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. 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 June 30, 2022, we had an accumulated deficit of $ 12,059,672. Our net income (loss) was $477,754 and $(1,391,967) for the three and six months ended June 30, 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, general and administrative costs associated with our operations, including costs incurred for being a public company since April 14, 2022. See below Initial Public Offering, Liquidity and Capital Resources and Notes to Unaudited Condensed 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, which was completed on July 8, 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. During the quarter ended June 30, 2022, we transferred an additional $2,350,000 to an Escrow Account for a total of $2,500,000 in advance of final government approval of the Acquistion. 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 and stock compensation expense 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 materials purchased on our behalf; and ● Third-party costs, including engineering incurred for development and design. 19 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. 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. The FMV adjustments, based on the trading price of outstanding warrants classified as liabilities, could impact the operating results in the reporting periods. Results of Operations – three months ended June 30, 2022 Three Months Ended June 30, 2022 June 30, 2021 Change Change % $ $ $ % Research and development $ 556,868 $ 375,511 $ 181,357 48 % General and administrative 2,230,801 435,376 1,795,425 412 % Interest expense (income) 1,100,507 (240 ) 1,100,747 100 % FMV (income) expense adjustment for Contingent Stock & Warrants (4,365,930 ) (4,365,930 ) 100 % Net income (loss) $ 477,754 (810,647 ) 1,288,401 158 % Revenue The Company has not generated any revenue to date. Research and Development For the three months ended June 30, 2022, Research and Development (“R&D”) expenses increased to $556,868 compared to $375,511 for the three months ended June 30 2021. The increase of $181,357 was primarily due to increased R&D costs of approximately $71,000 from $266,000 in 2021 to $337,000 in 2022 paid to Safegard for operating costs to use their facility and the purchase of raw materials. The facility, since 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 $81,000 and that commenced in the quarters in 2021. We had an approximate $29,000 increase in stock compensation as grants fully vested. 20 General and Administrative For the three months ended June 30, 2022, General and Administrative (“G&A”) expenses were $2,230,801 as compared to $435,376 for the three months ended June 30, 2021. The increase of $1,795,425 was primarily attributable to increases in: i) payroll and consulting fees of $314,000 from $202,000 in 2021 to $516,000 in 2022, primarily due to increased amounts of payroll and increased staffing, ii) increases in stock compensation expense, due to new option awards and increases in vesting of previously issued options, of approximately $231,000 from $94,000 in 2021 to $326,000 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 3 consultants in 2022 and 2021, for varying amounts of services. In addition, we had increases in G&A in the three months ended June 30, 2022 of approximately $1,250,000, principally from increased marketing and promotion ($67,000), professional fees ($82,000), travel ($81,000), board fees ($83,000), insurance ($154,000), public company and investor relations related ($211,000), issuance costs relating to warrants ($550,000) and other expenses ($22,000). Interest expense (income) Interest expense, net of interest income of $1,061 was $1,100,507 for the three months ended June 30, 2022, compared to interest income of $240 for the three months ended June 30, 2021. Interest expense increased, by $1,100,747 due to the financing entered into in December 2021 which resulted in interest payable at the 8% face amount of $8,000 plus accreted interest of $1,092,747 on the $2,000,000 Notes Payable which were repaid with proceeds from IPO. FMV Adjustment for Contingent Stock and Warrants The value of the Contingent Stock and Contingent Warrants (“Note Warrants”) required 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 June 30, 2022, the Company recorded a $351,000, fair market fair (FMV) benefit to reflect the decrease in the Contingent Stock through the date the shares were issued. For the three months ended June 30, 2022, the Company recorded a $4,014,000 FMV income to reflect the decrease in the Note Warrants and Warrants issued with the IPO. (See Note 6, 7 and 9 to the Unaudited Condensed Financial Statements) Results of Operations – six months ended June 30, 2022 Six Months Ended June 30, 2022 June 30, 2021 Change Change % $ $ $ % Research and development $ 1,063,243 843,075 220,168 26 % General and administrative 3,061,710 882,953 2,178,757 247 % Interest expense / (income) 1,345,944 (692 ) 1,346,636 100 % FMV (income) expense adjustment for Contingent Stock & Warrants (4,078,930 ) 0 (4,078,930 ) 100 % Net loss $ 1,391,967 1,725,336 (333,369 ) (19 )% 21 Revenue The Company has not generated any revenue to date. Research and Development For the six months ended June 30, 2022, Research and Development (“R&D”) expenses increased to $1,063,243 compared to $843,075 for the six months ended June 30, 2021. The increase of $220,168 was primarily due to increased R&D costs of approximately $80,000 from $691,000 in 2021 to $771,000 in 2022 paid to Safegard for operating costs to use their facility and the purchase of R&D materials. The facility, since 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 $152,000 that commenced in the later quarters in 2021. We had decreases in stock compensation expense of approximately $12,000 from $62,000 for the first six months ended June 30, 2021 to $50,000 for the six months ended June 30, 2022. The decline was primarily due to the timing of vested awards. General and Administrative For the six months ended June 30, 2022, General and Administrative (“G&A”) expenses were $3,061,710 as compared to $882,953 for the six months ended June 30, 2021. The increase of $2,178,757 was primarily attributable to increases in: i) payroll and consulting fees of $400,000 from $382,000 in 2021 to $782,000 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 $307,000 from $232,000 in 2021 to $539,000 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 3 consultants in 2022 and 2021, for varying amounts of services. In addition, we had increases in G&A in the six months ended June 30, 2022 of approximately $1,471,1,000, principally from increased marketing and promotion ($103,000), patent fees and registrations ($20,000), professional fees ($159,000), travel ($109,000), board fees ($98,000), insurance ($165,000), public company related expenses and investor relations ($218,000), issuance costs relating to the warrants ($550,000), rent expense ($19,000) and other expenses ($30,000). Interest expense (income) Interest expense, net of interest income of $1,152, was $1,345,944 for the six months ended June 30, 2022, compared to interest income of $692 for the six months ended June 30, 2021. Interest expense increased by $1,346,636 due to the financing entered into in December 2021 which resulted in interest payable at the 8% face amount of $47,111 plus accreted interest of $1,299,985 on the $2,000,000 Note Payable which was repaid at the IPO closing with net proceeds. FMV Adjustment for Contingent Stock and Warrants The value of the Contingent Stock, Note Warrants and other 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) expense in the statement of operations and comprehensive income (loss). For the six months ended June 30, 2022, the Company recorded a $181,000 fair market value (FMV) benefit to reflect the decrease in the Contingent Stock liability through the date the shares were issued. For the six months ended June 30, 2022, the Company recorded a $3,898,000 FMV income adjustment to reflect the decrease in Note Warrants and Warrants issued with the IPO. (See Note 6 and 7 to the Unaudited Condensed Financial Statements) Liquidity and Capital Resources 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. The net proceeds from the IPO were approximately $14.2 million of which $5,779,000 was attributed to the Warrant liability. (See Note 7 and 9 to the Unaudited Condensed Financial Statements) 22 At June 30, 2022 and December 31, 2021, we had a cash balance of $7,808,181, and $1,479,166, respectively. The Company has working capital of $4,947,040as of June 30, 2022 vs working capital deficiency of $1,156,998, as of December 31, 2021. The increase in our working capital was primarily related to net proceeds from our initial public offering of approximately $14.2 million prior to the effect of recording the liability attributed to the warrants from the IPO, less use of cash in operations, investing in fixed assets purchased, repayment of the Note Payable of $2.0 million and $2.4 in additional escrow paid relating to the Safegard acquisition agreement. Cash Flows Net Cash Used in Operating Activities The Company used cash of $3,093,105 and $1,412,332 in operating activities for the six months ended June 30, 2022 and 2021, respectively. The increase in cash used was principally due to the Company incurring additional SG&A expenses and R&D activities as described above during six months ended June 30, 2022. Net Cash Used in Investing Activities For the six months ended June 30, 2022 and 2021, the Company used cash in investing activities of $2,813,355 and $1,558,512, respectively. In both periods, the cash was used to acquire or pay deposits for machinery and equipment of $463,355 and $1,473,250, respectively. Further, in the six months ended June 30, 2022 and 2021 the Company used $2,350,000 and $75,000, respectively for escrow payments relating to the Safegard acquisition. Net Cash Provided by Financing Activities For the six months ended June 30, 2022 and 2021, the Company provided cash from financing activities of $12,235,475 and $1,660,000, respectively. In the 2022 period, the cash provided was primarily from the IPO net proceeds of $14,202,975,prior to the effect of recording the liability attributed to the warrants from the IPO, less the Notes repayment of $2,000,000. In 2021, the cash provided was from stock subscriptions from a private placement. 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. 23 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.