NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
1. Description of Business
Nature
of Business
Sharps
Technology, Inc. (“Sharps” or the “Company”) is a pre-revenue medical device company that has designed and patented
various safety syringes and is seeking commercialization by manufacturing and distribution of its products.
The
accompanying consolidated financial statements include the accounts of Sharps Technology, Inc. and its wholly owned subsidiary,
Safegard Medical (Hungary) KFT, collectively referred to as the “Company.” All intercompany transactions and balances have been
eliminated.
The
Company’s fiscal year ends on December 31.
On
April 13, 2022, the Company’s Initial Public Offering was deemed effective with trading commencing on April 14, 2022. The Company
received net proceeds of $14.2 million on April 19, 2022 (See Note 8).
Note
2. Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles
(“GAAP”) in the United States (“U.S.”) and are expressed in U.S. dollars.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. As
of December 31, 2022, the most significant estimates relate to derivative liabilities and stock-based compensation.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date
of purchase to be cash equivalents. Cash and cash equivalents are maintained with various financial institutions.
Inventories
The
Company values inventory at the lower of cost (average cost) or net realizable value. Work-in-process and finished goods inventories
consist of material, labor, and manufacturing overhead. Net realizable value is the estimated selling price in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. A reserve is established for any excess
or obsolete inventories or they may be written off. At December 31, 2022 and 2021, inventory is comprised of raw materials,
components and finished goods.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
2. Summary of Significant Accounting Policies (continued)
Fair
Value Measurements
ASC
820, Fair Value Measurements and Disclosures, require an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding
the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be
used to measure fair value.
The
Company’s outstanding warrants are fair valued on a recurring basis with the trading price which could cause fluctuations in
operating results at the reporting periods.
Level
1
Level
1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. Valuations
are based on quoted prices that are readily and regularly available in an active market and do not entail a significant degree of judgment.
Level
2
Level
2 applied to assets or liabilities for which there are other than Level 1 observable inputs such as quoted prices for similar assets
or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally
from, or corroborated by, observable market data.
Level
2 instruments require more management judgment and subjectivity as compared to Level 1 instruments. For instance: determining which instruments
are most similar to the instrument being priced requires management to identify a sample of similar securities based on the coupon rates,
maturity, issuer credit rating and instrument type, and subjectively select an individual security or multiple securities that are deemed
most similar to the security being priced; and determining whether a market is considered active requires management judgment.
Level
3
Level
3 applied to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement
of the fair value of the assets or liabilities. The determination for Level 3 instruments requires the most management judgment and subjectivity.
Fixed
Assets
Fixed
assets are stated at cost. Expenditures for maintenance and repairs are charged to operations as incurred. The Company’s fixed
assets consist of land, building, machinery and equipment, molds and website. Depreciation is calculated using the straight-line
method commencing on the date the asset is operating in the way intended by management over the following useful lives: Building
– 20 years, Machinery and Equipment – 3 -10 years and Website – 3 years. The expected life for Molds is based
lesser of the number of parts that will be produced based on the expected mold capability or 5 years.
Impairment
of Long-Lived Assets
Long-lived
assets are reviewed annually for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability is measured by comparison of the carrying amount of an asset group to the future net undiscounted
cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the projected discounted future net cash flows arising from
the asset.
There
were no impairment losses recognized during the years ended December 31, 2022 and 2021.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
2. Summary of Significant Accounting Policies (continued)
Goodwill
and Purchased Identified Intangible Assets
Goodwill
When
applicable, goodwill will be recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the
fair value of the net tangible and identified intangible assets acquired under a business combination. Goodwill also includes acquired
assembled workforce, which does not qualify as an identifiable intangible asset. The Company reviews impairment of goodwill annually
in the third quarter, or more frequently if events or circumstances indicate that the goodwill might be impaired. The Company first assesses
qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. If, after assessing the
totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit
is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary. If, based on the qualitative assessment,
it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company
proceeds to perform the quantitative goodwill impairment test. The Company first determines the fair value of a reporting unit using
weighted results derived from an income approach and a market approach. The income approach is estimated through the discounted cash
flow method based on assumptions about future conditions such as future revenue growth rates, new product and technology introductions,
gross margins, operating expenses, discount rates, future economic and market conditions, and other assumptions. The market approach
estimates the fair value of the Company’s equity by utilizing the market comparable method which is based on revenue multiples
from comparable companies in similar lines of business. The Company then compares the derived fair value of a reporting unit with its
carrying amount. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount
equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
Identified
Intangible Assets
The
Company’s identified intangible assets are amortized on a straight-line basis over their estimated useful lives of 5 years.
The Company makes judgments about the recoverability of finite-lived intangible assets whenever facts and circumstances indicate
that the useful life is shorter than originally estimated or that the carrying amount of assets may not be recoverable. If such
facts and circumstances exist, the Company assesses recoverability by comparing the projected undiscounted net cash flows associated
with the related asset or group of assets over their remaining lives against their respective carrying amounts. Impairments, if any,
are based on the excess of the carrying amount over the fair value of those assets. If the useful life is shorter than originally
estimated, the Company would accelerate the rate of amortization and amortize the remaining carrying value over the new shorter
useful life. The Company evaluates the carrying value of indefinite-lived intangible assets on an annual basis, and an impairment
charge would be recognized to the extent that the carrying amount of such assets exceeds their estimated fair value.
Stock-based
Compensation Expense
The
Company measures its stock-based awards made to employees based on the estimated fair values of the awards as of the grant date. For
stock option awards, the Company uses the Black-Scholes option-pricing model. For restricted stock awards, the estimated fair value is
generally the fair market value of the underlying stock on the grant date. Stock-based compensation expense is recognized over the requisite
service period and is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. The Company
recognizes forfeitures of stock-based awards as they occur on a prospective basis.
Stock-based
compensation expense for awards granted to non-employees as consideration for services received is measured on the date of performance
at the fair value of the consideration received or the fair value of the equity instruments issued, whichever can be more reliably measured.
Derivative
Instruments
The
Company accounts for common stock warrants as either equity-classified or liability-classified instruments based on an assessment of
the specific terms of the warrants and applicable authoritative guidance in Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC 480”), Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815,
Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments
pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification
under ASC 815, including whether the warrants are indexed to the Company’s own stock and whether the holders of the warrants could
potentially require net cash settlement in a circumstance outside of the Company’s control, among other conditions for equity classification.
This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent
quarterly period end date while the warrants are outstanding.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
2. Summary of Significant Accounting Policies (continued)
At
their issuance date and as of December 31, 2022, the warrants (see Notes 8 and 10) were accounted for as liabilities as these instruments
did not meet all of the requirements for equity classification under ASC 815-40 based on the terms of the aforementioned warrants. The
resulting warrant liabilities are re-measured at each balance sheet date until their exercise or expiration, and any change in fair value
is recognized in the Company’s consolidated statements of operations and comprehensive loss.
Foreign
Currency Translation/Transactions
The
Company has determined that the functional currency for its foreign subsidiary is the local currency. For financial reporting
purposes, assets and liabilities denominated in foreign currencies are translated at current exchange rates and profit and loss
accounts are translated at weighted average exchange rates. Resulting translation gains and losses are included as a separate
component of stockholders’ equity as accumulated other comprehensive income or loss. Gains or losses resulting from
transactions entered into in other than the functional currency are recorded as foreign exchange gains and losses in the
consolidated statements of operations and comprehensive loss.
Comprehensive
income (loss)
Comprehensive
income (loss) consists of the Company’s consolidated net loss and foreign currency translation adjustments related to its subsidiary. Foreign currency
translation adjustments included in comprehensive loss were not tax effected as the Company has a full valuation allowance at
December, 2022 and 2021. Accumulated other comprehensive income (loss) is a separate component of stockholders’ equity and
consists of the cumulative foreign currency translation adjustments.
Basic
and Diluted Loss Per Share
The
Company computes net loss per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted
earnings per share (EPS) on the face of the consolidated statement of operations and comprehensive loss. Basic EPS is computed by dividing
net income (loss) available to common stockholders (numerator) by the weighted average number of shares outstanding (denominator) during
the year. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method
and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used
in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all
dilutive potential shares if their effect is anti-dilutive. As at December 31, 2022, there were 10,405,916 stock options and warrants
that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would
have been antidilutive for the periods presented.
Income
Taxes
The
Company must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates
and judgments are used in the calculation of tax credits, tax benefits, tax deductions, and in the calculation of certain deferred taxes
and tax liabilities. Significant changes to these estimates may result in an increase or decrease to the Company’s tax provision
in a subsequent period.
The
provision for income taxes was comprised of the Company’s current tax liability and changes in deferred income tax assets and liabilities.
The calculation of the current tax liability involves dealing with uncertainties in the application of complex tax laws and regulations
and in determining the liability for tax positions, if any, taken on the Company’s tax returns in accordance with authoritative
guidance on accounting for uncertainty in income taxes. Deferred income taxes are determined based on the differences between the financial
reporting and tax basis of assets and liabilities. The Company must assess the likelihood that it will be able to recover the Company’s
deferred tax assets. If recovery is not likely on a more-likely-than-not basis, the Company must increase its provision for income taxes
by recording a valuation allowance against the deferred tax assets that it estimates will not ultimately be recoverable. However, should
there be a change in the Company’s ability to recover its deferred tax assets, the provision for income taxes would fluctuate in
the period of such change.
Research
and Development Costs
Research
and development costs are expensed as incurred.
Advance
payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized.
Such amounts are recognized as an expense as the related goods are delivered or the services are performed.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
2. Summary of Significant Accounting Policies (continued)
Contingencies
Liabilities for loss
contingencies arising from claims, assessments, litigations, fines and penalties and other sources are recognized when it is probable
that a liability has been incurred and the amount of the assessment can be reasonably estimated. Gain contingencies are evaluated and
not recognized until the gain is realizable or realized.
Recent
Accounting Pronouncements
In
March 2020, the FASB issued ASC Topic 848, Reference Rate Reform. ASC Topic 848 provides relief for impacted areas as it relates
to impending reference rate reform. ASC Topic 848 contains optional expedients and exceptions for applying GAAP to debt arrangements,
contracts, hedging relationships, and other areas or transactions that are impacted by reference rate reform. This guidance is effective
upon issuance for all entities and elections of certain optional expedients are required to apply the provisions of the guidance.
On
August 5, 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain financial
instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own
equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU
2020-06 simplifies the guidance in U.S. GAAP on the issuer’s accounting for convertible debt instruments, requires entities to
provide expanded disclosures about “the terms and features of convertible instruments” and how the instruments have been
reported in the entity’s financial statements. It also removes from ASC 815-40-25-10 certain conditions for equity classification
and amends certain guidance in ASC 260, Earnings per Share, on the computation of EPS for convertible instruments and contracts
on an entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance.
The ASU’s amendments are effective for smaller public business entities fiscal years beginning after December 15, 2023. The Company
continues to assess all potential impact of the standard and will disclose the nature and reason for any elections that the Company makes.
The
Company does not expect the adoption of any accounting pronouncements to have a material impact on the consolidated financial statements.
We
reviewed all other recently issued accounting pronouncements and have concluded they are not applicable or not expected to be significant
to the accounting for our operations.
Note
3. Inventories
Inventories,
net consisted of the following at December 31, 2022 and 2021:
Schedule of Inventories
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
Raw materials |
|
$ |
106,088 |
|
|
$ |
121,994 |
|
Work in process |
|
|
49,144 |
|
|
|
- |
|
Finished goods |
|
|
30,572 |
|
|
|
- |
|
Total |
|
$ |
185,804 |
|
|
$ |
121,994 |
|
Note
4. Fixed Assets
Fixed
asset, net, as of December 31, 2022 and 2021, are summarized as follows:
Schedule of Property, Plant and Equipment
| |
December 31, 2022 | | |
December 31, 2021 | |
| |
| | |
| |
Land | |
$ | 242,240 | | |
$ | - | |
Building | |
| 2,824,481 | | |
| - | |
Machinery and Equipment | |
| 4,601,293 | | |
| 3,778,766 | |
Website | |
| 16,600 | | |
| 16,600 | |
Fixed asset, gross | |
| 7,684,614 | | |
| 3,795,366 | |
Less: accumulated depreciation | |
| (679,724 | ) | |
| (32,034 | ) |
Fixed asset, net | |
$ | 7,004,890 | | |
$ | 3,763,332 | |
Depreciation
expense of fixed assets for the year ended December 31, 2022 and 2021 was $647,690
and $28,699,
respectively. Substantially, all of the Company’s fixed assets are located at the Company’s Hungary location.
During
the year ended December 2022, the Company recorded $63,612 in fixed asset costs relating to the estimated fair market value for options
granted in 2021 for the acquired machinery. As of December 31, 2022, the Company has $100,000 in remaining payments for machinery purchased,
which is included in accounts payable.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
5. Asset Acquisition
In
June 2020, the Company entered into a Share Purchase Agreement (“Agreement”) with Safegard Medical
(“Safegard”) and amendments to the Agreement, collectively, the Agreements, to purchase either the stock or certain
assets of a manufacturing facility for $2.5M
in cash, plus additional consideration of 28,571
shares of common stock with an estimated fair market value of $7.00, 35,714
stock options with an exercise price of $7.00
and 50,000
stock options with an exercise price of $4.25.
The purchase price includes the fair market value of the common stock of $200,000
and the vested options of $183,135.
The Agreements provided the Company various periods for due diligence and post due diligence, requirements for escrow payments
through the closing date (“Closing Date”).
Through
the Closing Date, the Agreements provided the Company with the exclusive use of the facility in exchange for payment of the facility’s
operating costs. The monthly fee (“Operating Costs”), which primarily covered the facility’s operating costs, was mainly
comprised of the seller’s workforce costs, materials and other recurring monthly operating cost.
During
the year ended December 31, 2022 and 2021, the Company had remitted $594,000 and $770,000, respectively for the aforementioned Operating
Costs. The remittance of operating costs was discontinued after the Closing Date. These costs were included in research and development
expense in the consolidated statement of operations and comprehensive loss as the activities at the facility in 2022 and 2021 were related
to design and testing of the Company’s products.
The
acquisition of Safegard, which closed on July 6, 2022, did not meet the definition of a business pursuant to ASC 805-10,
and accordingly was accounted for as an asset acquisition in accordance with ASC 805-50. The cost of the
acquisition was $2,936,712,
including transaction costs of $53,576,
with the allocation to the assets acquired on a relative fair value basis. The intangibles relate to permits and a limited workforce
acquired. Under ASC 805-50, no goodwill is recognized. The operating results for Safegard are included in the consolidated balance
sheet and consolidated statements of operations and comprehensive loss for the period beginning after the closing on July 6,
2022.
The
relative fair value of the assets acquired and related deferred tax liability is as follows:
Schedule of Fair Value of the Assets Acquisition
| |
| | |
Land | |
$ | 226,000 | |
Building and affixed assets | |
| 2,648,000 | |
Machinery | |
| 158,000 | |
Inventory | |
| 32,000 | |
Intangibles | |
| 64,712 | |
Deferred tax liability | |
| (192,000 | ) |
| |
| | |
Total | |
$ | 2,936,712 | |
The
useful lives for the acquired assets is Building - 20 years; Machinery – 5 to 10 years; Intangibles – 5 years. The related
depreciation and amortization is being recorded on a straight-line basis.
Note
6. Other Assets
Other
assets as of December 31, 2022 and 2021 are summarized as follows:
Schedule of Other Assets
| |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Acquisition (see Note 5) | |
$ | - | | |
$ | 472,701 | |
Intangibles, net | |
| 62,480 | | |
| - | |
Deposits or advance payments on machinery, molds and components (see Note 15) | |
| 336,466 | | |
| - | |
Other | |
| 12,370 | | |
| 57,162 | |
Other assets | |
$ | 411,316 | | |
$ | 529,863 | |
Intangibles
are related to the Asset Acquisition (see Note 5) and consist of an acquired workforce and permits. Amortization for the year ended December
31, 2022 was $6,882.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
7. Note Purchase Agreement
On
December 14, 2021, the Company entered into a Note Purchase Agreement (“NPA”) with three unrelated third-party
purchasers (“Purchasers”). The Purchasers provided financing to the Company in the form of bridge financing, aggregating
principal of $2,000,000
(the “Notes”). The principal under the Notes shall be payable on the earlier of (i) December 14, 2022, and (ii) the date
on which the Company consummates an initial public offering (“IPO”), herein referred to as the “Maturity
Date”. The Notes bore interest at 8%
with interest payments due monthly. The Company and the Purchasers had entered into a Security Agreement whereby the Notes were
collateralized by substantially all the assets of the Company, both tangible and intangible both currently owned with stated
exclusions, as defined, and any future acquired with stated exclusions, as defined.
The
NPA provided for covenants that until all of the Notes have been converted, exchanged, redeemed or otherwise satisfied in accordance
with their terms, the Company shall not, and the Company shall not permit any of its subsidiaries without the prior written consent of
the Purchasers: a) incur or guarantee any new debt, b) issue any securities that would cause a breach or default under the NPA, c) incur
any liens other than permitted, d) redeem or repurchase shares, e) declare or pay any cash dividend or distribution, e) sell, lease or
dispose of assets other than in the ordinary course of business, or f) engage in different line of business.
As
additional consideration to the Purchasers for providing the financing, the Company also agreed to a) issue each Purchaser a number
of shares of the Company’s Common Stock equal to 50% of the original principal amount of each Purchaser’s Note (the
“Contingent Stock”) and b) issue each Purchaser a number of warrants, which would allow the Purchasers to purchase
additional shares of the Company’s Common Stock, equal to 50% of the original principal amount each Purchaser’s Note for
a term of 5.0 years (the “Contingent Warrants”).
For
both the Contingent Stock and the Contingent Warrants, the number of shares and warrants that each Purchaser will be issued was unknown
at the time of the NPA and was determined based on a formula of 50% of the original principal amount divided by a “Subsequent
Offering Price” based on the valuation in a future offering of Common stock or other equity interest in the Company (such offering
referred to as a “Consummated Offering”) during the period beginning on December 14, 2021 through and including the date
the Company consummates an initial public offering (“IPO”) (such period referred to as the “Subsequent Offering Period”).
In
accordance with ASC 480-10-25-14, a fixed monetary amount exists at inception for the total value of Contingent Stock that may be issued
to each Purchaser. The Contingent Stock is not considered outstanding at inception, as it will only be issued upon the consummation of
a Consummated Offering, and accordingly, is a conditional obligation. As such the fair market value (“FMV”) of the Contingent
Stock at inception was $677,000, which was recorded as debt discount. Similarly, a fixed monetary amount further exists at inception
for the total value of Contingent Warrants that may be issued to each Purchaser. Accordingly, a conditional obligation exists and as
such the FMV of Contingent Warrants at inception was $585,000, which was recorded as debt discount. The Company incurred $197,500
of debt issuance costs associated with the NPA. The debt issuance costs were allocated between the Notes, Contingent Stock and Contingent
Warrants in a manner that was consistent with the allocation of the proceeds of the Notes. The portion of the debt issuance costs which
were allocated to the Contingent Stock and Contingent Warrants, which was $124,460, was expensed during the year ended December 31, 2021.
The debt issuance costs allocated to the Notes were recorded as a debt discount.
The
Contingent Stock and Contingent Warrant liabilities were measured at FMV on the date of issuance (based on the Black-Scholes valuation
model).
At
inception, the Notes were recorded at the net amount of approximately $665,000,
after adjusting for debt discounts of approximately $1,335,000
relating to the debt issuance costs, Contingent Stock and Contingent Warrants. Management calculates the effective interest rate
(“EIR”) to consider the potential repayment at redemption date by reference to the face value amount after taking into
account the stated 8%
interest rate. In 2022, through the repayment date, the Company recorded interest expense of $39,111
(2021 - $nil)
and accreted interest of $1,299,895
(2021 - $nil)
and repaid the $2,000,000
in Notes with proceeds from the IPO that closed on April 19, 2022.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
7. Note Purchase Agreement (continued)
The
value of the Contingent Stock and Contingent Warrants is required to be re-measured at FMV at each reporting date, using either the
Black-Scholes valuation model or other valuation method, if deemed more appropriate, with recognition of the changes in fair value
to other income or expense in the consolidated statement of operations in accordance with ASC 480, Debt and Equity. On April 19,
2022, the Company issued 235,295
shares of Common Stock to settle the Contingent Stock liability, re-measured the liability at its estimated FMV based on the
stock’s trading price and reclassified $496,000
to Common Stock Par Value and Additional Paid in Capital.
In
connection with the closing of the IPO, 235,295
warrants were issued to settle the Contingent Warrant liability (“Note Warrants”) with an exercise price of $4.25. The terms of the Note Warrants continue to require classification as a liability under ASC 815 with recognition of the
changes in fair value to other income or expense in the consolidated statement of operations in accordance with ASC 480 Debt and
Equity. During the year ended December 31, 2022, the Company recorded a FMV income adjustment of $554,412
to reduce the Warrant liability from $585,000
at December 31, 2021 to $30,588
at December 31, 2022. (See Notes 8 and 10)
Note
8. Stockholders’ Equity
Capital
Structure
On
December 11, 2017, the Company was incorporated in Wyoming with 20,000,000 shares of common stock authorized with a $0.0001 par value.
Effective, April 18, 2019, the Company’s authorized common stock was increased to 50,000,000 shares of common stock. The articles
of incorporation also authorized 10,000 preferred shares with a $0.001 par value.
Effective
March 22, 2022, the Company completed a plan and agreement of merger with Sharps Technology, Inc., a Nevada corporation (“Sharps
Nevada”). Pursuant to the merger agreement, (i) the Company merged with and into Sharps Nevada, (ii) each 3.5 shares of common
stock of the Company were converted into one share of common stock of Sharps Nevada and (iii) the articles of incorporation and bylaws
of Sharps Nevada, became the articles of incorporation and bylaws of the surviving corporation. The Company’s authorized common
stock and preferred stock increased from 50,000,000 to 100,000,000 and 10,000 to 1,000,000 shares, respectively. The par value of preferred
stock decreased from $0.001 to $0.0001 per share.
Common
Stock
On
April 13, 2022, the Company’s initial public offering (“IPO”) was declared effective by the SEC pursuant to which the
Company issued and sold an aggregate of 3,750,000 units (“Units”), each consisting of one share of common stock and two warrants,
to purchase one share of common stock for each whole warrant, with an initial exercise price of $4.25 per share and a term of five years.
In addition, the Company granted Aegis Capital Corp., as underwriter a 45-day over-allotment option to purchase up to 15% of the number
of shares included in the units sold in the offering, and/or additional warrants equal to 15% of the number of Warrants included in the
units sold in the offering, in each case solely to cover over-allotments, which the Aegis Capital Corp. partially exercised with respect
to 1,125,000 warrants on April 19, 2022.
The
Company’s common stock and warrants began trading on the Nasdaq Capital Market or Nasdaq on April 14, 2022. The net proceeds
from the IPO, prior to payments of certain listing and professional fees were approximately $14.2
million. The net proceeds, after reflecting par value, has been recorded in Additional Paid in Capital of $9.0 million and with
respect to the Warrants as a liability under ASC 815 of $5.2M. (See Note 10)
During
the year ended December 31, 2022, the Company issued 235,000 shares of common stock at the trading stock price in connection with services
provided to the Company and recorded a charge of $290,551, In addition, the Company issued 235,295 common shares relating to the Note
Purchase agreement. (See Note 7)
During
2021, the Company completed stock subscriptions through a private placement for 487,204 shares of common stock at $7.00 per share. The
Company received cash proceeds of $3,377,929 and had a subscription receivable of $32,500 which was received in January 2022. In addition,
the Company issued 71,429 shares with an estimated fair value of $500,000 to a vendor for engineering and design services provided for
equipment and for partial payments for equipment begin manufactured (See Note 4), 28,571 shares related to an acquisition (See Note 5)
and 2,857 shares for services with an estimated fair value of $20,000.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
8. Stockholders’ Equity (continued)
Warrants
|
a) |
In
connection with the IPO in April 2022, the Company issued 7,500,000
warrants (Trading Warrants) as a component of
the Units and 1,125,000
warrants to the underwriter (Overallotment Warrants),
as noted in Common Stock above. The Trading and Overallotment Warrants were recorded at the FMV, being the trading price of the warrants,
on the IPO effective date and the Warrants are classified as a Liability based on ASC 815. The Warrant liability requires remeasurement
at each reporting period. At the IPO, the liability was $5,778,750
and at December 31, 2022 the liability was $1,121,250.
During year ended December 31, 2022, the Company recorded a FMV gain adjustment of $4,657,500,
(See Note 10). |
|
|
|
|
b) |
The Company has issued
235,295 Warrants (“Note Warrants”) to the Purchasers of the Notes on April 19, 2022. The Note Warrants have an exercise
price of $4.25 and a term of five years. At the issuance date, the liability was $157,647 During the year ended December 31, 2022,
the Company recorded a FMV gain of 127,058. (See Note 10) |
|
|
|
|
c) |
The underwriter received
187,500 warrants in connection with the IPO for a nominal cost of $11,250. The Warrants have an exercise price of $5.32 and are exercisable
after October 9, 2022. The FMV at the date of issuance was $228,750 computed using the Black Sholes valuation model with the following
assumptions: a) volatility of 93.47%, five-year term, risk free interest rate 2.77% and 0% dividend rate. The estimated FMV was classified
as additional issuance costs. |
Note
9. Preferred Stock
In
February 2018, the Company Board of Directors issued one share of Series A Preferred Stock to Alan Blackman, the Company’s co-founder
and Director. The Series A Preferred Stock entitles the holder to vote on any matters related to the election of directors and was reduced
from 50.1% at December 31, 2021 to 29.5%, effective with the IPO. The Series A Preferred Stock has no right to dividends, or distributions
in the event of a liquidation and is not convertible into common stock. In the event the Company is sold during the two-year period following
completion of IPO at a price per share of more than 500% of the initial offering price per Unit in the IPO, the Series A Preferred Stock,
as in effect upon completion of the IPO, will entitle the holder to 10% of the total purchase price.
Note
10. Warrant Liability
The
Warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented as a Warrant liability in the accompanying
consolidated balance sheet. The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in
fair value presented within the consolidated statement of operations and comprehensive loss. (See Notes 7 and 8)
The
Warrant liability at December 31, 2022 was as follows:
Schedule
of Warrant Liability
| |
| | |
Note Warrants | |
$ | 30,588 | |
Trading and Overallotment Warrants | |
| 1,121,250 | |
Total | |
$ | 1,151,838 | |
Warrant liability | |
$ | 1,151,838 | |
The
Warrants outstanding at December 31, 2022 were as follows:
Schedule
of Warrant Outstanding
| |
| | |
Note warrants | |
| 235,295 | |
Trading and Overallotment Warrants | |
| 8,812,500 | |
Total | |
| 9,047,795 | |
Warrant outstanding | |
| 9,047,795 | |
The
following table presents the changes in the Warrant liability of the Level 1 warrants issued on April 14, 2022, the effective date of
the IPO measured at fair value:
Schedule
of Changes in the Warrant Liability
| |
Total | |
| |
| |
FMV of Note Warrants, at issuance | |
$ | 157,647 | |
| |
| | |
FMV of Trading and Overallotment Warrants, at issuance | |
| 5,778,750 | |
| |
| | |
Change in fair value of warrant liability, issuance through December 31, 2022 | |
| (4,784,559 | ) |
| |
| | |
Fair Value at December 31, 2022 | |
$ | 1,151,838 | |
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
11. Stock Options
A
summary of options granted and outstanding is presented below.
Schedule
of Stock Options Granted and Outstanding
| |
2022 | | |
2021 | |
| |
Options | | |
Weighted Average Exercise Price | | |
Options | | |
Weighted Average Exercise Price | |
Outstanding at Beginning of year | |
| 1,137,479 | | |
$ | 5.18 | | |
| 792,857 | | |
$ | 3.64 | |
Granted | |
| 367,500 | | |
| 1.63 | | |
| 511,764 | | |
| 7.00 | |
Cancelled | |
| (3,571 | ) | |
| (4.38 | ) | |
| (21,875 | ) | |
| (4.38 | ) |
Forfeited | |
| (143,286 | ) | |
$ | (3.77 | ) | |
| (145,157 | ) | |
$ | (2.57 | ) |
| |
| | | |
| | | |
| | | |
| | |
Outstanding at end of year | |
| 1,358,122 | | |
$ | 4.37 | | |
| 1,137,479 | | |
$ | 5.18 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at end of year | |
| 1,132,861 | | |
$ | 4.59 | | |
| 825,847 | | |
$ | 5.38 | |
During
the years ended December 31, 2022 and 2021, the estimated weighted-average grant-date fair value of options granted was $1.63 per share
and $4.55 per share, respectively. As of December 31, 2022 and 2021, there was $475,097 and $1,260,990, respectively, of unrecognized
stock-based compensation related to unvested stock options, which is expected to be recognized over a weighted-average period sixteen
months as of December 31, 2022.
The
following table summarizes information about options outstanding at December 31, 2022:
Schedule
of Information About Options Outstanding
Exercise Prices | | |
Options Outstanding | | |
Aggregate Intrinsic Value | | |
Weighted Average Remaining Contractual Life | | |
Options Exercisable | | |
Aggregate Intrinsic Value on Exercisable Shares | |
| | |
| | |
| | |
| | |
| | |
| |
$ | 1.21 | | |
| 307,500 | | |
| - | | |
| 4.42 | | |
| 168,551 | | |
$ | - | |
$ | 1.39 | | |
| 10,000 | | |
| - | | |
| 4.67 | | |
| 10,000 | | |
$ | - | |
$ | 1.75 | | |
| 68,571 | | |
| - | | |
| .25 | | |
| 68,571 | | |
$ | - | |
$ | 2.80 | | |
| 141,429 | | |
| - | | |
| .50 | | |
| 141,429 | | |
$ | - | |
$ | 4.25 | | |
| 50,000 | | |
| - | | |
| 4.50 | | |
| 37,500 | | |
$ | - | |
$ | 4.38 | | |
| 244,286 | | |
| - | | |
| 2.25 | | |
| 244,286 | | |
$ | - | |
$ | 7.00 | | |
| 536,336 | | |
| - | | |
| 3.00 | | |
| 462,524 | | |
$ | - | |
The
aggregate intrinsic values of stock options outstanding and exercised December 31, 2022 were calculated as the difference between the
exercise price of the options and the fair value of the Company’s common stock on December 31, 2022.
In
2022 and 2021, the Company recognized stock-based compensation expense of $1,012,592, of which $915,796 and $96,795 was recorded in general
and administrative and research and development expenses, respectively and $1,195,819, of which $1,091,227 and $105,592 was recorded
in general and administrative and research and development expenses, respectively. Further, in 2022, the Company recorded stock-based
charges of $63,612 relating to purchase of machinery (See Note 4) and $60,435 relating to an Acquisition. (See Note 5) and in 2021, the
Company recorded stock-based charges relating to consideration for purchase of machinery of $253,337 (see Note 4) and relating to an
Acquisition for $122,701 (see Note 5).
The
fair value of stock option awards accounted for under ASC 718 was estimated at the date of grant using a Black-Scholes option-pricing
model with the following assumptions:
Schedule
of Fair Value of Stock Option Awards
|
|
Year
Ended
December 31, 2022 |
|
|
Year
Ended
December 31, 2021 |
|
Expected
term (years) |
|
|
2.50
to 3.00 |
|
|
|
2.50
to 3.25 |
|
Expected
volatility |
|
|
100.81%
to 110.74 |
% |
|
|
97.26%
to 116.06 |
% |
Risk-free
interest rate |
|
|
2.90%
to 3.47 |
% |
|
|
0.18%
- .81 |
% |
Dividend
rate |
|
|
0 |
% |
|
|
0 |
% |
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2022 AND 2021
Note
12. Income Taxes
A
reconciliation of the Federal statutory rate (28%) to the total effective rate applicable to income (loss) is as follows:
Schedule
of Reconciliation of Federal Statutory Rate to Total Effective Rate
| |
| | |
| |
| |
Year Ended | | |
Year Ended | |
| |
December 31, 2022 | | |
December 31,
2021 | |
| |
| | |
| |
Expected benefit at statutory federal tax rate | |
$ | (974,329 | ) | |
$ | (979,527 | ) |
Permanent differences – net | |
| (859,515 | ) | |
| - | |
State and local taxes, net of federal tax benefit | |
| (265,607 | ) | |
| (311,373 | ) |
Other | |
| (21,965 | ) | |
| (57,563 | ) |
Change in valuation allowance | |
| 2,121,416 | | |
| 1,348,463 | |
Income tax Expense (Benefit)
Total | |
$ | - | | |
$ | - | |
The
components of the Company’s deferred tax assets (liabilities) are as follows:
Schedule
of Components of Deferred tax Assets
| |
Year Ended December 31, 2022 | | |
Year Ended December 31, 2021 | |
Deferred tax assets (liabilities): | |
| | | |
| | |
Fixed assets | |
$ | (268,594 | ) | |
$ | 3,837 | |
Interest | |
| 62,310 | | |
| 46,361 | |
Research and development expenses | |
| 454,942 | | |
| - | |
Stock-based compensation | |
| 917,351 | | |
| 637,112 | |
Net operating losses - federal | |
| 2,898,411 | | |
| 1,687,053 | |
Net operating losses – state and local | |
| 921,350 | | |
| 536,282 | |
Net operating losses - foreign | |
| 37,686 | | |
| - | |
Research credit | |
| 28,985 | | |
| 28,985 | |
Deferred tax assets gross | |
| 5,052,441 | | |
| 2,939,630 | |
Less valuation allowance | |
| (5,244,441 | ) | |
| (2,939,630 | ) |
Net deferred tax liability | |
$ | (192,000 | ) | |
$ | - | |
The
authoritative guidance, requires the asset and liability method of accounting for deferred income taxes. Deferred tax assets and liabilities
are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or
liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered.
The
guidance also requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred
tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a
company’s current and past performance, the market environment in which the company operates, length of carryback and
carryforward periods and existing contracts that will result in future profits. After reviewing all the evidence, the company has
recorded a full valuation allowance.
Note
13. Related Party Transactions and Balances
As
of December 31, 2022 and 2021, accounts payable and accrued liabilities include $105,667
and $59,375,
respectively, payable to officers and directors of the Company. The amounts are unsecured, non-interest bearing and are due on
demand (See Note 15).
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2022 AND 2021
Note
14. Fair Value Measurements
The
Company’s financial instruments include cash, accounts payable, notes payable, contingent stock and warrant liability and warrant
liability. Cash, contingent stock liability, contingent warrant liability and warrant liability are measured at fair value. Accounts
payable and notes payable are measured at amortized cost and approximates fair value due to their short duration and market rate for
similar instruments, respectively.
As
of December 31, 2022, the following financial assets and liabilities were measured at fair value on a recurring basis presented on the
Company’s consolidated balance sheet:
Schedule
of Assets and Liabilities Measured at Fair Value on Recurring Basis
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
Fair Value Measurements Using | | |
| |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
| |
| | |
| | |
| | |
| |
Assets | |
| | | |
| | | |
| | | |
| | |
Cash | |
$ | 4,170,897 | | |
| - | | |
| - | | |
$ | 4,170,897 | |
| |
| - | | |
| - | | |
| - | | |
| | |
Total assets measured at fair value | |
$ | 4,170,897 | | |
| - | | |
| | | |
$ | 4,170,897 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Warrant liability | |
$ | 1,151,838 | | |
| - | | |
| - | | |
$ | 1,151,838 | |
| |
| | | |
| | | |
| | | |
| | |
Total liabilities measured at fair value | |
$ | 1,151,838 | | |
| - | | |
| - | | |
$ | 1,151,838 | |
Note
15. Commitments and Contingencies
Fixed
Assets and Other
At
December 31, 2022, the Company has outstanding orders to purchase equipment, molds and component parts for research and development of
$609,953 of which advance payments of $209,678 have been made and recorded in Other Assets (See Note 6).
Contingencies
At
each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably
estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company is currently not
involved in any material litigation or other loss contingencies.
Royalty
Agreement
In
connection with the purchase of certain intellectual property in July 2017, Barry Berler and Alan Blackman entered into a royalty agreement
which provides that Barry Berler will be entitled to a royalty of four percent (4%) of net sales derived from the use, sale, lease, rent
and export of products related to the intellectual property. The royalty continues until the patent expires or is no longer used in the
Company’s product. The royalty agreement was assumed by the Company in December 2017.
In
September 2018, the Royalty Agreement was amended to reduce the royalty to 2% and further provided for a single payment of $500,000 to
Barry Berler within three years in return for cancellation of all further royalty obligations of the Company. In May 2019, the Royalty
Agreement was further amended to change the payment date to on or before May 31, 2021 or during the term of the amended Royalty Agreement
should the Company be acquired or a controlling interest be acquired. The Company has not made the aforementioned payment or incur any
change in control as such the 2% royalty remains in place.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEAR ENDED DECEMBER 31, 2022 AND 2021
Note
15. Commitments and Contingencies (continued)
Employment
Agreements
On
August 1, 2022, the Company cancelled the consulting agreement with Alan Blackman, Co- Chairman and Chief Operating Officer and entered
into an Employment Agreement which provides for annual salary of $256,000,
which provides for increases, and provisions compensation adjustments, expense and tax differential reimbursements, benefits and bonuses.
As of September 1, 2022, the annual salary is $320,000.
At June 30, 2022, the Company approved and accrued a $250,000
bonus to Mr. Blackman for services provided in
2022, of which $65,000
was paid subsequent to December 31, 2022.
On
September 30, 2022, the Company entered into a formal employment agreement, effective on such date and will continue until
terminated by either party, subject to the terms of the agreement, with Andrew R. Crescenzo who has been serving as the
Company’s Chief Financial Officer on a contract services basis for the last three years. The agreement provided for annual
compensation of $225,000 and plus a one-time $18,750 incentive payment upon the commencement of the agreement. During the course of
the term, Mr. Crescenzo will be eligible for (i) performance bonuses to be granted at the discretion of the Company’s
Compensation Committee and (ii) to participate in the Company’s 2022 Equity Incentive Plan. The agreement contains customary
employment terms and conditions.
In
October 2022, the Company entered into a service agreement (“Service Agreement”) with an unrelated third-party for
marketing and investor relations services. The Service Agreement, which has a term of one year, has various deliverables and
provides payments to the third party as follows; a) an initial fee of $90,000,
b) monthly fees through the term of $12,500,
c) 200,000
shares of restricted common stock and d) $300,000
specifically related to digital marketing activities. As stated in Note 8, the 200,000
shares of restricted common stock were valued at $230,000,
representative of the trading price on the issuance.
Note
16. Subsequent Events
On
January 25, 2023, the Company granted five-year options (the “Options”) to purchase a total of 975,000
shares of the Company’s common stock, par
value $0.0001
per share (the “Common Stock”) to
its directors, executive officers, employee and consultants pursuant to the Company’s. 2022 and 2023 Equity Incentive Plans. The
Options are exercisable at $1.37
per share which was the closing price on January
25, 2023. Of the Options granted, Options to purchase an aggregate of 495,000
shares of Common Stock were issued to executive
officers Options to purchase an aggregate of 455,000
shares of Common Stock were issued to directors
and Options to purchase an aggregate of 75,000
shares of Common Stock to employees and a consultant.
On
January 25, 2023, the Company’s Board of Directors adopted the 2023 Equity Incentive Plan (the “2023 Plan”). The 2023
Plan provides for the issuance of up to 1,400,000
options and/or shares of restricted stock to
be available for issuance to officers, directors, employees and consultants. The 2023 Plan is subject to shareholder approval at
the annual meeting.
On
February 09, 2023, the Company, appointed Justin Paige, as Vice President
of Technical Operations with a start date of February 15, 2023. The agreement provides for annual compensation of $235,000 and
Options to purchase 50,000 shares of Common Stock at the exercise price of $1.30, the closing price on the grant date. During the course
of the term, Mr. Paige will be eligible for (i) performance bonuses to be granted at the discretion of the Company’s Compensation
Committee and (ii) to participate in the Company’s Equity Incentive Plan. The agreement contains customary employment terms
and conditions and provides for severance of six months if a change in control occurs, as defined.
On
February 3, 2023, the Company completed a securities purchase agreement (“Offering”) with institutional investors and
received net proceeds from the Offering were approximately $3.2
million, net of $600,000
in fees relating to the placement agent and other offering expenses. The Offering was priced at the market under Nasdaq rules. In
connection with the Offering, the Company issued 2,248,521
units at a purchase price of $1.69
per unit. Each unit consists of one share of common stock and one non-tradable warrant exercisable for one share of common stock at
a price of $1.56.
The warrants have a term of five
years from the issuance date. On February 13, 2023, the Company filed an S-1 (Resale) Registration Statement in connection with the Offering.