Dror Ortho-Design, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect future results. In certain instances, parenthetical references are made to relevant sections of the Notes to Financial Statements to direct the reader to a further detailed discussion. This section should be read in conjunction with the Financial Statements and Supplementary Data included in this Annual Report on Form 10-K. This MD&A contains forward-looking statements reflecting our current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” contained in this Annual Report on Form 10-K. Unless the context otherwise requires, references in this MD&A to “Dror,” “we”, “us”, “our”, and the “Company” are intended to refer to (i) following the Share Exchange (as defined below), the business and operations of Dror Ortho-Design, Inc. and its consolidated subsidiaries, and (ii) prior to the Share Exchange, Dror Ortho-Design Ltd. (the predecessor entity and currently wholly owned subsidiary of Dror Ortho-Design, Inc.). All dollar amounts in this registration statement refer to U.S. dollars unless otherwise indicated. Overview We were incorporated as Novint Technologies, Inc. in the State of New Mexico in April 1999. On February 26, 2002, we changed our state of incorporation to Delaware by merging with Novint Technologies, Inc., a Delaware corporation. On July 5, 2023, we entered into a share exchange agreement with the shareholders of Dror Ortho-Design, Ltd. (“Private Dror”), pursuant to which the shareholders of Private Dror agreed to exchange all of their outstanding ordinary shares Private Dror for shares of our Common Stock and convertible preferred stock (the “Share Exchange”). On August 14, 2023 the Share Exchange was consummated and we changed our name to “Dror Ortho-Design, Inc.” Following the Share Exchange, we succeeded to the business of Private Dror as its sole line of business. The Share Exchange is being accounted for as a recapitalization, with Private Dror deemed to be the accounting acquirer and the Company the acquired company. Accordingly, Private Dror’s historical financial statements for periods prior to the consummation of the Share Exchange have become those of the Company. Operations reported for periods prior to the Share Exchange are those of Private Dror. Our Company We have reimagined the way people can correct their smile. We plan to disrupt the aligner market by offering millions of people a revolutionary alternative. We believe that people do not need to change their lifestyle to correct their smile as they are required to do with existing aligner solutions. 45 Existing aligner solutions generally share the same treatment principles, which are different from our solution. In most cases, patients seeking to improve their smile need to undergo a 12-to-15 month process of wearing plastic aligners, which need to be worn the entire day and should only be removed while eating or drinking. Patients are prescribed a series of 20 to 30 aligners that are intended to forcefully move teeth progressively closer to their intended final position. This process causes pain every time a new aligner is used and restricts blood circulation, which counterproductively slows down tooth movement. All-day aligner solutions are also intrusive, as patients need to conduct their lives at work or school wearing the plastic aligners. In addition, most existing aligner therapies require multiple visits to an orthodontist to monitor the progress of treatment plans through intraoral scanning, physical examination and patient testimony. We believe that recent rapid advancements in technology have made traditional aligner solutions no longer the most effective treatment option for smile correction. Our Company has developed a proprietary AI-based platform to correct people’s smiles in a discreet and less painful manner (the “Platform”). The Platform uses only one smart aligner to gently move teeth into their optimum position with pulsating air while the patient is sleeping or at home. We are involved in the research and development of an orthodontic alignment platform. We have several patents for the technology used in the Platform and is currently in the process of preparing the prototype for FDA approval. Our predecessor first generation Aerodentis System is a Class II medical device, which was cleared by FDA for commercialization in the U.S. pursuant to the 510(k) notification process for movement and alignment of teeth during orthodontic treatment of malocclusion in April 2020. The Company is preparing to apply for 510(k) clearance for the Platform as a Class II medical device, which constitutes an updated version of the currently cleared device. Such updated Platform contains new and/or different components than the original device, which is why a new 510(k) clearance is required prior to marketing the Platform in the U.S. We have not yet filed a 510(k) submission for the Platform, and it has, thus, not been found by the FDA to be substantially equivalent to the first generation Aerodentis System. The Company currently does not generate revenues to fund operations and anticipates that it will continue to incur significant losses as it continues to develop the Platform. Please refer to “Risk Factors - We are in the development stage, are not generating revenues and have no operating history in the manufacturing and distribution of orthodontic medical devices or platforms for consumer use.” for additional information. The Company intends to spend approximately $2.5 million over the next 18 months on software and hardware development as well as the accompanying regulatory approvals and IP protection associated with such software and hardware projects. Share Exchange As discussed above, on July 5, 2023, we entered into a Share Exchange Agreement (as amended by that certain Amendment to Share Exchange Agreement, dated August 14, 2023, the “Share Exchange Agreement”) with Private Dror and all shareholders of Private Dror. Pursuant to the Share Exchange Agreement, on August 14, 2023, the shareholders of Private Dror transferred all of their ordinary shares in Private Dror to us in exchange for 7,576,999 newly issued shares of our Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), and 106,782,187 shares of our Common Stock. As a result of these share exchanges, Private Dror became a wholly owned subsidiary of the Company. 46 Pursuant to the terms and conditions of the Share Exchange Agreement: ● The shareholders of Private Dror transferred 235,088 ordinary shares of Private Dror to us in exchange for 7,576,999 shares of Series A Convertible Preferred Stock and 106,782,187 shares of Common Stock (the “Share Exchange”). ● In connection with the Share Exchange, we assumed all of Private Dror’s obligations under Private Dror’s outstanding share options. ● All outstanding Series A-4 Warrants to purchase Private Dror’s ordinary shares were assumed by the Company and converted into Share Exchange Warrants (as defined below). ● Simultaneously with the Share Exchange, the board of directors and certain officers of the Company resigned, and a new board of directors, comprised of Private Dror’s legacy board of directors, and new officers were appointed for the Company. The Company’s new board of directors consists of Eliyahu (Lee) Haddad, Chaim Hurvitz, Moshe Shvets, Chaim Ravad and Yehuda Englander. In addition, immediately following the Share Exchange, Mr. Haddad was appointed as the Company’s chief executive officer, Mr. Shvets as Chief Technology Officer, and Mr. Hurvitz as chairman of the board of directors. Private Placement In connection with the closing of the Share Exchange, pursuant to the Purchase Agreement, the Company sold (1) the Private Placement Shares and shares of Series A Preferred Stock, or a combination thereof, at an effective purchase price of $0.011 per Private Placement Share or share of Common Stock underlying such shares of Series A Preferred Stock and (2) Private Placement Warrants to the Private Placement Investors in connection with the Private Placement. The Company received aggregate gross proceeds of $5,025,000 in connection with the first closing of the Private Placement on August 14, 2023 and an additional $200,000 in connection with a second closing of on September 13, 2023. The Company and the Private Placement Investors also entered into a Registration Rights Agreement, pursuant to which the Company agreed to register, among other registrable securities, on Form S-1 (or, if the Company is then eligible, on Form S-3) with the SEC: (i) the Private Placement Shares, (ii) Conversion Shares issuable in connection with the Purchase Agreement, (iii) the shares of Common Stock underlying the Private Placement Warrants issued to the Private Placement Investors, and (iv) the shares of Common Stock and Conversion Shares underlying the shares of Series A Preferred Stock issued to the investors in the December 2021 Transaction in connection with the Share Exchange. The Company filed a registration statement on Form S-1 covering the aforementioned securities with the SEC on February 9, 2024. Going Concern We have experienced net losses and negative cash flows from operations since our inception. As of December 31, 2023, we had cash of approximately $3.3 million, positive working capital of $3.2 million, an accumulated deficit of approximately $13.7 million and used cash in operations during the twelve months ended December 31, 2023 of approximately $2.4 million. The Company does not currently have sufficient available liquidity to fund its operations for at least the next 12 months. Such factors raise substantial doubt about our ability to sustain operations for at least one year from the issuance of the audited financial statements included in this Annual Report. The accompanying financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern. In response to these conditions and events, we are evaluating various financing strategies to obtain sufficient additional liquidity to meet our operating and capital requirements for the next twelve months following the date of this Annual Report. The potential sources of financing that we are evaluating include one or any combination of secured or unsecured debt, convertible debt and equity in both public and private offerings. We also plan to finance near-term operations with our cash on hand, as well as by exploring additional ways to raise capital. There is no assurance we will manage to raise additional capital or otherwise increase cash flows, if required. The sources of financing described above that could be available to us and the timing and probability of obtaining sufficient capital depend, in part, on our further developing and commercializing the Platform and on future capital market conditions. If our current assumptions regarding the pace of such development are incorrect, or if there are any other changes or differences in our current assumptions that negatively impact our financing strategy, we may have to reduce expenditures or significantly delay, scale back or discontinue the development or commercialization of the Platform. 47 Results of Operations Comparison of the Years Ended December 31, 2023 and 2022 The following table sets forth the results of our operations for the years ended December 31, 2023 and 2022: Years Ended December 31, 2023 2022 Change $ Change % Research and development $ 1,004,443 $ 850,680 $ 153,763 18 % General and administrative $ 1,120,426 $ 814,653 $ 305,773 38 % Share-based compensation $ 2,253,793 $ 19,908 $ 2,233,885 11221 % Financial income, net $ 90,147 $ 1,742 $ 88,405 5075 % Gain on retirement of royalty accrual $ 720,632 $ - $ 72,632 100 % Research and Development Expenses Research and development expenses were $1,004,443 for the year ended December 31, 2023, compared to $850,860 for the year ended December 31, 2022. The increase in research and development expenses of $153,763 or 18%, was primarily due to increased outsourced consulting activities relating to the development of our new product and an increase in salaries. General and Administrative Expenses General and administrative expenses were $1,120,426 for the year ended December 31, 2023, compared to $814,653 for the year ended December 31, 2022. The increase in general and administrative expenses of $305,773 or 38%, was primarily due to an increase in professional fees relating to public company compliance following the Share Exchange as well as an increase in salaries and related expenses during the year ended December 31, 2023. Share-based Compensation Expenses Share-based compensation expenses were $2,253,793 for the year ended December 31, 2023, compared to $19,908 for the year ended December 31, 2022. The increase in general and administrative expenses of $2,233,885 or 11221%, was primarily due to the modification of the outstanding stock options as part of the Share Exchange. Financial (Income) Expenses, Net Financial income was $90,147 for the year ended December 31, 2023, compared to $1,742 of income for the year ended December 31, 2022. The increase in financial income, net of $88,405 or 5075%, was primarily due to exchange rate differences resulting from the translation of NIS based assets and liabilities to US dollars. Gain on retirement of royalty accrual Gain on retirement of royalty accrual was $720,632 for the year ended December 31, 2023, which resulted from the retirement of outstanding royalty accrual due to the expiration of the relevant Statute of Limitations. There was not retirement of royalty accrual for the year ended December 31, 2022. Liquidity and Capital Resources Sources of Liquidity We do not have revenues to fund operations. We anticipate that we will continue to incur significant losses as it continues to develop its product. Historically, our primary source of cash has been proceeds from the sale of equity instruments. We raised $5.225 million through a private placement sale of shares to new investors concurrent with the Share Exchange. We intend to spend approximately $2.5 million over the next 18 months on software and hardware development as well as the accompanying regulatory approvals and IP protection associated with such software and hardware projects. We will need to raise additional capital to fund operating losses and grow our operations. There can be no assurance however that we will be able to raise additional capital when needed, or at terms deemed acceptable, if at all. Such factors raise substantial doubt about our ability to sustain operations for at least one year from the issuance of the audited financial statements included in this Annual Report. The accompanying financial statements do not include any adjustments related to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern. For additional information, see the section above titled “MD&A—Going Concern.” 48 Private Placement See the section above titled “MD&A—Our Company—Private Placement.” Cash Flows for the Years Ended December 31, 2023 and 2022 Years ended December 31, 2023 2022 Cash provided (used) in Operating activities $ (2,362,386 ) $ (1,517,178 ) Investing activities 17,966 - Financing activities 4,653,204 - Net increase (decrease) in cash and cash equivalents $ 2,308,784 $ (1,517,178 ) Cash Used in Operating Activities Net cash used in operating activities was $2,362,386 for the year ended December 31, 2023 as compared to $1,517,178 for the year ended December 31, 2022. The amount for the year ended December 31, 2023 primarily consisted of a net loss of $3,567,883 offset by non-cash charges of $1,533,831 (including: Share-based compensation expense of $2,253,793, gain on retirement of royalty accrual of $720,632 and depreciation expense of $670), and a decrease in operating assets and liabilities excluding cash of $328,334. The amount for the year ended December 31, 2022 primarily consisted of a net loss of $1,683,499, partially offset by non-cash charges of $20,578 (including: Share-based compensation expense of $ 19,908 and depreciation of $670), and a decrease in operating assets and liabilities excluding cash of $145,743. Cash Provided by Investing Activities During the year ended December 31, 2023, net cash provided by investing activities was $17,966 relating to the cash received in the Share Exchange. During the year ended December 31, 2022, there was no cash provided by or used in investing activities. Cash Provided by Financing Activities During the year ended December 31, 2023, net cash provided by financing activities was $4,653,204 relating to the net proceeds from the private placement raise. During the year ended December 31, 2022, there was no cash provided by or used in financing activities. Effects of Inflation Management does not believe that inflation has had a material impact on our business, sales, or operating results during the periods presented. Off-Balance Sheet Arrangements We currently do not have any off-balance sheet arrangements or financing activities with special-purpose entities. Critical Accounting Policies and Use of Estimates The SEC defined a company’s critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations and which require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies that are significant to understanding our results. Research and Development We expense all research and development costs as they are incurred. Research and development includes expenditures in connection with in-house research and development salaries and staff costs, consulting fees, as well as proprietary products and technology. 49 Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates or assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could vary from those estimates. Management utilizes various other estimates, including but not limited to accrued royalties, estimated lives of long-lived assets, the valuation of stock-based compensation, the valuation allowance for deferred tax assets and other contingencies. The results of any changes in accounting estimates are reflected in the financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period that they are determined to be necessary. Recent Accounting Pronouncements In October 2021, the FASB issued ASU 2021-07-Compensation-Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards. The measurement objective in Topic 718 for share-based awards is fair value based, and the current price input is measured at fair value. This input is used in determining an award’s fair value. The practical expedient in this Update allows a non-public entity to determine the current price of a share underlying an equity classified share-based award using the reasonable application of a reasonable valuation method. The practical expedient in this Update is effective prospectively for all qualifying awards granted or modified during fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application, including application in an interim period, is permitted for financial statements that have not yet been issued or made available for issuance as of October 25, 2021. The implementation of this standard did not have a material effect on our financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable.