Odysight.ai Inc.: Form 10-Q for the period ended Mar 31, 2024

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, 2023. 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, 2023 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

Overview

The Company’s primary business activities during last few months were enlarging our focus on R&D activities in the domain of I4.0 (including PdM and CBM in sectors such as aerospace, maritime energy and other heavy machinery, engines and complicated mechanics which have a need for monitoring and predictive maintenance applications). 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, 2024 and 2023

The following table summarizes our results of operations for the three months period ended March 31, 2024 and 2023, together with the changes in those items in dollars and as a percentage:

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, 2024, we generated revenues of $187,000, a decrease of $116,000, or 38%, from the three months ended March 31, 2023 revenues.

The decrease in revenues was primarily caused by a decrease in unit sales. Total revenues recorded from our miniature camera solution with a Fortune 500 multinational healthcare corporation for the three months ended March 31, 2024 amounted to approximately $106,000 compared to $288,000 for the three months ended March 31, 2023.

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Cost of Revenues

Cost of revenue is primarily comprised of cost of personnel including warehouse personnel costs, certain allocated facilities, and expenses associated with logistics and quality control.

Cost of revenues for the three months ended March 31, 2024 was $410,000, a decrease of $140,000, or 25%, compared to cost of revenues of $550,000 for the three months ended March 31, 2023.

The decrease was primarily due to a decrease in the number of products sold and supplied to the Fortune 500 company.

Gross Loss

Gross loss for the three months ended March 31, 2024 was $223,000, a decrease of $24,000, or 10%, compared to gross loss of $247,000 for the three months ended March 31, 2023.

The decrease was primarily due to decrease in revenues partially offset by decrease 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, 2024 were $1,567,000, an increase of $169,000, or 12%, compared to $1,398,000 for the three months ended March 31, 2023.

The increase was primarily due to an increase in payroll expenses for additional employee recruitment, as result of enlarging our focus on R&D activities in the domain of I4.0.

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.

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Sales and Marketing Expenses

Sales and marketing expenses primarily consist of payroll expenses, consulting services, promotional materials, exhibitions, demonstration equipment, and certain allocated facility infrastructure costs.

Sales and marketing expenses for the three months ended March 31, 2024 were $234,000, an increase of $58,000, or 33%, compared to $176,000 for the three months ended March 31, 2023.

The increase was primarily due to an increase in payroll expenses for additional employee recruitment.

We expect that our selling and marketing expenses will increase as we expand our selling and marketing efforts in the I4.0 domain.

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, public relations, accounting, auditing, tax services, and insurance costs.

General and administrative expenses for the three months ended March 31, 2024 were $1,340,000, an increase of $382,000, or 40%, compared to $958,000 for the three months ended March 31, 2023.

The decrease was primarily due to:

- an increase in patent related expenses due to maintenance, defense, and commercialization efforts involving existing patents;

- an increase in professional services expenses due to the hiring of a financial consultant, IR consultant, HR consultant and the appointment of new directors; and

- an increase in rent and maintenance, due to our new offices in Ramat Gan.

Operating loss

We incurred an operating loss of $3,364,000 for the three months ended March 31, 2024, an increase of $585,000, or 21%, compared to operating loss of $2,779,000 for the three months ended March 31, 2023.

The increase in operating loss was primarily due to an increase in expenses related to research and development, sales and marketing expenses and general and administrative expenses, each as described above.

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Cash Flows

The following table sets forth the significant sources and uses of cash for the periods set forth below (in dollars):

Operating Activities

Our primary uses of cash from operating activities have been for payroll expenses, research and development costs, manufacturing costs, marketing and promotional expenses, professional services cost and costs related to our facilities. We expect that our cash flows from operating activities will continue to increase due to an expected increase in the expenses of our business and our working capital requirements.

During the three months ended March 31, 2024, cash used in operating activities was $1.2 million, consisting of net loss of $3.1 million, a non-cash benefit of $0.4 million and a favorable net change in operating assets and liabilities of $1.5 million. Our non-cash benefit consisted primarily of non-cash charges for stock-based compensation. The net change in our operating assets and liabilities primarily reflects cash flows from changes in account receivable.

During the three months ended March 31, 2023, cash used in operating activities was $2.5 million, consisting of net loss of $2.7 million, an unfavorable net change in operating assets and liabilities of $0.4 million, partially offset by a non-cash benefit of $0.6 million. Our non-cash benefit consisted primarily of non-cash charges for stock-based compensation and depreciation. The net change in our operating assets and liabilities primarily reflects cash outflows from changes in contract liability and other current assets, partially offset by inflows from changes in other current expenses.

Investing Activities

During the three months ended March 31, 2024, cash used in investing activities was $22,000, consisting of purchase of property and equipment .

During the three months ended March 31, 2023, cash used in investing activities was $12 million, consisting mainly of investment, net on short-term deposits.

Financing Activities

During the three months ended March 31, 2023, cash provided by financing activities was $14 million, consisting of cash proceeds from issuance of shares and warrants.

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Liquidity and Capital Resources

As of March 31, 2024, we had cash and cash equivalents of $7.4 million and short-term deposits of $8.2 million compared to cash and cash equivalents of $8.9 million and short-term deposits of $8.1 million as of December 31, 2023. In addition, as of March 31, 2024, we incurred an accumulated deficit of $37.4 million compared to $34.2 million as of December 31, 2023.

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 allow us to fund our operating plan through 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.

Off-Balance Sheet Arrangements

None.

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(e), occurred during the fiscal quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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There have been no material changes from the information set forth in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31,2023 as filed with the SEC on March 26, 2024.