Odysight.ai Inc. 10-Q

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, 2022. 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, 2022 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: ● Production and supply of product to a Fortune 500 multinational healthcare corporation. ● 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 activity. Comparison of the Nine months ended September, 2023 and 2022 The following table summarizes our results of operations for the nine month period ended September 30, 2023 and 2022, together with the changes in those items in dollars and as a percentage: Nine months ended September 30, 2023 2022 % Change Revenues 1,087,000 506,000 115 % Cost of Revenues 1,648,000 1,279,000 29 % Gross Loss (561,000 ) (773,000 ) (27 )% Research and development expenses 4,107,000 3,023,000 36 % Sales and marketing expense 877,000 617,000 42 % General and administrative expenses 3,225,000 3,262,000 (1 )% Operating Loss (8,770,000 ) (7,675,000 ) 14 % 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, 2023, we generated revenues of $1,087,000, an increase of $581,000, or 115%, compared to revenues of $506,000 for the nine months ended September 30, 2022. The increase in revenues was primarily due to the completion of development of the product relating to our miniature camera solution with a Fortune 500 company during the second quarter of 2022 and moving to production stage. Total revenues recorded from our miniature camera solution with the Fortune 500 company for the nine months ended September 30, 2023 amounted to approximately $1,039,000 compared to $433,000 for the nine months ended September 30, 2022. 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 nine months ended September 30, 2023 was $1,648,000, an increase of $369,000, or 29%, compared to cost of revenues of $1,279,000 for the nine months ended September 30, 2022. The increase was primarily due to an increase in material costs due to an increase in the number of products sold and supplied to the Fortune 500 company. Gross Loss Gross loss for the nine months ended September 30, 2023 was $561,000, a decrease of $212,000, or 27%, compared to gross loss of $773,000 for the nine months ended September 30, 2022. The decrease was primarily due to increase in revenues partially offset by increase 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 nine months ended September 30, 2023 were $4,107,000, an increase of $1,084,000, or 36%, compared to $3,023,000 for the nine months ended September 30, 2022. The increase was primarily due to an increase in payroll expenses from additional employee recruitments, 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. - 20 - 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 nine months ended September 30, 2023 were $877,000, an increase of $260,000, or 42%, compared to $617,000 for the nine months ended September 30, 2022. The increase was primarily due to recent rebranding activities (including expenses related to the changing of the name of the Company which include among other designing a new logo and promotional materials). In addition, during June 2023 the Company participated on Paris Air Show, the world’s premier and largest event dedicated to the aviation and space industry. This increase was partially offset by a decrease in payroll expenses (including stock-based compensation) due to the resignation of our VP Business Development during the fourth quarter of 2022. 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 nine months ended September 30, 2023 were $3,225,000, a decrease of $37,000, or 1%, compared to $3,262,000 for the nine months ended September 30, 2022. Operating loss We incurred an operating loss of $8,770,000 for the nine months ended September 30, 2023, an increase of $1,095,000, compared to operating loss of $7,675,000 for the nine months ended September 30, 2022. The increase in operating loss was primarily due to an increase in expenses related to research and development and sales and marketing expenses, partially offset by a decrease in 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): Nine month ended September 30, 2023 2022 Cash used in Operating Activity (7,338,000 ) (4,107,000 ) Cash used in Investing Activity (594,000 ) (1,587,000 ) Cash provided by Financing Activity 13,835,000 - 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 of expenses of our business and our working capital requirements. During the nine months ended September 30, 2023, cash used in operating activities was $7.3 million, consisting of net loss of $8.1 million, an unfavorable net change in operating assets and liabilities of $0.5 million, partially offset by a non-cash benefit of $1.3 million. Our non-cash benefit consisted primarily of non-cash charges for stock-based compensation. 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. - 21 - Investing Activities For the nine months ended September 30, 2023, net cash flows used in investing activities was $594,000, consisting mainly of investment, net on short-term deposits. For the nine months ended September 30, 2022, net cash flows used in investing activities was $1,587,000, consisting mainly of investment, net on short-term deposits. Financing Activities During the nine months ended September 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 September 30, 2023 and 2022 The following table summarizes our results of operations for the three months period ended September 30, 2023, and 2022, together with the changes in those items in dollars and as a percentage: Three months ended September 30, 2023 2022 % Change Revenues 110,000 134,000 (18 )% Cost of Revenues 321,000 430,000 (25 )% Gross Loss (211,000 ) (296,000 ) (29 )% Research and development expenses 1,354,000 1,048,000 29 % Sales and marketing expense 208,000 171,000 22 % General and administrative expenses 1,099,000 810,000 36 % Operating Loss (2,872,000 ) (2,325,000 ) 24 % Revenues For the three months ended September 30, 2023, we generated revenues of $110,000, a decrease of $24,000, or 18%, from the three months ended September 30, 2022. The decrease in revenues was primarily due to an overall decrease in the sales of the Company’s products. 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 September 30, 2023 was $321,000, a decrease of $109,000, or 25%, compared to cost of revenues of $430,000 for the three months ended September 30, 2022. The decrease was primarily due to a decrease in material costs and salary expenses, which were due to decrease in revenues. Gross Loss Gross loss for the three months ended September 30, 2023 was $211,000, a decrease of $85,000, or 29%, compared to gross loss of $296,000 for the three months ended September 30, 2022. The decrease was primarily due to decrease in cost of revenues, partially offset by decrease in revenues as described above. - 22 - 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, 2023 were $1,354,000, an increase of $306,000, or 29%, compared to $1,048,000 for the three months ended September 30, 2022. The increase was primarily due to an increase in payroll expenses from additional employee recruitments, 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. 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 September 30, 2023 were $208,000, an increase of $37,000, or 22%, compared to $171,000 for the three months ended September 30, 2022. The increase was primarily due to an increase in marketing activities. 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 September 30, 2023 were $1,099,000, an increase of $289,000, compared to $810,000 for the three months ended September 30, 2022. The increase was primarily due to: ● Rent and maintenance expenses due to lease of new office space in Ramat Gan 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 $2,872,000 for the three months ended September 30, 2023, an increase of $547,000, compared to operating loss of $2,325,000 for the three months ended September 30, 2022. The increase in operating loss was primarily due to increases in expenses related to research and development and sales and marketing expenses. - 23 - 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, 2023 2022 Cash used in Operating Activity (2,255,000 ) (1,709,000 ) Cash provided by (used in) Investing Activity 14,963,000 (3,045,000 ) Cash used in Financing Activity (78,000 ) - Operating Activities Our primary use 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 be increase due to the expected increase in spending on our business and our working capital requirements. During the three months ended September 30, 2023, cash used in operating activities was $2.3 million, consisting of net loss of $2.5 million, an unfavorable net change in operating assets and liabilities of $0.3 million and a non-cash benefit of $0.5 million. Our non-cash benefit consisted primarily of non-cash charges of $0.3 million for stock-based compensation. 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 for stock-based compensation. Investing Activities For the three months ended September 30, 2023, net cash provided by Investing Activity was $15 million, consisting mainly of withdrawal, net on short-term deposits. For the three months ended September 30, 2022, net cash flows used in investing activities was $3,045,000, consisting mainly of investment, net in short terms deposits. Financing Activities For the three months ended September 30, 2023, net cash flows used in financing activities was $78,000, consisting of issuance expenses. Liquidity and Capital Resources As of September 30, 2023, we had cash and cash equivalents of $15.9 million and $3.6 million of short-term deposits compared to cash and cash equivalents $10.1 million and $3.0 million of short-term deposits as of December 31, 2022. In addition, as of September 30, 2023 we incurred an accumulated deficit of approximately $32.9 million, compared to $24.8 million as of December 31, 2022. Our primary sources of liquidity to date have been from fund raisings 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, as of November 13, 2023, 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. - 24 - Off-Balance Sheet Arrangements None. Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, we are not required to provide the information requested by this Item.