Odysight.ai Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Financial statements are unaudited; amounts below are in U.S. dollars. The company develops image-based camera and AI platforms for predictive maintenance and condition monitoring, and also supplies micro-visualization technology for medical devices. It changed its name from ScoutCam Inc. to Odysight.ai Inc. in June 2023.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $0.110m | $0.134m | $1.087m | $0.506m |
| Gross loss | $0.211m | $0.296m | $0.561m | $0.773m |
| Operating loss | $2.872m | $2.325m | $8.770m | $7.675m |
| Net loss | $2.542m | $2.244m | $8.104m | $7.804m |
| Basic and diluted loss per share | $0.24 | $0.32 | $0.86 | $1.10 |
| Cash used in operating activities | $2.255m | $1.709m | $7.338m | $4.107m |
Gross margin remained negative: approximately -192% in Q3 and -52% for the nine-month period. R&D spending was $1.354m in Q3 and $4.107m year to date; sales and marketing was $0.208m and $0.877m, respectively; general and administrative expense was $1.099m and $3.225m.
At September 30, cash and cash equivalents were $15.938m and short-term deposits were $3.569m, totaling $19.507m in cash and deposits. Total assets were $24.556m, total liabilities $5.997m, and shareholders’ equity $18.559m. The balance sheet lists lease liabilities and contract liabilities but no borrowings. Accumulated deficit was $32.866m. Current assets of $20.862m substantially exceeded current liabilities of $2.864m.
Cash from financing activities was $13.835m for the first nine months, primarily from a March 2023 private placement. The company issued 3,294,117 shares and warrants for gross proceeds of $14.0m; net proceeds reported in cash flows were $13.835m. Shares outstanding increased from 7,121,737 at December 31, 2022 to 10,440,850 at September 30, 2023, before any warrant exercise.
Changes versus comparable periods
- Nine-month revenue rose 115% to $1.087m, primarily as a Fortune 500 healthcare customer’s camera product moved from development into production. Revenue from that customer was approximately $1.039m, versus $0.433m in the prior-year period.
- Nine-month gross loss narrowed by 27%, but operating loss increased 14% as higher R&D and sales and marketing costs more than offset the improvement. R&D expense rose 36%, largely due to hiring for the company’s Industry 4.0 initiatives.
- Q3 revenue decreased 18% year over year, while operating loss increased 24%. Management attributed lower quarterly revenue to an overall decline in product sales and higher operating loss primarily to increased R&D and sales and marketing expenses.
- Nine-month operating cash use increased to $7.338m from $4.107m. The nine-month net loss increased to $8.104m from $7.804m; lower reported loss per share reflects a higher weighted-average share count.
Outlook, risks and notable items
- Management said cash and short-term deposits available as of November 13, 2023 were expected to fund the operating plan for at least 12 months from the filing date. It also expects significant ongoing costs, continued losses for the foreseeable future, and a need for substantial additional funding. Future financing could dilute shareholders; the company cautions that funding may not be available on acceptable terms.
- Management expects R&D and sales and marketing expenses to increase as it develops and commercializes Industry 4.0 solutions. It described production and supply of product to a Fortune 500 healthcare corporation as a current business activity, alongside expansion of predictive and condition-based maintenance efforts in sectors including aerospace, energy and heavy machinery.
- Revenue is concentrated among a limited number of customers. At September 30, remaining performance obligations were $2.9m, expected to be recognized over the product’s estimated manufacturing term. The company recognized $0.317m of development-services revenue in the nine-month period from previously deferred amounts and approximately $0.722m in product revenue from the related customer project.
- On October 7, 2023, Hamas attacked Israel; Israel declared war the following day. The filing said the company did not then expect a substantial operational impact, but warned that the conflict could disrupt operations, labor availability, supply, fundraising or securities sales. Its commercial insurance does not cover war- and terrorism-related losses.
- An Israel Innovation Authority program supports production-line improvements through April 2025. The company recorded $50,000 of grants as cost of revenues in Q3. The grant terms include royalties of 3% up to the grant and accrued interest amount if specified conditions and sales requirements are met, and may restrict transfer of certain technology or manufacturing rights outside Israel.
- The company reported no material pending legal claims, no off-balance-sheet arrangements, and effective disclosure controls as of quarter-end. Its common stock was quoted on OTCQB; the filing said a Nasdaq listing was not expected to be approved before filing its 2023 annual report at the earliest.
Important facts for investors to verify
- Customer concentration and the pace and profitability of production sales to the Fortune 500 healthcare customer; confirm how much of reported revenue is recurring or dependent on this relationship.
- Cash burn, timing of further funding needs, and whether the stated minimum 12-month runway remains supportable as R&D, commercialization and operating costs rise.
- Gross margins and unit economics: revenue increased year to date, but cost of revenue exceeded revenue, and the company continued to report substantial operating losses.
- Potential dilution from the increased share count, outstanding warrants covering 5,763,273 shares, and employee equity awards.
- Effects of the Israel conflict on employees, suppliers, facilities, customer delivery, insurance exposure and access to capital, as well as the conditions attached to IIA funding.