a non-exclusive license to Sumita to our patents related to “Small
Diameter Video Camera Heads and Medical Devices and Visualization Probes containing them” in return for payment of royalties and
a grant-back license to ScoutCam of Sumita’s patent and patent applications related to fiber optics illumination. For additional
information on our patent portfolio, refer to – “PROPRIETARY RIGHTS AND TECHNOLOGY” below.
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Our
Customers
Currently,
we have one major customer, a leading Fortune 500 multinational healthcare corporation, that is expected to generate most of our forecasted
revenue in the near term. In June 2022, we announced that we completed the verification and validation stage of our miniature camera
solution with this client and, on January 26, 2023, we announced that we had received an order from this client for $1.45 million.
In
addition, we derive a substantial portion of our revenue from applications of our micro visualization technology within the medical field.
In
addition, we announced the completion of a major development stage to equip Elbit Systems Ltd.’s leading defense UAS aerial platforms
with our real time video monitoring system.
Competition
There
are currently several companies that develop and provide monitoring solutions for PdM and CBM. These monitoring solutions can be the
sensor itself, data collection and storage, AI processing, or a combination of these capabilities. The CBM and PdM solutions are usually
based on traditional sensing solutions such as vibration, temperature, and acoustic sensors. Based on our research and discussions with
customers, we believe these traditional sensing methods are limited in their ability to provide an in depth view of the condition of
the monitored components and usually alert on the occurrence of an anomaly when component failure has already occurred, which is too
late in some cases. From the AI perspective, there are several vendors providing off-the-shelf AI capabilities which then require customization
per market, use case, and/or data source. We believe that our more holistic approach and reliance on image-based solutions creates richer
and more informative data, leveraged by AI and ML algorithms, enabling our customers to deploy predictive maintenance programs.
Proprietary
Rights and Technology
Our
solution for the market is based on our core intellectual property which we seek to review and patent on a regular basis, where applicable.
We are heavily invested in creating patents for our core technology.
Our
patent portfolio currently contains patent families which we consider material to our business and operating success. Our intellectual
property rights include patents and patent applications that were transferred to us by Medigus as part of the Addendum No. 1 to Amended
and Restated Asset Transfer Agreement (the “Addendum”), the License Agreement and the Letter Agreement, and additional patent
assets developed by ScoutCam. For additional information about the License Agreement refer to – “CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE” below. Under the Addendum, and subject to certain limitations as further set forth
therein, Medigus transferred to us the following material patent families in exchange for a license in connection with the marketing
and sale of the Medigus Ultrasonic Surgical Endostapler:
●
Patent family related to Integrated Endoscope Irrigation: this patent family relates to our ability to develop visualization components
and endoscopes, which include irrigation with a smaller outer diameter by saving the space of the tube that is required to lead the fluids
in a conventional manner. This patent has been granted in Canada, Europe (validated in Germany, Spain, France, Great Britain and Italy),
Israel, Japan (original and divisional), and the United States (two patents), and has two pending continuations in the United States.
The expiration dates for the two patents in the United States are November 28, 2033 and February 28, 2033;
●
Patent family related to Small Diameter Video Camera Heads and Medical Devices and Visualization Probes containing them: this patent
family relates to our ability to develop cameras, visualization components, and medical devices with a small diameter, thus enabling
the insertion of the camera into smaller cavities or leaving more space in the device for the use and application of other functions,
such as a working channel. This patent has been granted in Japan, Korea, Israel, the United States (2 patents, original and continuation
in part), and Europe (3 patents, original and 2 divisionals, currently under appeal after opposition proceedings, validated in Germany,
France, Great Britain, and Italy). The expiration dates for these patents are March 16, 2031 (for the patents in the United States),
and September 16, 2030 (for patents in each of the other aforementioned jurisdictions).
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As
a result of oppositional proceedings initiated by a third party in 2018, the Opposition Division of the EU Patent Office decided in 2019
to revoke two of the three European patents (EP 2.478.693 and EP 2.621.159) and in 2021 to maintain the third patent (EP 2.621.158).
Following appeals by Company and the third party of the 2019 and 2021 decisions, respectively, the Opposition Division of the EU Patent
Office is expected to hear and decide these matters in early 2024;
As
a result of a supplemental examination filed by the Company regarding one of the U.S. Patents (10,188,275), the U.S. Patent Office decided
to open reexamination proceedings for 23 of the 24 granted claims. The U.S. Patent Office is expected to conduct the reexamination proceedings
during the course of 2024; and
In
addition, our intellectual property rights further include the following material patent applications filed by ScoutCam:
●
Patent family related to Miniature Precision Medical Device: these pending patent applications relate to our ability to develop a miniature
precision medical device comprising an endoscope with at least one camera, where at least one sensor of one camera is distally located
at a tip of a shaft of the endoscope. Surrounding or next to the sensor, such shaft has sufficient space to accommodate at least one
accessory such as, for example, illumination source, irrigation tool, or suctioning tool. This patent family has pending patent application
in the United States and its expected expiry dates, if issued, will be in 2039-2040.
●
Patent family related to Medical Ophthalmic Device: this patent family is related to a tool comprising a hand piece having a flattened
cannulated tip that is adapted to receive flow from a pumping unit, in order to generate a jet of fluid suitable for procedures such
as “hydro-dissecting” cells in the eye. According to a representation of the invention, the tool comprises a visualization
probe with at least one camera, wherein the sensor of the camera is distally located at the tip of the tool to be inserted into the eye
for imaging from within the eye. This patent family is pending in China, Europe, Japan, Korea, and the United States. The patent application’s
expected expiry dates, if issued, will be in 2039-2040.
●
Patent family related to Systems and Methods for Monitoring Potential Failure in a Machine or a Component Thereof. This patent family
relates to system and methods for monitoring potential failure in a machine or a component thereof using at least one optical sensor.
Such sensors can be used in conjunction with diagnostic software/hardware tools to display and analyze changes in critical images that
could not have been displayed or analyzed using existing systems. This patent family includes a pending Patent Cooperation Treaty patent
application and national phase applications filed in Israel and the U.S. If ultimately issued by the United States Patent and Trademark
Office, such patent would be expected to expire in early 2042. Additional national phase patent application can be filed in other jurisdictions
by the end of July 2023.
We
have also applied for provisional applications relating to our predictive maintenance innovative technology and developments. All of
these applications are expected to have a lifetime of 20 years from filing.
Despite
our efforts to protect our intellectual property, unauthorized parties may still copy or otherwise obtain and use our technology. For
additional information, refer to – “WE MAY NOT BE SUCCESSFUL IN ENFORCING OUR INTELLECTUAL PROPERTY RIGHTS AGAINST THIRD
PARTIES” below.
Employment
We
currently have approximately 45 full-time (or near full-time) employees. This number is expected to grow. We may recruit additional
employees to the R&D team.
Research
and Development
Our
R&D organization is responsible for the design, development, testing, and delivery of new technologies, features, products, and integrations
of our component parts. Research and development employees are located primarily in our principal corporate office on Omer, Israel. We
currently have approximately 21 employees in our research and development organization. We intend to continue to invest in our research
and development capabilities.
8
Our
R&D efforts are focused on the following areas: (i) maturing our multi camera solution based on advanced visualization sensor technologies
focusing on sensing, computing, and prediction, cooperating with customers for mutual development projects that demonstrate our technology
by reaching customer KPIs and (ii) our industrial cloud-based product, which leverages our already in place cloud environment to develop
mutual proof of concept and minimal valuable product for our customers that enable cloud base solutions for customer KPIs.
Regulation
Our
approach to regulation is generally determined based on a given project. In our engagements with customers operating in the biomedical
sector, we comply with the medical device standards in that corresponding territory, such as the FDA or International Organization for
Standardization (ISO), among others. Compliance with these regulations is achieved through our QA department and the support we receive
from highly experienced quality assurance and regulatory affairs consultants. In addition, we are being audited annually by MEDCERT GmbH,
a German Notified Body.
For
instance, ISO 13485:2016 is a regulatory benchmark that we comply with while working on our medical device projects. ISO 13845:2016 is
similar to ISO 9001 in terms of its quality management system (QMS) requirements, however, ISO 13485:2016 is generally considered more
rigorous and comprehensive.
Given
that we do not manufacture or distribute end-user products to the medical sector, and instead service businesses pursuant to a B2B model,
we are subject to fewer regulatory standards commonly associated with medical device manufacturers or distributors. We develop and manufacture
components for other companies, and therefore our involvement in the regulatory submission demands comparatively less responsibility.
This notwithstanding, we communicate with business customers in order to identify certain regulatory dimensions inherent to a project,
to which we should pay additional attention. For example, when a component of ours is integrated into a business’s end-user product,
such as for the purpose of touching human tissue, we develop and manufacture our parts and components while taking into account certain
applicable regulatory standards. These standards might include, inter alia, relevant FDA regulations (e.g. CFR 21 part 820, the medical
device reporting requirements (MDR), among others) as well as ISO regulations (e.g. ISO 14644-1, specifically in connection with cleanrooms
and associated controlled environments, among other items, or ISO 10993, in connection with the biological evaluation of medical devices).
Furthermore, we prioritize our team’s compliance with the Restriction of Hazardous Substances Directives (RoHS) and REACH (EC 1907/2006).
Similarly,
if a component part of ours is incorporated into an electronic device for the purpose of being used inside a human body, we comply with
certain FDA requirements as well as IEC 60601 for safety and electrostatic discharge, including the heating of parts at more than 42
degrees Celsius and a variety of additional technical standards designed for the safety and essential performance of electronic medical
equipment. Moreover, we perform risk management assessments in accordance with EN ISO 14971:2019 and ISO/TR 24971:2020.
In
certain instances, our customers prefer that we conduct the testing of its products in internationally certified labs in order to further
guarantee that our component parts satisfy applicable regulatory standards. In this scenario, we perform the required tests as a service
to the customer and provide the customer with the official test results, specifically in accordance with ISO/IEC 17025:2017, which the
customer can later use in order to apply for the required marketing clearance of its end-user product.
Since
we are seeking to sell our products to customers in the aviation sector, we have completed the process of implementing the AS9100D Standard
to comply with aerospace industry requirements.
As
a U.S. company with foreign offices, we are subject to a variety of foreign laws governing our foreign operations, as well as U.S. laws
that restrict trade and certain practices, such as the Foreign Corrupt Practices Act.
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Israeli
Government Programs
As
a result of certain agreements between Medigus and ScoutCam Ltd. (for additional information about these agreements refer to –
“CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE” below) the Israel Innovation Authority, or the
IIA, approved a transfer of IIA know-how developed by Medigus in the framework of the Bio Medical Photonic Consortium, or the Medigus
Consortium, to ScoutCam Ltd.
Accordingly,
all rights and obligations with regard to the IIA under the Encouragement of Research, Development and Technological Innovation in the
Industry Law, 5744-1984, or the Innovation Law, in connection with such know-how now apply to ScoutCam Ltd.
The
following are details regarding the rights and obligations within the framework of ScoutCam Ltd.’s activity in the Medigus Consortium,
which continue to apply to ScoutCam Ltd. notwithstanding the termination of the Medigus Consortium:
(i)
The
property rights to information which has been developed belongs to the Medigus Consortium member that developed it. However, the
developing entity is obligated to provide the other members in the Medigus Consortium a license for the use of the new information,
without consideration, provided that the other members do not transfer such information to any entity which is not a member of the
Medigus Consortium. The provision of a license or of the right to use the new information to a third party is subject to approval
by the administration of the MAGNET Program at the IIA;
(ii)
The
Medigus Consortium member is entitled to register a patent for the new information which has been developed by it within the framework
of its activity in the Medigus Consortium. The foregoing registration does not require approval from the administration of the MAGNET
Program at the IIA; and
(iii)
The
know-how and technology developed under the program is subject to the restrictions set forth under the Innovation Law, including
restrictions on the transfer of such know-how and any manufacturing rights with respect thereto, without first obtaining the approval
of the IIA. Such approval may entail additional payments to the IIA, as determined under the Innovation Law and regulations.
Obligations
relevant to us under the Innovation Law include the following:
●
Local
Manufacturing Obligation. The terms of the grants under the Innovation Law require that we
manufacture the products developed with these grants in Israel. Under the regulations promulgated
under the Innovation Law, the products may be manufactured outside Israel by us or by another
entity only if prior approval is received from the IIA (such approval is not required for
the transfer of less than 10% of the manufacturing capacity in the aggregate, in which case
a notice should be provided to the IIA). In general, due to manufacturing outside Israel,
with respect to royalties bearing grants we would be required to pay royalties at an increased
rate, usually 1% in addition to the standard rate and increased royalties cap (between 120%
and 300% of the grants, depending on the manufacturing volume that is performed outside Israel).
●
Know-How
Transfer Limitation. The Innovation Law restricts the ability to transfer, in any manner,
know-how funded directly or indirectly by the IIA (sale of products is not prohibited), unless
the IIA approves doing so and subject to the terms of the Innovation Law and of the IIA’s
approval.
Among
other things, transfer of IIA funded know-how outside of Israel requires prior approval of IIA and in certain circumstances is subject
to certain payments to the IIA, calculated according to a formula provided under the Innovation Law. If we wish to transfer IIA funded
know-how outside of Israel, the terms for approval will be determined according to the character of the transaction and the consideration
paid to us for such transfer. The IIA approval to transfer know-how created, in whole or in part, in connection with a IIA-funded
project to third party outside Israel where the transferring company remains an operating Israeli entity is subject to payment of
a redemption fee to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the
ratio between the aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants,
multiplied by the transaction consideration, considering statutory depreciation and less royalties already paid to the IIA. The transfer
of such know-how to a party outside Israel where the transferring company ceases to exist as an Israeli entity is subject to a redemption
fee formula that is based, in general, on the ratio between aggregate IIA grants received by the company and the company’s
aggregate research and development expenses, multiplied by the transaction consideration considering statutory depreciation and less
royalties already paid to the IIA.
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The regulations promulgated
under the Innovation Law establish a maximum payment of the redemption fee paid to the IIA under the above mentioned formulas and
differentiates between two situations: (i) in the event that the company transfers its IIA funded know-how, in whole or in part,
or is sold as part of an M&A transaction, and subsequently ceases to conduct business in Israel, the maximum redemption fee under
the above mentioned formulas will be no more than six times the amount received (plus annual interest) for the applicable know-how
being transferred, or the entire amount received from the IIA, as applicable; (ii) in the event that following the transactions described
above (e.g. asset sale of IIA funded know-how or transfer as part of an M&A transaction) the company continues to conduct its
research and development activity in Israel (for at least three years following such transfer and maintain staff of at least 75%
of the number of research and development employees it had for the six months before the know-how was transferred and keeps the same
scope of employment for such research and development staff), then the company is eligible for a reduced cap of the redemption fee
of no more than three times the amounts received (plus annual interest) for the applicable know-how being transferred. In addition,
special rules and payment formulas apply for certain kinds of transfers of know-how outside of Israel, such as R&D licenses.
Transfer of IIA-funded know-how outside of Israel not according to the R&D Law may give rise to financial exposure as well as
criminal liability.
●
Approval of the transfer
of IIA funded technology to another Israeli company may be granted only if the recipient assumes and abides by the provisions of
the Innovation Law and related regulations, including the restrictions on the transfer of know-how and manufacturing rights outside
of Israel (in addition, there will be an obligation to pay royalties to the IIA from the income of such sale transaction as part
of the royalty payment obligation).
●
Approval to manufacture
products outside of Israel or consent to the transfer of technology, if requested, might not be granted. Furthermore, the IIA may
impose certain conditions on any arrangement under which it permits ScoutCam Ltd. to transfer technology or development out of Israel.