NOTE
8 - SUBSEQUENT EVENTS
On
April 9, 2020, pursuant to a licensing agreement entered into in March 2020, the Company received 10 year warrants to purchase
127,000 shares of Sanuwave Health, Inc. at a price of $0.19 per share.
On
May 20, 2020, the Company granted 15,000 options to purchase common stock of the Company to a consultant at $1.86 per share in
exchange for services. The options vest in tranches over 12 months and expire in 10 years.
In June 2020, the Company experienced a cybersecurity incident.
Specifically, the Company believes that unauthorized third parties were able to use an email domain similar to the Company’s
to convince two of the Company’s customers to send payments in the aggregate amount of approximately $308 to unauthorized
bank accounts that should have been sent to the Company. One of the customers has informed the Company that they successfully reclaimed
$78 of the fraudulent transfers and deposited such amount into the Company’s account on June 22, 2020. The remaining balance
of $230 is still owed and the Company still expects to collect. The expected loss on this breach, if any, cannot be reasonably
determined at this time.
The Company’s management has launched an investigation into
the incident and have notified the appropriate government authorities. The Company currently does not maintain an insurance related
to cybersecurity breaches. The Company is exploring a range of steps to enhance its security protections and prevent future unauthorized
activity. The Company is in discussions and is contemplating retaining a cybersecurity investigation firm to fully access the incident
and take additional remedial measures. As a result of discovering this breach, the Company is implementing internal control policies
such as changing passwords on a regular basis and customers who send wires will confirm with a phone call before sending. We have
not incurred, nor do we expect to incur significant costs related to investigating this incident.
On
June 22, 2020, we completed a bridge financing, pursuant to which we received from Globis Capital Partners LP, a loan in an aggregate
principal amount of $200,000, maturing in one year with interest accruing at 10% per annum, and 2020 Warrants to purchase an aggregate
of 100,000 shares of common stock at an initial exercise price of $2.50 per share, subject to adjustment, and were immediately
exercisable.
The
principal amount and all accrued but unpaid interest on the Note are due and payable on the date (the “Payment Date”)
that is the earlier of (i) June 22, 2021 or (ii) the date on which all amounts under the Note shall become due and payable in
the event of default. The Note bears interest at a rate of 10% per annum, payable on the Payment Date or the earlier payment in
full of the Note.
The
Warrant is exercisable at any time or times after the six month anniversary of the date of issuance, but not after its expiration.
The exercise price of the Warrant is adjustable for certain events, such as distribution of stock dividends, stock splits or fundamental
transactions including mergers or sales of assets. The holder of the Warrant will not have the right to exercise any portion of
the Warrant if the holder (together with its affiliates) would beneficially own in excess of 9.99% of the number of shares of
the Company’s common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is
determined in accordance with the terms of the Warrant. In no event will the number of shares to be issued upon (A) exercise of
the Warrant and (B) conversion of the Note exceed, in the aggregate, 9.99% of the total shares of the Company’s common stock
outstanding on the date immediately preceding the date of issuance.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of the results of operations and financial condition of NanoVibronix. (the “Company”)
as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 should be read in conjunction with our financial statements
and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. This discussion
and analysis should be read in conjunction with the Company’s audited financial statements and related disclosures as of
December 31, 2019 and for the year then ended, which are included in the Form 10-K filed with the Securities and Exchange Commission
(“SEC”) on May 20, 2020. References in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company. This
Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking.
These statements are based on current expectations and assumptions that are subject to risk, uncertainties and other factors.
These statements are often identified by the use of words such as “may,” “will,” “expect,”
“believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,”
and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk
Factors” elsewhere in this Quarterly Report, in our other reports filed with the SEC, and other factors that we may not
know.
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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Our
ability to continue as a going concern.
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The
delisting of our common stock from the NASDAQ Capital Market.
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The
geographic, social and economic impact of COVID-19 on the Company’s business operations.
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The
timing of clinical studies and eventual U.S. Food and Drug Administration approval of 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
ability to regain compliance with the continued listing requirements of the Nasdaq Capital Market and the risk that our common
stock will be delisted if we cannot do so.
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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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The
impact of cybersecurity risks and incidents and the related actual or potential costs
and consequences of such risks and incidents, including costs to limit such risks.
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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, 2019, 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 Quarterly Report on Form 10-Q. 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.
Implications
of being an Emerging Growth Company
We
are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, or the Securities Act,
as modified by the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. As such, we are eligible to take advantage of
certain exemptions from various reporting requirements applicable to other public companies that are not “emerging growth
companies” including, but not limited to:
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being
permitted to present only two years of audited financial statements and only two years of related disclosure in “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q;
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being
permitted to provide less extensive narrative disclosure than other public companies including not being required to comply
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and reduced disclosure obligations
regarding executive compensation in our periodic reports, proxy statements and registration statements;
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being
permitted to utilize exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and
stockholder approval of any golden parachute payments not previously approved;
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being
permitted to defer complying with certain changes in accounting standards; and
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being
permitted to use test-the-waters communications with qualified institutional buyers and institutional accredited investors.
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We
intend to take advantage of these and other exemptions available to “emerging growth companies.” We could remain an
“emerging growth company” until the earliest of (a) the last day of the fiscal year following the fifth anniversary
of the date of the first sale of common stock in an offering registered under the Securities Act of 1933, as amended, (b) the
last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (c) the last day of our fiscal year
in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act
of 1934, or Exchange Act (which would occur if the market value of our equity securities that is held by non-affiliates exceeds
$700 million as of the last business day of our most recently completed second fiscal quarter), or (d) the date on which we have
issued more than $1 billion in nonconvertible debt during the preceding three-year period.
The
JOBS Act permits an “emerging growth company” like us to take advantage of an extended transition period to comply
with new or revised accounting standards applicable to public companies. This means that an “emerging growth company”
can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have
elected to delay such adoption of new or revised accounting standards.
Recent
Events and Developments
In
December 2019, a strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China, and has reached
multiple other countries, resulting in government-imposed quarantines, travel restrictions and other public health safety measures
in China and other affected countries. The continued outbreak and spreading of COVID-19 has and may continue to adversely impact
our business, as our operations are based in and rely on third parties located in countries affected by the outbreak. Our third-party
manufacturer, which is based in China, temporarily shut down for sixty days due to the outbreak and only recently became fully
operational in April 2020 which lead to a significant delay in the production of goods needed to fulfill our sales orders. Additionally,
the notified regulatory body we rely on to obtain European CE approval is located in Italy and has been shut down for over a month,
which delayed our submission for CE mark approval for the year 2020. The CE Mark was subsequently approved in April 2020. The
various precautionary measures taken by many governmental authorities around the world in order to limit the spread of COVID-19
has had and may continue to have an adverse effect on the global markets and global economy, including on the availability and
pricing of employees, resources, materials, manufacturing and delivery efforts and other aspects of the global economy. The financial
downturn has compelled us to furlough or reduce working hours for much of our operating staff, and has forced remaining staff
as well as third-party contractors, and our clients may encounter cash-flow issues that will delay their payments to us. In addition,
remaining staff members have been forced to operate remotely from their homes resulting in delays in obtaining certain financial
records. We also rely on third-party professionals to provide services such as the preparation of our financial statements and
to conduct audits, and many of these parties have been affected by government-imposed precautionary measures, thereby delaying
our receipt of these services. Therefore, COVID-19has and could continue to disrupt production and cause delays in the supply
and delivery of our products, may continue to affect our operation, may further divert the attention and efforts of the medical
community to coping with COVID-19 and disrupt the marketplace in which we operate and may have a material adverse effect on our
operations. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and
cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain
COVID-19 or treat its impact, among others. The development of COVID-19 outbreak could materially disrupt our business and operations,
hamper our ability to raise additional funds or sell or securities, continue to slow down the overall economy, curtail consumer
spending, interrupt our sources of supply, and make it hard to adequately staff our operations
Effective
as of January 2020, the U.S. CMS has approved our PainShield™ for reimbursement for Medicare beneficiaries on a national
basis. We were notified on March 30, 2020 that our Medicare Enrollment Application was approved,
and we are now an approved Medicare Supplier for DME through the National Supplier Clearinghouse, Palmetto-GBA as well as Noridian
Administrative Services, LLC, the two Medicare Administrative Contractors that handle DME reimbursement nationwide. PainShield
is currently available for Medicare reimbursement on a national level under new HCPCS (Healthcare Common Procedure Coding System)
code K1004, as discussed above.
In
March 2020, we signed a license agreement with Sanuwave Health, Inc. for the manufacture and delivery of our WoundShield technology.
Under the terms of the agreement, we will receive warrants to purchase 127,000 shares of Sanuwave stock, a $250,000 milestone
payment based on receipt of U.S. Food and Drug Administration approval, and 10% royalty on Sanuwave’s gross revenues from
sales or rentals of WoundShield. In return, Sanuwave has received the worldwide, exclusive rights to our WoundShield product and
technology. In addition, Sanuwave will bear the costs and clinical validation responsibilities associated with obtaining approval
for WoundShield from the U.S. Food and Drug Administration and other regulatory agencies around the world, as discussed above.
In June 2020, the Company experienced a cybersecurity
incident. Specifically, the Company believes that one or two unauthorized third parties were able to use an email domain similar
to the Company’s to convince two of the Company’s customers to send payments in the aggregate amount of approximately
$308,000 to unauthorized bank accounts that should have been sent to the Company. One of the customers has informed the
Company that they successfully reclaimed $78,000 of the fraudulent transfers and deposited such amount into the Company’s
account on June 22, 2020. The remaining balance of $230 is still owed and the Company still expects to collect. The expected
loss on this breach, if any, cannot be reasonably determined at this time.
The Company’s management has launched
an investigation into the incident and have notified the appropriate government authorities. The Company currently does not maintain
an insurance related to cybersecurity breaches. The Company is exploring a range of steps to enhance its security protections
and prevent future unauthorized activity. The Company is in discussions and is contemplating retaining a cybersecurity
investigation firm to fully access the incident and take additional remedial measures. We have not incurred, nor do we expect
to incur significant costs related to investigating this incident.
On
June 22, 2020, the Company issued and sold to an accredited investor a promissory note (the “Note”) in the principal
amount of $200,000 and a seven-year warrant (the “Warrant”) to purchase 100,000 shares of the Company’s common
stock. The exercise price for each Warrant share is equal to $2.50, and the Warrant may also be exercised, in whole or in part,
by means of a cashless exercise.
Critical
Accounting Policies
A
critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation
and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Our critical accounting policies are more fully described in both (i)
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (ii) Note
3 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2019. There have not been any material changes to such critical accounting policies since December 31, 2019.
The
currency of the primary economic environment in which our operations are conducted is the U.S. dollar (“$” or “dollar”).
Accordingly, our functional currency is the dollar.
Results
of Operations
Three
Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Revenues.
For the three months ended March 31, 2020 and 2019, our revenues were approximately $114,000 and $79,000 respectively, an increase
of approximately 44%, or $35,000 between the periods. 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. Therefore, any growth
or decrease in revenues by quarter may not be linear or consistent.
For
the three months ended March 31, 2020, the percentage of revenues attributable to our products was: PainShield - 100% and UroShield
0%. For the three months ended March 31, 2019, the percentage of revenues attributable to our products was: PainShield - 91% and
UroShield - 9%. For the three months ended March 31, 2020 and 2019, the percentage of revenues attributable to our disposable
products was 5% and 7%, respectively. For the three months ended March 31, 2020 and 2019, the portion of our revenues that was
derived from distributors was 99% and 82%, respectively.
Gross
Profit. For the three months ended March 31, 2020 and 2019, gross profit was approximately $51,000 and $53,000, respectively,
a decrease of approximately 3% or $2,000, mainly due to sales of devices and patches from a discontinued model of PainShield at
reduced margins as well as the increased percentage of sales of our products to distributors.
Gross
profit as a percentage of revenues was approximately 45% and 67% for the three months ended March 31, 2020 and 2019, respectively.
The decrease in gross profit as a percentage is mainly due to the reason described above.
Research
and Development Expenses. For the three months ended March 31, 2020 and 2019, research and development expenses were approximately
$47,000 and $152,000, respectively between the periods. The decrease was mainly due to there being no clinical trials during the
three months ended March 31, 2020 as well as the furloughing of our staff members in March 2020 due to the impacts of the COVID-19
pandemic.
Research
and development expenses as a percentage of total revenues were approximately 42% and 192% for the three months ended March 30,
2020 and 2019, respectively.
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 March 31, 2020 and 2019, selling and marketing expenses were approximately
$254,000 and $321,000, respectively, a decrease of approximately 21%, or $67,000, between the periods. The decrease was primarily
due to a significant reduction in sales and marketing activities including related traveling or conventions attended during the
first quarter of 2020 due to COVID-19.
Selling
and marketing expenses as a percentage of total revenues were approximately 223% and 406% for the three months ended March 31,
2020 and 2019, respectively.
Selling
and marketing expenses consist mainly of payroll expenses to direct sales and marketing employees, stock-based compensation expenses,
travel expenses, conventions, 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 March 31, 2020 and 2019, general and administrative expenses were
approximately $657,000 and $1,803,000, respectively, a decrease of approximately 64%, or $1,146,000, between the periods. The
decrease was primarily due to the general and administrative portion of stock-based compensation expense of approximately $1,324,000
in 2019 compared to $60,000 in 2020.
General
and administrative expenses as a percentage of total revenues were approximately 576% and 2,282% for the three months ended March
31, 2020 and 2019, respectively.
Our
general and administrative expenses consist mainly of payroll expenses for management and administrative employees, stock-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 March 31, 2020 and 2019, financial expenses, net was approximately $5,000 compared
to a $32,000, respectively, a decrease of approximately $27,000, between the periods. The increase in 2019 was derived primarily
from exchange rate adjustments and changes in fair value of derivative liabilities and warrants.
Warrant
modification expense. For the three months ended March 31, 2020 and 2019, warrant modification expense was approximately $0
and $412,000, respectively. The warrant modification expense in 2019 was related to an amendment to warrants that extended the
expiration date by two years.
Tax
expenses. For the three months ended March 31, 2020 and 2019, tax expenses were $9,000 and $12,000. 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 $1,758,000, or 66%, to approximately $921,000 for the three months ended March
31, 2020 from approximately $2,679,000 in the same period of 2019. The decrease in net loss resulted primarily from the factors
described above.
Liquidity
and Capital Resources
We
incurred losses in the amount of approximately $921,000 during the three-month period ended March 31, 2020 and accumulated negative
cash flow from operating activities of $895,000 for the three-month period ended March 31, 2020. On June 22, 2020, the Company
issued and sold to an accredited investor a promissory note in the principal amount of $200,000 and a seven-year warrant to purchase
100,000 shares of the Company’s common stock.
We
expect to continue to incur losses and negative cash flows from operating activities and as a result. Without additional funding,
we will not have sufficient resources to fund its operations for the next twelve months from the date of this filing. These conditions
raise substantial doubt about our ability to continue as a going concern.
During
the next twelve months management expects that we will need to raise additional capital to finance its losses and negative cash
flows from operations and may continue to be dependent on additional capital raising as long as its products do not reach commercial
profitability. 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 have been relying on past financing activities to meet our short-term liquidity requirements but may need to
sell additional securities to advance our long-term plans. We have historically met our cash needs through a combination of issuance
of equity, borrowing activities and sales.
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 next twelve months, we may need to reduce our operating budget as well as sales and marketing expenses
which may impair our ability to execute our business objectives. However, we may be unable to raise sufficient additional capital
when we require it or upon terms favorable to us. Delisting from NASDAQ Capital Markets would adversely affect our ability to
raise additional financing through the public or private sale of equity securities, would significantly affect the ability of
investors to trade our securities and would negatively affect the value and liquidity of our Common Stock. In addition, the terms
of any securities we issue in future financings may be more favorable to new investors and may include preferences, superior voting
rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect on the holders of
any of our securities then outstanding. If we are unable to obtain adequate funds on reasonable terms, we may need to curtail
operations significantly, or enter into financing agreements with unattractive terms in order to provide sufficient working capital
for our operations.
Furthermore,
the COVID-19 pandemic has created significant economic uncertainty and volatility in the credit and capital markets. A continuation
or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability
to access capital, on our business, results of operations and financial condition, and on the market price of our common stock.
We
do not have any material commitments to capital expenditures as of March 31, 2020, and we are not aware of any material trends
in capital resources that would impact our business.
Cash
flows
General.
As of March 31, 2020, we had cash and cash equivalents of approximately $443,000, compared to approximately $1,338,000 as of March
31, 2019. The decrease is due to lack of financing activities in the first quarter of 2020. 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 $895,000 for the three months ended March 31, 2020 and $937,000 for the same
period in 2019.
Cash
provided by financing activities was approximately $0 for the three months ended March 31, 2020 compared to $225,000 for the three
months ended March 31, 2019.
Off
Balance Sheet Arrangements
Except
as disclosed, as of March 31, 2020, 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 as well issues
that may continue to occur due to the development of the coronavirus outbreak. While there were significant delays in the production
of goods due to COVID-19 issues, presently, we are no longer experiencing such delays in the production of our products. That
said, there are no assurances that if a second wave of the pandemic occurs that we will not experience significant delays in the
future. 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.