SkyAI, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS SHARPS TECHNOLOGY, INC. CONDENSED BALANCE SHEETS March 31, 2022 December 31, 2021 (Unaudited) (Audited) Assets: Current Assets Cash $ 255,615 $ 1,479,166 Prepaid expenses 6,995 7,995 Inventory 121,994 121,994 Current Assets 384,604 1,609,155 Fixed Assets, net of accumulated depreciation 3,939,894 3,763,332 Other Assets 610,764 529,863 TOTAL ASSETS $ 4,935,262 $ 5,902,350 Liabilities: Current Liabilities Accounts payable and accrued liabilities $ 852,394 $ 804,138 Notes payable, net of discount 906,432 700,015 Contingent stock liability 847,000 677,000 Contingent warrant liability 702,000 585,000 Total Current Liabilities 3,307,826 2,766,153 Commitments and Contingencies (Notes 5 and 13) Subsequent Events (Note 14) - - Stockholders’ Equity: Preferred stock, $ 0.0001 par value; 1,000,000 shares authorized; 1 share issued and outstanding - - Common stock, $ 0.0001 par value; 100,000,000 shares authorized; 5,187,062 shares issued and outstanding 2022 and 2021 519 519 Common stock subscription receivable - ( 32,500 ) Additional paid-in capital 14,164,342 13,835,882 Accumulated deficit ( 12,537,425 ) ( 10,667,704 ) Total Stockholders’ Equity 1,627,436 3,136,197 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 4,935,262 $ 5,902,350 1 SHARPS TECHNOLOGY, INC. CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE THREE MONTHS ENDED MARCH 31 (Unaudited) 2022 2021 Revenue, net $ - $ - Operating expenses: Research and development 506,375 467,564 General and administrative 830,909 447,576 Total operating expenses 1,337,284 915,140 Loss from operations ( 1,337,284 ) ( 915,140 ) Other income (expense) Interest income (expense) ( 245,437 ) 452 FMV adjustment for Contingent Stock and Warrants ( 287,000 ) Total Other Income (Expense) ( 532,437 ) 452 Net loss and comprehensive loss $ ( 1,869,721 ) $ ( 914,688 ) Net loss per share, basic and diluted $ ( 0.36 ) $ ( 0.20 ) Weighted average shares used to compute net loss per share, basic and diluted 5,187,062 4,597,000 2 SHARPS TECHNOLOGY, INC. CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2021 (Unaudited) Shares Amount Shares Amount Receivable Capital Deficit Equity Preferred Stock Common Stock Common Stock Subscription Additional Paid-in Accumulated Total Stockholders’ Shares Amount Shares Amount Receivable Capital Deficit Equity Balance – December 31, 2020 1 - 4,597,000 $ 460 $ - $ 8,133,655 $ ( 6,003,292 ) $ 2,130,823 Net loss for the three months ended March 31, 2021 - - - - - - ( 914,688 ) ( 914,688 ) Share-based payments - - - - - 189,237 - 189,237 Issuance of common stock for equipment order - - 14,286 1 - 99,999 - 100,000 Balance - March 31, 2021 1 - 4,611,286 $ 461 $ - $ 8,422,891 $ ( 6,917,980 ) $ 1,505,372 SHARPS TECHNOLOGY, INC. CONDENSED STATEMENT OF STOCKHOLDER’S EQUITY FOR THE THREE MONTH ENDED MARCH 31, 2022 (Unaudited) Preferred Stock Common Stock Common Stock Subscription Additional Paid in Accumulated Total Stockholder’s Shares Amount Shares Amount Receivable Capital Deficit Equity Balance -December 31, 2021 1 $ - 5,187,062 $ 519 $ ( 32,500 ) $ 13,835,882 $ ( 10,667,704 ) 3,136,197 Beginning Balance 1 $ - 5,187,062 $ 519 $ ( 32,500 ) $ 13,835,882 $ ( 10,667,704 ) 3,136,197 Net loss for the three months ended March 31, 2022 - - - - - - ( 1,869,721 ) ( 1,869721 ) Share-based compensation charges - - - - - 328,460 - 328,460 Collections of common stock subscriptions - - 32,500 - - 32,500 Balance - March 31, 2022 1 $ - 5,187,062 $ 519 $ - $ 14,164,342 $ ( 12,537,425 ) $ 1,627,436 Ending Balance 1 $ - 5,187,062 $ 519 $ - $ 14,164,342 $ ( 12,537,425 ) $ 1,627,436 3 SHARPS TECHNOLOGY, INC. CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 1,869,721 ) $ ( 914,688 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 73,050 Stock-based compensation 223,947 189,237 Accretion of debt discount 206,417 - FMV adjustment for Contingent Stock and Contingent Warrants 287,000 Changes in operating assets Prepaid expenses and other 1,000 ( 250 ) Other assets – deposits ( 370 ) Accounts payable and accrued liabilities ( 137,744 ) 10,000 Net cash used in operating activities ( 1,216,051 ) ( 716,071 ) CASH FLOWS FROM INVESTING ACTIVITIES: Deposits – Manufacturing Equipment - ( 850,000 ) Other assets – Escrow ( 40,000 ) ( 75,000 ) Net cash used in investing activities ( 40,000 ) ( 925,000 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from common stock subscriptions and subscriptions receivable 32,500 1,310,000 Net cash provided by financing activities 32,500 1,310,000 NET INCREASE (DECREASE) IN CASH ( 1,223,551 ) ( 331,071 ) CASH — BEGINNING OF PERIOD 1,479,166 1,790,203 CASH — END OF PERIOD $ 255,615 $ 1,459,132 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 39,111 $ - Cash paid for taxes $ - $ Non-cash investing and financing activity: Vested stock options and common stock for fixed assets acquired $ 63,512 $ 100,000 Vested stock options issued as consideration for acquisition $ 40,901 $ - 4 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Note 1. Description of Business Nature of Business Sharps Technology, Inc. (“Sharps” or the “Company”) is a pre-revenue medical device company that has designed and patented various safety syringes and is seeking commercialization by manufacturing and distribution of its products. The Company’s fiscal year ends on December 31. On April 14, 2022, the Company completed its Initial Public Offering and received net proceeds of $ 14.2 million. (See Note 14(b)). Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying financial statements have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) in the United States (“U.S.”) and are expressed in U.S. dollars. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The accounting estimates and assumptions that require management’s most significant, difficult, and subjective judgment include the valuation and recognition of stock-based compensation expense, contingent stock liability, contingent warrant liability, inventory obsolescence provision, depreciation of fixed assets and deferred tax asset valuation. Actual results experienced by the Company may differ from management’s estimates. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions. Inventories The Company values inventory at the lower of cost (average cost) or net realizable value. Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. A reserve is established for any excess or obsolete inventories or they may be written off. At March 31, 2022 and December 31, 2021, inventory is comprised of raw materials. 5 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Note 2. Summary of Significant Accounting Policies (continued) Fair Value Measurements ASC 820, Fair Value Measurements and Disclosures, require an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value. Level 1 Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Valuations are based on quoted prices that are readily and regularly available in an active market and do no entail a significant degree of judgment. Level 2 Level 2 applied to assets or liabilities for which there are other than Level 1 observable inputs such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market date. Level 2 instruments require more management judgment and subjectivity as compared to Level 1 instruments. For instance: determining which instruments are most similar to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates, maturity, issuer credit rating and instrument type, and subjectively select an individual security or multiple securities that are deemed most similar to the security being priced; and determining whether a market is considered active requires management judgment. Level 3 Level 3 applied to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities. The determination for Level 3 instruments requires the most management judgment and subjectivity. Fixed Assets Fixed assets are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. The Company’s fixed assets consist of machinery, molds and website. Depreciation is calculated using the straight-line method commencing on the date the asset is operating in the way intended by management over the following useful lives: Machinery and Equipment – 3 - 10 years and Website – 3 years. The expected life for Molds is based number of parts that will be produced based on the expected mold capability. 6 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Impairment of Long-Lived Assets Long-lived assets are reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured by comparison of the carrying amount of an asset group to the future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from the asset. There were no impairment losses recognized during the three months ended March 31, 2022 and 2021. Goodwill and Purchased Identified Intangible Assets Goodwill When applicable, goodwill will be recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and identified intangible assets acquired under a business combination. Goodwill also includes acquired assembled workforce, which does not qualify as an identifiable intangible asset. The Company reviews impairment of goodwill annually in the third quarter, or more frequently if events or circumstances indicate that the goodwill might be impaired. The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary. If, based on the qualitative assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company proceeds to perform the quantitative goodwill impairment test. The Company first determines the fair value of a reporting unit using weighted results derived from an income approach and a market approach. The income approach is estimated through the discounted cash flow method based on assumptions about future conditions such as future revenue growth rates, new product and technology introductions, gross margins, operating expenses, discount rates, future economic and market conditions, and other assumptions. The market approach estimates the fair value of the Company’s equity by utilizing the market comparable method which is based on revenue multiples from comparable companies in similar lines of business. The Company then compares the derived fair value of a reporting unit with its carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Identified Intangible Assets When applicable, the Company’s identified intangible assets are amortized on a straight-line basis over their estimated useful lives. The Company makes judgments about the recoverability of finite-lived intangible assets whenever facts and circumstances indicate that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such facts and circumstances exist, the Company assesses recoverability by comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any, are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally estimated, the Company would accelerate the rate of amortization and amortize the remaining carrying value over the new shorter useful life. The Company evaluates the carrying value of indefinite-lived intangible assets on an annual basis, and an impairment charge would be recognized to the extent that the carrying amount of such assets exceeds their estimated fair value. 7 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Stock-based Compensation Expense The Company measures its stock-based awards made to employees based on the estimated fair values of the awards as of the grant date. For stock option awards, the Company uses the Black-Scholes option-pricing model. For restricted stock awards, the estimated fair value is generally the fair market value of the underlying stock on the grant date. Stock-based compensation expense is recognized over the requisite service period and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. The Company recognizes forfeitures of stock-based awards as they occur on a prospective basis. Stock-based compensation expense for awards granted to non-employees as consideration for services received is measured on the date of performance at the fair value of the consideration received or the fair value of the equity instruments issued, whichever can be more reliably measured. Basic and Diluted Loss Per Share The Company computes net loss per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the statement of operations and comprehensive loss. Basic EPS is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during the year. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. Income Taxes The Company must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are used in the calculation of tax credits, tax benefits, tax deductions, and in the calculation of certain deferred taxes and tax liabilities. Significant changes to these estimates may result in an increase or decrease to the Company’s tax provision in a subsequent period. The provision for income taxes was comprised of the Company’s current tax liability and changes in deferred income tax assets and liabilities. The calculation of the current tax liability involves dealing with uncertainties in the application of complex tax laws and regulations and in determining the liability for tax positions, if any, taken on the Company’s tax returns in accordance with authoritative guidance on accounting for uncertainty in income taxes. Deferred income taxes are determined based on the differences between the financial reporting and tax basis of assets and liabilities. The Company must assess the likelihood that it will be able to recover the Company’s deferred tax assets. If recovery is not likely on a more-likely-than-not basis, the Company must increase its provision for income taxes by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. However, should there be a change in the Company’s ability to recover its deferred tax assets, the provision for income taxes would fluctuate in the period of such change. Research and Development Costs Research and development costs are expensed as incurred. Advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are recognized as an expense as the related goods are delivered or the services are performed. 8 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHD ENDED MARCH 31, 2022 AND 2021 (Unaudited) Note 2. Summary of Significant Accounting Policies (continued) Contingencies From time to time, the Company may be involved in legal and administrative proceedings and claims of various types. The Company records a liability in its financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. Management reviews these estimates in each accounting period as additional information becomes known and adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably estimated, the Company discloses the loss contingency and an estimate of possible loss or range of loss (unless such an estimate cannot be made). The Company does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss contingencies are expensed as incurred. Note 3. Recent Accounting Pronouncements In March 2020, the FASB issued ASC Topic 848, Reference Rate Reform . ASC Topic 848 provides relief for impacted areas as it relates to impending reference rate reform. ASC Topic 848 contains optional expedients and exceptions for applying GAAP to debt arrangements, contracts, hedging relationships, and other areas or transactions that are impacted by reference rate reform. This guidance is effective upon issuance for all entities and elections of certain optional expedients are required to apply the provisions of the guidance. On August 5, 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) , which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU 2020-06 simplifies the guidance in U.S. GAAP on the issuer’s accounting for convertible debt instruments, requires entities to provide expanded disclosures about “the terms and features of convertible instruments” and how the instruments have been reported in the entity’s financial statements. It also removes from ASC 815-40-25-10 certain conditions for equity classification and amends certain guidance in ASC 260, Earnings per Share , on the computation of EPS for convertible instruments and contracts on an entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. The ASU’s amendments are effective for smaller public business entities fiscal years beginning after December 15, 2023. The Company continues to assess all potential impact of the standard and will disclose the nature and reason for any elections that the Company makes. The Company does not expect the adoption of any accounting pronouncements to have a material impact on the financial statements. 9 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Note 4. Fixed Assets Fixed asset, net, as of March 31, 2022 and December 31, 2021, are summarized as follows: Schedule of Machinery and Equipment March 31, 2022 December 31, 2021 Website $ 16,600 $ 16,600 Machinery and equipment 4,028,378 3,778,766 Fixed asset, gross 4,044,978 3,795,366 Less: accumulated depreciation ( 105,084 ) ( 32,034 ) Fixed asset, net $ 3,939,894 $ 3,763,332 Depreciation expense of fixed assets for the three months ended March 31, 2022 and 2021 was $ 73,050 and $ 0 , respectively. During the three months ended March 31 2022, the Company recorded $ 63,512 in fixed asset costs relating to the fair market value for options granted in 2021 for the acquired machinery. During the three months ended March 31, 2021, the Company recorded $ 100,000 in fixed asset costs for common stock issued for the acquired machinery. As of March 31, 2022 the Company has $ 300,000 in remaining payments for machinery purchased, which is included in accounts payable and accrued expenses, which will be paid through May 31, 2022. Note 5. Other Assets Other assets as of March 31, 2022 and December 31, 2021 are summarized as follows: Schedule of Other Assets 2022 2021 Acquisition (see below) $ 523,494 $ 472,701 Other (see Note 13) 87,270 57,162 Other assets $ 610,764 $ 529,863 Acquisition Agreement In June 2020, the Company entered into a Share Purchase Agreement (“Agreement”) and amendments to the Agreement through April 28, 2022, collectively, the Agreements, to purchase either the stock or certain assets of a manufacturing facility for $ 2.5 M in cash, plus additional consideration of 28,571 shares of common stock with a fair market value of $ 7.00 and 35,714 stock options with an exercise price of $ 7.00 . At March 31, 2022, the fair market value of the common stock of $ 200,000 and the vested options of $ 163,602 is included in Other Assets, The Agreements provided the Company various periods for due diligence and post due diligence, requirements for escrow payments of $ 150,000 and a closing date is expected by June 30, 2022 (“Closing Date”). As of March 31, 2022, the Company has paid $ 150,000 in escrow payments, which is recorded in Other Assets. The escrow payments may be forfeited upon: the occurrence of any damage to the assets caused by the actions of the Company; the occurrence of any debt on the books of the seller as a result of an expense initiated by the Company; any failure by the Company to fund the Operating Costs; and any material breach by the Company of its obligations under this Agreement that causes any financial damage to either the seller or the assets. On the Closing Date, the Escrow balances will be applied to the final payment due the Sellers. Through the Closing Date, the Agreements provide the Company with the exclusive use of the facility in exchange for payment of the facility’s operating costs. The monthly fee (“Operating Costs”), which primarily covers the facility’s operating costs, is mainly comprised of the seller’s workforce costs, materials and other recurring monthly operating cost. 10 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FIN ANCIAL STATEMENTS FOR THE THREE MONTHS ENDEDMARCH 31, 2022 AND 2021 (Unaudited) Note 5. Other Assets (continued) Acquisition Agreement The payment of the Operating Costs does not provide the Company with rights associated with a rent agreement. As a result, the payment of operating costs was concluded not to be in substance a lease agreement, and therefore no right-of-use asset or lease liability were recognized. During the three months ended March 31, 2022 and 2021, the Company had remitted $ 275,000 and $ 150,000 , respectively for the aforementioned Operating Costs. These costs were included in research and development expense in the statement of operations and comprehensive loss as the activities at the facility in 2022 and 2021 were related to design and testing of the Company’s products. Note 6. Note Purchase Agreement On December 14, 2021, the Company entered into a Note Purchase Agreement (“NPA”) with three unrelated third-party purchasers (“Purchasers”). The Purchasers provided financing to the Company in the form of bridge financing, aggregating principal of $ 2,000,000 (the “Notes”). The principal under the Notes shall be payable on the earlier of (i) December 14, 2022, and (ii) the date on which the Company consummates an initial public offering (“IPO”), herein referred to as the “Maturity Date”. The Notes bear interest at 8 % with interest payments due monthly. The Company and the Purchasers have entered into a Security Agreement whereby the Notes are collateralized by substantially all the assets of the Company, both tangible and intangible both currently owned with stated exclusions, as defined, and any future acquired with stated exclusions, as defined. The NPA provides for covenants that until all of the Notes have been converted, exchanged, redeemed or otherwise satisfied in accordance with their terms, the Company shall not, and the Company shall not permit any of its subsidiaries without the prior written consent of the Purchasers, a) incur or guarantee any new debt, b) issue any securities that would cause a breach or default under the NPA, c) incur any liens other than permitted, d) redeem or repurchase shares, e) declare or pay any cash dividend or distribution, e) sell, lease or dispose of assets other than in the ordinary course of business or f) engage in different line of business. As additional consideration to the Purchasers for providing the financing, the Company also agreed to a) issue each Purchaser a number of shares of the Company’s Common Stock equal to 50% of the original principal amount each Purchaser’s Note (the “Contingent Stock”) and b) issue each Purchaser a number of warrants, which would allow the Purchasers to purchase additional shares of the Company’s Common Stock, equal to 50% of the original principal amount each Purchaser’s Note for a term of 5.5 years (the “Contingent Warrants”) . For both the Contingent Stock and the Contingent Warrants, the number of shares and warrants that each Purchaser will be issued is unknown at the time of the NPA and will be determined based on a formula of 50% of the original principal amount divided by a “Subsequent Offering Price” based on the valuation in a future offering of Common stock or other equity interest in the Company (such offering referred to as a “Consummated Offering”) during the period beginning on December 14, 2021 through and including the date the Company consummates an initial public offering (“IPO”) (such period referred to as the “Subsequent Offering Period”). If the Company has a Consummated Offering, which is not an IPO, each Purchaser can elect to use the price per share of that Consummated Offering to determine the quantity of Contingent Stock and Contingent Warrants it would be issued from the Company. However, each Purchaser also has an option to elect not to use that price per share, but instead utilize the price per share from a future IPO to determine the quantity of Contingent Stock and Contingent Warrants it would be issued from the Company. In the event the Company has an offering that is not an IPO after December 14, 2021, and any Purchaser does not elect to utilize that per share price to determine the quantity of Contingent Stock or Contingent Warrants it would receive (with the plan to utilize a future IPO’s per share price), and there ultimately is no IPO in the future, the Company would not issue any Contingent Stock or Contingent Warrants to that Purchaser. In the event that the Company never has any Consummated Offering after December 14, 2021 (whether it be an IPO or other type of offering), the Contingent Stock and Contingent Warrants would never be issued to the Purchasers. 11 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Note 6. Note Purchase Agreement (continued) In accordance with ASC 480-10-25-14, a fixed monetary amount exists at inception for the total value of Contingent Stock that may be issued to each Purchaser. The Contingent Stock is not considered outstanding at inception, as it will only be issued upon the consummation of a Consummated Offering, and accordingly, is a conditional obligation. As such the fair market value (“FMV”) of the Contingent Stock at inception was $ 677,000 , which was recorded as debt discount. Similarly, a fixed monetary amount further exists in inception for the total value of Contingent Warrants that may be issued to each Purchaser. Accordingly, a conditional obligation exists and as such the FMV of Contingent Warrants at inception was $ 585,000 , which has been recorded as debt discount. The Company incurred $ 197,500 of debt issuance costs associated with the NPA. The debt issuance costs were allocated between the Notes, Contingent Stock and Contingent Warrants in a manner that was consistent with the allocation of the proceeds of the Notes. The portion of the debt issuance costs which were allocated to the Contingent Stock and Contingent Warrants, which was $ 124,460 , was expensed during the year ended December 31, 2021. The debt issuance costs allocated to the Note was recorded as a debt discount. The Contingent Stock and Contingent Warrant liabilities were measured at FMV on the date of issuance (based on the December 31, 2021 Black-Scholes valuation model). In estimating the fair value of the Contingent Stock and Warrants on March 31, 2022, the Company estimated the probability of a Consummated Offering of 95%, a probability of the Note held to maturity of 4% and a dissolution factor of 1% . The Contingent Stock was measured using a 12% discount for lack of marketability using the Finnerty model and the Contingent Warrants were measured using the Black-Scholes option-pricing model using the following assumptions: Schedule Of Contingent Stock And Contingent Warrant Assumptions Stock Warrants Expected term (years) 0.5 5.5 Risk- Free interest rate 1.05 % 2.39 % Expected Volatility 75 % 92 % Dividend rate 0 % 0 % At inception, the Notes were recorded at the net amount of approximately $ 665,000 , after adjusting for debt discounts of approximately $ 1,335,000 relating to the debt issuance costs, Contingent Stock and Contingent Warrants. Management calculates the effective interest rate (“EIR”) to consider the potential repayment at redemption date by reference to the face value amount after taking into account the stated 8 % interest rate. For three months ended months ended March 31, 2022, the Company recorded interest expense of $ 39,111 and accreted interest of $ 206,417 . The value of the Contingent Stock and Contingent Warrants is required to be re-measured at FMV at each reporting date (based on the Black-Scholes valuation model) with recognition of the changes in fair value to other income or expense in the consolidated statement of operations in accordance with ASC 480, Debt and Equity. For the three months ended March 31, 2022, the Company recorded a $ 287,000 fair market fair (FMV) charge to reflect the increase in the Contingent Stock and Contingent Warrant liabilities. Subsequent to March 31, 2022, the Company completed its IPO (See Note 14(a)) and repaid the $ 2,000,000 Notes with net proceeds and settled the Contingent Stock and Warrant liability. 12 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Note 7. Stockholders’ Equity Capital Structure On December 11, 2017, the Company was incorporated in Wyoming with 20,000,000 shares of common stock authorized with a $ 0.0001 par value. Effective, April 18, 2019, the Company’s authorized common stock was increased to 50,000,000 shares of common stock. The articles of incorporation also authorized 10,000 preferred shares with a $ 0.001 par value Effective March 22, 2022, the Company completed a plan and agreement of merger with Sharps Technology, Inc., a Nevada corporation (“Sharps Nevada”). Pursuant to the merger agreement, (i) the Company merged with and into Sharps Nevada, (ii) each 3.5 shares of common stock of the Company were converted into one share of common stock of Sharps Nevada and (iii) the articles of incorporation and bylaws of Sharps Nevada, became the articles of incorporation and bylaws of the surviving corporation. The Company’s authorized common stock and preferred stock increased from 50,000,000 to 100,000,000 and 10,000 to 1,000,000 shares, respectively. The par value of preferred stock decreased from $ 0.001 to $ 0.0001 per share. Common Stock See Note 14(b) regarding Initial Public Offering. During the three months ended March 31, 2021, the Company completed stock subscriptions through a private placement for 187,143 shares of common stock at $ 7.00 per share. The Company received cash proceeds of $ 1,310,000 . Note 8. Preferred Stock In February 2018, the Company Board of Directors issued one share of Series A Preferred Stock to Alan Blackman, the Company’s co-founder and Director. The Series A Preferred Stock entitles the holder to vote 50.1 % on any matters related to the election of directors. The Series A Preferred Stock has no right to dividends, or distributions in the event of a liquidation and is not convertible into common stock. 13 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Note 9. Stock Options A summary of options granted and outstanding is presented below. Schedule of Stock Options Granted and Outstanding March 31, 2022 Shares Weighted Average Exercise Price Outstanding at Beginning of year 1,137,479 $ 5.18 Outstanding at end of period 1,137,479 $ 5.18 Exercisable at end of period 936,905 $ 4.94 As of March 31, 2022 there was $ 932,530 of unrecognized stock-based compensation related to unvested stock options, which is expected to be recognized over a weighted-average period of 34 months . The following table summarizes information about options outstanding at March 31, 2022: Schedule of Options Outstanding Exercise Prices Shares Outstanding Weighted Average Remaining Contractual Life Shares Exercisable $ 1.75 97,143 $ 1.00 97,143 $ 2.80 155,714 $ 1.30 155,714 $ 4.38 344,286 $ 3.00 291,223 $ 7.00 540,336 $ 4.00 392,825 For the three months ended March 31, 2022 and 2021, the Company recognized stock-based compensation expense of $ 223,947 , of which $ 213,635 and $ 10,312 was recorded in general and administrative and research and development expenses, respectively and $ 189,237 , of which $ 137,673 and $ 51,564 was recorded in general and administrative and research and development expenses, respectively. Further, for the three months ended March 31, 2022, the Company recorded stock-based charges relating to consideration for purchase of machinery of $ 63,512 (see Note 4) and $ 40,901 relating to an Acquisition (see Note 5). Note 10. Income Taxes At the end of each interim reporting period, the Company estimates its effective tax rate expected to be applied for the full year. This estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods. Accordingly, the Company’s effective tax rate for the three months ended March 31, 2022 was 0 %, compared to the effective tax rate of 0 % for the three months ended March 31, 2021. The Company’s effective tax rates for both periods were affected primarily by a full valuation allowance on domestic net deferred tax assets. 14 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Note 11. Related Party Transactions and Balances As of March 31, 2022 and December 31, 2021, accounts payable and accrued liabilities include $ 104,313 and $ 59,375 , respectively, payable to officers and directors and the Company. The amounts are unsecured, non-interest bearing and are due on demand. Note 12. Fair Value Measurements The Company’s financial instruments consisted of cash, accounts payable, notes payable, contingent stock liability and contingent warrant liability. Cash, contingent stock liability and contingent stock liability are measured at fair value. Accounts payable and notes payable are measured at amortized cost and approximates fair value due to their short duration and market rate for similar instruments, respectively. As of March 31, 2022, the following financial assets and liabilities were measured at fair value on a recurring basis presented on the Company’s balance sheet: Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis Level 1 Level 2 Level 3 2022 Fair Value Measurements Using Balance as at March 31, Level 1 Level 2 Level 3 2022 $ $ $ $ Assets Cash 255,615 - - 255,615 Contingent stock liability - - 847,000 847,000 Contingent warrant liability - - 702,000 702,000 Total assets measured at fair value 255,615 - 1,549,000 1,804,615 Note 13. Commitments and Contingencies Contingencies At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company is currently not involved in any litigation or other loss contingencies. Royalty Agreement In connection with the purchase of certain intellectual property in July 2017, Barry Berler and Alan Blackman entered into a royalty agreement which provides that Barry Berler will be entitled to a royalty of four percent ( 4 % ) of net sales derived from the use, sale, lease, rent and export of products related to the intellectual property. The royalty continues until the patent expires or is no longer used in the Company’s product. The royalty agreement was assumed by the Company in December 2017. In September 2018, the Royalty Agreement was amended to reduce the royalty to 2 % and further provided for a single payment of $ 500,000 to Barry Berler within three years in return for cancellation of all further royalty obligations of the Company. In May 2019, the Royalty Agreement was further amended to change the payment date to on or before May 31, 2021 or during the term of the amended Royalty Agreement should the Company be acquired or a controlling interest be acquired. The Company has not made the aforementioned payment or incur any change in control as such the 2 % royalty remains in place. 15 SHARPS TECHNOLOGY, INC. NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021 (Unaudited) Note 13. Commitments and Contingencies (continued) Fixed Asset The Company has an outstanding order to purchase molds of $ 120,000 of which progress payments $ 80,000 have been made and recorded in Other Assets. (See Note 4) Engagement Agreement On October 2, 2021, the Company entered into an engagement agreement with Aegis Capital Corp. (“Aegis”), and on January 21, 2022, the engagement agreement was amended. Pursuant to the engagement agreement as amended, the Company engaged Aegis to act as underwriter in connection with a proposed public offering of common stock and warrants by the Company. The agreement contemplates that (subject to execution of an underwriting agreement for the offering) Aegis would be entitled to an 8 % underwriting discount, a 1 % non-accountable expense allowance, reimbursement of certain expenses, and warrants to purchase 5% of the number of shares of common stock sold in the offering, with an exercise price equal to 125% of the public offering price and a term of four years and six months commencing six months from the closing of the offering . The agreement has a termination date of twelve months from the date thereof or upon completion of the proposed offering. Note 14. Subsequent Events (a) Initial Public Offering: On April 13, 2022, the Company completed its initial public offering (“IPO”) which was declared effective by the Security and Exchange Commission (SEC), and the Company’s common stock and warrants began trading on the Nasdaq Capital Market or Nasdaq on April 14, 2022 and which closed on April 19, 2022. As a result, the unaudited consolidated financial statements as of March 31, 2022 do not reflect the impact of the IPO. The net proceeds from the IPO, prior to payments of certain listing and professional fees were approximately $ 14.2 million. In connection with the closing of the IPO, the Company used net proceeds to repay the Note Payable of $ 2 million. (b) In connection with the repayment of the Note Payable, the Company issued to the Note holders 235,294 shares of common stock and 235,294 warrants. (c) Subsequent to the IPO, the Company awarded 267,500 options to officers, directors and employees under the 2022 Equity Incentive Plan at the market price on dated awarded. 16