Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Readers
are advised to review the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial
statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2021. Some of the information
contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our
plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary
Note Regarding Forward-Looking Statements”. You should review the “Risk Factors” section of our Annual Report for the
fiscal year ended December 31, 2021 for a discussion of important factors that could cause actual results to differ materially from the
results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
The
Company’s primary business activity during last few months was enlarging its focus on R&D activities in the domain of I4.0
(including PdM and CBM in sectors such as the aviation, energy and automotive). The main effect of this activity was an increase in the
number of employees to enable the Company to manage the anticipated increased workload and solution development.
Comparison
of the three months ended March 31, 2022 and 2021
The
following table summarizes our results of operations for the three month period ended March 31, 2022 and 2021, together with the changes
in those items in dollars and as a percentage:
| |
2022 | | |
2021 | | |
% Change | |
Revenues | |
| 2,000 | | |
| 24,000 | | |
| (92 | )% |
Cost of Revenues | |
| 288,000 | | |
| 203,000 | | |
| 42 | % |
Gross Loss | |
| (286,000 | ) | |
| (179,000 | ) | |
| 60 | % |
Research and development expenses | |
| 954,000 | | |
| 281,000 | | |
| 240 | % |
Sales and marketing expense | |
| 243,000 | | |
| 197,000 | | |
| 23 | % |
General and administrative expenses | |
| 1,286,000 | | |
| 933,000 | | |
| 38 | % |
Operating Loss | |
| (2,769,000 | ) | |
| (1,590,000 | ) | |
| 74 | % |
Revenues
As
a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from
a limited number of customers.
For
the three months ended March 31, 2022, ScoutCam generated revenues of $2,000, a decrease of $22,000, or 92%, from the three months ended
March 31, 2021 revenues.
The
decrease in revenues was primarily due to an overall decrease in the sales of the Company’s component products to occasional customers.
Cost
of Revenues
Cost
of revenue is primarily comprised of cost of personnel including warehouse personnel costs, inventory write-downs, certain allocated
facilities, and expenses associated with logistics and quality control.
Cost
of revenues for the three months ended March 31, 2022 was $288,000, an increase of $85,000, or 42%, compared to cost of revenues of $203,000
for the three months ended March 31, 2021.
The
increase was primarily due to an increase in payroll expenses due to stock-based compensation and increase in facility costs due to a
lease for additional office space.
Gross
Loss
Gross
loss for the three months ended March 31, 2022 was $286,000, an increase of $107,000, or 60%, compared to gross loss of $179,000 for
the three months ended March 31, 2021.
The
increase was primarily due to decrease in revenues and increase in cost of revenues as described above.
Research
and Development Expenses
Research
and development efforts are focused on new product development and on developing additional functionality for our new and existing
products. These expenses primarily consist of employee-related expenses, including salaries, benefits, and stock-based
compensation expense for personnel engaged in research and development functions, consulting and professional fees related to research
and development activities, prototype materials, facility costs and other allocated expenses, which include expenses for rent and maintenance
of our facility, utilities, depreciation and other supplies. We expense research and development costs as incurred.
Research
and development expenses for the three months ended March 31, 2022 were $954,000, an increase of $673,000, or 240%, compared to $281,000
for the three months ended March 31, 2021.
The
increase was primarily due to an increase in payroll expenses (including stock-based compensation), materials and subcontractors, and
because we have recently begun examining additional applications for our micro ScoutCam™ portfolio outside of the medical, defense
and aerospace fields, including in sectors such as automotive, industrial non-destructing-testing industries, automotive and energy.
In
addition, there was an increase in R&D payroll expenses in first quarter of 2022 due to the fact that during the first quarter of
2021 a substantial part of our payroll expenses was capitalized to contract fulfillment asset and was not recognized as expenses
in profit and loss.
We
expect that our research and development expenses will increase as we continue to develop our products and service and recruit additional
research and development employees to the I4.0 domain.
Sales
and Marketing Expenses
Sales
and marketing expenses primarily consist of personnel costs, consulting services, promotional materials, demonstration equipment and
certain allocated facility infrastructure costs.
Sales
and marketing expenses for the three months ended March 31, 2022 were $243,000, an increase of $46,000, or 23%, compared to $197,000
for the three months ended March 31, 2021.
The
increase was primarily due to an increase in payroll expenses (including stock-based compensation) due to the recruitment of a
VP Business Development in Industry 4.0.
We
expect that our selling and marketing expenses will increase as we continue to increase our selling and marketing efforts.
General
and Administrative Expenses
General
and administrative expenses primarily consist of salaries and other related costs, including stock-based compensation, for personnel
in executive, finance and administrative functions. General and administrative expenses also include direct and allocated facility-related
costs, as well as professional fees for legal, patent, consulting, investor, and public relations, accounting, auditing, tax services
and insurance costs.
General
and Administrative expenses for the three months ended March 31, 2022 were $1,286,000, an increase of $353,000, or 38%, compared to
$933,000 for the three months ended March 31, 2021.
The
increase was primarily due to an increase of $511,000 in share based compensation due to new option grants, partially offset by a decrease
in IP expenses.
Operating
loss
We
incurred an operating loss of $2,769,000 for the three months ended March 31, 2022, an increase of $1,179,000, or 74%, compared to operating
loss of $1,590,000 for the three months ended March 31, 2021.
The
increase in operating loss was primarily due to increases in expenses related to general and administrative, research and development,
and sales and marketing, as described above.
Liquidity
and Capital Resources
As
of March 31, 2022, we had cash and cash equivalents of $8.3 million and $11 million of short-term deposits compared to cash and cash
equivalents $8.6 million and 11 million of short-term deposits as of December 31, 2021. In addition, as of March 31, 2022 we incurred
an accumulated deficit of approximately $18.1 million, compared to $15.3 million as of December 31, 2021.
Our
primary sources of liquidity to date have been from fund raising and warrant exercises.
Additional
Cash Requirements
We
plan to continue to invest for long-term growth, and therefore we expect that our expenses will increase. We currently believe that our
existing cash and cash equivalents and short-term deposits will be sufficient to meet our anticipated cash needs for at least the next
12 months. We expect our expenses will increase in connection with our ongoing activities, particularly as we continue
the research and development and the scale up process of our I4.0 solutions. We expect to incur significant commercialization expenses
related to product sales, marketing, manufacturing and distribution. Furthermore, we will continue to incur additional costs associated
with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing
operations. We may raise these funds through equity financing, debt financing or other sources, which may result in further dilution
in the equity ownership of our common stock. There is no assurance that we will be able to maintain operations at a level sufficient
for investors to obtain a return on their investment in our common stock, or that we will be able to raise sufficient capital required
to implement our business plan on acceptable terms, if at all. Even if we are successful in raising sufficient capital to implement our
business plan, we will, most likely, continue to be unprofitable for the foreseeable future. If we are unable to raise capital when needed
or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization
efforts.
Cash
Flows
The
following table sets forth the significant sources and uses of cash for the periods set forth below (in dollars):
| |
Three month ended March 31, | |
| |
2022 | | |
2021 | |
Cash used in Operating Activity | |
| (224,000 | ) | |
| (774,000 | ) |
Cash used in Investing Activity | |
| (24,000 | ) | |
| (117,000 | ) |
Cash provided by Financing Activity | |
| - | | |
| 10,281,000 | |
Operating
Activities
Our
primary uses of cash from operating activities have been for headcount-related expenditures, research and development costs, manufacturing
costs, marketing and promotional expenses, professional services cost and costs related to our facilities. Our cash flows from operating
activities will continue to be affected due to the expected increase of spending on our business and our working capital requirements.
During
the three months ended March 31, 2022, cash used in operating activities was $0.2 million, consisting of net loss of $2.8 million, partially
offset by a non-cash benefit of $0.8 million and a favorable net change in operating assets and liabilities of $1.7 million. Our
non-cash benefit consisted primarily of non-cash charges of $0.8 million for stock-based compensation. The net change in our operating
assets and liabilities primarily reflects cash inflows from changes in contract liability of $1.6 million.
During
the three months ended March 31, 2021, cash used in operating activities was $0.8 million, consisting of net loss of $1.6 million,
partially offset by a non-cash benefit of $0.1 million and a favorable net change in operating assets and liabilities of
$0.7 million. Our non-cash benefit consisted primarily of stock-based compensation expense of $0.1 million. The net change in
our operating assets and liabilities primarily reflects cash inflows from the changes in contract liability of $0.7 million, account
payables of $0.4 million and other accrued expenses of $0.1 million, partially offset by cash outflows from changes in contract
fulfillment assets of $0.2 million, inventory and other current assets of $0.2 million.
Investing
Activities
During
the three months ended March 31, 2022, cash used in investing activities was $24,000, consisting of purchases of property and equipment.
During
the three months ended December 31, 2021, cash used in investing activities was $117,000, consisting of purchases of property and equipment.
Financing
Activities
During
the three months ended March 31, 2021, cash provided by financing activities was $10.3 million, consisting primarily of $9.5 million
from cash proceeds from issuance of shares and warrants and $0.8 million proceeds from exercise of warrants.
Off-Balance
Sheet Arrangements
None.