# SKYX Platforms Corp. (SKYX) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SKYX Platforms Corp.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1598981/000149315222006252/form10-k.htm
Accession: 0001493152-22-006252
Filing date: 2022-03-08
Report date: 2021-12-31
Extracted from Item 7 to the first post-MD&A boundary after HTML sanitization.
Confidence: high

Company profile: /company/SKYX/
All MD&A years: /company/SKYX/mda/
Next year: /company/SKYX/mda/fy2022/ (FY 2022)

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.

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 into 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
commercial manufacturing and marketing in the first half of 2022 for the advanced products and the smart universal power-plug, ceiling
fans and lighting products and the second half of 2022 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.

The
ongoing COVID-19 pandemic has caused significant disruption in the international and United States economies and financial markets. We
have been following the recommendations of local health authorities to minimize exposure risk for our employees, including the temporary
closures of our offices and having employees work remotely to the extent possible, which has to an extent adversely affected their efficiency.
In addition, the cancellation of in-person meetings and conferences has had an adverse impact on our business and financial condition
and has hampered our ability to meet with customers to promote products, generate revenue and access usual sources of liquidity on reasonable
terms, which in turn has negatively impacted our financial performance. As the situation continues to evolve, we will continue to closely
monitor market conditions and respond accordingly.

In
March 2020, the CARES Act was enacted. Among other things, the CARES Act established the PPP, which funded eligible businesses through
federally guaranteed loans. Under the PPP, companies are eligible for forgiveness of principal and accrued interest if the proceeds are
used for eligible costs, which include, but are not limited to, payroll, benefits, mortgage, lease, and utility expenses. We have applied
for and received certain financial assistance under the CARES Act, as described further below.

46

Results
of Operations

Comparison
of the Years Ended December 31, 2021 and 2020

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,","","","Change"],["","","2021","","","2020","","","2021 vs. 2020"],["Revenue","","$","43,109","","","$","258,376","","","$","(215,267",")","","","(83.3",")%"],["Cost of revenues","","","(149,286",")","","","(503,033",")","","","353,747","","","","(70.03",")%"],["Gross loss","","","(106,177",")","","","(244,657",")","","","138,480","","","","(56.6",")%"],["Selling, general and administrative expenses","","","5,081,906","","","","8,741,320","","","","(3,659,414",")","","","(41.9",")%"],["Loss from operations","","","(5,188,083",")","","","(8,985,977",")","","","3,797,894","","","","(42.3",")%"],["Other income / (expense)"],["Interest expense","","","(560,418",")","","","(515,515",")","","","(44,903",")","","","8.7","%"],["Other income, loan forgiveness","","","10,000","","","","257,468","","","","(247,468",")","","","(96.1",")%"],["Gain on exchange","","","8,051","","","","408","","","","7,643","","","","NM"],["Interest income","","","36","","","","1,511","","","","(1,475",")","","","(97.6",")%"],["Total other expense, net","","","(542,331",")","","","(256,128",")","","","(286,203",")","","","111.7","%"],["Net loss including noncontrolling interest","","","(5,730,414",")","","","(9,242,105",")","","","3,511,691","","","","(38.0",")%"],["Less net loss attributable to noncontrolling interest","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014"],["Preferred dividends","","","129,456","","","","130,206","","","","(750",")","","","(0.6",")%"],["Net loss attributed to common shareholders","","$","(5,859,870",")","","$","(9,372,311",")","","$","3,512,441","","","","(37.5",")%"]]
[[/GREPCENT_TABLE]]

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 2021 and 2020, we opted to sell through our existing
inventory of discontinued products to facilitate our planned transition into our new patented product lines.

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.

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
decrease in selling, general, and administrative expenses during 2021 when compared to the prior period was primarily due to a decrease
in stock-based compensation of $3.6 million during 2021. The decrease in stock-based compensation during 2021 was primarily due to fewer
options and shares of common stock granted during 2021.

Other
Income (Expense)

The
increase in interest expense in 2021 when compared to the prior period was primarily due to higher weighted-average interest-bearing
obligations during 2021, resulting from the compounding of accrued interest.

The
decrease in other income loan forgiveness during 2021 when compared to 2020 was primarily due to a non-recurring forgiveness of a PPP
loan during 2020, which did not occur during 2021.

47

Liquidity
and Capital Resources

As
of December 31, 2021 and December 31, 2020, we had $10,426,249 and $2,308,871 in cash and cash equivalents, respectively. As we develop
our revenue base, we have raised additional funds through the sale of our common stock and issuance of debt, including completing our
initial public offering in February 2022 for gross proceeds of $23.1 million. We believe that our sources of liquidity and capital will
be sufficient to finance our continued operations for at least the next 12 months. Our debt previously included a $10,000,000 secured
loan, arranged in April 2016 pursuant to a promissory note between us and NBG, to support our working capital needs. As of December 31,
2020, we had $5,458,642 outstanding under the note (exclusive of interest). On December 14, 2021, we entered into a new secured promissory
note with NBG, in the amount of approximately $5.9 million, which amended and replaced the April 2016 promissory note. The unpaid principal
accrues interest at the Wall Street Journal prime rate plus 1.75% per year. The amended note will mature sixty months following the date
of issuance. The Company agreed to make the following payments to NBG: on the date of issuance, $243,000; on December 30, 2021, an amount
equal to all accrued and unpaid interest as of such date, plus $100,000; and on each of July 1, 2022, December 30, 2022, July 1, 2023
and December 30, 2023, an installment payment in an amount equal to all accrued and unpaid interest as of the respective date, plus $200,000.
Commencing January 15, 2024, the Company will begin paying equal monthly installments of $144,176 in principal, plus all accrued and
unpaid interest as of the payment date. The Company may prepay the amounts due under the amended note at any time and from time to time.
The note contains customary events of default and, in the event that an event of default occurs, the amended note and all accrued interest
will become immediately due and payable. The amended note is secured by the existing pledge and security agreement and by a first priority
security interest in substantially all of the Company’s assets.

In
addition, we have agreed to pay GE certain minimum royalty payments under the License Agreement. In December 2020, we agreed to pay a
total of approximately $5.1 million to GE in quarterly installments through December 2023. As of December 31, 2021, the outstanding balance
of such royalty payments was approximately $3.8 million.

The
following is a summary of our cash balances and cash flows as of and for the years ended December 31, 2021 and 2020:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","Change"],["Net Cash Flows","","2021","","2020","","Year Ended 2021 vs. 2020"],["Cash Flows from Operating Activities","","$","(4,627,755",")","","$","(3,129,293",")","","$","(1,498,462",")","","","47.9","%"],["Cash Flows from Investing Activities","","$","(179,203",")","","$","(109,876",")","","$","(69,327",")","","","63.1","%"],["Cash Flows from Financing Activities","","$","12,924,336","","","$","3,674,303","","","$","9,250,033","","","","251.7","%"],["Cash and Cash Equivalents, End of Year","","$","10,426,249","","","$","2,308,871","","","$","8,117,378","","","","351.6","%"]]
[[/GREPCENT_TABLE]]

Fiscal
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 and a decrease of accounts payable and other obligations of approximately $600,000. We also incurred approximately
$179,000 in payments related to our patents pursuant to our investing activities. There were no changes to our inventory carrying
values at December 31, 2021 when compared to the prior year measurement date. Our inventory consists primarily of analog components that
we intend to use in the manufacturing of our products upon launch in 2022.

We
generated $12.9 million in financing activities, of which $13.2 million was generated from the issuance of our shares of common stock
and approximately $178,000 from the issuance of a note payable pursuant to the PPP, offset by principal repayments of a note payable
of $343,000.

Fiscal
2020

During
2020, we used $3.1 million in our operating activities, which consisted of our net loss of $9.2 million adjusted for non-cash equity
compensation of $5.1 million, as well as a decrease in accounts receivable and inventory of approximately $418,000 and $325,000, respectively,
and an increase of accounts payable and other obligations of approximately $376,000.

48

We
also incurred approximately $95,000 in payments related to our patents pursuant to our investing activities.

We
generated $3.7 million in financing activities, of which $2.1 million and $1.3 million were generated from the issuance of our shares
of common stock and convertible notes, respectively, and approximately $280,000 from the issuance of a note payable pursuant to the Paycheck
Protection Program.

Working
capital

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

We
had working capital of $8,751,934 as of December 31, 2021, as compared to $1,018,361 as of December 31, 2020. Working capital improved
by approximately $7.7 million, which was primarily attributable to an increase in cash proceeds from stock issuances, which was offset,
in part, by an increase in accrued expenses and the current portion of notes payable.

A
majority of our sales do not require us to take delivery of inventory. Production of the Sky technology and products will be originated
upon receipt of FOB (free on board) purchase contracts from customers. Upon the completion of each purchase contract, the finished products
will be transported from the manufacturer directly to the ports and loaded on vessels secured by the customer, upon which the products
become the property of the customer. Our sales were impacted during the years ended December 31, 2021 and 2020 as we executed the liquidation
of discontinued inventory as we continued the development of our new patented “Smart” platforms and technologies.

Non-GAAP
Financial Measures

To
supplement our consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles
in the United States of America (“GAAP”), management uses adjusted net income (loss) to evaluate operating and financial
performance and believes the measure is useful to investors because it eliminates the impact of certain noncash and/or other items that
management does not consider to be indicative of our performance from period to period. Management also believes this non-GAAP measure
is useful to investors to evaluate and compare our operating and financial performance across periods, as well as facilitating comparisons
to others in our industry, although other companies may calculate this non-GAAP measure differently, which may limit the usefulness of
this measures for comparative purposes.

We
use the non-GAAP financial measure of Adjusted EBITDA, which is defined as net income (loss), plus interest income; interest expense;
depreciation and amortization; unrealized derivative gains and losses; non-recurring income and expenses; and stock-based compensation
expense. We believe that Adjusted EBITDA helps identify underlying trends in our business that could otherwise be masked by the effect
of the expenses that we exclude in Adjusted EBITDA.

These
non-GAAP measures should not be considered in isolation or as a substitute for, or superior to, financial measures calculated in accordance
with GAAP. These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in our
financial statements and are subject to inherent limitations. Investors should review the reconciliations of these non-GAAP financial
measures to the comparable GAAP financial measures that are included below. Investors should not rely on any single financial measure
to evaluate our business.

49

The
following table presents a reconciliation of Adjusted EBITDA to net loss, the most comparable GAAP financial measure, for each of the
periods presented:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2021","","","2020"],["Adjusted EBITDA reconciliation to Net Loss:"],["Net loss","","$","(5,730,414",")","","$","(9,242,105",")"],["Other Income / (Expense)"],["Equity-based compensation","","","(1,463,033",")","","","(5,068,428",")"],["Depreciation and amortization","","","(84,287",")","","","(106,309",")"],["Interest expense","","","(560,418",")","","","(515,515",")"],["Other income, loan forgiveness","","","10,000","","","","257,468"],["Gain on exchange","","","8,051","","","","408"],["Interest income","","","36","","","","1,511"],["Total adjustment","","","(2,089,651",")","","","(5,430,865",")"],["Adjusted EBITDA","","$","(3,640,763",")","","$","(3,811,240",")"],["Net loss per share \u2013 basic and diluted","","$","(0.09",")","","$","(0.15",")"],["Adjusted EBITDA per share - basic and diluted","","$","(0.05",")","","$","(0.06",")"]]
[[/GREPCENT_TABLE]]

Off
Balance Sheet Arrangements

We
do not have any off-balance sheet arrangements.

Future
Impact of COVID-19

The
negative impact of the COVID-19 pandemic on companies continues and we are currently unable to assess with certainty the broad effects
of COVID-19 on our future business. As of December 31, 2021, we had no material assets that would be subject to impairment or change
in valuation due to COVID-19.

Critical
Accounting Policies

Our
significant accounting policies are disclosed in Note 2 to our consolidated financial statements for the year ended December 31, 2021.
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.

50

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, 2021 and 2020, 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:

[[GREPCENT_TABLE]]
[["","\u25cf","Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;"],["","\u25cf","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"],["","\u25cf","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."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","\u25cf","identification of the contract, or contracts, with a customer;"],["","\u25cf","identification of the performance obligations in the contract;"],["","\u25cf","determination of the transaction price;"],["","\u25cf","allocation of the transaction price to the performance obligations in the contract; and"],["","\u25cf","recognition of revenue when, or as, we satisfy a performance obligation."]]
[[/GREPCENT_TABLE]]

51

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.

See
the notes to the consolidated financial statements for the year ended December 31, 2021 included elsewhere in this Form 10-K for additional
discussion regarding recent accounting pronouncements.