Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
accompanying condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form
10-Q.
Unless
the context requires otherwise, references in this Form 10-Q to the “Company,” “InspireMD,” “we,”
“our” and “us” refer to InspireMD, Inc., a Delaware corporation, and its subsidiaries.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future
events, future financial performance, strategies, expectations, competitive environment and regulation. Words such as “may,”
“will,” “should,” “could,” “would,” “predicts,” “potential,”
“continue,” “expects,” “anticipates,” “future,” “intends,” “plans,”
“believes,” “estimates,” and similar expressions, as well as statements in future tense, identify forward-looking
statements. Forward-looking statements should not be read as a guarantee of future performance or results and may not be accurate
indications of when such performance or results will be achieved. Forward-looking statements are based on information we have
when those statements are made or our management’s good faith belief as of that time with respect to future events and are
subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in
or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited
to:
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our
history of recurring losses and negative cash flows from operating activities, significant future commitments and the uncertainty
regarding the adequacy of our liquidity to pursue our complete business objectives, and substantial doubt regarding our ability
to continue as a going concern;
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our
need to raise additional capital to meet our business requirements in the future and such capital raising may be costly or
difficult to obtain and could dilute out stockholders’ ownership interests;
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our
ability to regain or maintain compliance with NYSE American listing standards;
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the
impact of the recent COVID-19 outbreak on our manufacturing, sales, business plan and the global economy;
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our
ability to generate revenues from our products and obtain and maintain regulatory approvals for our products;
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our
ability to adequately protect our intellectual property;
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our
dependence on a single manufacturing facility and our ability to comply with stringent manufacturing quality standards and
to increase production as necessary;
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the
risk that the data collected from our current and planned clinical trials may not be sufficient to demonstrate that our technology
is an attractive alternative to other procedures and products;
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market
acceptance of our products;
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negative
clinical trial results or lengthy product delays in key markets;
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an
inability to secure and maintain regulatory approvals for the sale of our products;
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intense
competition in our industry, with competitors having substantially greater financial, technological, research and development,
regulatory and clinical, manufacturing, marketing and sales, distribution and personnel resources than we do;
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entry
of new competitors and products and potential technological obsolescence of our products;
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inability
to carry out research, development and commercialization plans;
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loss
of a key customer or supplier;
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technical
problems with our research and products and potential product liability claims;
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product
malfunctions;
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price
increases for supplies and components;
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adverse
economic conditions;
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insufficient
or inadequate reimbursement by governmental and other third-party payers for our products;
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our
efforts to successfully obtain and maintain intellectual property protection covering our products, which may not be successful;
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adverse
federal, state and local government regulation, in the United States, Europe or Israel and other foreign jurisdictions;
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the
fact that we conduct business in multiple foreign jurisdictions, exposing us to foreign currency exchange rate fluctuations,
logistical and communications challenges, burdens and costs of compliance with foreign laws and political and economic instability
in each jurisdiction;
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the
escalation of hostilities in Israel, which could impair our ability to manufacture our products; and
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loss
or retirement of key executives and research scientists.
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The
foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein
or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking
statements. For a discussion of these and other risks that relate to our business and investing in our common stock, you should
carefully review the risks and uncertainties described in this Quarterly Report on Form 10-Q, and those described from time to
time in our future reports filed with the Securities and Exchange Commission. The forward-looking statements contained in this
Quarterly Report on Form 10-Q are expressly qualified in their entirety by this cautionary statement. We do not undertake any
obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such
statement is made or to reflect the occurrence of unanticipated events.
Overview
We
are a medical device company focusing on the development and commercialization of our proprietary MicroNet™ stent platform
technology for the treatment of complex vascular and coronary disease. A stent is an expandable “scaffold-like” device,
usually constructed of a metallic material, that is inserted into an artery to expand the inside passage and improve blood flow.
Our MicroNet, a micron mesh sleeve, is wrapped over a stent to provide embolic protection in stenting procedures.
Our
CGuard™ carotid embolic prevention system (“CGuard EPS”) combines MicroNet and a self-expandable nitinol stent
in a single device for use in carotid artery applications. Our CGuard EPS received CE mark approval in the European Union in March
2013, and we launched its release on a limited basis in October 2014. In January 2015, a new version of CGuard, with a rapid exchange
delivery system, received CE mark approval in Europe and in September 2015, we announced the full market launch of CGuard EPS
in Europe. Subsequently, we launched CGuard EPS in Russia and certain countries in Latin America and Asia, including India. We
expect to receive approval to launch CGuard EPS in Brazil, and we are seeking strategic partners for potential launch of CGuard
EPS in Japan and China.
In
April 2017, we had a pre-investigational device exemption (“IDE”) submission meeting with the U.S. Food and Drug Administration
(“FDA”) regarding CGuard EPS where we presented materials that we believed would support a formal IDE submission seeking
approval to conduct a human clinical trial in the United States which included our draft synopsis for the clinical trial design.
The FDA agreed to our pre-clinical test plan and clinical trial design. On July 26, 2019, we submitted an IDE application for
CGuard EPS. In connection with such application, on August 23, 2019, we received a request for additional information from the
FDA in support of our application. We continue to work closely with the FDA to address FDA’s information and testing requests
in support of our pending IDE application, as the initiation of clinical testing in the U.S. is one of our top priorities. Following
resolution of all comments from the FDA, we plan to re-submit the IDE application in May 2020, as IDE approval by the FDA
would be a critical step toward the commencement of a human clinical trial using CGuard EPS in the United States.
Additionally,
we intend to continue to evaluate potential product enhancements and manufacturing enhancements for CGuard EPS that are expected
to reduce cost of goods and/or provide the best-in-class performing delivery system. In furtherance of our strategy focusing on
establishing CGuard EPS as a viable alternative to vascular surgery, we are exploring adding a procedural protection device to
our portfolio incorporating the principal of reverse flow of the carotid artery as an adjunctive alternative to femoral access.
We cannot give any assurance that we will receive sufficient (or any) proceeds from future financings or the timing of such financings,
if ever for potential product enhancements and manufacturing enhancements. In addition, such additional financings may be costly
or difficult to complete. Even if we receive sufficient proceeds from future financings, there is no assurance that we will be
able to timely apply for CE mark approval following our receipt of such proceeds. We believe these improvements may allow us to
reduce cost of goods and increase penetration in our existing geographies and better position us for entry into new markets.
We
consider the addressable market for our CGuard EPS consists of individuals with diagnosed, symptomatic high-grade carotid artery
stenosis (HGCS, ≥70% occlusion) for whom an intervention is preferable to medical (drug) therapy. This group includes not only
carotid artery stenting patients but also individuals undergoing carotid endarterectomy, as the two approaches compete for the
same patient population. Assuming full penetration of the intervention caseload by CGuard EPS, we estimate that the addressable
market for CGuard EPS was approximately $1.0 billion in 2017. (source: Health Research International 2017 Results of Update
Report on Global Carotid Stenting Procedures and Markets by Major Geography and Addressable Markets).
Our
MGuard™ Prime™ Embolic Protection System (“MGuard Prime EPS”) is marketed for use in patients with acute
coronary syndromes, notably acute myocardial infarction (heart attack) and saphenous vein graft coronary interventions (bypass
surgery). MGuard Prime EPS combines MicroNet with a bare-metal cobalt-chromium based stent. MGuard Prime EPS received CE mark
approval in the European Union in October 2010 for improving luminal diameter and providing embolic protection. However, as a
result of a shift in industry preferences away from bare-metal stents in favor of drug-eluting (drug-coated) stents, in 2014 we
decided to curtail further development of this product in order to focus on the development of a drug-eluting stent product, MGuard
DES™. Due to limited resources, though, our efforts have been limited to testing drug-eluting stents manufactured by potential
partners for compatibility with MicroNet and seeking to incorporate MicroNet onto a drug-eluting stent manufactured by a potential
partner. The FDA has clarified that the primary mode of action for drug-eluting cardiovascular stents, which are regulated as
combination products, is that of the device component and has assigned the FDA Center for Devices and Radiological Health (CDRH)
primary responsibility for premarket review and regulation, providing some clarity about what to expect regarding the regulatory
framework related to the development of MGuard DES™.
We
also intend to develop a pipeline of other products and additional applications by leveraging our MicroNet technology to new applications
to improve peripheral vascular and neurovascular procedures, such as the treatment of the superficial femoral artery disease,
vascular disease below the knee and neurovascular stenting to seal aneurysms in the brain.
Presently,
none of our products may be sold or marketed in the United States.
Recent
Developments
COVID-19
Developments
In December 2019, a strain of coronavirus,
COVID-19, was reported to have surfaced in Wuhan, China, and has reached multiple other countries, and, on March 12, 2020, the
World Health Organization (the “WHO”) declared COVID-19 to be a pandemic. In an effort to contain and mitigate the
spread of COVID-19, many countries have imposed unprecedented restrictions on travel, quarantines
and other public health safety measures. We have not experienced significant COVID-19 related impact on our financial condition
and results of operations in the first quarter 2019. However, procedures with CGuard EPS, which are generally scheduled or non-emergency
procedures, have mostly been postponed as hospitals shift resources to patients affected by COVID-19. To our knowledge,
most European countries in which we operate are slowly reinstating elective procedures, but we do not know when the hospitals
will resume to normal pre-pandemic levels with such procedures. In addition, most of our sales have historically come from
Europe, where the pandemic has had a severe impact. We anticipate that the continuation of the pandemic and related restrictions
and safety measures may result in a significant decline in sales of our products for the upcoming periods. For more discussion
on our risks related to COVID-19, please see risk factors included under “Item 1A. Risk Factors” herein.
In
response to significant market volatility and uncertainties relating to COVID-19, our board of directors (the “Board”)
and management have taken the following voluntary reductions of compensation as a measure of fiscal responsibility.
Effective
April 1, 2020, the Board approved a 50% decrease in the annual cash compensation for non-employee directors from an aggregate
amount of $154,000 to $77,000.
On
April 21, 2020, Marvin Slosman, our President, Chief Executive Officer and Director, signed a waiver reducing his annual base
salary from $400,000 to $200,000 for the period beginning April 1, 2020 and ending on such date as Mr. Slosman shall
determine, and Craig Shore, our Chief Financial Officer, Chief Administrative Officer, Secretary and Treasurer, signed a waiver
reducing his monthly base salary from NIS 80,125 to NIS 40,063 for the period beginning April 1, 2020 and
ending on such date as Mr. Shore shall determine. In addition, effective April 1, 2020, we reduced the annual salaries
of most of our employees by 20% to 30% until further notice. We expect that such reductions of the base salaries
of our employees, including Mr. Slosman and Mr. Shores, will result in a decrease of approximately $300,000 in operating expenses
in the second quarter of 2020.
NYSE
American Deficiency
On
August 7, 2019, we received notification from the NYSE American that we do not meet continued listing standards of the NYSE American
as set forth in Part 10 of the NYSE American Company Guide (the “Company Guide”). Specifically, we are not in compliance
with Section 1003(a)(iii) of the Company Guide because we reported stockholders’ equity of less than $6 million as of June
30, 2019, and net losses in our five most recent fiscal years ended December 31, 2018. As a result, we became subject to the procedures
and requirements of Section 1009 of the Company Guide.
On
October 11, 2019, NYSE American accepted our plan to regain compliance with Section 1003(a)(iii) of the Company Guide by August
7, 2020. We are subject to periodic review during the period covered by the compliance plan. Failure to make progress consistent
with the plan or to regain compliance with the continued listing standards by the end of the plan period could result in our common
stock being delisted from the NYSE American.
Critical
Accounting Policies
A
critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation
and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Our critical accounting policies are more fully described in both (i)
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (ii) Note
2 of the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December
31, 2019. There have not been any material changes to such critical accounting policies since December 31, 2019.
The
currency of the primary economic environment in which our operations are conducted is the U.S. dollar (“$” or “dollar”).
Contingencies
We
and our subsidiaries are involved in legal proceedings that arise from time to time in the ordinary course of business. We record
accruals for these types of contingencies to the extent that we conclude the occurrence of such contingencies is probable and
that the related liabilities are estimable. When accruing these costs, we recognize an accrual in the amount within a range of
loss that is the best estimate within the range. When no amount within the range is a better estimate than any other amount, we
accrue for the minimum amount within the range. Legal costs are expensed as incurred.
Results
of Operations
Three
months ended March 31, 2020 compared to the three months ended March 31, 2019
Revenues.
For the three months ended March 31, 2020, revenue increased by $619,000, or 149.2%, to $1,034,000, from $415,000 during the three
months ended March 31, 2019. This increase was predominantly driven by a 158.2% increase in sales volume of CGuard EPS
from $376,000 during the three months ended March 31, 2019, to $971,000 during the three months ended March 31, 2020, mainly due
to our previous third-party sterilizer equipment failures, which caused a significant interruption in sterilized product supply
for the majority of the first quarter 2019 as well as our continued focus in expanding revenue base in our major markets. In addition,
MGuard Prime EPS sales increased from $39,000 during the three months ended March 31, 2019, to $63,000 during the three months
ended March 31, 2020, due to the delayed shipments of sterilized products during the three months ended March 31, 2019, as mentioned
above.
With
respect to geographical regions, the increase in revenue was primarily attributable to a $567,000 increase in revenue from sales
made in Europe (driven by a $559,000 increase of CGuard EPS sales for reasons discussed in the paragraph above), as well as an
increase of $35,000 in revenue from sales made in Asia and Middle East (driven by a $33,000 increase of CGuard EPS sales for reasons
discussed in the paragraph above), as well as an increase of $17,000 in revenue from sales of CGuard EPS made in Australia and
South Africa.
Gross
Profit (Loss). For the three months ended March 31, 2020, gross profit (revenue less cost of revenues) increased by $368,000,
to a gross profit of $295,000, compared to a gross loss of $73,000 during the same period in 2019. This increase in gross profit
resulted from a $223,000 increase in revenues (as mentioned above), less the related material and labor costs, resulting from
delays related to product sterilization interruption during the three months ended March 31, 2019 as discussed above, which did
not occur during the three months ended in March 31, 2020, a decrease of $118,000 in write-offs of inventory during the three
months ended March 31, 2020 due to the same sterilization issue mentioned above and a decrease of $27,000 in miscellaneous expenses.
Gross margin (gross profits as a percentage of revenue) increased to 28.5% during the three months ended March 31, 2020 from (17.6)%
during the three months ended March 31, 2019, driven mainly by delays in product sterilization and write-offs of CGuard EPS inventory
during the three months ended in March 31, 2019.
Research
and Development Expenses. For the three months ended March 31, 2020, research and development expenses decreased by 53.5%,
or $602,000, to $523,000, from $1,125,000 during the three months ended March 31, 2019. This decrease resulted primarily from
a decrease of $328,000 in clinical expenses associated with CGuard EPS, mainly related to IDE approval process, a decrease of
$354,000 due to a settlement expenses made to a former service provider pursuant to settlement agreement during the three months
ended March 31, 2019, which did not occur during the three months ended on March 31, 2020 (see Part II, Item 1. “Legal Proceedings”
below) and a decrease of $25,000 in miscellaneous expenses. These decreases were partially offset by an increase of $105,000 in
development expenses related to CGuard EPS.
Selling
and Marketing Expenses. For the three months ended March 31, 2020, selling and marketing expenses decreased by 1.6%, or $10,000,
to $624,000, from $634,000 during the three months ended March 31, 2019.
General
and Administrative Expenses. For the three months ended March 31, 2020, general and administrative expenses decreased by 9.9%,
or $129,000, to $1,169,000, from $1,298,000 during the three months ended March 31, 2019. This decrease resulted primarily from
a decrease of $175,000 in legal expenses due to the reduced need for legal services partially offset by an increase of $46,000
in miscellaneous expenses.
Financial
Expenses (Income). For the three months ended March 31, 2020, financial income increased by 155.8%, or $120,000, to $43,000
of financial income, from $77,000 of financial expenses during the three months ended March 31, 2019. The increase in financial
income primarily resulted from an increase of $122,000 in financial income related to changes in exchange rates and a decrease
of $2,000 in miscellaneous expenses.
Tax
Expenses (Income). For the three months ended March 31, 2020, there was no material change in our tax expenses as compared
to the three months ended March 31, 2019.
Net
Loss. Our net loss decreased by $1,229,000, or 38.3%, to $1,978,000, for the three months ended March 31, 2020, from $3,207,000
during the three months ended March 31, 2019. The decrease in net loss resulted primarily from a decrease of $741,000 in operating
expenses, an increase of $368,000 in gross profit and an increase of $120,000 in financial income.
Liquidity
and Capital Resources
We
had an accumulated deficit as of March 31, 2020, of approximately $160 million, as well as a net loss of $1,978,000 and negative
operating cash flows for the three months ended March 31, 2020. We expect to continue incurring losses and negative cash flows
from operations until our products (primarily CGuard EPS) reach commercial profitability. As a result of these expected losses
and negative cash flows from operations, along with our current cash position, we only have sufficient resources to fund operations
through the end of August 2020. Therefore, there is substantial doubt about our ability to continue as a going concern.
Our
plans include continued commercialization of our products and raising capital through the sale of additional equity securities,
debt or capital inflows from strategic partnerships. There are no assurances, however, that we will be successful in obtaining
the level of financing needed for our operations. The COVID-19 pandemic has resulted in significant financial market volatility
and uncertainty in recent weeks. A continuation or worsening of the levels of market disruption and volatility seen in the recent
past could have an adverse effect on our ability to access capital and on the market price of our common stock, and we may not
be able to successfully raise capital through the sale of our securities. If we are unsuccessful in commercializing our products
or raising capital, we may need to reduce activities, curtail or cease operations.
Anti-Dilution
Provisions
Our
outstanding shares of Series B Preferred Stock and Series C Preferred Stock contain anti-dilution provisions that may result in
the reduction of the conversion price thereof in the future. This feature may result in an indeterminate number of shares of common
stock being issued upon conversion of the Series B Preferred Stock or the Series C Preferred Stock. Sales of additional shares
of common stock issuable upon conversion of the Series B Preferred Stock or Series C Preferred Stock as a result of anti-dilution
adjustments will dilute the interests of other security holders and may depress the price of our common stock. Accordingly, we
may find it more difficult to raise additional equity capital while any of our Series B Preferred Stock or Series C Preferred
Stock is outstanding. As of May 10, 2020, 17,303 shares of Series B Preferred Stock
and 26,558 shares of Series C Preferred Stock were outstanding.
Three
months ended March 31, 2020 compared to the three months ended March 31, 2019
General.
At March 31, 2020, we had cash and cash equivalents of $3,141,000, as compared to $5,514,000 as of December 31, 2019. We have
historically met our cash needs through a combination of issuing new shares, borrowing activities and product sales. Our cash
requirements are generally for research and development, marketing and sales activities, finance and administrative cost, capital
expenditures and general working capital.
For
the three months ended March 31, 2020, net cash used in our operating activities decreased by $1,131,000 to $2,354,000, from $3,485,000
during the same period in 2019. The primary reason for the decrease in cash used in our operating activities was a decrease of
payments for third party related expenses and for professional services of $975,000 (primarily due to production related payments)
and an increase of $323,000 in payments received from customers to $989,000 during the three months ended March 31, 2020, from
$666,000 during the same period in 2019. These changes that decreased the cash used in our operating activities were partially
offset by an increase of $167,000 paid during the three months ended March 31, 2020 in compensation costs from $1,737,000 in the
three months ended March 31, 2019 to $1,904,000 during the same period in 2020 (mainly driven by an increase of $280,000 in termination
payments to James Barry, Ph. D., our former chief executive officer, president and director, in connection with his resignation
effective December 31, 2019 offset by other payroll and bonus payouts change of $113,000).
Cash
used by our investing activities was $3,000 during the three months ended March 31, 2020 compared to $105,000 during the three
months ended March 31, 2019. The primary reasons for the decrease in cash used by our investing activities were a decrease of
$66,000 in payments made for purchase of property, plant and equipment to $0 during the three months ended March 31, 2020, from
$66,000 during the same period in 2019 and a decrease of $36,000 deposited to employee funds to $3,000 during the three months
ended March 31, 2020, from $39,000 during the same period in 2019.
Cash
provided by financing activities for the three months March 31, 2020 was $3,000, compared to $16,000 during the same period in
2019. The principal source of the cash provided by financing activities during the three months ended March 31, 2020 and March
31, 2019 was the funds received from the exercise of pre-funded warrants that resulted in approximately $3,000 and $16,000, respectively.
As
of March 31, 2020, our current assets exceeded our current liabilities by a multiple of 2.1. Current assets decreased by $2,374,000
during the period and current liabilities decreased by $512,000 during the period. As a result, our working capital decreased
by $1,862,000 to $2,833,000 as of March 31, 2020.
Off
Balance Sheet Arrangements
We
have no off-balance sheet transactions, arrangements, obligations (including contingent obligations) or other relationships with
unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Factors
That May Affect Future Operations
We
believe that our future operating results will continue to be subject to quarterly variations based upon a wide variety of factors,
including the impact of the COVID-19 pandemic, cyclical nature of the ordering patterns of our distributors, timing of regulatory
approvals, the implementation of various phases of our clinical trials and manufacturing efficiencies due to the learning curve
of utilizing new materials and equipment. Our operating results could also be impacted by a weakening of the Euro and strengthening
of the New Israeli Shekel, or NIS, both against the U.S. dollar. Lastly, other economic conditions we cannot foresee may affect
customer demand, such as individual country reimbursement policies pertaining to our products. For a discussion of these and other
risks that relate to our business, you should carefully review the risks and uncertainties described under the heading “Part
II – Item 1A. Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K
for the year ended December 31, 2019, and those described from time to time in our future reports filed with the Securities and
Exchange Commission.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
regulators, or the board or management of the Company, may determine are needed.
Contractual
Obligations and Commitments
During
the three months ended March 31, 2020, there were no material changes to our contractual obligations and commitments.