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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2024

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to

 

Commission File Number: 001-41276

 

SKYX PLATFORMS CORP.

(Exact name of registrant as specified in its charter)

 

Florida   46-3645414

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

2855 W. McNab Road

Pompano Beach, Florida 33069

(Address, including zip code, of principal executive offices)

 

(855)759-7584

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading symbol(s)   Name of each exchange on which registered
Common Stock, no par value per share   SKYX   The Nasdaq Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

As of November 1, 2024, the registrant had 102,501,694 shares of common stock, no par value per share, issued and outstanding.

 

 

 

 

 

 

SKYX PLATFORMS CORP.

 

Form 10-Q

 

TABLE OF CONTENTS

 

  PART I. FINANCIAL INFORMATION  
     
  Cautionary Note Regarding Forward Looking Statements  
     
Item 1 Financial Statements 4
  Consolidated Balance Sheets 4
  Consolidated Statements of Operations and Comprehensive Loss 5
  Consolidated Statements of Changes in Stockholders’ Equity 6
  Consolidated Statements of Cash Flows 7
  Notes to Consolidated Financial Statements 8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3 Quantitative and Qualitative Disclosures About Market Risk 28
Item 4 Controls and Procedures 28
  PART II. OTHER INFORMATION  
Item 1 Legal Proceedings 29
Item 1A Risk Factors 29
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3 Defaults Upon Senior Securities 30
Item 4 Mine Safety Disclosures 30
Item 5 Other Information 30
Item 6 Exhibits 31
     
Signatures   32

 

2
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) of SKYX Platforms Corp. (the “Company,” “we,” “us,” or “our”) contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our strategy, future financial condition, future operations, projected costs, prospects, plans, objectives of management, outlook, and expected market growth, are forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “aim,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” “target,” “seek” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve risks, uncertainties, and other factors, which have outcomes that are difficult to predict and may be outside our control, which may cause actual results, levels of activity, performance, or achievements to be materially different from the information expressed or implied by these forward-looking statements. Forward-looking statements in this Form 10-Q include, but are not limited to, statements about:

 

  our ability to successfully launch, develop additional features and achieve market acceptance of our smart products and technologies, access and integrate our products and technologies with third-party platforms or technologies, respond to rapidly changing technology and customer demands, and compete in our industry;
  our ability to successfully integrate and manage and grow the operations of Belami, Inc. (“Belami”) with our business;
  our ability to expand, operate and successfully manage our operations, including managing our business transformation in connection with evolving our business strategy to focus on smart products and technologies and integrating new lines of business;
  our ability to raise additional financing to support and continue our operations as needed;
  our ability to comply with the terms of, and timely repay, our current debt financing;
  our reliance on a limited number of third-party manufacturers and suppliers and our ability to successfully reduce our production costs;
  our potential dependence upon a limited number of customers and/or on contracts awarded through competitive bidding processes;
  any downturn in the cyclical industries in which our customers operate;
  our ability to acquire other businesses, license rights, form alliances or dispose of operations when desired;
  our ability to comply with regulations relating to applicable quality standards;
  our ability to maintain, protect and enhance our intellectual property and retain rights to use intellectual property owned by third parties;
  the potential outcome of any legal proceedings;
  compliance with various tax laws and regulations, including income and sale tax;
  our ability to successfully sell and distribute our products and technologies;
  our ability to attract and retain key executives and qualified personnel;
  guidance provided by management, which may differ from our actual operating results;
  our ability to successfully manage our planned development and expansion, including the additional costs of being a public company;
  our estimated total addressable market;
  our ability to maintain effective internal control over financial reporting and disclosure controls and procedures;
  the potential impact of unstable market and economic conditions on our business, financial condition and stock price, including the effects of governmental regulations, geopolitical conflicts, including the Israel-Gaza-Lebanon war and, potentially deteriorating relationships with China, inflation, labor shortages, supply chain constraints and shortages, including availability of affordable electronic microchips, instability in the global banking system and the possibility of an economic recession;
  the potential impact of cybersecurity breaches or disruptions to our information systems, including our cloud-based infrastructure;
  risks related to our use of artificial intelligence capabilities in our product offerings, including operational and reputational risks;
  the potential impact of widespread outages, interruptions, or other failures of operational, communication, and other systems;
  the potential impact of natural disasters and other catastrophic events;
  risks related to ownership of our common stock; and
  the potential impact of anti-takeover and director and officer liability provisions in our charter documents and under Florida law.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions, and beliefs about future events and are subject to risks, uncertainties, and other factors, including unpredictable or unanticipated factors that we have not discussed in this Form 10-Q. Investors should refer to the heading “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and in this Form 10-Q for a discussion of other important factors, many of which are outside of our control, that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. Considering the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. The forward-looking statements in this Form 10-Q represent our views as of the date of this Form 10-Q. We anticipate that subsequent events and developments will cause our views to change; however, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by U.S. federal securities laws. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Form 10-Q.

 

3
 

 

Part I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SKYX PLATFORMS CORP.

Consolidated Balance Sheets

 

  

(Unaudited)

September 30, 2024

  

(Audited)

December 31, 2023

 
Assets          
Current assets:          
Cash and cash equivalents  $10,172,387   $16,810,983 
Restricted cash       2,750,000 
Accounts receivable   2,925,687    3,384,976 
Inventory, net   4,538,112    3,425,734 
Deferred cost of revenues   308,908    224,445 
Prepaid expenses and other assets   1,040,595    721,717 
Total current assets   18,985,689    27,317,855 
           
Other assets:          
Property and equipment, net   839,998    436,587 
Restricted cash   2,876,382    2,869,270 
Right of use assets   20,297,189    21,214,652 
Intangibles, definite life   5,609,141    8,141,032 
Goodwill   16,157,000    16,157,000 
Other assets   204,807    204,807 
Total other assets   45,984,517    49,023,348 
           
Total Assets  $64,970,206   $76,341,203 
           
Liabilities and Stockholders’ Equity          
           
Current liabilities:          
Accounts payable and accrued expenses  $16,838,539   $12,388,475 
Accounts payable and accrued expenses-related party   500,000     
Notes payable, current   3,622,945    5,724,129 
Operating lease liabilities, current   2,447,069    1,898,428 
Royalty obligation   1,000,000    800,000 
Consideration payable       730,999 
Deferred revenues   2,108,351    1,475,519 
Convertible notes, current-related parties   950,000    950,000 
Convertible notes, current   3,292,408    225,000 
           
Total current liabilities   30,759,312    24,192,550 
           
Long term liabilities:          
Long term accounts payable and accrued expenses   300,520    744,953 
Notes payable   636,291    1,016,924 
Consideration payable       3,038,430 
Operating lease liabilities   20,745,239    22,267,558 
Convertible notes   7,594,274    5,758,778 
Convertible notes related parties        
           
Royalty obligations   1,100,000    3,100,000 
           
Total long-term liabilities   30,376,324    35,926,643 
           
Total liabilities   61,135,636    60,119,193 
Stockholders’ Equity:          
Common stock and additional paid-in-capital: $0 par value, 500,000,000 shares authorized; and 102,385,859 and 93,473,433 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively   175,398,040    162,025,024 
Accumulated deficit   (171,563,470)   (145,803,014)
Accumulated other comprehensive loss        
Total stockholders’ equity   3,834,570    16,222,010 
           
Total Liabilities and Stockholders’ Equity  $64,970,206   $76,341,203 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

4
 

 

SKYX Platforms Corp.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 

   2024   2023   2024   2023 
   For the three-months ended September 30,   For the nine-months ended September 30, 
   2024   2023   2024   2023 
Revenue   22,168,919    21,617,579   $62,592,888   $36,611,659 
Cost of revenues   15,327,319    14,917,493    43,596,611    25,207,604 
Gross profit loss   6,841,600    6,700,086    18,996,277    11,404,055 
                     
Selling and marketing expenses   6,275,742    5,702,647    19,074,266    12,546,736 
General and administrative expenses   8,171,293    7,519,042    22,651,096    24,869,910 
Total expenses, net   14,447,035    13,221,689    41,725,362    37,416,646 
                     
Loss from operations   (7,605,435)   (6,521,603)   (22,729,085)   (26,012,591)
Other income / (expense)                    
Interest expense, net   (1,015,871)   (662,173)   (3,031,371)   (2,601,526)
Gain on extinguishment of debt               1,201,857 
                     
Total other expense, net   (1,015,871)   (662,173)   (3,031,371)   (1,399,669)
                     
Net loss   (8,621,306)   (7,183,776)   (25,760,456)   (27,412,260)
Other comprehensive loss:                    
Other comprehensive income (loss):               62,147 
Net comprehensive loss attributed to common stockholders  $(8,621,306)  $(7,183,776)  $(25,760,456)  $(27,350,113)
                     
Net loss per share - basic and diluted  $(0.08)  $(0.08)  $(0.25)  $(0.31)
                     
Weighted average number of common shares outstanding – basic and diluted   103,507,590    91,081,313    101,481,416    87,055,643 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

5
 

 

SKYX Platforms Corp.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

   2024   2023   2024   2023 
   For the three months ended September 30,   For the nine months ended September 30, 
   2024   2023   2024   2023 
                 
Shares of common stock                    
Balance, beginning of period   101,249,700    90,660,148    93,473,433    82,907,541 
Common stock issued pursuant to offerings       592,150    3,535,067    3,576,458 
Common stock issued pursuant to acquisition           1,853,421    1,923,285 
Common stock issued pursuant to extinguishment of debt               574,713 
Common stock issued pursuant to exercise of options   128,023        128,023     
Common stock issued pursuant to conversion of preferred stock               580,400 
Common stock issued pursuant to services   1,008,136    593,767    3,395,915    2,283,668 
                     
Balance, September 30   102,385,859    91,846,065    102,385,859    91,846,065 
                     
Common stock and paid-in capital                    
Balance, beginning of period  $172,426,254   $147,282,469   $162,025,024   $114,039,638 
Common stock issued pursuant to offerings       785,256    4,330,295    8,231,529 
Common stock issued pursuant to services   2,964,286    2,470,601    9,035,221    13,109,135 
Common stock issued pursuant to conversion of preferred stock               220,099 
Common stock issued pursuant to acquisition               7,327,716 
Common stock issued pursuant to exercise of options   7,500        7,500     
Common stock issued pursuant to extinguishment of debt               2,040,231 
Debt discount               5,569,978 
Balance, September 30  $175,398,040   $150,538,326   $175,398,040   $150,538,326 
                     
Accumulated Deficit                    
Balance, beginning of period  $(162,942,164)  $(126,298,842)  $(145,803,014)  $(106,070,358)
Net loss   (8,621,306)   (7,183,776)   (25,760,456)   (27,412,260)
Balance, end of period  $(171,563,470)  $(133,482,618)  $(171,563,470)  $(133,482,618)
                     
Accumulated other comprehensive loss                    
Balance, beginning of period  $   $   $   $(62,147)
Other comprehensive income               62,147 
Balance, end of period                
                     
Total stockholders’ equity  $3,834,570   $17,055,708   $3,834,570   $17,055,708 

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

6
 

 

SKYX Platforms Corp.

Consolidated Statements of Cash Flows

(Unaudited)

 

   2024   2023 
   For the nine months ended September 30, 
   2024   2023 
Cash flows from operating activities:          
Net loss  $(25,760,456)  $(27,412,260)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   3,125,903    2,098,935 
Amortization of debt discount   933,476    867,572 
Impairment of intangible assets   1,118,750     
Gain on forgiveness of debt       (1,201,857)
Non-cash equity-based compensation expense   9,035,220    13,109,135 
Change in operating assets and liabilities:          
Inventory   (1,112,378)   (1,675,394)
Accounts receivable   459,289    (512,826)
Prepaid expenses and other assets   (318,878)   79,224 
Deferred charges   (84,463)   1,200,916 
Deferred revenues   632,832    (74,111)
Operating lease liabilities   (1,636,374)   (215,743)
Accretion operating lease liabilities       890,474 
Other assets        
Royalty obligation   (400,000)    
Consideration payable   (750,000)    
Accounts payable and accrued expenses   1,805,631    2,753,572 
           
Net cash used in operating activities   (12,951,448)   (10,092,363)
           
Cash flows from investing activities:          
Purchase of debt securities       (136,033)
Proceeds from disposition of debt securities       7,572,136 
Acquisition, net of cash acquired       (4,206,200)
Purchase of property and equipment   (536,014)   (119,942)
Net cash (used in) provided by investing activities   (536,014)   3,109,961 
           
Cash flows from financing activities:          
Proceeds from issuance of common stock- offerings   4,426,221    8,723,461 
Placement costs   (88,426)   (491,932)
Proceeds from line of credit   120,687    6,197,695 
Proceeds from anticipated issuance of preferred stock   1,800,000     
Proceeds from anticipated issuance of preferred stock-related parties   500,000     
Proceeds from issuance of convertible notes       10,350,000 
Principal repayments of notes payable   (2,652,504)   (5,147,300)
Net cash provided by financing activities   4,105,978    19,631,924 
           
(Decrease) increase in cash, cash equivalents and restricted cash   (9,381,484)   12,649,522 
Cash, cash equivalents, and restricted cash at beginning of period   22,430,253    9,461,597 
Cash, cash equivalents and restricted cash at end of period  $13,048,769   $22,111,119 
Cash paid during the period for:          
Interest  $1,161,304   $666,539 

Supplementary disclosure of non-cash financing activities:

          
           
Substitution of consideration payable to convertible notes  $3,117,408   $ 
Substitution of royalty payable to convertible notes   1,000,000     
Business acquisition:          
Assets acquiring excluding identifiable intangible assets and goodwill and cash       7,090,094 
Liabilities assumed and consideration payable       19,755,903 
Identifiable intangible assets and goodwill       19,993,525 
Debt discount       5,569,978 
Common stock issued pursuant to antidilutive provisions        
Fair value of shares issued pursuant to acquisition      $7,327,716 
Common stock pursuant to extinguishment of debt       2,040,231 
Right-of-use assets and operating lease liabilities   662,698     

 

The accompanying notes are an integral part of the unaudited consolidated financial statements.

 

7
 

 

SKYX Platforms Corp.

Notes to Consolidated Financial Statements

(Unaudited)

 

NOTE 1 ORGANIZATION AND NATURE OF OPERATIONS

 

SKYX Platforms Corp., a corporation (the “Company”), was incorporated in Florida in May 2004.

 

The Company maintains offices in Sacramento, California, Johns Creek, Georgia, Miami and Pompano Beach, Florida, New York City, and Guangdong Province, China.

 

The Company has a series of advanced-safe-smart platform technologies. The Company’s 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, the Company has expanded the capabilities of its power-plug product, to include its second generation 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, Bluetooth Low Energy and voice control. It allows scheduling, energy savings eco mode, dimming, back-up emergency light, night light, light color changing and much more. The Company’s 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.

 

Since April 2023, the Company also markets home lighting, ceiling fans and other home furnishings from third parties.

 

Going Concern

 

The Company’s liquidity sources include $ 13 million in cash and cash equivalents, including restricted cash of $2.9 million held for long-term purposes, and $ 11.7 million of working capital deficit as of September 30, 2024. The Company has a history of recurring operating losses, and its net cash used in operating activities amounted to $13.0 million and $10.1 million during the nine months ended September 30, 2024, and 2023, respectively. The Company has also generated net cash provided by financing activities of $4.1 million and $19.6 million during the nine months ended September 30, 2024 and 2023, 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 supporting its continued growth, 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, generate cash provided by financing activities through its at the market (“ATM”) offering or other equity or debt financing means.

 

NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated financial statements as of September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023 are unaudited. The results of operations for the interim periods are not necessarily indicative of the results of operations for the respective fiscal years. The consolidated statement of financial condition at December 31, 2023 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statement presentation. The accompanying consolidated financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for additional disclosures and accounting policies.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the 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 nonconforming events. Accordingly, actual results will differ from estimates.

 

8
 

 

Basis of Consolidation

 

The consolidated financial statements include the results of the Company and one of its subsidiaries, SQL Lighting and Fans LLC from January 1, 2023 and the results from its remaining subsidiaries, Belami, Inc., BEC, CA 1, Inc., BEC CA 2, LLC, Luna BEC, Inc., and Confero Group LLC from April 28, 2023. All intercompany balances and transactions have been eliminated in consolidation.

 

Cash, Cash Equivalents, and Restricted Cash

 

The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. On September 30, 2024, and December 31, 2023, the Company’s cash composition was follows:

  

   September 30, 2024   December 31, 2023 
         
Cash and cash equivalents  $10,172,387   $16,810,983 
Restricted cash   2,876,382    5,619,270 
Total cash, cash equivalents and restricted cash  $13,048,769   $22,430,253 

 

Restricted Cash

 

The Company issued a letter of credit of $2.8 million in September 2023 to use as collateral for certain obligations to one of its lessors. The letter of credit was issued by a financial institution and was secured by cash of $2.8 million as of September 30, 2024 and December 2023. Additionally, pursuant to the Company’s acquisition of Belami, Inc., the Company placed $750,000 in an escrow account as of December 31, 2023 which was released to Belami, Inc. sellers in April 2024. Furthermore, the Company secured a line of credit of $2.0 million with cash of the equivalent amount as of December 31, 2023. The Company satisfied its obligations under the line of credit in August 2024.

 

Customer Contracts Balances

 

Accounts receivables are recorded in the period when the right to receive payment or other consideration becomes unconditional. Accounts receivables are recorded at the invoiced amount and are not interest bearing. The Company maintains an allowance for doubtful accounts based upon an estimate of probable credit losses in existing accounts receivable. The majority of the Company’s accounts receivable are from third-party payers and are paid within a few days from the order date. The Company determines the allowance based upon individual accounts when information indicates the customers may have an inability to meet their financial obligations, historical experience, and currently available evidence. As of September 30, 2024, and December 31, 2023, the Company’s allowance for doubtful accounts was $8,584 and $54,987, respectively.

 

The Company determines an allowance for sales returns based upon historical experience. As of September 30, 2024, and December 31, 2023, the Company’s allowance for sales returns was $26,393 and $182,584, respectively, and is recorded as accrued expenses in the accompanying consolidated financial statements.

 

The Company defers the revenue related to undelivered customer orders for which it was paid or has a right to be paid at each measurement date. Such amounts are recognized as deferred revenues in the accompanying balance sheet. Deferred revenues amounted to $2,108,351 and $1,475,519 as of September 30, 2024 and December 31, 2023, respectively.

 

The costs associated with such deferred revenues are recognized as deferred charges in the accompanying balance sheet. Such charges include the carrying value of related inventory, freight, and sales charges. The deferred charges amounted to $308,908 and $224,445 as of September 30, 2024 and December 31, 2023, respectively.

 

Inventory

 

Inventories are stated at the lower of cost, determined on the first-in, first-out (FIFO) method. Cost principally consists of the purchase price (adjusted for lower of cost or market), customs, duties, and freight. The Company periodically reviews historical sales activity to determine potentially obsolete items and evaluates the impact of any anticipated changes in future demand.

  

   September 30, 2024   December 31, 2023 
Inventory, component parts  $2,975,163   $2,230,252 
Inventory, finished goods   2,862,949    2,495,482 
Allowance   (1,300,000)   (1,300,000)
Inventory-total  $4,538,112   $3,425,734 

 

The Company will maintain an allowance based on specific inventory items that have shown no activity over a reasonable period. The Company tracks inventory as it is repurposed, disposed, scrapped, or sold at below cost to determine whether additional items on hand should be reduced in value through an allowance method. The Company has recorded an allowance of $1.3 million as of September 30, 2024, and December 31, 2023.

 

9
 

 

GE Agreements

 

The Company has the following agreements with General Electric (“GE”) related to the Company’s products.

 

  A U.S. and Global Licensing and Master Service Agreement dated December 4, 2023, which replaced a prior agreement with similar terms. The agreement expires on December 4, 2028 and includes automatic renewal provisions. Pursuant to such agreement, GE’s licensing team has the rights to exclusively license certain of the Company’s Standard and Smart plug-and-play products set forth in a statement of work in the U.S. and worldwide. Pursuant to the agreement, the Company expects that GE’s licensing team will seek and arrange licensee partners for our products in the U.S. and globally, including negotiating agreement terms, managing contracts, collecting payments, auditing partners, assisting with patent strategy and protection, and assisting in auditing product quality control under the “Nine Sigma” guidelines. For products licensed to third parties, the Company and GE will each receive a specified percentage of the revenue earned from such licensing, unless otherwise provided in the applicable statement of work.
   
  The second agreement consists of a letter agreement dated November 28, 2023, as amended on April 11, 2024. The agreement expires on December 15, 2027 and includes a Repayment Plan Under U.S. and Global Trademark Agreement dated June 15, 2011 (as later amended), which expired November 30, 2023, between SQL Lighting & Fans, LLC and GE Trademark Licensing, Inc. Under this new payment arrangement, the Company pays royalty payment obligation of $2.7 million in the aggregate (the “Royalty Payment”) payable in quarterly installments beginning on December 15, 2023 and ending on December 15, 2026 and issued a convertible promissory note amounting to $1.0 million,

 

Loss Per Share

 

Basic net earnings (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common stock outstanding during each period. Diluted earnings (loss) per share are computed by dividing net income (loss) for the period by the weighted average number of common stocks, common stock equivalents and potentially dilutive securities outstanding during each period.

 

The Company uses the “treasury stock” method to determine whether there is a dilutive effect of outstanding convertible debt, option, and warrant contracts. For the three- and nine-month ended September 30, 2024, and 2023, the Company recognized net loss and a dilutive net loss, and the effect of considering any common stock equivalents would have been antidilutive for the period. Therefore, a separate computation of diluted earnings (loss) per share is not presented for the periods presented.

 

The Company had the following anti-dilutive common stock equivalents on September 30, 2024, and September 30, 2023:

  

   September 30, 2024   September 30, 2023 
Stock warrants   1,817,523    2,063,522 
Stock options   35,832,641    35,084,598 
Unvested restricted stock   4,853,919    4,045,675 
Convertible notes   6,475,709    3,920,005 
Preferred stock        
Total   48,979,792    45,113,800 

 

Recently Issued Accounting Pronouncements

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its consolidated financial statements.

 

10
 

 

NOTE 3 PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

   September 30, 2024   December 31, 2023 
Equipment and furniture  $1,156,664   $968,213 
Leasehold improvements   456,659    139,649 
Total   1,643,876    1,107,862 
Less: accumulated depreciation   (803,878)   (671,275)
Total, net  $839,998   $436,587 

 

Depreciation expense amounted to $132,603 and $67,897 during the nine months ended September 30, 2024 and 2023, respectively.

 

NOTE 4 INTANGIBLE ASSETS AND GOODWILL

 

Intangible assets consisted of the following:

       September 30, 2024   December 31, 2023 
   Useful life   Carrying Value   Accumulated Amortization   Net carrying value   Carrying Value   Accumulated Amortization   Net carrying value 
                             
Customer relationships   7   $4,500,000   $(910,708)  $3,589,292   $4,500,000   $(428,571)  $4,071,429 
E-commerce technology platforms   1- 4    1,400,000        1,400,000    3,900,000    (650,000)   3,250,000 
Patents and other   15    931,831    (311,982)   619,849    1,040,927    (221,324)   819,603 
        $6,831,831   $(1,222,690)  $5,609,141   $9,440,927   $(1,299,895)  $8,141,032 

 

Amortization expense on intangible assets amounted to $1,213,389 and $642,943 during the nine-month ended September 30, 2024, and 2023, respectively.

 

During the quarter ended September 30, 2024, the Company evaluated the effectiveness of the E-commerce technology platforms it acquired in 2023. Management determined that revenues could increase without increasing its operating expenses (and potentially decrease its general and administrative expenses) using a different E-commerce technology platform. Management believes it will discontinue using its legacy platforms and deploy a new E-commerce technology platform by October 1, 2025. Accordingly, the estimated useful life of its legacy platforms decreased from 4 to 1 year. The reduced estimated useful life of the intangible asset indicated a possible impairment of the carrying value of such intangible. Management prepared, with a third-party firm, an analysis of the future cash flows related to the legacy platform and determined that, as of September 30, 2024, such future cash flows were lower than the carrying value of the related intangible asset. Accordingly, management believes that its legacy platforms’ carrying value was impaired. Based on the future estimated discounted cash flows, Management believes that the carrying value of the legacy platforms should be $1.4 million. Accordingly, management recorded an impairment expense of $1.1 million and adjusted the carrying value of its legacy platform to $1.4 million as of and during the quarter ended September 30, 2024.

 

The following table sets forth the estimated amortization expense for the next five years:

Twelve months ended September 30:    
2025  $2,089,449 
2026   689,449 
2027   689,449 
2028   689,449 
2029   689,449 

 

11
 

 

NOTE 5 DEBTS

 

The following table presents the details of the principal outstanding:

 

   September 30, 2024   December 31, 2023   APR at September 30, 2024   Maturity   Collateral
Convertible Notes (b,c)   15,592,408    11,525,000    6.0010.00%   September 2023-March 2028   Substantially all company assets
Notes payable to financial institutions and others(a)   4,259,234    6,493,126    7.93-8.5%   August 2025- November 2052   Substantially all Company assets
                        
Notes payable to Belami sellers       247,927    4.86%   April 2024  
                        
Total  $19,851,644   $18,266,053              
Unamortized debt discount   (3,755,726)   (4,591,222)             
Debt, net of Unamortized debt Discount  $16,095,918   $13,674,831              

 

 

   For the nine-month period ended 
   September 30, 2024   September 30, 2023 
Interest expense  $2,061,236   $1,939,353 

 

As of September 30, 2024, the expected future principal payments for the Company’s debt are due as follows:

  

      
Twelve months ended September 30, 2025  $7,934,455 
Twelve months ended September 30, 2026   428,688 
Twelve months ended September 30, 2027   1,002,040 
Twelve months ended September 30, 2028   10,353,039 
Twelve months ended September 30, 2029 and thereafter   133,422 
 Total  $19,851,644 

 

  (a) The unpaid principal bears annual interest at the Wall Street Journal prime rate plus 1.75% per year.
     
  (b) Included in Convertible Notes are loans provided to the Company from two directors and an officer. The notes each have the following terms: three-year subordinated convertible promissory note of principal face amounts. Subject to other customary terms, one of the convertible promissory note of $600,000 payable to a director matured in 2023, and the other remaining convertible promissory notes mature in May 2025, bear interest at an annual rate of 6% through December 2023 and 10% thereafter, which is payable annually in cash or common stock, at the holder’s discretion. At any time after issuance and prior to or on the maturity date, the notes are convertible at the option of the holder into shares of common stock at a conversion price ranging from $3 to $15 per share.
     
    During 2023, the Company issued convertible promissory notes for $10.4 million. As an inducement to enter the financing transactions, the Company issued 1,391,667 warrants to the noteholders at an adjusted exercise price of $2.70 per warrant. The Company recorded a debt discount aggregating $5.6 million which was recognized as debt discount and additional paid-in capital in the accompanying balance sheet. The Company recognized $ 835,496 as amortized debt discount during the nine-month ended September 30, 2024, and it is reflected as interest expense in the accompanying unaudited consolidated statement of operations. Only the convertible promissory notes issued during fiscal 2023 are secured by substantially all of the assets of the Company.

 

12
 

 

  (c) On March 29, 2024, the Company and the Belami sellers entered into a letter agreement modifying certain obligations under the Belami stock purchase agreement. In connection with the letter agreement, the Company issued convertible promissory notes to each of the sellers (the “Seller Note(s)”) in substitution of an aggregate of $3,117,408 in cash due to the sellers on the first anniversary of the closing. Each seller received a Seller Note in an amount of $1,039,303 on the same date. In addition to other customary terms, the Seller Notes bear annual interest at 10%, with interest and principal coming due on May 16, 2025, and can be converted by the Sellers at any time at $3.00 per share of our common stock.
     
    Additionally, the convertible promissory notes include a $1.0 million note payable to GE issued in April 2024. The convertible note is due in April 2027, does not bear interest and is convertible at a price of $1.07 per share.

 

NOTE 6 OPERATING LEASE LIABILITIES

 

In April 2022, the Company entered into a 58-month lease related to certain office and showroom space pursuant to a sublease that expires in February 2027. The Company recognized a right-of-use asset and a liability of $1,428,764 pursuant to this lease.

 

In September 2022, the Company entered a 124-month lease related to its future headquarters offices and showrooms space. The Company recognized a right-of-use asset and a liability of $22,192,503 pursuant to such lease. In connection with the execution of lease, the Company was required to provide the landlord with a letter of credit in the amount of $2.7 million, which is secured by the same amount of cash. In January 2024, the Company entered in a 35-month lease related to its Sacramento office. The Company recognized a right-of-use asset and a liability of $ 662,696 pursuant to such lease.

 

The following table outlines the total lease cost for the Company’s operating leases as well as weighed average information for these leases as of September 30, 2024:

SCHEDULE OF LEASE COST OPERATING LEASE

   Nine Month Ended September 30, 
   2024   2023 
Cash paid for operating lease liabilities  $1,636,374   $710,135 
Right-of-use assets obtained in exchange for new operating lease obligations  $662,696   $- 
Fixed rent payments   2,703,789    746,652 
Lease – Depreciation expense  $1,580,160   $1,404,634 
Weighted-average discount rate   6.48%   6.41%
Weighted-average remaining lease term (in months)   96    105 

 

SCHEDULE OF MINIMUM LEASE OBLIGATION

     
Minimum Lease obligation    
Twelve months ended September 30, 2025  $2,447,069 
Twelve months ended September 30, 2026   2,537,065 
Twelve months ended September 30, 2027   2,421,977 
Twelve months ended September 30, 2028   2,436,559 
Twelve months ended September 30, 2029 and thereafter   13,349,637 
Total  $23,192,307 

 

 SCHEDULE OF INTEREST EXPENSE  LEASE LIABILITIES 

   For the nine-month period ended 
   September 30, 2024   September 30, 2023 
Interest expense  $1,122,282   $1,172,962 

 

13
 

 

NOTE 7 ROYALTY OBLIGATIONS

 

The Company had a license agreement with General Electric (“GE”) which provided, among other things, for rights to market certain of the Company’s products displaying the GE brand in consideration of royalty payments to GE. The agreement expired in 2023.

 

The Company owes $2.1 million to GE pursuant to the license agreement as of September 30, 2024. The payments associated with this debt are payable in quarterly tranches aggregating $0.8 million during 2024 and 2025 and $0.9 million in 2026. The Company owed an additional amount of $1.4 million pursuant to its agreements with GE which is payable in 2027 as of March 31, 2024. During April 2024, GE and the Company agreed to reduce such additional amount by $400,000 in exchange for the issuance of a convertible promissory note of $1.0 million.

 

NOTE 8 ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following:

  

   September 30, 2024   December 31, 2023 
Accrued interest, convertible notes  $1,141,670   $744,953 
Funds received in anticipation of closing of Preferred shares   2,300,000    - 
Trade payables   13,401,713    11,513,918 
Accrued compensation   795,676    874,557 
 Total  $17,639,059   $13,133,428 

 

NOTE 9 RELATED PARTY TRANSACTIONS

 

Convertible Notes

 

Convertible notes due to related parties represent amounts provided to the Company from a director and the Company’s Co-Chief Executive Officers. The outstanding principal on the convertible promissory notes, associated with related parties was $950,000 as of September 30, 2024 and December 31, 2023 and accrued interest of $ 293,260 and $151,081as of September 30, 2024, and December 31, 2023, respectively.

 

Series A Preferred Stock

 

The Company received $500,000, in aggregate, from a director and one of the Company’s Co-Chief Executive Officers as well as from its President in anticipation of the closing of its Preferred Series A-1 shares in October 2024. These proceeds were reflected as accounts payable and accrued expenses in the accompanying balance sheet as of September 30, 2024.

 

NOTE 10 STOCKHOLDERS’ EQUITY

 

(A) Common Stock

 

The Company issued the following common stock during the nine months ended September 30, 2024, and 2023:

  

Transaction Type  Shares Issued   Valuation $   Range of Value
Per Share
 
2024 Equity Transactions               
Common stock issued, pursuant to services provided   3,395,915    9,035,221   $0.82 -1.78 
Common stock issued pursuant to stock at the market offering, net   3,535,067    4,330,295    0.952- 1.64 
 Common stock issued pursuant to exercise of options, net   128,023    7,500    .10 
Common stock issued pursuant to acquisition (1)   1,853,421         

 

Transaction Type  Shares Issued   Valuation $   Range of Value
Per Share
 
2023 Equity Transactions               
Common stock issued, pursuant to services provided   2,238,668    13,109,135   $1.22-3.82 
Common stock issued pursuant to stock at the market offering, net   3,576,458    8,231,529    2.55-3.25 
Common stock issued pursuant to conversion of preferred stock   580,400    220,099    0.25 
Common stock issued pursuant to acquisition   1,923,285    7,327,716    3.81 
Common stock issued pursuant to extinguishment of debt   574,713    2,040,231    3.55 

 

As of September 30, 2024, the remaining amount to be used under the ATM offering program is $5.9 million.

 

  (1) Common stock issued pursuant to the acquisition consists of shares issued in April 2024 pursuant to the acquisition of Belami. The value of the shares issued in April 2024 was reflected in the common stock and additional paid-in capital at the date of acquisition in 2023.

 

14
 

 

(B) Preferred Stock

 

The following is a summary of the Company’s Preferred Stock activity during the nine months ended September 30, 2023:

 

Transaction Type  Quantity   Carrying Value   Value per Share 
Preferred Stock Balance at January 1, 2023   880,400   $220,099   $0.25 
2023 Preferred Stock redemptions   880,400    220,099    0.25 
Preferred Stock Balance at September 30, 2023      $   $ 

 

The Series A Preferred Stock was convertible at the holder’s option. The Company could repurchase shares of the Preferred Stock for $1.20-2.00 per share. Holders also had a put option, allowing them to sell their shares of Preferred Stock back to the Company at $0.25 per share, and therefore the stock was classified as Mezzanine equity rather than permanent equity. This Series A Preferred Stock was retired during 2023.

 

During October 2024, the Company completed its authorization of the issuance of 440,000 shares of newly authorized Series A Preferred Stock and Series A-1 Preferred Stock. The designations of each class of preferred stock are as follows:

 

Series A Preferred Stock:

 

Cumulative dividend of 8% annually, 12% if paid after dividend date;
Original issue price of $25 per share;
Conversion option at the holder’s option at $2 per share, with subsequent equity offering reset provision, if issued below $2 per share, of no less than $1.20 per share;
Redemption at the price of $25 per share at the Company’s option after 5 years or upon change of control (substantially outside the control of the holder);
Voting rights on as converted basis.

 

Series A-1 Preferred Stock:

 

Cumulative dividend of 8% annually, 12% if paid after dividend date;
Original issue price of $25 per share;
Conversion option at the holder’s option at $2 per share, with subsequent equity offering reset provision, if issued below $2 per share, of no less than $1.20 per share;
Redemption at the price of $25 per share at the Company’s option after three years or upon change of control (substantially outside the control of the holder);
Voting rights on as converted basis.

 

(C) Stock Options

 

The following is a summary of the Company’s stock option activity during the nine-month ended September 30, 2024, and 2023:

  

Options  Shares  

Weighted

Average

Exercise Price

  

Weighted

Average

Remaining

Contractual

Life

(In Years)

  

Aggregate

Intrinsic

Value

 
Outstanding, January 1, 2024   35,805,976   $7.33    ––   $740,820 
Exercised   210,000    0.1    ––    –– 
Granted   2,598,500    1.2    ––    –– 
Forfeited   (2,436,835)   4.8         
Awards expired   -  $-    -    - 
Outstanding, September 30, 2024   35,832,641   $7.08    2.33   $639,840 
                     
Exercisable, September 30, 2024   12,996,349   $4.31    2.05   $639,840 

 

15
 

 

Options  Shares  

Weighted

Average

Exercise Price

  

Weighted

Average

Remaining

Contractual

Life

(In Years)

  

Aggregate

Intrinsic

Value

 
Outstanding, January 1, 2023   33,289,250   $7.7    -   $2,370,800 
Awards Granted in Period   2,221,350    2.85    -    - 
Awards expired   (426,002)  $4.0    -    - 
                     
Outstanding, September 30, 2023   35,084,598   $7.5    2.9   $2,370,800 
                     
Exercisable, September 30, 2023   13,247,370   $4.4    2.31   $2,370,800 

 

The following table summarizes the range of the Black Scholes pricing model assumptions used by the Company during the nine months ended September 30, 2024, and 2023:

  

   September 30, 2024   September 30, 2023 
   Range   Range 
Stock price  $0.90 - 1.63   $3.74-3.84 
Exercise price  $0 - 14   $3.74-3.84 
Expected life (in years)   2.50- 4.00 yrs.    3.5-5 yrs. 
Volatility   36.796.5%   48-54%
Risk-fee interest rate   3.50 - 4.62%   3.51-5.02%
Dividend yield        

 

The Company does not have historical stock prices that can be reliably determined for a period that is at least equal to the expected terms of its options. The expected options terms are 3.5 years, and its historical period is 2.7 years. The Company relies on the expected volatility of comparable peer-group publicly traded companies within its industry sector, to supplement the Company’s historical data for the period of the expected terms of the options that exceeds the period of the Company’s historical volatility data.

 

Unamortized future option expense was $14.4 million (excluding certain market-based options which management cannot ascertain to have a probable outcome amounting to $63 million) on September 30, 2024, and it is expected to be recognized over a weighted-average period of 1.2 years.

 

(D) Warrants Issued

 

The following is a summary of the Company’s warrant activity during the nine months ended September 30, 2024 and 2023:

  

  

Number of

Warrants

  

Weighted Average

Exercise Price

 
Balance, January 1, 2024   2,063,522   $5.76 
Issued        
Exercised        
Forfeited   (245,999)   9.94 
Balance, September 30, 2024   1,817,523   $5.20 

 

16
 

 

  

Number of

Warrants

  

Weighted Average

Exercise Price

 
Balance, January 1, 2023   671,855   $11.5 
Issued   1,391,667    3.0 
Exercised        
Forfeited        
Balance, September 30, 2023   2,063,522   $5.76 

 

During the nine months ended September 30, 2024, the Company did not issue any warrants. During the nine months ended September 30, 2023, as an inducement to enter certain financing transactions, the Company issued 1,391,667 3- year warrants to certain noteholders at an adjusted exercise price of $2.70 per warrant. The Company recorded a debt discount aggregating $5.6 million which was recognized as debt discount and additional paid-in capital in the accompanying balance sheet.

 

(E) Restricted stock units

 

A summary of the Company’s non-vested restricted stock units during the nine months ended September 30, 2024 and 2023 are as follows:

  

   Shares   Weighted Average Grant Due Fair Value 
Non-vested restricted stock units, January 1, 2024  4,919,702   $4.21 
Granted   3,789,980    0.69 
Vested   (3,681,925)   2.33 
Forfeited   (173,838)   2.88 
Non-Vested restricted stock units, September 30, 2024   4,853,919    2.93 
           
Non-vested restricted stock units, January 1, 2023   2,516,461    8.39 
Granted   4,110,924    2.21 
Vested   (2,325,308)   4.25 
Forfeited   (256,402)   10.70 
Non-vested restricted stock units on September 30, 2023   4,045,675    5.27 

 

The weighted-average remaining contractual life of the restricted units as of September 30, 2024, is 1.7 years.

 

One RSU and RSA give the right to receive one share of the Company’s common stock. RSU and RSAs that vest based on service and performance are measured based on the fair values of the underlying stock on the date of grant. The Company used a Lattice model to determine the fair value of the RSU with a market condition. Compensation with respect to RSU and RSA awards is expensed on a straight-line basis over the vesting period.

 

During the nine-month ended September 30, 2024, and 2023, the Company recognized compensation expenses of $ 9,035,220, and $13,109,135, respectively, related to RSUs and RSAs.

 

NOTE 11 CONCENTRATIONS OF RISKS

 

Major Customers and Accounts Receivable

 

The Company had no customers whose revenue individually represented 10% or more of the Company’s total revenue during the nine-month period ended September 30, 2024, and 2023. The Company had two customers with accounts receivable balances aggregating representing 23% of the Company’s total accounts receivable on September 30, 2024, and September 30, 2023 and one third party payor representing 48% and 24% of the Company’s total accounts receivable on September 30, 2024, and September 30, 2023, respectively.

 

17
 

 

Liquidity

 

The Company’s cash and cash equivalents are held primarily with two financial institutions. The Company has deposits which exceed the amount insured by the FDIC. To reduce the risk associated with the failure of such counterparties, the Company periodically evaluates the credit quality of the financial institutions in which it holds deposits.

 

Product and Geographic Markets

 

The Company generates its income primarily from lighting and heating products, and increasingly, smart-based products sold primarily in the United States.

 

NOTE 12 PROFORMA FINANCIAL STATEMENTS (unaudited)

 

The following pro forma consolidated results of operations have been prepared as if the acquisition occurred on January 1, 2023:

  

   Nine-month period ended
September 30,
 
   2023 
Revenues  $60,649,120 
Net loss  $(26,430,206)
Basic and diluted loss per share  $(0.28)
Weighted average number of shares outstanding- basic and diluted   92,768,792 

 

 

These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting the results to reflect, among other things, 1) additional amortization that would have been charged assuming the fair value adjustments to amortizable intangible assets had been applied, 2) the shares issued and issuable by the Company to acquire Belami, 3) fair value of the initial grant and options to Belami employees, and 4) the increase in interest expense related to the issuance of convertible notes payable, including amortization of debt discount. Furthermore, it excludes transaction costs related to the Belami acquisition. These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that would have resulted had the acquisition occurred on the date indicated or that may result in the future.

 

NOTE 13 SUBSEQUENT EVENTS

 

Management has evaluated subsequent events through November 12, 2024, which is the date the consolidated financial statements were available to be issued. There were no significant subsequent events that required adjustment to or disclosure in the unaudited consolidated financial statements other than the following:

 

The Company generated proceeds of $11.0 million by issuing 440,000 shares of its newly authorized Preferred Series A and A-1 Stock in October 2024.

 

18
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q and our audited financial statements and related notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K for the year ended December 31, 2023. This discussion and analysis and other parts of this Form 10-Q contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties, and assumptions, such as statements regarding our plans, objectives, strategy, expectations, outlook, intentions, and projections. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in “Part I. Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2023, in this Form 10-Q, and in other filings with the Securities and Exchange Commission (the “SEC”). Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements” contained in this Form 10-Q.

 

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, Bluetooth Low Energy 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 third-generation smart-advanced platform to be available in 2024. We expect to manufacture the additional product offerings within the next six months. We hold over 97 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 and related risk of recession increased during 2022 and have continued to impact operations during 2023 and 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 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 near 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, instability in the global banking system, employee availability and wage increases.

 

The Israel-Hamas-Lebanon 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.

 

During April 2023, we completed the previously announced acquisition of all the issued and outstanding shares of Belami, a strategic e-commerce lighting and home décor conglomerate. The Company paid cash and issued an aggregate of 3,776,706 shares of our common stock as consideration for the acquisition. The Company expects that Belami will serve as a marketing and growth platform and should provide several distribution channels for our products, including to retail customers, builders, and professionals.

 

In connection with the acquisition, the Company engaged in private placements of its securities during the first quarter of 2023, 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. The proceeds were used to fund the cash component of the Belami acquisition and to pay certain transaction expenses in connection with the acquisition and the private placements.

 

19
 

 

Recent Developments

 

In March 2024, the Company and the Belami sellers entered into a letter agreement modifying certain obligations under the stock purchase agreement for the acquisition of Belami. In connection with the letter agreement, the Company issued convertible promissory notes to each of the sellers (the “Seller Note(s)”) in substitution of an aggregate of $3,117,408 in cash due to the sellers on the first anniversary of the closing of the Belami acquisition. Each seller received a Seller Note in an amount of $1,039,303 on the same date. In addition to other customary terms, the Seller Notes bear annual interest at 10%, with interest and principal coming due on May 16, 2025, and can be converted by the sellers into shares of our common stock at any time at $3.00 per share of our common stock. The Seller Notes include customary events of default accelerating maturity, including a breach of the Company’s covenants, representations, and warranties under the Belami stock purchase agreement and a change of control of Belami. The letter agreement further provided that the Company would perform all other obligations arising on the first anniversary of the closing, including issuance of shares of common stock due to sellers, and that on such date the non-fundamental representations and warranties will expire, and the Company would release $750,000 held in escrow. In April 2024, the Company issued an aggregate of 1,853,421 shares of common stock to the sellers and released the escrow amount.

 

On April 11, 2024, the Company entered into an amendment to the letter agreement previously entered into with GE Trademark Licensing, Inc. (“GE-TL”) in December 2023, which extended the deadline for the Company to issue the convertible note to GE-TL to May 1, 2024, and also issued a three-year, $1.0 million convertible note to GE-TL, thereby reducing obligations due in 2027 by $400,000. The note does not bear interest, and the principal amount of the note is convertible into shares of the Company’s common stock at any time at the option of the holder at $1.07 per share.

 

During the second quarter of 2023, we began our at the market offering (“ATM”) pursuant to which we may sell up to $20 million of shares of our common stock.

 

During October 2024, the Company completed its authorization of the issuance of 440,000 shares each of newly authorized Series A Preferred Stock and Series A-1 Preferred Stock which generated proceeds of $11.0 million.

 

The designations of each class of preferred stock are as follows:

 

Series A Preferred Stock:

 

Cumulative dividend of 8% annually, 12% if paid after dividend date;
Original issue price of $25 per share;
Conversion option at the holder’s option at $2 per share, with subsequent equity offering reset provision of no less than $1.20 per share;
Redemption at the price of $25 per share at the Company’s option after 5 years or upon change of control (substantially outside the control of the holder)
Voting rights on as converted basis.

 

Series A-1 Preferred Stock:

 

Cumulative dividend of 8% annually, 12% if paid after dividend date;
Original issue price of $25 per share;
Conversion option at the holder’s option at $2 per share, with subsequent equity offering reset provision of no less than $1.20 per share;
Redemption at the price of $25 per share at the Company’s option after three years or upon change of control (substantially outside the control of the holder)
Voting rights on as converted basis.

 

20
 

 

Results of Operations

 

Comparison of the Three and Nine months Ended September 30, 2024, and 2023

 

   Three months ended
September 30,
   Increase/   Increase/   Nine months ended
September 30,
   Increase/   Increase/ 
   2024($)   2023($)   Decrease $   Decrease %   2024($)   2023($)   Decrease $   Decrease % 
Revenue   22,168,919    21,617,579    551,340    3    62,592,888    36,611,659    25,981,229    71 
Cost of revenues   15,327,319    14,917,493    409,826    3    43,596,611    25,207,604    18,389,007    73 
Gross profit   6,841,600    6,700,086    141,514    2    18,996,277    11,404,055    7,592,222    67 
                                         
Selling and marketing expenses   6,275,742    5,702,647    573,095    10    19,074,266    12,546,736    6,527,530    52 
General and administrative expenses   8,171,293    7,519,042    662,251    9    22,651,096    24,869,910    (2,218,814)   (9)
Total expenses   14,447,035    13,221,689    1,225,346    9    41,725,362    37,416,646    4,308,716    12 
Operating loss   (7,605,435)   (6,521,603)   1,083,832    17    (22,729,085)   (26,012,591)   (3,283,506)   (13)
Other income / (expense)             -                          
Interest expense, net   (1,015,871)   (662,173)   (353,698)   53    (3,031,371)   (2,601,526)   (429,845)   17 
Gain on extinguishment of debt   -    -              -    (1,201,857)   (1,201,857)   (100)
Total other income (expense), net   (1,015,871)   (662,173)   (353,698)   

 NM

   (3,031,371)   (1,399,669)   (1,631,702)   117 
              -                          
Net loss   (8,621,306)   (7,183,776)   (1,437,530)   20    (25,760,456)   (27,412,260)   (1,651,804)   (6)

 

NM: Not meaningful

 

Revenue

 

   

Three months ended

September 30,

    Increase/     Increase/    

Nine months ended

September 30,

    Increase/     Increase/  
    2024($)     2023($)     Decrease $     Decrease %     2024($)     2023($)     Decrease $     Decrease %  
Revenue     22,168,919       21,617,579        551,340        3       62,592,888       36,611,659        25,981,229        71  

 

The increase in revenues during the three-month period ended September 30, 2024 is primarily due increased weighted average price of lighting and heating products offset by a decrease of units sold. The increase in revenues during the nine-month period ended September 30, 2024 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. We believe that our revenues will be higher in 2025 than in 2024 primarily resulting from revenues from the sale of our advanced and smart products.

 

21
 

 

Cost of Revenues

 

   

Three months ended

September 30,

    Increase/     Increase/     Nine months ended
September 30,
    Increase/     Increase/  
    2024 ($)     2023 ($)     Decrease $     Decrease %     2024 ($)     2023 ($)     Decrease $     Decrease %  
Cost of revenues      15,327,319        14,917,493        409,826       3        43,596,611        25,207,604       18,389,007       73  

 

The cost of revenue consists primarily of costs associated with selling the products marketed by Belami. The increase in cost of revenues during the 2024 interim periods is commensurate with the increase in revenues and is primarily due to costs associated with revenues from products marketed by Belami which was acquired on April 28, 2023.

 

We believe that the cost of revenues will increase in 2024 compared to 2023, commensurate with an anticipated increase in revenues.

 

Sales and Marketing Expenses

 

    Three months ended
September 30,
    Increase/     Increase/     Nine months ended
September 30,
    Increase/     Increase/  
    2024 ($)     2023 ($)     Decrease $     Decrease %     2024 ($)     2023 ($)     Decrease $     Decrease %  
Selling and marketing expenses     6,275,742       5,702,647        573,095        10       19,074,266       12,546,736        6,527,530        52  

 

Sales 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 the three-month period ended September 30, 2024 is primarily due to increased marketing programs expenses. The increase in selling and marketing expenses during the nine-month period ended September 30, 2024 is primarily due to such expenses increasing following the acquisition of Belami on April 28, 2023

 

General and Administrative Expenses

 

   Three month ended September 30,   Increase/   Increase/   Nine months ended  September 30,   Increase/   Increase/ 
   2024 ($)   2023 ($)   Decrease $   Decrease %   2024 ($)   2023 ($)   Decrease $   Decrease % 
General and administrative expenses   8,171,293    7,519,042    662,251    9    22,651,096    24,869,910    (2,218,814)   (9)

 

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 the three-month period ended September 30, 2024 is primarily due to the following:

 

Nonrecurring impairment charge of $1.1 million of our E-commerce technology platforms which will be discontinued in September 2025 which will be replaced by a new platform expected to increase our revenues and possibly decrease our general and administrative expenses, offset by a decrease in share-based payments.

 

The decrease in general, and administrative expenses during the nine-month period ended September 30, 2024 primarily due to the following:

 

  Decreased share-based payments resulting from greater issuance of shares to employees following the acquisition of Belami, Inc. during the second quarter of 2023;
 

Offset by increased amortization of intangibles which were amortized over nine months during 2024 and five months during 2023, following the acquisition of Belami in April 2023. The increase of depreciation and amortization expenses of $1.0 million primarily related to increased intangibles acquired during the second quarter of 2023. Additionally, we recognized an impairment expense of $1.1 million during the quarter ended September 30, 2024.

 

We believe that our operating expenses will be higher during 2024 when compared to 2023 as we continue to invest to support our anticipated growth which now includes such expenses related to Belami’s operations following its acquisition.

 

22
 

 

Other Income (Expense)

 

   Three-month ended
September 30,
   Increase/   Increase/   Nine-month ended
September 30,
   Increase/   Increase/ 
   2024($)   2023($)   Decrease $   Decrease %   2024($)   2023($)   Decrease $   Decrease % 
Interest expense, net   (1,015,871)   (662,173)   353,697    53    (3,031,374)   (2,601,526)   429,848   17 

 

The increase in interest expense during the interim 2024 periods resulted primarily from interest charges related to increased interest-bearing weighted average debt in the current periods when compared to the prior year periods.

 

  

Three-month ended

September 30,

   Increase/   Increase/  

Nine-month ended

September 30,

   Increase/   Increase/ 
   2024($)   2023($)   Decrease $   Decrease %   2024($)   2023($)   Decrease $   Decrease % 
Gain on extinguishment of debt   -    -    -    -    -    1,201,857    (1,201,857)   (100)

 

The decrease in gain on extinguishment of debt is due to a non-recurring gain on extinguishment of debt which occurred during the second quarter of 2023.

 

Liquidity and Capital Resources

 

As of September 30, 2024, and 2023, we had $13.0 million and $22.1 million in cash, cash equivalents, and restricted cash, respectively.

 

We have raised additional funds through the sale of our common stock for gross proceeds of $4.4 million pursuant to placements and offerings during the nine-month period ended September 30, 2024.

 

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 September 30, 2024, we did not issue any shares of common stock under such program. From inception through September 30, 2024, we issued 7,894,899 shares of common stock under such a program for net proceeds of $13,795,059, net of brokerage fees and legal fees of $619,415. As of September 30, 2024, the remaining amount to be used under the ATM offering program is $5.9 million.

 

On October 4, 2024, we sold an aggregate of 440,000 shares of two series of preferred stock, resulting in total gross proceeds of $11.0 million, pursuant to (i) a Securities Purchase Agreement entered into with an accredited investor, pursuant to which such investor purchased an aggregate of 200,000 shares of Series A Preferred Stock, at a purchase price of $25.00 per share, and (ii) a Securities Purchase Agreement entered into with certain accredited investors, pursuant to which such investors purchased an aggregate of 240,000 shares of Series A-1 Preferred Stock, at a purchase price of $25.00 per share.

 

Our future capital requirements will depend on many factors, including the Belami 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.

 

23
 

 

We owe approximately $15.6 million under fixed rate obligations as of September 30, 2024. In addition, we owe GE certain minimum royalty payments under a license agreement and other accrued expenses which amounted to $2.3 million as of September 30, 2024.

 

On March 29, 2024, we entered into a letter agreement with Belami sellers, modifying certain obligations under the Stock Purchase Agreement. In connection with the letter agreement, the Company issued convertible promissory notes to each of the Sellers (the “Seller Note(s)”) in substitution of an aggregate of $3,117,408 in cash due to the Sellers on the first anniversary of the Closing. Each Seller received a Seller Note in the amount of $1,039,303 on the same date. In addition to other customary terms, the Seller Notes bear annual interest at 10%, with interest and principal coming due on May 16, 2025, and can be converted by the Sellers at any time at $3.00 per share of our common stock.

 

On September 23, 2024, the Company, through its wholly owned subsidiary, Belami, entered into a $3.5 million secured revolving line of credit (the “line of credit”) with a commercial bank, increasing, and renewing its previous revolving line of credit with such bank. The line of credit bears interest at a variable rate per annum equal to The Wall Street Journal Prime Rate, subject to a floor of 7.5% and ceiling of the maximum rate allowed under applicable law, payable monthly, and matures September 5, 2025. The line of credit is subject to customary default and acceleration provisions and to certain financial covenants, including working capital in excess of $1.75 million and a debt service coverage ratio in excess of 1.25 to 1.00 (calculated as described in the business loan agreement governing the line of credit). In addition, the Company agreed to guarantee Belami’s obligations under the line of credit, pursuant to a commercial guaranty agreement.

 

As common with companies having a similar cash conversion cycle as ours, when sales are converted into cash rapidly, often referred to as the “Dell Working Capital Model,” we leverage our trades payable to finance our operations to lower our cost of capital, and accordingly, we may have negative working capital. This negative working capital is partly inherent to the relatively quick turnaround of finished goods inventory, quicker collection of accounts receivables, and longer payment cycle of trades payable. Our accounts receivable, inventory, net of trades payable, amounted to $(7.5) million and $(7.2) million as of September 30, 2024, and 2023, respectively.

 

During October 2024, the Company authorized the issuance of 440,000 shares of newly authorized Series A Preferred Stock and Series A-1 Preferred Stock which generated proceeds of $11.0 million. We received $2.3 million of such proceeds in September 2024. The designations of each class of preferred stock are as follows:

 

Series A Preferred Stock:

 

Cumulative dividend of 8% annually, 12% if paid after dividend date;
Original issue price of $25 per share;
Conversion option at the holder’s option at $2 per share, with a subsequent reset provision of $1.20 per share;
Redemption at the price of $25 per share at the Company’s option after 5 years or upon change of control (substantially outside the control of the holder)
Voting rights on as converted basis.

 

Series A-1 Preferred Stock:

 

Cumulative dividend of 8% annually, 12% if paid after dividend date;
Original issue price of $25 per share;
Conversion option at the holder’s option at $2 per share, with a subsequent reset provision of $1.20 per share;
Redemption at the price of $25 per share at the Company’s option after three years or upon change of control (substantially outside the control of the holder)
Voting rights on as converted basis.

 

24
 

 

Please see below a summary of the primary components of our cash used in or provided by operating investing and financing activities during the nine-month period ended September 30, 2024

 

   For the nine months ended September 30, 
   2024   2023 
Cash flows from operating activities:          
Net loss  $(25,760,456)  $(27,412,260)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation, amortization, and impairment   4,244,653    2,098,935 
Amortization of debt discount   933,476    867,572 
Gain on forgiveness of debt       (1,201,857)
Non-cash equity-based compensation expense   9,035,220    13,109,135 
Change in operating assets and liabilities:          
Working capital changes   (1,404,341)   2,446,112 
           
Net cash used in operating activities   (12,951,448)   (10,092,363)
           
Cash flows from investing activities:          
           
Proceeds from disposition of debt securities, net       7,436,103 
Acquisition, net of cash acquired       (4,206,200)
Purchase of property and equipment   (536,014)   (119,942)
Net cash used in investing activities   (536,014)   3,109,961 
           
Cash flows from financing activities:          
Proceeds from issuance of equity instruments, net of costs   4,337,795    8,231,529 
Proceeds from anticipated issuance of preferred stocks   2,300,000     
Proceeds from issuance of debt instruments, net   (2,531,817)   11,400,395 
           
Net cash provided by financing activities   4,105,978    19,631,924 
           
(Decrease) increase in cash, cash equivalents and restricted cash   (9,381,484)   12,649,522 
Cash, cash equivalents, and restricted cash at beginning of period   22,430,253    9,461,597 
Cash, cash equivalents and restricted cash at end of period  $13,048,769   $22,111,119 

 

The changes in working capital, net are primarily attributable to timing differences in accounts receivable, accounts payable related to operations and deferred revenues.

 

25
 

 

Going Concern

 

The Company’s liquidity sources include $ 13.0 million in cash, cash equivalents and restricted cash, and $ 11.7 million of working capital deficit as of September 30, 2024. The Company has a history of recurring operating losses and its net cash used in operating activities amounted to $13.0 million and $10.1 million during the nine months ended September 30, 2024, and 2023, respectively. The Company has also generated net cash provided by financing activities of $4.1 million and $19.6 million during the nine months ended September 30, 2024 and 2023, 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 supporting its continued growth, 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, generate cash provided by financing activities through its 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 and impairment 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 three-months ended
September 30,
   For the nine-months ended
September 30
 
   2024   2023   2024   2023 
Net loss  $(8,621,306)  $(7,183,776)  $(25,760,456)  $(27,412,260)
Share-based payments   2,964,2856    2,470,601    9,035,221    13,109,035 
Interest expense   1,015,871    662,173    3,031,371    2,601,526 
Impairment   1,118,750        1,118,750     
Depreciation, amortization   928,794    1,067,203    3,125,903    2,098,935 
Transaction costs   -    123,000    -    516,601 
EBITDA, as adjusted  $(2,593,606)  $(2,860,779)  $(9,449,211)  $(9,086,063)

 

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.

 

26
 

 

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 September 30, 2024, and December 31, 2023, 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.

 

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.

 

27
 

 

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;