Odysight.ai Inc. 10-K

item 9a. controls and Procedures Disclosure Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures are being made only in accordance with authorization of our management and directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting on December 31, 2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework, in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment under those criteria, management has determined that, as of December 31, 2023, our internal control over financial reporting was effective. Attestation Independent Report of the Registered Public Accounting Firm This annual report on Form 10-K does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report on Form 10-K. Changes in Internal Control over Financial Reporting There were no changes in internal control over financial reporting during the year ended December 31, 2023 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. Item 9b. Other information None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not Applicable 44 part iii Item 10. Directors, Executive Officers and corporate governance Directors, Executive Officers, Promoters and Control Persons The following table sets forth the names and ages of our directors and executive officers: Name Age Position Prof. Benad Goldwasser † 73 Chairman of the Board Jackson Schneider † 59 Director Ronit Rubin † 59 Director Moshe (Mori) Arkin 71 Director Inbal Kreiss† 57 Director Zeev Vurembrand † 72 Director Nir Nimrodi † 55 Director Yehu Ofer* 58 Chief Executive Officer Tanya Yosef * 41 Chief Financial Officer Eli Israeli* 53 Chief Technology Officer Jacob Avinu* 41 Senior VP of Product Portfolio * Executive Officer † Independent Director On June 1, 2023, Ronen Rosenbloom notified the Company that he would resign as a member of our board of directors effective immediately. Mr. Rosenbloom advised the Company that his resignation was not the result of any conflict with the Company or objection to any action taken by it. On August 13, 2023, our board of directors appointed Mr. Nir Nimrodi to serve as a member of the board of directors. On December 6, 2023, certain of the Company’s stockholders representing more than 50% of the Company’s outstanding share capital as of November 30, 2023 voted by written consent to reelect Ms. Inbal Kreiss and elect Mr. Jackson Schneider and Ms. Ronit Rubin as Class II directors of the Company, with a term of office for each to expire at the third succeeding annual meeting of the stockholders after their election and until their successors are duly elected and qualified. On February 21, 2024, the Company appointed Ms. Yosef as VP of Finance, a position she is expected to begin on May 5, 2024. Ms. Yosef will continue to serve as Chief Financial Officer until such time as the new position is effective. An announcement by the Company regarding the appointment of a new chief financial officer will be forthcoming. Directors Prof. Benad Goldwasser has served as chairman of our board of directors since December 26, 2019, and has served as chairman of Odysight.ai’s board of directors since its inception. Prof. Goldwasser is a serial entrepreneur and retired urology medical doctor. In 2016, Prof. Goldwasser launched a venture capital fund partnered with SAIL, a Shanghai Government investment company. Prof. Goldwasser has served as a member of the board of directors of Innoventric Ltd. since 2017 and Inspira Technologies Ltd. since January 2021. From 2013-2016 Prof. Goldwasser served as an external director of BioCanCell Ltd. (TASE: BICL). Prof. Goldwasser was the co-founder of Vidamed Inc., Medinol Ltd., Rita Medical Inc., Optonol Ltd. and GI View Ltd. Prof. Goldwasser served as managing director of Biomedical Investments Ltd., an Israeli Venture Capital firm. During his medical career, he served as Chairman of Urology at the Chaim Sheba Medical Center and Professor of Surgery at Tel-Aviv University. Prof. Goldwasser holds MD and MBA degrees from Tel-Aviv University . Jackson Schneider has served on our board of directors since December 6, 2023. Mr. Schneider is currently a Senior Research Scholar at Columbia University in New York, a position he has held since July 2023. From January 2014 to November 2022, Mr. Schneider served as President and CEO of Embraer Defense & Security, a leading Latin American aerospace and defense company and, from August 2020 to August 2022, he served as a visiting senior research fellow (non-resident) in the Department of War Studies at King’s College in London. Before this, Mr. Schneider served in other capacities for Embraer and in a series of senior management positions for Mercedes-Benz Do Brasil LTDA, Daimler-Chrysler (Mercedes-Benz), and Unilever do Brasil. Mr. Schneider also served on the board of directors of Tempest S.A., Visiona Tecnologia Aerospacial S.A., and OGMA, the Portugal Aerospace Industry, each affiliated with Embraer, until April 2023. He currently serves on the advisory board or Board of Directors of Sonda Tecnologias (Brazil), Abra Aviation Group (London), and Mercedes-Benz Do Brasil. In addition, Mr. Schneider has served in leadership roles in various industry associations and is currently the President of the Superior Council for Trade and Commerce in the Federation of Industries of the State of Sao Paulo (FIESP). He holds a law degree from 1982 to 1986 from UFRGS/UNB and an MBA from the Business School Sao Paulo (BSP) in Brazil in partnership with the Rotman School in Toronto, Canada. 45 Ronit Rubin has served on our board of directors since December 6, 2023. Ms. Rubin is currently EMEA President for AllCloud, a professional services company providing organizations with the tools for cloud enablement and transformation, a position she has held since 2016. Prior to this, Ms. Rubin served as VP, Business Division and VP, Information Technology at Partner Communications Ltd. and as VP, Information Technology at Cal-Israel Credit Cards Ltd. From 1984-2006, Ms. Rubin served in various roles for the navy of the Israeli Defense Forces, including as Commander, Computers Unit and Head of Information Systems Department. She currently serves as a board member of CardCom Technology. Ms. Rubin holds a BA in Economics & Logistics from Bar-Ilan University in Ramat Gan, Israel, and an MA in Business Management from Ben-Gurion University of the Negev in Be’er Sheva, Israel. Moshe (Mori) Arkin has served on our board of directors since February 15, 2021. Mr. Arkin is a leading life science and pharmaceutical entrepreneur and serves as the chairman of Arkin Holdings, which he founded in 2009. Mr. Arkin has served as chairman of the board of directors of Sol Gel Technologies Ltd. (NASDAQ: SLGL) since 2014 and sits on the board of directors of several private pharmaceutical and medical device companies, including Digma Medical, a company developing systems to treat insulin resistance present in type 2 diabetes and other metabolic syndrome diseases, and Valcare Medical, a company developing heart valve devices. From 2005 to 2008, Mr. Arkin served as the head of generics at Perrigo Company, and from 2005 until 2011, as a member of its board of directors. Prior to joining Sol Gel Technologies Ltd., Mr. Arkin served as a director of cCAM Biotherapeutics Ltd., a company focused on the discovery and development of novel immunotherapies to treat cancer from 2012 until its acquisition in 2015 by Merck & Co., Inc. Mr. Arkin served as chairman of Agis Industries Ltd. from 1972 until its acquisition by Perrigo Company in 2005. Mr. Arkin holds a B.A. degree in psychology from the Tel Aviv University, Israel. Inbal Kreiss has served on our board of directors since April 9, 2021. Ms. Kreiss is currently the Chief of Innovation at the Systems, Missiles and Space Division of the Israeli Aerospace Industries Ltd. (IAI) and Chairwoman of RAKIA, Scientific and Technological Mission to the International Space Station. Since 2013, Ms. Kreiss has served as Deputy Director of the Space Division at IAI, leading the development, construction, launch and operation of observation and communication satellites for both Israeli and foreign users. Prior to that, Ms. Kreiss held various leadership positions within IAI, including chief engineer of Israel’s Arrow 2 anti-ballistic missile defense system from 2000 to 2006, and project manager of the Arrow 3 exo-atmospheric interceptor from 2007 to 2013. Ms. Kreiss holds a B.Sc degree in chemical engineering from the Technion, Israeli Institute of Technology, an Executive Masters in Business Administration degree from Tel Aviv University, and completed a visiting research fellowship at the Aeronautics & Astronautics Department of the Massachusetts Institute of Technology (MIT). Zeev Vurembrand has served on our board of directors since May 13, 2021. Mr. Vurembrand is currently the Chief Executive Officer and Owner of Vurembrand Management & Innovation Ltd. and a member of the board of Bezeq the Israeli Telecommunication Corp. Ltd. (TASE: BEZQ) since 2017. Mr. Vurembrand also served as chairman of the board of Lageen Ltd. from 2019 until December 2023. From 2013 until 2019, Mr. Vurembrand was the Chief Executive Officer of Kupat Holim Meuhedet, Israel’s third largest health care organization. From 2008 until 2013, he was the Chief Executive Officer of Alon Holding Blue Square – Israel Ltd., and prior to that, from 2007 until 2008, he was the Chief Executive Officer of Phoenix Investments and Finance Ltd. Earlier in his career, from 2002 until 2007, Mr. Vurembrand was the Chief Executive Officer of Clalit Health Services Group, Israel’s largest health care organization. Mr. Vurembrand has served on numerous boards of directors, including Africa Israel Residences LTD. (TASE: AFRE) from 2014 until 2016, Discount Bank (TASE:DSCT) 2006 until 2007, U-Bank from 2005 until 2006, Blue Square Israel (TASE: BSI) from 2001 until 2006, and Dikla Medical Insurance Ltd. from 1995 until 2002. Mr. Vurembrand has also served on the board of trustees of Bar Ilan University since 2019. Mr. Vurembrand holds a B.Sc degree in industrial engineering and management from the Technion, Israeli Institute of Technology. Nir Nimrodi has served on our board of directors since August 13, 2023. Mr. Nimrodi has served as chairman and chief executive officer of Accellix Inc., a life sciences company, since May 2019 and has over 25 years’ experience working in start-ups and large global businesses in the life sciences, pharmaceutical, and biotechnology industries. From 2014 to April 2019, Mr. Nimrodi was the chief business officer of Intrexon (currently Precigen, Inc.). Prior to this, he held several executive roles at Life Technologies Inc. (now part of Thermo Fisher), and was chief executive officer at Proneuron Biotechnologies Inc. and Mindsense Biosystems Ltd. In addition, Mr. Nimrodi currently serves as a member of the board of Evogene Ltd. (NASDAQ: EVGN) and at the private companies Genesee Scientific and Scopio Labs. Mr. Nimrodi holds a B.A. in Economics and an MBA from Tel-Aviv University. 46 Executive Officers Yehu Ofer has served as Chief Executive Officer of the Company since October 18, 2022. Mr. Ofer served as a colonel (now retired) in the Israeli Air Force (“IAF”), commanding two operational squadrons before commanding “Wing 15”, the optic and electronic intelligence wing of the IAF. In his last position, Mr. Ofer served as Israel Defense Attaché to Italy, Greece, Serbia, and Croatia, where he oversaw the largest ever government-to-government transaction between Israel and Italy. Upon his retirement from the Israel Defense Forces in 2013, Mr. Ofer joined Elbit Systems Ltd. in its electro-optics unit as a technology development and program manager in airborne optic and laser solutions. Mr. Ofer also managed Elbit System’s aerospace division as VP of large-scale development programs and VP of the Brazil business unit. In his last position at Elbit Systems, Mr. Ofer served as VP of Global Business Development, Marketing and Sales, a position he held since 2020. Mr. Ofer holds an MBA degree from the University of Haifa, a Bachelor of Economics and Logistics degree (cum laude) from Bar Ilan University in Tel Aviv, and a degree from the National Security College in Tel Aviv. Tanya Yosef has served as our Chief Financial Officer since December 27, 2019. Ms. Yosef is a certified public accountant with many years of experience and held various positions with Medigus Ltd. (Nasdaq: MDGS) since December of 2009, including most recently as chief financial officer and prior thereto as financial controller. During 2008-2009 Ms. Yosef worked in the audit department at Kesselman & Kesselman, a member firm of PricewaterhouseCoopers International Limited. Ms. Yosef holds a BA degree in Economics and Accounting from the Ben-Gurion University, Israel . Eli Israeli has been our Chief Technology Officer since October 11, 2023. Before joining us, Mr. Israeli served from January 2022 to September 2023 as CTO at Gadfin, where he spearheaded the development and execution of Gadfin’s technology strategy. From December 2019 to February 2022, Mr. Israeli served as the Senior Vice President of System Engineering, Program Management, and Customer Success at Israel Aerospace Industries (IAI) headquarters. His career includes a variety of other roles, including Chairman of the consortium of AI Academy - Artificial Intelligence Training; Director of Program Management, Ground-Based & Missiles Defense Systems at IAI; Director of System Engineer and Product Management, Civil Aircraft Protection Systems at the Israel Ministry of Defense – DDR&D; Senior Systems Engineer, Unmanned Aerial Vehicle at the Israeli Air Force; and Director of R&D and Program Management, MALE Unmanned Aerial System at the Israeli Ministry of Defense - DDR&D. Mr. Israeli holds an MSc in System Engineering and Program Management from the Technion – Israel Institute of Technology in Haifa, Israel, and a BSc in electrical engineering and Bachelor of Education (BEd) from Tel Aviv University. Jacob Avinu has served as our Senior VP of Product Portfolio since November 15, 2022. Mr. Avinu has more than 15 years of experience in development, operations, and leadership in a variety of industries, including aviation and aerospace. He joined Odysight.ai from Elbit Systems, where since 2018 he led the advanced capabilities R&D group in helmet-mounted displays and sensors, a key segment within the company’s aerospace division. Before joining Elbit Systems, Mr. Avinu served for six years in the IAF as a computer vision system engineer and commander of the electronic systems development group. Mr. Avinu holds a Master of Science degree from Ben-Gurion University of the Negev in Beer-Sheva, Israel with a focus on electro-optical engineering, and a Bachelor of Science degree in electrical engineering from Ort Braude College of Engineering in Karmiel Israel. Mr. Avinu also studied practical engineering and electronics at the Israeli Air Force Academy. Staggered Board Our board of directors is divided into three classes. Zeev Vurembrand and Nir Nimrodi are our Class I directors, with their terms of office to expire at our 2025 annual meeting of stockholders. Jackson Schneider, Ronit Rubin and Inbal Kreiss are our Class II directors, with their terms of office to expire at our 2026 annual meeting of stockholders. Professor Benad Goldwasser and Moshe (Mori) Arkin are our Class III directors, with their terms of office to expire at our 2024 annual meeting of stockholders. At each annual meeting of stockholders, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. 47 Our board of directors may consider a broad range of factors relating to the qualifications and background of nominees to serve as director, which may include various diversity factors. We have no formal policy regarding board diversity. Our officers hold office until the earlier of their death, resignation or removal by our board of directors or until their successors have been selected. They serve at the pleasure of our board of directors. Family Relationships There are no family relationships between or among any of our directors or executive officers. Involvement in Certain Legal Proceedings To our knowledge, our directors and executive officers have not been involved in any of the following events during the past ten years: a) any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; b) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); c) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; d) being found by a court of competent jurisdiction in a civil action, the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; e) being subject of, or a party to, any federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or f) being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. Compliance with Section 16(a) of the Exchange Act Our common stock is not registered pursuant to Section 12 of the Exchange Act. Accordingly, our directors, officers and principal stockholders are not subject to the beneficial ownership reporting requirements of Section 16(a) of the Exchange Act. Code of Ethics We have adopted a code of business conduct and ethics that applies to all of our directors, officers, and employees (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions). We have made the code of business conduct and ethics available on our website at www.odysight.ai. We will disclose promptly by posting such disclosure on our website any amendment to or waiver from the code of business conduct and ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as required by law or SEC regulations. Information contained on, or that can be accessed through, our website does not constitute a part of this Annual Report. 48 Board Committees We are not currently subject to listing requirements of any national securities exchange, which generally require the creation of an audit committee, compensation committee or process, and nominations committee or process, and that each of these committees or processes be comprised of independent directors and tasked with performing certain responsibilities for the board of directors. Notwithstanding the foregoing, we have voluntarily created an audit committee and compensation committee with responsibilities consistent with those required under SEC and Nasdaq rules. Audit Committee . The members of the audit committee are Ms. Kreiss, Ms. Rubin, and Mr. Vurembrand, with Mr. Vurembrand as its designated chairperson. The audit committee is governed by a written charter approved by the board of directors and available on our website at www.odysight.ai. The board of directors has determined that all current audit committee members are financially literate under the Nasdaq listing requirements and that Mr. Vurembrand qualifies as an “audit committee financial expert” as defined by the SEC rules adopted pursuant to the Exchange Act. The Nasdaq listing requirements require that audit committees have at least three directors and that all directors be independent, as defined in the Nasdaq listing requirements and Rule 10A-3 under the Exchange Act. The Board has determined that Ms. Kreiss, Ms. Rubin, and Mr. Vurembrand meet the independence criteria established in the Nasdaq listing requirements and the Exchange Act. The audit committee assists the board of directors in its oversight of financial reporting practices and the quality and integrity of the financial reports of Odysight.ai including compliance with legal and regulatory requirements, the independent auditors’ qualifications and independence, and the performance of Odysight.ai’s internal control function. The audit committee is responsible for the appointment of the Company’s independent auditors. The audit committee oversees our internal controls and risk assessment and management policies and meets with our independent auditor and management regarding our internal controls and other matters. The audit committee is responsible for periodically reviewing the Company’s code of business conduct and ethics and has established procedures for the receipt, retention, and treatment of complaints received by Odysight.ai regarding accounting controls or auditing matters and the confidential, anonymous submission by Company employees of concerns regarding questionable accounting or auditing matters. The audit committee is also responsible for approving or ratifying related person transactions pursuant to the Company’s related person transaction approval policy contained in the audit committee charter. Compensation Committee . The members of the compensation committee are Ms. Kreiss, Mr. Nimrodi, and Mr. Vurembrand, with Ms. Kreiss as its designated chairperson, all of whom meet the independence criteria established by the Nasdaq listing requirements. The compensation committee is governed by a written charter approved by the board of directors and available on our website at www.odysight.ai. The compensation committee is charged with the responsibility for setting executive compensation, reviewing certain compensation programs, administering our equity incentive plans, reviewing and discussing with management the compensation discussion and analysis required in proxy statements (if and when applicable), preparing a report on executive compensation required by SEC rules to be included in proxy statements (if and when applicable), and making other recommendations to the board of directors. 49 item 11. Executive Compensation The following sets forth information about the compensation paid to or accrued by the company’s named executive officers, as that term is defined in Item 402(m)(2) of Regulation S-K, as of December 31, 2023. Name and Principal Position Year Base Salary (7) Bonus Stock Awards (8) Option Awards (8) (9) All Other Compensation Total $ in thousands Yehu Ofer, 2023 $ 349 $ - $ - $ 355 $ 40 $ 744 Chief Executive Officer (1) 2022 $ 68 $ 21 6 $ - $ 774 $ 8 $ 871 Jacob Avinu, 2023 $ 278 $ 33 $ - $ 47 $ 28 $ 386 Senior VP Product (2) 2022 $ 38 $ 14 6 $ - $ 258 $ 1 $ 311 Tanya Yosef, 2023 $ 137 $ - $ - $ 47 $ - $ 184 Chief Financial Officer (3) 2022 $ 148 $ - $ - $ - $ - $ 148 Arik Priel, 2023 $ 257 $ - $ - $ 47 $ 23 $ 327 Chief Software Architect (4) 2022 $ 265 $ - $ - $ - $ 27 $ 292 Ido Molad, 2023 $ 152 $ 20 6 $ 75 $ 72 $ - $ 319 VP Research and Development (5) (1) Consists of Mr. Ofer’s compensation earned in his capacity as the Chief Executive Officer of our wholly-owned subsidiary, Odysight.ai Ltd. Mr. Ofer did not earn any compensation in his capacity as the Chief Executive Officer of Odysight.ai Inc. Mr. Ofer’s employment commenced on October 18, 2022. In connection with the appointment of Mr. Ofer as the Company’s Chief Executive Officer, the Company entered into an employment agreement with Mr. Ofer. The agreement provides for a monthly base salary of NIS 70,000, subject to adjustments for inflation as announced from time to time in accordance with Israeli law. The agreement also provides that Mr. Ofer is entitled to receive an equity grant of options to purchase a total of 300,000 shares of the Company’s Common Stock, par value $0.001 per share, at an exercise price of $4.50 per share, which shall vest and become exercisable as follows: 33.33% of the shares covered by Mr. Ofer’s options on the first anniversary of his service as CEO, and 8.33% of the shares covered by Mr. Ofer’s options at the end of each subsequent three-month period thereafter over the course of the subsequent two years. Furthermore, Mr. Ofer’s options will immediately vest upon the occurrence of the following (i) the sale of all or substantially all of the assets of the Company, (ii) the sale of more than 50% of the Common Stock of the Company in a non-public sale, (iii) the dissolution or liquidation of the Company or (iv) any merger, share exchange, consolidation or other reorganization or business combination if immediately after such transaction either (A) the persons who were directors of the Company immediately prior to such transaction do not constitute at least a majority of the directors of the surviving entity or (B) the persons who hold a majority of the voting capital stock of the surviving entity are not the persons who held a majority of the voting capital stock of the Company immediately prior to such transaction. Additionally, the Company agreed to pay Mr. Ofer both (i) a signing bonus in the aggregate amount of NIS 70,000 and (ii) an annual bonus pursuant to certain pre-determined measurable objectives agreed to with Mr. Ofer and approved by the board of directors by January 31 with respect to each calendar year, with the Company agreeing to recommend to the board of directors a grant of restricted stock in lieu of Mr. Ofer’s bonus through such time the Company is profitable and subject to meeting applicable objectives. In accordance with the terms of Mr. Ofer’s employment agreement, he will also receive additional benefits customary for an executive officer of his experience and for companies of similar stature and standing to that of the Company. (2) Consists of Mr. Avinu’s compensation earned in his capacity as the Senior VP Product of our wholly-owned subsidiary, Odysight.ai Ltd. Mr. Avinu’s employment commenced on November 15, 2022. In connection with the appointment of Mr. Avinu as the Company’s Senior VP Product, the Company entered into an employment agreement with Mr. Avinu. The agreement provides for a monthly salary of NIS 60,000. The agreement also provides that Mr. Avinu is entitled to receive an equity grant of options to purchase a total of 100,000 shares of the Company’s Common Stock, par value $0.001 per share, at an exercise price of $4.50 per share, which shall vest and become exercisable as follows: 33.33% of the shares covered by Mr. Avinu’s options on the first anniversary of his service as SVP Product, and 8.33% of the shares covered by Mr. Avinu’s options at the end of each subsequent three-month period thereafter over the course of the subsequent two years. Additionally, the agreement provides to Mr. Avinu: (i) a signing bonus in the aggregate amount of NIS 50,000 (ii) a performance bonus in the aggregate amount of NIS 120,000 pursuant to certain objectives and (iii) the Company will consider, at to its sole discretion, after the first and second years following his employment, granting Mr. Avinu additional options / RSUs pursuant to certain objectives, subject to the approval of such grant by the CEO and board of directors of the Company. In accordance with the terms of Mr. Avinu’s employment agreement, he will also receive additional benefits customary for an executive officer of his experience and for companies of similar stature and standing to that of the Company. 50 (3) Consists of Ms. Yosef’s compensation earned in her capacity as the Chief Financial Officer of our wholly-owned subsidiary, Odysight.ai Ltd. Ms. Yosef did not earn any compensation in her capacity as the Chief Financial Officer of Odysight.ai Inc. Ms. Yosef’s employment commenced on January 15, 2021. In connection with the appointment of Ms. Yosef as the Company’s Chief Financial Officer, the Company entered into an employment agreement with Ms. Yosef that provides for a monthly base salary of NIS 29,500 and monthly travel pay of NIS 2,500. In accordance with the terms of Ms. Yosef’s employment agreement, she will also receive additional benefits customary for an executive officer of her experience and for companies of similar stature and standing to that of the Company. (4) Consists of Mr. Priel’s compensation earned in his capacity as the Chief Software Architect of our wholly-owned subsidiary, Odysight.ai Ltd. Mr. Priel’s employment commenced on November 1, 2021. In connection with the appointment of Mr. Priel as the Company’s Chief Software Architect, the Company entered into an employment agreement with Mr. Priel that provides for a monthly base salary of NIS 60,000. In accordance with the terms of Mr. Priel’s employment agreement, he will also receive additional benefits customary for an executive officer of his experience and for companies of similar stature and standing to that of the Company. (5) Consists of Mr. Molad’s compensation earned in his capacity as the VP Research and Development of our wholly-owned subsidiary, Odysight.ai Ltd. Mr. Molad’s employment commenced on June 4, 2023. In connection with the appointment of Mr. Molad as the Company’s VP Research and Development, the Company entered into an employment agreement with Mr. Molad that provides for a monthly base salary of NIS 56,000 and monthly travel pay of NIS 6,500. The agreement also provides that Mr. Molad is entitled to receive an equity grant of options to purchase a total of 30,000 shares of the Company’s Common Stock, par value $0.001 per share, and 25,000 RSUs, the terms and conditions of which shall be subject to the sole discretion of the board of directors. Additionally, the agreement provides to Mr. Molad: (i) a signing bonus in the aggregate amount of NIS 75,000 and (ii) a performance bonus pursuant to certain objectives, which will be paid in cash and/or options/RSUs at the sole discretion of the Company. In accordance with the terms of Mr. Molad’s employment agreement, he will also receive additional benefits customary for an employee of his experience and for companies of similar stature and standing to that of the Company. (6) Represents a signing bonus. (7) Base salaries are intended to provide a level of compensation sufficient to attract and retain an effective management team, when considered in combination with the other components of our executive compensation program. The relative levels of base salary for our named executive officers are designed to reflect each named executive officer’s scope of responsibility and accountability. Base salary amounts include management insurance (which includes pension, disability insurance and severance pay) and payments towards such employee’s education fund, and Israeli social security. Each named executive officer also receives gross-up payments for the taxes on these benefits. The amounts included here are the U.S. dollar equivalent from NIS. The conversion rate used was the average of the 2022 and 2023 rates between the U.S. dollar and NIS, as published by the Bank of Israel. (8) The amount shown in the “Option Awards” and “Stock Awards” columns represents the aggregate grant date fair value of awards computed in accordance with ASC 718, not the actual amounts paid to or realized by the Named Executive Officer during 2023 and 2022. The ASC 718 fair value amount as of the grant date for stock options generally is spread over the number of months of service required for the grant to vest. (9) The fair value of each stock option award is estimated as of the date of grant using the Black-Scholes valuation model. 51 Employment Agreements We, and through our wholly-owned subsidiary, Odysight.ai Ltd., have entered into written employment agreements with each of our executive officers. All of these agreements contain customary provisions regarding noncompetition, confidentiality of information, and assignment of inventions. However, the enforceability of the noncompetition provisions may be limited under applicable law. In addition, we have entered into agreements with each executive officer and director pursuant to which we have agreed to indemnify each of them to the fullest extent permitted by law to the extent that these liabilities are not covered by directors and officers’ insurance. Outstanding Equity Awards The following table provides information regarding equity awards for each of our named executive officers as of our fiscal year end of December 31, 2023. Options Award Restricted Stock Awards Name and Position No. of Securities Underlying Unexercised Options (#) Exercisable No. of Securities Underlying Unexercised Options (#) Unexercisable Option Exercise Price ($) Vesting Schedule Option Expiration Date Number of Units of Stock That Have Not Vested (#) Market Value of Units of Stock That Have Not Vested ($)(1) Yehu Ofer, - 150,000 3.00 (2) July 9, 2030 - - Chief Executive Officer 99,990 200,010 4.50 (2) November 14, 2029 Jacob Avinu, - 20,000 3.00 (2) July 9, 2030 - - Senior VP Product Portfolio 33,330 66,670 4.50 (2) November 14, 2029 Tanya Yosef - 20,000 3.00 (2) July 9, 2030 - - Chief Financial Officer 14,814 2,964 4.50 (2) May 13, 2028 29,609 - 2.61 (3) February 12, 2027 Arik Priel - 20,000 3.00 (2) July 9, 2030 - - Chief Software Architect 26,666 13,334 4.50 (2) November 15, 2028 Ido Molad - 30,000 3.00 (2) September 19, 2030 25,000 76,250 VP Research and Development (1) Based on the fair market value of our Common Stock on December 31, 2023 ($3.05 per share). (2) 33.33% of the options granted will vest on the first anniversary date of the option grant, and 8.33% of the options will vest at the end of each subsequent three-month period thereafter over the course of the following two (2) years. Pursuant to an acceleration mechanism, any outstanding and unvested options shall immediately accelerate and vest upon the occurrence of certain events, including, inter alia, a merger or sale of all assets of the Company. (3) 25% of the options granted will vest on the first anniversary date of the option grant, and 6.25% of the options will vest at the end of each subsequent three-month period thereafter over the course of the following three (3) years. Pursuant to an acceleration mechanism, any outstanding and unvested options shall immediately accelerate and vest upon the occurrence of certain events, including, inter alia, a merger or sale of all assets of the Company. 52 Retirement or Similar Benefit Plans We do not have any arrangements or plans that provide for the payment of retirement or similar benefits to our directors or executive officers. Resignation, Retirement, Other Termination, or Change in Control Arrangements We have no contract, agreement, plan or arrangement, whether written or unwritten, that provides for payments to our directors or executive officers at, following, or in connection with the resignation, retirement or other termination of our directors or executive officers, or a change in control of our Company or a change in our directors’ or executive officers’ responsibilities following a change in control. Director Compensation The following table sets out the compensation paid to directors for services rendered during the year ended December 31, 2023. Name Fees Earned or Paid in Cash Stock Awards (*) Option Awards (*) All Other Compensation Total $ in thousands Prof. Benad Goldwasser $ 120 $ - $ 355 $ - $ 475 Shmuel Donnerstein (1) $ 15 $ - $ 71 $ - $ 86 Ronen Rosenbloom (2) $ 6 $ - $ - $ - $ 6 Lior Amit (1) $ 29 $ - $ 71 $ - $ 100 Moshe (Mori) Arkin $ 16 $ - $ 71 $ - $ 87 Inbal Kreiss $ 32 $ - $ 71 $ - $ 103 Zeev Vurembrand $ 32 $ - $ 71 $ - $ 103 Ronit Rubin (3) $ 2 $ - $ 72 $ - $ 74 Jackson Schneider (3) $ 7 $ - $ 120 $ - $ 127 Nir Nimrodi (4) $ 9 $ - $ 72 $ - $ 81 (1) Served as director of Odysight.ai Inc. until December 6, 2023. (2) Served as director of Odysight.ai Inc. until June 1, 2023. (3) Served as a director of Odysight.ai Inc. since December 6, 2023. (4) Served as a director of Odysight.ai Inc. since August 13, 2023. (*) The amount shown in the “Stock Awards” and “Option Awards” columns represents the aggregate grant date fair value of awards computed in accordance with ASC 718, not the actual amounts paid to or realized by the directors during fiscal 2023. The fair value of each stock option award is estimated as of the date of grant using the Black-Scholes valuation model. Additional information regarding the assumptions used to estimate the fair value of all stock option awards is included in Note 9b-c Consolidated Financial Statements. 53 On March 15, 2020, our board of directors approved a quarterly fee of $4,000 payable to each of our currently serving directors, excluding Prof. Goldwasser. On each of April, 9, 2021 and August 12, 2021, our board of directors approved the same terms for directors appointed subsequent to March 15, 2020. On May 15, 2022, the board of directors approved a quarterly fee in the amount of $2,000 payable to a director for each committee on which such director serves, if any, with such fee in addition to any other fees to which such director is entitled as a member of the board of directors or any other committee. On July 31, 2019, the Company entered into a consulting agreement with Prof. Goldwasser, whereby Prof. Goldwasser agreed to serve as chairman of the Board of Directors of the Company. Effective retroactively to March 1, 2019, services as chairman under the agreement were provided in consideration for a monthly fee of $10,000 and a grant of options to purchase Common Stock of the Company representing 5% of the fully diluted share capital of the Company post issuance of the then-next financing round, subject to certain limitations. The Options, which will have a six-year term, will vest in eight equal semi-annual installments over a period of four years with an exercise price per share calculated based on a 25% discount on the sale price of the Common Stock in the then-next fund raising of the Company and accelerated vesting upon closing of a material transaction resulting in change of control of the Company and/or in case Prof. Goldwasser is dismissed not for cause, with other terms and limitations as provided in the consulting agreement. On November 22, 2023, our board of directors approved a separate compensation arrangement with Mr. Jackson Schneider, subject to his election as a director, which took place on December 6, 2023. In light of the special role and contributions that Mr. Schneider is expected to make to the operation of the Company, the Board approved compensation that includes an annual fee of $80,000, which will be paid on a monthly basis in equal installments, and a recommendation to the Board to grant Mr. Schneider options to purchase a total of 50,000 shares of common stock at an exercise price per share equal to $3.00 per share, vesting over a period of three years and such other terms as provided in a Director Service Agreement signed between Mr. Schneider and the Company. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder matters Security Ownership of Certain Beneficial Owners and Management The table below provides information regarding the beneficial ownership of our common stock as of March 26, 2024, of (i) each of our current directors, (ii) each of the Named Executive Officers, (iii) all of our current directors and officers as a group, and (iv) each person or entity known to us who owns more than 5% of our common stock. The percentage of common stock beneficially owned is based on 10,446,685 shares of common stock outstanding as of March 26, 2024. The number and percentage of shares beneficially owned by a person or entity also include shares of common stock issuable upon exercise of warrants that are currently exercisable or will become exercisable within 60 days of March 26, 2024. However, these shares are not deemed to be outstanding for the purpose of computing the percentage of shares beneficially owned of any other person or entity. 54 Unless otherwise indicated below, the address for each beneficial owner listed in the table below is c/o Odysight.ai Inc., Suite 7A, Industrial Park, P.O. Box 3030, Omer, Israel 8496500. Name and Address of Beneficial Owner Amount and Nature of Beneficial Ownership (1) Percent of Class Prof. Benad Goldwasser (2) 629,231 5.78 % Inbal Kreiss (3) 16,025 * Moshe (Mori) Arkin (4) 7,252,579 55.6 % Zeev Vurembrand (5) 29,689 * Yehu Ofer (6) 169,325 1.60 % Tanya Yosef (7) 47,387 * Eli Israeli - - Jacob Avinu (8) 49,997 * Nir Nimrodi - - Jackson Schneider - - Ronit Rubin - - Directors and officers as a group (11 individuals) 8,194,233 59.56 % The More Group (9) 930,820 8.53 % The Phoenix Holdings (10) 3,673,711 30.44 % The Meitav Dash Group (11) 916,108 8.40 % * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Each of the beneficial owners named in the table have, to our knowledge, direct ownership of and sole voting and investment power with respect to the shares of common stock beneficially owned by them. (2) Includes options to purchase 435,290 shares of common stock which are currently exercisable or will become exercisable within 60 days of March 26, 2024. (3) Includes options to purchase 16,025 shares of common stock which are currently exercisable or will become exercisable within 60 days of March 26, 2024. (4) Securities included herein are held directly by Mr. Moshe Arkin, Mr. Arkin through his individual retirement account at Phoenix Insurance Company Ltd., or by M. Arkin (1999) Ltd, a company wholly-owned by Mr. Arkin. These securities include warrants to purchase 2,575,164 shares of Common Stock and options to purchase 21,581 shares of Common Stock which are currently exercisable or will become exercisable within 60 days of March 26, 2024. (5) Consists of options to purchase 14,689 shares of common stock which are currently exercisable or will become exercisable within 60 days of March 26, 2024. (6) Consists of options to purchase 149,992 shares of common stock which are currently exercisable or will become exercisable within 60 days of March 26, 2024. (7) Consists of options to purchase 47,387 shares of common stock which are currently exercisable or will become exercisable within 60 days of March 26, 2024. (8) Includes options to purchase 49,997 shares of common stock which are currently exercisable or will become exercisable within 60 days of March 26, 2024. 55 (9) Based on information provided to or available to the Company, includes of warrants to purchase 470,159 shares of common stock Consists of options to purchase 470,159 shares of common stock which are currently exercisable or will become exercisable within 60 days of March 26, 2024. The business address of the More Group is BSR Tower 1, 2 Ben Gurion Street, Ramat Gan, Israel. (10) Based on information provided to or available to the Company and on the Schedule 13G/A filed by The Phoenix Holdings with the SEC on February 12, 2024, securities included herein are held directly by Phoenix Insurance and Phoenix Amitim, majority or wholly-owned subsidiaries of the Phoenix Holdings Ltd. In general, subsidiaries of the Phoenix Holdings Ltd. manage their own funds and/or the funds of others, including for holders of exchange-traded notes or various insurance policies, members of pension or provident funds, unit holders of mutual funds, and portfolio management clients. Each subsidiary operates under independent management and makes its own independent voting and investment decisions. These securities include 1,620,189 warrants to purchase shares of Common Stock, which are currently exercisable or will become exercisable within 60 days of March 26, 2024. Not included as beneficially owned by The Phoenix Holdings are shares of Common Stock held by Mr. Arkin through his individual retirement account at Phoenix Insurance Company Ltd.; rather, as indicated in footnote 4 above, these shares of Common Stock are beneficially owned by Mr. Arkin. The business address of the Phoenix Holdings Ltd. is Derech Hashalom 53, Givataim 53454, Israel. (11) Based on information provided to or available to the Company, includes warrants to purchase 458,054 shares of common stock which are currently exercisable or will become exercisable within 60 days of March 26, 2024. On June 1, 2023, a stock transfer agreement was entered into by and among Medigus Ltd., L.I.A. Pure Capital Ltd., Mr. Eli Yoresh and Ms. Cheli Menashe, as sellers, and M. Arkin (1999) Ltd., The Phoenix Insurance Company Ltd., Shotfut Menayot Israel – Phoenix Amitim, Lior Prosor, Prof. Benad Goldwasser and Mr. Yehu Ofer, as purchasers. Pursuant to the agreement, the sellers sold an aggregate of 2,022,964 shares of our Common Stock to the purchasers for $6.07 million (equal to $3.00 per share). Medigus sold 1,924,575 shares, representing its entire beneficial ownership in the Company as follows: (i) M. Arkin (1999) Ltd. purchased 1,293,576 shares; (ii) The Phoenix Insurance Company Ltd. purchased 65,000 shares; (iii) Shotfut Menayot Israel – Phoenix Amitim purchased 368,333 shares; (iv) Mr. Lior Prosor purchased 33,333 shares; (v) Prof. Goldwasser purchased 150,000 shares: and (vi) Mr. Ofer purchased 14,333 shares of our Common Stock. L.I.A. Pure Capital Ltd. sold an aggregate of 78,900 shares of our Common Stock to M. Arkin (1999) Ltd. Mr. Eli Yoresh sold 11,156 shares of our Common Stock to M. Arkin (1999) Ltd.). Ms. Cheli Menashe sold 8,333 shares of our Common Stock to M. Arkin (1999) Ltd. Concurrently, each of Mr. Arkin, Phoenix Insurance and Phoenix Amitim provided written consent to the inclusion in a Registration Statement on Form S-1 currently pending with the SEC but not yet declared effective as of the date of this Annual Report of the Common Stock acquired by each of the other purchasers in the stock transfer agreement, including Prof. Goldwasser, Mr. Ofer and Mr. Prosor, and we have included in a Registration Statement on Form S-1 currently pending with the SEC but not yet declared effective as of the date of this Annual Report the Common Stock acquired by each such purchaser (except as to certain shares of Common Stock acquired by Mr. Arkin). Prof. Goldwasser is chairman of our board of directors. Mr. Ofer is our chief executive officer. Following the transaction, Mr. Arkin, who currently serves as a director on our board of directors, beneficially owns more than 50% of our outstanding shares of Common Stock. Item 13. Certain relationships and related transactions, and director independence Related Party Transactions The following section describes various related party transactions. Pursuant to a stock transfer agreement dated June 1, 2023, Medigus sold all of its shares of our Common Stock, following which sale Medigus beneficially owned none of our Common Stock and ceased to be a “related person”. On April 20, 2020, Medigus and Odysight.ai Ltd. entered into an Intercompany Services Agreement, which amended and restated the intercompany services agreement executed between the parties on May 30, 2019. The agreement has an initial term of one year, and renews automatically for additional one-year periods, unless either party provides 60 (sixty) days written notice of non-renewal. Either Medigus or Odysight.ai Ltd. may terminate the agreement for convenience upon providing 60 days prior written notice. The services to be provided by Odysight.ai Ltd. include the provision of office space, utilities, car services, insurance, and chief financial officer services. In consideration for the foregoing services, Odysight.ai Ltd. is entitled to arm’s length service fees based on the most recent transfer pricing analysis as performed by an external expert, which may be adjusted from time to time. On March 22, 2022, Odysight.ai Ltd. provided prior written notice to Medigus of termination of the Intercompany Services Agreement effective May 21, 2022. 56 Since January 1, 2021 and as of the date hereof, our board of directors authorized the allotment of options to purchase 278,334 shares of Common Stock to Prof. Benad Goldwasser and an aggregate of 1,406,842 options and RSUs to purchase shares of Common Stock to certain officers and directors of our Company. On March 29, 2021, we issued to certain investors, including Arkin Ltd., 2,469,156 units in exchange for an aggregate purchase price of $20 million. Each such unit consists of (i) one share of Common Stock and (ii) one warrant to purchase one share of Common Stock with an exercise price of $10.35 per share. Each such warrant is exercisable until the close of business on March 31, 2026. Pursuant to the terms of the foregoing warrants, following April 1, 2024, if the closing price of our the Common Stock equal or exceeds 135% of the aforementioned exercise price (subject to appropriate adjustments for stock splits, stock dividends, stock combinations and other similar transactions after the issue date of the warrants) for any thirty (30) consecutive trading days, we may force the exercise of the warrants, in whole or in part, by delivering to these investors a notice of forced exercise. The shares of Common Stock and the warrants were issued to such investors pursuant to Regulation S of the Securities Act of 1933, as amended. The securities issued in connection with the foregoing investment were registered by us for resale under a registration statement on Form S-1 declared effective on May 10, 2021. On March 16, 2023, we entered into and consummated securities purchase agreements with (i) Phoenix Insurance Company Ltd. (for Moshe Arkin through his individual retirement account) and (ii) Phoenix Insurance, and Phoenix Amitim, in connection with the sale and issuance of an aggregate of 3,294,117 units, at a purchase price of $4.25 per unit, and for an aggregate purchase price of $14,000,000 (the “Private Placement”). Each unit consists of: (i) one share of Common Stock and (ii) one warrant to purchase one share of Common Stock with an exercise price of $5.50 (the “Warrants”). The Warrants are immediately exercisable and will expire three (3) years from the date of issuance and will be subject to customary adjustments. In connection with the Private Placement, we undertook to file a Registration Statement on Form S-1 with the Securities and Exchange Commission covering the resale of the shares of Common Stock issued pursuant to the Private Placement, the shares of Common Stock underlying the Warrants issued pursuant to the Private Placement, and any other shares of Common Stock and shares of Common Stock underlying warrants to the extent previously issued to Mr. Arkin, Phoenix Insurance or Phoenix Amitim. We further undertook that the Registration Statement on Form S-1 would not include any shares of Common Stock or other securities for the account of any other holder without the prior written consent of Mr. Arkin, Phoenix Insurance and Phoenix Amitim. As with Mr. Arkin, Phoenix Insurance and Phoenix Amitim are existing shareholders of the Company. The shares of Common Stock and warrants were issued pursuant to Regulation S of the Securities Act of 1933, as amended. During 2022 and 2023 the Company received development services in the amount of $117,000 and $29,000, respectively, from Smartec R&D Ltd., a company owned by our former CTO, Amir Govrin. 57 Policies and Procedures for Related Party Transactions The audit committee is responsible for approving or ratifying related person transactions pursuant to Odysight.ai’s related person transaction approval policy contained in the audit committee charter. In reviewing and approving any such related person transactions, the audit committee shall consider all relevant facts and circumstances, including whether the transaction is on terms comparable to those that could be obtained in an arm’s length transaction and the extent of the related person’s interest in the transaction. The audit committee shall have the authority to establish guidelines for related person transactions and intercompany arrangements where it deems it to be appropriate. Director Independence Our board of directors has determined that Professor Benad Goldwasser, Mr. Jackson Schneider, Ms. Inbal Kreiss, Ms. Ronit Rubin, Mr. Zeev Vurembrand and Mr. Nir Nimrodi do not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent”. We are not currently subject to listing requirements of any national securities exchange, which generally stipulate certain requirements that a majority of a company’s board of directors be classified as “independent”. As a result, we are not at this time required to have our board of directors comprised of a majority of “independent directors”. Notwithstanding the foregoing, we have voluntarily adopted the definition of “independent” as defined under Nasdaq Rule 5605(a)(2), and believe Professor Goldwasser, Mr. Schneider, Ms. Kreiss, Ms. Rubin, Mr. Vurembrand and Mr. Nimrodi qualify accordingly. Item 14. Principal accounting fees and services Audit and Accounting Fees The following table sets forth the fees billed to our Company for professional services rendered by Brightman Almagor Zohar & Co., a firm in the Deloitte global network, for the fiscal years ended December 31, 2022 and December 31, 2023: Services Year Ended December 31, 2023 Year Ended December 31, 2022 $ in thousands Audit fees (1) $ 110 $ 85 Tax fees (2) $ -- $ 21 Total fees $ 110 $ 106 (1) Audit fees consist of audit and review services, consents and review of documents filed with the SEC. (2) Tax fees consist of services related to representing the Company before the ITA in a VAT assessment. Audit Committee Administration of Engagement The audit committee maintains a pre-approval policy that provides guidelines for the audit, audit-related, tax, and other permissible non-audit services that may be provided by the independent registered public accounting firm (the independent auditors) in order to ensure that the provision of such services does not impair the auditor’s independence. Under this policy, the audit committee annually pre-approves the audit fee and terms of the engagement, as set forth in the engagement letter, along with a specified list of audit-related and tax services. If any service to be provided by the independent auditors has not received pre-approval during this annual process, it will require specific pre-approval by the audit committee. 58 Part IV Item 15. exhibits AND financial statement schedules Exhibit No. Exhibit Description 3.1.1 Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1.1 to our Form S-1 filed with the SEC on July 17, 2023) 3.2.1 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed with the SEC on June 8, 2023) 4.1* Description of the Registrant’s Securities 10.1 Amended and Restated Asset Transfer Agreement, by and between Odysight.ai Ltd. and Medigus Ltd., dated December 1, 2019 (incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K filed with the SEC on December 31, 2019) 10.2+ Consulting Agreement by and between Odysight.ai Ltd. and Prof. Benad Goldwasser, dated July 31, 2019 (incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K filed with the SEC on December 31, 2019) 10.3 2020 Share Incentive Plan (incorporated by reference to Exhibit 10.3 to our Annual Report on Form 10-K filed with the SEC on March 28, 2023) 10.4 Form of Notice of Option Grant and Option Agreement (incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K filed with the SEC on March 28, 2023) 10.5 Form of Notice of RSU Grant and RSU Agreement (incorporated by reference to Exhibit 10.5 to our Annual Report on Form 10-K filed with the SEC on March 28, 2023) 10.6+ Employment Agreement of Eli Israeli, dated September 19, 2023 (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form S-1/A filed with the SEC on December 20, 2023) 10.7+ Employment Agreement of Tanya Yosef, dated January 14, 2021 (incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K filed with the SEC on March 31, 2021) 10.8** Addendum No. 1 to the Amended and Restated Asset Transfer Agreement, dated July 27, 2020, by and between Odysight.ai Ltd. and Medigus Ltd. (incorporated by reference to Exhibit 10.30 to our Registration Statement on Form S-1/A filed with the SEC on October 19, 2021) 10.9 Purchase Order Form, between Odysight.ai Inc. and the Investors in the March 2021 Private Placement (incorporated by reference to Exhibit 10.34 to our Registration Statement on Form S-1 filed with the SEC on May 4, 2021) 10.10 Form of Warrant (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed with the SEC on March 24, 2021) 10.11+ Employment Agreement of Yehu Ofer, dated July 13, 2022 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 18, 2022) 10.12+ Employment Agreement of Jacob Avinu, dated September 20, 2022 (incorporated by reference to Exhibit 10.14 to our Registration Statement on Form S-1 filed with the SEC on July 17, 2023) 10.13+ Employment agreement of Ido Molad, dated May 21,2023 (incorporated by reference to Exhibit 10.14 to our Form S-1 filed with the SEC on February 20, 2023) 10.14 Form of Warrant to Purchase Shares of Common Stock (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on March 17, 2023) 10.15 Stock Purchase Agreement, dated March 16, 2023 by and between Odysight.ai Inc. and the Investors defined therein (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 17, 2023) 10.16 Stock Purchase Agreement, dated March 16, 2023 by and between Odysight.ai Inc. and the Investors defined therein. (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on March 17, 2023) 10.17 Registration Rights Agreement, dated March 16, 2023, among Odysight.ai Inc. and the Investor defined therein (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on March 17, 2023) 10.18 Registration Rights Agreement, dated March 16, 2023, among Odysight.ai Inc. and the Investor defined therein (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on March 17, 2023) 10.19+ Director Appointment and Service Agreement of Jackson Schneider, dated December 6, 2023 (incorporated by reference to Exhibit 10.18 to our Registration Statement on Form S-1/A filed with the SEC on December 20, 2023) 10.20 Securities Exchange Agreement, dated September 16, 2019, by and among Medigus Ltd. and Intellisense Solutions Inc. (incorporated by reference to Exhibit 99.2 to the report on Form 6-K filed by Medigus Ltd. on September 17, 2019) 10.21 Stock Transfer Agreement, dated June 1, 2023, by and among M. Arkin (1999) Ltd. and additional purchasers listed therein, and Medigus Ltd. and additional sellers listed therein (incorporated by reference to Exhibit 10.22 to our Form S-1 filed with the SEC on February 20, 2023) 21.1* Subsidiaries of the Registrant 23.1* Consent of Brightman Almagor Zohar & Co., a Firm in the Deloitte Global Network 31.1* Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer and Principal Financial Officer 32.1* Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer and Principal Financial Officer 101.INS Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) * Filed herewith ** Certain confidential information contained in this exhibit, marked by brackets, was omitted because it is both (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed. “[***]” indicates where the information has been omitted from this exhibit + Management contract or compensatory plan or arrangement (b) Financial Statement Schedules. Schedules have been omitted because the information required to be set out therein is not applicable or is shown in the financial statements or notes thereto. Item 16. Form 10-K summary Not applicable. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ODYSIGHT.AI INC. By: /s/ Yehu Ofer Name: Yehu Ofer Title: Chief Executive Officer Date: March 26, 2024 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Yehu Ofer Chief Executive Officer March 26, 2024 Yehu Ofer (Principal Executive Officer) /s/ Tanya Yosef Chief Financial Officer March 26, 2024 Tanya Yosef (Principal Financial and Accounting Officer) /s/ Benad Goldwasser Chairman of the Board March 26, 2024 Benad Goldwasser /s/ Ronit Rubin Director March 26, 2024 Ronit Rubin /s/ Jackson Shneider Director March 26, 2024 Jackson Shneider /s/ Nir Nimrodi Director March 26, 2024 Nir Nimrodi /s/ Mori Arkin Director March 26, 2024 Mori Arkin /s/ Inbal Kreiss Director March 26, 2024 Inbal Kreiss /s/ Zeev Vurembrand Director March 26, 2024 Zeev Vurembrand 60 ODYSIGHT.AI INC. TABLE OF CONTENTS Page Consolidated Financial Statements – in US Dollars (USD) in thousands Report of Independent Registered Public Accounting Firm (PCAOB ID 1197 ) F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Shareholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to the Consolidated Financial Statements F-8 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Odysight.ai Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Odysight.ai Inc. and its Subsidiary (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, changes in shareholders’ equity and cash flows, for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Stock-Based Compensation to Employees, Directors and Service Providers – Stock Options — Refer to Notes 2i and 9b to the consolidated financial statements. Critical Audit Matter Description During the year ended December 31, 2023, the Company recorded stock options related compensation expense of $1,664 thousand. The Company estimated the fair value of these stock options granted using the Black-Scholes option pricing model. The Black-Scholes option-pricing model required management to make a number of assumptions, of which the most significant are the stock price volatility and the expected option term. Auditing the Company’s accounting of stock-based options required auditor judgment due to the subjectivity of assumptions used to estimate the fair value of stock-based options granted. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the stock-based compensation included the following, among others: ● We assessed the accuracy and completeness of the awards granted during the year by reading the relevant Board of Directors minutes and grant documents. ● We evaluated the appropriateness of the valuation method used for the stock option grants and whether the method used for determining fair value was applied appropriately. ● We evaluated the significant assumptions used by management to calculate the fair value of stock options granted. Such evaluation included independent calculation of the expected volatility. ● We developed an independent estimate of the fair value for all the grants during the year and compared our estimate of fair value to the fair value used by management. /s/ Brightman Almagor Zohar & Co . Certified Public Accountants A Firm in the Deloitte Global Network Tel Aviv, Israel March 26, 2024 We have served as the Company’s auditor since 2020. F- 2 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) CONSOLIDATED BALANCE SHEETS Note 2023 2022 December 31, Note 2023 2022 USD in thousands Assets CURRENT ASSETS: Cash and cash equivalents 8,945 10,099 Short terms deposits 3 8,096 3,047 Accounts receivable 1,372 60 Inventory 4 504 630 Other current assets 432 281 Total current assets 19,349 14,117 NON-CURRENT ASSETS: Contract fulfillment assets 10 1,256 1,495 Property and equipment, net 5 477 648 Operating lease right-of-use assets 11 1,380 307 Severance pay asset 271 328 Other non-current assets 96 - Total non-current assets 3,480 2,778 TOTAL ASSETS 22,829 16,895 Liabilities and shareholders’ equity CURRENT LIABILITIES: Accounts payable 287 297 Contract liabilities - short term 10 527 1,426 Operating lease liabilities - short term 11 470 199 Accrued compensation expenses 546 365 Related parties 8 41 58 Other current liabilities 6 211 214 Total current liabilities 2,082 2,559 NON-CURRENT LIABILITIES: Contract liabilities - long term 10 1,795 2,218 Operating lease liabilities - long term 11 856 64 Liability for severance pay 261 268 Other non-current liabilities 28 - Total non-current liabilities 2,940 2,550 TOTAL LIABILITIES 5,022 5,109 SHAREHOLDERS’ EQUITY: 9 Common stock, $ 0.001 par value; 300,000,000 shares authorized as of December 31, 2023 and December 31, 2022, 10,443,768 and 7,121,737 shares issued and outstanding as of December 31, 2023 and December 31, 2022 10 7 Additional paid-in capital 52,004 36,541 Accumulated deficit ( 34,207 ) ( 24,762 ) TOTAL SHAREHOLDERS’ EQUITY 17,807 11,786 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 22,829 16,895 The accompanying notes are an integral part of these consolidated financial statements. F- 3 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) CONSOLIDATED STATEMENTS OF OPERATIONS Note 2023 2022 Year ended December 31, Note 2023 2022 USD in thousands (except per share data) REVENUES 10 3,033 665 COST OF REVENUES 2,524 1,631 GROSS PROFIT (LOSS) 509 ( 966 ) RESEARCH AND DEVELOPMENT EXPENSES 12 5,602 4,197 SALES AND MARKETING EXPENSES 13 1,109 699 GENERAL AND ADMINISTRATIVE EXPENSES 14 4,431 3,577 OPERATING LOSS ( 10,633 ) ( 9,439 ) OTHER INCOME 200 30 FINANCING INCOME (EXPENSES), NET 988 ( 59 ) LOSS BEFORE TAXES ON INCOME ( 9,445 ) ( 9,468 ) TAXES ON INCOME - - NET LOSS ( 9,445 ) ( 9,468 ) Net loss per share (basic and diluted, in USD) ( 0.98 ) ( 1.33 ) Weighted average common shares (basic and diluted, in thousands) 9,668 7,122 The accompanying notes are an integral part of these consolidated financial statements. F- 4 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Common stock Additional paid-in capital Accumulated deficit Total Shareholders’ equity Number in thousands Amount USD in thousands Balance at January 1, 2023 7,122 $ 7 $ 36,541 $ ( 24,762 ) $ 11,786 Stock based compensation (see note 9) - - 1,664 - 1,664 Issuance of shares upon RSU vesting (see note 9) 28 - * - * - - Issuance of shares and warrants(see note 9) 3,294 3 13,799 - 13,802 Net loss - - - ( 9,445 ) ( 9,445 ) Balance at December 31, 2023 10,444 $ 10 $ 52,004 $ ( 34,207 ) $ 17,807 Common stock Additional paid-in capital Accumulated deficit Total Shareholders’ equity Number in thousands Amount USD in thousands Balance at January 1, 2022 7,122 $ 7 $ 34,903 $ ( 15,294 ) $ 19,616 Balance 7,122 $ 7 $ 34,903 $ ( 15,294 ) $ 19,616 Stock based compensation (see note 9) - - 1,638 - 1,638 Net loss - - - ( 9,468 ) ( 9,468 ) Balance at December 31, 2022 7,122 $ 7 $ 36,541 $ ( 24,762 ) $ 11,786 Balance 7,122 $ 7 $ 36,541 $ ( 24,762 ) $ 11,786 * Represents an amount less than $1 thousand. The accompanying notes are an integral part of these consolidated financial statements. F- 5 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS 2023 2022 Year ended December 31, 2023 2022 USD in thousands CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ( 9,445 ) ( 9,468 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 284 251 Stock based compensation 1,664 1,638 Profit (loss) from exchange differences on cash and cash equivalents ( 159 ) 269 Interest and exchange differences from operating lease liability - ( 49 ) Severance pay asset and liability 50 ( 8 ) Interest income in respect of deposits ( 49 ) ( 34 ) CHANGES IN OPERATING ASSET AND LIABILITY: Increase in accounts receivable ( 1,312 ) ( 52 ) Decrease (increase) in inventory 126 ( 463 ) Increase in operating lease liability ( 391 ) ( 233 ) Increase in ROU asset 381 261 Decrease (increase) in current and non-current other assets ( 247 ) 162 Increase (decrease) in account payable ( 10 ) 194 Decrease in contract fulfillment assets 239 180 Increase (decrease) in current and non-current contract liabilities ( 1,322 ) 1,224 Increase in accrued compensation expenses 181 10 Increase (decrease) in related parties ( 17 ) 19 Increase (decrease) in current and non-current other liabilities 18 4 Net cash flows used in operating activities ( 10,009 ) ( 6,095 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ( 113 ) ( 118 ) Withdrawal of short terms deposits 21,500 14,500 Investment in short terms deposits ( 26,500 ) ( 6,500 ) Net cash flows provided by (used in) investing activities ( 5,113 ) 7,882 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of shares and warrants 13,809 - Net cash flows provided by financing activities 13,809 - INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 1,313 ) 1,787 BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,099 8,581 PROFITS FROM EXCHANGE DIFFERENCES ON CASH AND CASH EQUIVALENTS 159 ( 269 ) BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR 8,945 10,099 F- 6 Non cash activities - Year ended December 31, 2023 2022 USD in thousands Non cash activities Right-of-use assets obtained in exchange for operating lease liabilities 1,506 155 Termination of right-of-use assets in exchange for cancellation of operating lease obligations ( 52 ) - F- 7 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – GENERAL : a . Odysight.ai Inc (the “Company”), formerly known as ScoutCam Inc., was incorporated under the laws of the State of Nevada on March 22, 2013. Prior to the closing of the Exchange Agreement (as defined below), the Company was a non-operating “shell company”. On June 5, 2023, the Company filed with the Nevada Secretary of State a Certificate of Amendment to the Registrant’s Articles of Incorporation to change its name from “ScoutCam Inc.” to “Odysight.ai Inc.”, effective June 5, 2023. The Company’s wholly owned subsidiary, Odysight.ai Ltd (“Odysight.ai”), formerly known as ScoutCam Ltd., was formed in the State of Israel on January 3, 2019, as a wholly-owned subsidiary of Medigus Ltd. (“Medigus”), an Israeli company traded on the Nasdaq Capital Market, and commenced operations on March 1, 2019. In December 2019, Medigus and Odysight.ai consummated an asset transfer agreement, under which Medigus transferred and assigned certain assets and intellectual property rights related to its miniaturized imaging business to Odysight.ai. On December 30, 2019, the Company and Medigus consummated a securities exchange agreement (the “Exchange Agreement”), pursuant to which Medigus delivered 100 % of its holdings in Odysight.ai to the Company in exchange for shares of the Company’s common stock representing 60 % of the issued and outstanding share capital of the Company immediately upon the consummation of the Exchange Agreement. During 2020-2023 Medigus decreased its holdings in the Company such that as of March 31, 2023, Medigus owned 18.45 % of the Company’s outstanding common stock. On June 1, 2023, Medigus sold all of its holdings in the Company to existing shareholders and to Chairman of the Board and CEO of the Company. On February 28, 2024, D. VIEW Ltd. was formed in the State of Israel, wholly owned by Odysight.ai Inc., to act as a local agent for the defense market in Israel. The Company, through Odysight.ai, provides image-based platforms. Through the use of its proprietary visualization technology, Odysight.ai offers solutions across predictive maintenance and condition-based monitoring markets, in sectors such as energy, automotive and aviation. Odysight.ai’s solutions are based on small and highly resilient cameras, specialized AI analysis and supplementary technologies. Some of the Company’s products utilize micro visualization technology in medical devices for minimally invasive medical procedures. b. Since incorporation of Odysight.ai and through December 31, 2023, the Company accumulated a deficit of approximately $ 34.2 million and its activities have been funded mainly by its shareholders. The Company’s management believes the Company’ cash and cash resources will allow the Company to fund its operating plan through at least the next 12 months from the filing date of these Consolidated Financial Statements. However, the Company expects to continue to incur significant research and development and other costs related to its ongoing operations, requiring the Company to obtain additional funding in order to continue its future operations until becoming profitable. c. On October 7, 2023, Hamas terrorists infiltrated Israel’s southern border from the Gaza Strip and conducted a series of attacks on civilian and military targets, which led Israel to formally declare war on Hamas the next day. The war is ongoing as of the issuance date of these financial statements. At this stage, the Company does not expect substantial impact of the above-described events on its operations. F- 8 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES : a. Basis of preparation : The consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles in the United States (“U.S. GAAP”) applied on a consistent basis. b. Use of estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The Company evaluates its assumptions on an ongoing basis, including those related to contingencies and inventory impairment, as well as estimates used in applying its revenue recognition policy. Actual results may differ from these estimates. c. Functional currency A majority of Odysight.ai’s revenues are generated in U.S. dollars. The substantial majority of Odysight.ai costs are incurred in U.S. dollars and New Israeli Shekels (“NIS”). Odysight.ai management believes that the U.S. dollar is the currency of the primary economic environment in which Odysight.ai operates. Thus, the functional currency of Odysight.ai is the U.S. dollar. Transactions and balances originally denominated in U.S. dollars are presented at their original amounts. Balances in non-U.S. dollar currencies are translated into U.S. dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. For non-U.S. dollar transactions and other items in the statements of operations (indicated below), the following exchange rates are used: (i) for transactions exchange rates at transaction dates and (ii) for other items (derived from non-monetary balance sheet items such as depreciation and amortization) historical exchange rates. Currency transaction gains and losses are presented in financial income or expenses, as appropriate. d. Cash and Cash Equivalents The Company considers as cash equivalents all short-term, highly liquid investments, which include short-term bank deposits with original maturities of three months or less from the date of purchase that are not restricted as to withdrawal or use and are readily convertible to known amounts of cash. e. Short-term bank deposits Bank deposits with maturities of more than three months but less than one year are included in short-term bank deposits. Such short-term bank deposits are stated at cost which approximates fair market value. F- 9 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) : f. Accounts receivable Accounts receivable are presented in the Company’s consolidated balance sheets net of allowance for doubtful accounts. The Company estimates the collectability of its accounts receivable balances and adjusts its allowance for doubtful accounts accordingly. When revenue recognition criteria are not met for a sale transaction that has been billed, the Company does not recognize deferred revenues or the related account receivable. As of December 31, 2023 and 2022, no allowance for doubtful accounts was recorded. g. Property and equipment Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives. The annual depreciation rates are as follows: SCHEDULE OF PROPERTY AND EQUIPMENT ANNUAL DEPRECIATION RATES % Machinery and laboratory equipment 10 %- 15 % Office furniture and equipment 10 % Computers and computer software 33 % Leasehold improvements Over the shorter of the lease term (including options if any) or useful life h. Severance pay Israeli labor law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. Pursuant to Section 14 of the Severance Compensation Act, 1963 (“Section 14”), all of the Odysight.ai’s employees in Israel are entitled to a monthly contribution, at a rate of 8.33 % of their monthly salary, made in their name with insurance companies. Contributions under Section 14 relieve Odysight.ai from any future severance payment obligation with respect to those employees. The aforementioned contributions are not recorded as an asset on the Company’s balance sheet and there is no liability recorded, as the Company does not have a future obligation to make any additional payments. The asset and the liability for severance pay presented in the balance sheets reflects employees that began employment prior to automatic application of Section 14. The severance pay liability of Odysight.ai to its employees that began employment prior to automatic application of Section 14 is based upon the number of years of service and the latest monthly salary of such employees and is partly covered by regular deposits with recognized pension funds and deposits with severance pay funds. Under labor laws, these deposits are in the employees’ names and, subject to certain limitations, are the property of the employees. Odysight.ai records the obligation as if it were payable at each balance sheet date on an undiscounted basis. F- 10 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) : i. Stock-Based Compensation The Company applies the fair value recognition provisions of ASC 718, Compensation—Stock Compensation, or ASC 718, for stock-based awards granted to employees, directors, and other providers for their services. The Company measures and recognizes compensation expense for its equity classified stock-based awards granted under its plan based on estimated fair values on the grant dates. The Company calculates the estimated fair value of option awards on the grant date using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires a number of assumptions, of which the most significant are the stock price volatility and the expected option term. The Company’s expected dividend rate is zero since the Company does not currently pay cash dividends on its stocks and does not anticipate doing so in the foreseeable future. Volatility is derived from the historical volatility of publicly traded set of peer companies. The risk-free interest rates used in the Black-Scholes calculations are based on the prevailing U.S. Treasury yield as determined by the U.S. Federal Reserve. The weighted average expected life of options was estimated individually in respect of each grant. Each of the above factors requires the Company to use judgment and make estimates in determining the percentages and time periods used for the calculation. If the Company were to use different percentages or time periods, the estimated fair value of option awards could be materially different. The Company recognizes stock-based compensation cost for option awards on an accelerated basis over the employee’s requisite service period, forfeitures are accounted for as they occur. j. Inventories Inventories include raw materials, inventory in process and finished products and are valued at the lower of cost or net realizable value. Inventories are stated at a lower of cost, determined by the first-in, first-out method, or market based on net realizable value . Costs of purchased raw materials and inventory in process include costs of design, raw materials, direct labor, other direct costs and fixed production overheads. The inventories are adjusted for estimated excess and obsolescence and written down to net realizable value based upon estimates of future demand, technology developments and market conditions. k. Revenue recognition a) Revenue measurement The Company’s revenues are measured according to the ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). Under ASC 606, revenues are measured according to the amount of consideration that the Company expects to be entitled to receive in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties. Revenues are presented net of VAT. b) Revenue recognition The Company recognizes revenue when a customer obtains control over promised goods or services. For each performance obligation, the Company determines at contract inception whether it satisfies the performance obligation over time or satisfies the performance obligation at a point in time. Performance obligations are satisfied over time if one of the following criteria is met: F- 11 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) : (a) the customer simultaneously receives and consumes the benefits provided by the Company’s performance; (b) the Company’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or (c) the Company’s performance does not create an asset with an alternative use for the Company and the Company has an enforceable right to payment for performance completed to date. If a performance obligation is not satisfied over time, a Company satisfies the performance obligation at a point in time. The transaction price is allocated to each distinct performance obligations on a relative standalone selling price (“SSP”) basis and revenue is recognized for each performance obligation when control has passed. In most cases, the Company is able to establish SSP based on the observable prices of services sold separately in comparable circumstances to similar customers and for products based on the Company’s best estimates of the price at which the Company would have sold the product regularly on a stand-alone basis. The Company reassesses the SSP on a periodic basis or when facts and circumstances change. Product Revenue Revenues from product sales are recognized at a point in time when the customer obtains control of the Company’s product, typically upon shipment to the customer. Indirect taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenues. Service Revenue The Company also generates revenues from development services. Revenue from development services is recognized over the period of the applicable service contract. To the extent development services are not distinct from the performance obligation relating to the subsequent mass production phase of the prototype under development, revenue from these services is deferred until commencement of the production phase of the project and are then recognized over the expected term production. F- 12 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued) : l. Cost of revenues Cost of revenue consists of products purchased from sub-contractors, raw materials for in-house assembly line, shipping and handling costs to customers, salary, employee-related expenses, depreciation and overhead expenses. Cost of revenues are expensed commensurate with the recognition of the respective revenues. Costs deferred in respect of deferral of revenues are recorded as contract fulfilment assets on the Company’s balance sheet and are written down to the extent the contract is expected to incur losses. IIA grants are offset against cost revenues. m. Research and development costs Research and development costs are expensed as incurred and includes salaries and employee-related expenses, overhead expenses, material, and third-party contractors’ charges. n. Income taxes Income taxes are accounted for using the asset and liability approach under ASC-740, “Income Taxes”. The asset and liability approach requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax liabilities and assets is based on provisions of the relevant tax law. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Uncertain tax positions are accounted for in accordance with the provisions of ASC 740-10, under which a company may recognize the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxation authorities, based on the technical merits of the position, at the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Interest and penalties, if any, related to unrecognized tax benefits are recognized in tax expense. The Company and Odysight.ai provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. o. Legal contingencies The Company follows ASC 450-20, Loss Contingencies, to report accounting for contingencies. From time to time, the Company and its subsidiary become involved in legal proceedings or are subject to claims arising in their ordinary course of business. Such matters are generally subject to many uncertainties and outcomes are not predictable with assurance. The Company accrues for contingencies when the loss is probable and can reasonably estimate the amount of any such loss. F- 13 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES (continued): p. Basic and diluted net loss per share of common stock : Basic net loss per share of common stock is computed by dividing net loss, as adjusted, to include the weighted average number of shares of common stock outstanding during the year. Diluted net loss per share of common stock is computed by dividing net loss, as adjusted, by the weighted average number of shares of common stock outstanding during the year, plus the number of shares of common stock that would have been outstanding if all potentially dilutive shares of common stock had been issued, using the treasury stock method, in accordance with ASC 260-10 “Earnings per Share”. All outstanding stock options and warrants have been excluded from the calculation of the diluted loss per share for the years ended December 31, 2023 and December 31, 2022, since all such securities have an anti-dilutive effect. q. Leases In accordance with ASC 842, the Company determines whether an arrangement is or contains a lease based on the facts and circumstances present at inception of an arrangement. An arrangement is or contains a lease if the arrangement conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Arrangements that are determined to be leases at inception are recognized as long-term right-of-use (“ROU”) assets and short and long-term lease liabilities in the consolidated balance sheet at lease commencement. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future fixed lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company applies its incremental borrowing rate based on the economic environment at commencement date in determining the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases or payments are recognized on a straight-line basis over the lease term. The Company has elected not to recognize on the balance sheet leases with terms of 12 months or less. r. New accounting pronouncements Recently issued accounting pronouncements, not yet adopted In December 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This guidance is intended to enhance the transparency and decision-usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to disclosure regarding rate reconciliation and income taxes paid both in the U.S. and in foreign jurisdictions. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 on a prospective basis. Early adoption is permitted, with the option to apply the standard retrospectively. The Company does not expect any significant impact from the adoption of this standard. F- 14 NOTE 3 - SHORT-TERM DEPOSITS : Short term deposits as of December 31, 2023 bearing annual interest rates of 7.2 % and 6.3 %, with maturities of up to 12 months. NOTE 4 - INVENTORY : SCHEDULE OF INVENTORY 2023 2022 December 31, 2023 2022 USD in thousands Raw materials and supplies 445 438 Work in progress 34 148 Finished goods 25 44 Inventory Net 504 630 During the years 2023 and 2022, no impairment occurred. NOTE 5 - PROPERTY AND EQUIPMENT, NET : Property, plant and equipment, net consisted of the following: SCHEDULE OF PROPERTY, PLANT AND EQUIPMENT NET 2023 2022 December 31, 2023 2022 USD in thousands Cost: Machinery and laboratory equipment 626 619 Leasehold improvements, office furniture and equipment 171 351 Computers and computer software 237 182 Total property and equipment, gross 1,034 1,152 Less: accumulated deprecation ( 557 ) ( 504 ) Total property and equipment, net 477 648 Depreciation expenses were $ 284 thousand and $ 251 thousand for the years ended December 31, 2023 and 2022, respectively. F- 15 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 – OTHER CURRENT LIABILITIES: SCHEDULE OF OTHER ACCRUED EXPENSES 2023 2022 December 31, 2023 2022 USD in thousands Government authorities 52 - Accrued expenses 132 214 Other payables 27 - Total other accrued expenses 211 214 NOTE 7 - INCOME TAXES : a. Basis of taxation 1. Tax rates applicable to the income of the Israeli subsidiary: Odysight.ai is taxed according to Israeli tax laws. The Israeli corporate tax rate from the year 2018 and onwards is 23 %. 2. Tax rates applicable to the income of the U.S. company: The Company is taxed according to U.S. tax laws. The U.S. corporate tax rate from the year 2018 and onwards is 21 %. b. Deferred income taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows: SCHEDULE OF COMPONENT OF DEFERRED TAX ASSET 2023 2022 December 31, 2023 2022 USD in thousands Operating loss carryforward 25,006 19,239 Net deferred tax asset before valuation allowance 5,786 4,564 Valuation allowance ( 5,786 ) ( 4,564 ) Net deferred tax - - As of December 31, 2023, the Company has provided a full valuation allowance of $ 5,786 thousand in respect of deferred tax assets resulting from tax loss carryforwards and other temporary differences. Management currently believes that because the Company has a history of losses, it is more likely than not that the deferred tax regarding the loss carryforward and other temporary differences will not be realized in the foreseeable future. c. Available carryforward tax losses: As of December 31, 2023, the Company has an accumulated tax loss carryforward of approximately $ 25,006 thousand. Carryforward tax losses in Israel are of unlimited duration. Under the Tax Cut and Jobs Act of 2017, or the Tax Act (subject to modifications under the Coronavirus Aid, Relief, and Economic Security Act), federal net operating losses (NOL) incurred in taxable years ending after December 31, 2017 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will conform to the newly enacted federal tax law. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50 percentage point change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. Such limitations may result in the expiration of net operating losses before utilization. d. The main reconciling item between the statutory tax rate of the Company and the effective tax rate is the recognition of valuation allowance in respect of deferred taxes relating to accumulated net operating losses carried forward due to the uncertainty of the realization of such deferred taxes. e. As of December 31, 2021, Odysight.ai owed NIS 740 thousand, (approximately $ 229 thousand) in additional taxes to the Israel Tax Authority following a VAT audit in Israel for 2019-2021. On November 18, 2021, Odysight.ai filed an appeal to the Israeli Tax Authority on the finding of the VAT audit. Due to the uncertainty regarding the outcome of the appeal, the financial statements as of December 31, 2021 included a provision related to the additional taxes of $ 229 thousand, which was included in general and administrative expenses in the statement of operation report. In July 2022, Odysight.ai reached an agreement with the Israeli Tax Authority, according to which the amount due in additional taxes was reduced to NIS 340 thousand (approximately $ 100 thousand). F- 16 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 – RELATED PARTIES : a. Related Parties Balances: SCHEDULE OF BALANCES WITH RELATED PARTIES 2023 2022 December 31, 2023 2022 USD in thousands Directors (directors’ accrued compensation) 31 48 Smartec R&D Ltd. (see note 8b) 10 10 Related parties 41 58 b. During 2022 and 2023 the Company received development services from Smartec R&D Ltd., a company owned by the Company’s former CTO. Total compensation for the fiscal years ended December 31, 2022 and December 31, 2023 was $ 117 thousands and $ 29 thousands, respectively. F- 17 NOTE 9 - EQUITY : Increase of the authorized share capital On January 20, 2021, the Company’s Board of Directors approved an increase of the authorized share capital of the Company by an additional 225,000,000 shares of common stock par value $ 0.001 per share, such that the authorized share capital of the Company following such increase shall be consisting of 300,000,000 shares of common stock. a. Private placement: 1. On March 29, 2021, the Company issued to certain investors, including Arkin, a major stockholder of the Company, of which Mori Arkin, a director of the company, is the owner, 2,469,156 units in exchange for an aggregate purchase price of $ 20 million. Each such unit consists of (i) one share of common stock and (ii) one warrant to purchase one share of common stock with an exercise price of $ 10.35 per share . Each such warrant is exercisable until the close of business on March 31, 2026 . Pursuant to the terms of the foregoing warrants, following April 1, 2024, if the closing price of Company common stock equal or exceeds 135 % of the aforementioned exercise price (subject to appropriate adjustments for stock splits, stock dividends, stock combinations and other similar transactions after the issue date of the warrants) for any thirty (30) consecutive trading days, the Company may force the exercise of the warrants, in whole or in part, by delivering to these investors a notice of forced exercise. 2. On March 16, 2023, the Company consummated a Stock Purchase Agreements for a private placement with (i) Moshe Arkin and (ii) The Phoenix Insurance Company Ltd. and Shotfut Menayot Israel – Phoenix Amitim, in connection with the sale and issuance of an aggregated amount of 3,294,117 units (collectively, the “Units”), at a purchase price of $ 4.25 per Unit, and for an aggregated purchase price of $ 14,000,000 . Each Unit consists of: (i) one share of the Company’s common stock with par value of $ 0.001 per share (the “Common Stock”) and (ii) one warrant to purchase one share of Common Stock with an exercise price of $ 5.50 (the “Warrants”). The Warrants are immediately exercisable and will expire three years from the date of issuance and will be subject to customary adjustments. F- 18 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 – EQUITY (continued): Warrants: As of December 31, 2023, the Company had the following outstanding warrants to purchase common stock: SCHEDULE OF STOCK WARRANTS OUTSTANDING TO PURCHASE COMMON STOCK Number of Shares of Exercise Price common stock Issuance Expiration Per Share Underlying Warrant Date Date ($) Warrants March 2021 Warrant March 29, 2021 March 31, 2026 10.35 2,469,156 March 2023 Warrant March 27, 2023 March 26, 2026 5.50 3,294,117 5,763,273 b. Stock-based compensation to employees, directors and service providers: In February 2020, the Company’s Board of Directors approved the 2020 Share Incentive Plan (the “Plan”). The Plan initially included a pool of 580,890 shares of common stock for grant to Company employees, consultants, directors and other service providers. On March 15, 2020, the Company’s Board of Directors approved an increase to the Company’s option pool pursuant to the Plan by an additional 64,099 shares of common stock. On June 22, 2020, the Company’s Board of Directors approved an increase to the Company’s option pool pursuant to the Plan by an additional 401,950 shares of common stock. During the second quarter of 2021, the Company’s Board of Directors approved an increase to the Company’s option pool pursuant to the Plan by an additional 777,778 shares of common stock. During the first quarter of 2023, the Company’s Board of Directors approved an increase to the option pool pursuant to the Plan by an additional 1,000,000 shares of common stock. The Plan is designed to enable the Company to grant options to purchase shares of common stock and RSUs under various and different tax regimes including, without limitation: (i) pursuant and subject to Section 102 of the Israeli Tax Ordinance or any provision which may amend or replace it and any regulations, rules, orders or procedures promulgated thereunder and to designate them as either grants made through a trustee or not through a trustee; and (ii) pursuant and subject to Section 3 (i) of the Israeli Tax Ordinance. During 2022, the Company granted 479,000 options pursuant to the Plan. During 2023, the Company granted 986,000 options pursuant to the Plan Options granted generally have a contractual term of seven years and vest over a period of three to four years . F- 19 NOTE 9 – EQUITY (continued): Stock Option Activity The following summarizes stock option activity: SCHEDULE OF STOCK OPTION ACTIVITY Amount of options Weighted average exercise price Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (in thousands) $ $ in thousands Outstanding - January 1, 2022 1,253,554 3.31 5.65 5,884 Granted 479,000 4.50 - - Forfeited ( 172,514 ) 3.57 - - Outstanding - December 31, 2022 1,560,040 3.64 5.17 2,116 Granted 986,000 3.15 - - Forfeited ( 90,971 ) 3.28 - - Outstanding - December 31, 2023 2,455,069 3.46 5.04 312 Options Exercisable - December 31, 2023 1,163,201 3.39 3.57 268 As of December 31, 2023, the aggregate intrinsic value of options granted is calculated as the difference between the exercise price and the closing price on the same date. The Company estimates the fair value of stock option awards on the grant date using the Black-Scholes option pricing model. The weighted-average grant date fair value per option granted during the year ended December 31, 2023 was $ 2.37 . The fair value of each award is estimated using Black-Scholes option-pricing model based on the following assumptions: based on underlying value of shares of $ 3 , exercise price of $ 3 -$ 4.5 , expected volatility of 88 %- 90 %, term of the options – 7 years and risk-free interest rate 3.93 %- 4.47 %. Volatility is derived from the historical volatility of publicly traded set of peer companies. The risk-free interest rates used in the Black-Scholes calculations are based on the prevailing U.S. Treasury yield as determined by the U.S. Federal Reserve. The Company has not paid dividends and does not anticipate paying dividends in the foreseeable future. Accordingly, no dividend yield was assumed for purposes of estimating the fair value of the Company’s stock-based compensation. The weighted average expected life of options was estimated individually in respect of each grant. The unrecognized compensation expense calculated under the fair-value method for stock options expected to vest as of December 31, 2023 is approximately $ 1.93 million and is expected to be recognized over a weighted-average period of 1.38 years. During 2023 and 2022 the Company’s Board of Directors authorized the grant of options to purchase 150,000 shares of common stock of the Company and 45,000 shares of common stock of the Company, respectively, to Prof. Goldwasser, the Chairman of the Board. During 2023 the Company’s Board of Directors authorized the grant of options to purchase 260,000 shares of common stock of the Company to directors of the Company. During 2023 and 2022 the Company’s Board of Directors authorized the grant of options to purchase 225,000 shares of common stock of the Company and 400,000 shares of common stock of the Company, respectively, to certain officers of the Company. Compensation expense recorded by the Company in respect of its stock-based employees, directors and service providers compensation awards in accordance with ASC 718-10 for the year ended December 31, 2023 and 2022 amounted to $ 1,664 thousands and $ 1,638 thousands, respectively. F- 20 c. Restricted stock unit (“RSU”) to employees and service providers: During the year ended December 31, 2023, the Company granted 25,000 RSUs pursuant to the Plan. Each RSU will vest based on continued service which is generally over three years. The grant date fair value of the award will be recognized as stock-based compensation expense over the requisite service period. The fair value of restricted stock units was estimated on the date of grant based on the fair value of the Company’s common stock. The cost of the benefit embodied in the RSU granted during 2023, based on their fair value as at the grant date, is estimated to be approximately $ 75 thousand. These amounts will be recognized in the statements of operations over the vesting period. The following table summarizes RSU activity for December 31, 2023: SCHEDULE OF STOCK OPTION ACTIVITY Amount of RSUs Weighted Average Grant Date Fair Value per Share Weighted Average Remaining Contractual Term (years) $ Outstanding - December 31, 2022 50,000 6.32 6.44 Granted 25,000 3 - Forfeited ( 7,501 ) 7.2 Vested ( 27,914 ) 6.28 - Unvested and Outstanding - December 31, 2023 39,585 4.08 6.30 The unrecognized compensation expense calculated under the fair-value method for RSUs expected to vest as of December 31, 2023 is approximately $ 70 thousand and is expected to be recognized over a weighted-average period of 1.15 years. The following table sets forth the total stock-based payment expenses resulting from options and RSU granted, included in the statements of operation and comprehensive income: SCHEDULE OF STOCK-BASED PAYMENT EXPENSE 2023 2022 Year ended on December 31, 2023 2022 USD in thousands Cost of revenues 22 29 Research and development 522 576 Sales and marketing expenses 126 130 General and administrative 994 903 Total expenses 1,664 1,638 F- 21 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 – REVENUES AND ENTITY WIDE DISCLOSURES : ASC 280, “Segment Reporting,” establishes standards for reporting information about operating segments. The Company manages its business based on one operating segment, as described in Note 1. a. Disaggregation of revenue SCHEDULE OF DISAGGREGATION OF REVENUE 2023 2022 Year ended on December 31, 2023 2022 USD in thousands Development Services (customer A) ( * ) 422 317 Products 2,611 348 Revenue 3,033 665 (*) During the second quarter of 2022, the Company completed the development of to a customer-specific project for a Fortune 500 multinational healthcare corporation (“Customer A”) and moved from the development phase of the project to its production phase. As a result, during the year ended December 31, 2023, the Company recognized development services revenues and related development costs that had been previously deferred, in the amounts of $ 422 thousand and $ 239 thousand, respectively. The amounts were recognized based on the expected manufacturing term of the product, which the Company estimates at 7 years . In addition, following the commencement of the production phase, the Company recognized product revenues of $ 2,514 thousands during the year ended December 31, 2023 from the sale of units of the product developed in the context of these development services. b. Revenues by geographical area (based on the location of customers) The following is a summary of revenues within geographic areas: SCHEDULE OF REVENUES WITHIN GEOGRAPHIC AREAS 2023 2022 Year ended on December 31, 2023 2022 USD in thousands United States 2,983 553 United Kingdom 4 65 I srael 27 - Other 19 47 Revenue 3,033 665 c. Major customers Set forth below is a breakdown of Company’s revenue by major customers (major customer –revenues from these customers constituted at least 10% of total revenues in a certain year): SCHEDULE OF MAJOR CUSTOMER BREAKDOWN OF COMPANY’S REVENUE Year ended on December 31, 2023 2022 USD in thousands Customer A 2,977 538 Customer B - 65 F- 22 d. Contract fulfillment assets and Contract liabilities: SCHEDULE OF CONTRACT FULFILLMENT ASSETS AND CONTRACT LIABILITIES 2023 2022 December 31, 2023 2022 USD in thousands Contract fulfillment assets 1,256 1,495 Contract liabilities 2,322 3,644 Contract liabilities include deferred service and advance payments. The change in contract fulfillment assets: 2023 2022 December 31, 2023 2022 USD in thousands Balance at beginning of year 1,495 1,675 Contract costs recognized during the period ( 239 ) ( 180 ) Balance at end of year 1,256 1,495 The change in contract liabilities: 2023 2022 December 31, 2023 2022 USD in thousands Balance at beginning of year 3,644 2,420 Deferred revenue relating to new sales - 1,613 Revenue recognized during the year ( 1,322 ) ( 389 ) Balance at end of year 2,322 3,644 Remaining Performance Obligations Remaining Performance Obligations (“RPO”) represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be recognized as revenue in future periods. As of December 31, 2023, the total RPO amounted to $ 2.3 million, which the Company expects to recognize over the expected manufacturing term of the product under development. F- 23 ODYSIGHT.AI INC. (Formerly known as ScoutCam Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - LEASES a. Omer office space In December 2020, Odysight.ai entered into a lease agreement for office space in Omer, Israel (“original space”), with the 36-month term for such agreement beginning on January 1, 2021 . In March 2021, Odysight.ai entered into a lease agreement for additional office space in Omer, Israel (“additional space”), with the term for such agreement is ending December 31, 2023 . On June 25, 2023, Odysight.ai entered into an amendment to these agreements, pursuant to which the lease for the additional space will be shortened and end on June 30, 2023 and the lease for the original space will be extended for an additional five years until December 31, 2028. It was also agreed that Odysight.ai has an option to terminate the agreement for the original space after three years. Odysight.ai expect that the lease period will be three years. Monthly lease payments under the agreement for the original space are approximately $ 7 thousand. b. Ramat Gan office space In December 2022, Odysight.ai entered into a lease agreement for office space in Ramat Gan, Israel. The agreement is for 12 months beginning on December 14, 2022 and the Company has an option to extend the lease period for an additional one year . Monthly lease payments under the agreement are $ 3 thousand. The Company terminate the agreement after 12 months. In May 2023, Odysight.ai entered into an additional lease agreement for office space in Ramat Gan, Israel. The agreement is for 48 months beginning on July 1, 2023 and the Company has an option to extend the lease period for an additional two years. The Company does not currently expect to extend the lease period. Monthly lease payments under the agreement are in the amount of approximately $ 25 thousand. Odysight.ai subleases part of the additional office space in Ramat Gan to an unrelated third party for approximately $ 7 thousand per month. In addition, the Company leases vehicles under various operating lease agreements. On December 31, 2023, the Group’s ROU assets and lease liabilities for operating leases totaled $ 1,380 thousand and $ 1,326 thousand, respectively. On December 31, 2022, the Group’s ROU assets and lease liabilities for operating leases totaled $ 307 thousand and $ 263 thousand, respectively. Operating lease expenses were $ 403 thousand and $ 264 thousand for the years ended December 31, 2023 and 2022, respectively. Supplemental cash flow information related to operating leases during the period presented was as follows: SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO OPERATING LEASES 2023 2022 Year ended December 31, 2023 2022 USD in thousands Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases 479 261 Lease term and discount rate related to operating leases as of the period presented were as follows: SCHEDULE OF LEASE TERM AND DISCOUNT RATE RELATED TO OPERATING LEASES December 31, 2023 2022 USD in thousands Weighted-average remaining lease term (in years) 0.89 0.84 Weighted-average discount rate- leases vehicles 6 % 6 % Weighted-average discount rate- leases offices 12.8 % 6 % F- 24 The maturities of lease liabilities under operating leases as of December 31, 2023 are as follows: SCHEDULE OF MATURITIES LEASE LIABILITIES UNDER OPERATING LEASES USD in thousands 2024 572 2025 528 2026 403 2027 156 Total undiscounted lease payments 1,659 Less: Imputed interest ( 333 ) Total lease liabilities 1,326 NOTE 12 – RESEARCH AND DEVELOPMENT EXPENSES : SCHEDULE OF RESEARCH AND DEVELOPMENT EXPENSES 2023 2022 Year ended December 31, 2023 2022 USD in thousands Salaries and related expense 3,561 2,034 Stock-based compensation 521 576 Materials and subcontractors 767 1,030 Depreciation 164 163 Travel expenses 41 73 Vehicle expenses 110 75 Rent and maintenance and other expenses 438 246 Research and Development expenses 5,602 4,197 NOTE 13 – SALES AND MARKETING EXPENSES : SCHEDULE OF SALES AND MARKETING EXPENSES 2023 2022 Year ended December 31, 2023 2022 USD in thousands Salaries and related expense 142 213 Stock-based compensation 126 132 Business development and marketing 667 323 Exhibitions 152 - Vehicle expenses 15 22 Other expenses 7 9 Sales And Marketing Expenses 1,109 699 NOTE 14 – GENERAL AND ADMINISTRATIVE EXPENSES : SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES 2023 2022 Year ended December 31, 2023 2022 USD in thousands Salaries and related expense 1,132 1,027 Stock-based compensation 994 903 Professional services 1,037 859 Patents 486 292 Depreciation 56 34 Insurance 182 337 Vehicle expenses 100 73 Rent and maintenance and other expenses 444 181 VAT provision (note 7e) - ( 129 ) General and Administrative expenses 4,431 3,577 NOTE 15 - COMMITMENTS AND CONTINGENCIES On April 2023, the Company received approval from the Israel Innovation Authority (previously the Office of the Chief Scientist), (the “IIA”) to support and enhance the Company’s production line and capabilities in the next 24 months until April 2025. Pursuant to the agreement with the IIA relating to the program, the Company has to pay royalties of 3% to the IIA up to the amount IIA funding received and the accrued interest repayment of the grant is contingent upon the Company successfully completing its enhancement plans and generating sales from the enhancements preformed . The Company has no obligation to repay these grants if its enhancement plans are not completed or aborted or if it generates no sales. During the year ended December 31, 2023 grants of $ 60 thousand recorded as cost of revenues in the consolidated statements. NOTE 16 - SUBSEQUENT EVENTS : On February 28, 2024, D. VIEW Ltd. was formed in the State of Israel, wholly owned by Odysight.ai Inc., to act as a local agent for the defense market in Israel. F- 25