SkyAI, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Sharps Technology, Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of Sharps Technology, Inc. (the “Company”) as of December 31, 2023, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the year ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and the results of its operations and its cash flows for the year ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. Going Concern Uncertainty The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has not generated revenue or cash flow from operations since inception, and does not have an established source of funding sufficient to cover its operating costs. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. We have served as the Company’s auditor since December 20, 2023. New York, New York March 28, 2024 PCAOB ID No. 127 * * * * * PKF O’CONNOR DAVIES LLP 245 Park Avenue, New York, NY 10167 I Tel: 212.867.8000 or 212.286.2600 I Fax: 212.286.4080 I www.pkfod.com PKF O’Connor Davies LLP is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms. 30 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Sharps Technology Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Sharps Technology Inc. and its subsidiary (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. CHARTERED PROFESSIONAL ACCOUNTANTS Manning Elliott LLP Vancouver, Canada March 30, 2023 PCAOB ID: 1524 We have served as the Company’s auditor since 2018. F- 1 SHARPS TECHNOLOGY, INC. CONSOLIDATED BALANCE SHEETS December 31, 2023 December 31, 2022 Assets: Current Assets Cash $ 3,012,908 $ 4,170,897 Prepaid expenses and other current assets 116,508 66,749 Inventories, Net ( Note 3 ) 1,709,135 185,804 Current Assets 4,838,551 4,423,450 Fixed Assets, net of accumulated depreciation (Notes 4 and 5) 6,822,142 7,004,890 Other Assets (Notes 5 and 6) 128,575 411,316 TOTAL ASSETS $ 11,789,268 $ 11,839,656 Liabilities: Current Liabilities Accounts payable (Note 4) $ 794,107 $ 543,226 Accrued expenses and other 476,090 311,458 Warrant liability (Notes 8 and 10) 2,422,785 1,151,838 Total Current Liabilities 3,692,982 2,006,522 Deferred Tax Liability ( Note 12 ) 162,000 192,000 Total Liabilities 3,854,982 2,198,522 Commitments and Contingencies (Note 15) - - Subsequent Events (Note 16) - - Stockholders’ Equity: Preferred stock, $ .0001 par value; 1,000,000 shares authorized; 1 share issued and outstanding - - Common stock, $ .0001 par value; 100,000,000 , shares authorized; 15,274,457 shares issued and outstanding and (2022: 9,407,415 ) 1,528 941 Additional paid-in capital 32,489,950 24,733,306 Accumulated other comprehensive income 591,812 214,253 Accumulated deficit ( 25,149,004 ) ( 15,307,366 ) Total Stockholders’ Equity 7,934,286 9,641,134 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 11,789,268 $ 11,839,656 The accompanying notes are an integral part of these financial statements. F- 2 SHARPS TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the year ended For the year ended December 31, 2023 December 31, 2022 Revenue, net $ - $ - Operating expenses: Research and development (Note 5) 1,605,547 2,280,933 General and administrative 8,521,103 6,457,860 Total operating expenses ( 10,126,650 ) ( 8,738,793 ) Loss from operations ( 10,126,650 ) ( 8,738,793 ) Other income (expense) Interest income (expense) 138,118 ( 1,320,416 ) FMV adjustment on contingent stock & warrants 169,583 5,392,911 Foreign currency and other ( 52,689 ) 26,636 Net loss Before Provision for Taxes $ ( 9,871,638 ) $ ( 4,639,662 ) Deferred Tax Benefit 30,000 - Net Loss ( 9,841,638 ) ( 4,639,662 ) Net loss per share, basic and diluted $ ( 0.76 ) $ ( 0.57 ) Weighted average shares used to compute net loss per share, basic and diluted 13,032,717 8,100,410 The accompanying notes are an integral part of these financial statements. F- 3 SHARPS TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS For the year ended For the year ended December 31, 2023 December 31, 2022 Net loss $ ( 9,841,638 ) $ ( 4,639,662 ) Other comprehensive income: Foreign currency translation adjustments 377,559 214,253 Comprehensive loss $ ( 9,464,079 ) $ ( 4,425,409 ) The accompanying notes are an integral part of these financial statements. F- 4 SHARPS TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Shares Amount Shares Amount Receivable Capital Income Deficit Equity Preferred Stock Common Stock Common Stock Subscription Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders’ Shares Amount Shares Amount Receivable Capital Income Deficit Equity Balance – December 31, 2021 1 $ - 5,187,062 $ 519 $ ( 32,500 ) $ 13,835,882 $ - $ ( 10,667,704 ) $ 3,136,197 Net loss for the year ended December 31, 2022 - - - - - - - ( 4,639,662 ) ( 4,639,662 ) Shares issued in Initial Public Offering - 3,750,000 375 - 8,974,282 - - 8,974,657 Issuance of shares for contingent stock liability - 235,294 24 - 495,976 - - 496,000 Share-based compensation charges - - - - - 1,136,638 - - 1,136,638 Fractional share adjustment - - 59 - - - - - - Issuance of common stock for services - - 235,000 23 - 290,528 - - 290,551 Foreign currency translation - - - - - - 214,253 - 214,253 Collection of stock subscription - - - - 32,500 - - - 32,500 Balance – December 31, 2022 1 $ - 9,407,415 941 $ - $ 24,733,306 $ 214,253 $ ( 15,307,366 ) $ 9,641,134 Balance 1 $ - 9,407,415 941 $ - $ 24,733,306 $ 214,253 $ ( 15,307,366 ) $ 9,641,134 Net loss for the year ended December 31, 2023 ( 9,841,638 ) ( 9,841,638 ) Net loss - - ( 9,841,638 ) ( 9,841,638 ) Share-based compensation charges 963,023 963,023 Shares issued in Offering 2,248,521 225 2,783,160 2,783,385 Shelf Registration Offering – see Note 8 3,618,521 362 2,457,642 2,458,004 Private Placement Offering – see Note 8 1,552,819 1,552,819 Foreign currency translation 377,559 377,559 Balance – December 31, 2023 1 $ - 15,274,457 1,528 $ - $ 32,489,950 $ 591,812 $ ( 25,149,004 ) $ 7,934,286 Balance 1 $ - 15,274,457 1,528 $ - $ 32,489,950 $ 591,812 $ ( 25,149,004 ) $ 7,934,286 The accompanying notes are an integral part of these financial statements. F- 5 SHARPS TECHNOLOGY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended For the year ended December 31, 2023 December 31, 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 9,841,638 ) $ ( 4,639,662 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 882,177 654,572 Stock-based compensation 963,023 1,012,592 Issuance of common stock for services - 290,551 Accretion of debt discount - 1,299,985 FMV for adjustment for contingent stock - ( 181,000 ) FMV adjustment for Contingent warrants and warrants ( 169,583 ) ( 5,211,911 ) Fixed asset impairment 560,000 - Deferred tax benefit ( 30,000 ) - IPO issuance costs relating to warrants 205,112 550,433 Foreign exchange loss 44,463 496 Changes in operating assets Prepaid expenses ( 82,169 ) ( 58,754 ) Inventory ( 1,441,462 ) ( 34,109 ) Other assets ( 12,735 ) ( 12,000 ) Accounts payable and accrued liabilities 415,512 ( 104,352 ) Net cash used in operating activities ( 8,507,300 ) ( 6,433,159 ) CASH FLOWS FROM INVESTING ACTIVITIES: Deposits paid on fixed assets and components - ( 209,678 ) Purchase of fixed assets ( 698,277 ) ( 542,662 ) Asset acquisition - ( 2,365,576 ) Net cash used in investing activities ( 698,277 ) ( 3,117,916 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from Initial Public Offering and additional offerings 8,029,628 14,202,975 Repayment of note payable - ( 2,000,000 ) Proceeds from subscriptions receivable - 32,500 Net cash provided by financing activities 8,029,628 12,235,475 Effect of exchange rate changes on cash 17,960 7,331 NET INCREASE (DECREASE) IN CASH ( 1,157,989 ) 2,691,731 CASH — BEGINNING OF YEAR 4,170,897 1,479,166 CASH — END OF YEAR $ 3,012,908 $ 4,170,897 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ - $ 47,111 Cash paid for taxes $ - $ - Non-cash investing and financing activity: FMV for Common stock issued for contingent shares $ - $ 496,000 FMV for Warrants issued for contingent warrants $ - $ 554,312 Common stock issued and vested stock options for fixed assets acquired $ - $ 63,612 Common stock issued and vested stock options issued as consideration for acquisition $ - $ 60,435 The accompanying notes are an integral part of these financial statements. F- 6 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 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 accompanying consolidated financial statements include the accounts of Sharps Technology, Inc. and its wholly owned subsidiaries, Safegard Medical (Hungary) KFT, collectively referred to as the “Company.” All intercompany transactions and balances have been eliminated. The Company’s fiscal year ends on December 31. On April 13, 2022, the Company’s Initial Public Offering was deemed effective with trading commencing on April 14, 2022. The Company received net proceeds of $ 14.2 million on April 19, 2022 (See Note 8). Note 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated 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. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has not generated revenue or cash flow from operations since inception. As of December 31, 2023, the Company used cash in operations of $ 8,507,300 and has cash of $ 3,012,908 which is not sufficient to fund the Company’s planned operations for the next 12 months. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to raise sufficient financing to acquire or commercialize its products into a profitable business. The Company intends to finance its future development and commercialization activities and its working capital needs largely from the sale of equity securities and/or with additional funding from other traditional financing sources until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. As of December 31, 2023, the most significant estimates relate to derivative liabilities and stock-based compensation. 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. At December 31, 2023 and 2022, the Company had no cash equivalents. 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 December 31, 2023 and 2022, inventory is comprised of raw materials, components and finished goods. F- 7 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 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. The Company’s outstanding warrants are fair valued on a recurring basis with the trading price or FMV using Black Sholes which could cause fluctuations in operating results at the reporting periods. 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 not 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 data. 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 land, building, machinery and equipment, molds, computer system 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: Building – 20 years, Machinery and Equipment – 3 - 10 years and Computer systems and Website – 3 years. The expected life for Molds is based lesser of the number of parts that will be produced based on the expected mold capability or 5 years. 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. The Company recorded an impairment of $ 560,000 during the year ended December 31, 2023 and no impairment during the year ended December 31, 2022. F- 8 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 2. Summary of Significant Accounting Policies (continued) Purchased Identified Intangible Assets Identified Intangible Assets The Company’s identified intangible assets are amortized on a straight-line basis over their estimated useful lives of 5 years. 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 finite-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. 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. F- 9 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 2. Summary of Significant Accounting Policies (continued) Derivative Instruments The Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC 480”), Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own stock and whether the holders of the warrants could potentially require net cash settlement in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the warrants are outstanding. At their issuance date and as of December 31, 2023, certain warrants (see Notes 8 and 10) are accounted for as liabilities as these instruments did not meet all of the requirements for equity classification under ASC 815-40 based on the terms of the aforementioned warrants. The resulting warrant liabilities are re-measured at each balance sheet date until their exercise or expiration, and any change in fair value is recognized in the Company’s consolidated statements of operations. Foreign Currency Translation/Transactions The Company has determined that the functional currency for its foreign subsidiary is the local currency. For financial reporting purposes, assets and liabilities denominated in foreign currencies are translated at current exchange rates and profit and loss accounts are translated at weighted average exchange rates. Resulting translation gains and losses are included as a separate component of stockholders’ equity as accumulated other comprehensive income or loss. Gains or losses resulting from transactions entered into in other than the functional currency are recorded as foreign exchange gains and losses in the consolidated statements of operations. Comprehensive income (loss) Comprehensive income (loss) consists of the Company’s consolidated net loss and foreign currency translation adjustments related to its subsidiary. Foreign currency translation adjustments included in comprehensive loss were not tax effected as the Company has a full valuation allowance at December 31, 2023 and 2022. Accumulated other comprehensive income (loss) is a separate component of stockholders’ equity and consists of the cumulative foreign currency translation adjustments. 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 consolidated statements of operations. 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 period. Basic EPS includes the 3,381,479 of pre-funded warrants (see Note 8). 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. As of December 31, 2023, there were 22,950,155 stock options and warrants that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented. 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. F- 10 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 2. Summary of Significant Accounting Policies (continued) 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. Contingencies Liabilities for loss contingencies arising from claims, assessments, litigations, fines and penalties and other sources are recognized when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. Gain contingencies are evaluated and not recognized until the gain is realizable or realized. Recent Accounting Pronouncements 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 is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements and does not expect the adoption of this amended guidance to have a material impact on the Company’s consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) : Improvements to Income Tax Disclosures . The new guidance requires disaggregated information about the effective tax rate reconciliation and additional information on taxes paid that meet a quantitative threshold. The new guidance is effective for public companies for annual reporting periods beginning after December 15, 2024, and for non-public companies for annual reporting periods beginning after December 15, 2025, with early adoption permitted for both. The Company will adopt the new standard in the annual reporting period beginning after December 15, 2025 and is currently evaluating the impacts of the new guidance on its disclosures within the consolidated financial statements. The Company does not expect the adoption of any accounting pronouncements to have a material impact on the consolidated financial statements. The Company reviewed all other recently issued accounting pronouncements and have concluded they are not applicable or not expected to be significant to the accounting for our operations. F- 11 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 3. Inventories Inventories, net consisted of the following at December 31, 2023 and 2022: Schedule of Inventories December 31, 2023 December 31, 2022 Raw materials $ 254,461 $ 106,088 Work in process 170,464 49,144 Finished goods 1,284,210 30,572 Total $ 1,709,135 $ 185,804 Note 4. Fixed Assets Fixed asset, net, as of December 31, 2023 and 2022, are summarized as follows: Schedule of Property, Plant and Equipment December 31, 2023 December 31, 2022 Land $ 260,460 $ 242,240 Building 3,022,490 2,824,481 Machinery and Equipment 4,464,317 4,601,293 Computer and Website 290,661 16,600 Total Fixed Assets 8,037,928 7,684,614 Less: accumulated depreciation ( 1,215,786 ) ( 679,724 ) Fixed asset, net $ 6,822,142 $ 7,004,890 Depreciation expense of fixed assets for the year ended December 31, 2023 and 2022 was $ 876,064 and $ 647,690 , respectively. Substantially, all of the Company’s fixed assets are located at the Company’s Hungary location. In the fourth quarter of 2023, the Company recorded, in Research and Development expenses, an asset impairment of $ 560,000 relating to Molds, which were included in Machinery and Equipment, due to a decision to discontinue usage of certain molds. During the year ended December 2022, the Company recorded $ 63,612 in fixed asset costs relating to the estimated fair market value for options granted in 2021 for the acquired machinery. As of December 31, 2023, the Company has $ 100,000 in remaining payments for machinery purchased, which is included in accounts payable. Note 5. Asset Acquisition In June 2020, the Company entered into a Share Purchase Agreement (“Agreement”) with Safegard Medical (“Safegard”) and amendments to the Agreement, 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 an estimated fair market value of $ 7.00 , 35,714 stock options with an exercise price of $ 7.00 and 50,000 stock options with an exercise price of $ 4.25 . The purchase price includes the fair market value of the common stock of $ 200,000 and the vested options of $ 183,135 . The Agreements provided the Company various periods for due diligence and post due diligence, requirements for escrow payments through the closing date (“Closing Date”). Through the Closing Date, the Agreements provided 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 covered the facility’s operating costs, was mainly comprised of the seller’s workforce costs, materials and other recurring monthly operating cost. During the year ended December 31, 2022, the Company had remitted $ 594,000 , respectively for the aforementioned Operating Costs. The remittance of operating costs was discontinued after the Closing Date. These costs were included in research and development expense in the consolidated statement of operations as the activities at the facility in 2022 were related to design and testing of the Company’s products. F- 12 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 5. Asset Acquisition (continued) The acquisition of Safegard, which closed on July 6, 2022, did not meet the definition of a business pursuant to ASC 805-10, and accordingly was accounted for as an asset acquisition in accordance with ASC 805-50. The cost of the acquisition was $ 2,936,712 , including transaction costs of $ 53,576 , with the allocation to the assets acquired on a relative fair value basis. The intangibles relate to permits and a limited workforce acquired. Under ASC 805-50, no goodwill is recognized. The operating results for Safegard are included in the consolidated balance sheet and consolidated statements of operations for the period beginning after the closing on July 6, 2022. The relative fair value of the assets acquired and related deferred tax liability is as follows: Schedule of Fair Value of the Assets Acquisition Land $ 226,000 Building and affixed assets 2,684,000 Machinery 158,000 Inventory 32,000 Intangibles 64,712 Deferred tax liability ( 192,000 ) Total $ 2,936,712 The useful lives for the acquired assets is Building - 20 years; Machinery – 5 to 10 years; Intangibles – 5 years. The related depreciation and amortization is being recorded on a straight-line basis. Note 6. Other Assets Other assets as of December 31, 2023 and 2022 are summarized as follows: Schedule of Other Assets December 31, December 31, 2023 2022 Intangibles, net $ 52,513 $ 62,480 Deposits or advance payments on machinery, molds and components (see Note 15) - 336,466 Other 76,062 12,370 Other assets $ 128,575 $ 411,316 Intangibles are related to the Asset Acquisition (see Note 5) and consist of an acquired workforce and permits. Amortization for the year ended December 31, 2023 was $ 15,184 . Note 7. 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 bore interest at 8 % with interest payments due monthly. The Company and the Purchasers had entered into a Security Agreement whereby the Notes were 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. F- 13 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 7. Note Purchase Agreement (continued) The NPA provided 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 of 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 5.0 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 was unknown at the time of the NPA and was 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”). 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 at 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 was 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 Notes were recorded as a debt discount. The Contingent Stock and Contingent Warrant liabilities were measured at FMV on the date of issuance (based on the Black-Scholes valuation model). 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. In 2022, through the repayment date, the Company recorded interest expense of $ 39,111 and accreted interest of $ 1,299,895 and repaid the $ 2,000,000 in Notes with proceeds from the IPO that closed on April 19, 2022. The value of the Contingent Stock and Contingent Warrants is required to be re-measured at FMV at each reporting date, using either the Black-Scholes valuation model or other valuation method, if deemed more appropriate, 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. On April 19, 2022, the Company issued 235,295 shares of Common Stock to settle the Contingent Stock liability, re-measured the liability at its estimated FMV based on the stock’s trading price and reclassified $ 496,000 to Common Stock Par Value and Additional Paid in Capital. In connection with the closing of the IPO, 235,295 warrants were issued to settle the Contingent Warrant liability (“Note Warrants”) with an exercise price of $ 4.25 adjusted to $ 0.64 at September 29, 2023, based on anti-dilution terms in the warrants. The terms of the Note Warrants continue to require classification as a liability under ASC 815 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. (See Notes 8 and 10) F- 14 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 8. 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 On September 29, 2023, the Company completed two simultaneous offerings and received aggregate gross proceeds of approximately $ 5.6 million, before expenses to the placement agent and other offering expenses of $ 716,000 . a. The first offering, the securities purchase agreement offering (the “Shelf Offering”) with institutional investors and the Company resulted in the Company receiving net proceeds from the Shelf Offering and the sale of pre-funded warrants of approximately $ 2.5 million, includes the value of the pre-funded warrants recorded in Additional Paid in Capital, net of $ 362,000 in fees relating to the placement agent and other offering expenses. The Shelf Offering was priced at the market under Nasdaq rules. In connection with the Shelf Offering, the Company issued 3,618,521 shares of common at a purchase price of $ 0.64 per unit and 800,000 pre-funded warrants at $ 0.639 per pre-funded warrants. The exercise price of the pre-funded warrants will be $ 0.001 per share. b. The second offering, the securities purchase agreement offering (“Private Placement”) with institutional investors and the Company received net proceeds from the Private Placement of approximately $ 2.4 million, net of $ 354,000 in fees relating to the placement agent and other offering expenses. In connection with the Private Placement, the Company issued: (i) 2,581,479 PIPE Shares (or PIPE Pre-Funded Warrants in lieu thereof) and (ii) PIPE Warrants (non-trading) to purchase 8,750,003 shares of our common stock, at a combined purchase price of $ 1.074 per unit (or $1.073 per pre-funded unit). The PIPE Warrants have a term of five and one-half ( 5.5 ) years from the issuance date and are exercisable for one share of common stock at an exercise price of $ 0.64 . The net proceeds, after reflecting par value, has been recorded in Additional Paid in Capital of $ 1.6 million and with respect to the PIPE Warrants recorded as a liability under ASC 815 of $ 985,204 . On October 16, 2023, the Company filed an S-1 (Resale) Registration Statement in connection with the Private Placement and on October 26, 2023 the S-1 went effective. At December 31, 2023 the warrant liability is $ 1,036,875 . (See Notes 8 and 10). On February 3, 2023, the Company completed a securities purchase agreement (“Offering”) with institutional investors and received net proceeds from the Offering were approximately $ 3.2 million, net of $ 600,000 in fees relating to the placement agent and other offering expenses. The Offering was priced at the market under Nasdaq rules. In connection with the Offering, the Company issued 2,248,521 units at a purchase price of $ 1.69 per unit. Each unit consists of one share of common stock and one non-tradable warrant exercisable for one share of common stock at a price of $ 1.56 , adjusted to $ 0.64 at September 29, 2023, based on anti-dilution terms in the warrants. The warrants have a term of five years from the issuance date. On February 13, 2023, the Company filed an S-1 (Resale) Registration Statement in connection with the Offering. On April 13, 2022, the Company’s initial public offering (“IPO”) was declared effective by the SEC pursuant to which the Company issued and sold an aggregate of 3,750,000 units (“Units”), each consisting of one share of common stock and two warrants, to purchase one share of common stock for each whole warrant, with an initial exercise price of $ 4.25 per share and a term of five years . In addition, the Company granted Aegis Capital Corp., as underwriter a 45-day over-allotment option to purchase up to 15% of the number of shares included in the units sold in the offering, and/or additional warrants equal to 15% of the number of Warrants included in the units sold in the offering, in each case solely to cover over-allotments, which the Aegis Capital Corp. partially exercised with respect to 1,125,000 warrants on April 19, 2022. F- 15 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 8. Stockholders’ Equity (continued) The Company’s common stock and warrants began trading on the Nasdaq Capital Market or Nasdaq on April 14, 2022. The net proceeds from the IPO, prior to payments of certain listing and professional fees were approximately $ 14.2 million. The net proceeds, after reflecting par value, has been recorded in Additional Paid in Capital of $ 9.0 million and with respect to the Warrants as a liability under ASC 815 of $ 5.2 M. (See Note 10) During the year ended December 31, 2022, the Company issued 235,000 shares of common stock at the trading stock price in connection with services provided to the Company and recorded a charge of $ 290,551 , In addition, the Company issued 235,295 common shares relating to the Note Purchase agreement. (See Note 7) Warrants a) In connection with a one-year advisory services arrangement entered into in April 2023, the Company issued 495,000 warrants during the year ended December 31, 2023 at an exercise price of $ 1.56 . The warrants have a three-year term and were fully vested on issuance. The FMV of the warrants recorded for the year end ended December 31, 2023 was $ 42,915 as computed using the Black Sholes valuation model. The assumptions for the year ended December 31, 2023 were: a) expected term – 3 years, b) expected volatility – 24.49 % to 44.83 %, c) risk free rate- 3.58 % to 4.67 .% and d) dividend rate – 0 %. b) In connection with the Private Placement in September 2023, the Company issued 8,750,003 non-trading PIPE Warrants as a component of the Unit as noted in Common Stock above. The PIPE Warrants were recorded at the FMV, computed using the Black Sholes valuation method. The PIPE Warrant’s liability requires remeasurement at each reporting period. The PIPE Warrants are classified as a liability based on ASC 815. At the issuance date and December 31, 2023, the liability was $ 985,204 and $ 1,036,875 , respectively and for the year ended December 31, 2023 a FMV loss adjustment of $ 51,671 was recorded (See Note 10). c) In connection with the Offering in February 2023, the Company issued 2,248,521 non-trading warrants Offering Warrants as a component of the Unit as noted in Common Stock above. The Offering Warrant’s liability requires remeasurement at each reporting period. The Offering Warrants were recorded at the FMV, computed using the Black Sholes valuation method. The Offering Warrants are classified as a liability based on ASC 815. At the issuance date and at December 31, 2023 the liability was $ 455,326 and $ 234,072 , respectively. During the year ended December 31, 2023, the Company recorded a FMV gain adjustment of $ 221,254 . (See Note 10). d) In connection with the IPO in April 2022, the Company issued 7,500,000 warrants (Trading Warrants) as a component of the Units and 1,125,000 warrants to the underwriter (Overallotment Warrants), as noted in Common Stock above. The Trading and Overallotment Warrants were recorded at the FMV, being the trading price of the warrants, on the IPO effective date and the Warrants are classified as a Liability based on ASC 815. The Warrant liability requires remeasurement at each reporting period. At December 31, 2023 and 2022, the liability was $ 1,121,250 . During years ended December 31, 2023 and 2022, the Company recorded a FMV loss (gain) adjustment of $ 0 and $( 4,784,559 ), respectively (See Note 10). F- 16 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 8. Stockholders’ Equity (continued) e) The Company has issued 235,295 Warrants (“Note Warrants”) to the Purchasers of the Notes on April 19, 2022. The Note Warrants have an exercise price of $ 4.25 and a term of five years . At December 31,2023 and 2022, the liability was $ 30,588 . During the years ended December 31, 2023 and 2022, the Company recorded a FMV loss (gain) of $ 0 and ($ 127,059 ), respectively. (See Note 10) f) The underwriter received 187,500 warrants in connection with the IPO for a nominal cost of $ 11,250 . The Warrants have an exercise price of $ 5.32 and are exercisable after October 9, 2022. The FMV at the date of issuance was $ 228,750 computed using the Black Sholes valuation model with the following assumptions: a) volatility of 93.47 %, five -year term, risk free interest rate 2.77 % and 0 % dividend rate. These warrants were recorded in Equity at the estimated FMV and classified as additional issuance costs. Note 9. 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 on any matters related to the election of directors and was reduced from 50.1 % at December 31, 2022 to 29.5 %, effective with the IPO. 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. In the event the Company is sold during the two-year period following completion of IPO at a price per share of more than 500% of the initial offering price per Unit in the IPO, the Series A Preferred Stock, as in effect upon completion of the IPO, will entitle the holder to 10 % of the total purchase price. (See Note 15) Note 10. Warrant Liability The Warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented as a Warrant liability in the accompanying consolidated balance sheet. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within the consolidated statement of operations, The non-trading warrants, related to the February 2023 and September 2023 offerings, are valued using the Black-Scholes pricing model. The assumptions for the year ended December 31, 2023 were as follows: (See Notes 7 and 8) Schedule of Fair Value of Warrant Year Ended December 31, 2023 Expected term (years) 4.10 to 5.50 Expected volatility 45.30 % to 70.44 % Risk-free interest rate 3.53 % to 4.54 % Dividend rate 0 % The Warrant liability at December 31, 2023 and 2022 was as follows: Schedule of Warrant Liability 2023 2022 Trading and Overallotment Warrants $ 1,121,250 1,121,250 Note Warrants 30,588 30,588 Offering Warrants – February 2023 234,072 - Offering Warrants – September 2023 1,036,875 - Total Warrant Liability $ 2,422,785 1,151,838 The Warrants outstanding at December 31, 2023 and 2022 were as follows: Schedule of Warrant Outstanding December 31, 2023 December 31, 2022 Trading and Overallotment Warrants 8,812,500 8,812,500 Note Warrants 235,294 235,294 Offering Warrants – February 2023 2,248,521 - Offering Warrants – September 2023 8,750,003 - Warrants issued for services arrangement 495,000 - Total Warrants Outstanding 20,541,318 9,047,794 F- 17 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 10. Warrant Liability (continued) For the years ended December 31, 2023 and 2022 the FMV loss (gain) adjustment, which is reflected in the FMV adjustment on Warrants in the Consolidated Statements of Operations was ($ 169,583 ) and ($ 4,784,559 ), respectively. Note 11. Stock Options On January 24, 2023, the Company’s Board of Directors initially adopted the 2023 Equity Incentive Plan (the “2023 Plan”), to provide for the issuance of up to 1,400,000 options and/or shares of restricted stock be available for issuance to officers, directors, employees and consultants. The 2023 Plan was subsequently updated to provide for the issuance of up to 3,500,000 options and/or shares of restricted stock. The 2023 Plan was approved by shareholders at the annual meeting A summary of options granted and outstanding is presented below. Schedule of Stock Options Granted and Outstanding 2023 2022 Options Weighted Average Exercise Price Options Weighted Average Exercise Price Outstanding at Beginning of year 1,358,122 $ 4.37 1,137,479 $ 5.18 Granted 1,065,000 1.35 367,500 1.63 Cancelled ( 3,571 ) ( 4.38 ) Forfeited ( 14,286 ) $ 1.75 ( 143,286 ) $ ( 3.77 ) Outstanding at end of year 2,408,836 $ 3.03 1,358,122 $ 4.37 Exercisable at end of year 1,881,327 $ 3.47 1,132,861 $ 4.59 1) During the year ended December 31, 2023, the Company granted five -year options (the “Options”) to purchase a total of: a) 975,000 shares of the Company’s common stock, par value $ 0.0001 per share (the “Common Stock”) to its directors, executive officers, employees and consultants pursuant to the Company’s. 2022 and 2023 Equity Incentive Plans. The Options are exercisable at $ 1.37 per share which was the closing price on January 25, 2023. b) 90,000 shares of the Company’s Common Stock in connection with an employment or consulting agreements at the exercise price, representing the closing price on the grant date ranging from $ 0.82 to $ 1.30 . During the year ended December 31, 2023, 660,000 Options have been granted under the 2023 Equity Incentive Plan and the remaining 405,000 Options were issued under the 2022 Equity Incentive Plan. At December 31, 2023, 1,748,836 Options are outstanding under the 2022 Equity Incentive Plan. During the years ended December 31, 2023 and 2022, the estimated weighted-average grant-date fair value of options granted was $ .80 per share and $ 1.63 per share, respectively. As of December 31, 2023 and 2022, there was $ 498,454 and $ 475,097 , respectively, of unrecognized stock-based compensation related to unvested stock options with a weighted average fair value of $ .94 and $ 2.05 per share, respectively, which is expected to be recognized over a weighted-average period sixteen months as of December 31, 2023. The following table summarizes information about options outstanding at December 31, 2023: Schedule of Information About Options Outstanding Exercise Prices Options Outstanding Aggregate Intrinsic Value Weighted Average Remaining Contractual Life Options Exercisable Aggregate Intrinsic Value on Exercisable Shares $ .82 to .92 40,000 - 4.58 18,794 - $ 1.21 307,500 - 3.42 240,386 - $ 1.30 50,000 - 4.21 43,750 - $ $ 1.37 975,000 - 4.17 561,719 - $ 1.75 54,285 - 2.25 54,285 - $ 2.80 141,429 - 2.25 141,429 - $ 1.39 10,000 - 3.75 10,000 - $ 4.25 50,000 - 3.75 50,000 - $ 4.38 244,286 - 1.25 244,286 - $ 7.00 536,335 - 2.00 516,679 - At December 31,2023, the stock options outstanding and the options exercisable have exercise prices that exceed the stock market price at December 31, 2023 and as such no intrinsic value exist. Intrinsic value is defined as the difference between the exercise price of the options and the market price of the Company’s common stock. F- 18 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 11. Stock Options (continued) In 2023 and 2022, the Company recognized stock-based compensation expense of $ 920,108 , of which $ 906,745 and $ 13,363 was recorded in general and administrative and research and development expenses, respectively and $ 1,012,592 , of which $ 915,797 and $ 96,795 was recorded in general and administrative and research and development expenses, respectively. Further, in 2022, the Company recorded stock-based charges of $ 63,612 relating to purchase of machinery (See Note 4) and $ 60,435 relating to an Acquisition. (See Note 5.) The fair value of stock option awards accounted for under ASC 718 was estimated at the date of grant using a Black-Scholes option-pricing model with the following assumptions: Schedule of Fair Value of Stock Option Awards Year Ended December 31, 2023 Year Ended December 31, 2022 Expected term (years) 2.88 to 3.25 2.50 to 3.00 Expected volatility 75.40 % to 89.93 % 100.81 % to 110.74 % Risk-free interest rate 3.71 % to 4.27 % 2.90 % to 3.47 % Dividend rate 0 % 0 % Note 12. Income Taxes A reconciliation of the Federal statutory rate of 21 % and 28 % in the years ended December 31, 2023 and 2022, respectively to the total effective rate applicable to income (loss) is as follows: Schedule of Reconciliation of Federal Statutory Rate to Total Effective Rate Year Ended Year Ended December 31, 2023 December 31, 2022 Expected benefit at statutory federal tax rate $ ( 2,073,230 ) $ ( 974,329 ) Permanent differences – net ( 35,469 ) ( 859,515 ) State and local taxes, net of federal tax benefit - ( 265,607 ) Other ( 24,569 ) ( 21,965 ) Change in valuation allowance 2,103,268 2,121,416 Income tax expense (benefit) $ ( 30,000 ) $ - The components of the Company’s deferred tax assets (liabilities) are as follows: Schedule of Components of Deferred tax Assets Year Ended December 31, 2023 Year Ended December 31, 2022 Deferred tax assets (liabilities): Fixed assets $ ( 281,073 ) $ ( 268,594 ) Interest 35,178 62,310 Research and development expenses 400,810 454,942 Stock-based compensation 895,509 917,351 Charitable Contributions 420 Net operating losses - federal 4,456,242 2,898,411 Net operating losses – state and local 543,264 921,350 Net operating losses - foreign 233,114 37,686 Research credit 28,985 28,985 Less valuation allowance ( 6,474,449 ) ( 5,244,441 ) Net deferred tax liability $ ( 162,000 ) $ ( 192,000 ) F- 19 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 12. Income Taxes (continued) The authoritative guidance requires the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. The guidance also requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s current and past performance, the market environment in which the company operates, length of carryback and carryforward periods and existing contracts that will result in future profits. After reviewing all the evidence, the company has recorded a full valuation allowance. As of December 31, 2023, the Company had U.S. federal net operating loss carryforwards of approximately $ 21,222,000 of which $ 241,000 , if not fully utilized, expires by 2038 and which $ 20,981,000 do not expire. The Company has foreign net operating loss carryforwards of $ 2,590,000 , if not fully utilized, expire through 2028. Utilization is dependent on generating sufficient taxable income prior to expiration of the tax loss carryforwards. The geographical components of loss before income taxes consisted of the following for the years ended December 31: Schedule of Geographical Components of Loss Before Income Taxes Year Ended Year Ended December 31, 2023 December 31, 2022 United Stated Operations $ ( 8,173,807 ) $ ( 3,978,832 ) International Operations ( 1,667,831 ) ( 660,830 ) (Loss) Income before taxes ( 9,871,638 ) ( 4,639,662 ) Note 13. Related Party Transactions and Balances As of December 31, 2023 and 2022, accounts payable and accrued liabilities include $ 32,974 and $ 105,667 , respectively, payable to officers, and directors of the Company. The amounts are unsecured, non-interest bearing and are due on demand (See Note 15). Note 14. Fair Value Measurements The Company’s financial instruments include cash, accounts payable, notes payable, contingent stock and warrant liability and warrant liability. Cash, contingent stock liability, contingent warrant liability and warrant 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. F- 20 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 14. Fair Value Measurements (continued) As of December 31, 2023, the following financial assets and liabilities were measured at fair value on a recurring basis presented on the Company’s consolidated balance sheet: Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis Fair Value Measurements Using Level 1 Level 2 Level 3 Total Assets Cash $ 3,012,908 - - $ 3,012,908 Total assets measured at fair value $ 3,012,908 - - $ 3,012,908 Liabilities Warrant liability $ - 2,422,785 — $ 2,422,785 Total liabilities measured at fair value $ - 2,422,785 - $ 2,422,785 As of December 31, 2022, the following financial assets and liabilities were measured at fair value on a recurring basis presented on the Company’s consolidated balance sheet: Fair Value Measurements Using Level 1 Level 2 Level 3 Total Assets Cash $ 4,170,897 - - $ 4,170,897 - - - Total assets measured at fair value $ 4,170,897 - $ 4,170,897 Liabilities Warrant liability $ 1,151,838 - - $ 1,151,838 Total liabilities measured at fair value $ 1,151,838 - - $ 1,151,838 Note 15. Commitments and Contingencies Fixed Assets and Other At December 31, 2023, the remaining amounts due under outstanding orders of $ 56,874 is recorded in Accounts Payable. At December 31, 2022, the Company has outstanding orders to purchase equipment, molds and component parts for research and development of $ 609,953 of which advance payments of $ 209,678 have been made and recorded in Other Assets (See Note 6). F- 21 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 15. Commitments and Contingencies (continued) 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 material 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. Employment Agreements On August 1, 2022, the Company cancelled the consulting agreement with Alan Blackman, Co- Chairman and Chief Operating Officer and entered into an Employment Agreement which provides for annual salary of $ 256,000 , which provides for increases, and provisions compensation adjustments, expense and tax differential reimbursements, benefits and bonuses. As of September 1, 2022, the annual salary is $ 320,000 . At June 30, 2022, the Company approved and accrued a $ 250,000 bonus to Mr. Blackman for services provided in 2022, of which $ 65,000 was paid subsequent to December 31, 2022. The Company terminated Mr. Blackman’s Employment Agreement effective May 1, 2023. Mr. Blackman continued to serve as the Co-Chairman and a member of the Board of Directors. Subsequent to June 30, 2023, the Company and Mr. Blackman entered into a separation agreement whereby, Mr. Blackman will be paid severance payments of approximately $ 346,000 , which was recorded as an expense and an accrued expense as of June 30, 2023, over thirteen months, continue his medical benefits for such period with a cost of approximately $ 29,000 which has been accrued at June 30, 2023. At December 31, 2023, the outstanding balance due Mr. Blackman is $ 218,000 , which is recorded in accrued expenses. Further, all unvested options were fully vested and the Company recorded a charge of $ 60,000 . In connection with the separation agreement, Mr. Blackman no longer serves as Co-Chairman or Board member and has agreed to vote his Series A Preferred Stock in favor of the election, reelection, and/or designation of each individual nominated to serve as a director on the Board of Director as shall be identified in an applicable proxy statement filed by the Company for such election of directors. Once the payments due Mr. Blackman are fully paid, the Series A Preferred Stock shall be deemed immediately cancelled and forfeited and without further consideration. The Series A Preferred shall at such time be returned to the status of an authorized but unissued share of preferred stock of the Company. F- 22 SHARPS TECHNOLOGY, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Note 15. Commitments and Contingencies (continued) On September 30, 2022, the Company entered into a formal employment agreement, effective on such date and will continue until terminated by either party, subject to the terms of the agreement, with Andrew R. Crescenzo who has been serving as the Company’s Chief Financial Officer on a contract services basis for the last three years. The agreement provided for annual compensation of $ 225,000 and plus a one-time $ 18,750 incentive payment upon the commencement of the agreement. During the course of the term, Mr. Crescenzo will be eligible for (i) performance bonuses to be granted at the discretion of the Company’s Compensation Committee and (ii) to participate in the Company’s 2022 Equity Incentive Plan. The agreement contains customary employment terms and conditions. In October 2022, the Company entered into a service agreement (“Service Agreement”) with an unrelated third-party for marketing and investor relations services. The Service Agreement, which has a term of one year, has various deliverables and provides payments to the third party as follows; a) an initial fee of $ 90,000 , b) monthly fees through the term of $ 12,500 , c) 200,000 shares of restricted common stock and d) $ 300,000 specifically related to digital marketing activities. As stated in Note 8, the 200,000 shares of restricted common stock were valued at $ 230,000 , representative of the trading price on the issuance. On February 9, 2023, the Company, appointed Justin Page, as Vice President of Technical Operations with a start date of February 15, 2023. The agreement provides for annual compensation of $ 235,000 and Options to purchase 50,000 shares of Common Stock at the exercise price of $ 1.30 , the closing price on the grant date. During the course of the term, Mr. Paige will be eligible for (i) performance bonuses to be granted at the discretion of the Company’s Compensation Committee and (ii) to participate in the Company’s Equity Incentive Plan. The agreement contains customary employment terms and conditions and provides for severance of six months if a change in control occurs, as defined. On November 10, 2023, the Company executed an Employment Agreement with Robert Hayes, its Chief Executive Officer amending the employment letter dated September 6, 2021. The agreement term automatically renews for successive one-year terms as of the commencement date unless prior written notice by either party within ninety days prior to end of the current term. The agreement provides for termination of employment and severance benefits under stated conditions and restrictive covenants. The agreement provides for annual compensation retroactive to June 1, 2023 of $ 600,000 from $ 400,000 and a stated increase with the successful acquisition of InjectEZ and other terms of the acquisition agreement (See Note 5). The agreement provides for bonus compensation for: (i) closing the Nephron acquisition agreement, (ii) long-term incentives for achieving revenue targets and market caps for the Company’s stock and (iii) other Company achievements. In addition, the agreement provides for benefits and paid time off. Note 16. Subsequent Events In January 2024, the holders of 398,441 of pre-funded warrants exercised their warrants at the exercise price of $ .001 . F- 23 Item 9. Changes in and Disagreements with Accountants None.