SKYX Platforms Corp. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this Form 10-K. This discussion and other parts of this Form 10-K contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, strategy, expectations, outlook, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this Form 10-K. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements” contained in this Form 10-K. 45 Overview We have a series of advanced-safe-smart platform technologies. Our first-generation technologies enable light fixtures, ceiling fans and other electrically wired products to be installed safely and plugged in to a ceiling’s electrical outlet box within seconds, and without the need to touch hazardous wires. The plug and play technology method is a universal power-plug device that has a matching receptacle that is simply connected to the electrical outlet box on the ceiling, enabling a safe and quick plug and play installation of light fixtures and ceiling fans in just seconds. The plug and play power-plug technology eliminates the need of touching hazardous electrical wires while installing light fixtures, ceiling fans and other hard wired electrical products. In recent years, we have expanded the capabilities of our power-plug product to include advanced-safe and quick universal installation methods, as well as advanced-smart capabilities. The smart features include control of light fixtures and ceiling fans by the SkyHome App, through WIFI, BLE and voice control. It allows scheduling, energy savings eco mode, dimming, back-up emergency light, night light, light color changing and much more. Our second-generation technology is an all-in-one safe and smart-advanced platform that is designed to enhance all-around safety and lifestyle of homes and other buildings. Our products are designed to improve all around home and building safety and lifestyle. While we have developed and created working prototypes of our advanced and smart products, we are continuing to refine the product prototypes and expect to begin manufacturing during 2023 for the advanced products and the smart universal power-plug, ceiling fans and lighting products and for the Smart Sky Platform. We hold over 60 U.S. and global patents and patent applications and have received a variety of final electrical code approvals, including UL, United Laboratories of Canada (cUL) and Conformité Européenne (CE), and 2017 and 2020 inclusion in the NEC Code Book. We believe our total addressable market in the United States exceeds $500 billion, based on the Company’s internal calculations derived from the estimation of the total target user pool, projected average selling price, and projected units per household. We believe there are billions of installations of light and other electrical fixtures globally. Our estimates of the addressable market for our products may prove to be incorrect. The projected demand for our products could materially differ from actual demand. Even if the total addressable market for our products is as large as we have estimated and even if we are able to gain market awareness and acceptance, we may not be able to penetrate the existing market to capture additional market share. During April 2022, we entered into a sublease agreement, pursuant to which we agreed to sublease approximately 3,400 square feet of office space located on the 54th floor of Carnegie Hall Tower, located at 152 West 57th Street, New York, New York, at a fixed monthly base rent starting at $26,893 for the first year of the sublease. The New York office space supports our general and administrative functions, sales and marketing, and business development. During September 2022, we entered into a lease agreement, pursuant to which we agreed to lease approximately 32,200 square feet located at 400 Biscayne Boulevard, Miami Florida. The fixed minimum monthly base rent amounts to $214,480 during the first full year. The lease provides for rent abatements of a minimum of 10 months. The lease also provides for the lessor’s leasehold improvements of up to $2.3 million. The Miami office space will support our headquarters, general and administrative functions, sales and marketing, and business development. Inflation and related risk of recession has increased during 2022 and is expected to continue to increase during 2023. Inflationary factors, such as increases in interest rates, supply and overhead costs and transportation costs, may adversely affect our operating results and we may not be able to offset increased costs with increased sales price per unit, particularly as we work toward commercial manufacturing of our products. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience some effect in the foreseeable future (especially if inflation rates continue to rise). In addition, we may be negatively impacted as a result of supply chain constraints, consequences associated with government regulations, ongoing and potential geopolitical conflicts, employee availability and wage increases. During February 2023, we announced the Acquisition, pursuant to which we agreed to acquire all of the issued and outstanding shares of Belami, a strategic e-commerce lighting and home décor conglomerate. The Company will pay both cash and common stock as consideration for the Acquisition. The Acquisition is expected to close during the second quarter of 2023. The Company expects that Belami will serve as a marketing and growth platform and will provide several distribution channels, including to retail customers, builders and professionals. For additional information regarding the Acquisition, see “Item 1. Business—Recent Developments.” 46 In connection with the Acquisition, the Company closed the Private Placements, pursuant to which the Company issued and sold (i) subordinated secured convertible promissory notes in the aggregate principal amount of $10.35 million and (ii) warrants to purchase an aggregate of up to 1,391,667 shares of the Company’s common stock for investors. The proceeds will be used for the cash component of the Acquisition consideration and to pay certain transaction expenses in connection with the Acquisition and the Private Placements. In addition, in March 2023, the Company acquired 50% of the equity of a strategic e-commerce private label lighting website, for $225,000. The other 50% of the equity is owned by Belami. The Company expects that this acquisition will serve as another marketing and growth platform for the Company and will provide additional distribution to both professional and retail channels for the Company’s products. Results of Operations Years Ended December 31, 2022 and 2021 2022 2021 Increase / (Decrease) ($) Increase / (Decrease) (%) Revenue $ 32,022 $ 43,109 $ (11,087 ) (26 )% Cost of revenues (18,913 ) (88,461 ) (69,548 ) (79 )% Gross profit 13,109 (45,352 ) 58,461 NM Selling, general and administrative expenses 26,638,291 5,142,731 21,495,560 NM Operating loss (26,625,182 ) (5,188,083 ) 21,437,099 NM Other income / (expense) Interest expense, net (589,009 ) (560,382 ) 28,627 5 % Other income - loan forgiveness 178,250 — 178,250 NM Other income — 18,051 (18,051 ) NM Total other income (expense), net (410,759 ) (542,331 ) (131,572 ) (24 )% Net loss $ (27,035,941 ) $ (5,730,414 ) $ 21,305,527 NM NM: Not meaningful Revenue The decrease in revenues was directly related to the planned reduction of discontinued inventory as we continued to shift our focus to the development of our new patented “Smart” platforms and technologies. During 2022 and 2021, we opted to sell through our existing inventory of discontinued products to facilitate our planned transition into our new product lines. We believe that revenues will be higher in 2023 than in 2022, since we launched the marketing of our advanced and smart products in late 2022 and expect to begin commercial sales in 2023. We also expect the pending Acquisition to increase our revenues, assuming the Company successfully consummates the Acquisition. Cost of Revenues During 2022 and 2021, revenues were mostly derived from the sale of a small number of replacement parts and standard canopy kits. The inventory and related costs of such products are not significant and are not reflected on our balance sheet nor in the cost of revenues. The reduction in cost of revenues was related to the decrease in sales, which resulted from our decision to discontinue our old products and transition to our patented “Smart” platforms and technologies. We believe that cost of revenues will increase in 2023 compared to in 2022, commensurate with an anticipated increase in revenues. 47 Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of an allocation of product development, sales, finance, legal, human resources, including salaries, wages, and benefits, and depreciation and amortization, including non-cash equity-based compensation. The increase in selling, general, and administrative expenses during 2022 when compared to the prior year was primarily due to the following: ● Increase of $12.5 million related to share-based payments during 2022 when compared to 2021, which was primarily due to a greater number of shares of common stock issued and options granted for services during 2022; ● Increased investments in marketing programs and product development of approximately $2.4 and $1.9 million, respectively, in anticipation of the launch of our product offerings during 2022 compared to 2021; and ● Increase in other spending amounting to $3.8 million related to support of planned increase in scope of operations. We believe that our selling, general, and administrative expenses will be higher during 2023 when compared to 2022 as we continue to invest to support our anticipated growth. Other Income (Expense) The increase in interest expense in 2022 when compared to the prior year was primarily due to higher weighted-average interest-bearing obligations during 2022, resulting from the compounding of accrued interest. The increase in other income - loan forgiveness during 2022 when compared to the prior year was due the forgiveness of a PPP loan during the first quarter of fiscal 2022, which did not occur during 2021. We believe that interest expenses will increase during fiscal 2023 when compared to 2022, primarily as a result of increased operating lease liabilities. Liquidity and Capital Resources As of December 31, 2022 and 2021, we had $16.8 million and $10.4 million in cash and cash equivalents, restricted cash, and investments in debt securities, respectively. As we develop our revenue base, we have raised additional funds through the sale of our common stock and securities convertible into our common stock and issuance of debt, including completing our initial public offering in February 2022 for gross proceeds of $23.1 million and the Private Placements in February and March 2023 for gross proceeds of $10.35 million, pursuant to which we issued convertible notes and warrants. We believe that our existing cash and debt securities will be sufficient to support our working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including consummation of the Acquisition, our revenue growth rate, expenditures related to our headcount growth, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the price at which we are able to purchase parts to incorporate in our product offerings, the introduction of platform enhancements, and the market adoption of our platforms. We may continue to enter in arrangements to acquire or invest in complementary businesses, products, and technologies. We may, because of those arrangements, including the pending Acquisition, or the general expansion of our business, be required to seek additional equity or debt financing. If we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, results of operations, and financial condition. During 2022, we entered into certain lease and sublease agreements, including (i) a sublease agreement entered into during April 2022, pursuant to which we agreed to sublease approximately 3,400 square feet of office space located on the 54th floor of Carnegie Hall Tower, located at 152 West 57th Street, New York, New York, at a fixed monthly base rent starting at $26,893 for the first year of the sublease, and (ii) a lease agreement entered into during September 2022, pursuant to which we agreed to lease approximately 32,200 square feet located at 400 Biscayne Boulevard, Miami, Florida, at a fixed minimum monthly base rent of $214,480 during the first full year of the lease. The Miami, Florida lease provides for rent abatements of a minimum of 10 months, as well as for the lessor’s leasehold improvements of up to $2.3 million. We also issued a letter of credit of $2.7 million to one of the lessors as collateral for certain obligations related to the lease. 48 We owe approximately $5.5 million under fixed rate obligations and $1.3 million under convertible notes as of December 31, 2022. We issued an additional $8.1 million in convertible notes during the first quarter of 2023. In addition, we owe GE certain minimum royalty payments under the License Agreement which amounted to $2.6 million as of December 31, 2022. 2022 During 2022, we used $13.8 million in our operating activities, which consisted of our net loss of $27.0 million adjusted for non-cash equity compensation of $14.0 million and an increase of inventory of $1.0 million. We have recently increased our inventory in preparation for the anticipated launch of commercial sales of our advanced and smart products during 2023. Our net cash used in investing activities amounted to $8.1 million and consisted primarily of purchases of debt securities of $7.4 million. We generated $20.9 million in financing activities, of which $20.6 million was generated from our initial public offering. 2021 During 2021, we used $4.6 million in our operating activities, which consisted of our net loss of $5.7 million adjusted for non-cash equity compensation of $1.5 million. We generated $12.9 million in financing activities, which consisted primarily of proceeds from issuance of our shares of common stock of $13.0 million. Non-GAAP Financial Measures Management considers selling, general, and administrative expenses, adjusted for non-cash stock compensation, an important indicator in consistently evaluating our business operations and the use of cash in our operating activities. We use such measure to analyze and evaluate our liquidity and capital resources and intend to continue using such measure until we generate revenues. Such measure eliminates significant items that do not involve cash outlay. This measure should be considered in addition to, rather than as a substitute, for selling, general and administrative expenses. This non-GAAP financial measure excludes significant expenses that are required by GAAP to be recorded in our financial statements and is subject to inherent limitations. Investors should review the reconciliation of this non-GAAP financial measure to the comparable GAAP financial measure included below. Investors should not rely on any single financial measure to evaluate our business. For the year ended December 31, 2022 2021 Sales, general, and administrative expenses, as reported $ 26,638,291 $ 5,142,731 Non-cash share-based payments (13,959,796 ) (1,463,033 ) Non-cash, sales, general, and administrative expenses, as adjusted $ 12,678,495 $ 3,679,698 Off Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Critical Accounting Policies Our significant accounting policies are disclosed in Note 2 to our 2022 consolidated financial statements. The following is a summary of those accounting policies that involve significant estimates and judgment of management. 49 Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, actual results could differ significantly from estimates. Fair Value of Financial Instruments Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2022 and 2021, we believe the amounts reported for cash, prepaid expenses, accounts payable, accounts payable – related party, accrued expenses and other current liabilities, accrued interest, notes payable and convertible note payable approximate fair value because of their short maturities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include: ● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; ● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and ● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Stock-Based Compensation Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation–Stock Compensation ”, which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. Stock-based compensation is measured at the grant date of options based on the value of the award granted using the Black- Scholes option pricing model based on projections of various potential future outcomes and recognized over the period in which the award vests. Expected volatility is the assumption having the greatest impact on the fair value of options. Our expected volatility is based on the historical volatility of comparable companies. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense is included in general and administrative expenses. 50 Revenue Recognition We account for revenues in accordance with Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We determine revenue recognition through the following steps: ● identification of the contract, or contracts, with a customer; ● identification of the performance obligations in the contract; ● determination of the transaction price; ● allocation of the transaction price to the performance obligations in the contract; and ● recognition of revenue when, or as, we satisfy a performance obligation. Recent Accounting Pronouncements Although there are several new accounting pronouncements issued or proposed by the Financial Accounting Standards Board, which we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements has had or will have a material impact on our financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company”, we are not required to provide the information required by this Item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements required to be included in this report appear as indexed in the appendix to this report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.