Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

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, 2024. 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 year ended December 31, 2024 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.

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, 2029, we changed our name to ScoutCam Inc. Following this acquisition, we integrated and fully adopted the acquired miniaturized imaging business into us as our primary business activity. On June 5, 2023, we changed our name to Odysight.ai Inc.

We are a pioneer in the development, production and marketing of an innovative visualization and artificial intelligence, or AI, solution that deploys small cameras 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.

The Odysight TruVision solution streams visual information to our processing unit, an in-platform, high-performance AI/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 real-time monitoring. The rich and informative 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 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 minimizes downtime by enabling real-time visual analysis of any failure occurrences. Additionally, we 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.

The Odysight TruVision solution was successfully used by NASA as we seek to reshape the aerospace, Industry 4.0, transportation and energy markets with a vison-based technology leveraging AI and machine learning to deliver innovative solutions that transform maintenance practices. As used in this Quarterly Report on Form 10-Q, Industry 4.0, or I4.0, refers to the integration of advanced technologies into manufacturing and industrial processes to create smart, interconnected systems for improved efficiency and productivity.

Odysight solutions are already deployed in the aviation and medical sectors. Our customers include the Israeli Air Force, the Israeli Ministry of Defense, France-based Safran Aircraft Engines, a global international defense contractor, a leading Fortune 500 medical company as well as NASA, who came back to us for a repeat order. Historically, our revenue stream has been derived mainly from the medical sector. We have secured several contracts for our PdM and CBM systems with major government clients and defense and aviation companies and our backlog as of September 30, 2025 of approximately $14.2 million reflects mostly those contracts.

As we have not received a purchase order for 2025 from the Fortune 500 medical company customer and do not expect to receive such order, we decided, during the first quarter of 2025, to fully derecognize the fulfilment asset and contract liability associated with this customer.

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 deadly terror attacks on civilian and military targets skirting the Gaza Strip in the southern part of Israel and fired rockets on many of the communities in southern and central Israel. Following the attack, Israel's security cabinet declared war and commenced a military campaign in Gaza against Hamas. Following the outbreak of the war, the Hezbollah terrorist organization regularly fired rockets into northern Israel and, in October 2024, Israel invaded southern Lebanon in response to these attacks. On November 27, 2024, Israel and Lebanon agreed to a ceasefire, the result of which is uncertain. During the course of the war, other terrorist organizations have fired rockets into Israel, such as various rebel militia groups in Syria and Iraq and the Houthi movement, which controls parts of Yemen. The Houthis movement has also attacked commercial shipping vessels in the Gulf of Aden and Red Sea. In addition, following two direct attacks by Iran on Israel in 2024 involving hundreds of drones and missiles, the two countries fought a 12-day war in June 2025 that was triggered by large-scale preemptive Israeli airstrikes on Iranian nuclear and military sites. Iran retaliated with significant ballistic missile and drone attacks on Israel, leading to direct U.S. military intervention against Iranian nuclear sites before a U.S.-brokered ceasefire was declared. As of October 9, 2025, Israel and Hamas entered into a ceasefire agreement calling for a permanent end of the war. However, there are no assurances that such as agreement will hold. While the conflict has created heightened security concerns, disruptions to business operations and economic instability, the ceasefire may contribute to improved regional stability. However, the security situation remains fluid, and any renewed military actions, restrictions, or government-imposed measures could adversely affect our operations, supply chains and financial condition.

The war has had significant economic, military and social consequences to Israel. To date the war has not had a material adverse effect on our business. While we have offices in Omer and Ramat Gan, Israel, neither of our sites is located near Israel's relevant borders where the main impact of the war has been felt. Nevertheless, we have experienced some minor disruptions to our routine work, including some difficulties in traveling outside of Israel and occasional rocket fire on the municipalities where our offices are located, requiring our employees to take temporarily shelter for a few minutes at a time in on-site safe rooms. Pursuant to instructions from Israel's Home Front Command, the Company's offices were closed on certain days during the war with Iran. In addition, several of our executives and employees were called up to military reserve duty, including company officers such as our CEO, who until recent months was subject to military reserve duty a few days a month. We have taken various measures to mitigate the effects of the war, including adopting work-from-home measures, increased employee overtime and third-party outsourcing where needed, and reviewing our business continuity plan. In addition, with the backdrop of the ongoing conflict, some of our clients and potential clients have not prioritized conducting transactions with us, and the war may have caused some delays in their finalizing purchase orders. We do not believe that such delays have had a material impact on our business. The war has also increased negative sentiments regarding Israel and Israeli companies in the international community. For example, Israeli defense companies were initially banned from participating in prestigious industry conferences in France during 2024; however, both bans were later overturned by French courts and did not impact our participation in such conferences.

Conversely, as a result of the intensive flight hours flown by all Israeli Air Force platforms as a result of the war and an enhanced Israel Ministry of Defense budget, we have experienced a growing interest in our technology from Israeli clients, including government agencies and R&D programs, which may lead to more rapid assimilation of our technology into relevant platforms than we had anticipated prior to the commencement of the war, positively affecting on our business activity. For additional information, see "Risks Related to our Operations in Israel - Our headquarters and other significant operations are located in Israel and, therefore, our results may be adversely affected by political, economic and military instability in Israel" in our Annual Report on Form 10-K for the year ended December 31, 2024.

Comparison of the nine months ended September 30, 2025 and 2024

The following table summarizes our results of operations for the nine months period ended September 30, 2025 and 2024, together with the changes in those items in dollars in thousands and as a percentage:

		Nine months ended September 30,
		2025				2024				% Change
Revenues			2,576				2,660				(3	)%
Cost of Revenues			1,882				1,964				(4	)%
Gross Profit			694				696				-
Research and development expenses			7,322				4,705				56	%
Sales and marketing expense			1,604				806				99	%
General and administrative expenses			5,473				3,929				39	%
Operating Loss			(13,705	)			(8,744	)			57	%

Revenues

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of customers.

Revenues for the nine months ended September 30, 2025 amounted to $2,576 thousand, compared to $2,660 thousand for the nine months ended September 30, 2024.

Revenues for the nine months ended September 30, 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 6(a)(1) to our interim consolidated financial statements for the nine months ended September 30, 2025, and
	-	$0.7 million in revenues from our vision-based platform solutions for PdM and CBM.

Revenues for the nine months ended September 30, 2024 were primarily comprised of:

	-	$2.0 million in revenues from products sold to the Fortune 500 medical company customer, and
	-	$0.6 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 nine months ended September 30, 2025 was $1,882 thousand, a decrease of $82 thousand, or 4%, compared to cost of revenues of $1,964 thousand for the nine months ended September 30, 2024.

The decrease in cost of revenues is consistent with the decrease in revenues, as described above.

Gross Profit

Gross profit for the nine months ended September 30, 2025, was $694 thousand, a decrease of $2 thousand, compared to gross profit of $696 thousand for the nine months ended September 30, 2024.

The decrease in cost of revenues 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, including expenses for 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, 2025, were $7,322 thousand, an increase of $2,617 thousand, or 56%, compared to $4,705 thousand for the nine months ended September 30, 2024.

The increase in research and development expenses was mainly due to the development of new products and the resulting 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 that our research and development expenses will increase as we continue to develop our products and services and recruit additional research and development employees due to increased focus on R&D activities 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 nine months ended September 30, 2025, were $1,604 thousand, an increase of $798 thousand, or 99%, compared to $806 thousand for the nine months ended September 30, 2024.

The increase in sales and marketing expenses was primarily driven by our enhanced selling and marketing activity, including efforts to penetrate new markets and verticals, and enhance product visibility. This led to higher payroll and related expenses associated with the recruitment of new employees and an increase in additional expenses resulting from the engagement of new marketing consultants.

We expect that our sales and marketing expenses will increase as we expand our selling and marketing efforts in the I4.0 domain

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 nine months ended September 30, 2025, were $5,473 thousand, an increase of $1,544 thousand, or 39%, compared to $3,929 thousand for the nine months ended September 30, 2024.

The increase in general and administrative expenses 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 fund raising and uplisting to Nasdaq; and
	-	an increase in stock-based compensation from new option grants.

Operating loss

We incurred an operating loss of $13,705 thousand for the nine months ended September 30, 2025, an increase of $4,961 thousand or 57%, compared to operating loss of $8,744 thousand for the nine months ended September 30, 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.

Cash Flows

Our primary uses of cash used in 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 from operating activities will continue to increase due to an expected increase in the expenses of our business and our working capital requirements.

The following table sets forth the significant sources and uses of cash for the periods set forth below (in dollars in thousands):

		Nine months ended September 30,
		2025				2024
Cash used in Operating Activity			(9,821	)			(5,522	)
Cash provided by Investing Activity			269				7,962
Cash provided by Financing Activity			21,057				9,850

Operating Activities

During the nine months ended September 30, 2025, cash used in operating activities was $9.8 million, consisting of net loss of $12.8 million, partially offset by a favorable net change in operating assets and liabilities of $0.3 million and a non-cash benefit of $2.6 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 a decrease in contract fulfilment assets, partially offset by outflows from changes in current and non-current contract liabilities.

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.

Investing Activities

During the nine months ended September 30, 2025, net cash provided by investing activities was $0.3 million, consisting mainly of a withdrawal of short-term deposits.

During nine months ended September 30, 2024, net cash flows provided by investing activities was $8 million, consisting mainly of a withdrawal of short-term deposits.

Financing Activities

During the nine months ended September 30, 2025, cash provided by financing activities was $21.1 million, consisting of cash proceeds from issuance of shares, net of issuance costs and proceeds from options exercise.

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.

Comparison of the three months ended September 30, 2025 and 2024

The following table summarizes our results of operations for the three months period ended September 30, 2025, and 2024, together with the changes in those items in dollars in thousands and as a percentage:

		Three months ended September 30,
		2025				2024				% Change
Revenues			149				1,292				(88	)%
Cost of Revenues			126				887				(86	)%
Gross Profit			23				405				(94	)%
Research and development expenses			2,479				1,730				43	%
Sales and marketing expense			580				347				67	%
General and administrative expenses			1,671				1,344				24	%
Operating Loss			(4,707	)			(3,016	)			56	%

Revenues

As a result of the nature of our target market and the current stage of our development, a substantial portion of our revenue comes from a limited number of customers.

For the three months ended September 30, 2025, we generated revenues of $149 thousand, a decrease of $1,143 thousand, or 88%, compared to $1,292 thousand for the three months ended September 30, 2024.

The decrease in revenues was primarily attributable to the decrease in revenues from the Fortune 500 medical company customer.

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 three months ended September 30, 2025, was $126 thousand, a decrease of $761 thousand, or 86%, compared to cost of revenues of $887 thousand for the three months ended September 30, 2024.

The decrease in cost of revenues was mainly due to the decrease in revenues, as described above.

Gross Profit

Gross profit for the three months ended September 30, 2025, was $23 thousand, a decrease of $382 thousand, or 94%, as compared to the three months ended September 30, 2024.

The change in gross profit was due to both the decrease in revenues and 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, including expenses for 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, 2025 were $2,479 thousand, an increase of $749 thousand, or 43%, compared to $1,730 thousand for the three months ended September 30, 2024.

The increase in research and development expenses was mainly due to the development of new products and the resulting increase in payroll and related expenses for new employees' recruitment and an increase in stock-based compensation from new option grants.

We expect that our research and development expenses will increase as we continue to develop our products and services and recruit additional research and development employees due to increased focus on R&D activities 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, 2025, were $580 thousand, an increase of $233 thousand, or 67%, compared to $347 thousand for the three months ended September 30, 2024.

The increase in sales and marketing expenses was primarily driven by our enhanced selling and marketing activity, including efforts to penetrate new markets and verticals and enhance product visibility. This led to higher payroll and related expenses associated with the recruitment of new employees and additional expenses resulting from the engagement of new marketing consultants.

We expect that our sales and marketing expenses will increase as we expand our selling and marketing efforts in the I4.0 domain

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 three months ended September 30, 2025, were $1,671 thousand, an increase of $327 thousand, or 24% compared to $1,344 thousand for the three months ended September 30, 2024.

The increase in general and administrative expenses was primarily due to an increase in stock-based compensation from new option grants and an increase in professional servicescosts.

Operating loss

We incurred an operating loss of $4,707 thousand for the three months ended September 30, 2025, an increase of $1,691 thousand, or 56%, compared to operating loss of $3,016 thousand for the three months ended September 30, 2024.

The increase in operating loss was due to decreases in gross profit and increases in research and development expenses, sales and marketing expenses and general and administrative expenses, each as described above.

Cash Flows

Our primary uses of cash used in 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 from operating activities will continue to increase due to an expected increase in the expenses of our business and our working capital requirements.

The following table sets forth the significant sources and uses of cash for the periods set forth below (in dollars in thousands):

		Three months ended September 30,
		2025				2024
Cash used in Operating Activity			(3,418	)			(2,199	)
Cash used in Investing Activity			(11	)			(8	)
Cash provided by Financing Activity			1				9,850

Operating Activities

During the three months ended September 30, 2025, cash used in operating activities was $3.4 million, consisting of net loss of $4.4 million and a non-cash benefit of $1 million. Our non-cash benefit consisted primarily of non-cash charges of $0.9 million for stock-based compensation.

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.

Investing Activities

For the three months ended September 30, 2025, net cash flows used in investing activities was $11 thousand, attributable to a purchase of property and equipment.

For the three months ended September 30, 2024, net cash flows provided by investing activities was $8 million, attributable to a purchase of property and equipment.

Financing Activities

For the three months ended September 30, 2025, net cash flows provided by financing activities was $1 thousand, consisting of proceeds from options exercise, partially offset by issuance expenses.

Backlog

Backlog represents 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.

Our backlog as of September 30, 2025 was approximately $14.2 million compared to approximately $15.0 million as of December 31, 2024.

Liquidity and Capital Resources

As of September 30, 2025, we had cash and cash equivalents and restricted cash of $29.8 million compared to cash and cash equivalents and restricted deposit of $18.5 million as of December 31, 2024. In addition, as of September 30, 2025, we incurred an accumulated deficit of $58.7 million 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 commissions and estimated offering expenses.

Our primary sources of liquidity to date have been from fund-raising, revenues from customers 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 from the date of this report. We expect our expenses will increase in connection with our ongoing activities, particularly as we continue the research and development and the scale up Odysight TruVision 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.

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 September 30, 2025 were approximately $0.9 million. For additional details regarding our lease, see Note 3 to our interim consolidated financial statements for the nine months ended September 30, 2025.

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.