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:
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The timing of clinical studies and eventual U.S. Food and Drug Administration approval of WoundShield™ and our other product candidates.
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Regulatory actions that could adversely affect the price of or demand for our approved products.
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Market acceptance of existing and new products.
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Favorable or unfavorable decisions about our products from government regulators, insurance companies or other third-party payers.
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Our intellectual property portfolio.
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Our ability to recruit and retain qualified regulatory and research and development personnel.
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Unforeseen changes in healthcare reimbursement for any of our approved products.
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Lack of financial resources to adequately support our operations.
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Difficulties in maintaining commercial scale manufacturing capacity and capability.
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Our ability to generate internal growth.
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Changes in our relationship with key collaborators.
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Changes in the market valuation or earnings of our competitors or companies viewed as similar to us.
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Our failure to comply with regulatory guidelines.
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Uncertainty in industry demand and patient wellness behavior.
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General economic conditions and market conditions in the medical device industry.
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Future sales of large blocks of our common stock, which may adversely impact our stock price.
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Depth of the trading market in our common stock.
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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 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 for the fiscal year ended December 31, 2015, 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 Note 2 of the Notes to the Consolidated Financial Statements
included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. There have not been any material changes
to such critical accounting policies since December 31, 2015.
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.
Results of Operations
Nine months Ended September 30, 2016 Compared
to Nine months Ended September 30, 2015
Revenues
. For the nine months ended September
30, 2016 and 2015, our revenues were approximately $180,000 and $108,000, respectively, an increase of approximately 67%, or $72,000,
between the periods. The increase was mainly attributable to increased sales from adding distributors as well as having positive
results from our increased marketing campaigns. Our revenues may fluctuate as we add new customers or when existing customers make
large purchases of our products during one period and no purchases during another period. Our revenues may fluctuate from quarter-to-quarter
and, as we continue to grow our business, growth in revenues by quarter may not be linear or consistent.
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, 2015, the percentage of revenues attributable to our products was: PainShield - 94% and UroShield - 6%. For the nine months
ended September 30, 2016 and 2015, the percentage of revenues attributable to the disposable units of our PainShield and UroShield
products was 45% and 41%, respectively. For the nine months ended September 30, 2016 and 2015, the portion of our revenues that
was derived from distributors was 34% and 27%, respectively.
Gross
Profit
. For the nine months ended September 30, 2016, gross profit increased by approximately 41%, or $30,000, to
approximately $103,000 from approximately $73,000 during the same period in 2015. The increase was due to the increase in
revenues.
Gross profit as a percentage of revenues was approximately 57% and 68% for the nine months ended September
30, 2016 and 2015, respectively. The decrease in gross profit as a percentage is mainly due to the increased percentage of distributor
sales which typically carry a lower gross profit percentage than our direct to consumer sales.
Research and Development Expenses
. For
the nine months ended September 30, 2016 and 2015, research and development expenses were approximately $447,000 and $297,000,
respectively, an increase of approximately 51%, or $150,000, between the periods. This increase was mainly due to an increased
volume of clinical trial costs that took place in 2016 as well as increased development of new products.
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.
Research and development expenses as a percentage
of total revenues were approximately 248% and 275% for the nine months ended September 30, 2016 and 2015, respectively. The decrease
was due primarily to the increase in revenues which was offset by the increased activity described above.
Selling and Marketing Expenses
. For the
nine months ended September 30, 2016 and 2015, selling and marketing expenses were approximately $390,000 and $207,000, respectively,
an increase of approximately 88%, or $183,000, between the periods. The increase was mainly due to an increase in selling and marketing
activities, particularly increased trade show expenses as well as a favorable debt settlement which reduced costs by $75,000 in
2015.
Selling and marketing expenses as a percentage
of total revenues were approximately 217% and 192% for the nine months ended September 30, 2016 and 2015, respectively. The increase
was due primarily to the increase in revenues and the increase in trade show expenses described above.
General and Administrative Expenses
For
the nine months ended September 30, 2016 and 2015, general and administrative expenses were approximately $741,000 and $533,000,
respectively, an increase of approximately 39%, or $208,000, between the periods. The increase was mainly due to the costs and
increased professional fees associated with our becoming a public company.
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.
Financial Expenses net
. For the nine
months ended September 30, 2016 and 2015, financial expenses, net were approximately $209,000 and $1,112,000, respectively, a decrease
of approximately 81%, or $904,000, between the periods. The decrease resulted primarily from the lower 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, 2016 and 2015, tax expenses were $28,000 and $27,000, respectively. The tax expense is computed by multiplying income
before taxes at our Israeli subsidiary by the appropriate tax rate.
Net Loss.
Our net loss decreased by approximately
$392,000, or 18%, to approximately $1,711,000 for the nine months ended September 30, 2016 from approximately $2,103,000 in the
same period of 2015. The increase in net loss resulted primarily from the factors described above.
Three Months Ended September 30, 2016
Compared to Three Months Ended September 30, 2015
Revenues
. For the three months ended
September 30, 2016 and 2015, our revenues were approximately $61,000 and $40,000, respectively, an increase of approximately 53%,
or $21,000, between the periods. The increase was mainly attributable to increased sales from adding distributors as well as having
positive results from our increased marketing campaigns. Our revenues may fluctuate as we add new customers or when existing customers
make large purchases of our products during one period and no purchases during another period. Our revenues may fluctuate from
quarter-to-quarter and, as we continue to grow our business, growth in revenues by quarter may not be linear or consistent.
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, 2015, the percentage of revenues attributable to our products was: PainShield - 98% and UroShield - 2%. For the three months
ended September 30, 2016 and 2015, the percentage of revenues attributable to the disposable units of our PainShield and UroShield
products was 38% and 45%, respectively. For the three months ended September 30, 2016 and 2015, the portion of our revenues that
was derived from distributors was 36% and 32%, respectively.
Gross Profi
t. For the three months ended
September 30, 2016, gross profit increased by approximately 13%, or $4,000, to approximately $34,000 from approximately $30,000
during the same period in 2015. The increase was due to the increase in revenues.
Gross profit
as a percentage of revenues was approximately 56% and 75% for the three months September 30, 2016 and 2015, respectively. The
decrease in gross profit as a percentage is mainly due to the increased percentage of distributor sales which typically carry
a lower gross profit percentage than our direct to consumer sales.
Research and Development Expenses
. For
the three months ended September 30, 2016 and 2015, research and development expenses were approximately $161,000 and $87,000,
respectively, an increase of approximately 85%, or $74,000, between the periods. The decrease in gross profit as a percentage is mainly due to the increased percentage of distributor
sales which typically carry a lower gross profit percentage than our direct to consumer sales.
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.
Research and development expenses as a percentage
of total revenues were approximately 264% and 218% for the three months ended September 30, 2016 and 2015, respectively. The increase
was primarily due to the increase in expenses related to our clinical trials.
Selling and Marketing Expenses
. For the
three months ended September 30, 2016 and 2015, selling and marketing expenses were approximately $119,000 and $73,000, respectively,
an increase of approximately 63%, or $46,000, between the periods. The increase was mainly due to an increase in selling and marketing
activities, particularly increased salaries and marketing expenses.
Selling and marketing expenses as a percentage
of total revenues were approximately 197% and 183% for the three months ended September 30, 2016 and 2015, respectively. The increase
was due primarily to the increase in revenues.
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, 2016 and 2015, general and administrative expenses were approximately $298,000 and $208,000,
respectively, an increase of approximately 43%, or $90,000, between the periods. The increase was mainly due to the costs and increased
professional fees associated with our becoming a public company.
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.
Financial Expenses, net
. For the three
months ended September 30, 2016 and 2015, net were approximately $52,000 and $683,000, respectively, a decrease of approximately
92%, or $631,000, between the periods. The decrease resulted primarily from the 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, 2016 and 2015, tax expenses were $9,000 and $18,000, respectively. The
tax expenses are attributed to our Israel subsidiary.
Net Loss.
Our net loss decreased by approximately
$432,000, or 42%, to approximately $607,000 for the three months ended September 30, 2016 from approximately $1,039,000 in the
same period of 2015. The decrease 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 $1,711,000 during the nine month period ended September
30, 2016, and have accumulated negative cash flow from operating activities of $1,107,000 for the nine month period ended September
30, 2016. We expect to continue to incur losses and negative cash flows from operating activities and as a result, we will not
have sufficient resources to fund our operation for the next twelve months. These conditions raise doubts about our ability to
continue as a going concern. During the next twelve months management expects that the Company will need to raise additional capital
to finance its losses and negative cash flows from operations for the next twelve months and may continue to be dependent on additional
capital raising as long as our products do not reach commercial profitability.
During the nine months ended September 30, 2016,
and through November 14, 2016, we met our short-term liquidity requirements from our existing cash reserves. 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 continue to
use our existing cash reserves use to meet our short-term liquidity requirements as well as to advance our long-term plans. It
is our current belief that if we do not continue to see significant increases in revenues, or if we are unable to raise additional
capital at a later time in the current year, we will need to reduce our operating budget as well as sales and marketing expenses
which may impair our ability to execute our business objectives. It should also be noted that there are no assurances that we would
be able to raise additional capital on terms favorable to us.
Nine months Ended September 30, 2016 Compared
to nine months Ended September 30, 2015
General
. As of September 30, 2016, we
had cash and cash equivalents of approximately $532,000, compared to approximately $1,614,000 as of December 31, 2015. 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
$1,107,000 for the nine months ended September 30, 2016 and $1,100,000 for the same period in 2015.
Cash used in investing activities was $8,000
and $1,000 for the nine month periods ended September 30, 2016 and 2015, respectively, and was related to purchases of fixed assets.
Cash provided by financing activities was approximately
$33,000 for the nine months ended September 30, 2016 derived from proceeds received on the exercise of options and $3,005,000 for
the nine months ended September 30, 2015, which derived from issuance of shares of common stock, series C preferred stock and warrants
to purchase shares of common stock for aggregate consideration of $3,005,000, which is net of issuance costs of $145,000.
Off Balance Sheet Arrangements
As of September 30, 2016, 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.