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Aug. 12, 2021, 4:32 p.m. EDT

10-Q: SCOUTCAM INC.

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(EDGAR Online via COMTEX) -- 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 activity during last few months was 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, while expanding the R&D team to enable additional projects in parallel. The main effect of this activity was the increase in the number of employees to enable the Company to manage the anticipated increased workload. In addition, the Company has enlarged its focus on I4.0 activities.

Other major activities were the following:

- expanding marketing activities, including the recruitment of a Director of Business Development in the US, and launching a multi-platform digital marketing campaign;

Comparison of the six months ended June 30, 2021 and 2020

The following table summarizes our results of operations for the six months period ended June 30, 2021, and 2020, together with the changes in those items in dollars and as a percentage:







                                                Six months ended June 30,
                                                  2021              2020         % Change
        Revenues                                    298,000           74,000           303 %
        Cost of Revenues                            610,000          281,000           117 %
        Gross Loss                                 (312,000 )       (207,000 )          51 %
        Research and development expenses           754,000          370,000           104 %
        Sales and marketing expense                 293,000          188,000            56 %
        General and administrative expenses       2,328,000        1,680,000            39 %
        Operating Loss                           (3,687,000 )     (2,445,000 )          51 %
        


- 20 -

Revenues

For the six months ended June 30, 2021, we generated revenues of $298,000, an increase of $224,000 from the six months ended June 30, 2020.

The increase in revenues was primarily due to revenues from A.M. Surgical. Total revenues recorded from A.M. Surgical during the six months ended June 30, 2021 amounted to approximately $200,000. We did not record any revenue from A.M. Surgical during the six months ended June 30, 2020.

Cost of Revenues

Cost of revenues for the six months ended June 30, 2021 was $610,000, an increase of $329,000 compared to cost of revenues of $281,000 for the six months ended June 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 six months ended June 30, 2021, was $312,000, an increase of $105,000 compared to gross loss of $207,000 for the six months ended June 30, 2020.

Research and Development Expenses

Research and development expenses for the six months ended June 30, 2021 were $754,000, an increase of $384,000, or 104%, compared to $370,000 for the six months ended June 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(TM) 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.

- 21 -

Sales and Marketing Expenses

Sales and marketing expenses for the six months ended June 30, 2021, were $293,000, an increase of $105,000, or 56%, compared to $188,000 for the six months ended June 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 six months ended June 30, 2021 were $2,328,000, an increase of $648,000, or 39%, compared to $1,680,000 for the six months ended June 30, 2020. The increase was primarily due to:

? 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;

Operating loss

We incurred an operating loss of $3,687,000 for the six months ended June 30, 2021, an increase of $1,242,000, or 51%, compared to operating loss of $2,445,000 for the six months ended June 30, 2020. The increase in operating loss was due to $105,000 increase in gross loss, $384,000 increase in research and development expenses, and $105,000 increase in sales and marketing expenses and $648,000 increase in administrative and general expenses.







        Cash Flows
        The following table sets forth the significant sources and uses of cash for the
        periods set forth below (in dollars):
                                                Six month ended June 30,
                                                  2021             2020
        Cash used in Operating Activity         (3,054,000 )     (2,277,000 )
        Cash used in Investing Activity           (170,000 )       (221,000 )
        Cash provided by Financing Activity     21,622,000        2,777,000
        


- 22 -

Operating Activities

For the six months ended June 30, 2021, net cash flows used in operating activities was $3,054,000, due primarily to a net loss of $3,694,000, partially offset by share based compensation of $635,000.

Investing Activities

For the six months ended June 30, 2021, net cash flows used in investing activities was $170,000, due to the purchase of property and equipment.

Financing Activities

For the six months ended June 30, 2021, net cash flows provided by financing activities was $21,622,000, due to proceeds from the issuance of shares and warrants equivalent to approximately $19,118,000 and proceeds from exercise from warrants of approximately $2,504,000.

Comparison of the three months ended June 30, 2021 and 2020

The following table summarizes our results of operations for the three months period ended June 30, 2021, and 2020, together with the changes in those items in dollars and as a percentage:







                                                Three months ended June 30,
                                                    2021               2020        % Change
        Revenues                                       274,000          34,000           706 %
        Cost of Revenues                               407,000         151,000           170 %
        Gross Loss                                    (133,000 )      (117,000 )          14 %
        Research and development expenses              421,000         115,000           266 %
        Sales and marketing expense                    148,000         136,000             9 %
        General and administrative expenses          1,395,000         568,000           146 %
        Operating Loss                              (2,097,000 )      (936,000 )         124 %
        


Revenues

For the three months ended June 30, 2021, we generated revenues of $274,000, an increase of $240,000 from the three months ended June 30, 2020.

The increase in revenues was primarily due to revenues from A.M. Surgical. Total revenues recorded from A.M. Surgical during the three month ended June 30, 2021 amounted to approximately $200,000. We did not record any revenue from A.M. Surgical during the three months ended June 30, 2020.

Cost of Revenues

Cost of revenues for the three months ended June 30, 2021, was $407,000, an increase of $256,000 compared to cost of revenues of $151,000 for the three months ended June 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 June 30, 2021, was $133,000, an increase of $16,000 compared to gross loss of $117,000 for the three months ended June 30, 2020.

- 23 -

Research and Development Expenses

Research and development expenses for the three months ended June 30, 2021 were $421,000, an increase of $306,000, or 266%, compared to $115,000 for the three months ended June 30, 2020. The increase was primarily due to (i) an increase in payroll expenses, 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 began examining additional applications for our micro ScoutCam(TM) 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 June 30, 2021 were $148,000, an increase of $12,000, or 9%, compared to $136,000 for the three months ended June 30, 2020.

General and Administrative Expenses

General and Administrative expenses for the three months ended June 30, 2021 were $1,395,000, an increase of $827,000, or 146%, compared to $568,000 for the three months ended June 30, 2020. The increase was primarily due to:

? an increase in share based compensation due to new options grants as described in Note 4 of our interim condensed financial statements as of June 30, 2021; ? an increase in in payroll expenses due to the hiring of additional employees including a new CEO and controller, and an increase due to the transition of our CFO from part-time to full-time; and ? An increase in IP expenses due to maintenance, defense, and commercialization efforts of existing patents.

Operating loss

We incurred an operating loss of $2,097,000 for the three months ended June 30, 2021, an increase of $1,161,000, or 124%, compared to operating loss of $936,000 for the three months ended June 30, 2020. The increase in operating loss was due to $16,000 increase in gross loss, $306,000 increase in research and development expenses, and $12,000 increase in sales and marketing expenses and $827,000 increase in administrative and general expenses.







        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 June 30,
                                                   2021              2020
        Cash used in Operating Activity           (2,280,000 )     (1,140,000 )
        Cash used in Investing Activity              (53,000 )        (36,000 )
        Cash provided by Financing Activity       11,341,000        1,949,000
        


- 24 -

Operating Activities

For the three months ended June 30, 2021, net cash flows used in operating activities were $2,280,000, due primarily to a net loss of $2,088,000 and change in operating asset and liabilities of approximately $698,000, partially offset by share based compensation of $556,000.

Investing Activities

For the three months ended June 30, 2021, net cash flows used in investing activities were $53,000, due to the purchase of property and equipment.

Financing Activities

For the three months ended June 30, 2021, net cash flows provided by financing activities were $11,341,000, due to proceeds from the issuance of shares and warrants equivalent to approximately $9,618,000 and proceeds from exercise from warrants of approximately $1,723,000.

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 June 30, 2021.

As of June 30, 2021, our total assets were $25,548,000. 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 June 30, 2021.

As of June 30, 2021, our total liabilities were $3,066,000. 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 June 30, 2021, we incurred accumulated deficit of approximately $10 million. The management believes that our cash and cash resources as of June 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.

Aug 12, 2021

COMTEX_391469210/2041/2021-08-12T16:31:52

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