SIDUS SPACE INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)

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You should read the following discussion and analysis of our financial condition
and plan of operations together with and our accompanying consolidated financial
statements and the related notes appearing elsewhere in this Annual Report on
Form 10-K. In addition to historical information, this discussion and analysis
contains forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those discussed
below. Factors that could cause or contribute to such differences include, but
are not limited to, those identified below, and those discussed in the section
titled "Risk Factors" included elsewhere in this Annual Report on Form 10-K. All
amounts in this report are in U.S. dollars, unless otherwise noted.



Overview of Operations


We are a space-as-a-service company focused on commercial satellite design,
manufacture, launch, and data collection with a vision to enable space flight
heritage status for new technologies and deliver data and predictive analytics
to both domestic and global customers. We are building an all-inclusive
space-as-a-service platform for the global space economy. We are developing and
plan to launch 100 kg (220-pound) satellites with available space to rapidly
integrate customer sensors and technologies. By developing a plug-and-play
operating system for space, we believe we can deliver customer sensors to orbit
in months, rather than years. In addition, we intend on delivering high-impact
data for insights on aviation, maritime, weather, space services, earth
intelligence and observation, financial technology (Fintech) and the Internet of
Things. Our revenues to date have been from our space related manufacturing
offerings and we have not generated revenue from our constellation space
offering.



Results of Operations


Comparison of the year ended December 31, 2021 to the year ended December 31, 2020



The following table provides certain selected financial information for the
periods presented:



                                               Years Ended
                                               December 31,
                                          2021              2020            Change             %
Revenue- non-related parties          $    789,490      $  1,631,413     $   (841,923 )           (52 )%
Revenue - related parties                  619,234           175,769       
  443,465             252 %
Total revenue                            1,408,724         1,807,182         (398,458 )           (22 )
Cost of revenue                          1,775,299         1,786,410          (11,111 )            (1 )%
Gross Profit (Loss)                       (366,575 )          20,772         (387,347 )        (1,865 )%
Gross Profit (Loss) Percentage                 (26 )%              1 %     
      (27 )%       (2,364 )%

Operating expense                        3,146,957         1,553,909        1,593,048             103 %
Other income (expense)                    (232,606 )          (9,769 )       (222,837 )         2,281 %
Net loss                              $ (3,746,138 )    $ (1,542,906 )   $ (2,403,232 )           143 %




Revenue



The decrease in non-related party revenue of 52% for the year ended December 31,
2021 to $789,000 as compared to approximately $1.6 million for the year ended
December 31, 2020 was driven by negative impacts as a result of the Covid-19
global pandemic and due to the uneven nature of contract business. The increase
in revenue from related parties of 252% to approximately $619,000 from
approximately $176,000 was driven by our related party outsourcing more of its
work to us as opposed to outside sources.



Cost of Revenue


The decrease in cost of revenue of 1% for the year ended December 31, 2021 to
$1.77 million as compared to approximately $1.78 million for the year ended
December 31, 2020 was driven by fewer materials purchases and other direct costs
as a percentage of revenue. As a manufacturing entity, materials and other
direct costs are a percentage of revenue. The percent change in the cost of
revenue was less than the percent change in revenue due to increased costs due
to inflationary pressure on labor costs and raw materials as compared to fixed
rate contracts for work.



Gross Profit (Loss)


The increase in our gross loss of approximately $387,000 or 1,865% for the year
ended December 31, 2021 as compared to a gross profit of approximately $21,000
for the year ended December 31, 2020 is primarily attributable to a reduction in
revenue and and an increase in labor intensive contracts. Additionally, costs of
both labor and materials increased due to inflationary pressures as a result of
a strong job market and supply chain constraints.



Operating Expenses



                                             Years Ended
                                            December 31,
                                        2021            2020           Change           %
Operating expenses
Payroll expense                      $ 1,503,236     $   905,012     $   598,224          66 %
Sales and marketing expense               71,111         154,384         (83,273 )       (54 )%
Lease expense                            253,311         159,122          94,189          59 %
Depreciation expense                      34,767          41,521          (6,754 )       (16 )%
Professional fees                        335,604          19,216         316,388       1,646 %
General and administrative expense       948,928         274,654         674,274         245 %
Total                                $ 3,146,957     $ 1,553,909     $ 1,593,048         103 %




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Overall operating expenses increased by $1.6 million to approximately $3.15
million for the year ended December 31, 2021 as compared to approximately $1.55
million for the year ended December 31, 2020. The increase is primarily
attributed to an increase in our payroll expenses to $1.5 million from $905,012
for the year ended December 31, 2020, primarily as a result of an expansion of
our staff, an increase in our lease expenses to $253,311 from $159,122 as a
result of our leasing more space for our expansion, an increase in our
professional fees from approximately $19,000 to approximately $335,00 as a
result of preparing for our initial public offering and an increase in our other
general and administrative costs to $948,000 from $278,000 for the prior period,
which is related to an increase in the size of our Company.



Total other income (expense)


During the year ended December 31, 2021we had a gain on the cancellation of the PPP loan of $633,830other expense of $504financing costs related to our IPO of
$768,905 and the interest charges of $97,027.

During the year ended December 31, 2020we had other income from $10,000 thanks to EIDL subsidies, other miscellaneous costs of $1,500 and the interest charges of $18,269.

Cash and capital resources

The following table shows selected financial information about us as of December 31, 2021and December 31, 2020.


                               December 31,      December 31,
                                   2021              2020             Change           %
Current assets                 $  16,007,584     $     582,617     $ 15,627,967       2,648 %
Current liabilities            $   3,810,269     $   8,095,721     $

(4,285,452) (53)% Working capital (deficiency) $12,197,315 ($7,513,104) $19,910,419 262%

We had an accumulated deficit of $15.4 million and working capital of $12.2 million from December 31, 2021. From December 31, 2021we have had $13.7 million
cash.

From December 31, 2021excess working capital is due to funds raised from the sale of shares in our IPO, and as of
December 31, 2020the working capital deficit is mainly due to $7.3 millionthanks to CTC, our main shareholder.

Current assets increased by $15.6 million to $16 million as of December 31, 2021
from $582,617 as of December 31, 2020. The increase is primarily attributable to
the funds raised in our initial public offering.



Current liabilities decreased by approximately $4.3 million to approximately
$3.8 million as of December 31, 2021 from $8.1 million as of December 31, 2020.
The decrease was attributable to a forgiveness of related party advances owed to
CTC, our principal stockholder.



Cash Flow



                                                 Years Ended
                                                December 31,
                                            2021             2020            Change

Cash flows used in operating activities ($2,484,778) ($1,587,234) $

   (897,544 )
Cash used in investing activities       $   (217,840 )   $     (4,508 )   $   (213,332 )
Cash provided by financing activities   $ 16,393,301     $  1,554,579     $
14,838,722
Cash on hand                            $ 13,710,845     $     20,162     $ 13,690,683




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Cash flow from operating activities

Year ended December 31, 2021 and 2020



For the years ended December 31, 2021 and 2020, we did not generate positive
cash flows from operating activities. For the year ended December 31, 2021, net
cash flows used in operating activities was approximately $2.5 million compared
to approximately $1.6 million during the year ended December 31, 2020.



Cash flows used in operating activities for the year ended 2021, comprised of a
net loss of $3.7 million, which was reduced by non-cash expenses of $1.4 million
for stock based compensation, financing expenses and depreciation and
amortization, an increase due to the forgiveness of PPP loans of approximately
$634,000 and a net change in working capital of approximately $520,000.



For the year ended December 31, 2020net cash used in operating activities including a net loss of approximately $1.5 millionwhich was reduced by non-cash expenses of approximately $464,000 depreciation and increased by a net change in working capital of approximately
$509,000.

Cash flow from investing activities

Over the years ended December 31, 2021 and 2020, we purchased property, plant and equipment for an amount of approximately $218,000 and about $4,500
respectively.

Cash flow from financing activities



During the year ended December 31, 2021, net cash provided by financing
activities of approximately $16.4 million included proceeds from our initial
public offering in December, 2021 of approximately $16.3 million, net proceeds
from notes payable of approximately $307,000, payments on our finance leases of
approximately $75,000, repayments of notes payable of approximately $16,000 and
repayments of notes payable to CTC, our principal stockholder, of $250,000.
During the year ended December 31, 2020, net cash provided by financing
activities of $1.5 million included proceeds from our majority shareholder of
$1.6 million, proceeds from a PPP loan of approximately $322,000 and was offset
by the repayment of notes payable of approximately $63,000, payments on our
finance leases of approximately $260,000.



Off-balance sheet arrangements

We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Critical Accounting Policies and Significant Judgments and Estimates



This discussion and analysis of our financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with generally accepted accounting principles in the United States
("GAAP"). The preparation of these financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported expenses incurred during
the reporting periods. Our estimates are based on our historical experience and
on various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions. While our significant accounting policies are
described in more detail in the notes to our financial statements included
elsewhere in this annual report on Form 10-K, we believe that the following
accounting policies are critical to understanding our historical and future
performance, as these policies relate to the more significant areas involving
management's judgments and estimates.



We believe our most critical accounting policies and estimates relate to the
following:



  ? Revenue Recognition
  ? Inventory
  ? Lease Accounting




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Revenue Recognition



We adopted ASC 606 - Revenue from Contracts with Customers using the modified
retrospective transition approach. The core principle of ASC 606 is that revenue
should be recognized in a manner that depicts the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled for exchange of those goods or services. Our
updated accounting policies and related disclosures are set forth below,
including the disclosure for disaggregated revenue. The impact of adopting ASC
606 was not material to the Consolidated Financial Statements.



Our revenue is recognized under Topic 606 in a manner that reasonably reflects
the delivery of our services and products to customers in return for expected
consideration and includes the following elements:



  ?  executed contracts with our customers that we believe are legally
     enforceable;
  ?  identification of performance obligations in the respective contract;

? determination of the transaction price for each performance obligation in

respective contract;

? Allocation of the transaction price to each performance obligation; and

? revenue recognition only when we satisfy each performance obligation.

These five elements, applied to each of our revenue categories, are summarized below:

Revenues from fixed price contracts that are still in progress at month end are
recognized on the percentage-of-completion method, measured by the percentage of
total costs incurred to date to the estimated total costs for each contract.
This method is used because management considers total costs to be the best
available measure of progress on these contracts. Revenue from fixed price
contracts and time-and-materials contracts that are completed in the month the
work was started are recognized when the work is shipped. To achieve this core
principle, we apply the following five steps: identify the contract with the
client, identify the performance obligations in the contract, determine the
transaction price, allocate the transaction price to performance obligations in
the contract and recognize revenues when or as we satisfy a performance
obligation.



Revenues from fixed price service contracts that contain provisions for
milestone payments are recognized at the time of the milestone being met and
payment received. This method is used because management considers that the
payments are nonrefundable unless the entity fails to perform as promised. If
the customer terminates the contract we are entitled only to retain any progress
payments received from the customer and we have no further rights to
compensation from the customer. Even though the payments made by the customer
are nonrefundable, the cumulative amount of those payments is not expected, at
all times throughout the contract, to at least correspond to the amount that
would be necessary to compensate us for performance completed to date.
Accordingly, we account for the progress under the contract as a performance
obligation satisfied at a point in time. To achieve this core principle, we
apply the following five steps: identify the contract with the client, identify
the performance obligations in the contract, determine the transaction price,
allocate the transaction price to performance obligations in the contract and
recognize revenues when or as we satisfy a performance obligation.



Inventory



Inventory consists of work in progress and finished goods and consists of
estimated revenue calculated on a percentage of completion based on direct labor
and materials in relation to the total contract value. We do not maintain raw
materials.



Leases



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The standard
requires lessees to recognize the assets and liabilities that arise from leases
in the balance sheet. Additionally, in July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842) - Targeted Improvements, which, among other things, provides
an additional transition method that would allow entities to not apply the
guidance in ASU 2016-02 in the comparative periods presented in the financial
statements and instead recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. We determine if an
arrangement is a lease at inception. Operating leases are included in operating
lease right-of-use ("ROU") assets, operating lease liabilities - current, and
operating lease liabilities - noncurrent on the balance sheets. Finance leases
are included in property and equipment, other current liabilities, and other
long-term liabilities in our balance sheets.



ROU assets represent our right to use an underlying asset for the lease term and
lease liabilities represent our obligation to make lease payments arising from
the lease. Operating lease ROU assets and liabilities are recognized at
commencement date based on the present value of lease payments over the lease
term. As most of our leases do not provide an implicit rate, we generally use
our incremental borrowing rate based on the estimated rate of interest for
collateralized borrowing over a similar term of the lease payments at
commencement date. The operating lease ROU asset also includes any lease
payments made and excludes lease incentives. Our lease terms may include options
to extend or terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense for lease payments is recognized on a
straight-line basis over the lease term.



Leases with a lease term of 12 months or less at inception are not recorded on
our balance sheet and are expensed on a straight-line basis over the lease term
in our statement of operations.



JOBS Act



On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides
that an "emerging growth company" can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended
("Securities Act") for complying with new or revised accounting standards. In
other words, an "emerging growth company" can delay the adoption of certain
accounting standards until those standards would otherwise apply to private
companies.



We have chosen to take advantage of the extended transition periods available to
emerging growth companies under the JOBS Act for complying with new or revised
accounting standards until those standards would otherwise apply to private
companies provided under the JOBS Act. As a result, our financial statements may
not be comparable to those of companies that comply with public company
effective dates for complying with new or revised accounting standards.



We are in the process of evaluating the benefits of relying on other exemptions
and reduced reporting requirements provided by the JOBS Act. Subject to certain
conditions set forth in the JOBS Act, as an "emerging growth company," we intend
to rely on certain of these exemptions, including without limitation, (i)
providing an auditor's attestation report on our system of internal controls
over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act
and (ii) complying with any requirement that may be adopted by the Public
Company Accounting Oversight Board ("PCAOB") regarding mandatory audit firm
rotation or a supplement to the auditor's report providing additional
information about the audit and the financial statements, known as the auditor
discussion and analysis. We will remain an "emerging growth company" until the
earliest of (i) the last day of the fiscal year in which we have total annual
gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year
following the fifth anniversary of the date of the completion of this offering;
(iii) the date on which we have issued more than $1 billion in nonconvertible
debt during the previous three years; or (iv) the date on which we are deemed to
be a large accelerated filer under the rules of the SEC.

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