Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You
should read the following discussion and analysis of financial condition and results of operations in conjunction with our consolidated
financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q.
Unless
the context requires otherwise, references in this Form 10-Q to the “Company,” “NanoVibronix,” “we,”
“our” and “us” refer to NanoVibronix, Inc., a Delaware corporation, and its subsidiaries.
Cautionary
Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains “forward-looking statements,” which include information relating to future
events, future financial performance, financial projections, 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 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 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:
|
●
|
Our
ability to continue as a going concern.
|
|
●
|
The timing of clinical
studies and eventual U.S. Food and Drug Administration approval of WoundShield™ and our other product candidates.
|
|
●
|
Regulatory actions that could adversely affect
the price of or demand for our approved products.
|
|
●
|
Market acceptance of existing and new products.
|
|
●
|
Favorable or unfavorable
decisions about our products from government regulators, insurance companies or other third-party payers.
|
|
●
|
Our intellectual property portfolio.
|
|
●
|
Our ability to recruit and retain qualified
regulatory and research and development personnel.
|
|
●
|
Unforeseen changes in healthcare reimbursement
for any of our approved products.
|
|
●
|
Lack of financial resources to adequately support
our operations.
|
|
●
|
Difficulties in maintaining commercial scale
manufacturing capacity and capability.
|
|
●
|
Our ability to generate internal growth.
|
|
●
|
Changes in our relationship with key collaborators.
|
|
●
|
Changes in the market valuation or earnings
of our competitors or companies viewed as similar to us.
|
|
●
|
Our failure to comply with regulatory guidelines.
|
|
●
|
Uncertainty in industry demand and patient wellness
behavior.
|
|
●
|
General economic conditions and market conditions
in the medical device industry.
|
|
●
|
Future sales of large blocks of our common stock,
which may adversely impact our stock price.
|
|
●
|
Depth of the trading market in our common stock.
|
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 financial performance, you should carefully
review the risks and uncertainties described under the heading “Item 1A. Risk Factors” and elsewhere in this Quarterly
Report on Form 10-Q and in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2016, and those described from
time to time in our future reports filed with the Securities and Exchange Commission. Moreover, new risks regularly emerge and
it is not possible for us to predict or articulate all risks we face, nor can we assess the impact of all risks on our business
or the extent to which any risk, or combination of risks, may cause actual results to differ from those contained in any forward-looking
statements. All forward-looking statements included in this Form 10-Q are based on information available to us on the date of
this prospectus. Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise
any forward-looking statement, whether as a result of new information, future events or otherwise.
Overview
We
are a medical device company focusing on noninvasive biological response-activating devices that target wound healing and pain
therapy and can be administered at home, without the assistance of medical professionals. Our WoundShield, PainShield and UroShield
products are backed by novel technology which relates to ultrasound delivery through surface acoustic waves.
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 our Annual Report on Form 10-K/A for the fiscal 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”).
Accordingly, our functional currency is the dollar.
Recent
Events
Underwritten
Public Offering
On
November 6, 2017, we closed an underwritten public offering (the “Offering”) of 1,224,488 shares of our common stock
(and common stock equivalents), together with warrants (which includes warrants pursuant to the over-allotment option granted
to the underwriter) to purchase up to 972,609 shares of common stock at an offering price of $4.90 per share of common stock and
accompanying warrant to purchase 0.75 of one share of common stock. Total gross proceeds from the offering totaled approximately
$6,000,000, and net proceeds totaled approximately $5,100,000 after deducting underwriting and estimated offering expenses. Each
warrant has an exercise price of $6.95 per full share of common stock with a life of five years. We intend to use the net proceeds
from this offering: (i) to cover expenses related to listing our shares on The NASDAQ Capital Market; (ii) to expand our sales
leadership and field level sales resources; (iii) for research and development; (iv) to implement our Surface Acoustic Wave platform
to other applications; (v) to pursue complimentary acquisitions; and (vi) for general working capital. The securities were issued
pursuant to our registration statement on Form S-1 originally filed with the Securities and Exchange Commission on June 21, 2017,
and declared effective on November 1, 2017.
Conversion
of Convertible Promissory Notes
In
September 2017, all of the holders of the convertible promissory notes issued in connection with a series of bridge financings
between March 1, 2017 and September 15, 2017 (collectively, the “2017 Notes”) agreed to convert the full principal
and accrued interest on the 2017 Notes into equity securities of the Company in the event the Company consummated a Qualified
Financing any time before December 31, 2017. The Offering constituted a Qualified Financing, and based on the outstanding principal
amount and all accrued but unpaid interest on the 2017 Notes at 80% of the offering price of $4.90 per share of common stock and
accompanying warrant, we issued an aggregate of 361,462 shares of common stock (and common stock equivalents) and warrants to
purchase an aggregate of 271,096 shares of common stock to the holders of the 2017 Notes, all of which are subject to lock-up
agreements for 180 days from November 1, 2017.
Results
of Operations
Nine
Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Revenues
.
For the nine months ended September 30, 2017 and 2016, our revenues were approximately $169,000 and $180,000, respectively, a
decrease of approximately 6.1%, or $11,000, between the periods. The decrease was mainly attributable to decreased sales to consumers
in the nine months ended September 30, 2017. Our revenues may fluctuate as we add new consumers or when existing distributors
or consumers make large purchases of our products during one period and no purchases during another period. Our revenues may fluctuate
from quarter-to-quarter and any growth or decrease in revenues by quarter may not be linear or consistent.
For
the nine months ended September 30, 2017, the percentage of revenues attributable to our products was: PainShield 81% and UroShield
- 19%. For the nine months ended September 30, 2016, the percentage of revenues attributable to our products was: PainShield -
89% and UroShield - 11%. For the nine months ended September 30, 2017 and 2016, the percentage of revenues attributable to our
disposable products was 53% and 45%, respectively. For the nine months ended September 30, 2017 and 2016, the portion of our revenues
that was derived from distributors was 42% and 34%, respectively.
Gross
Profit
. For the nine months ended September 30, 2017 and 2016, gross profit was approximately $113,000 and $103,000, respectively,
an increase of approximately 9.7%, or $10,000, between the periods. The increase was mainly due to a markdown of obsolete inventory
during such period in 2016.
Gross
profit as a percentage of revenues was approximately 67% and 57% for the nine months ended September 30, 2017 and 2016, respectively.
The increase in gross profit as a percentage is mainly due to the markdown of obsolete inventory as described above.
Research
and Development Expenses
. For the nine months ended September 30, 2017 and 2016, research and development expenses were approximately
$474,000 and $447,000, respectively, an increase of approximately 6%, or $27,000, between the periods. The increase was primarily
due to the increase in expenses related to our clinical trials.
Research
and development expenses as a percentage of total revenues were approximately 280% and 248% for the nine months ended September
30, 2017 and 2016, respectively. The increase was due primarily to the increase in expenses described above.
Our
research and development expenses consist mainly of payroll expenses to employees involved in research and development activities,
stock-based compensation expenses, expenses related to subcontracting, patents application and registration, clinical trial and
facilities expenses associated with and allocated to research and development activities.
Selling
and Marketing Expenses
. For the nine months ended September 30, 2017 and 2016, selling and marketing expenses were approximately
$309,000 and $390,000, respectively, a decrease of approximately 21%, or $81,000, between the periods. The decrease was mainly
due to a decrease in our sales staff and, to a lesser degree, decreased selling and marketing activities, particularly trade show
expenses and marketing campaigns as we had to reduce our sales budget due to limited cash resources.
Selling
and marketing expenses as a percentage of total revenues were approximately 182% and 216% for the nine months ended September
30, 2017 and 2016, respectively. The decrease was due primarily to the decrease in expenses described above.
Selling
and marketing expenses consist mainly of payroll expenses to direct sales and marketing employees, stock-based compensation expenses,
travel expenses, advertising and marketing expenses, rent and facilities expenses associated with and allocated to selling and
marketing activities.
General
and Administrative Expenses
. For the nine months ended September 30, 2017 and 2016, general and administrative expenses were
approximately $1,404,000 and $741,000, respectively, an increase of approximately 89%, or $663,000, between the periods. The increase
was mainly due to a $223,000 increase in our stock based compensation and the increased compensation costs of the new management
team hired in the fourth quarter of 2016.
General
and administrative expenses as a percentage of total revenues were approximately 830% and 412% for the nine months ended September
30, 2017 and 2016, respectively. The increase was due primarily to the increase in expenses described above.
Our
general and administrative expenses consist mainly of payroll expenses for management and administrative employees, share-based
compensation expenses, accounting, legal and facilities expenses associated with general and administrative activities and costs
associated with being a publicly traded company.
Financial
Expenses, net
. For the nine months ended September 30, 2017 and 2016, financial expenses, net were approximately $1,217,000
and $208,000, respectively, an increase of approximately 485%, or $1,009,000, between the periods. The increase resulted primarily
an additional expense of approximately $865,000 related to the issuance of the Warrants amortized over the life of the 2017 Notes
issued in the first two quarters of 2017 and a $293,000 increase due to a higher valuation adjustment of our warrants that were
issued with our 2013 and 2015 convertible promissory notes.
Tax
expenses.
For the nine months ended September 30, 2017 and 2016, tax expenses were $33,000 and $28,000, respectively. The
tax expense is computed by multiplying income before taxes at our Israeli subsidiary by the appropriate tax rate. The increase
in our tax expenses was due to increased spending by our Israel subsidiary.
Loss.
Our loss increased by approximately $1,613,000, or 94%, to approximately $3,324,000 for the nine months ended September 30,
2017 from approximately $1,711,000 in the same period of 2016. The increase in net loss resulted primarily from the factors described
above.
Three
Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Revenues
. For the three months ended September 30, 2017 and 2016, our revenues were approximately $65,000 and $61,000, respectively,
an increase of approximately 7%, or $4,000, between the periods. The increase was attributable to increased sales to our distributors
in the three months ended September 30, 2017. Our revenues may fluctuate as we add new consumers or distributors or when existing
consumers or distributors make large purchases of our products during one period and no purchases during another period. Our revenues
may fluctuate from quarter-to-quarter and any growth or decrease in revenues by quarter may not be linear or consistent.
For
the three months ended September 30, 2017, the percentage of revenues attributable to our products was: PainShield - 92% and UroShield
- 8%. For the three months ended September 30, 2016, the percentage of revenues attributable to our products was: PainShield -
82% and UroShield -18%. For the three months ended September 30, 2017 and 2016, the percentage of revenues attributable to our
disposable products was 45% and 38%, respectively. For the three months ended September 30, 2017 and 2016, the portion of our
revenues that was derived from distributors was 52% and 36%, respectively.
Gross
Profit
. For the three months ended September 30, 2017, gross profit increased by approximately 26%, or $9,000, to approximately
$43,000 from approximately $34,000 during the same period in 2016. The increase was due to higher sales as well as a markdown
of obsolete inventory.
Gross
profit as a percentage of revenues was approximately 65% and 56% for the three months ended September 30, 2017 and 2016, respectively.
The increase in gross profit as a percentage is mainly due to the increased percentage of higher margin sales described above.
Research
and Development Expenses
. For the three months ended September 30, 2017 and 2016, research and development expenses were approximately
$160,000 and $161,000, respectively.
Research
and development expenses as a percentage of total revenues were approximately 246% and 264% for the three months ended September
30, 2017 and 2016, respectively. The decrease was due to the increase in revenues.
Our
research and development expenses consist mainly of payroll expenses to employees involved in research and development activities,
stock-based compensation expenses, expenses related to subcontracting, patents application and registration, clinical trial and
facilities expenses associated with and allocated to research and development activities.
Selling
and Marketing Expenses
. For the three months ended September 30, 2017 and 2016, selling and marketing expenses were approximately
$109,000 and $120,000, respectively, a decrease of approximately 9%, or $11,000, between the periods. The decrease was mainly
due to a decrease in our sales staff and to a lesser degree decreased selling and marketing activities, particularly marketing
expenses as we had to reduce our sales budget due to limited cash resources.
Selling
and marketing expenses as a percentage of total revenues were approximately 168% and 196% for the three months ended September
30, 2017 and 2016, respectively. The decrease was due primarily to the decrease in expenses described above.
Selling
and marketing expenses consist mainly of payroll expenses to direct sales and marketing employees, stock-based compensation expenses,
travel expenses, advertising and marketing expenses, rent and facilities expenses associated with and allocated to selling and
marketing activities.
General
and Administrative Expenses
. For the three months ended September 30, 2017 and 2016, general and administrative expenses were
approximately $387,000 and $298,000, respectively, an increase of approximately 30%, or $89,000, between the periods. The increase
was mainly due to the increased compensation costs of the new management team hired in the fourth quarter of 2016 including their
stock based compensation.
Our
general and administrative expenses consist mainly of payroll expenses for management and administrative employees, share-based
compensation expenses, accounting, legal and facilities expenses associated with general and administrative activities and costs
associated with being a publicly traded company.
Financial
Expenses, net
. For the three months ended September 30, 2017 and 2016, financial expenses, net were approximately $975,000
and $52,000, respectively, an increase of approximately $923,000, between the periods. The increase resulted from additional expenses
incurred from the issuance of the Warrants amortized over the life of the 2017 Notes issued in the first two quarters of 2017
as well as by an increase derived by a higher valuation adjustment of our warrants that were issued with our 2013 and 2015 convertible
promissory notes.
Tax
expenses.
For the three months ended September 30, 2017 and 2016, tax expenses were $11,000 and $9,000, respectively. The
tax expense is computed by multiplying income before taxes at our Israeli subsidiary by the appropriate tax rate. The increase
in our tax expenses was due to increased spending by our Israel subsidiary.
Loss.
Our net loss increased by approximately $993,000, or 163%, to approximately $1,599,000 for the three months ended September
30, 2017 from approximately $606,000 in the same period of 2016. The increase in net loss resulted primarily from the factors
described above.
Liquidity
and Capital Resources
We
continue to incur losses and negative cash flows from operating activities. We have incurred losses in the amount of $3,324,000
(not $3,3242,000)
During
the nine months ended September 30, 2017, and through November 14, 2017, we met our short-term liquidity requirements from our
existing cash reserves and from proceeds from the sales of convertible promissory notes in an aggregate amount of $1,380,000,
as well as the net proceeds of $5,100,000 from our underwritten public offering which closed on November 6, 2017. Our future capital
requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully commercialize
our products, our development of future products and competing technological and market developments. We intend to use these proceeds
to meet our short-term liquidity requirements as well as to advance our long-term plans. It is our current belief that such proceeds
will provide sufficient funding to meet our liquidity needs for the next twelve months. While we believe we have sufficient capital
to execute our business plan over the next twelve months, there are no assurances that we will not need to raise additional capital
at a later time, or that we would be able to raise additional capital, if required, on terms favorable to us.
We
do not have any material commitments to capital expenditures as of September 30, 2017, and we are not aware of any material trends
in capital resources that would impact our business.
Nine
Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
General
.
As of September 30, 2017, we had cash and cash equivalents of approximately $82,000, compared to approximately $106,000 as of
December 31, 2016. The decrease is attributable primarily to our net cash used in operating activities. We have historically met
our cash needs through a combination of issuance of equity, borrowing activities and sales. Our cash requirements are generally
for product development, research and development cost, marketing and sales activities, finance and administrative cost, capital
expenditures and general working capital.
Cash
used in our operating activities was approximately $1,402,000 for the nine months ended September 30, 2017 and $1,107,000 for
the same period in 2016. The increase in our cash usage was mainly associated with the increase in our net operating loss for
the nine months ended September 30, 2017 compared to the three months ended September 30, 2016, for the reasons described above.
Cash
used in investing activities was $2,000 and $8,000 for the nine month periods ended September 30, 2017 and 2016, respectively,
and was related to purchases of fixed assets.
Cash
provided by financing activities was approximately $1,380,000 for the nine months ended September 30, 2017 derived from proceeds
received from the issuance of 2017 Notes and $33,000 for the nine months ended September 30, 2017, which was derived from proceeds
from the exercise of certain options.
Off
Balance Sheet Arrangements
As
of September 30, 2017, 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 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.