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, 2020. 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, 2020 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 activities during last few months were the completion of R&D in connection with a
customer-specific project and the transition to the production stage with respect to a contract with a Fortune 500 Multinational
Healthcare Corporation, and R&D activities in the domain of I4.0 (including Predictive Maintenance and CBM
(Condition Based Monitoring) in sectors such as the Aviation, Energy and Automotive).
Other
major activities were the following:
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expanding
marketing activities, including the recruitment of a Director of Business Development in the US, and launching a multi-platform digital
marketing campaign;
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extensive
activity in connection with the Company’s IP, including submissions of new patent applications as well as maintenance, defense,
and commercialization efforts of existing patents;
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increased
operation expenses in order to improve the current Company’s R&D capabilities;
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increase
in research and development activities, including the development of new products and the improvement of existing technology, and
the examination of additional applications for our micro ScoutCam™ portfolio outside of the medical, defense and aerospace
fields, including sectors such as, inter alia, automotive, industrial non-destructing-testing industries, and predictive maintenance
(i.e. Industry 4.0) based on Internet of Things (IoT); and
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investment
in capital expenses to provide the necessary facilities, IT, and lab tools for our newly recruited employees and to upgrade the Company’s
production and quality control capabilities.
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Comparison
of the nine months ended September 30, 2021 and 2020
The
following table summarizes our results of operations for the nine months period ended September 30, 2021, and 2020, together with the
changes in those items in dollars and as a percentage:
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Nine months ended September 30,
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2021
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2020
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% Change
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Revenues
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321,000
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86,000
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273
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%
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Cost of Revenues
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821,000
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434,000
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89
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%
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Gross Loss
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(500,000
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)
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(348,000
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)
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44
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%
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Research and development expenses
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1,350,000
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514,000
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163
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%
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Sales and marketing expense
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472,000
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302,000
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56
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%
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General and administrative expenses
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3,931,000
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2,309,000
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70
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%
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Other income
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3,000
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-
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-
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Operating Loss
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(6,250,000
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)
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(3,473,000
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)
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80
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%
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Revenues
For
the nine months ended September 30, 2021, we generated revenues of $321,000, an increase of $235,000 from the nine months ended September
30, 2020.
The
increase in revenues was primarily due to revenues from A.M. Surgical. Total revenues recorded from A.M. Surgical during the nine months
ended September 30, 2021 amounted to approximately $200,000. We did not record any revenue from A.M. Surgical during the nine months
ended September 30, 2020.
Cost
of Revenues
Cost
of revenues for the nine months ended September 30, 2021 was $821,000, an increase of $387,000 compared to cost of revenues of $434,000
for the nine months ended September 30, 2020. The increase was primarily due to an increase in materials as a result of an increase in
revenues and an increase in payroll expenses as a result of hiring additional employees as part of the transition to the production stage
with respect to a contract with a Fortune 500 Multinational Healthcare Corporation.
Gross
Loss
Gross
loss for the nine months ended September 30, 2021, was $500,000, an increase of $152,000 compared to gross loss of $348,000 for the nine
months ended September 30, 2020.
Research
and Development Expenses
Research
and development expenses for the nine months ended September 30, 2021 were $1,350,000, an increase of $836,000, or 163%, compared to
$514,000 for the nine months ended September 30, 2020. The increase was primarily due to (i) an increase in payroll expenses and
materials and subcontractors and (ii) an increase in research and development activities, including the development of new products
and the improvement of existing technology. We recently begun examining additional applications for our micro ScoutCam™
portfolio outside of the medical, defense and aerospace fields, including sectors such as, inter alia, automotive, industrial
non-destructing-testing industries, and predictive maintenance (i.e. Industry 4.0) based on Internet of Things (IoT). We plan to
further expand the activity in these non-medical spaces.
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 for the nine months ended September 30, 2021, were $472,000, an increase of $170,000, or 56%, compared to $302,000
for the nine months ended September 30, 2020. The increase was primarily due to an expanding marketing activity, including the recruitment
of a Director of Business Development in the US, and launching a multi-platform digital marketing campaign.
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 for the nine months ended September 30, 2021 were $3,931,000, an increase of $1,622,000, or 70%, compared
to $2,309,000 for the nine months ended September 30, 2020. The increase was primarily due to:
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an increase of $616,000 in IP expenses due to maintenance,
defense, and commercialization efforts of existing patents;
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the provision of $229,000 due to VAT audit as described
in Note 9 of our interim condensed financial statements as of September 30, 2021;
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an increase of $151,000 in share based compensation
due to new option grants as described in Note 4 of our interim condensed financial statements as of September 30, 2021;
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an
increase in in payroll expenses due to the hiring of additional employees including a new CEO, controller and the shift in the position
of the CFO from part-time to full-time;
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an
increase in professional services expenses due to the hiring of a financial consultant, HR consultant, the
appointment of new directors and additional hires;
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Operating
loss
We
incurred an operating loss of $6,250,000 for the nine months ended September 30, 2021, an increase of $2,777,000, or 80%, compared to
operating loss of $3,473,000 for the nine months ended September 30, 2020. The increase in operating loss was due to $152,000 increase
in gross loss, $836,000 increase in research and development expenses, and $170,000 increase in sales and marketing expenses and $1,622,000
increase in administrative and general expenses offset by $3,000 income from a sublease.
Cash
Flows
The
following table sets forth the significant sources and uses of cash for the periods set forth below (in dollars):
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Nine month ended September 30,
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2021
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2020
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Cash used in Operating Activity
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(4,704,000
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)
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(2,710,000
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)
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Cash used in Investing Activity
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(483,000
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)
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(249,000
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)
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Cash provided by Financing Activity
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21,527,000
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2,777,000
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Operating
Activities
For
the nine months ended September 30, 2021, net cash flows used in operating activities was $4,704,000, due primarily to a net loss
of $6,256,000, $504,000 increase in contract fulfilment assets partially offset by share based compensation of $1,317,000 and
$529,000 increase in contract liabilities.
Investing
Activities
For
the nine months ended September 30, 2021, net cash flows used in investing activities was $483,000, due to the purchase of property and
equipment.
Financing
Activities
For
the nine months ended September 30, 2021, net cash flows provided by financing activities was $21,527,000, due primarily
to proceeds from the issuance of shares and warrants equivalent to approximately $19,118,000 and proceeds from exercise from warrants
of approximately $2,459,000.
Comparison
of the three months ended September 30, 2021 and 2020
The
following table summarizes our results of operations for the three months period ended September 30, 2021, and 2020, together with the
changes in those items in dollars and as a percentage:
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Three months ended September 30,
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2021
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2020
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% Change
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Revenues
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23,000
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12,000
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92
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%
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Cost of Revenues
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211,000
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153,000
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38
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%
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Gross Loss
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(188,000
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)
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(141,000
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33
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%
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Research and development expenses
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596,000
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144,000
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314
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%
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Sales and marketing expense
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179,000
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114,000
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57
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%
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General and administrative expenses
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1,603,000
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629,000
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155
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%
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Other income
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3,000
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-
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%
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Operating Loss
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(2,563,000
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(1,028,000
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149
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%
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Revenues
For
the three months ended September 30, 2021, we generated revenues of $23,000, an increase of $11,000 from the three months ended September
30, 2020.
Cost
of Revenues
Cost
of revenues for the three months ended September 30, 2021, was $211,000, an increase of $58,000 compared to cost of revenues of $153,000
for the three months ended September 30, 2020. The increase was primarily due to an increase in materials as a result of an increase
in revenues and an increase in payroll expenses as a result of hiring additional employees as part of the transition to the production
stage with respect to a contract with a Fortune 500 Multinational Healthcare Corporation.
Gross
Loss
Gross
loss for the three months ended September 30, 2021, was $188,000, an increase of $47,000 compared to gross loss of $141,000 for the three
months ended September 30, 2020.
Research
and Development Expenses
Research
and development expenses for the three months ended September 30, 2021 were $596,000, an increase of $452,000, or 314%, compared to $144,000
for the three months ended September 30, 2020. The increase was primarily due to (i) an increase in payroll expenses, including increase
in share based compensation (ii) materials and subcontractors; and (iii) an increase in research and development activities, including
the development of new products and the improvement of existing technology. We recently began examining additional applications for our
micro ScoutCam™ portfolio outside of the medical, defense and aerospace fields, including sectors such as automotive, industrial
non-destructing-testing industries, and predictive maintenance (i.e. Industry 4.0) based on Internet of Things (IoT). We plan to further
expand the activity in these non-medical spaces.
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.
Sales
and Marketing Expenses
Sales
and marketing expenses for the three months ended September 30, 2021 were $179,000, an increase of $65,000, or 57%, compared to $114,000
for the three months ended September 30, 2020. The increase was primarily due to expanded marketing activity, including the launching
of a multi-platform digital marketing campaign.
General
and Administrative Expenses
General
and Administrative expenses for the three months ended September 30, 2021 were $1,603,000, an increase of $974,000, or 155%, compared
to $629,000 for the three months ended September 30, 2020. The increase was primarily due to:
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an
increase in in payroll expenses due to the hiring of additional employees including a new CEO, controller and the shift in the position
of the CFO from part-time to full-time;
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an
increase of $418,000 in share based compensation due to new option grants as described in Note 4 of our interim condensed financial
statements as of September 30, 2021;
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the provision of $229,000 due to VAT audit as described
in Note 9 of our interim condensed financial statements as of September 30, 2021.
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an
increase in IP expenses due to maintenance, defense, and commercialization efforts of existing patents;
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an
increase in professional services expenses due to the hiring of a financial consultant, HR consultant, the appointment of new directors
and additional hires;
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Operating
loss
We
incurred an operating loss of $2,563,000 for the three months ended September 30, 2021, an increase of $1,535,000, or 149%, compared
to operating loss of $1,028,000 for the three months ended September 30, 2020. The increase in operating loss was due to $47,000 increase
in gross loss, $452,000 increase in research and development expenses, and $65,000 increase in sales and marketing expenses and $974,000
increase in administrative and general expenses offset by $3,000 income from a sublease
Cash
Flows
The
following table sets forth the significant sources and uses of cash for the periods set forth below (in dollars):
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Three month ended September 30,
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2021
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2020
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Cash used in Operating Activity
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(1,786,000
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)
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(433,000
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)
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Cash used in Investing Activity
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(177,000
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)
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(28,000
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)
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Cash used in Financing Activity
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(95,000
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)
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-
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Operating
Activities
For
the three months ended September 30, 2021, net cash flows used in operating activities were $1,786,000, due primarily to a net
loss of $2,562,000 partially offset by share based compensation of $682,000.
Investing
Activities
For
the three months ended September 30, 2021, net cash flows used in investing activities were $177,000 due to the purchase of property
and equipment.
Future
Funding Requirements
The
Company believes that it will require additional financing in order to provide the capital it needs to achieve its growth targets.
Liquidity
and Capital Resources
We
generated liquidity primarily from fund raising and warrant exercises as described in Note 4 of our interim condensed financial statements
as of September 30, 2021.
As
of September 30, 2021, our total assets were $23,602,000. As of December 31, 2020, our total assets were $5,895,000. The increase of
assets was mainly due to an increase of cash and cash equivalents due to fundraising activities and warrants exercise, as described in
Note 4 of our interim condensed financial statements as of September 30, 2021.
As
of September 30, 2021, our total liabilities were $3,000,000. As of December 31, 2020, our total liabilities were $1,931,000. The increase
of liabilities was mainly due to an increase of accounts payables, contract liabilities and operating lease liabilities.
Since
our incorporation through September 30, 2021, we incurred accumulated deficit of approximately $12.6 million. The management believes
that our cash and cash resources as of September 30, 2021 will allow us to fund our operating plan through at least the next 12 months.
However, we expect to continue to incur significant research and development expenses and other costs related to our ongoing operations;
and in order to continue our future operations, we will need to obtain additional funding at least until such time that we become profitable.
Off-Balance
Sheet Arrangements
None.