Odysight.ai Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Readers are advised to review the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and related notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2023. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements”. You should review the “Risk Factors” section of our Annual Report for the fiscal year ended December 31, 2023, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis . Unless otherwise designated, the terms “we,” “us,” “our,” “Odysight.ai,” “the Company,” and “our Company” refer to Odysight.ai Inc. and our wholly-owned subsidiaries, including Odysight.ai Ltd., a private company organized under the laws of the State of Israel. Overview Our primary business activity in prior quarters was enlarging our focus on R&D activities in the domain of PdM and CBM (we refer to these applications as Industry 4.0, or I4.0), including in sectors such as aerospace, maritime energy and other heavy machinery, engines and complicated mechanics which require ongoing monitoring and predictive maintenance applications. The main effect of this activity was to enable the Company to accelerate its growth and support an increased workload and solution development requirements from customers. Comparison of the nine months ended September 30, 2024 and 2023 The following table summarizes our results of operations for the nine months period ended September 30, 2024 and 2023, together with the changes in those items in dollars and as a percentage: Nine months ended September 30, 2024 2023 % Change Revenues 2,660,000 1,087,000 145 % Cost of Revenues 1,964,000 1,648,000 19 % Gross Profit (Loss) 696,000 (561,000 ) Research and development expenses 4,705,000 4,107,000 15 % Sales and marketing expense 806,000 877,000 (8 )% General and administrative expenses 3,929,000 3,225,000 22 % Operating Loss (8,744,000 ) (8,770,000 ) - Revenues For the nine months ended September 30, 2024, we generated revenues of $2,660,000, an increase of $1,573,000, or 145 %, compared to revenues of $1,087,000 for the nine months ended September 30, 2023. The increase in revenues was primarily attributable to an increase in revenues from a Fortune 500 multinational healthcare corporation, as well as recognition of revenues from Industry 4.0. The increase in revenues from a Fortune 500 multinational healthcare corporation (see note 6 to our interim financial statements) was mainly due to: - an increase in the number of units sold and supplied to the customer during the nine months ended September 30, 2024, and - formalization of negotiations with the customer, following which the sale price per unit increased significantly compared to the previous sale price. A substantial portion of our current revenue comes from a limited number of customers. Cost of Revenues Cost of revenue is primarily comprised of cost of personnel and certain allocated expenses related to facilities, logistics and quality control. Cost of revenues for the nine months ended September 30, 2024 was $1,964,000, an increase of $316,000, or 19%, compared to cost of revenues of $1,648,000 for the nine months ended September 30, 2023. The increase in cost of revenues was primarily due to an increase in revenues. Gross Profit (Loss) Gross profit for the nine months ended September 30, 2024, was $696,000. Gross loss for the nine months ended September 30, 2023, was $561,000. The change was due to both an increase in revenues and an increase in cost of revenues, as described above. The transition from a gross loss to a gross profit was principally attributable to: - formalization of negotiations with the Fortune 500 multinational healthcare corporation, following which the unit price experienced a substantial increase compared to its previous level; and - an increase in the number of units sold and supplied to the customer during the nine months ended September 30, 2024. Research and Development Expenses Research and development efforts are focused on new product development, as well as developing and enhancing functionality for our existing products. These expenses primarily consist of employee-related expenses, including salaries, benefits, and stock-based compensation expense for personnel engaged in research and development functions, consulting, and professional fees related to research and development activities, prototype materials, facility costs, and other allocated expenses, including costs related to rent and maintenance of our facilities, utilities, depreciation, and other supplies. We expense research and development costs as incurred. Research and development expenses for the nine months ended September 30, 2024 were $4,705,000, an increase of $598,000, or 15%, compared to $4,107,000 for the nine months ended September 30, 2023. The increase in research and development expenses was mainly due to an increase in payroll and related expenses for new employee recruitment but also attributable in part to: - an increase in stock-based compensation due to new options grants; - procuring materials and employment of subcontractors for Industry 4.0 projects; and - development of new products. We expect that our research and development expenses will increase as we continue to develop and improve our products and services in the I4.0 domain. - 20 - Sales and Marketing Expenses Sales and marketing expenses primarily consist of payroll and related expenses, consulting services, promotional materials, exhibitions, demonstration equipment, and certain allocated facility infrastructure costs. Sales and marketing expenses for the nine months ended September 30, 2024 were $806,000, a decrease of $71,000, or 8%, compared to $877,000 for the nine months ended September 30, 2023. The decrease in sales and marketing expenses was mainly due to one-time expenses incurred during the nine months ended September 30, 2023 which did not reoccur during the nine months ended September 30, 2024. During the nine months ended September 30, 2023, we incurred significant expenses related to rebranding activities. These activities included costs associated, inter alia, with altering our name, design of a new logo, and the creation of new promotional materials. We expect that our sales and marketing expenses will increase as we expand our commercial activity in the I4.0 domain. General and Administrative Expenses General and administrative expenses primarily consist of payroll and other related costs, including stock-based compensation. General and administrative expenses also include direct and allocated cost, such as facility-related costs, professional fees, legal, patent, investors and public relations, accounting, auditing, tax services, and insurance costs. General and administrative expenses for the nine months ended September 30, 2024, were $3,929, 000, an increase of $704,000, or 22%, compared to $3,225,000 for the nine months ended September 30, 2023. The increase in general and administrative expenses was primarily due to: - an increase in professional services expenses due to the hiring of a financial consultant, IR consultant, HR consultant, and the appointment of new directors; - an increase in payroll and related expenses due to cash compensation bonuses paid to existing employees, including the CEO, CFO, and Senior VP of Product Portfolio; and - an increase in stock-based compensation due to new options grants. Operating loss We incurred an operating loss of $8,744,000 for the nine months ended September 30, 2024, a decrease of $26,000, or 0.3%, compared to operating loss of $8,770,000 for the nine months ended September 30, 2023. The decrease in operating loss was primarily due to an increase in gross profit and a decrease in sales and marketing expenses, partially offset by increase in expenses related to research and development and general and administrative expenses, each as described above. Cash Flows The following table sets forth the significant sources and uses of cash for the periods set forth below (in dollars): Nine month ended September 30, 2024 2023 Cash used in Operating Activity (5,522,000 ) (7,338,000 ) Cash provided by (used in) Investing Activity 7,962,000 (594,000 ) Cash provided by Financing Activity 9,850,000 13,835,000 Operating Activities Our primary uses of cash from operating activities have been for payroll expenses, research and development costs, manufacturing costs, marketing and promotional expenses, professional services costs, and costs related to our facilities. We expect that cash flows related to our operating activities will continue to increase as our business and our working capital requirements grow. During the nine months ended September 30, 2024, cash used in operating activities was $5.5 million, consisting of net loss of $8.2 million, partially offset by a favorable net change in operating assets and liabilities of $1 million and a non-cash benefit of $1.7 million. Our non-cash benefit consisted primarily of non-cash charges for stock-based compensation. The net change in our operating assets and liabilities primarily reflects cash inflows from changes in accounts receivable and accrued compensation expenses, partially offset by outflows from changes in current and non-current other assets and contract liabilities. During the nine months ended September 30, 2023, cash used in operating activities was $7.3 million, consisting of a net loss of $8.1 million, an unfavorable net change in operating assets and liabilities of $0.5 million, partially offset by a non-cash benefit of $1.3 million. Our non-cash benefit consisted primarily of non-cash charges for stock-based compensation. - 21 - Investing Activities For the nine months ended September 30, 2024, net cash flows provided by investing activities was $8 million, consisting mainly of withdrawal of short-term deposits. For the nine months ended September 30, 2023, net cash flows used in investing activities was $0.6 million, consisting mainly of investment, net on short-term deposits. Financing Activities During the nine months ended September 30, 2024, cash provided by financing activities was $9.9 million, consisting of cash proceeds from issuance of shares, net of issuance costs. During the nine months ended September 30, 2023, cash provided by financing activities was $13.9 million, consisting of cash proceeds from issuance of shares and warrants, net of issuance costs. Comparison of the three months ended September 30, 2024 and 2023 The following table summarizes our results of operations for the three months period ended September 30, 2024, and 2023, together with the changes in those items in dollars and as a percentage: Three months ended September 30, 2024 2023 % Change Revenues 1,292,000 110,000 1075 % Cost of Revenues 887,000 321,000 176 % Gross Profit (Loss) 405,000 (211,000 ) Research and development expenses 1,730,000 1,354,000 28 % Sales and marketing expense 347,000 208,000 67 % General and administrative expenses 1,344,000 1,099,000 22 % Operating Loss (3,016,000 ) (2,872,000 ) 5 % Revenues For the three months ended September 30, 2024, we generated revenues of $1,292,000, an increase of $1,182,000, or 1,075%, compared to revenues of $110,000 for the three months ended September 30, 2023. The increase in revenues was primarily attributable to an increase in revenues from a Fortune 500 multinational healthcare corporation, as well as recognition of revenues from Industry 4.0. The increase in revenues from a Fortune 500 multinational healthcare corporation (see note 6 to our interim financial statements) was mainly due to: - an increase in the number of units sold and supplied to the customer during the three months ended September 30, 2024, and - formalization of negotiations with the customer, following which the sale price per unit increased significantly compared to the previous sale price. Cost of Revenues Cost of revenue is primarily comprised of cost of personnel and certain allocated expenses related to facilities, logistics, and quality control. Cost of revenues for the three months ended September 30, 2024 was $887,000, an increase of $566,000, or 176%, compared to cost of revenues of $321,000 for the three months ended September 30, 2023. The increase in cost of revenues was primarily due to increase in revenues. Gross Profit ( Loss) Gross profit for the three months ended September 30, 2024, was $405,000 compared to gross loss for the three months ended September 30, 2023 of $211,000. The change was due to both an increase in revenues and an increase in cost of revenues, as described above. The transition from a gross loss to a gross profit was principally attributable to: - formalization of negotiations with the Fortune 500 multinational healthcare corporation, following which the unit price experienced a substantial increase compared to its previous level; and - an increase in the number of units sold and supplied to the customer during the three months ended September 30, 2024. - 22 - Research and Development Expenses Research and development efforts are focused on new products development, as well as developing and enhancing functionality for our existing products. These expenses primarily consist of employee-related expenses, including salaries, benefits, and stock-based compensation expense for personnel engaged in research and development functions, consulting, and professional fees related to research and development activities, prototype materials, facility costs, and other allocated expenses, including cost related to rent and maintenance of our facilities, utilities, depreciation, and other supplies. We expense research and development costs as incurred. Research and development expenses for the three months ended September 30, 2024 were $1,730,000, an increase of $376,000, or 28%, compared to $1,354,000 for the three months ended September 30, 2023. The increase was mainly due to the following reasons: - an increase in stock-based compensation due to new options grants; - procuring materials and employment of subcontractors for Industry 4.0 projects; and - development of new products. We expect that our research and development expenses will increase as we continue to develop and improve our products and services in the I4.0 domain. Sales and Marketing Expenses Sales and marketing expenses primarily consist of payroll and related expenses, consulting services, promotional materials, exhibitions, demonstration equipment, and certain allocated facility infrastructure costs. Sales and marketing expenses for the three months ended September 30, 2024, were $347,000, an increase of $139,000, or 67%, compared to $208,000 for the three months ended September 30, 2023. The increase was mainly due to the following reasons: - an increase in stock-based compensation due to new options grants; and - exhibition and international travel expenses. We expect that our sales and marketing expenses will increase as we expand our commercial activity in the I4.0 domain. General and Administrative Expenses General and administrative expenses primarily consist of payroll and other related costs, including stock-based compensation. General and administrative expenses also include direct and allocated cost, such as facility-related, professional fees, legal, patent, investors and public relations, accounting, auditing, tax services, and insurance costs. General and administrative expenses for the three months ended September 30, 2024, were $1,344,000, an increase of $245,000, or 22%, compared to $1,099,000 for the three months ended September 30, 2023. The increase in general and administrative expenses was primarily due to: - an increase in professional services expenses due to the hiring of a financial consultant, IR consultant, HR consultant and the appointment of new directors; - an increase in payroll and related expenses due to cash compensation bonuses paid to existing employees, including the CEO, CFO, and Senior VP of Product Portfolio; and - an increase in stock-based compensation due to new options grants. Operating loss We incurred an operating loss of $3,016,000 for the three months ended September 30, 2024, an increase of $144,000, or 5%, compared to operating loss of $2,872,000 for the three months ended September 30, 2023. The increase in operating loss was primarily due to an increase in sales and marketing expenses, research and development expenses, and general and administrative expenses, partially offset by an increase in gross profit, each as described above. - 23 - Cash Flows The following table sets forth the significant sources and uses of cash for the periods set forth below (in dollars): Three month ended September 30, 2024 2023 Cash used in Operating Activity (2,199,000 ) (2,255,000 ) Cash provided by (used in) Investing Activity (8,000 ) 14,963,000 Cash provided by (used in) Financing Activity 9,850,000 (78,000 ) Operating Activities Our primary use of cash from operating activities was for payroll expenses, research and development costs, manufacturing costs, marketing and promotional expenses, professional services costs and costs related to our facilities. We expect that cash flows related to our operating activities will continue to increase as our business and our working capital requirements grow. During the three months ended September 30, 2024, cash used in operating activities was $2.2 million, consisting of net loss of $2.9 million, a favorable net change in operating assets and liabilities of $0.1 million and a non-cash benefit of $0.5 million. Our non-cash benefit consisted primarily of non-cash charges of $0.5 million for stock-based compensation. During the three months ended September 30, 2023, cash used in operating activities was $2.3 million, consisting of a net loss of $2.5 million, an unfavorable net change in operating assets and liabilities of $0.3 million and a non-cash benefit of $0.5 million. Our non-cash benefit consisted primarily of non-cash charges of $0.3 million for stock-based compensation. Investing Activities For the three months ended September 30, 2024, net cash flows used in investing activities was $8,000, attributable mainly to a purchase of property and equipment. For the three months ended September 30, 2023, net cash provided by investing Activity was $15 million, consisting mainly of withdrawal, net on short-term deposits. Financing Activities During the three months ended September 30, 2024, cash provided by financing activities was $9.9 million, consisting of cash proceeds from issuance of shares, net of issuance costs. For the three months ended September 30, 2023, net cash flows used in financing activities was $78,000, consisting of issuance expenses. Contractual Obligations and Commitments During the nine months ended September 30, 2024, there were no material changes to our contractual obligations and commitments since the year ended December 31, 2023. Liquidity and Capital Resources As of September 30, 2024, we had cash, cash equivalents and restricted cash of $21 million compared to cash and cash equivalents and short-term deposits of $17 million as of December 31, 2023. In addition, as of September 30, 2024, we incurred an accumulated deficit of approximately $42.4 million, as compared to $34.2 million as of December 31, 2023. During July 2024, we closed a private placement in which we issued 2,144,583 shares of our common stock for a purchase price of $4.80 per share to new and existing investors resulting in gross proceeds of $10.3 million. Our primary sources of liquidity to date have been from fund-raising and warrant exercises. Additional Cash Requirements We plan to continue to invest in long-term growth, and therefore we expect that our expenses will grow. We currently believe that our existing cash and cash equivalents and short-term deposits will allow us to fund our operating plan through at least the next 12 months. We expect our expenses will increase in connection with our ongoing activities, particularly as we continue the research and development and the scale up process of our I4.0 solutions. We expect to incur significant commercialization expenses related to product sales, marketing, manufacturing, and distribution. Furthermore, we will continue to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. We may raise these funds through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our common stock. There is no assurance that we will be able to maintain operations at a level sufficient for investors to obtain a return on their investment in our common stock, or that we will be able to raise sufficient capital required to implement our business plan on acceptable terms, if at all. Even if we are successful in raising sufficient capital to implement our business plan, we will, most likely, continue to be unprofitable for the foreseeable future. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce, or eliminate our research and development programs or future commercialization efforts. - 24 - Off-Balance Sheet Arrangements None. Item 3. Quantitative and Qualitative Disclosures About Market Risk. As a smaller reporting company, we are not required to provide the information requested by this Item.