NOTE
2 - LIQUIDITY AND PLAN OF OPERATIONS
The
Company’s ability to continue to operate is dependent mainly on its ability to successfully market and sell its products
and the receipt of additional financing until profitability is achieved. The Company currently incurs and historically has incurred
losses from operations and expects to do so in the foreseeable future. In 2020, the Company raised $4,223 of net proceeds from
the sale of common stock in underwritten public offerings, received $200 through the issuance of notes payable from a related
party and received $42 from the Paycheck Protection Program. Despite the recent financing, the Company may 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 the Company’s ability to continue as a going concern. During the next twelve months management expects that the Company
may 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.
Management’s
plans include the continued commercialization of the Company’s products and raising capital through the sale of additional
equity securities, debt or capital inflows from strategic partnerships. There are no assurances, however, that the Company will
be successful in obtaining the level of financing needed for its operations. If the Company is unsuccessful in commercializing
its products and raising capital, it will need to reduce activities, curtail or cease operations. The financial statements do
not include any adjustments with respect to the carrying amounts of assets and liabilities and their classification that might
be necessary should the Company be unable to continue as a going concern.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation and principles of consolidation
The
Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) for the interim financial information and with instructions
to Form 10-Q and Article 10 of Regulation S-X. The unaudited consolidated financial statements include the accounts of all subsidiaries
in which the Company holds a controlling financial interest as of the financial statement date.
The
unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The terms “we,”
“us,” “our,” and the “Company” refer to NanoVibronix, Inc. and its wholly owned subsidiary.
All intercompany accounts and transactions have been eliminated in consolidation.
Unaudited
interim financial information
In
the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, which
include only normal recurring adjustments, necessary to state fairly the financial position and results of operations of the Company.
These consolidated financial statements and notes thereto are unaudited and should be read in conjunction with the Company’s
audited financial statements for the year ended December 31,2019, as found in the Company’s Annual Report on Form 10-K filed
with the Securities and Exchange Commission (the “SEC”) on May 20, 2020.
The
balance sheet for December 31, 2019 was derived from the Company’s audited financial statements for the year ended December
31, 2019. The results of operations for the periods presented are not necessarily indicative of results that could be expected
for the entire fiscal year due to seasonality and other factors. Certain information and footnote disclosures normally included
in the consolidated financial statements in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations
of the SEC for interim reporting.
Use
of estimates
The
preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments
and assumptions. The Company believe that the estimates, judgments and assumptions used are reasonable based upon information
available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Cash
and cash equivalents
Cash
consists of funds on hand and held in bank accounts. Cash equivalents includes demand deposits placed with banks or other financial
institutions and all highly liquid investments with original maturities of three months or less.
Restricted
cash
Restricted
cash of $350 represents cash restricted per a court order which resulted from a dispute between the Company and a former officer
and director, see Note 9.
Foreign
currency translation and transaction
Non-U.S.
dollar denominated transactions and balances have been re-measured to U.S. dollars. All transaction gains and losses from re-measurement
of monetary balance sheet items denominated in non-U.S. dollar currencies are reflected in the statements of operations as financial
income or expenses, as appropriate. Gains and losses from foreign currency translation for the nine months ended September 30,
2020 and 2019 were $8 and $40, respectively.
Revenue
recognition
It
is the Company’s policy that revenues from product sales is recognized in accordance with ASC 606 “Revenue Recognition.”
Five basic steps must be followed before revenue can be recognized; (1) Identifying the contract(s) with a customer that creates
enforceable rights and obligations; (2) Identifying the performance obligations in the contract, such as promising to transfer
goods or services to a customer; (3) Determining the transaction price, meaning the amount of consideration in a contract to which
an entity expects to be entitled in exchange for transferring promised goods or services to a customer; (4) Allocating the transaction
price to the performance obligations in the contract, which requires the company to allocate the transaction price to each performance
obligation on the basis of the relative standalone selling prices of each distinct good or services promised in the contract;
and (5) Recognizing revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service
to a customer. The amount of revenue recognized is the amount allocated to the satisfied performance obligation.
Revenue
from product sales is recorded at the net sales price, or “transaction price,” which includes estimates of variable
consideration that result from discounts, chargebacks and distributor fees, processing fees, as well as allowances for returns
and government rebates. The Company constrains revenue by giving consideration to factors that could otherwise lead to a probable
reversal of revenue. Collectability of revenue is reasonably assured based on historical evidence of collectability between the
Company and its customers. See Note 7 for a detailed breakout of revenue.
Revenues
from sales to distributors are recognized at the time the products are delivered to the distributors. The Company does not grant
rights of return, credits, rebates, price protection, or other privileges on its products to distributors.
Fair
Value Measurements
When
required to measure assets or liabilities at fair value, the Company uses a fair value hierarchy based on the level of independent,
objective evidence surrounding the inputs used. The Company determines the level within the fair value hierarchy in which the
fair value measurements in their entirety fall. The categorization within the fair value hierarchy is based upon the lowest level
of input that is significant to the fair value measurement. Level 1 uses quoted prices in active markets for identical assets
or liabilities, Level 2 uses significant other observable inputs, and Level 3 uses significant unobservable inputs. The amount
of the total gains or losses for the period are included in earnings that are attributable to the change in unrealized gains or
losses relating to those assets and liabilities still held at the reporting date. The Company measures its investment in equity
securities at fair value on a recurring basis. The Company’s equity securities are valued using inputs observable in active
markets and are therefore classified as Level 1 within the fair value hierarchy.
Recently
issued accounting pronouncements not yet adopted
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2016-02, Leases (Topic 842). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)
and a right of use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months
or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets
and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the
earliest period presented using a modified retrospective approach. Public business entities should apply the amendments in ASU
2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application
is permitted for all public business entities and all nonpublic business entities upon issuance. The Company (as an EGC) that
is taking advantage of the extended transition period offered to private entities would apply this for fiscal years beginning
after December 15, 2021. The Company does not believe that the adoption will have a material effect on the Company’s condensed
interim consolidated financial statements and related disclosures.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments (“ASU 2016-13”) and also issued subsequent amendments to the initial guidance: ASU 2018-19,
ASU 2019-04, and ASU 2019-05 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected
credit losses for financial assets held. The Company will be required to adopt this ASU for fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. The adoption of Topic 326 is not expected to have a material on
the Company’s financial statements and financial statement disclosures.
Recently
adopted accounting standards
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement”, which adds disclosure requirements to Topic 820 for the range and weighted average
of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for interim and annual
reporting periods beginning after December 15, 2019. Although the Company adopted ASU 2018-13 on January 1, 2020, there was no
material impact on the financial statements.
NOTE
4 - STOCKHOLDERS’ EQUITY
Stock-based
compensation and Options
During
the nine-month period ended September 30, 2020 and 2019, 0 and 63,412 options were exercised, and 137,000 and 120,000 options
were issued, respectively. The options issued in the nine-month period ended September 30, 2020 and 2019, were recorded at a fair
value of $123 and $183, respectively, and vested either quarterly or immediately. During the nine-month period ended September
30, 2020 and 2019, stock-based compensation expense of $326 and $514 was recorded for options that vested, respectively.
The
fair value for options granted in the nine-month ended September 30, 2020 is estimated at the date of grant using a Black-Scholes-Merton
options pricing model with the following underlying assumptions:
Price at valuation
|
|
$
|
1.60 – 2.07
|
|
Exercise price
|
|
$
|
1.60 – 2.07
|
|
Risk free interest
|
|
|
0.29 - 0.34
|
%
|
Expected term (in years)
|
|
|
5
|
|
Volatility
|
|
|
60.2 – 61.2
|
%
|
The
total stock-based expense recognized in the financial statements for services received from employees and non-employees is shown
in the following table.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3
|
|
|
|
-
|
|
|
|
5
|
|
|
|
-
|
|
Selling and marketing
|
|
|
11
|
|
|
|
11
|
|
|
|
33
|
|
|
|
33
|
|
General and administrative
|
|
|
169
|
|
|
|
99
|
|
|
|
288
|
|
|
|
481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183
|
|
|
$
|
110
|
|
|
$
|
326
|
|
|
$
|
514
|
|
As
of September 30, 2020, the total unrecognized estimated compensation cost related to non-vested stock options granted prior to
that date was $53, which is expected to be recognized over a weighted average period of approximately 0.35 years.
Issuance
of common stock for cash
On
August 24, 2020, the Company entered into an underwriting agreement with H.C. Wainwright & Co., LLC (“Wainwright”)
(as amended and restated, the “August Underwriting Agreement”). Pursuant to the August Underwriting Agreement, the
Company sold, in an upsized firm commitment offering, 4,531,434 shares of the Company’s common stock, to Wainwright at an
offering price to the public of $0.75 per share, less underwriting discounts and commissions. The Company received net proceeds
from the sale of such offering, after deducting underwriting discounts and commissions and other estimated offering expenses payable
by the Company, of approximately $2.7 million. In addition, as partial compensation for Wainwright’s services as underwriter
in the offering, the Company has issued to Wainwright’s designees warrants to purchase 339,858 shares of common stock. The
warrants expire on August 24, 2025 and have an exercise price of $0.9375 per share.
On
September 22, 2020, the Company entered into an underwriting agreement with Wainwright (as amended and restated, the “September
Underwriting Agreement”). Pursuant to the September Underwriting Agreement, the Company sold, in an upsized firm commitment
offering, 1,794,783 shares of common stock to Wainwright at an offering price to the public of $1.00 per share, less underwriting
discounts and commissions. The Company received net proceeds from the sale of such offering, after deducting underwriting discounts
and commissions and other estimated offering expenses payable by the Company, of approximately $1.4 million. In addition, as partial
compensation for Wainwright’s services as underwriter in the offering, the Company issued to Wainwright’s designees
warrants to purchase 134,609 shares of common stock. The warrants expire on September 22, 2025 and have an exercise price of $1.25
per share.
Issuance
of common stock for services
On February 11, 2019, the Company entered
into a consulting agreement (the “Agreement”) with Bespoke Growth Partners, Inc. (“Bespoke”), pursuant
to which, amongst other things, Bespoke was entitled to receive up to 650,000 shares of common stock of the Company, of which
275,000 shares were issued on the date of signing. As of June 30, 2020, 375,000 shares of common stock, valued at $2.25 per
share, or $844, was owed to Bespoke. On August 5, 2020, the Company paid $75 and issued an additional 375,000 shares of common
stock, valued at $566, or $1.51 per share, to Bespoke under the Agreement. As a result of the change in stock price at issuance,
the Company’s general and administrative expenses have been reduced by $278.
Series
C, D and E Preferred Stock conversion to common stock
Each
share of Series E Preferred Stock is convertible at any time and from time to time at the option of a holder of Series E Preferred
Stock into one share of the Company’s common stock, provided that each holder would be prohibited from converting Series
E Preferred Stock into shares of the Company’s common stock if, as a result of such conversion, any such holder, together
with its affiliates, would own more than 9.99% of the total number of shares of the Company’s common stock then issued and
outstanding. This limitation may be waived with respect to a holder upon such holder’s provision of not less than 61 days’
prior written notice to the Company.
During
the nine months ended September 30, 2020, shareholders converted 950,000 shares of Series E Preferred Stock into 950,000 shares
of common stock at a conversion rate of 1 to 1. No purchase was made in order to convert these shares.
Each
share of Series D Preferred Stock is convertible into 1,000 shares of common stock at any time at the option of the holders, provided
that each holder would be prohibited from converting Series D Preferred Stock into shares of common stock if, as a result of such
conversion, any such holder, together with its affiliates, would own more than 4.99% of the total number of shares of common stock
then issued and outstanding. This limitation may be waived with respect to a holder upon such holder’s provision of not
less than 61 days’ prior written notice to the Company.
During
the nine months ended September 30, 2020, shareholders converted 150.7 shares of Series D Preferred Stock into 150,782 shares
of common stock at a conversion rate of 1 to 1,000. No purchase was made in order to convert these shares.
Each share of Series C Preferred Stock
is convertible into one share of common stock at any time at the option of the holders, provided that each holder would be prohibited
from converting Series C Preferred Stock into shares of common stock if, as a result of such conversion, any such holder, together
with its affiliates, would own more than 9.99% of the total number of shares of common stock then issued and outstanding. This
limitation may be waived with respect to a holder upon such holder’s provision of not less than 61 days’ prior written
notice to the Company.
During
the nine months ended September 30, 2020, shareholders converted 487,890 shares of Series C Preferred Stock into 487,890 shares
of common stock at a conversion rate of 1 to 1. No purchase was made in order to convert these shares.
NOTE
5 – NOTES PAYABLE
In
May 2020, the Company was granted a loan (the “PPP Loan”) in the amount of $42, pursuant to the Paycheck Protection
Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Securities (“CARES”)
Act, which was enacted March 27, 2020. The application for these funds required the Company to, in good faith, certify that the
current economic uncertainty made the loan request necessary to support the ongoing operations of the Company. This certification
further required the Company to consider its current business activity and its ability to access other sources of liquidity sufficient
to support ongoing operations in a manner that is not significantly detrimental to the business. The Company made this good faith
assertion based upon the adverse impact the COVID-19 pandemic had on its business and the global economy. While the Company has
made this assertion in good faith based upon all available guidance, management will continue to assess their continued qualification
if and when updated guidance is released by the Treasury Department. The receipt of these funds, and the forgiveness of the loan
attendant to these funds, is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness
of such loan based on its future adherence to the forgiveness criteria.
The
PPP Loan, which was in the form of a note that was granted on May 14, 2020, matures in two years and accrues interest at a rate
of 1.00% per annum, payable in monthly payments commencing six months after loan disbursement. The Company also has the option
to negotiate with the lender to extend the maturity date to up to five years. The note may be prepaid by the Company at any time
prior to maturity with no prepayment penalties. Funds from the PPP Loan may only be used for payroll costs and any payments of
certain covered interest, lease and utility payments. The Company has used the entire PPP Loan amount for qualifying expenses
in the covered period. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying
expenses as described in the CARES Act. The ultimate forgiveness of the PPP Loan is also predicated upon regulatory authorities
concurring with management’s good faith assessment that the current economic uncertainty made the loan request necessary
to support ongoing operations. If, despite the Company’s good-faith belief that given the circumstances the Company satisfied
all eligibility requirements for the PPP Loan, the Company is later determined to have violated any applicable laws or regulations
or it is otherwise determined that the Company was ineligible to receive the PPP Loan, the Company may be required to repay the
PPP Loan in its entirety and/or be subject to additional penalties. In the event the PPP Loan, or any portion thereof, is forgiven,
the amount forgiven is applied to outstanding principal. The Company plans to apply for loan forgiveness in the 4th
quarter of 2020.
On
June 22, 2020, the Company issued and sold to a related party an unsecured promissory note in the principal amount of $200, which
accrues interest at 10% per annum and matures in one year. On August 28, 2020, the Company paid the note in full including $4
of accrued interest.
In
addition to the promissory note, the Company granted a seven-year equity 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 warrants may also be exercised, in whole or
in part, by means of a cashless exercise. The warrants were recognized as a debt discount and is amortized over the life of the
note. The warrants were valued at $123 using a Black Scholes Merton pricing model with the following underlying assumptions:
Price at valuation
|
|
$
|
2.21
|
|
Exercise price
|
|
$
|
2.50
|
|
Risk free interest
|
|
|
0.34
|
%
|
Expected term (in years)
|
|
|
7
|
|
Volatility
|
|
|
60.7
|
%
|
NOTE
6 - LOSS PER SHARE APPLICABLE TO COMMON STOCKHOLDER
Basic
net loss per common share (“Basic EPS”) is computed by dividing net loss available to common stockholders by the weighted
average number of shares of common stock outstanding during the period. All outstanding stock options and warrants for the three
and nine months ended September 30, 2020 and 2019 have been excluded from the calculation of the diluted net loss per share because
all such securities are anti-dilutive for all periods presented.
The
following table summarizes the Company’s securities, in common stock equivalents, which have been excluded from the calculation
of dilutive loss per share as their effect would be anti-dilutive:
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
Series D Preferred Stock
|
|
|
153,000
|
|
|
|
303,782
|
|
Series E Preferred Stock
|
|
|
875,000
|
|
|
|
1,810,000
|
|
Stock Options - employee and non-employee
|
|
|
1,693,332
|
|
|
|
749,361
|
|
Warrants
|
|
|
5,424,739
|
|
|
|
266,667
|
|
Total
|
|
|
8,146,071
|
|
|
|
3,129,810
|
|
NOTE
7 - GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA
Summary
information about geographic areas:
The
Company manages its business on the basis of one reportable segment and derives revenues from selling its products directly to
patients as well as through distributor and licensing agreements. The following is a summary of revenues within geographic areas:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
United States
|
|
$
|
130
|
|
|
$
|
101
|
|
|
$
|
391
|
|
|
$
|
259
|
|
Europe
|
|
|
17
|
|
|
|
-
|
|
|
|
137
|
|
|
|
161
|
|
Israel
|
|
|
1
|
|
|
|
-
|
|
|
|
3
|
|
|
|
13
|
|
India
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
8
|
|
Canada
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Total
|
|
$
|
150
|
|
|
$
|
101
|
|
|
$
|
533
|
|
|
$
|
443
|
|
During
the three-month period ended September 30, 2020 and 2019, revenues from distributors accounted for 85% and 93% of total revenues,
respectively.
During
the nine-month period ended September 30, 2020 and 2019, revenues from distributors accounted for 68% and 59% of total revenues,
respectively.
NOTE
8 – OTHER ASSETS
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. The fair value for warrants received is estimated at the
date of grant using a Black-Scholes-Merton pricing model with the following underlying assumptions:
Price at valuation
|
|
$
|
0.19 – 0.26
|
|
Exercise price
|
|
$
|
0.19
|
|
Risk free interest
|
|
|
0.66 - 0.73
|
%
|
Expected term (in years)
|
|
|
10
|
|
Volatility
|
|
|
140.6 – 143.9
|
%
|
The Company considers this to be
level 3 inputs and is valued at each reporting period. The fair value of these warrants on April 9, 2020 and September 30, 2020
was $23 and $27, respectively. The change in fair value for the nine months ended September 30, 2020 was $4 and is included
in financial expenses on the income statement.
NOTE
9 - COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases office facilities and motor vehicles under operating leases, which expire on various dates, the latest of which
is June 2021.
Rent
and related expenses were $13 and $36, for the three and nine months ended September 30, 2020, respectively, and $13 and $43 for
the three and nine months ended September 30, 2019, respectively.
Other
Risks
On
March 12, 2020, the World Health Organization declared COVID-19 to be a pandemic, and the COVID-19 pandemic has resulted in significant
financial market volatility and uncertainty. 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 shares.
On
March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the
COVID-19 pandemic. The CARES Act, among other things, permits NOL carryovers and carrybacks to offset 100% of taxable income for
taxable years beginning before 2021. In addition, the CARES Act allows NOLs incurred in 2018, 2019, and 2020 to be carried back
to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has been consistently
in a loss position in the U.S. and at present does not expect that the NOL carryback provision of the CARES Act would result in
a material cash benefit to the Company.
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 to unauthorized bank accounts that should have been sent to the Company.
The total amount of customer payments has been recovered and received by the Company.
Legal
Proceedings
The Company is subject to a lawsuit filed
by its former officer and director, Jona Zumeris, on December 17, 2019 in the Haifa Israel District Financial Court, seeking damages
of approximately $900 for breach of the Separation Agreement executed on July 4, 2018, and to which matter both parties have agreed
to proceed to settle in mediation scheduled to begin in late May 2020. The Company believes that a major part of the allegations
included in the suit are without merit, however, due to the uncertainties of litigation or mediation, the Company can give no
assurance that the Company will be able to reach reasonable settlement, or if it were to proceed in court, prevail on the claims
made against the Company in such lawsuit. The Israeli court issued a court order demanding that the Company restrict approximately
$700 of the Company’s money until the matter is adjudicated. The Company appealed the court order. In February 2020, the
Company agreed to restrict approximately $350 and agreed to try to settle the matter in mediation which commenced in May 2020
and is still ongoing. The cash restriction is relating to this dispute is reflected on the balance sheet as “restricted
cash.”
NOTE
10 - SUBSEQUENT EVENTS
Issuances
of shares of common stock
On
October 12 and October 20, 2020, a shareholder converted 900,000 shares of Series C Preferred Stock into 900,000 shares of common
stock at a conversion rate of 1 to 1. No purchase was made in order to convert these shares.
Departure
of Interim Chief Financial Officer
On
October 5, 2020, the Company and James Cardwell, the Company’s former Interim Chief Financial Officer, agreed by mutual
understanding that Mr. Cardwell’s employment as an officer and employee of the Company will cease as of October 5, 2020,
in accordance with the terms of his CFO Consulting Agreement with the Company dated June 1, 2019.
Appointment
of Chief Financial Officer
On
October 5, 2020, the Company entered into an Employment Agreement (the “Employment Agreement”) with Stephen Brown,
pursuant to which the Company appointed Mr. Brown as Chief Financial Officer, effective October 5, 2020, with a term to continue
in effect until terminated by either party.
As
consideration for his services as Chief Financial Officer, Mr. Brown is entitled to receive (i) an annual base salary of $200,000,
less applicable payroll deductions and tax; (ii) reimbursement of any reasonable and customary, documented out-of-pocket expenses
actually incurred by Mr. Brown in connection with the performance of his services under the Employment Agreement; and (iii) an
annual bonus of $25,000, if earned, as determined by the Company in its sole discretion. Mr. Brown is also eligible to receive
certain grants of incentive stock options to purchase shares of common stock of the Company.
Option
Cancellations
On
November 2, 2020, the Company entered into an option cancellation and release agreement (collectively, the “Cancellation
Agreements”) with each of Brian Murphy, Christopher Fashek, Martin Goldstein, Michael Ferguson, Stephen Brown, and Thomas
Mika (collectively, the “Option holders”), pursuant to which the parties agreed to cancel options to purchase an aggregate
of 804,788 shares of common stock of the Company at exercise prices ranging from $2.57 to $6.00 (the “Options”) previously
granted to each of the Option holders. In exchange for the cancellation of the Options, the Company paid $1.00 to each Option
holder.
Nasdaq
Stockholders’ Equity Minimum
On
August 5, 2020, the Company received notice from the Listing Qualifications Staff of the Nasdaq Stock Market LLC (“Nasdaq”)
indicating that the Company no longer satisfied the Nasdaq Listing Rule 5550(b)(1) (the “Rule”), which requires listed
companies to maintain stockholders’ equity of at least $2.5 million for continued listing on Nasdaq, and was therefore subject
to delisting. In response, the Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”),
which request stayed any further action by the Listing Qualifications Staff. The hearing was held on September 24, 2020.
On
October 6, 2020, the Company received formal notice that the Panel had granted the Company’s request for an extension through
December 15, 2020 to evidence compliance with the Rule. The Company expects to timely satisfy the terms of the Panel’s decision;
however, there can be no assurance that it will be able to do so.
If
compliance with the Rule cannot be demonstrated by December 15, 2020, Nasdaq will provide written notification that the Company’s
common stock could be delisted. In such event, Nasdaq rules permit the Company to appeal any delisting determination to a Nasdaq
Hearings Panel. Accordingly, there can be no assurance that the Company will be able to regain compliance with the Nasdaq listing
rules or maintain its listing on the Nasdaq Capital Market. If the Company’s common stock is delisted, it could be more
difficult to buy or sell the Company’s common stock or to obtain accurate quotations, and the price of the Company’s
common stock could suffer a material decline. Delisting could also impair the Company’s ability to raise capital.
Nasdaq
Bid Price Minimum
On
November 5, 2020, the Company received a letter from the Nasdaq indicating that, based upon the closing bid price of the Company’s
common stock for the 30 consecutive business day period between September 24, 2020, through November 4, 2020, the Company did
not meet the minimum bid price of $1.00 per share required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq
Listing Rule 5550(a)(2). The letter also indicated that the Company will be provided with a compliance period of 180 calendar
days, or until May 4, 2021 (the “Compliance Period”), in which to regain compliance pursuant to Nasdaq Listing Rule
5810(c)(3)(A).
In
order to regain compliance with Nasdaq’s minimum bid price requirement, the Company’s common stock must maintain a
minimum closing bid price of $1.00 for at least ten consecutive business days during the Compliance Period. In the event the Company
does not regain compliance by the end of the Compliance Period, the Company may be eligible for additional time to regain compliance.
To qualify, the Company will be required to meet the continued listing requirement for the market value of its publicly held shares
and all other initial listing standards for the Nasdaq Capital Market, with the exception of the bid price requirement, and will
need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse
stock split if necessary. If the Company meets these requirements, the Company may be granted an additional 180 calendar days
to regain compliance. However, if it appears to Nasdaq that the Company will be unable to cure the deficiency, or if the Company
is not otherwise eligible for the additional cure period, Nasdaq will provide notice that the Company’s common stock will
be subject to delisting.
The
letter has no immediate impact on the listing of the Company’s common stock, which will continue to be listed and traded
on the Nasdaq Capital Market, subject to the Company’s compliance with the other listing requirements of the Nasdaq Capital
Market. Although the Company will use all reasonable efforts to achieve compliance with Rule 5550(a)(2), there can be no assurance
that the Company will be able to regain compliance with that rule or will otherwise be in compliance with other listing criteria
of the Nasdaq Capital Market.
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 September 30, 2020 and for the three and nine months ended September 30, 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
UroShield has not been cleared or approved by the U.S. Food and Drug Administration,
or U.S. FDA, nor has it undergone the same type of review as an U.S. FDA-approved
or cleared device.
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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 our business operations.
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The
timing of clinical studies and eventual U.S. FDA 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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Our
ability to comply with our contractual covenants, including in respect to our debt.
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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 SEC. 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; and
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being
permitted to defer complying with certain changes in accounting standards.
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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
COVID-19
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 ongoing COVID-19 pandemic 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 pandemic. Our third-party manufacturer, which is based in China, temporarily
shut down for sixty days due to the pandemic and became fully operational in April 2020 which led to a significant delay in the
production of goods needed to fulfill our sales orders, which were scheduled to be fulfilled in our first quarter of 2020. We
were able to fulfill these orders in the second quarter of 2020. Additionally, the notified regulatory body we rely on to obtain
European CE approval is located in Italy and has been shut down for approximately six weeks from March to April 2020, 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 for several months during the second quarter of this year,
and has forced our remaining staff as well as third-party contractors to work remotely. In addition, many staff members
continue to operate remotely from their homes, which is continuing to result 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. Such government-imposed precautionary measures may have been relaxed in certain countries or states, but there
is no assurance that more strict measures will be put in place again due to a resurgence in COVID-19 cases. Therefore, the COVID-19
pandemic has and may again 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. Assessment of the complete 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
continuation of the COVID-19 pandemic 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.
Uroshield
Update
In September 2020, the U.S. FDA
exercised its enforcement discretion to allow distribution of our UroShield device in the United States. This temporary authorization
is limited to use as an extracorporeal acoustic wave generating accessory to urological indwelling catheter for use during the
COVID-19 pandemic.
Nasdaq
Stockholders’ Equity Minimum
On
September 14, 2018, we received a letter from the Listing Qualifications Staff (the “Staff”) of The Nasdaq Stock Market
LLC (“Nasdaq”) notifying us that we were no longer in compliance with the minimum stockholders’ equity requirement
for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’
equity of at least $2.5 million. In response, we timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”),
which request stayed any further action by the Staff. The hearing was held on September 24, 2020. To evidence compliance with
the rule, we believe that Nasdaq may require that we have enough stockholders’ equity (in excess of $2.5 million) that would
enable us to maintain stockholders’ equity of at least $2.5 million for up to 12 months, taking into account our historical
losses, current operations and plans.
On
October 6, 2020, we received formal notice that the Panel had granted our request for an extension through December 15, 2020 to
evidence compliance with the rule. We expect to timely satisfy the terms of the Panel’s decision; however, there can be
no assurance that it will be able to do so.
If
compliance with the rule cannot be demonstrated by December 15, 2020, Nasdaq will provide written notification that our common
stock could be delisted. In such event, Nasdaq rules permit us to appeal any delisting determination to a Nasdaq Hearings Panel.
Accordingly, there can be no assurance that we will be able to regain compliance with the Nasdaq listing rules or maintain its
listing on the Nasdaq Capital Market. If our common stock is delisted, it could be more difficult to buy or sell our common stock
or to obtain accurate quotations, and the price of our common stock could suffer a material decline. Delisting could also impair
our ability to raise capital.
Nasdaq
Bid Price Minimum
On
November 5, 2020, we received a letter from the Staff indicating that, based upon the closing bid price of our common stock for
the 30 consecutive business day period between September 24, 2020, through November 4, 2020, we did not meet the minimum bid price
of $1.00 per share required for continued listing on the Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2). The
letter also indicated that we will be provided with a compliance period of 180 calendar days, or until May 4, 2021 (the “Compliance
Period”), in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).
In
order to regain compliance with Nasdaq’s minimum bid price requirement, our common stock must maintain a minimum closing
bid price of $1.00 for at least ten consecutive business days during the Compliance Period. In the event we do not regain compliance
by the end of the Compliance Period, we may be eligible for additional time to regain compliance. To qualify, we will be required
to meet the continued listing requirement for the market value of its publicly held shares and all other initial listing standards
for the Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its
intention to cure the deficiency during the second compliance period, by effecting a reverse stock split if necessary. If we meet
these requirements, we may be granted an additional 180 calendar days to regain compliance. However, if it appears to Nasdaq that
we will be unable to cure the deficiency, or if we are not otherwise eligible for the additional cure period, Nasdaq will provide
notice that our common stock will be subject to delisting.
The
letter has no immediate impact on the listing of our common stock, which will continue to be listed and traded on the Nasdaq Capital
Market, subject to our compliance with the other listing requirements of the Nasdaq Capital Market. Although we will use all reasonable
efforts to achieve compliance with Rule 5550(a)(2), there can be no assurance that we will be able to regain compliance with that
rule or will otherwise be in compliance with other listing criteria of the Nasdaq Capital Market.
August
2020 Public Offering
On
August 27, 2020, we sold an aggregate of 4,531,434 shares of common stock in an underwritten public offering, or the August 2020
Offering, at an offering price to the public of $0.75 per share. We received net proceeds from the August 2020 Offering, after
deducting underwriting discounts and commissions and other estimated offering expenses payable by us, of approximately $2.7 million.
September
2020 Public Offering
On
September 25, 2020, we sold an aggregate of 1,794,783 shares of common stock in an underwritten public offering, or the September
2020 Offering, at an offering price to the public of $1.00 per share. We received net proceeds from the September 2020 Offering,
after deducting underwriting discounts and commissions and other estimated offering expenses payable by us, of approximately $1.4
million.
Option
Cancellation
On
November 2, 2020, we entered into an option cancellation and release agreement (collectively, the “Cancellation Agreements”)
with each of Brian Murphy, Christopher Fashek, Martin Goldstein, Michael Ferguson, Stephen Brown, and Thomas Mika (collectively,
the “Option holders”), pursuant to which the parties agreed to cancel options to purchase an aggregate of 804,788
shares of our common stock at exercise prices ranging from $2.57 to $6.00 (the “Options”) previously granted to each
of the Option holders. In exchange for the cancellation of the Options, we paid $1.00 to each Option holder.
Departure
of Interim Chief Financial Officer
On
October 5, 2020, we and James Cardwell, our former Interim Chief Financial Officer, agreed by mutual understanding that Mr. Cardwell’s
employment as an officer and employee of the Company will cease as of October 5, 2020, in accordance with the terms of his CFO
Consulting Agreement, dated June 1, 2019.
Appointment
of Chief Financial Officer
On
October 5, 2020, we entered into an Employment Agreement (the “Employment Agreement”) with Stephen Brown, pursuant
to which we appointed Mr. Brown as Chief Financial Officer, effective October 5, 2020, with a term to continue in effect until
terminated by either party. As consideration for his services as Chief Financial Officer, Mr. Brown is entitled to receive (i)
an annual base salary of $200,000, less applicable payroll deductions and tax; (ii) reimbursement of any reasonable and customary,
documented out-of-pocket expenses actually incurred by Mr. Brown in connection with the performance of his services under the
Employment Agreement; and (iii) an annual bonus of $25,000, if earned, as determined by us in our sole discretion. Mr. Brown is
also eligible to receive certain grants of incentive stock options to purchase shares of our common stock.
Critical
Accounting Policies
A
critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation
and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Our critical accounting policies are more fully described in both (i)
“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and (ii) Note
3 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2019. There have not been any material changes to such critical accounting policies since December 31, 2019.
The
currency of the primary economic environment in which our operations are conducted is the U.S. dollar (“$” or “dollar”).
Accordingly, our functional currency is the dollar.
Results
of Operations
Three
Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Revenues.
For the three months ended September 30, 2020 and 2019, our revenues were approximately $150,000 and $101,000 respectively, an
increase of approximately 49%, or $49,000 between the periods. The increase was mainly due to increased sales to our distributors.
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 September 30, 2020 and 2019, 100% of our revenues were attributable PainShield. For the three months ended
September 30, 2020 and 2019, the percentage of revenues attributable to our disposable products was 7% and 12%, respectively.
For the three months ended September 30, 2020 and 2019, the portion of our revenues that was derived from distributors was 85%
and 93%, respectively.
Gross
Profit. For the three months ended September 30, 2020 and 2019, gross profit was approximately $99,000 and $47,000, respectively,
an increase of approximately 111% or $52,000, mainly due to more advantageous pricing with our distributors as opposed to discounts
given in the prior period.
Gross
profit as a percentage of revenues was approximately 66% and 47% for the three months ended September 30, 2020 and 2019, respectively.
The increase in gross profit as a percentage is mainly due to the reason described above.
Research
and Development Expenses. For the three months ended September 30, 2020 and 2019, research and development expenses were approximately
$68,000 and $79,000, respectively, between the periods. The decrease was due to decreased activities related to our clinical trials
in 2020.
Research
and development expenses as a percentage of total revenues were approximately 45% and 78% for the three months ended September
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 September 30, 2020 and 2019, selling and marketing expenses were approximately
$289,000 and $228,000, respectively, an increase of approximately 27%, or $61,000, between the periods. The increase was primarily
due to a restarting marketing programs after the capital raise in August 2020.
Selling
and marketing expenses as a percentage of total revenues were approximately 193% and 226% for the three months ended September
30, 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 September 30, 2020 and 2019, general and administrative expenses were
approximately $546,000 and $533,000, respectively, an increase of approximately 2%, or $13,000, between the periods.
General
and administrative expenses as a percentage of total revenues were approximately 364% and 528% for the three months ended September
30, 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 September 30, 2020 and 2019, financial
expenses, net was approximately $15,000 compared to $20,000, respectively, a decrease of approximately $5,000, between the periods.
The decrease in 2020 was derived primarily from exchange rate adjustments.
Tax
expenses. For the three months ended September 30, 2020 and 2019, there was a tax benefit of $20,000 and an expense of $2,000,
respectively. The tax expense is computed by multiplying income before taxes at our Israeli subsidiary by the appropriate tax
rate, net of adjustments.
Net
loss. Our net loss decreased by approximately $107,000, or 13%, to approximately $922,000 for the three
months ended September 30, 2020 from approximately $815,000 in the same period of 2019. The decrease in net loss resulted primarily
from the factors described above.
Nine
Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Revenues.
For the nine months ended September 30, 2020 and 2019, our revenues were approximately $533,000 and $443,000 respectively, an
increase of approximately 20%, or $90,000 between the periods. The increase was mainly due to increased sales to our distributors.
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 nine months ended September 30, 2020, the percentage of revenues attributable to our products was: PainShield - 100% and UroShield
0%. For the nine months ended September 30, 2019, the percentage of revenues attributable to our products was: PainShield - 54%
and UroShield - 46%. For the nine months ended September 30, 2020 and 2019, the portion of our revenues that was derived from
distributors was 68% and 59%, respectively.
Gross
Profit. For the nine months ended September 30, 2020 and 2019, gross profit was approximately $188,000 and $307,000, respectively,
a decrease of approximately 39% or $119,000, mainly due to an agreement with a distributor where we sold roughly $112,000 of products
in the second quarter of 2020 at a steep discount in order to gain entry into a new market. We have since discontinued selling
further products to this distributor.
Gross
profit as a percentage of revenues was approximately 35% and 69% for the nine months ended September 30, 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 nine months ended September 30, 2020 and 2019, research and development expenses were approximately
$131,000 and $381,000, respectively between the periods. The decrease was mainly due to there being no clinical trials during
the nine months ended September 30, 2020 as well as the furloughing of our staff members in the second quarter of 2020 due to
the impacts of the COVID-19 pandemic.
Research
and development expenses as a percentage of total revenues were approximately 25% and 86% for the nine months ended September
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 nine months ended September 30, 2020 and 2019, selling and marketing expenses were approximately
$723,000 and $820,000, respectively, a decrease of approximately 12%, or $97,000, between the periods. The decrease was primarily
due to a significant reduction in marketing activities including related traveling or conventions attended during the first two
quarters of 2020 as well as a temporary reduction of salaries during the second quarter of 2020, both due to the impacts of the
COVID-19 pandemic.
Selling
and marketing expenses as a percentage of total revenues were approximately 136% and 185% for the nine months ended September
30, 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 nine months ended September 30, 2020 and 2019, general and administrative expenses were
approximately $2,513,000 and $3,018,000, respectively, a decrease of approximately 17%, or $505,000, between the periods. The
decrease was primarily due to the general and administrative portion of stock-based compensation expense of approximately $1,522,000
in 2019 compared to $291,000 in 2020, partially offset by an increase in consulting and legal fees in the nine months ended
September 30, 2020.
General
and administrative expenses as a percentage of total revenues were approximately 471% and 681% for the nine months ended September
30, 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 nine months ended September 30, 2020 and 2019, financial expenses, net was approximately $25,000 compared
to a $71,000, respectively, a decrease of approximately $46,000, between the periods. The change was derived primarily from exchange
rate adjustments.
Change
in fair value of derivative liabilities. For the nine months ended September 30, 2020 and 2019, there was a change in fair
value of derivative liabilities resulting in a gain of approximately $0 and $102,000, respectively, an increase of approximately
$102,000, between the periods. The income in 2019 was derived from the valuation of derivative liabilities.
Loss
on extinguishment of derivative liability. For the nine months ended September 30, 2020 and 2019, there was a loss on extinguishment
of derivative liability of approximately $0 compared to $288,000, respectively. The loss in 2019 was derived from the extinguishment
of embedded derivative liabilities upon repayment of its related debt.
Warrant
modification expense. For the nine months ended September 30, 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 nine months ended September 30, 2020 and 2019, there was a tax benefit of $7,000 and an expense of $20,000,
respectively. The tax expense is computed by multiplying income before taxes at our Israeli subsidiary by the appropriate tax
rate, net of adjustments.
Net
loss. Our net loss decreased by approximately $1,281,000, or 28%, to approximately $3,320,000 for the
nine months ended September 30, 2020 from approximately $4,601,000 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 $3,320,000 during the nine-month period ended September 30, 2020 and accumulated
negative cash flow from operating activities of $2,073,000 for the nine-month period ended September 30, 2020.
In
2020, we raised $4,223,000 of net proceeds from the sale of common stock in underwritten public offering and received $42,000
from the Paycheck Protection Program. During the next twelve months management expects that we may need to raise additional capital
to finance our losses and negative cash flows from operations and may continue to be dependent on additional capital raising as
long as our 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.
In connection with the lawsuit filed by
our former officer and director in the Haifa Israel District Financial Court, we were required by the court to keep $350,000 of
cash restricted. See Part II, Item 1. Legal Proceedings.
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 September 30, 2020, and we are not aware of any material trends
in capital resources that would impact our business.
Cash
flows
General.
As of September 30, 2020, we had cash and restricted cash of approximately $3,531,000, compared to approximately $2,258,000 as
of September 30, 2019. The increase is due to financing activities in the third 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 $2,073,000 for the nine months ended September 30, 2020 and $2,842,000 for
the same period in 2019.
Cash
provided by financing activities was approximately $4,265,000 for the nine months ended September 30, 2020 compared to $4,204,000
for the nine months ended September 30, 2019.
Off
Balance Sheet Arrangements
Except
as disclosed, as of September 30, 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, outcome of pending litigation as well issues
that may continue to occur due to the development of the COVID-19 pandemic. 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. However,
the impact of the ongoing COVID-19 pandemic and its resurgence is currently indeterminable and rapidly evolving and may adversely
affect our operations in the future, including significant delays in the production of goods. Additionally, the COVID-19
pandemic has also caused significant disruptions to the global financial markets, which may impact our ability to raise additional
capital. 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.