Item 1A. Risk Factors
There are numerous and varied risks, known
and unknown, that may prevent us from achieving our goals. You should carefully consider the risks described below and the other
information included 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, including the consolidated financial statements and related notes. If any of the following risks, or any other risks
not described below, actually occur, it is likely that our business, financial condition, and/or operating results could be materially
adversely affected. In such case, the trading price and market value of our common stock could decline and you may lose part or
all of your investment in our common stock. The risks and uncertainties described below include forward-looking statements and
our actual results may differ from those discussed in these forward-looking statements.
Risks Related to Our Business
We have a history of losses and we expect to continue
to incur losses and may not achieve or maintain profitability.
For the three months ended March 31, 2017,
we had a net loss of $877,000, with revenues of $52,000. For the fiscal year ended December 31, 2016, we had a net loss of $2,831,000,
with revenues of $229,000. As of March 31, 2017, we had an accumulated deficit of $24,294,000 and a total stockholders’ deficit
of $2,803,000. We expect to incur losses for at least the next year, as we continue to incur expenses related to seeking U.S. Food
and Drug Administration approval for UroShield and WoundShield, and market acceptance of PainShield, which will require costly
clinical trials and research, further product development and professional fees associated with regulatory compliance. Even if
we succeed in commercializing our new products, we may not be able to generate sufficient revenues to cover our expenses and achieve
profitability or be able to maintain profitability.
The report of our independent registered public accounting
firm contains an explanatory paragraph as to our ability to continue as a going concern, which could prevent us from obtaining
new financing on reasonable terms or at all.
Because we have had recurring losses and
negative cash flows from operating activities, substantial doubt exists regarding our ability to remain in operation at the same
level we are currently performing. Further, the report of Kost Forer Gabbay & Kasierer, a member firm of Ernst & Young
Global, our independent registered public accounting firm, with respect to our financial statements at December 31, 2016 and 2015
and for the two years ended December 31, 2016, includes an explanatory paragraph as to our potential inability to continue as a
going concern. This may adversely affect our ability to obtain new financing on reasonable terms or at all.
If we fail to obtain an adequate level of reimbursement
for our approved products by third party payers, there may be no commercially viable markets for our approved products or the markets
may be much smaller than expected.
The availability and levels of reimbursement
by governmental and other third party payers affect the market for our approved products. The efficacy, safety, performance and
cost-effectiveness of our product and product candidates, and of any competing products, will determine the availability and level
of reimbursement. Reimbursement and healthcare payment systems vary significantly by country, and include both government sponsored
healthcare and private insurance. To obtain reimbursement or pricing approval in some countries, we may be required to produce
clinical data, which may involve one or more clinical trials, that compares the cost-effectiveness of our approved products to
other available therapies. We may not obtain reimbursement or pricing approvals in markets we seek to enter in a timely manner,
if at all. Our failure to receive reimbursement or pricing approvals in target markets would negatively impact market acceptance
of our products in these jurisdictions, placing us at a material cost disadvantage to our competitors.
Even if we obtain reimbursement approvals
for our products, we believe that, in the future, reimbursement for any of our products or product candidates may be subject to
increased restrictions both in the United States and in international markets. Future legislation, regulation or policies of third
party payers that limit reimbursement may adversely affect the demand for our products currently under development and our ability
to sell our products on a profitable basis. In addition, third party payers continually attempt to contain or reduce the costs
of healthcare by challenging the prices charged for healthcare products and services.
In the United States, specifically, health
care providers, such as hospitals and clinics, and individual patients, generally rely on third-party payers. Third-party reimbursement
is dependent upon decisions by the Centers for Medicare and Medicaid Services, contracted Medicare carriers or intermediaries,
individual managed care organizations, private insurers, other governmental health programs and other payers of health care costs.
Failure to receive or maintain favorable coding, coverage and reimbursement determinations for our products by these organizations
could discourage medical practitioners from using or prescribing our products due to their costs. In addition, with recent federal
and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will
likely continue to focus on health care reform including the reform of the Medicare and Medicaid programs, and on the cost of medical
products and services, which could limit reimbursement. Additionally, third-party payers are increasingly challenging the prices
charged for medical products and services, and imposing conditions on payment. We may be unable to sell our products on a profitable
basis if third-party payers deny coverage, provide low reimbursement rates or reduce their current levels of reimbursement.
We face the risk of product liability claims and may not
be able to obtain insurance.
Our business exposes us to the risk of product
liability claims that are inherent in the development of medical devices and products. If the use of one or more of our products
harms people, we may be subject to costly and damaging product liability claims brought against us by clinical trial participants,
consumers, health care providers, pharmaceutical companies or others selling our products. We currently carry clinical trial and
product liability insurance for the products we sell. However, we cannot predict all of the possible harms or side effects that
may result and, therefore, the amount of insurance coverage we hold may not be adequate to cover all liabilities we might incur.
We intend to expand our insurance coverage to include the sale of additional commercial products as we obtain marketing approval
for our product candidates in development and as our sales expand, but we may be unable to obtain commercially reasonable product
liability insurance for such products. If we are unable to obtain insurance at an acceptable cost or otherwise protect against
potential product liability claims and we continue to make sales, or if our coverages turns out to be insufficient, we may be exposed
to significant liabilities, which may materially and adversely affect our business and financial position. If we are sued for any
injury allegedly caused by our products and do not have sufficient insurance coverage, our liability could exceed our total assets
and our ability to pay the liability. A product liability claim or series of claims brought against us would decrease our cash
and could reduce our value or marketability.
We could incur substantial costs and disruption to our
business as a result of any dispute related to, or claim of infringement of another party’s intellectual property rights,
which could harm our business and operating results.
In recent years, there has been significant
litigation in the United States over patents and other intellectual property rights. From time to time, we may face allegations
that we or customers who use our products have infringed the trademarks, copyrights, patents and other intellectual property rights
of third parties, including allegations made by our competitors or by non-practicing entities, or that we or our customers have
misappropriated the intellectual property rights of such third parties. We cannot predict whether assertions of third party intellectual
property rights or claims arising from these assertions will substantially harm our business and operating results. If we are forced
to defend any infringement or misappropriation claims or attacks on the validity of our intellectual property rights, whether they
are with or without merit or are ultimately determined in our favor, we may face costly litigation and diversion of technical and
management personnel. Most of our competitors have substantially greater resources than we do and are able to sustain the cost
of complex intellectual property litigation to a greater extent and for longer periods of time than we could. Furthermore, an adverse
outcome of a dispute may require us, among other things: to pay damages, potentially including treble damages and attorneys’
fees, if we are found to have willfully infringed a party’s patent or other intellectual property rights; to cease making,
licensing or using products that are alleged to incorporate or make use of the intellectual property of others; to expend additional
development resources to redesign our products; and to enter into potentially unfavorable royalty or license agreements in order
to obtain the rights to use necessary technologies. Royalty or licensing agreements, if required, may be unavailable on terms acceptable
to us, or at all. In any event, we may need to license intellectual property which would require us to pay royalties or make one-time
payments. Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements,
the time and resources necessary to resolve them could harm our business, operating results, financial condition and reputation.
Risks Related to the Regulation of Our Products
We are subject to extensive governmental regulation, including
the requirement of U.S. Food and Drug Administration approval or clearance, before our product candidates may be marketed.
The process of obtaining U.S. Food and Drug
Administration approval is lengthy, expensive and uncertain, and we cannot be sure that our additional product candidates will
be approved in a timely fashion, or at all. If the U.S. Food and Drug Administration does not approve or clear our product candidates
in a timely fashion, or at all, our business and financial condition would likely be adversely affected.
Both before and after approval or clearance
of our product candidates, we, our product candidates, our suppliers and our contract manufacturers are subject to extensive regulation
by governmental authorities in the United States and other countries. Failure to comply with applicable requirements could result
in, among other things, any of the following actions:
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FDA issuance of Form 483 or Warning Letters, which may be made public and may lead to further regulatory or enforcement actions, or similar letters by other regulatory authorities;
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fines and other monetary penalties;
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unanticipated expenditures;
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delays in U.S. Food and Drug Administration approval and clearance, or U.S. Food and Drug Administration refusal to approve or clear a product candidate;
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product recall or seizure;
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interruption of manufacturing or clinical trials;
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operating restrictions;
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injunction or other restrictions imposed on our operations, including closing our facilities or our contract manufacturers’ facilities; or
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criminal prosecutions.
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In addition to the approval and clearance
requirements, numerous other regulatory requirements apply, both before and after approval or clearance, to us, our products and
product candidates, and our suppliers and contract manufacturers. These include requirements related to the following:
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testing and quality control;
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manufacturing;
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quality assurance
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labeling;
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advertising;
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promotion;
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distribution;
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export;
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reporting to the U.S. Food and Drug Administration certain adverse experiences associated with the use of the products; and
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obtaining additional approvals or clearances for certain modifications to the products or their labeling or claims.
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We are also subject to inspection by the
U.S. Food and Drug Administration to determine our compliance with regulatory requirements, as are our suppliers and contract manufacturers,
and we cannot be sure that the U.S. Food and Drug Administration will not identify compliance issues that may disrupt production
or distribution, or require substantial resources to correct.
The U.S. Food and Drug Administration’s
requirements may change and additional government regulations may be promulgated that could affect us, our product candidates,
and our suppliers and contract manufacturers. We cannot predict the likelihood, nature or extent of government regulation that
may arise from future legislation or administrative action. There can be no assurance that we will not be required to incur significant
costs to comply with such laws and regulations in the future, or that such laws or regulations will not have a material adverse
effect upon our business.
We are uncertain regarding the success of our clinical
trials for our products in development.
We believe that all of our products in development,
which consist of LungShield and RenooSkin, will require clinical trials to determine their safety and efficacy by regulatory bodies
in their target markets, including the U.S. Food and Drug Administration and various foreign regulators. There can be no assurance
that we will be able to successfully complete the U.S. and foreign regulatory approval processes for products in development. In
addition, there can be no assurance that we will not encounter additional problems that will cause us to delay, suspend or terminate
our clinical trials. In addition, we cannot make any assurance that clinical trials will be deemed sufficient in size and scope
to satisfy regulatory approval requirements, or, if completed, will ultimately demonstrate our products to be safe and efficacious.
The adoption of health policy changes and health care
reform in the United States may adversely affect our business and financial results.
On March 23, 2010, President Obama signed
into law major health care reform legislation under the Patient Protection and Affordable Care Act of 2010, commonly referred to
as the Affordable Care Act, which was modified on March 30, 2010, by the enactment of the Health Care and Education Reconciliation
Act of 2010. The Affordable Care Act contains numerous regulations regarding the payment for and provision of health care, including
provisions aimed at improving quality, extending health care coverage to tens of millions of individuals, enhancing remedies for
fraud and abuse, adding transparency requirements and conditions to reimbursement, and decreasing health care costs. The Affordable
Care Act also includes significant provisions that encourage state and federal law enforcement agencies to increase activities
related to preventing, detecting and prosecuting those who commit fraud, waste and abuse in federal healthcare programs, including
Medicare, Medicaid and Tricare. This legislation is one of the most comprehensive and significant reforms ever experienced by the
United States health care industry and has significantly changed the way health care is financed by both governmental and private
insurers. Extending health care coverage to those who previously lacked coverage will likely result in substantial cost to the
United States federal government, which may force additional changes to the health care system in the United States. Much of the
funding for expanded health care coverage may be sought through cost savings. While some of these savings may come from realizing
greater efficiencies in delivering care, improving the effectiveness of preventive care and enhancing the overall quality of care,
much of the cost savings may come from reducing the cost of health care and increased enforcement activities. The cost of health
care could be reduced by decreasing the level of reimbursement for medical services or products (including products we may sell
or market), or by restricting coverage of medical services or products. A reduction in the use of or reimbursement for products
we may sell in the United States could materially adversely affect our business and results of operations.
Some of the provisions of the Affordable
Care Act have not yet been fully implemented and the effect of the legislation is difficult to predict. The Affordable Care Act
continues to be implemented through regulation and government activity, and is subject to possible additional implementing regulations
and interpretive guidelines. Further, the Affordable Care Act has been subject to judicial and Congressional challenges, and legislative
initiatives to modify, limit, or repeal the Affordable Care Act continue. It remains to be seen, however, precisely what new health
care reform legislation will be enacted, if any, and what impact it will have on the availability of health care and containing
or lowering the cost of health care. The manner in which the Affordable Care Act continues to evolve could materially affect the
extent to which and the amount at which health care products and services are reimbursed by government programs such as Medicare,
Medicaid and Tricare. We cannot predict all impacts the Affordable Care Act or other health care reform legislation may have on
our products, but it may result in our products being chosen less frequently or the pricing being substantially lowered.
In addition, other health care reform proposals
have emerged at the federal and state levels, including those aimed at reducing health care costs and increasing transparency.
We cannot predict the effect these newly enacted laws or any future legislation or regulation will have on us. However, the implementation
of new legislation and regulation may lower reimbursements for our products, increase our compliance and other costs, and adversely
affect our business.
We cannot predict what additional healthcare
reform initiatives may be adopted in the future or how federal and state legislative and regulatory developments are likely to
evolve, but we expect ongoing initiatives in the United States to increase pressure on pricing for health care products and services.
Such reforms could have an adverse effect on the pricing and market for our products.
If we fail to comply with the U.S. federal and state fraud
and abuse and other health care laws and regulations, we could be subject to criminal and civil penalties and exclusion from the
Medicare and Medicaid programs, which would have a material adverse effect on our business and results of operations.
All of our financial relationships with
health care providers and others who provide products or services to federal health care program beneficiaries are potentially
governed by the federal and state fraud and abuse laws, and other health care laws and regulations may be or become applicable
to our business and operations and expose us to risk. For example:
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The
federal Anti-Kickback Statute, which prohibits the offer, payment, solicitation or receipt of any form of remuneration in return
for referring, ordering, leasing, purchasing or arranging for, or recommending the ordering, purchasing or leasing of, items or
services payable by Medicare, Medicaid or any other federal health care program.
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Federal
false claims laws and civil monetary penalty laws, including the False Claims Act, that prohibit, among other things, individuals
or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other government
health care programs that are false or fraudulent, or making a false statement to avoid, decrease or conceal an obligation to pay
money to the federal government.
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The
federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits knowingly and willfully executing,
or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses,
representations, or promises, any of the money or property owned by, or under the custody or control of, any health care benefit
program, and for knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statements
in connection with the delivery of or payment for health care benefits, items or services.
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HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, and its implementing regulations,
which also impose obligations and requirements on health care providers, health plans, and healthcare clearinghouses as well as
their respective business associates that perform certain services for them that involve the use or disclosure of individually
identifiable health information, with respect to safeguarding the privacy and security of certain individually identifiable health
information.
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The
federal transparency requirements under the Affordable Care Act, including the provision commonly referred to as the Physician
Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable
under Medicare, Medicaid or Children’s Health Insurance Program to report annually to Centers for Medicare and Medicaid Services,
or CMS, information related to payments and other transfers of value to physicians and teaching hospitals, and ownership and investment
interests held by physicians and their immediate family members.
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Analogous
state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may be broader in scope and apply
to referrals and items or services reimbursed by both governmental and non-governmental third-party payers, including private insurers,
many of which differ from each other in significant ways and often are not preempted by federal law, thus complicating compliance
efforts.
Because of the breadth of these laws and
the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could
be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these
laws. Efforts to ensure that our business arrangements with third parties and our operations are compliant with applicable health
care laws and regulations will involve the expenditure of appropriate, and possibly significant, resources. If we are found to
be in violation of any current or future statutes or regulations involving applicable fraud and abuse or other health care laws
and regulations, we may be subject to significant civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment,
exclusion from government funded health care programs, such as Medicare and Medicaid, contractual damages, reputational harm, diminished
profits and future earnings, which could have a material adverse effect on our business, results of operations and financial condition.
If any physicians or other health care providers or entities with whom we expect to do business are found to not be in compliance
with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government
funded health care programs, which could adversely affect our ability to operate our business and our results of operations.
Risks Related to our Operations in Israel
We conduct our operations in Israel and therefore our
results may be adversely affected by political, economic and military instability in Israel and its region.
Our principal offices and manufacturing
facilities are located in Israel and most of our officers and employees are residents of Israel. Accordingly, political, economic
and military conditions in Israel and the surrounding region may directly affect our business. Since the establishment of the State
of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. Any hostilities involving
Israel or the interruption or curtailment of trade within Israel or between Israel and its trading partners could adversely affect
our operations and results of operations and could make it more difficult for us to raise capital. During the summer of 2014, Israel
was engaged in an armed conflict with Hamas in Gaza, which involved missile strikes against civilian targets in various parts of
Israel and negatively affected business conditions in Israel. In addition, recent political uprisings and conflicts in various
countries in the Middle East, including Egypt and Syria, are affecting the political stability of those countries. It is not clear
how this instability will develop and how it will affect the political and security situation in the Middle East. This instability
has raised concerns regarding security in the region and the potential for armed conflict. In addition, it is widely believed that
Iran, which has previously threatened to attack Israel, has been stepping up its efforts to achieve nuclear capability. Iran is
also believed to have a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon.
Additionally, the Islamic State of Iraq and Levant (“ISIL”), a violent jihadist group, is involved in hostilities in
Iraq and Syria. Although ISIL’s activities have not directly affected the political and economic conditions in Israel, ISIL’s
stated purpose is to take control of the Middle East, including Israel. The tension between Israel and Iran and/or these groups
may escalate in the future and turn violent, which could affect the Israeli economy in general and us in particular. Any armed
conflicts, terrorist activities or political instability in the region could adversely affect business conditions and could harm
our results of operations. For example, any major escalation in hostilities in the region could result in a portion of our employees
being called up to perform military duty for an extended period of time. Parties with whom we do business have sometimes declined
to travel to Israel during periods of heightened unrest or tension, forcing us to make alternative arrangements when necessary.
In addition, the political and security situation in Israel may result in parties with whom we have agreements involving performance
in Israel claiming that they are not obligated to perform their commitments under those agreements pursuant to force majeure provisions
in such agreements.
Our commercial insurance does not cover
losses that may occur as a result of events associated with the security situation in the Middle East. Although the Israeli government
currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure
you that this government coverage will be maintained. Any losses or damages incurred by us could have a material adverse effect
on our business. Any armed conflicts or political instability in the region would likely negatively affect business conditions
and could harm our results of operations.
Further, in the past, the State of Israel
and Israeli companies have been subjected to an economic boycott. Several countries still restrict business and trade activity
with the State of Israel and with Israeli companies. These restrictive laws and policies may have an adverse impact on our operating
results, financial condition or the expansion of our business.
Because a certain portion of our expenses is incurred
in currencies other than the U.S. dollar, our results of operations may be harmed by currency fluctuations and inflation.
We expect our revenues from future licensing
agreements to be denominated mainly in U.S. dollars or in Euros. We pay a substantial portion of our expenses in U.S. dollars;
however, a portion of our expenses, related to salaries of the employees in Israel and payment to part of the service providers
in Israel and other territories, are paid in New Israeli Shekels, or NIS, and in other currencies. In addition, a portion of our
financial assets is held in NIS and in other currencies. As a result, we are exposed to the currency fluctuation risks, and we
do not attempt to hedge against such risks. For example, if the NIS strengthens against the U.S. dollar, our reported expenses
in U.S. dollars may be higher than anticipated. In addition, if the NIS weakens against the U.S. dollar, the U.S. dollar value
of our financial assets held in NIS will decline.
Risks Related to Our Organization, and Our Securities
We are currently controlled by our executive officers,
directors and principal stockholders, and our executive officers, directors and principal stockholders have significant influence
regarding all matters submitted to our stockholders for approval.
As of March 31, 2017, our directors, executive
officers and 5% or greater stockholders and their respective affiliates beneficially owned in the aggregate approximately 62.6%
of our voting capital stock. Upon the closing of this offering, our directors, executive officers and 5% or greater stockholders
and their respective affiliates will beneficially own in the aggregate approximately % of our outstanding shares of common stock.
As a result, if these stockholders were to choose to act together, they would be able to exercise significant influence with respect
to all matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if
they choose to act together, will exercise significant influence with respect to the election of directors and approval of any
merger, consolidation, sale of all or substantially all of our assets or other business combination or reorganization. This concentration
of voting power could delay or prevent an acquisition of us on terms that other stockholders may desire. The interests of this
group of stockholders may not always coincide with your interests or the interests of other stockholders, and they may act in a
manner that advances their best interests and not necessarily those of other stockholders, and might affect the prevailing market
price for our securities.
You may experience additional dilution as a result of
future equity offerings.
In order to raise additional capital, we
have issued equity securities in the past and may in the future offer additional shares of our common stock or other securities
convertible into or exchangeable for our common stock at prices that may not be the same as the price per unit in this offering.
The price per share at which we sell additional shares of our common stock, or securities convertible or exchangeable into common
stock, in future transactions may be lower than the price per share paid by investors in this offering.
In addition, we may be required to issue
additional shares of common stock to the holders of certain warrants to purchase an aggregate of 563,910 shares of common stock,
upon exercise of such warrants, pursuant to a full ratchet anti-dilution price protection in such warrants, if, prior to the expiration
of these warrants, we issue equity or equity-linked securities at an effective common stock purchase price of less than the applicable
exercise price then in effect. Such issuance of additional shares of common stock will be dilutive to all of our stockholders,
including new investors in this offering.
We have a significant number of outstanding convertible
notes, warrants and options, and future sales of our common stock upon conversion of these convertible notes or upon exercise of
these options or warrants, or the perception that future sales may occur, may cause the market price of our common stock to decline,
even if our business is doing well.
Sales of a significant number of shares
of our common stock in the public market could harm the market price of our common stock and make it more difficult for us to raise
funds through future offerings of common stock. Our stockholders and the holders of our outstanding convertible notes, warrants
and options, upon conversion of these convertible notes or upon exercise of these options or warrants, may sell substantial amounts
of our common stock in the public market. The availability of these shares of our common stock for resale in the public market
has the potential to cause the supply of our common stock to exceed investor demand, thereby decreasing the price of our common
stock.
In addition, the fact that our stockholders
and holders of our outstanding convertible notes, warrants and options can sell substantial amounts of our common stock in the
public market, whether or not sales have occurred or are occurring, could make it more difficult for us to raise additional financing
through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
There has been a limited market for our common stock and
we cannot ensure investors that an active market for our common stock will be sustained.
There has been limited trading in our common
stock and there can be no assurance that an active trading market in our common stock will be maintained. Due to the illiquidity,
the market price may not accurately reflect our relative value. If our common stock is thinly traded, a large block of shares traded
can lead to a dramatic fluctuation in the share price and investors may not be able to liquidate their investment in us at all
or at a price that reflects the value of the business.
In addition, our common stock currently
trades on the OTCQB over-the-counter marketplace, which generally lacks the liquidity, research coverage and institutional investor
following of a national securities exchange like the NYSE MKT, the New York Stock Exchange or the NASDAQ Capital Market. While
we have applied to list our common stock on The NASDAQ Capital Market, there can be no assurance that trading of our common stock
on such market will be sustained or desirable.
Complying with the laws and regulations affecting public
companies has increased and will increase our costs and the demands on management and could harm our operating results.
As a public company, we will continue to
incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with
public company reporting requirements. We also anticipate that we will incur costs associated with relatively recently adopted
corporate governance requirements, including requirements of the Securities Exchange Commission and the NASDAQ Stock Market. We
expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming
and costly. We also expect that these rules and regulations may make it more difficult and more expensive for us to obtain director
and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher
costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals
to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect
to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
For example, the Sarbanes-Oxley Act requires,
among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness
of our disclosure controls and procedures quarterly. Section 404 of the Sarbanes-Oxley Act (“Section 404”) requires
us to perform system and process evaluation and testing of our internal control over financial reporting to allow management to
report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control
over financial reporting. Our compliance with applicable provisions of Section 404, including the requirement that our independent
registered public accounting firm undertake an assessment of our internal control over financial reporting, will require that we
incur substantial accounting expense and expend significant management time on compliance-related issues as we implement additional
corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements
of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies
in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could
decline and we could be subject to sanctions or investigations by the Securities Exchange Commission or other regulatory authorities,
which would require additional financial and management resources. Furthermore, investor perceptions of our company may suffer
if deficiencies are found, and this could cause a decline in the market price of our stock. Irrespective of compliance with Section
404, any failure of our internal control over financial reporting could have a material adverse effect on our stated operating
results and harm our reputation. If we are unable to implement these requirements effectively or efficiently, it could harm our
operations, financial reporting, or financial results and could result in an adverse opinion on our internal control over financial
reporting from our independent registered public accounting firm.
If we fail to maintain effective internal control over
financial reporting, the market price of our securities may be adversely affected.
As a public reporting company, we are required
to establish and maintain effective internal control over financial reporting. Failure to establish such internal control, or any
failure of such internal control once established, could adversely impact our public disclosures regarding our business, financial
condition or results of operations. Any failure of our internal control over financial reporting could also prevent us from maintaining
accurate accounting records and discovering accounting errors and financial frauds.
Rules adopted by the Securities and Exchange
Commission pursuant to Section 404 require annual assessment of our internal control over financial reporting. The standards that
must be met for management to assess the internal control over financial reporting as effective are complex, and require significant
documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing
activities necessary to make an assessment of our internal control over financial reporting. If we cannot assess our internal control
over financial reporting as effective, investor confidence and share value may be negatively impacted. In addition, management’s
assessment of internal control over financial reporting may identify weaknesses and conditions that need to be addressed in our
internal control over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses
and conditions that need to be addressed in our internal control over financial reporting (including those weaknesses identified
in our periodic reports), or disclosure of management’s assessment of our internal control over financial reporting may have
an adverse impact on the price of our securities.
We may be subject to ongoing restrictions related to grants
from the Israeli Office of the Chief Scientist.
Through our Israeli subsidiary, as of March
31, 2017, we received grants of $492,000 from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and
Labor, or the Office of the Chief Scientist, for research and development programs related to products that we are not currently
commercializing or marketing. Because we are no longer developing the product to which the grants relate, we do not believe that
we are subject to any material conditions with respect to the grants, except for the restrictions on our ability to make certain
transfers of the technology or intellectual property related to these grants described below. We could in the future determine
to apply for further grants. If we receive any such grants, we would have to comply with specified conditions, including paying
royalties with respect to grants received. If we fail to comply with these conditions in the future, sanctions might be imposed
on us, such as grants could be cancelled and we could be required to refund any payments previously received under these programs.
Pursuant to the Israeli Encouragement of
Industrial Research and Development Law, any products developed with grants from the Office of the Chief Scientist are required
to be manufactured in Israel and certain payments may be required in connection with the change of control of the grant recipient
and the financing, mortgaging, production, exportation, licensing and transfer or sale of its technology and intellectual property
to third parties, which will require the Office of the Chief Scientist’s prior consent and, in case such a third party is
outside of Israel, extended royalties and/or other fees. This could have a material adverse effect on and significant cash flow
consequences to us if, and when, any technologies, intellectual property or manufacturing rights are exported, transferred or licensed
to third parties outside Israel. If the Office of the Chief Scientist does not wish to give its consent in any required situation
or transaction, we would need to negotiate a resolution with the Office of the Chief Scientist. In any event, such a transaction,
assuming it was approved by the Office of the Chief Scientist, would involve monetary payments, such as royalties or fees, of not
less than the applicable funding received from the Office of the Chief Scientist plus interest, not to exceed, in aggregate, six
times the applicable funding received from the Office of the Chief Scientist.