SKYX Platforms Corp

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 $19.7 million in cash and cash equivalents, including restricted cash of $5.6 million, and $1.2 million of working capital as of March 31, 2024. However, the Company has a history of recurring operating losses and its net cash used in operating activities amounted to $6.2 million and $4.1 million during the three months ended March 31, 2024 and March 31, 2023, respectively. The Company has also generated net cash provided by financing activities of $3.6 million and $10.3 million during the three months ended March 31, 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 March 31, 2024 and for the three months ended March 31, 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 could differ significantly from estimates.

Reclassifications

For comparability, reclassifications of prior-year balances were made to conform with current-year presentations, such as sales and marketing expenses which were previously included in selling, general, and administrative expenses in the 2023 comparable period.

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. The Company’s cash composition was as follows:

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 March 31, 2024 and December 31, 2023. Additionally, pursuant to the Company’s acquisition of Belami, Inc., the Company placed $750,000 in an escrow account. Furthermore, the Company secured a line of credit of $2.0 million with cash of the equivalent amount.

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 March 31, 2024, and December 31, 2023, the Company’s allowance for doubtful accounts was $54,987 and $54,987, respectively. The Company determines an allowance for sales returns based upon historical experience. As of March 31, 2024, and December 31, 2023, the Company’s allowance for sales returns was $185,501 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 $1,616,038 and $1,475,519 as of March 31, 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 $245,734 and $224,445 as of March 31, 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.

The Company will maintain an allowance based on specific inventory items that have shown no activity over a reasonable period of time. 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 March 31, 2024 and December 31, 2023.

GE Agreements

The Company has two U.S. and global agreements with General Electric (“GE”) related to the Company’s products.

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 is 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-month ended March 31, 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 as of March 31, 2024, and March 31, 2023:

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.

NOTE 3 FURNITURE AND EQUIPMENT

Furniture and equipment consisted of the following:

Depreciation expense amounted to $30,305 and $22,141 during the three-month ended March 31, 2024 and 2023, respectively.

NOTE 4 INTANGIBLE ASSETS AND GOODWILL

Intangible assets consisted of the following:

Amortization expense on intangible assets amounted to $513,559 and $14,307 during the three-month ended March 31, 2024 and 2023, respectively.

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

NOTE 5 DEBTS

The following table presents the details of the principal outstanding:

As of March 31, 2024, the expected future principal payments for the Company’s debt are due as follows:

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 in 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 Belami, subsidiary of SKYX entered in a 35-month lease related to its Sacramento office. The Company recognized a right-of-use asset and a liability of $662,698 pursuant to such lease.

The following table outlines the total lease cost for the Company’s operating leases as well as weighted average information for these leases as of March 31, 2024:

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 $2.5 million to GE pursuant to the license agreement. 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. Additionally, the Company owes an additional amount of $1.4 million pursuant to its agreements with GE which is payable in 2027. During April 2024, GE and the Company agreed to reduce the additional amount of $1.4 million by $400,000 in exchange for the issuance of a convertible promissory note of $1.0 million. The GE 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. The Company may prepay the entire then-outstanding principal amount of a Note at any time, plus a prepayment premium; if the Company exercises such right, the Note holder may instead elect to convert the Note into shares of common stock. The Note also provides for certain piggyback registration rights.

NOTE 8 ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

NOTE 9 RELATED PARTY TRANSACTIONS

Convertible Notes Due to Related Parties

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 March 31, 2024, and December 31, 2023 and accrued interest of $272,824 and $151,081, respectively.

NOTE 10 STOCKHOLDERS’ EQUITY

(A) Common Stock

The Company issued the following common stock during the three months ended March 31, 2024, and 2023:

As of March 31, 2024, the remaining amount to be used under the ATM offering program is $6.5 million.

(B) Preferred Stock

The following is a summary of the Company’s Preferred Stock activity during the three months ended March 31, 2023:

The Series A Preferred Stock was convertible at the holder’s option. The Company could repurchase shares of the Preferred Stock for $3.50 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.

There wereno shares of Series A Preferred Stock outstanding at March 31, 2024 and the Company terminated its designation of the Series A Preferred Stock in May 2023. The Company has not designated any other preferred stock as of March 31, 2024.

(C) Stock Options

The following is a summary of the Company’s stock option activity during the three month ended March 31, 2024 and 2023:

The following table summarizes the range of the Black Scholes pricing model assumptions used by the Company during three month ended March 31, 2024 and 2023:

The Company cannot use its historical volatility as expected volatility because there is not enough liquidity in trades of common stock during a term comparable to the expected term of stock option issued. The Company relies on the expected volatility of comparable publicly traded companies within its industry sector, which is deemed more relevant, to compute its expected volatility.

Unamortized future option expense was $13.9 million (excluding certain market-based options which management cannot ascertain to have a probable outcome amounting to $63 million) at March 31, 2024 and it is expected to be recognized over a weighted-average period of 2 years.

(D) Warrants Issued

The following is a summary of the Company’s warrant activity during three month ended March 31, 2024 and 2023:

During the three months ended March 31, 2024, the Company did not issued any warrants. During the three months ended March 31, 2023 as an inducement to enter certain financing transactions, the Company issued 1,391,667 3- year 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.

(D) Restricted stock units

A summary of the Company’s non-vested restricted stock units during the three months ended March 31, 2024 and 2023 are as follows:

The weighted-average remaining contractual life of the restricted units as of March 31, 2024 is 1.3 years.

One RSU gives the right to receive one share of the Company’s common stock. RSUs 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 three months ended March 31, 2024, and 2023, the Company recognized compensation expense of $3,295,029, and $2,963,702, respectively, related to stock options, 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 three months ended March 31, 2024 and 2023. The Company had one third-party payor accounts receivable balance representing 24% of the Company’s total accounts receivable at March 31, 2024 and none at March 31, 2023.

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 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:

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 May 14, 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.