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-and second-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 third-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. We are continuing to refine our products and began manufacturing certain advanced and smart products in 2023, and expect additional products, including the Sky Smart Platform, to be available in 2024. We hold over 96 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 differ materially 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. Inflation continued to increase during 2023 and is expected to continue to increase during 2024. 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 continue to work toward commercial manufacturing and sale 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 because of supply chain constraints, consequences associated with government regulations, ongoing and potential geopolitical conflicts, employee availability and wage increases. In addition, the Israel-Hamas war may adversely impact our operations in the near future. We have a number of developers working in Israel. If such individuals are called for service or this war escalates regionally, it may create work interruptions leading to longer periods between releases of offering improvements and increased costs. On April 28, 2023, we completed our acquisition (the “Closing”) of all of the issued and outstanding shares of Belami, an online retailer and e-commerce provider specializing in home lighting, ceiling fans, and other home furnishings. We expect these 60 websites will serve as a marketing and growth platform for our smart products and should provide several distribution channels, including to retail customers, builders, and professionals. For additional information regarding the Acquisition, see “Item 1. Business—Overview-E-Commerce.” 46 Results of Operations Years Ended December 31, 2023 and 2022 For the year ended December 31, Increase/ Increase/ 2023 2022 (Decrease) $ (Decrease) % Revenue $ 58,785,762 $ 32,022 58,753,740 NM Cost of revenues 40,749,913 18,913 40,731,000 NM Gross profit 18,035,849 13,109 18,022,740 NM Selling and marketing expenses 18,805,069 7,991,487 10,813,582 135 % General and administrative expenses 37,055,986 18,646,804 18,409,182 99 % Total expenses 55,861,055 26,638,291 29,222,764 108 % Operating loss (37,825,206 ) (26,625,182 ) 11,200,024 42 % Other income / (expense) Interest expense, net (3,109,307 ) (589,009 ) 2,520,298 NM Gain on extinguishment of debt 1,201,857 178,250 (1,023,607 ) NM Total other income (expense), net (1,907,450 ) (410,759 ) 1,496,691 NM Net loss (39,732,656 ) (27,035,941 ) 12,696,715 47 % NM: Not meaningful Revenue The increase in revenues during 2023, when compared to 2022, is primarily due to revenues from products marketed by Belami which was acquired on April 28, 2023. We believe that revenues will be higher in 2024 than in 2023, primarily resulting from revenues from Belami, which was acquired in April 2023, and the sale of our advanced and smart products. Cost of Revenues The cost of revenues consists primarily of costs associated with selling the products marketed by Belami. The increase in cost of revenues during 2023 when compared to 2022, is primarily due to costs associated with revenues from products marketed by Belami which was acquired on April 28, 2023. We believe that cost of revenues will increase in 2024 compared to 2023, commensurate with an anticipated increase in revenues. 47 Selling and Marketing Expenses Selling and marketing expenses consist primarily of sales and marketing compensation as well as sales and marketing programs. The increase in selling and marketing expenses during 2023 when compared to 2022 is primarily due to such expenses following the acquisition of Belami aggregating $11.1 million during 2023. We believe that our selling and marketing expenses will be higher during 2024 when compared to 2023 as we continue to invest to support our anticipated growth and now includes such expenses related to Belami’s operations following its acquisition. General and Administrative Expenses General and administrative expenses consist primarily of an allocation of product development, finance, legal, human resources, including salaries, wages, and benefits, and depreciation and amortization, including share-based payments. The increase in general, and administrative expenses during 2023 when compared to 2022 was primarily due to the following: ● Increase in general and administrative expenses following the acquisition of Belami aggregating $8 million ● Increase of depreciation and amortization expenses of $2.0 million primarily related to increase in intangibles acquired during the second quarter of 2023 and right-of-use assets acquired during the third quarter of 2022. ● Increase in consideration due to General Electric of $1.4 million, pursuant to agreements negotiated in November 2023. ● Loss from subsequent measurement of inventory of $1.3 million recognized during 2023. We believe that our operating expenses may be higher during 2024 when compared to 2023 as we continue to invest to support our anticipated growth and now includes such expenses related to Belami’s operations following its acquisition. Other Income (Expense) The increase in interest expense during 2023 when compared to 2022 is primarily due to interest imputed pursuant to operating lease liabilities and debt which were entered into the latter part of 2022 and convertible debt (including amortization of debt discount, which were entered into the first quarter of 2023. The debt discount is related to inducements the Company granted to holders of convertible debt. The variations in gain on extinguishment debt is due to two separate non-recurring transactions: the forgiveness of the PPP loan recognized during 2022 and a gain on forgiveness of debt in April 2023 as the debt forgiven to a lender exceeded the consideration we paid. Liquidity and Capital Resources As of December 31, 2023 and 2022, we had $22.4 million and $16.8 million in cash and cash equivalents, restricted cash, and investments in debt securities, respectively. 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 engaging in private placements and offerings during, 2023 of a combination of convertible notes payable and shares of our common stock aggregating $19.6 million. These offerings included shares sold pursuant to our ATM offering program which provides us with additional access to capital, as needed, subject to market conditions. During the three months ended December 31, 2023, we issued 783,374 shares of common stock under such program for net proceeds of $1,228,000, net of brokerage fees and legal expenses of approximately $25,000. In aggregate, from the start of the ATM offering program through December 31, 2023, we sold 4,359,832 shares of common stock, generating approximately $9.4 million of proceeds, net of brokerage fees and legal expenses of $604,000. As of March 21, 2024, we had the remaining capacity to issue shares of common stock with a consideration of up to $6.5 million under the offering program. 48 Our future capital requirements will depend on many factors, including the Belami acquisition and integration of operations, our revenue growth rate, expenditures related to our headcount growth and manufacturing, 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 arrangements to acquire or invest in complementary businesses, products, and technologies. We may, because of those arrangements, 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 April and May 2023, the Company repaid in full approximately $6.2 million due to a lender by issuing 574,713 shares of the Company’s common stock and paying $2.0 million in cash. The Company also obtained an aggregate $6.5 million in revolving lines of credits and a term loan with two financial institutions during 2023. The lines of credit mature in 2024 and the term loan matures in 2026. 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. On February 10, 2023, we entered into a Managed Client Agreement and, as subsequently amended (as amended, the “Office Management Agreement”) with RGN-MCA Miami II, LLC (“Spaces”), having a term commensurate with the Miami lease, pursuant to which Spaces will manage one floor of the Miami office for the Company, renting co-working office spaces and providing support services, following completion of the office construction. The Office Management Agreement is subject to final approval by the landlord under the Miami lease. The Company will receive net revenues from the rentals, after deducting up to 16% in platform and management fees and certain operating expenses. The Company projects to receive net revenues to offset a significant portion of the costs of the Miami lease. We owe approximately $11.5 million under fixed rate obligations as of December 31, 2023. In addition, we owe GE certain minimum royalty payments under a license agreement which amounted to $3.9 million as of December 31, 2023. 49 2023 During 2023, we used $13.0 million in our operating activities, which consisted of our net loss of $38.0 million adjusted for non-cash equity compensation of $18.0 million as well as an increase of accounts payable and accrued expenses of $5.5 million. We are managing our accounts payable based on vendor terms. Our net cash provided by investing activities amounted to $3.2 million and consisted primarily of disposition of debt securities of $7.6 million offset by cash used to acquire Belami, net of acquired cash of $4.2 million. We generated $22.7 million in financing activities, of which $19.6 million was generated from a combination of issuance of convertible notes and proceeds from issuance of shares of common stock at the market.and $6.5 million proceeds from lines of credit lines term loan and offsetting term loan repayment of debt of $3.4 million. 2022 During 2022, we used $13.8 million in our operating activities, which consisted of our net loss of $527.0 million adjusted for non-cash equity compensation of $13.9 million. We used $8.1 million in our investing activities, which primarily consisted of purchase of debt securities of $7.4 million. We generated $20.9 million in financing activities, which consisted primarily of proceeds from the issuance of our shares of common stock of $23.1 million. Going Concern The Company’s liquidity’s sources include $22.4 million in cash and cash equivalents and $3.1 million of working capital. However, the Company has a history of recurring operating losses and its net cash used in operating activities amounted to $13.0 million and $13.8 million during 2023 and 2022, respectively. The Company has also generated net cash provided by financing activities of $22.7 million and $20.9 million during 2023 and 2022, respectively. Accordingly, the Company’s management cannot ascertain that there is no substantial doubt that it will be able to meet its obligations as they become due within one year after the date that its financial statements are issued. Management intends to mitigate such conditions by continuing to support its continued growth by decreasing its cash used in operating activities through increased revenues and increased margins from products sold to large retailers and its internet portals, and to the extent necessary, generating cash provided by financing activities through it’s at the market offering or other equity or debt financing means. Non-GAAP Financial Measures Management considers earnings (loss) before interest, taxes, depreciation and amortization, or EBITDA, as adjusted, an important indicator in evaluating our business on a consistent basis across various periods. Due to the significance of non-recurring items, EBITDA, as adjusted, enables our management to monitor and evaluate our business on a consistent basis. We use EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and potential acquisitions. We believe that EBITDA, as adjusted, eliminates items that are not part of our core operations, such as interest expense and amortization expense associated with intangible assets, or items that do not involve a cash outlay, such as share-based payments and non-recurring items, such as transaction costs. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute for, pre-tax income (loss), net income (loss) and cash flows used in operating activities. 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, 2023 2022 Net loss $ (39,732,656 ) $ (27,035,941 ) Share-based payments 17,977,252 13,959,795 Interest expense 3,109,307 589,009 Depreciation, amortization 2,885,856 883,231 Transaction costs 516,601 - EBITDA, as adjusted $ (15,283,640 ) $ (11,603,906 ) Off Balance Sheet Arrangements We do not have any off-balance sheet arrangements. 50 Critical Accounting Policies Our significant accounting policies are disclosed in Note 2 to our consolidated financial statements for the year ended December 31, 2023, contained in our Annual Report on Form 10-K for the year ended December 31, 2023. The following is a summary of those accounting policies that involve significant estimates and judgment of management. 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 recognized in the balance sheet, where it is practicable to estimate that value. As of December 31, 2023 and 2022, we believe the amounts reported for cash, prepaid expenses, accounts payable and 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. 51 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 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. 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. 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 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.