SkyAI, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus or the Prospectus, filed with the Securities and Exchange Commission or the SEC, pursuant to Rule 424(b) under the Securities Act of 1933, as amended or the Securities Act), on April 15, 2022. The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in our other filings with the SEC, including the Prospectus. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” refer to Sharps Technology, Inc .and its consolidated subsidiaries. Overview Since our inception in 2017, we have devoted substantially all of our resources to the research and development of our safety syringe products. To date, we have generated no revenue. We have incurred net losses in each year since our inception and, as of March 31, 2022, we had an accumulated deficit of $12,537,425 Our net loss was $1,869,721 for the three months ended March 31, 2022. Substantially all of our net loss resulted from costs incurred in connection with our research and development efforts, payroll and consulting fees, stock compensation and general and administrative costs associated with our operations. See below Initial Public Offering, Liquidty and Capital Resources and Notes to Unaudited Financial Statements. We classify our operating expenses as research and development, and general and administrative expenses. We maintain a corporate office located in Melville, New York, but employees and consultants work remotely and will continue to do so indefinitely. In June 2020, in connection with the agreement to acquire Safegard, a former syringe manufacturing facility in Hungary, by June 30, 2022, we were contractually provided the exclusive use of the facility for research and development and testing in exchange for payment of the seller’s operating costs, including among others, use of Safegard’s work force, utility costs and other services. In order to compete in the market, we must build inventory. Commercial quantities of inventory are required to secure orders. Delivery is expected shortly after receiving orders. Research and Development Research and development expense consists of expenses incurred while performing research and development activities for our various syringe products. We recognize research and development expenses as they are incurred. Our research and development expense primarily consist of: ● Manufacturing and testing costs and related supplies and materials; ● Consulting fees paid for our Chief Technology Officer; ● Operating costs paid to Safegard, including among others, for use of Safegard’s work force, utilities and other services, relating to the facility being utilized; and ● Third-party costs, including engineering incurred for development and design. 17 Substantially all of our research and development expenses to date have been incurred in connection with our syringe products. We expect our research and development expenses to increase for the foreseeable future as we continue to enhance our product to meet the market requirements for our Sharps Provensa product line for its various intended uses throughout the world. Initial Public Offering On April 13, 2022, our registration statement on Form S-1 (File No. 333-263715), as amended, related to our initial public offering (“IPO”) was declared effective by the SEC, and our common stock and warrants began trading on the Nasdaq Capital Market or Nasdaq on April 14, 2022. Our IPO closed on April 19, 2022. As a result, our unaudited consolidated financial statements as of March 31, 2022 do not reflect the impact of our IPO. Net proceeds from the IPO 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. Critical Accounting Policies and Estimates and Recent Accounting Standards This 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 accounting principles generally accepted in the United States. The preparation of our 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 our financial statements, as well as the reported revenues and expenses during the reported 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. Actual results may differ from these estimates under different assumptions or conditions. Results of Operations Revenue The Company has not generated any revenue to date. Research and Development For the three months ended March 31, 2022, Research and Development (“R&D”) expenses increased to $506,375 compared to $467,564 for the three months ended March 31 2021. The increase of $38,811 was primarily due to increased R&D costs of approximately $125,000 from $150,000 in 2021 to $275,000 in 2022 paid to Safegard for operating costs to use their facility. The use of the facility, which commenced in June 2020, has been used for further development, production of current prototype samples and related testing. The operating costs primarily related to use of Safegard’s workforce, utility costs incurred and other services. In addition, we had increases in depreciation related to R&D equipment of $71,000 acquired and that commenced use later in 2021. We had decreases in: i) stock compensation expense relating to our Chief Technology Officer of $41,000 from $52,000 in 2021 to $10,000 in 2022 and ii) decreases in materials costs for testing of $116,000 from $167,000 in 2021 to $51,000 in 2022. General and Administrative For the three months ended March 31, 2022, General and Administrative (“G&A”) expenses were $830,900 as compared to $447,576 for the three months ended March 31, 2021. The increase of $383,333 was primarily attributable to increases in: i) payroll and consulting fees of $85,000 from $180,000 in 2021 to $265,000 in 2022, primarily due to increased amounts of payroll and fees paid and additional employees on staff, ii) increases in stock compensation expense, due to new option awards and increases in vesting of previously issued options, of approximately $76,000 from $138,000 in 2021 to $214,000 in 2022, relating to employees and consultants. We had an average of two employees in 2021 and through September 2021 which increased to four in the last quarter of 2021. We engaged an average of 5 consultants in 2022 and 2021, for varying amounts of services. In addition, we had increases in G&A in the three months ended March 31, 2022 of approximately $222,000, principally from increased marketing and promotion ($36,000), patent fees and registrations ($32,000), professional fees ($76,000), travel ($47,000), board fees ($15,000), insurance ($11,000) and other expenses ($5,000). 18 Interest (expense) income Interest (expense), net of interest income of $91, was $245,437 for the three months ended March 31, 2022, compared to interest income of $452 for the three months ended March 31, 2021. Interest expense increased as of March 31, 2022, by $245,889 due to the financing entered into in December 2021 which resulted in interest payable at the 8% face amount of $39,111 plus accreted interest of $206,417 on the $2,000,000 Note Payable. FMV Adjustment for Contingent Stock and Contingent Warrants The value of the Contingent Stock and Contingent Warrants requires the Fair Market Value (“FMV”) to be remeasured at each reporting date while outstanding with recognition of the changes in fair value to other income or expense in the statement of operations and comprehensive income (loss). 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 liability. See Note 6 to the Unaudited Financial Statements. Liquidity and Capital Resources At March 31, 2022 and December 31, 2021, we had a cash balance of $255,615, and $1,479,166, respectively. The Company had working capital deficiency of $2,923,222 as of March 31, 2022 vs working capital deficiency of $1,156,998, as of December 31, 2021. The increase in our working capital deficiency was primarily related to use of cash in operations and investing in fixed asset purchased or deposits and the impact of the increased FMV and Note of 493,417 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 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. . See Note 14(a) to the unaudited financial statements. Cash Flows Net Cash Used in Operating Activities The Company used cash of $1,216,051 and $716,071 in operating activities for the period ended March 31, 2022 and 2021, respectively. The increase in cash used was principally due to the Company incurring additional R&D activities during March 31, 2022, attributed to completing product design and product and production validation, and additional business related General and Administrative costs. Net Cash Used in Investing Activities For the three months ended March 31, 2022, and March 31, 2021, the Company used cash in investing activities of $40,000 and $925,000, respectively. In both periods, the cash was used to acquire or pay deposits for machinery and equipment of $40,000 and $850,000, respectively. Further, in the three months ended March 31, 2021 the Company used $75,000 for an escrow payment relating to the Safegard acquisition. 19 Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4). Emerging Growth Company Status We are an “emerging-growth company”, as defined in the JOBS Act, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As an emerging growth company we can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We intend to avail ourselves of these options. Once adopted, we must continue to report on that basis until we no longer qualify as an emerging growth company. We will cease to be an emerging growth company upon the earliest of: (i) the end of the fiscal year following the fifth anniversary of the initial public offering; (ii) the first fiscal year after our annual gross revenue are $1.07 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700 million as of the end of the second quarter of that fiscal year. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If, as a result of our decision to reduce future disclosure, investors find our common shares less attractive, there may be a less active trading market for our common shares and the price of our common shares may be more volatile. We are also a “smaller reporting company”, meaning that the market value of our stock held by non-affiliates plus the aggregate amount of gross proceeds to us as a result of the IPO is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for smaller reporting companies.