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,”
“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 will probably 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 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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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 in our Annual Report on Form 10-K for the twelve
month period ended December 31, 2016, 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 Argentina, Colombia and Russia.
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 and, together with our first generation
MGuard stent combining MicroNet with a bare-metal stainless steel stent, unless otherwise indicated, we refer to both kinds of
bare-metal stents as our MGuard coronary products. We market and sell MGuard Prime EPS for the treatment of coronary disease in
the European Union. 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.
We
are also developing a neurovascular flow diverter (“NGuard”), which is an endovascular device that directs blood flow
away from cerebral aneurysms in order to ultimately seal the aneurysms. Our flow diverter would utilize an open cell, highly flexible
metal scaffold to which MicroNet would be attached. We have completed initial pre-clinical testing of this product in both simulated
bench models and standard in vivo pre-clinical models. However, as we plan to focus our resources on the further expansion of
our sales and marketing activities for CGuard EPS and MGuard Prime EPS and, provided that we have sufficient resources, the development
of CGuard EPS with a smaller delivery catheter (5 French gauge) and its submission for CE mark approval, we do not intend to resume
further development of NGuard until at least the third quarter of 2018.
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 open diseased vessels in the brain.
Presently,
none of our products may be sold or marketed in the United States.
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, 2016. There have not been any material changes to such critical accounting policies since December 31, 2016.
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 September 30, 2017 compared to the three months ended September 30, 2016
Revenues
.
For the three months ended September 30, 2017, revenue increased by $249,000, or 53.1%, to $718,000 from $469,000 during the three
months ended September 30, 2016. This increase was predominantly driven by an 89.9% increase in sales of CGuard EPS from $277,000
in the three months ended September 30, 2016, to $526,000 in the three months ended September 30, 2017 as we continued focus on
expanding existing markets such as Italy, expansion into new geographies such as Russia, as well as the transition from our prior
exclusive distribution partner for most of Europe to local distributors. The transition to local distributors reflects an effort
to broaden our sales efforts from only interventional neuroradiologists to include vascular surgeons, interventional cardiologists
and interventional radiologists, as well. Revenue from sales of MGuard EPS remained flat at $192,000 in the three months ended
September 30, 2017, compared to the same period in 2016.
With
respect to regions, the increase in revenue was primarily attributable to an increase of $233,000 in revenue from sales of CGuard
EPS from our distributors in Europe and an increase of $21,000 in revenue from sales of CGuard EPS in Latin America.
Gross
Profit
. For the three months ended September 30, 2017, gross profit (revenue less cost of revenues) increased by 410.0%, or
$123,000, to $153,000, compared to $30,000 during the same period in 2016. The increase in gross profit resulted primarily from
an increase of $249,000 in revenues (as mentioned above), a decrease of $25,000 of expenses related to the underutilization of
our manufacturing resources and a decrease of $14,000 in miscellaneous expenses, partially offset by an increase in material and
labor costs of $165,000, which resulted from our increase in sales. Gross margin (gross profits as a percentage of revenue) increased
to 21.3% in the three months ended September 30, 2017 from 6.4% in the three months ended September 30, 2016.
Research
and Development Expenses
. For the three months ended September 30, 2017, research and development expenses remained relatively
flat compared to the same period in 2016 due to an increase of $40,000 in a salary related accrual. This increase in research
and development expenses was partially offset by a decrease of $41,000 in miscellaneous expenses.
Selling
and Marketing Expenses
. For the three months ended September 30, 2017, selling and marketing expenses increased by 117.2%,
or $362,000, to $671,000, from $309,000 during the three months ended September 30, 2016. This increase in selling and marketing
expenses resulted primarily from an increase of $195,000 in salary expenses, an increase of $100,000 in travel expenses and an
increase of $67,000 in miscellaneous expenses. The increase in selling and marketing expenses was driven primarily to support
the CGuard EPS sales and marketing related activities as we transitioned away from our prior exclusive distribution partner for
most of Europe to using local distributors, as well as expansion of existing markets and into new geographies.
General
and Administrative Expenses
. For the three months ended September 30, 2017, general and administrative expenses increased
by 7.5%, or $89,000, to $1,279,000 from $1,190,000 during the three months ended September 30, 2016. The increase in general and
administrative expenses resulted primarily from an increase of $88,000 in salary expenses, primarily due to a salary related accrual,
an increase of $67,000 in expenses related to our 2017 regulatory audit which included the recertification of our CE Mark as well
as an increase of $35,000 in miscellaneous expenses. These increase in general and administrative expenses were partially offset
by a decrease of $101,000 in share based compensation expenses due to the timing of vesting of certain equity grants to our chief
executive officer and the reversal of certain equity grants to two former directors.
Financial
Expenses
. For the three months ended September 30, 2017, financial expenses decreased by 99.6% or $236,000, to $1,000, from
$237,000 during the three months ended September 30, 2016. The decrease in financial expenses resulted from a decrease in interest
expenses due to the repayment of the remaining balance of our outstanding indebtedness of $1.2 million on March 21, 2017.
Tax
Expenses (Income).
For the three months ended September 30, 2017, there was no material change in tax expenses (income) compared
to the same period in 2016.
Net
Loss
. Our net loss increased by $91,000, or 4.6%, to $2,086,000 for the three months ended September 30, 2017, from $1,995,000
during the same period in 2016. The increase in net loss resulted primarily from an increase of $450,000 in operating expenses,
partially offset by a decrease of $236,000 in financial expenses and an increase of $123,000 in gross profit.
Nine
months ended September 30, 2017 compared to the nine months ended September 30, 2016
Revenues
.
For the nine months ended September 30, 2017, revenue increased by $355,000, or 22.6%, to $1,927,000, from $1,572,000 during the
nine months ended September 30, 2016. This increase was predominantly driven by a 38.1% increase in sales of CGuard EPS from $952,000
in the nine months ended September 30, 2016, to $1,315,000 in the nine months ended September 30, 2017, as we expanded into new
geographies such as Russia, continued focus on expanding existing markets such as Italy, as well as the transition from our prior
exclusive distribution partner for most of Europe to local distributors. The transition to local distributors reflects an effort
to broaden our sales efforts from only interventional neuroradiologists to include vascular surgeons, interventional cardiologists
and interventional radiologists, as well. This increase in sales of CGuard EPS was partially offset by a 1.3% decrease in sales
of MGuard Prime EPS from $620,000 in the nine months ended September 30, 2016, to $612,000 in the nine months ended September
30, 2017, largely driven by doctors increasingly using drug-eluting stents rather than bare metal stents such as MGuard Prime
EPS in STEMI patients.
With
respect to regions, the increase in revenue was primarily attributable to an increase of $333,000 in revenue from sales of CGuard
EPS from our distributors in Europe an increase of $132,000 in revenue from sales of MGuard Prime EPS from our distributors in
Latin America and an increase of $30,000 in revenue from sales of CGuard EPS from our distributors in Latin America, partially
offset by a decrease of $96,000 in revenue from sales of MGuard Prime EPS from our distributors in Europe and a decrease of $44,000
in revenue from sales of MGuard Prime EPS from our distributors in the Middle East.
Gross
Profit
. For the nine months ended September 30, 2017, gross profit (revenue less cost of revenues) increased by 136.7%, or
$216,000, to $374,000, compared to $158,000 during the same period in 2016. The increase in gross profit resulted primarily from
an increase of $355,000 in revenues (as mentioned above), a decrease of $76,000 of expenses related to the underutilization of
our manufacturing resources and a decrease in write-offs of inventory of MGuard Prime EPS of $66,000. These increases in gross
profit were partially offset by an increase in material and labor costs of $244,000, which resulted from our increase in sales
and an increase of $37,000 in miscellaneous expenses. Gross margin (gross profits as a percentage of revenue) increased to 19.4%
in the nine months ended September 30, 2017 from 10.1% in the nine months ended September 30, 2016.
Research
and Development Expenses
. For the nine months ended September 30, 2017, research and development expenses increased by 10.0%,
or $95,000, to $1,041,000, from $946,000 during the nine months ended September 30, 2016. This increase in research and development
expenses resulted primarily from an increase of $191,000 in salary expenses primarily due to the resignation and timing of the
replacement of our former vice president of research and development who resigned on March 10, 2016, lowering our expenses in
the nine months ended September 30, 2016 as well as a salary related accrual in 2017. In addition to the increase in salary expenses,
the increase in research and development expenses for the nine months ended September 30, 2017, compared to the same period in
2016 resulted from an increase of $104,000 in development and clinical expenses associated with CGuard EPS, primarily due to our
pre-IDE meeting with the FDA. This increase however, was partially offset by a decrease of $166,000 in share-based compensation
expenses due to the recognition of all remaining unrecognized costs following the option cancellation agreement with our chief
executive officer in 2016 while he was our chief operating officer, resulting in higher share-based compensation expenses in 2016,
as well as a decrease of $34,000 in miscellaneous expenses.
Selling
and Marketing Expenses
. For the nine months ended September 30, 2017, selling and marketing expenses increased by 70.4%, or
$758,000, to $1,835,000, from $1,077,000 during the nine months ended September 30, 2016. This increase in selling and marketing
expenses resulted primarily from an increase of $264,000 in salary expenses, an increase of $182,000 in travel expenses, an increase
of $113,000 in consulting fees, an increase of $99,000 in share-based compensation expenses due to a former employee’s forfeiture
of the former employee’s share-based compensation in 2016, reducing our 2016 share-based compensation expenses, for which,
no such reduction occurred during 2017, an increase of $95,000 in expenditures related to our participation in trade shows and
promotional activities and an increase of $5,000 in miscellaneous expenses. The increase in selling and marketing expenses was
primarily to support the new sales and marketing CGuard EPS related activities due to the transition from our prior exclusive
distribution partner for most of Europe to local distributors.
General
and Administrative Expenses
. For the nine months ended September 30, 2017, general and administrative expenses increased by
16.0%, or $592,000, to $4,281,000, from $3,689,000 during the nine months ended September 30, 2016. The increase in general and
administrative expenses resulted primarily from an increase of $292,000 due to a salary related accrual, an increase of $121,000
in rent and related expense, primarily due to a city tax refund we received in 2016, which reduced our 2016 rent and related expenses,
while no such refund was received in 2017, as well as a termination fee for our Boston office in the nine months ended September
30, 2017, which increased our rent and related expenses, an increase of $52,000 in legal expenses and an increase of $127,000
in miscellaneous expenses.
Financial
Expenses
. For the nine months ended September 30, 2017, financial expenses decreased by 75.7%, or $483,000, to $155,000, from
$638,000 during the nine months ended September 30, 2016. The decrease in financial expenses primarily resulted from a decrease
in interest expenses due to the repayment of the remaining balance of our outstanding indebtedness of $1.2 million on March 21,
2017.
Tax
Expenses (Income).
For the nine months ended September 30, 2017, there was no material change in tax expenses (income) compared
to the same period in 2016.
Net
Loss
. Our net loss increased by $746,000, or 12.0%, to $6,939,000 for the nine months ended September 30, 2017, from $6,193,000
during the same period in 2016. The increase in net loss resulted primarily from an increase of $1,445,000 in operating expenses,
partially offset by a decrease of $483,000 in financial expenses and an increase of $216,000 in gross profit.
Liquidity
and Capital Resources
We
had an accumulated deficit as of September 30, 2017, of $139 million, as well as a net loss of $6,939,000 and negative operating
cash flows. 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 for a period of up to four months from the date
of filing of this Quarterly Report on Form 10-Q. Therefore, there is substantial doubt about our ability to continue as
a going concern.
Our
plans include the 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. If we are unsuccessful in commercializing our products and raising capital,
we may need to reduce activities, curtail or cease operations.
On
March 14, 2017, we announced the closing of a “best efforts” public offering of Series C Convertible Preferred Stock,
Series B warrants to purchase shares of common stock and Series C warrants to purchase shares of common stock. We received gross
proceeds of approximately $6.8 million from the offering, before deducting placement agent fees and offering expenses.
Our outstanding
shares of Series B Preferred Stock and Series B 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 Convertible Preferred Stock or the Series C Convertible Preferred Stock. In addition, The
Series B Convertible Preferred Stock provides for the payment of dividends in cash or in shares of our common stock, and we may
not be able to pay such dividends in cash, which will require us to have shares of common stock available to pay the dividend.
Sales of additional shares of common stock issuable upon conversion of the Series B Convertible Preferred Stock or Series C Convertible
Preferred stock as a result of anti-dilution adjustments or on the Series B Preferred Stock as dividends on the Series B Preferred
Stock 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 Convertible Preferred Stock or Series C Convertible
Preferred Stock is outstanding.
On
March 21, 2017, we paid down the remaining $1.2 million balance under our Loan and Security Agreement (the “Loan Agreement”),
dated as of October 23, 2013, with Hercules Technology Growth Capital, Inc. (“Hercules”). All liens and other security
interests granted to Hercules by us and our subsidiaries in connection with the Loan Agreement were terminated upon such payment.
Nine
months ended September 30, 2017 compared to the nine months ended September 30, 2016
General
.
At September 30, 2017, we had cash and cash equivalents of $4,765,000, as compared to $7,516,000 as of December 31, 2016. 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 costs, capital
expenditures and general working capital.
For
the nine months ended September 30, 2017, net cash used in our operating activities increased $742,000 to $6,356,000, from $5,614,000
in the same period in 2016. The primary reason for the increase in cash used in our operating activities was an increase of payments
for third party related expenses and for professional services of $1,201,000 including the end of term charge of $520,000 to Hercules,
from $3,833,000 to $5,034,000. This increase in cash used in operating activities was partially offset by an increase of $351,000
in payments received from customers from $1,421,000 in the nine months ended September 30, 2016 to $1,772,000 in the same period
in 2017 as well as a decrease of $108,000 in salary payments from $3,202,000 in the nine months ended September 30, 2016 to $3,094,000
in the same period in 2017.
Cash
used by our investing activities was $282,000 during the nine months ended September 30, 2017, resulting primarily from the purchase
of production equipment, compared to $81,000 of cash provided during the same period in 2016 resulting primarily from the receipt
of cash previously funded to employee retirement funds.
Cash
provided by financing activities for the nine months ended September 30, 2017 was $3,883,000, compared to $12,756,000 during the
same period in 2016. The principal source of the cash provided by financing activities during the nine months ended September
30, 2017, was the funds received from our March 2017 public offering of preferred stock and warrants that resulted in approximately
$6,072,000 of aggregate net proceeds, offset by loan repayments of $2,179,000. The principal source of the cash provided by financing
activities during the nine months ended September 30, 2016 was the funds received from the issuance of preferred stock and warrants
in a public offering closed on July 7, 2016, as well issuance of shares and warrants in a concurrent public offering and private
placement closed on March 21, 2016, for approximately $14,424,000 of net proceeds, offset by loan repayments of $1,651,000.
As
of September 30, 2017, our current assets exceeded our current liabilities by a multiple of 2.3. Current assets decreased by $2,439,000
during the period and current liabilities decreased by $2,055,000 during the period. As a result, our working capital decreased
by $384,000 to $3,432,000 at September 30, 2017.
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.
Recent
Accounting Pronouncements
See
Note 3 – “Recently Issued Accounting Pronouncements” in the accompanied financial statements.
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 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, 2016, and those described from time to time in our future reports filed with the Securities and Exchange Commission.
Contractual
Obligations and Commitments
During
the nine months ended September 30, 2017, there were no material changes to our contractual obligations and commitments.