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 Predictive Maintenance, PdM, and Condition Based Monitoring, 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.
In
addition, recently the Company completed the verification and validation (V&V) stage of its miniature camera solution with a Fortune
500 company and moved from R&D stage to production stage.
Comparison
of the nine months ended September 30, 2022 and 2021
The
following table summarizes our results of operations for the nine months period ended September 30, 2022 and 2021, together with the
changes in those items in dollars and as a percentage:
| |
Nine
months ended September 30, | | |
| |
| |
2022 | | |
2021 | | |
%
Change | |
Revenues | |
| 506,000 | | |
| 321,000 | | |
| 58 | % |
Cost
of Revenues | |
| 1,279,000 | | |
| 821,000 | | |
| 56 | % |
Gross Loss | |
| (773,000 | ) | |
| (500,000 | ) | |
| 55 | % |
Research and development
expenses | |
| 3,023,000 | | |
| 1,193,000 | | |
| 153 | % |
Sales and marketing expense | |
| 617,000 | | |
| 629,000 | | |
| (2 | )% |
General
and administrative expenses | |
| 3,262,000 | | |
| 3,931,000 | | |
| (17 | )% |
Operating Loss | |
| (7,675,000 | ) | |
| (6,253,000 | ) | |
| 23 | % |
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 nine months ended September 30, 2022, we generated revenues of $506,000, an increase of $185,000, or 58% from the nine months ended
September 30, 2021.
The
increase in revenues was primarily due to the increase in revenue from our miniature camera
solution with the Fortune 500 company due to completion R&D stage and moving to production stage. Total
revenues recorded from our miniature camera solution with the Fortune 500 company during
the nine months ended September 30, 2022, amounted to approximately $433,000. We did not
record any revenue from our miniature camera solution with the Fortune 500 company during
the nine months ended September 30, 2021.
This
increase in revenues was partly offset by the following:
|
- |
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, 2022. |
|
|
|
|
- |
the
decrease of $49,000 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 nine months ended September 30, 2022 was $1,279,000, an increase of $458,000, or 56%, compared to cost of revenues
of $821,000 for the nine months ended September 30, 2021. The increase was primarily due to an increase in materials as a result of an
increase in revenues, an increase in payroll expenses due to stock-based compensation and due to the transition from the R&D stage
to the production stage as described on “Overview” and increase in facility costs due to a lease for additional office space.
In the second quarter of 2022 the Company completed the development service
stage of its miniature camera solution relating to these advanced payments and moved to production. As a result, the Company recognized
expenses of $120 thousands during the nine-month period, based on the expected manufacturing term of the product.
Gross
Loss
Gross
loss for the nine months ended September 30, 2022 was $773,000, an increase of $273,000, or 55%, compared to gross loss of $500,000 for
the nine months ended September 30, 2021.
The
increase was primarily due to increase in cost of revenues partially offset by an increase in revenue 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 nine months ended September 30, 2022 were $3,023,000, an increase of $1,830,000, or 153%, compared to
$1,193,000 for the nine months ended September 30, 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 and
increase in facility costs due to a lease for additional office space.
In
addition, there was an increase in R&D payroll expenses in first nine months of 2022 due to the fact that during the corresponding period last year a 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 nine months ended September 30, 2022 were $617,000, a decrease of $12,000, or 2%, compared to $629,000
for the nine months ended September 30, 2021.
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 nine months ended September 30, 2022 were $3,262,000, a decrease of $669,000, or 17%, compared to
$3,931,000 for the nine months ended September 30, 2021.
The
decrease was primarily due to:
|
- |
decrease
in IP expenses and |
|
- |
cancellation of
a provision of $129,000 related to additional taxes due, following the entering into an agreement with the Israeli Tax Authority. On
September 30, 2021, the Company accrued an amount of approximately NIS 740,000 ($229,000) for additional taxes due following a VAT
audit by the Israeli Tax Authority for the years 2019-2021. In July 2022, the Company reached an agreement with the Israeli Tax
Authority, according to which the amount due in additional taxes was reduced to approximately NIS 341,000 ($100,000). |
Operating
loss
We
incurred an operating loss of $7,675,000 for the nine months ended September 30, 2022, an increase of $1,422,000, or 23%, compared to
operating loss of $6,253,000 for the nine months ended September 30, 2021.
The
increase in operating loss was primarily due to increases in gross loss and expenses related to research and development, partially
offset by decrease in sales and marketing expenses and general and administrative expenses, as described above.
Cash
Flows
The
following table sets forth the significant sources and uses of cash for the periods set forth below (in dollars):
| |
Nine
month ended September 30, | |
| |
2022 | | |
2021 | |
Cash used in
Operating Activity | |
| (4,107,000 | ) | |
| (4,704,000 | ) |
Cash used in Investing
Activity | |
| (1,587,000 | ) | |
| (483,000 | ) |
Cash provided by Financing
Activity | |
| - | | |
| 21,527,000 | |
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 nine months ended September 30, 2022, cash used in operating activities was $4.1 million, consisting of net loss of $7.8 million,
partially offset by a non-cash benefit of $1.9 million, a favorable net change in operating assets and liabilities of $1.4 million and
loss from exchange differences on cash and cash equivalents of $0.3 million. Our non-cash benefit consisted primarily of non-cash charges
of $1.4 million for stock-based compensation. The net change in our operating assets and liabilities primarily reflects cash inflows
from changes in contract liability of $1.3 million.
During
the nine months ended September 30, 2021, cash used in operating activities was $4.7 million, consisting of net loss of $6.3 million
partially offset by a non-cash benefit of $1.3 million and a favorable net change in operating assets and liabilities of $0.2 million.
Our non-cash benefit consisted primarily of non-cash charges of $1.3 million for stock-based compensation.
Investing
Activities
For
the nine months ended September 30, 2022, net cash flows used in investing activities was $1,587,000, due to change of $1,500,000
in short terms deposits and due to purchase of property and equipment.
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 $21.5 million, due to proceeds from the
issuance of shares and warrants equivalent to approximately $19.1 million and proceeds from exercise from warrants of approximately $2.5
million.
Comparison
of the three months ended September 30, 2022 and 2021
The
following table summarizes our results of operations for the three months period ended September 30, 2022, and 2021, together with the changes
in those items in dollars and as a percentage:
| |
Three
months ended September 30, | | |
| |
| |
2022 | | |
2021 | | |
%
Change | |
Revenues | |
| 134,000 | | |
| 23,000 | | |
| 483 | % |
Cost
of Revenues | |
| 430,000 | | |
| 211,000 | | |
| 104 | % |
Gross Loss | |
| (296,000 | ) | |
| (188,000 | ) | |
| 57 | % |
Research and development
expenses | |
| 1,048,000 | | |
| 550,000 | | |
| 91 | % |
Sales and marketing expense | |
| 171,000 | | |
| 225,000 | | |
| (24 | )% |
General
and administrative expenses | |
| 810,000 | | |
| 1,603,000 | | |
| (49 | )% |
Operating Loss | |
| (2,325,000 | ) | |
| (2,566,000 | ) | |
| (9 | )% |
Revenues
For
the three months ended September 30, 2022, we generated revenues of $134,000, an increase of $111,000, or 483%, from the three months
ended September 30, 2021.
The
increase in revenues was primarily due to the increase in revenue from our miniature camera
solution with the Fortune 500 company due to completion R&D stage and moving to production stage. Total
revenues recorded from our miniature camera solution with the Fortune 500 company during
the three months ended September 30, 2022, amounted to approximately $106,000. We did not
record any revenue from our miniature camera solution with the Fortune 500 company during
the three months ended September 30, 2021.
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 September 30, 2022 was $430,000, an increase of $219,000, or 104%, compared to cost of revenues
of $211,000 for the three months ended September 30, 2021.
The
increase was primarily due to an increase in materials as a result of an increase in revenues, an increase in payroll expenses due to
stock-based compensation and due to the transition from the R&D stage to the production stage as described on “Overview”
and increase in facility costs due to a lease for additional office space.
In the second quarter of 2022 the Company completed the development service
stage of its miniature camera solution relating to these advanced payments and moved to production. As a result, the Company recognized
expenses of $60 thousands during the nine-month period, based on the expected manufacturing term of the product.
Gross
Loss
Gross
loss for the three months ended September 30, 2022 was $296,000, an increase of $108,000, or 57%, compared to gross loss of $188,000
for the three months ended September 30, 2021.
The
increase was primarily due to increase in cost of revenues partially offset by an increase in revenue 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 September 30, 2022 were $1,048,000, an increase of $498,000, or 91%, compared to
$550,000 for the three months ended September 30, 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 and
increase in facility costs due to a lease for additional office space.
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 September 30, 2022 were $171,000, a decrease of $54,000, or 24%, compared to $225,000
for the three months ended September 30, 2021.
The
decrease was primarily due to a decrease in marketing activity, the retirement of a director of business development in the US and
a decrease in expenditures on 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 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 September 30, 2022 were $810,000, a decrease of $793,000, or 49%, compared to
$1,603,000 for the three months ended September 30, 2021.
The
decrease was primarily due to:
| - | decrease
in IP expenses, |
| - | decrease
in share-based compensation expenses and |
| - | cancellation of a provision of $129,000 related to additional taxes due,
following the entering into an agreement with the Israeli Tax Authority. On September 30, 2021, the Company accrued an amount of approximately
NIS 740,000 ($229,000) for additional taxes due following a VAT audit by the Israeli Tax Authority for the years 2019-2021. In July 2022,
the Company reached an agreement with the Israeli Tax Authority, according to which the amount due in additional taxes was reduced to
approximately NIS 341,000 ($100,000). |
Operating
loss
We
incurred an operating loss of $2,325,000 for the three months ended September 30, 2022, a decrease of $241,000, or 9%, compared to operating
loss of $2,566,000 for the three months ended September 30, 2021.
The
decrease in operating loss was primarily due to decrease in general and administrative and sales and marketing expenses partially
offset by increase in gross loss and in expenses related to research and development, as described above.
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 September 30, | |
| |
2022 | | |
2021 | |
Cash used in
Operating Activity | |
| (1,709,000 | ) | |
| (1,650,000 | ) |
Cash used
in Investing Activity | |
| (3,045,000 | ) | |
| (313,000 | ) |
Cash used in Financing
Activity | |
| - | | |
| (95 | ) |
Operating
Activities
Our
primary use 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 September 30, 2022, cash used in operating activities was $1.7 million, consisting of net loss of $2.2 million
partially offset by a non-cash benefit of $0.5 million. Our non-cash benefit consisted primarily of non-cash charges of $0.5 million
for stock-based compensation.
During
the three months ended September 30, 2021, cash used in operating activities was $1.7 million, consisting of net loss of $2.6 million
partially offset by a non-cash benefit of $0.7 million. Our non-cash benefit consisted primarily of non-cash charges of $0.7 million
for stock-based compensation.
Investing
Activities
For
the three months ended September 30, 2022, net cash flows used in investing activities was $3,045,000, primarily due to change of $3,000,000
in short terms deposits.
For
the three months ended September 30, 2021, net cash flows used in investing activities was $313,000, due to the purchase of property
and equipment.
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.
Liquidity
and Capital Resources
As
of September 30, 2022, we had cash and cash equivalents of $2.6 million and $12.6 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 September 30, 2022 we
incurred an accumulated deficit of approximately $23.1 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.
Off-Balance
Sheet Arrangements
None.