Odysight.ai Inc. 10-K

item 7. management’s discussion and analysis of financial condition and results of operations You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Special Note Regarding Forward-Looking Statements” for a discussion of the uncertainties and assumptions associated with these statements. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. Overview We were incorporated under the laws of the State of Nevada on March 22, 2013, under the name Intellisense Solutions Inc. On December 30, 2019, we acquired all of the issued and outstanding share capital of ScoutCam Ltd. and, on December 31, 2019, we changed our name to ScoutCam Inc. Following this acquisition, we integrated and fully adopted the acquired miniaturized imaging business as our primary business activity. On June 5, 2023, we changed our name to Odysight.ai Inc. On February 11, 2025, our common stock began trading on the Nasdaq Capital Market under the symbol “ODYS”. We are a pioneer in the development, production and marketing of innovative visual monitoring artificial intelligence, or AI, solutions that deploys small visual sensors to monitor critical safety components in hard-to-reach locations and harsh environments, across various Predictive Maintenance, or PdM, and Condition Based Monitoring, or CBM, use cases applied both for the civil and defense sectors. We aim to be the industry benchmark for real-time, visual-based machine and infrastructure health monitoring and predictive maintenance analysis through AI and machine learning data analytics. Our solutions stream visual information to our processing unit, an in-platform, high-performance AI/ML (machine learning) computer, allowing maintenance and operations teams, on the ground and during operations, visibility into areas that are inaccessible under normal operating conditions or where conditions are not suitable for continuous monitoring. The data, continuously collected and analyzed by our solution on our secured cloud, provides customers with real-time failure / anomaly detection, events and data recordings, interfacing with platform mission systems and providing real-time alerts and streaming video or images, all while training our algorithms for ongoing improved accuracy and prediction capabilities. Our customers benefit from increased safety, a reduction in downtime, a more efficient data driven operation, increased mission readiness and lower maintenance costs for their monitored platforms, using the prediction capabilities of our solution to efficiently plan maintenance work on monitored components. Our solution aims to enhance safety and minimize costly downtime by enabling real-time visual analysis of any failure occurrences and to leverage advanced big data analytics to offer predictive insights throughout the entire system lifecycle. This includes efficient spare parts management and intelligent performance predictions, ensuring optimal system reliability and efficiency. 44 Our solutions are already deployed in the industrial, automotive and aviation sectors. Our customers include the Israeli Air Force, the Israeli Ministry of Defense, a global international defense contractor, NASA and Israel Railways Ltd., as well as a leading European provider of elevator monitoring solutions. Historically, our revenue stream has been derived mainly from the medical sector. Public Offering and Nasdaq Listing In February 2025, we closed a public offering, including the exercise of an over-allotment option granted to the underwriter in the public offering. The public offering and the over-allotment option exercise price was $6.50 per share. In the aggregate, we sold a total of 3,653,124 shares of common stock, generating gross proceeds of approximately $23.7 million, prior to the deduction of underwriting discounts, commissions and estimated offering expenses. After deducting issuance costs, we received proceeds of approximately $20.9 million. Also in February 2025, our common stock began trading on the Nasdaq Capital Market under the symbol “ODYS”. Impact of the Ongoing War in Israel on Our Business On October 7, 2023, the Hamas terrorist organization launched a series of terror attacks on civilian and military targets in southern Israel. Since then, Israel has been involved in an ongoing military campaign and has faced hostilities on multiple fronts, including regular rocket and drone attacks and threats from Hamas in the Gaza Strip, Hezbollah in Lebanon, the Houthi movement in Yemen and other terrorist organizations active in the region. While Israel and Hamas reached a ceasefire framework in October 2025 contemplating a permanent end to that conflict, there is no assurance the agreement will hold. Furthermore, the regional security situation escalated significantly in late February 2026, following preemptive strikes by Israel and the United States against Iranian nuclear and ballistic capabilities. In response, Iran launched missile and drone attacks toward population centers and military installations in Israel, Europe and neighboring countries in the Gulf region, and also launched counter-strikes against U.S. forces and allied bases throughout the Gulf region. In addition, in early March 2026, Hezbollah initiated further missile strikes against Israel, leading to retaliatory strikes and limited ground incursions into Lebanon. The war has had economic, military and social consequences for Israel. While the conflict has not had a material adverse effect on our business to date, we have experienced disruptions to our routine work, including travel limitations and occasional rocket fire requiring employees at our Omer and Ramat Gan offices to take temporary shelter in on-site safe rooms. Pursuant to instructions from Israel’s Home Front Command, our offices were closed on certain days during the current conflict with Iran and Hezbollah. Additionally, several of our executives and employees have been called up to military reserve duty, including our CEO, who was subject to reserve duty a few days a month until recent months. To mitigate these effects, we have adopted work-from-home measures, increased employee overtime and utilized third-party outsourcing where necessary. The ongoing conflict has influenced our commercial environment in the following ways: ● Customer Prioritization : During more intense periods of the conflict, some Israeli clients have prioritized other matters, which has caused occasional delays in finalizing purchase orders. These delays have had a temporary impact on our business. ● Defense Technology Interest : Conversely, due to intensive flight hours flown by the Israeli Air Force and an enhanced Ministry of Defense budget, we have seen growing interest in our technology from Israeli government agencies and R&D programs. This may lead to a more rapid assimilation of our technology into relevant platforms than previously anticipated. ● International Sentiment : The war has increased negative sentiments regarding Israel and Israeli companies internationally, including efforts to boycott Israeli goods and services and specific efforts targeting Israeli defense firms. While we have faced challenges, such as initial bans from industry conferences that were later overturned, these efforts have not impacted our participation in such events to date. The security situation remains fluid. Any renewed military actions, intensified boycotts or government-imposed measures could adversely affect our operations, supply chains and financial condition. 45 Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are more fully described in Note 2 to our financial statements appearing elsewhere in this Annual Report, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations. Revenues Our 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. We recognize revenue when a customer obtains control over promised goods or services. For each performance obligation, we determine 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: (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, we satisfy the performance obligation at a point in time. Revenues from product customization and development contracts in which the performance obligation is satisfied over time are recognized over the duration of the contract and commensurate with the progress of services. We measure the progress of services using the input method, based on the effort expended relative to the estimated total effort to satisfy the performance obligation. 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. Stock-Based Compensation We apply 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. Determining the amount of stock-based compensation to be recorded requires us to develop estimates of the fair value of stock options as of their grant date. We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model. Calculating the fair value of stock-based awards requires that we make subjective assumptions. Pursuant to ASC 718, we measure stock-based awards granted to employees, members of the board of directors and other providers at fair value on the date of grant and recognize the corresponding stock-based compensation expense of those awards on a straight-line basis over the requisite service period. 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. Our expected dividend rate is zero since we do not currently pay cash dividends and do not anticipate doing so in the foreseeable future. Each of the above factors requires us to use judgment and make estimates in determining the percentages and time periods used for the calculation. If we were to use different percentages or time periods, the fair value of option awards could be materially different. We recognize stock-based compensation cost for option awards on an accelerated basis over the employee’s requisite service period, and forfeitures are accounted for as they occur. Volatility is derived from a blend of the Company’s volatility and historic volatility of a 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. We have 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 our stock-based compensation. The weighted average expected life of options was estimated individually in respect of each grant. 46 Comparison of the Year Ended December 31, 2025 and the Year Ended December 31, 2024 Overview Our primary business activity in 2025 was enlarging our focus on activities in the domain of Industry 4.0, including PdM and CBM in sectors such as aerospace, transportation and other heavy machinery, engines and complicated mechanics that require ongoing monitoring and predictive maintenance applications. The main effect of this activity was to support our planned accelerated growth, and solution quality and development. The following table summarizes our results of operations for the years ended December 31, 2025 and 2024, together with the changes in those items in dollars and as a percentage: 2025 2024 % Change Revenues 3,015,000 3,964,000 (24 )% Cost of Revenues 2,144,000 2,807,000 (24 )% Gross Profit 871,000 1,157,000 (25 )% Research and development expenses 9,639,000 6,884,000 40 % Sales and marketing expense 2,327,000 1,218,000 91 % General and administrative expenses 7,040,000 5,562,000 27 % Operating Loss (18,135,000 ) (12,507,000 ) 45 % Revenues As a result of the nature of our target market and the current stage of the deployment of our solutions, a substantial portion of our revenue comes from a limited number of customers. For the year ended December 31, 2025, we generated revenues of $3,015,000, a decrease of $949,000, or 24%, from 2024 revenues. Revenues for the year ended December 31, 2025 were primarily comprised of: - Full derecognition of the contract liability associated with the Fortune 500 medical company customer, in the amount of $1.7 million, as described in Note 9(a)(1) to financial statements, and - $1.2 million in revenues from our vision-based platform solutions for PdM and CBM. Revenues for the year ended December 31, 2024 were primarily comprised of: - $3.0 million in revenues from products sold to the Fortune 500 medical company customer, and - $0.9 million in revenues from our vision-based platform solutions for PdM and CBM. Cost of Revenues Cost of revenues is primarily comprised of cost of personnel, certain allocated expenses related to facilities, logistics and quality control. Cost of revenues for the year ended December 31, 2025, were $2,144,000, a decrease of $663,000, or 24%, compared to cost of revenues of $2,807,000 for the year ended December 31, 2024. The decrease in cost of revenues is consistent with the decrease in revenues, as described above. Gross Profit Gross profit for the year ended December 31, 2025 was $871,000, a decrease of $286,000, or 25%, compared to a gross profit of $1,157,000 for the year ended December 31, 2024. The decrease in gross profit was due to the decrease in revenues partially offset by the decrease in cost of revenues, as described above. Research and Development Expenses Research and development efforts are focused on new product development and on developing additional functionality for our new and existing products. These expenses primarily consist of employee-related expenses, including salaries, benefits, and stock-based compensation expense for personnel engaged in research and development functions, consulting, and professional fees related to research and development activities, prototype materials, facility costs, and other allocated expenses, which include expenses for rent and maintenance of our facility, utilities, depreciation, and other supplies. We expense research and development costs as incurred. 47 Research and development expenses for the year ended December 31, 2025 were $9,639,000, an increase of $2,755,000, or 40%, compared to $6,884,000 for the year ended December 31, 2024. The increase in research and development expenses was mainly due to the development of new products and the increase in payroll and related expenses related to the recruitment of new employees, an increase in stock-based compensation from new option grants and procuring materials and services of subcontractors for Industry 4.0 projects. We expect our research and development expenses may modestly grow as we continue to develop our products and services and recruit additional experts to support our focus on Industry 4.0 solutions. Sales and Marketing Expenses Sales and marketing expenses primarily consist of payroll expenses, consulting services, promotional materials, exhibitions, demonstration equipment, and certain allocated facility infrastructure costs. Sales and marketing expenses for the year ended December 31, 2025 were $2,327,000, an increase of $1,109,000, or 91%, compared to $1,218,000 for the year ended December 31, 2024. The increase in sales and marketing expenses was primarily driven by our enhanced global selling and marketing activity, including efforts to penetrate new territories and market verticals and enhance product visibility. This led to higher expenses associated with the recruitment of new workforce and marketing consultants. We expect that our sales and marketing expenses will increase as we expand our global selling and marketing efforts. General and Administrative Expenses General and administrative expenses primarily consist of salaries and other related costs, including stock-based compensation, for personnel in executive, finance, and administrative functions. General and administrative expenses also include direct and allocated facility-related costs as well as professional fees for legal, patent, consulting, investor, public relations, accounting, auditing, tax services, and insurance costs. General and administrative expenses for the year ended December 31, 2025 were $7,040,000, an increase of $1,478,000, or 27%, compared to $5,562,000 for the year ended December 31, 2024. The increase/decrease was primarily due to: - an increase in payroll and related expenses due to the recruitment of new employees, including a CFO, and cash compensation bonuses paid to senior executives; - expenses related to our fundraising and uplisting to Nasdaq; and - an increase in stock-based compensation from new option grants. 48 Operating loss We incurred operating loss of $18,135,000 for the year ended December 31, 2025, an increase of $5,628,000, or 45%, compared to operating loss of $12,507,000 for the year ended December 31, 2024. The increase in operating loss was due to increases in research and development expenses, general and administrative expenses and sales and marketing expenses, each as described above. Key Business Metrics and Non-GAAP Financial Measures We monitor the key business metric set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and assess operational efficiencies. Our key business metric is backlog. Increases or decreases in our key performance metric may not correspond with increases or decreases in our revenue. Backlog Backlog is a key business metric that we define as booked orders based on purchase orders or hard commitments but not yet recognized as revenue. Orders included in backlog may be cancelled or rescheduled by customers. A variety of conditions, both specific to the individual customer and generally affecting the customer’s industry, may cause customers to cancel, reduce or delay orders that were previously made or anticipated. We cannot assure the timely replacement of cancelled, delayed or reduced orders. Backlog is presented for supplemental informational purposes only and is not intended to be a substitute for any GAAP financial measures, including revenue or net income (loss), and, as calculated, may not be comparable to companies in other industries or within the same industry with similarly titled measures of performance. In addition, backlog should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Therefore, backlog should be considered in addition to, not as a substitute for, or in isolation from, measures prepared in accordance with GAAP. Backlog as of December 31, 2025 was approximately $13.8 million compared to approximately $15 million as of December 31, 2024. Liquidity and Capital Resources Overview As of December 31, 2025, we had cash, cash equivalents and restricted cash of $26 million, compared to cash and cash equivalents and restricted deposits of $18.5 million as of December 31, 2024. In addition, as of December 31, 2025, we incurred an accumulated deficit of approximately $63 million, as compared to $46 million as of December 31, 2024. In February 2025, we closed a public offering, including the exercise of an over-allotment option granted to the underwriter in the public offering, at a price of $6.50 per share. In the aggregate, we issued 3,653,124 shares of common stock, generating gross proceeds of approximately $23.7 million, prior to the deduction of underwriting discounts, commissions and estimated offering expenses. Our primary sources of liquidity to date have been from fundraising, revenues from customers and warrant exercises. Additional Cash Requirements W e plan to continue to invest in long-term growth, and therefore we expect that our expenses will continue to grow. We currently believe that our existing cash and cash equivalents and short-term deposits will allow us to fund our operating plan through the at least the next 12 months from the date of this Annual Report. Our expenses may increase in connection with our ongoing activities, particularly as we continue our commercialization efforts, research and development and the scale up of our 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 may need to raise additional capital before we become profitable from sales of our solutions and may do so to expand our business, pursue strategic investments, take advantage of financing opportunities or for other reasons. 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. 49 Cash Flows Our primary uses of cash from operating activities have been for headcount-related expenditures, research and development costs, manufacturing costs, marketing and promotional expenses, professional services cost, and costs related to our facilities. Our cash flows from operating activities will continue to be affected due to the expected increase in spending on our business and to meet our working capital requirements. Comparison of the Year Ended December 31, 2025 and the Year Ended December 31, 2024 The following table sets forth the significant sources and uses of cash for the years ended December 31, 2025 and December 31, 2024 (in dollars): 2025 2024 Cash used in Operating Activities (13,703,000 ) (8,217,000 ) Cash provided by Investing Activities 254,000 7,637,000 Cash provided by Financing Activities 21,139,000 9,818,000 Operating Activities During the year ended December 31, 2025, cash used in operating activities was $13.7 million, consisting of net loss of $17 million, partially offset by a non-cash benefit of $3.2 million and a favorable net change in operating assets and liabilities of $0.1 million. Our non-cash benefit consisted primarily of non-cash charges of $3.1 million for stock-based compensation. The favorable net change in our operating assets and liabilities was primarily due to an increase in accrued compensation expenses of $0.1 million and decrease in inventory of $0.2 million. During the year ended December 31, 2024, cash used in operating activities was $8.2 million, consisting of net loss of $11.8 million, partially offset by a non-cash benefit of $2.4 million and a favorable net change in operating assets and liabilities of $1.2 million. Our non-cash benefit consisted primarily of non-cash charges of $2.4 million for stock-based compensation. The favorable net change in our operating assets and liabilities was primarily due to decrease in accounts receivable and decrease in fulfillment asset partially offset by decrease in contract liabilities. Investing Activities During the year ended December 31, 2025, cash provided by investing activities was $0.3 million, consisting mainly of withdrawal of short terms deposits, net. During the year ended December 31, 2024, cash provided by investing activities was $7.6 million, consisting mainly of withdrawal of short terms deposits, net. Financing Activities During the year ended December 31, 2025, net cash provided by financing activities was $21.1 million, consisting of cash proceeds from issuance of shares in a private placement, net of issuance costs and proceeds from options exercise. During the year ended December 31, 2024, cash provided by financing activities was $9.8 million, consisting of cash proceeds from issuance of shares in a private placement, net of issuance costs. 50 Contractual Obligations and Commitments Operating lease payments represent our commitment for future rent made leases for our offices in Israel and for vehicle leasing. The total future payments for our operating lease obligation as of December 31, 2025 were approximately $770 million. For additional details regarding our lease, see Note 10 to our consolidated financial statements for the year ended December 31, 2025 included in this Annual Report on Form 10-K. Our lease for proximately 800 square meters of office, manufacturing and laboratory space in Omer, Israel is set to expire in May 2026, at which time we have leased an alternative location in Omer consisting of approximately 286 square meters of space. We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules. item 7a. quantitative and qualitative disclosures about market risk As a smaller reporting company, we are not required to provide the information required by this Item. item 8. financial statements and supplementary data The information called for by Item 8 is included following the “Index to Financial Statements” on page F-1 of this Annual Report. item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.