Odysight.ai Inc.: Form 10-Q for the period ended Jun 30, 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 activity during last few months was 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 to enable the Company to accelerate its growth and support the anticipated increased workload and solution development requirements.

Comparison of the six months ended June 30, 2024 and 2023

The following table summarizes our results of operations for the six months period ended June 30, 2024 and 2023, together with the changes in those items in dollars and as a percentage:

Revenues

For the six months ended June 30, 2024, we generated revenues of $1,368,000, an increase of $391,000, or 40%, as compared to the six months ended June 30, 2023.

The increase in revenues was primarily attributable to the increase in revenues from a Fortune 500 multinational healthcare corporation, as well as recognition of revenues from Industry 4.0.

The increase in revenues from a Fortune 500 multinational healthcare corporation (see note 5 to our interim financial statements) due to:

• an increase in the number of units sold and supplied to the customer during the six months ended June 30, 2024, and
• formalization of negotiations with the customer, following which the sale price per unit increased significantly compared to the previous price.

A substantial portion of our current revenue comes from a limited number of customers.

Cost of Revenues

Cost of revenue is primarily comprised of cost of personnel, certain allocated expenses related to facilities, logistics and quality control.

Cost of revenues for the six months ended June 30, 2024, was $1,077,000, a decrease of $250,000, or 19%, compared to cost of revenues of $1,327,000 for the six months ended June 30, 2023.

This decrease was primarily attributed to a reduction in the price of certain materials and improvements in the production process. These savings were partially offset by the increase in number of units sold and supplied to a Fortune 500 multinational healthcare corporation.

Gross Profit (Loss)

Gross profit for the six months ended June 30, 2024, was $291,000. Gross loss for the six months ended June 30, 2023, was $350,000.

The change was due to both increase in revenues and decrease in cost of revenues, as described above.

The transition from a gross loss to a gross profit is attributable to:

• formalization of negotiations with the Fortune 500 multinational healthcare corporation, following which the unit price experienced a substantial increase compared to its previous rate;
• an increase in the number of units sold and supplied to the customer during the six months ended June 30, 2024, and
• reduction in the price of certain materials and improvements in the production process

Research and Development Expenses

Research and development efforts are focused on new products development, as well as developing and enhancing functionality for our 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, including costs related to 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 six months ended June 30, 2024, were $2,975,000, an increase of $222,000, or 8%, compared to $2,753,000 for the six months ended June 30, 2023.

The increase was primarily attributable to an increase in payroll and related expenses for new employees’ recruitment.

We expect that our research and development expenses will increase as we continue to develop and improve our products and services in the I4.0 domain.

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Sales and Marketing Expenses

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

Sales and marketing expenses for the six months ended June 30, 2024, were $459,000, a decrease of $210,000, or 31%, compared to $669,000 for the six months ended June 30, 2023.

During the six months ended June 30, 2023, the Company incurred significant expenses related to rebranding activities. These activities included costs associated, inter alia, with altering the Company’s name, design of a new logo and the creation of new promotional materials. Additionally, the Company participated in the Paris Air Show in June 2023, the world’s premier and largest event dedicated to the aviation and space industry.

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

General and Administrative Expenses

General and administrative expenses primarily consist of payroll and other related costs, including stock-based compensation. General and administrative expenses also include direct and allocated cost, such as facility-related costs, professional fees, legal, patent, investors and public relations, accounting, auditing, tax services, and insurance costs.

General and administrative expenses for the six months ended June 30, 2024, were $2,585,000, an increase of $459,000, or 22%, compared to $2,126,000 for the six months ended June 30, 2023.

The increase was primarily due to:

- 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 stock-based compensation due to new options grants.

Operating loss

We incurred an operating loss of $5,728,000 for the six months ended June 30, 2024, a decrease of $170,000, or 3%, compared to operating loss of $5,898,000 for the six months ended June 30, 2023.

The decrease in operating loss was primarily due to an increase in gross profit and a decrease in sales and marketing expenses, partially offset by increase in expenses related to research and development and general and administrative expenses, each 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):

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 costs and costs related to our facilities. We expect that cash flows related to our operating activities will continue to increase as our business and our working capital requirements grow.

During the six months ended June 30, 2024, cash used in operating activities was $3.3 million, consisting of net loss of $5.3 million, partially offset by an unfavourable net change in operating assets and liabilities of $0.9 million and a non-cash benefit of $1.1 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 inflows from changes in accounts receivable and accrued compensation expenses, partially offset by outflows from changes in current and non-current other assets.

During the six months ended June 30, 2023, cash used in operating activities was $5.1 million, consisting of net loss of $5.5 million, an unfavourable net change in operating assets and liabilities of $0.3 million, partially offset by a non-cash benefit of $0.8 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 outflows from changes in contract liability and other current assets, was partially offset by inflows from changes in accounts payables and other accounts payables.

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Investing Activities

During the six months ended June 30, 2024, cash provided by investing activities was $8 million, attributable mainly to a withdrawal, net of short-term deposits.

During the six months ended June 30, 2023, cash used in investing activities was $15.6 million, consisting mainly of investment, net on short-term deposits.

Financing Activities

During the six months ended June 30, 2023, cash provided by financing activities was $13.9 million, consisting of cash proceeds from issuance of shares and warrants, net of issuance costs.

Comparison of the three months ended June 30, 2024 and 2023

The following table summarizes our results of operations for the three months period ended June 30, 2024, and 2023, together with the changes in those items in dollars and as a percentage:

Revenues

For the three months ended June 30, 2024, we generated revenues of $1,181,000, an increase of $507,000, or 75%, as compared to the three months ended June 30, 2023.

The increase in revenues was primarily attributable to the increase in revenues from a Fortune 500 multinational healthcare corporation, as well as recognition of revenues from Industry 4.01

The increase in revenues from a Fortune 500 multinational healthcare corporation (see note 5 to our interim financial statements) due to:

• an increase in the number of units sold and supplied to the customer during the three months ended June 30, 2024, and
• formalization of negotiations with the customer, following which the sale price per unit increased significantly compared to the previous price.

Cost of Revenues

Cost of revenue is primarily comprised of cost of personnel, certain allocated expenses related to facilities, logistics and quality control.

Cost of revenues for the three months ended June 30, 2024, was $667,000, a decrease of $110,000, or 14%, compared to cost of revenues of $777,000 for the three months ended June 30, 2023.

This decrease was primarily attributed to a reduction in the price of certain materials and improvements in the production process. These savings were partially offset by the increase in number of units sold and supplied to a Fortune 500 multinational healthcare corporation.

Gross Profit ( Loss)

Gross profit for the three months ended June 30, 2024, was $514,000. Gross loss for the three months ended June 30, 2023 was $103,000.

The change was due to both increase in revenues and decrease in cost of revenues as described above.

The transition from a gross loss to a gross profit is attributable to:

• formalization of negotiations with the Fortune 500 multinational healthcare corporation, following which the unit price experienced a substantial increase compared to its previous rate;
• an increase in the number of units sold and supplied to the customer during the three months ended June 30, 2024, and
• reduction in the price of certain materials and improvements in the production process.
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Research and Development Expenses

Research and development efforts are focused on new products development, as well as developing and enhancing functionality for our 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, including cost related to 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 June 30, 2024 were $1,408,000, an increase of $53,000, or 4%, compared to $1,355,000 for the three months ended June 30, 2023.

We expect that our research and development expenses will increase as we continue to develop our products and services in the I4.0 domain.

Sales and Marketing Expenses

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

Sales and marketing expenses for the three months ended June 30, 2024, were $225,000, a decrease of $268,000, or 54%, compared to $493,000 for the three months ended June 30, 2023.

During the three months ended June 30, 2023, the Company incurred significant expenses related to rebranding activities. These activities included costs associated, inter alia, with altering the Company’s name, design of a new logo and the creation of new promotional materials. Additionally, the Company participated in the Paris Air Show in June 2023, the world’s premier and largest event dedicated to the aviation and space industry.

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

General and Administrative Expenses

General and administrative expenses primarily consist of payroll and other related costs, including stock-based compensation. General and administrative expenses also include direct and allocated cost, such as facility-related, professional fees, legal, patent, investors and public relations, accounting, auditing, tax services, and insurance costs.

General and administrative expenses for the three months ended June 30, 2024, were $1,245,000, an increase of $77,000, or 7% compared to $1,168,000 for the three months ended June 30, 2023.

The increase was primarily due to:

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

- an increase in stock-based compensation due to new options grants.

Operating loss

We incurred an operating loss of $2,364,000 for the three months ended June 30, 2024, a decrease of $755,000, or 24%, compared to operating loss of $3,119,000 for the three months ended June 30, 2023.

The decrease in operating loss was primarily due to an increase in gross profit and a decrease in sales and marketing expenses, partially offset by increase in expenses related to research and development 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 use of cash from operating activities was for payroll expenses, research and development costs, manufacturing costs, marketing and promotional expenses, professional services costs and costs related to our facilities. We expect that cash flows related to our operating activities will continue to increase as our business and our working capital requirements grow.

During the three months ended June 30, 2024, cash used in operating activities was $2.1 million, consisting of net loss of $2.2 million, an unfavourable net change in operating assets and liabilities of $0.6 million and a non-cash benefit of $0.7 million. Our non-cash benefit consisted primarily of non-cash charges of $0.5 million for stock-based compensation. The net change in our operating assets and liabilities primarily reflects cash outflows from changes in accounts receivable.

During the three months ended June 30, 2023, cash used in operating activities was $2.6 million, consisting of net loss of $2.9 million, a favourable net change in operating assets and liabilities of $0.1 million and a non-cash benefit of $0.2 million. Our non-cash benefit consisted primarily of non-cash charges of $0.3 million for stock-based compensation.

Investing Activities

For the three months ended June 30, 2024, net cash flows provided by investing activities was $8 million, attributable mainly to a withdrawal, net on short-term deposits.

For the three months ended June 30, 2023, net cash flows used in investing activities was $3.5 million, consisting mainly of investment, net on short-term deposits.

Financing Activities

For the three months ended June 30, 2023, net cash flows used in financing activities was $64,000, consisting of issuance expenses.

Liquidity and Capital Resources

As of June 30, 2024, we had cash, cash equivalents and restricted cash of $13.5 compared to cash and cash equivalents and short-term deposits of $17 million as of December 31, 2023. In addition, as of June 30, 2024, we incurred an accumulated deficit of approximately $39.6 million, as 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 in long-term growth, and therefore we expect that our expenses will grow. 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.

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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 June 30, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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