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. The Company has historically had recurring losses and negative cash used from
operations which raised substantial doubt about the Company’s ability to continue as a going concern at that time. During the first
quarter of 2021, the Company used $954 of cash in operations. Although we expect to continue to incur losses and negative cash flows
from operating activities, we had a cash balances of $7,978 as of March 31, 2021. Because the Company has sufficient resources to fund
our operation for the next twelve months from the date of this filing, the substantial doubt has been alleviated. The Company may need
to continue to raise additional capital to finance its losses and negative cash flows from operations beyond the next twelve months and
may continue to be dependent on additional capital raising as long as our products do not reach commercial profitability. If we are unable
to increase in the number of authorized shares of our common stock, we will be unable to issue common stock or convertible instruments.
As a result, the Company will be limited in its ability to raise additional capital.
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, 2020, as found in the Company’s Annual Report on Form 10-K
filed with the Securities and Exchange Commission (the “SEC”) on April 15, 2021.
The
balance sheet for December 31, 2020 was derived from the Company’s audited financial statements for the year ended December 31,
2020. 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.
Foreign
currency translation
Non-U.S.
dollar denominated transactions and balances have been re-measured to U.S. dollars. All 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 other comprehensive income,
as appropriate. The cumulative translation gains as of the years ended March
31, 2021 and 2020 were $5 and $0, 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. Adoption of ASC 606 has not changed the timing and nature
of the Company’s revenue recognition and there has been no material effect on the Company’s financial statements.
Revenue
from product sales is recorded at the net sales price, or “transaction price,” which includes estimates of variable consideration
that result from coupons, 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.
Revenues
from sales to distributors are recognized at the time the products are delivered to the distributors (“sell-in”). The Company
does not grant rights of return, credits, rebates, price protection, or other privileges on its products to distributors.
Sequencing
The
Company adopted a sequencing policy under ASC 815-40-35 whereby if reclassification of contracts from equity to liabilities is necessary
pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares. This was due to the Company
committing more shares than authorized. While temporary suspensions are in place to keep the potential exercises beneath the number authorized,
certain instruments are classified as liabilities, after allocating available authorized shares on the basis of the most recent grant
date of potentially dilutive instruments. Pursuant to ASC 815, issuances of securities granted as compensation in a share-based payment
arrangement are not subject to the sequencing policy.
Recently
adopted accounting standards
In
February 2016, the FASB issued 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. On January 1, 2020,
we adopted ASU 2016-02 and its related amendments, which changed our accounting for leases. As a result of this change, we recognized
right-of-use assets and lease liabilities on the consolidated balance sheet for all leases with a term longer than 12 months and classified
them as operating leases. The right-of-use assets and lease liabilities have been measured by the present value of remaining lease payments
over the lease term using our incremental borrowing rates or implicit rates, when readily determinable.
In
June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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, 2021, including interim periods
within those fiscal years. The adoption of Topic 326 did not have a material on the Company’s financial
statements and financial statement disclosures.
NOTE
4 – STOCKHOLDERS’ EQUITY
Common
stock and over-issuance
The
common stock confers upon the holders the right to receive notice to participate and vote in general meetings of the Company, and the
right to receive dividends, if declared, and to participate in the distribution of the surplus assets and funds of the Company in the
event of liquidation, dissolution or winding up of the Company.
As
of December 3, 2020, we had 20,000,000 authorized shares of our common stock and 19,850,014 shares of common stock outstanding resulting
in 149,986 shares of common stock being available for issuance. On December 4, 2020, certain holders of the Company’s Series C
Preferred Stock converted 396,509 shares of Series C Preferred Stock into 396,509 shares of common stock, resulting in an overissue of
246,523 shares of common stock. Beginning on December 17, 2020, through January 22, 2021, certain holders of warrants we had issued in
December 2020 (the “December 2020 Warrants”) exercised a portion of the December 2020 Warrants for 2,657,144 shares of Common
Stock, resulting in an additional overissue of 2,657,144 shares of Common Stock. As of December 31, 2020, the aggregate number of shares
of common stock that was overissued by the Company was 4,109,635. The shares issued in excess of the authorized amount are classified
as liabilities. The common stock equivalents are subject to the Company’s sequencing policy and are classified as derivative liabilities
(see Note 5). On March 3, 2021, the Company filed a proxy statement in connection with a special meeting of stockholders to be held on
March 31, 2021 to (i) ratify the increase in the number of authorized shares of common stock from 20,000,000 to 24,109,635 and the issuance
of such 4,109,635 shares of common stock, and (ii) further increase the number of our authorized shares of common stock. On May 6, 2021,
the Company’s stockholders voted to approve the ratification of the increase in the number of authorized shares of common stock
from 20,000,000 to 24,109,635 and the issuance of such 4,109,635 shares of common stock to be effective as of December 4, 2020 but the
stockholders did not approve a further increase in the number of its authorized shares of common stock. We have filed with the Secretary
of State of the State of Delaware a Certificate of Validation with respect to the Share Increase Ratification and such Certificate
of Validation has become effective.
Stock-based
compensation and Options
During
the three-month period ended March 31, 2021 and 2020, 180,000 and 0 options were granted, respectively. The options were granted to a
employees and consultants in 2021 and were recorded at a fair value and vested over three years. During the three-month period ended
March 31, 2021 and 2020, stock-based compensation expense of $109 and $71 was recorded for options that vested, respectively.
The
fair value for options granted in the first quarter of 2021 is estimated at the date of grant using a Black-Scholes-Merton options pricing
model with the following underlying assumptions:
Price at valuation
|
|
$
|
1.04
|
|
Exercise price
|
|
$
|
1.04
|
|
Risk free interest
|
|
|
0.49
|
%
|
Expected term (in years)
|
|
|
5
|
|
Volatility
|
|
|
81.5
|
%
|
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
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5
|
|
|
|
-
|
|
Selling and marketing
|
|
|
21
|
|
|
|
11
|
|
General and administrative
|
|
|
83
|
|
|
|
60
|
|
Total
|
|
$
|
109
|
|
|
$
|
71
|
|
As
of March 31, 2021, the total unrecognized estimated compensation cost related to non-vested stock options granted prior to that date
was $197, which is expected to be recognized over a weighted average period of approximately 0.55 years.
Series
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.
In
February 2020, a stockholder converted 110,000 shares of Series E Preferred Stock into 110,000 shares of common stock at a conversion
rate of 1 to 1. No purchase was made in order to convert these shares.
Warrant
exercises and modification
On
December 2, 2020, we entered into a Securities Purchase Agreement with certain institutional and accredited investors pursuant to which
the Company issued and sold to such investors in a private placement an aggregate of (i) 5,914,285 shares of the Company’s common
stock at an offering price of $0.70 per share and (ii) pre-funded warrants to purchase up to 2,657,144 shares of common stock at a purchase
price of $0.699 per pre-funded warrant, for gross proceeds of approximately $6.0 million, and net proceeds of approximately $5.4 million.
In January 2021, two investors exercised an aggregate of 1,657,144 warrants at $0.001 per share.
On
January 21, 2021, Company entered into letter agreements (the “Letter Agreements”) with certain existing accredited investors
to exercise certain outstanding warrants (the “Existing Warrants”) to purchase up to an aggregate of 1,205,968 shares of
the Company’s common stock at an exercise price per share of $1.165 (the “Exercise”). Certain of the Existing Warrants
(the “Registered Existing Warrants”) and the shares of common stock underlying the Registered Existing Warrants have been
registered pursuant to a registration statement on Form S-3 (File No. 333-251264) and a registration statement on Form S-1 (File No.
333-218871). In consideration for the exercise of the Existing Warrants for cash, the exercising holders will receive new unregistered
warrants to purchase up to an aggregate of 1,205,967 shares of common stock (the “New Warrants”) at an exercise price of
$1.04 per share and with an exercise period of seven years from the initial closing date. The gross proceeds to the Company from the
Exercise were approximately $1.4 million.
The
New Warrants were accounted for in warrant modification expense, which was measured at the amount equal to the incremental value reflecting
the change in the fair value of the warrants before and after the Warrant Amendment. Accordingly, warrant modification expense in the
amount of $1,627 was recorded with a corresponding increase in additional paid in capital.
In
estimating the warrants’ fair value, the Company used the following assumptions:
Risk free interest
|
|
|
0.05 – 0.35
|
%
|
Dividend yield
|
|
|
0
|
%
|
Volatility
|
|
|
82.7% - 211
|
%
|
Contractual term (in years)
|
|
|
0.79 – 2.67
|
|
NOTE
5 – DERIVATIVE LIABILITIES
During
2020, the Company established a sequencing policy to which common stock equivalents are exercisable to shares of common stock more than
the Company’s authorized limit. It was determined that all options and warrants by the end of the year were no longer permitted
to be classified as equity and were valued at fair market value using Black Scholes and recorded as derivative liabilities.
A
summary of quantitative information with respect to valuation methodology and significant unobservable inputs used for the Company’s
purchase warrants that were categorized within Level 3 of the fair value hierarchy during the quarter ended March 31, 2021 is as follows:
Stock price
|
|
$
|
1.02
|
|
Conversion price
|
|
$
|
0.72
- 6.00
|
|
Contractual term (in years)
|
|
|
0.79 – 4.87
|
|
Volatility (annual)
|
|
|
82.7% - 211
|
%
|
Risk-free rate
|
|
|
0.05%
- 0.92
|
%
|
The
foregoing assumptions were reviewed quarterly and were subject to change based primarily on management’s assessment of the probability
of the events described occurring.
Financial
Liabilities Measured at Fair Value on a Recurring Basis
The
fair value accounting standards define fair value as the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is determined based upon assumptions that market participants
would use in pricing an asset or liability. Fair value measurements are rated on a three-tier hierarchy as follows:
●
|
Level
1 inputs: Quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
●
|
Level
2 inputs: Inputs, other than quoted prices included in Level 1, that are observable either directly or indirectly; and
|
●
|
Level
3 inputs: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own
assumptions.
|
There
were no transfers between Level 3 during the three months ended March 31, 2021.
The
following table presents changes in Level 3 liabilities measured at fair value for the three months ended March 31, 2021.
|
|
Derivative
Liabilities
|
|
Balance – December 31, 2020
|
|
$
|
2,471
|
|
New issuances
|
|
|
1,692
|
|
Change in fair value of derivative liability
|
|
|
1,947
|
|
Exercises/redemptions
|
|
|
(3,169
|
)
|
Balance – March 31, 2021
|
|
$
|
2,942
|
|
NOTE
6 – LEASES
The
Company has operating lease agreements with terms up to 3 years, including car leases.
The
Company’s weighted-average remaining lease term relating to its operating leases is 2.80 years, with a weighted-average discount
rate of 10%.
The
Company incurred $6 of lease expense for its operating leases for the quarter ended March 31, 2021.
The
following table presents information about the amount and timing of liabilities arising from the Company’s operating leases as
of March 31, 2021:
2021
|
|
$
|
9
|
|
2022
|
|
|
10
|
|
2023
|
|
|
9
|
|
Total undiscounted operating lease payments
|
|
|
28
|
|
Less: Imputed interest
|
|
|
3
|
|
Present value of operating lease liabilities
|
|
$
|
25
|
|
NOTE
7 – 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 months
ended March 31, 2021 and 2020 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:
|
|
March 31, 2021
|
|
|
March 31, 2020
|
|
Series D Preferred Stock
|
|
|
153,000
|
|
|
|
303,782
|
|
Series E Preferred Stock
|
|
|
875,000
|
|
|
|
1,715,000
|
|
Stock Options - employee and non-employee
|
|
|
1,928,544
|
|
|
|
1,556,332
|
|
Warrants
|
|
|
5,447,594
|
|
|
|
266,667
|
|
Total
|
|
|
8,404,138
|
|
|
|
3,841,781
|
|
The
diluted loss per share equals basic loss per share in the three months ended March 31, 2021 and 2020 because the Company had a net loss
and the impact of the assumed exercise of stock options and the vesting of restricted stock would have been anti-dilutive.
NOTE
8 – 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 agreements. The following is a summary of revenues within geographic areas:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
United States
|
|
$
|
92
|
|
|
$
|
110
|
|
New Zealand
|
|
|
9
|
|
|
|
-
|
|
Israel
|
|
|
1
|
|
|
|
1
|
|
Europe
|
|
|
1
|
|
|
|
3
|
|
Total
|
|
$
|
103
|
|
|
$
|
114
|
|
NOTE
9 – 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
|
|
$
|
0.17
|
|
Exercise price
|
|
$
|
0.19
|
|
Risk free interest
|
|
|
1.74
|
%
|
Expected term (in years)
|
|
|
9
|
|
Volatility
|
|
|
139.2
|
%
|
The
Company considers this to be level 3 inputs and is valued at each reporting period. The fair value of these warrants decreased by $2
during the quarter, leaving a balance of $21 as of March 31, 2021.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
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.
Pending
litigation
On
February 26, 2021, Protrade Systems, Inc. (“Protrade”) filed a Request for Arbitration (the “Request”) with the
International Court of Arbitration (the “ICA”) of the International Chamber of Commerce alleging the Company is in breach
of an Exclusive Distribution Agreement dated March 7, 2019 (the “Agreement”) between Protrade and the Company. Protrade alleges,
in part, that the Company has breached the Agreement by discontinuing the manufacture of the DV0057 Painshield MD device in favor of
an updated 10-100-001 Painshield MD device. Protrade claims damages estimated at $3 million. The Company believes it is too early to
determine the most likely outcome. The Company disputes the claims asserted by Protrade and intends to respond to the Request and defend
against the claims vigorously.
NOTE
11 – OTHER LIABILITIES
In
January 2021, investors attempted exercise warrants for 663,332 shares of common stock for an aggregate amount of $390.
Due to the Company’s lack of authorized shares, in April 2021, the proceeds from the exercise of $390 was returned to the
investors.
NOTE
12 – SUBSEQUENT EVENTS
On
April 6, 2021, the Company agreed to purchase 663,332 warrants from investors for a total of $388. The warrants had exercise
prices between $0.88 and $0.94 per share.
At
the Special Meeting on May 6, 2021, our stockholders approved the ratification, pursuant to Section 204 of the Delaware General Corporation
Law and Delaware common law, of an increase in the number of authorized shares of our common stock from 20,000,000 to 24,109,635 shares
and the issuance of 4,109,635 shares of common stock upon conversion and exercise of certain of the Company’s securities as more
particularly described in the Company’s definitive proxy statement filed with the SEC on March 3, 2021 (the “Share Increase
Ratification”). We have filed with the Secretary of State of the State of Delaware a Certificate of Validation with respect to
the Share Increase Ratification and such Certificate of Validation has become effective.
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, Inc. (the “Company”)
as of March 31, 2021 and for the three months ended March 31, 2021 and 2020 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, 2020 and
for the year then ended, which are included in the Form 10-K filed with the Securities and Exchange Commission (“SEC”) on
April 15, 2021. 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:
|
●
|
Our
history of losses and expectation of continued losses.
|
|
●
|
The
geographic, social and economic impact of COVID-19 on the Company’s business operations.
|
|
●
|
Our
ability to raise funding for, and the timing of, clinical studies and eventual U.S. Food and Drug Administration approval of our
product candidates.
|
|
●
|
The
risk that we may not obtain the requisite votes at our annual meeting to increase the number of authorized shares of common stock.
|
|
●
|
Regulatory
actions that could adversely affect the price of or demand for our approved products.
|
|
●
|
Market
acceptance of existing and new products.
|
|
●
|
Favorable
or unfavorable decisions about our products from government regulators, insurance companies or other third-party payers.
|
|
●
|
Risks
of product liability claims and the availability of insurance.
|
|
●
|
Our
ability to successfully develop and commercialize our products.
|
|
●
|
Our
ability to generate internal growth.
|
|
●
|
Risks
related to computer system failures and cyber-attacks.
|
|
●
|
Our
ability to obtain regulatory approval in foreign jurisdictions.
|
|
●
|
Uncertainty
regarding the success of our clinical trials for our products in development.
|
|
●
|
Risks
related to our operations in Israel, including political, economic and military instability.
|
|
●
|
The
price of our securities is volatile with limited trading volume
|
|
●
|
Our
ability to comply with the continued listing requirements of the NASDAQ capital market.
|
|
●
|
Our
ability to maintain effective internal control over financial reporting and to remedy identified material weaknesses.
|
|
●
|
We
are a “smaller reporting company” and have reduced disclosure obligations that may make our stock less attractive to
investors.
|
|
●
|
Our
intellectual property portfolio and our ability to protect our intellectual property rights.
|
|
●
|
Our
ability to recruit and retain qualified regulatory and research and development personnel.
|
|
●
|
Unforeseen
changes in healthcare reimbursement for any of our approved products.
|
|
●
|
The
adoption of health policy changes and health care reform.
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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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Risks
related to our operations in Israel.
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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, 2020, 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.
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 2020, 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.
Business
Developments
Effective
as of January 2020, the U.S. Centers for Medicare and Medicaid Services (“CMS”) 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.
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.
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
April 21, 2021, the Company received notice from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock
Market LLC (“Nasdaq”) indicating that the Company no longer satisfied the minimum $2.5 million stockholders’ equity
requirement for continued listing on The Nasdaq Capital Market under Nasdaq Listing Rule 5550(b)(1) (the “Equity Requirement”).
The Company reported stockholders’ equity of approximately $2.4 million in its Annual Report on Form 10-K as of and for the fiscal
year ended December 31, 2020 and does not otherwise satisfy the alternative criteria pertaining to market value of listed securities
or net income. In accordance with the Nasdaq Listing Rules, the Company has been granted a period of 45 calendar days, or through June
7, 2021, to submit its plan to evidence compliance with the Equity Requirement for the Staff’s review. If the Company’s plan
is accepted, the Staff may grant the Company an extension of up to 180 calendar days from the date of the notification letter, or October
18, 2021, to evidence compliance with the Equity Requirement. While the Company is evaluating various courses of action in its effort
to regain compliance with the Equity Requirement and plans to timely submit a compliance plan to the Staff for its review, there can
be no assurance that the Company’s plan will be accepted by the Staff or, if accepted, that the Company will be able to timely
satisfy the terms of the extension granted by the Staff. If the Company’s plan is not accepted by the Staff or if accepted but
the Company does not timely regain compliance, the Company’s common stock would be subject to delisting. In such event, the Company
would be entitled to request a hearing before a Nasdaq Hearings Panel, which request would stay any delisting action by Nasdaq at least
until the ultimate conclusion of the hearing process.
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, 2020. There have not been any material changes
to such critical accounting policies since December 31, 2020.
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, 2021 Compared to Three Months Ended March 31, 2020
Revenues.
For the three months ended March 31, 2021 and 2020, our revenues were approximately $103,000 and $114,000 respectively, a decrease of
approximately 10%, or $11,000 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, 2021 and 2020, the percentage of revenues attributable to our products was: PainShield - 100% and UroShield
0%. For the three months ended March 31, 2021 and 2020, the portion of our revenues that was derived from distributors was 94% and 99%,
respectively.
Gross
Profit. For the three months ended March 31, 2021 and 2020, gross profit was approximately $77,000 and $51,000, respectively, an
increase of approximately 51% or $26,000, mainly due to sales of our products to distributors at higher margins and during the same period,
the Company did not offer special discounts on products as was done in the same fiscal period during 2020.
Gross
profit as a percentage of revenues was approximately 75% and 45% for the three months ended March 31, 2021 and 2020, 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 March 31, 2021 and 2020, research and development expenses were approximately
$64,000 and $47,000, respectively between the periods. The increase was mainly due to options expense during the three months ended March
31, 2021.
Research
and development expenses as a percentage of total revenues were approximately 62% and 42% for the three months ended March 30, 2021 and
2020, 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, 2021 and 2020, selling and marketing expenses were approximately $311,000
and $254,000, respectively, an increase of approximately 22%, or $57,000, between the periods. The increase was primarily due to increased
salaries and consulting fees during the first quarter of 2021.
Selling
and marketing expenses as a percentage of total revenues were approximately 302% and 223% for the three months ended March 31, 2021 and
2020, 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, 2021 and 2020, general and administrative expenses were approximately
$1,016,000 and $657,000, respectively, an increase of approximately 55%, or $359,000, between the periods. The increase was primarily
due to legal fees related to a lawsuit with a former officer and director and efforts to ratify our prior overissuances of common stock.
General
and administrative expenses as a percentage of total revenues were approximately 986% and 576% for the three months ended March 31, 2021
and 2020, 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, 2021 and 2020, financial expenses, net was approximately $7,000 compared to a
$5,000, respectively, an increase of approximately $2,000 between the periods due to the change in fair value of the investment in Sanuwave.
Change
in fair value of derivative liabilities. For the three
months ended March 31, 2021 and 2020, there was a change in fair value of derivative liabilities
resulting in losses of approximately $1,948,000 and $0, respectively. The loss in 2021 was derived from the Company’s total potentially
dilutive shares exceed the Company’s authorized share limit.
Warrant
modification expense. For the three months ended March 31, 2021 and 2020, warrant modification expense was approximately $1,627,000
and $0, respectively. The warrant modification expense in 2021 was related to warrants held by a certain investor that were repriced.
The investor was also granted new warrants to replace the repriced warrants after they were exercised.
Tax
expenses. For the three months ended March 31, 2021 and 2020, tax expenses were $21,000 and $9,000. The tax expense is computed by
multiplying income before taxes at our Israeli subsidiary by the appropriate tax rate.
Net
loss. Our net loss increased by approximately $3,996,000, or 434%, to approximately $4,917,000 for the three months ended March 31,
2021 from approximately $921,000 in the same period of 2020. The increase in net loss resulted primarily from the factors described above.
Liquidity
and Capital Resources
We
have incurred losses in the amount of approximately $4,917,000 and had negative cash flow from operating activities of $954,000 during
the quarter ended March 31, 2021. Although we expect to continue to incur losses and negative cash flows from operating activities, we
had a cash balance of just over $7,953,000 as of March 31, 2021 and therefore, we have sufficient resources to fund our operation for
the next twelve months from the date of this filing. The Company may need to continue to raise additional capital to finance its losses
and negative cash flows from operations beyond the next twelve months and may continue to be dependent on additional capital raising
as long as our products do not reach commercial profitability. If we do not increase the number of authorized shares of our common stock,
we will be unable to issue common stock or convertible instruments. As a result, the Company will be limited in its ability to raise
additional capital.
During
the quarter ended March 31, 2021, we received approximately $1,406,000 of net proceeds from the exercise of warrants. 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 as well as our ability to overcome
obstacles that may be presented due to developments caused by the coronavirus outbreak. We expect to continue to incur losses and negative
flows from operations. We intend to use the proceeds generated from equity financings, or strategic alliances with third parties, either
alone or in combination with equity financing to meet our short-term liquidity requirements as well as to advance our long-term plans.
While we believe we have sufficient capital to execute our business plan over the next twelve months, there are no assurances that we
will not need to raise additional capital at a later time, or that we would be able to raise additional capital, if required, on terms
favorable to us.
We
do not have any material commitments to capital expenditures as of March 31, 2021, and we are not aware of any material trends in capital
resources that would impact our business.
Cash
flows
As
of March 31, 2021, we had cash and cash equivalents of approximately $7,978,000, compared to approximately $443,000 as of March 31, 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 $954,000 for the three months ended March 31, 2021 and $895,000 for the same period
in 2020.
Cash
provided by financing activities was approximately $1,406,000 for the three months ended March 31, 2021 compared to $0
for the three months ended March 31, 2020.
Off-Balance
Sheet Arrangements
As
of March 31, 2021, 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 (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.