SKYX

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes included elsewhere in this Form 10-Q and our audited financial statements and related notes thereto for the year ended December 31, 2025 included in our Annual Report on Form 10-K for the year ended December 31, 2025. This discussion and analysis and other parts of this Form 10-Q contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties, and assumptions, such as statements regarding our plans, objectives, strategy, expectations, outlook, intentions, and projections. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth in “Part I. Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2025, in this Form 10-Q, and in other filings with the Securities and Exchange Commission (the “SEC”). Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements” contained in this Form 10-Q. Overview We have a series of advanced-safe-smart platform technologies. Our first and second-generation technologies enable light fixtures, ceiling fans and other electrically wired products to be installed safely and plugged into a ceiling’s electrical outlet box within seconds, and without the need to touch hazardous wires. The plug and play technology method is a universal power-plug device that has a matching receptacle that is simply connected to the electrical outlet box on the ceiling, enabling a safe and quick plug and play installation of light fixtures and ceiling fans in just seconds. The plug and play power-plug technology eliminates the need of touching hazardous electrical wires while installing light fixtures, ceiling fans and other hardwired electrical products. In recent years, we have expanded the capabilities of our power-plug product to include advanced-safe and quick universal installation methods, as well as advanced-smart capabilities. The smart features include control of light fixtures and ceiling fans by the SkyHome App, through WIFI, Bluetooth Low Energy and voice control. It allows scheduling, energy savings eco mode, dimming, back-up emergency light, night light, light color changing and much more. Our third-generation technology is an all-in-one safe and smart-advanced platform that is designed to enhance all-around safety and lifestyle of homes and other buildings. Our products are designed to improve all around home and building safety and lifestyle. We are continuing to refine our products and began manufacturing certain advanced and smart products in 2023 and expect additional products, including the third-generation smart-advanced platform to be available in 2026. We expect to manufacture the additional product offerings within the next six months. We hold over 100 U.S. and global patents and patent applications and have received a variety of final electrical code approvals, including UL, Underwriters Laboratories of Canada (cUL) and Conformité Europeenne (CE), and 2017 and 2020 inclusion in the NEC Code Book. We believe our total addressable market in the United States exceeds $500 billion, based on the Company’s internal calculations derived from the estimation of the total target user pool, projected average selling price, and projected units per household. We believe there are billions of installations of light and other electrical fixtures globally. Our estimates of the addressable market for our products may prove to be incorrect. The projected demand for our products could differ materially from actual demand. Even if the total addressable market for our products is as large as we have estimated and even if we are able to gain market awareness and acceptance, we may not be able to penetrate the existing market to capture additional market share. Recent Developments During 2025 and January 2026, we generated proceeds of $5.6 million pursuant to our ATM, $29.3 million pursuant to the issuance of shares of our common stock, $5.4 million pursuant to the issuance of our preferred stock, and $5.3 million pursuant to the issuance of convertible notes. We have expanded our product lines to include an all-in-one plug and play combined heater, fan, and lighting product which will eventually accommodate the integration of our smart and advanced products. 18 Results of Operations Comparison of the Six months ended June 30, 2026, and 2025 For the three months ended June 30, Increase/ Increase/ (Decrease) For the six months ended June 30, Increase/ Increase/ (Decrease) 2026 2025 (Decrease) % 2026 2025 (Decrease) % Revenue $ 25,270,500 $ 23,061,655 $ 2,208,845 9.6 $ 47,364,889 $ 43,175,593 $ 4,189,296 9.7 Cost of revenues 17,977,665 16,064,486 1,913,179 11.9 33,446,611 30,466,974 2,979,637 9.8 Selling and marketing expenses 6,785,963 6,185,017 600,946 9.7 13,853,792 13,012,437 841,355 6.5 General and administrative expenses 7,578,762 8,333,265 (754,503 ) (9.1 ) 15,298,536 14,930,320 368,216 2.5 Total expenses $ 32,342,390 $ 30,582,768 $ 1,759,622 5.8 $ 62,598,939 $ 58,409,731 $ 4,189,208 7.2 Operating loss $ (7,071,890 ) $ (7,521,113 ) $ 449,223 (6.0 ) $ (15,234,050 ) $ (15,234,138 ) $ 88 (0.0 ) Other expense Interest expense, net 1,152,194 1,305,816 (153,622 ) (11.8 ) 2,265,611 2,644,919 (379,308 ) (14.3 ) Total other expense, net $ 1,152,194 $ 1,305,816 $ (153,622 ) (11.8 ) $ 2,265,611 $ 2,644,919 $ (379,308 ) (14.3 ) Net loss $ (8,224,084 ) $ (8,826,929 ) $ 602,845 (6.8 ) $ (17,499,661 ) $ (17,879,057 ) $ 379,396 (2.1 ) Revenue The increase in revenues is primarily due to an increased number of units of lighting and heating products sold. We believe that our revenues will be higher in 2026 than in 2025 primarily resulting from revenues from the sale of our advanced and smart products. Cost of Revenues The increase in cost of revenue is proportionate to the increase in revenues. We believe that the cost of revenues will increase in 2026 compared to 2025, commensurate with an anticipated increase in revenues. Selling and Marketing Expenses Selling and marketing expenses consist primarily of sales and marketing compensation as well as sales and marketing programs. The increase in selling and marketing expenses is primarily due to increased marketing programs costs. We believe that our selling and marketing expenses in 2026 will increase slightly but at a lower rate than the revenue growth when compared to 2025. General and Administrative Expenses General and administrative expenses consist primarily of an allocation of product development, finance, legal, human resources, including salaries, wages, and benefits, and depreciation and amortization, including share-based payments. The decrease in general and administrative expenses during the second quarter of 2026 was primarily attributable to lower share-based compensation during the second quarter of 2026 offset by an increase in costs of supporting our operations during the first quarter of 2026. Interest Expenses, Net Interest expenses consist of interest on interest-bearing obligations and amortization of debt discount offset by interest income. The decrease in interest expenses, net is primarily due to higher interest income earned on greater interest-bearing cash accounts. Liquidity and Capital Resources As of June 30, 2026, and December 31, 2025, we had $27.7 million and $10.1 million in cash, cash equivalents, and restricted cash, respectively. During the six months ended June 30, 2026, the Company issued approximately 12 million shares of common stock pursuant to offerings, for aggregate net proceeds of approximately $27.4 million. The Company received proceeds of approximately $1.9 million from the exercise of warrants. Our future capital requirements will depend on many factors, including our revenue growth rate, expenditures related to our headcount growth, the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of platform enhancements, and the market adoption of our platforms. We may continue to enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may, because of those arrangements, or the general expansion of our business, be required to seek additional equity or debt financing. If we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, results of operations, and financial condition. We owe approximately $17.3 million under fixed rate obligations as of June 30, 2026. As common with companies having a similar cash conversion cycle as ours, when sales are converted into cash rapidly, often referred to as the “Dell Working Capital Model,” we leverage our trades payable to finance our operations to lower our cost of capital, and accordingly, we may have negative working capital. This negative working capital is partly inherent to the relatively quick turnaround of finished goods inventory, quicker collection of accounts receivables, and longer payment cycle of trades payable. Our negative working capital, which consists of accounts receivable, inventory, net of trades and compensation payable, amounted to $9.9 million as of June 30, 2026. 19 Please see below a summary of the primary components of our cash used in or provided by operating investing and financing activities during the six-month periods ended June 30, 2026, and 2025: For the six months ended June 30, 2026 2025 Operations: Net loss $ (17,499,661 ) $ (17,879,057 ) Depreciation and amortization 2,825,395 2,837,152 Stock-based payments 6,334,492 6,653,522 Working capital changes (1,346,281 ) 2,078,605 Net cash used in operating activities (9,686,055 ) (6,309,778 ) Investing: Purchase of property and equipment (92,076 ) (775,365 ) Net cash used in investing activities (92,076 ) (775,365 ) Financing: Proceeds from issuance of stock 27,392,004 8,346,550 Dividends paid (506,045 ) (484,504 ) Proceeds from exercise of warrants and options 1,911,101 - Principal repayments of notes payable (1,410,079 ) (569,790 ) Net cash provided by financing activities 27,386,981 7,292,256 Change in cash and cash equivalents, and restricted cash 17,608,850 207,113 Cash, cash equivalents and restricted cash at beginning of the period 10,102,621 15,500,495 Cash, cash equivalents and restricted cash at end of period $ 27,711,471 $ 15,707,608 The changes in working capital, net are primarily attributable to timing differences in accounts receivable, accounts payable related to operations and deferred revenues. Non-GAAP Financial Measures Management considers earnings (loss) before interest, taxes, depreciation and amortization, or EBITDA, as adjusted, an important indicator in evaluating our business on a consistent basis across various periods. Due to the significance of non-recurring items, EBITDA, as adjusted, enables our management to monitor and evaluate our business on a consistent basis. We use EBITDA, as adjusted, as a supplemental measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and potential acquisitions. We believe that EBITDA, as adjusted, eliminates items that are not part of our core operations, such as interest expense and amortization and impairment expense associated with intangible assets, or items that do not involve a cash outlay, such as share-based payments, and non-recurring items, such as transaction costs. EBITDA, as adjusted, should be considered in addition to, rather than as a substitute for, pre-tax income (loss), net income (loss) and cash flows used in operating activities. This non-GAAP financial measure excludes significant expenses that are required by GAAP to be recorded in our financial statements and is subject to inherent limitations. Investors should review the reconciliation of this non-GAAP financial measure to the comparable GAAP financial measure included below. Investors should not rely on any single financial measure to evaluate our business. For the three months ended June 30, For the six months ended June 30, 2026 2025 2026 2025 Net loss $ (8,224,084 ) $ (8,826,929 ) $ (17,499,661 ) $ (17,879,057 ) Share-based payments 2,536,609 3,612,364 5,634,494 6,653,522 Interest expense 1,152,194 1,305,816 2,265,611 2,644,919 Depreciation, amortization 1,001,961 1,272,337 2,181,184 2,280,154 EBITDA, as adjusted $ (3,533,320 ) $ (2,636,412 ) $ (7,418,372 ) $ (6,300,462 ) 20 Critical Accounting Policies Our significant accounting policies are disclosed in Note 2 to our consolidated financial statements for the year ended December 31, 2025 contained in our Annual Report on Form 10-K. The following is a summary of those accounting policies that involve significant estimates and judgment of management. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Such estimates and assumptions impact both assets and liabilities, including but not limited to: net realizable value of accounts receivable and inventory, estimated useful lives and potential impairment of property and equipment, the valuation of intangible assets, estimate of fair value of share based payments and derivative liabilities, estimates of fair value of warrants issued and recorded as debt discount, estimates of tax liabilities and estimates of the probability and potential magnitude of contingent liabilities. Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the financial statements, which management considered in formulating its estimate could change in the near term due to one or more future non-conforming events. Accordingly, actual results could differ significantly from estimates. Fair Value of Financial Instruments Disclosures about fair value of financial instruments require disclosure of the fair value information, whether or not recognized in the balance sheet, where it is practicable to estimate that value. As of June 30, 2026, and December 31, 2025, we believe the amounts reported for cash, prepaid expenses, accounts payable and accrued expenses and other current liabilities, accrued interest, notes payable and convertible note payable approximate fair value because of their short maturities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include: ● Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; ● Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and ● Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Stock-Based Compensation Stock-based compensation is accounted for based on the requirements of ASC 718 - “Compensation-Stock Compensation”, which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. Stock-based compensation is measured at the grant date based on the value of the award granted using the Black- Scholes option pricing model based on projections of various potential future outcomes and recognized over the period in which the award vests. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense is included in general and administrative expenses. 21 Revenue Recognition We account for revenues in accordance with Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). Under Topic 606, revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We determine revenue recognition through the following steps: ● identification of the contract, or contracts, with a customer; ● identification of the performance obligations in the contract; ● determination of the transaction price; ● allocation of the transaction price to the performance obligations in the contract; and ● recognition of revenue when, or as, we satisfy a performance obligation. Recent Accounting Pronouncements Although there are several new accounting pronouncements issued or proposed by the Financial Accounting Standards Board, which we have adopted or will adopt, as applicable, we do not believe any of these accounting pronouncements have had or will have a material impact on our financial position or results of operations. ITEM