For the three months ended March 31, 2022, one
customer comprised approximately 39% of total revenues. During the three months ended March 31, 2021, one customer comprised approximately
58% of total revenues.
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:
There were no transfers between Level 3 during
the quarters ended March 31, 2022 and 2021.
The following table presents changes in Level
3 asset and liability measured at fair value for the quarters ended March 31, 2022 and 2021:
The following table sets forth the Company’s
assets and liabilities which are measured at fair value on a recurring basis by level within the fair value hierarchy:
NOTE
9 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date of filing this Quarterly Report on Form 10-Q and determined that no material
events occurred.
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, 2022 and for the three months ended March 31, 2022 and 2021 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, 2021 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, 2022, as amended on May 2, 2022. 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
history of losses and expectation of continued losses.
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● |
Global
economic and political instability and conflicts, such as the conflict between Russia and Ukraine, could adversely affect our business,
financial condition or results of operations. |
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● |
Increasing
inflation could adversely affect our business, financial condition, results of operations or cash flows. |
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The
geographic, social and economic impact of COVID-19 on the Company’s business operations. |
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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. |
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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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Risks
of product liability claims and the availability of insurance. |
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Our
ability to successfully develop and commercialize our products. |
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Our
ability to generate internal growth. |
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Risks
related to computer system failures and cyber-attacks. |
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Our
ability to obtain regulatory approval in foreign jurisdictions. |
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Uncertainty
regarding the success of our clinical trials for our products in development. |
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Risks
related to our operations in Israel, including political, economic and military instability. |
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The
price of our securities is volatile with limited trading volume |
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Our
ability to comply with the continued listing requirements of the NASDAQ capital market. |
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Our
ability to maintain effective internal control over financial reporting and to remedy identified material weaknesses. |
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We
are a “smaller reporting company” and have reduced disclosure obligations that may make our stock less attractive to
investors. |
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Our
intellectual property portfolio and our ability to protect our intellectual property rights. |
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Our
ability to recruit and retain qualified regulatory and research and development personnel. |
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Unforeseen
changes in healthcare reimbursement for any of our approved products. |
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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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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. |
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, 2021, as amended, 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
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.
On
March 15, 2022, the arbitrator issued a final award, which, although
found that Protrade’s claims failed as a matter of law or were unsupported by the evidence, nevertheless awarded Protrade
$1,500,250, which consists of $1,432,000 for “lost profits” and $68,250 as reimbursement of arbitration costs, on the
grounds that the Company allegedly failed to supply Protrade with certain patches utilized by users of DV0057 Painshield MD device.
The arbitrator based her decision on the basis of testimony of Protrade’s president who asserted that a user would use in
excess of 33 patches per each device. The Company believes that the number of patches per device alleged by Protrade is grossly
inflated. Accordingly, on April 13, 2022, the Company submitted an application for the
correction of the award. If the application is denied, the Company will continue vehemently opposing the award in all appropriate
fora. As of March 31, 2022 and December 31, 2021, the Company accrued the amount of the award to Protrade amounting to
$1,500,250 as part of “Other accounts payable and accrued expenses”.
On
March 2, 2022, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market (“Nasdaq”) indicating
that, based upon the closing bid price of our common stock for the 30 consecutive business day period between January 14, 2022, through
March 1, 2022, 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 August 29, 2022, in which to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A). The letter further provided that
if, at any time during the 180-day period, the closing bid price of our common stock was at least $1.00 for a minimum of 10 consecutive
business days, Nasdaq would provide us with written confirmation that it had achieved compliance with the minimum bid price requirement.
Critical
Accounting Policies
A
critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires
management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain. Our critical accounting policies are more fully described in both (i) “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and (ii) Note 3 of the Notes to the Consolidated Financial
Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as amended. There have not been any
material changes to such critical accounting policies since December 31, 2021.
The
currency of the primary economic environment in which our operations are conducted is the U.S. dollar (“$” or “dollar”).
Accordingly, our functional currency is the dollar.
Results
of Operations
Three
Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Revenues.
For the three months ended March 31, 2022 and 2021, our revenues were approximately $272,000 and $103,000 respectively, an increase of
approximately 164%, or $169,000 between the periods. The increase in revenues is due to increased orders from our largest customer (see
Note 6), as well as the addition of selling to veteran administration facilities, limited to available finished goods. 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, 2022, the percentage of revenues attributable to our products was: PainShield - 99% and UroShield -
1%. For the three months ended March 31, 2021, the percentage of revenues attributable to our products was: PainShield -100% and UroShield
- 0%. For the three months ended March 31, 2022 and 2021, the portion of our revenues that was derived from distributors was 87% and
94%, respectively.
Gross
Profit. For the three months ended March 31, 2022 and 2021, gross profit was approximately $106,000 and $77,000, respectively, an
increase of approximately 38% or $29,000, mainly due to increased sales to veteran affairs (VA) facilities and sales of products to distributors
at higher margins.
Gross
profit as a percentage of revenues was approximately 39% and 75% for the three months ended March 31, 2022 and 2021, respectively. While
the total amount of gross profit increased, the gross profit as percentage of revenues decreased due to increased costs of manufacturing,
patches that were expired and written off, and replacement of old components.
Research
and Development Expenses. For the three months ended March 31, 2022 and 2021, research and development expenses were approximately
$66,000 and $64,000, respectively between the periods. The increase was mainly due to increase in payments to subcontractors and consultants
for continuous research, offset by the decreased salaries of employees involved in research and development activities during the three
months ended March 31, 2022.
Research
and development expenses as a percentage of total revenues were approximately 24% and 62% for the three months ended March 31, 2022 and
2021, respectively. This decrease was due to the increase in revenues.
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, 2022 and 2021, selling and marketing expenses were approximately $210,000
and $311,000, respectively, a decrease of approximately 32%, or $101,000, between the periods. The decrease was primarily due to decreased
salaries of sales and marketing employees, re-allocating a portion of sales and marketing employee’s salary to general and administrative
expense due to change in roles and responsibilities, and decrease in options expense during the first quarter of 2022.
Selling
and marketing expenses as a percentage of total revenues were approximately 77% and 302% for the three months ended March 31, 2022 and
2021, respectively. The decrease in our percentage was due to the increase in revenues and the reasons described above.
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, 2022 and 2021, general and administrative expenses were approximately
$942,000 and $1,016,000, respectively, a decrease of approximately 7%, or $74,000, between the periods. The decrease was primarily due
to legal fees related to a lawsuit with a former officer and director and efforts to ratify our prior over-issuances of common stock
in 2021 that were not incurred in 2022.
General
and administrative expenses as a percentage of total revenues were approximately 346% and 986% for the three months ended March 31, 2022
and 2021, 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.
Change
in fair value of derivative liabilities. For the three
months ended March 31, 2022 and 2021, there was a change in fair value of derivative liabilities
resulting in losses of approximately $0 and $1,948,000, respectively. The loss in 2021 was derived from the Company’s total potentially
dilutive shares exceed the Company’s authorized share limit that was ultimately resolved in the third quarter of 2021.
Warrant
modification expense. For the three months ended March 31, 2022 and 2021, warrant modification expense was approximately $0 and $1,627,000,
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, 2022 and 2021, tax expenses were $7,000 and $21,000. The tax expense is computed
by multiplying income before taxes at our Israeli subsidiary by the appropriate tax rate.
Net
loss. Our net loss decreased by approximately $3,785,000, or 77%, to approximately $1,132,000 for the three months
ended March 31, 2022 from approximately $4,917,000 in the same period of 2021. The decrease in net loss resulted primarily from the factors
described above.
Liquidity
and Capital Resources
We
have incurred losses in the amount of approximately $1,137,000 and had negative cash flow from operating activities of $1,741,000
during the quarter ended March 31, 2022. Although we expect to continue to incur losses and negative cash flows from operating activities
through 2022, we had a cash balance of just over $5,990,000 as of March 31, 2022 and the Company’s management believes that the
Company has sufficient capital to execute its business plan over the next twelve months. If the Company is unable to successfully commercialize
its products over the next twelve months, it may need to raise additional capital at a later time. There are no assurances that the Company
would be able to raise additional capital, if required, on terms favorable to it. If the Company is unsuccessful in commercializing its
products and raising capital, it will need to reduce activities, curtail or cease operations.
During
the quarter ended March 31, 2022, we met our short-term liquidity requirements from our existing cash reserves. Our future capital requirements
and the adequacy of our available funds will depend on many factors, including our ability to successfully commercialize our products,
our development of future products and competing technological and market developments 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 later, 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, 2022, and we are not aware of any material trends in capital
resources that would impact our business.
Cash
flows
As
of March 31, 2022, we had cash and cash equivalents of approximately $5,990,000, compared to approximately $7,978,000 as of March 31,
2021. We have historically met our cash needs through a combination of issuance of equity, borrowing activities and sales. Our cash requirements
are generally for product development, research and development cost, marketing and sales activities, finance and administrative cost,
capital expenditures and general working capital.
Cash
used in our operating activities was approximately $1,741,000 for the three months ended March 31, 2022 and $954,000 for the same
period in 2021.
Cash
provided by financing activities was approximately $0 for the three months ended March 31, 2022 compared to $1,406,000 for the three
months ended March 31, 2021.
Off-Balance
Sheet Arrangements
As
of March 31, 2022, 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 as 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 subsequent waves of the pandemic occur 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.