NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
1 - GENERAL:
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a.
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General
Medigus Ltd. (the “Company”) was incorporated in Israel on December 9, 1999 and is resident
in Israel. The address of its registered office is P.O. Box 3030, Omer, 8496500.
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On
July 22, 2007 the Company established a wholly owned subsidiary in the U.S, Medigus USA LLC (hereinafter - the “Subsidiary”).
The
Subsidiary has not engaged in any business activities until October 2013.
On
October 1, 2013, the Company and the Subsidiary entered into an agreement whereby the Subsidiary provides services to the Company
in consideration for reimbursement of direct costs plus a reasonable premium.
The Company together with its
subsidiary (hereinafter – the “Group”) is a medical device group specializing in developing innovative endoscopic
procedures and devices. To date most of the Group's research and development activities have been focused in developing and manufacturing
of the MUSE endoscopy system (hereinafter - “MUSE”), a FDA approved system, for the treatment of gastroesophageal reflux
disease (GERD). In addition, the Group uses the technological platform it developed for the purpose of additional special systems
and products that are suitable for both medical and industrial applications.
To
date, the Company continues negotiations to market the MUSE endoscopy system, together with marketing and selling miniature cameras
and related equipment.
The
Company's shares are listed on the Tel Aviv Stock Exchange Ltd. (“TASE”) and as of May 20, 2015, the Company’s
American Depository Shares (ADSs) evidenced by American Depositary Receipts (ADRs) are listed on the NASDAQ Capital Market.
MEDIGUS
LTD.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
1 - GENERAL
(continued)
:
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b.
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During
the three months period ended March 31, 2017, the Group incurred a total comprehensive
loss of USD 2 million and negative cash flows from operating activities of USD 1.1 million.
As of March 31, 2017, the Group had accumulated losses of USD 55.3 million. Based on
the projected cash flows and its cash balances as of March 31, 2017, the Group's Management
is of the opinion that without further fund raising it will not have sufficient resources
to enable it to continue its operating activities including the development, manufacturing
and marketing of its products for a period of at least 12 months from the date of approval
of these financial statements. As a result, there is substantial doubt about the Group’s
ability to continue as a going concern.
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Management’s
plans include the continued commercialization of their products and securing sufficient financing through the sale of additional
equity securities, debt or capital inflows from strategic partnerships. There are no assurances however, that the Group will be
successful in obtaining the level of financing needed for its operations. If the Group is unsuccessful in commercializing its
products and securing sufficient financing, it may need to reduce activities, curtail or cease operations.
The
financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and the
amounts and classification of liabilities that might be necessary should the Group be unable to continue as a going concern.
NOTE
2 - BASIS FOR PREPARATION OF THE CONDENSED FINANCIAL STATEMENTS:
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a.
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The
Group’s condensed consolidated financial information as of March 31, 2017, and
for the three-month interim period ended on that date (hereinafter - “the interim
financial information”) has been prepared in accordance with the guidance of IAS
34 ‘Interim Financial Reporting’ (hereafter – “IAS 34”).
The interim financial information does not include all of the information and disclosures
required in annual financial statements. The interim financial information should be
read in conjunction with the 2016 annual financial statements and its accompanying notes,
which are in compliance with International Financial Reporting Standards (hereinafter
– “IFRS”), which are standards and interpretations issued by the International
Accounting Standards Board. Interim results are not indicative of future or full year
results. The financial statements were approved on May 28, 2017.
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The
preparation of interim financial statements requires the Group’s management to exercise judgment and also requires use of
accounting estimates and assumptions that affect the application of the Group’s accounting policies and the reported amounts
of assets, liabilities, revenues and expenses. Actual results could differ from those estimates.
In
the preparation of these interim financial statements, the significant judgments exercised by management in the application of
the Group’s accounting policies and the uncertainty involved in the key sources of those estimates were identical to the
ones used in the Group’s annual financial statements for the year ended December 31, 2016.
MEDIGUS
LTD.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
3 - SIGNIFICANT ACCOUNTING POLICIES
The
accounting policies adopted in the preparation of the interim financial information are consistent with those followed in the
preparation of the Group's annual financial statements for the year ended December 31, 2016.
NOTE
4 - FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
Estimates
of fair value
The
following is an analysis of the financial instruments measured at fair value, according to valuation methods. Inputs for the asset
or liability that are not based on observable market data (unobservable inputs) (Level 3).
The
following table presents the group's financial liabilities measured at fair value, net of unrecognized Day 1 Loss:
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March 31,
2017
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USD in thousands
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Fair value of warrants
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5,975
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Unrecognized Day 1 Loss
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(1,242
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)
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Warrants, net
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4,733
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NOTE
5 - INVENTORY:
Composed
as follows:
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March
31
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December 31
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2017
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2016
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USD in thousands
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Current assets:
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Raw materials and supplies
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77
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|
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Work in progress
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105
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128
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Finished goods
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19
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70
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201
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198
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Non-current assets:
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Raw materials and supplies
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776
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829
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Work in progress
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48
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66
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Finished goods
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23
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39
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Provision for impairment
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(297
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)
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550
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934
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MEDIGUS
LTD.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
6 - TRANSACTIONS WITH RELATED PARTIES:
Compensation
to key management personnel for employment services which were provided to the Group (including stock based compensation) in the
three - month period ended March 31, 2017 was USD 77 thousands (in the three - month period ended March 31, 2016 - USD 121 thousand).
NOTE
7 - EQUITY:
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a)
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On
March 15, 2017, the Group effected a change in the ratio of ordinary shares per ADS from
5 ordinary shares per ADS to 50 ordinary shares per ADS. The change in the ordinary shares
ratio for the ADSs had the same effect as a 1-for-10 reverse stock split of the ADSs.
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b)
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On
March 28, 2017, the Company allotted in a public issue, a total of 48,985,700 ordinary
shares of the Company, a total of 2,142,858 warrants (Series A) for the purchase of an
additional 107,142,900 shares and a total 1,163,144 warrants (Series B) for the purchase
of an additional 58,157,200 shares for total cash consideration of approximately USD
7.5 million. Each warrant (Series A) is exercisable into 50 ordinary shares of the Company
at an exercise price of USD 3.50 per warrant during the five years following the allotment.
Each warrant (Series B) is exercisable into 50 ordinary shares of the Company at an exercise
price of USD 0.01 per warrant.
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Warrants
(Series A) and warrants (Series B) may, under certain circumstances, also be exercised via a cashless exercise mechanism, whereby
the number of shares the value of which equals the exercise premium in cash will be deducted from the number of shares to be issued
upon exercise of the warrant. In addition, the number of warrants outstanding will be adjusted for certain events specified
in the warrant agreement.
To
the placement agent on this offering the Company issued 150,000 warrants. Each warrant is exercisable into 50 shares in consideration
for an exercise price of USD 4.375 per warrant during the 5 years following the allotment. The warrants may, under certain circumstances,
also be exercised via a cashless exercise mechanism.
These warrants are classified
as financial liabilities measured at fair value through profit or loss at each reporting period, as the warrants may be net share
settled. The warrants are initially recognized at fair value adjusted to defer the difference between the fair value at initial
recognition and the transaction price (“Day 1 profit or loss”), as the Company uses valuation techniques that incorporate
data not obtained from observable markets. Transaction costs allocated to the warrants are recognized immediately in profit or
loss.
Unrecognized
Day 1 profit or loss is amortized over the life of the instrument. Any unrecognized Day 1 profit or loss is immediately recognized
in income statement if fair value of the financial instrument in question can be determined either by using only market observable
model inputs or by reference to a quoted price for the same product in an active market.
Upon
exercise, the carrying amount of the warrants (which is presented net of the related unrecognized Day 1 profit or loss, if any)
is reclassified to equity with no impact on profit or loss.
MEDIGUS
LTD.
NOTES
TO THE CONDENSED FINANCIAL STATEMENTS
(
Unaudited
)
NOTE
7 - EQUITY
(continued)
:
Net
proceeds from the issuance, net of cash issuance expenses, amounted to approximately USD 6.5 million. Issuance expenses were attributed
to equity and liability in proportion with the allocation of the proceeds.
During
March 2017 130,000 warrants (Series B) were exercised. Accordingly, 6,500,000 ordinary shares of the Company were allotted.
The
warrants are presented as non-current liabilities, as cash settlement is not required.
On
March 30, 2017 the Company received the exercise letters for 295,000 warrants (Series B). The shares were allotted on April 4,
2017.
Medigus Ltd.
Operating and Financial Review as of
March 31, 2017, and for the Three Months then Ended
The information
contained in this section should be read in conjunction with (1) our unaudited condensed consolidated interim financial statements
as of March 31, 2017, and for the three months then ended and related notes included in this report and (2) our audited consolidated
financial statements and related notes for the year ended December 31, 2016, which appears in our Form 20-F filed with the Securities
and Exchange Commission on March 31, 2017, or the annual report, and the other information contained in such annual report. Factors
that could cause our actual results in the future to differ from our expectations or projections include the risks and uncertainties
relating to our business described in our annual report under the heading “Risk Factors.”
Revenues for the three months ended March
31, 2017, were USD 114 thousand, a decrease of USD 148 thousand, or 56%, compared to USD 262 thousand for the three months ended
March 31, 2016. This decrease was primarily due to a decrease in development services provided to National Aeronautics and Space
Administration (NASA) in the amount of approximately USD 110 thousand and to one of Israel's leading industrial companies in the
amount of approximately USD 118 thousand during the three months period ended March 31, 2016.
Gross loss for the three months ended March
31, 2017, was USD 230 thousand, a decrease of USD 401 thousand, compared to USD 171 thousand gross profit for the three months
ended March 31, 2016. This decrease was primarily due to an inventory impairment of USD 297 thousand and a decrease on revenues
as described above.
Research and development expenses for the
three months ended March 31, 2017, were USD 475 thousand, a decrease of USD 735 thousand, or 61%, compared to USD 1,210 thousand
for the three months ended March 31, 2016. This decrease was primarily due to a cost reduction program which was implemented by
the Company since the third quarter of 2016.
Sales and marketing expenses for the three
months ended March 31, 2017, were USD 146 thousand, a decrease of USD 602 thousand, or 80%, compared to USD 748 thousand for the
three months ended March 31, 2016. This decrease was primarily due to a cost reduction program which was implemented by the Company
since the third quarter of 2016.
General and administrative expenses for
the three months ended March 31, 2017, were USD 1,389 thousand, an increase of USD 269 thousand, or 24%, compared to USD 1,120
thousand for the three months ended March 31, 2016. This increase resulted primarily due to a USD 908 thousand increase in professional
expenses in connection with issuance expenses which were charged directly to profit or loss, offset by a decrease in professional
expenses in connection with an intellectual property litigation.
Operating loss for the three months ended
March 31, 2017, was USD 2,240 thousand, compared to USD 2,907 thousand in the three months ended March 31, 2016. The decrease in
operating loss was due to all of the reasons described above.
The Company held USD 8.4 million in cash
and cash equivalents as of March 31, 2017.
Net cash used in operating activities was
USD 1.1 million for the three months ended March 31, 2017, compared to net cash used in operating activities of USD 2.9 million
for the corresponding 2016 period. The USD 1.8 million decrease in net cash used in operating activities was primarily due to a
cost reduction program which was implemented by the Company since the third quarter of 2016.
Net cash generated from financing activities
for the three month period ended March 31, 2017, was approximately USD 6.5 million and represented net proceeds from the issuance
of shares and warrants (for additional information see Note 7b to our financial statements).