Odysight.Ai Inc. annual report, FY2021

Business context and reporting period

The supplied filing is ScoutCam Inc.’s Form 10-K for the fiscal year ended December 31, 2021, not a filing under the name Odysight.Ai Inc. The company develops and sells customized miniature imaging and image-processing solutions, primarily to businesses in medical, defense and aerospace markets, and is pursuing Industry 4.0 applications such as predictive maintenance and condition-based monitoring.

ScoutCam reported that it was transitioning a customer-specific project for a Fortune 500 healthcare company from development toward serial production while expanding research and development and marketing for Industry 4.0. The company completed a one-for-nine reverse stock split in August 2021.

Financial results and liquidity

Amounts below are in U.S. dollars; financial statements report in thousands unless noted.

Revenue fell 21%, largely because sales to A.M. Surgical declined to about $199,000 from $383,000; growth from other customers partly offset the decline. One customer contributed $199,000, or about 51% of 2021 revenue. The company’s negative gross margin reflects cost of revenue exceeding revenue.

Cash used in operating activities was $5.886 million, compared with $4.187 million in 2020. Investing activities used $11.595 million, including $11 million placed in short-term deposits and $595,000 in property and equipment. Financing activities provided $22.559 million, including $19.118 million from share and warrant issuance and $3.491 million from warrant exercises.

At year-end, cash and cash equivalents were $8.581 million and short-term deposits were $11.013 million. Current assets were $20.212 million against current liabilities of $1.309 million. Total liabilities were $3.930 million, including $2.420 million of contract liabilities and $459,000 of lease liabilities; the balance sheet does not show conventional borrowings. Accumulated deficit was $15.294 million. Management said available cash and deposits were expected to fund anticipated needs for at least 12 months and beyond, while also stating that additional funding would be needed to continue future operations.

Material changes versus 2020

• Operating loss widened by 94%, primarily as research and development, sales and marketing, and general and administrative expenses rose.
• Research and development expense increased 176%, reflecting hiring, materials and subcontractors, expansion into Industry 4.0, and costs that had been capitalized as contract fulfillment assets in 2020.
• General and administrative expense rose 81%; stated drivers included $675,000 of additional intellectual-property costs, a $229,000 Israeli VAT provision, $528,000 more share-based compensation, about $206,000 of Nasdaq-uplisting costs, and higher staffing and professional-service expenses.
• Cash and short-term deposits rose substantially following 2021 equity and warrant financing. Shares outstanding increased to 7,121,737 at year-end from 4,084,122 a year earlier.
• Contract liabilities increased to $2.420 million from $848,000, while contract fulfillment assets increased to $1.675 million from $1.130 million.

Outlook, risks, contingencies and unusual items

Management expects research and development and selling and marketing costs to increase as the company develops Industry 4.0 solutions, expands commercialization and scales production. It expects continued losses for the foreseeable future and says additional funding may be required; financing could dilute existing shareholders. Remaining performance obligations were $3.2 million at year-end, expected to be recognized over the manufacturing term of the product under development. This is contracted future revenue, not revenue already recognized.

The company deferred all billed development-service revenue because it determined the services were not distinct from the later manufacturing obligation. At year-end, related contract liabilities were $2.420 million and contract fulfillment assets were $1.675 million. Revenue recognition depends on the project’s manufacturing phase and accounting assessment.

• Customer and execution concentration: Near-term forecast revenue was expected to depend substantially on one large biomedical customer; prospective Industry 4.0 engagements were at varying stages and pilots were not assured of becoming production contracts.
• Funding and operating losses: The company has a limited operating history, significant accumulated losses, and may need further capital despite its year-end liquidity.
• Supply chain and COVID-19: The company relies on third-party suppliers, including a single source for certain miniature sensors, and reported shipping delays and cost increases. It described COVID-related operational and commercial disruption, while its financial-statement note said no material adverse impact on year-end results or financial position had been determined.
• Israeli VAT matter: A 2019–2021 VAT audit resulted in a provision of approximately $229,000; the company had appealed the tax authority’s finding.
• Patents and government funding: European opposition proceedings affected patents in a key patent family. Certain Israeli Innovation Authority-funded technology is subject to restrictions on overseas transfer and manufacturing, and potential royalties or approval conditions.
• Equity and governance: The March 2021 financing issued 2,469,156 shares and warrants exercisable at $10.35 per share. The filing also describes possible dilution from options, warrants and a contingent Medigus share issuance if specified sales targets are achieved.
• Trading and listing: Shares traded on the OTCQB with thin trading; the company’s Nasdaq application had not been approved as described in the filing.

The independent auditor issued an unqualified opinion on the financial statements. Management assessed internal control over financial reporting as effective; the auditor did not attest to that assessment. The auditor identified development-services revenue and contract liabilities as a critical audit matter because of the judgment involved in determining performance obligations and revenue timing.

Important facts for investors to verify

1. Confirm the issuer identity: the supplied 10-K is for ScoutCam Inc., while the request metadata names Odysight.Ai Inc.
2. Review the main customer’s production schedule, purchase commitments and the timing and conditions for recognizing the $3.2 million of remaining performance obligations.
3. Assess cash burn, the availability and maturity of short-term deposits, and whether management’s stated funding runway remains valid given continuing losses and planned spending.
4. Check the status and potential financial impact of the Israeli VAT appeal and the European patent opposition proceedings.
5. Quantify potential dilution from outstanding warrants and options, future financing, and the contingent Medigus share issuance; confirm share counts reflect the reverse split.
6. Verify whether Industry 4.0 pilots have converted into recurring commercial contracts and whether customer and supplier concentration has changed.