NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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, Inc, collectively referred to as the “Company.” The consolidated balance sheet as of September 30,
2022, the consolidated statements of operations and comprehensive loss and stockholders’ equity for the three and nine months
ended September 30, 2022 and 2021, and the consolidated statements of cash flows for the nine months ended September 30, 2022 and
2021 (the “interim statements”) are unaudited. All intercompany transactions and balances have been eliminated. In the
opinion of management, all adjustments (which include normal recurring adjustments) necessary to present fairly the financial
position and operating results for the interim periods have been made. Certain information and footnote disclosure, normally
included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States,
have been condensed or omitted. The interim statements should be read in conjunction with the consolidated financial statements for
the year ended December 31, 2021 and notes thereto contained in the Company’s Form S-1 filed with the Securities and Exchange
Commission. The consolidated balance sheet at December 31, 2021 has been derived from the audited financial statements at that date.
The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2022.
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
amounts reported in the financial statements and accompanying notes. The accounting estimates and assumptions that require management’s
most significant, difficult, and subjective judgment include the valuation and recognition of stock-based compensation expense, contingent
stock liability, contingent warrant liability, warrant liability, inventory obsolescence provision, depreciation of fixed assets and
deferred tax asset valuation. Actual results experienced by the Company may differ from management’s estimates.
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 September 30, 2022 and December 31, 2021, inventory is comprised of raw materials and components.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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 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 number of parts
that will be produced based on the expected mold capability.
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 three and nine months ended September 30, 2022 and 2021.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
Note
2. Summary of Significant Accounting Policies (continued)
At
their issuance date and as of September 30, 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 statement 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. Foreign currency translation
adjustments included in comprehensive loss were not tax effected as the Company has a full valuation allowance at September 30, 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 September 30, 2022,
there were 10,552,773
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
Note
2. Summary of Significant Accounting Policies (continued)
Contingencies
From
time to time, the Company may be involved in legal and administrative proceedings and claims of various types. The Company records a
liability in its consolidated financial statements for these matters when a loss is known or considered probable and the amount can
be reasonably estimated. Management reviews these estimates in each accounting period as additional information becomes known and
adjusts the loss provision when appropriate. If the loss is not probable or cannot be reasonably estimated, a liability is not
recorded in the consolidated financial statements. If a loss is probable but the amount of loss cannot be reasonably estimated, the
Company discloses the loss contingency and an estimate of possible loss or range of loss (unless such an estimate cannot be made).
The Company does not recognize gain contingencies until they are realized. Legal costs incurred in connection with loss
contingencies are expensed as incurred.
Note
3. 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.
Note
4. Fixed Assets
Fixed
asset, net, as of September 30, 2022 and December 31, 2021, are summarized as follows:
Schedule
of Property, Plant and Equipment
| |
September
30, 2022 | | |
December
31, 2021 | |
| |
| | |
| |
Land | |
$ | 205,442 | | |
$ | - | |
Building | |
| 2,232,779 | | |
| - | |
Machinery
and Equipment | |
| 4,501,756 | | |
| 3,778,766 | |
Website | |
| 16,600 | | |
| 16,600 | |
Fixed asset, gross | |
| 6,956,577 | | |
| 3,795,366 | |
Less:
accumulated depreciation | |
| (312,087 | ) | |
| (32,034 | ) |
Fixed
asset, net | |
$ | 6,644,490 | | |
$ | 3,763,332 | |
Depreciation
expense of fixed assets for the nine months ended September 30, 2022 and 2021 was $280,053 and $6,149, respectively.
During
the nine months ended September 30, 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 September 30, 2022, the Company has $100,000 in remaining payments for
machinery purchased, which is included in accounts payable and accrued liabilities.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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 10,000 stock options with an exercise price of $4.25. At July 6, 2022, the fair market
value of the common stock of $200,000 and the vested options of $183,136 is included in the acquisition price. 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 three and nine months ended September 30, 2022, the Company had remitted $ nil (2021 - $250,000) and $683,000 (2021 - $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, was accounted for as an asset acquisition in accordance with ASC 805-50 by
using the cost accumulation model. 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 derived from a third-party asset valuation performed. The
intangible 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 statement of operations and comprehensive loss after
the closing on July 6, 2022.
The
relative fair value of the assets acquired is as follows:
Schedule
of fair value of the assets acquisition
| |
| | |
Land | |
$ | 220,000 | |
Building
and affixed assets | |
| 2,391,000 | |
Machinery | |
| 154,000 | |
Inventory | |
| 109,000 | |
Intangibles | |
| 62,712 | |
| |
| | |
Total | |
$ | 2,936,712 | |
The
useful lives for the acquired assets is Building - 20 years; Machinery – 5 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 September 30, 2022 and December 31, 2021 are summarized as follows:
Schedule
of Other Assets
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Acquisition
(see Note 5) | |
$ | - | | |
$ | 472,701 | |
Intangibles | |
| 55,426 | | |
| - | |
Deposits
on machinery and molds (see Note 15) | |
| 111,013 | | |
| - | |
Other | |
| 22,262 | | |
| 57,162 | |
Other
assets | |
$ | 188,701 | | |
$ | 529,863 | |
Intangibles
are related to the Asset Acquistion (see Note 5) that occurred in July 2022. Intangibles, as of September 30, 2022, consist of an acquired
workforce and permits. Amortization for the three and nine months ended September 30, 2022 was $3,136.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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 bear interest at 8% with interest payments due monthly. The Company and the Purchasers have entered into a Security Agreement
whereby the Notes are 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 provides 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 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 is unknown
at the time of the NPA and will be 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 in 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 has been 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 Notes with proceeds from the IPO that closed on April 19, 2022.
The
Contingent Stock and Contingent Warrant liabilities were measured at FMV on the date of issuance using the Black-Scholes valuation model.
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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, 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 Contingent Warrants (“Note Warrants”) with an exercise price of $4.25. were
issued. 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 nine months ended September 30, 2022, the Company recorded a FMV income adjustment of $502,648 to reduce the Warrant liability from
$585,000 at December 31, 2021 to $82,352 at September 30, 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 and with respect to the Warrants as a liability under ASC 815. (See Note 10)
During
the nine months ended September 30, 2022, the Company issued 35,000 shares of common stock at the trading stock price in connection with
services provided to the Company and recorded a charge of $60,551, In addition, the Company issued 235,295 common shares relating to
the Note Purchase agreement. (See Note 7)
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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 September 30, 2022 the liability was $3,018,750. During the three and nine months ended September 30, 2022, the Company recorded
a FMV gain (loss) adjustment of $(618,413) and 2,760,000, respectively. (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 three and nine
months ended September 30, 2022, the Company recorded a FMV gain (loss) of $(16,870) and $75,295, respectively. (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 $228,655 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 25%, effective with the IPO. Subequently, the Company approved a change to 29.5% with all other rights
unchanged. 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 September 30, 2022 was as follows:
Schedule
of Warrant Liability
| |
| |
|
Note
Warrants | |
$ | 82,352 | |
Trading
and Overallotment Warrants | |
| 3,018,750 | |
Total | |
$ | 3,101,102 | |
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 September 30, 2022 | |
| (2,835,295 | ) |
| |
| | |
Fair
Value at September 30, 2022 | |
$ | 3,101,102 | |
SHARPS
TECHNOLOGY, INC.
NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
Note
11. Stock Options
A
summary of options granted and outstanding is presented below:
Schedule
of Stock Options Granted and Outstanding
| |
September
30, 2022 | |
| |
Shares | | |
Weighted Average Exercise Price | |
Outstanding
at beginning of period | |
| 1,137,479 | | |
$ | 5.18 | |
Options
granted | |
| 367,500 | | |
| 1.63 | |
Outstanding
at end of period | |
| 1,504,979 | | |
$ | 4.32 | |
| |
| | | |
| | |
Exercisable
at end of period | |
| 1,208,015 | | |
$ | 4.48 | |
During
the nine months ended September 30 2022, the Company issued 367,500 stock options at exercise prices ranging from $1.08 to $4.25. As
of September 30, 2022 there was $680,881 of unrecognized stock-based compensation related to unvested stock options, which is expected
to be recognized over a weighted-average period of thirty seven months.
The
following table summarizes information about options outstanding at September 30, 2022:
Schedule
of Information About Options Outstanding
Exercise
Prices | | |
Shares
Outstanding | | |
Weighted
Average Remaining Contractual Life | | |
Shares
Exercisable | |
$ | 1.08
to 1.39 | | |
| 317,500 | | |
$ | 4.67 | | |
| 152,915 | |
$ | 1.75 | | |
| 97,143 | | |
$ | .75 | | |
| 97,143 | |
$ | 2.80 | | |
| 155,714 | | |
$ | 1.00 | | |
| 155,714 | |
$ | 4.25 | | |
| 50,000 | | |
$ | 4.75 | | |
| 31,250 | |
$ | 4.38 | | |
| 344,286 | | |
$ | 2.75 | | |
| 346,929 | |
$ | 7.00 | | |
| 540,336 | | |
$ | 3.75 | | |
| 424,064 | |
For
the three months ended September 30, 2022 and 2021, the Company recognized stock-based compensation expense of $287,298,
of which $264,269
and $23,029
was recorded in general and administrative and research and development expenses, respectively and $606,315
in 2021, of which $573,911
and $32,404
was recorded in general and administrative and research and development expenses, respectively.
For
the nine months ended September 30, 2022 and 2021, the Company recognized stock-based compensation expense of $876,851, of which $803,640
and $73,211 was recorded in general and administrative and research and development expenses, respectively and $932,722 in 2021, of which
$838,442 and $94,280 was recorded in general and administrative and research and development expenses, respectively. Further, for the
three and nine months ended September 30, 2022, the Company recorded stock-based charges of $19,534 and $60,435, respectively, relating
to an Acquisition. (See Note 5)
The
fair value of stock option awards accounted for under ASC 718 was estimated at the date of grant using the Black-Scholes option-pricing
model.
Note
12. Income Taxes
At
the end of each interim reporting period, the Company estimates its effective tax rate expected to be applied for the full year. This
estimate is used to determine the income tax provision or benefit on a year-to-date basis and may change in subsequent interim periods.
Accordingly, the Company’s effective tax rate for the three and nine months ended September 30, 2022 was 0%, compared to the effective
tax rate of 0% for the three and nine months ended September 30, 2021. The Company’s effective tax rates for both periods were
affected primarily by a full valuation allowance on domestic net deferred tax assets.
Note
13. Related Party Transactions and Balances
As
of September 30, 2022 and December 31, 2021, accounts payable and accrued liabilities include $148,000 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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 September 30, 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 | | |
June
30, 2022 | |
| |
Fair
Value Measurements Using | | |
Balance
as at | |
| |
Level
1 | | |
Level
2 | | |
Level
3 | | |
September
30, 2022 | |
| |
| | |
| | |
| | |
| |
Assets | |
| | | |
| | | |
| | | |
| | |
Cash | |
$ | 6,389,839 | | |
| - | | |
| - | | |
$ | 6,389,839 | |
| |
| - | | |
| - | | |
| - | | |
| | |
Total
assets measured at fair value | |
$ | 6,389,839 | | |
| - | | |
| | | |
$ | 6,389,839 | |
| |
| | | |
| | | |
| | | |
| | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Warrant
liability | |
$ | 3,101,102 | | |
| - | | |
| - | | |
$ | 3,101,102 | |
| |
| | | |
| | | |
| | | |
| | |
Total
liabilities measured at fair value | |
$ | 3,101,102 | | |
| - | | |
| - | | |
$ | 3,101,102 | |
Note
15. Commitments and Contingencies
Fixed
Asset
At
September 30, 2022, the Company has outstanding orders to purchase equipment and molds of $239,664 of which progress payments of $111,013
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
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 and provisions compensation adjustments, expense and tax differential
reimbursements, benefits and bonuses. At June 30, 2022, the Company approved and accrued a $250,000 bonus to Mr. Blackman for services
provided in 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.
Note
16. Subsequent Event
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. The initial fee and the first monthly fee have been paid and the
aforementioned common shares have been issued subsequent to September 30, 2022.