reAlpha Tech Corp. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes included elsewhere in this report, as well as our audited financial statements and related notes included in our most recent Transition Report on Form 10-KT for the eight months ended December 31, 2023 (the “Form 10-KT”). In addition to historical information, this discussion and analysis here and throughout this report contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements due to a number of factors, including but not limited to, the risks described in the section titled “Risk Factors” in our Form 10-KT. Business Overview We are a real estate technology company developing an end-to-end commission-free homebuying platform, which we have named reAlpha, previously called “Claire”. Utilizing the power of AI and an acquisition-led growth strategy, our goal is to offer a more affordable, streamlined experience for those on the journey to homeownership. reAlpha integrates AI-driven tools to offer tailored property recommendations, an intuitive visual interface, and included digital title and escrow services. The tagline: “No fees. Just keys. TM ” reflects our dedication to eliminating traditional barriers and making homebuying more accessible and transparent. reAlpha was announced on April 24, 2024, and it assists homebuyers with tasks such as mortgage pre-approval, booking tours, sending offer letters and completing property acquisitions. reAlpha also provides market insights, detailed property data, and uses large language models to answer queries and facilitate the homebuying process via a user-friendly, 24/7 web platform and IOS application. reAlpha’s capabilities are complemented and supported by reAlpha Realty, LLC, our in-house brokerage firm, on a no-obligation and commission free basis. Although reAlpha is currently only available for homebuyers in 20 counties in Florida, we intend to expand its capabilities nationwide by the end of 2026 depending on numerous factors, including, among other things, our ability to scale the platform, obtain additional data and successfully market the platform. Due to current macroeconomic conditions, such as higher interest rates, inflation, and elevated property prices, our real estate acquisition operations have been halted. Instead, our current focus is being directed towards the continuous enhancement and refinement of reAlpha and our AI technologies for commercial use to generate technology-derived revenue. Further, as part of our growth strategy, we intend to continue identifying target companies that are complementary to our business, and we intend to generate revenue from integrating such acquisitions that we may complete from time to time into our business. To advance such strategy, during the second and third quarters of 2024 we announced the acquisitions of Naamche, Inc. and its Nepal counterpart entity Naamche, Inc. Pvt. Ltd. (collectively, “Naamche”), AiChat Pte. Ltd (“AiChat”), Hyperfast Title LLC (“Hyperfast”) and Debt Does Deals, LLC (d/b/a Be My Neighbor) (“Be My Neighbor”). These acquisitions have added revenue, additional potential sources of revenue, technology services, and additional capabilities to the reAlpha platform. For instance, following the acquisition of Be My Neighbor, we now have an in-house mortgage brokerage, which mortgage brokerage services are also directly offered through reAlpha. Be My Neighbor is licensed to operate in 27 U.S. states. Additionally, because of our acquisition of Hyperfast, we now can offer title, closing, and settlement services in 3 U.S. states. Following the integration of these companies into our business, consumers using reAlpha have access to these services directly in the platform, both through the web platform and IOS application. We expect to continue seeking additional strategic acquisitions that we believe will add additional sources of potential revenue and services to homebuyers using reAlpha, including, but not limited to, home insurance, AI product companies, and real estate brokerages. Additionally, we have already acquired a mortgage brokerage and a title company, but we may consider further acquisitions in these verticals to add additional U.S. state licenses and potential revenue opportunities. 25 Before shifting our focus towards the development of our AI technologies, our operational model was asset-heavy and built on utilizing our proprietary AI powered technology tools for the acquisition of real estate, converting them into short-term rentals, and enabling individual investors to acquire fractional interests in these real estate properties, allowing such investors to receive distributions based on the property’s performance as a short-term rental. We may resume the complementary asset-heavy model from our rental business segment if the prevailing interest rates and other macroeconomic factors align more favorably with such business model. In the meantime, our growth strategy will encompass both organic and inorganic methods through commercialization of our AI technologies that are in varying stages of development and acquisitions of complementary businesses and technologies. In particular, we intend to acquire companies that we believe will complement our business model and accelerate our proposition to expand our technology offerings to customers by offering IT services, staffing and accounting services and others. Our reportable segments consist of (i) technology services (formerly named “platform services”) and (ii) rental business. Our technology services segment offers and develops AI based products and services to customers in the real estate industry. We are actively developing four operating technologies that are in varying stages of development: GENA, reAlpha BRAIN, reAlpha App and our main AI-powered platform, reAlpha. Our rental business segment, to the extent we resume operations, focuses on purchasing properties for syndication, which process is powered by this segment’s technologies and products. Technology Services (formerly “Platform Services”) We seek to differentiate ourselves from competitors primarily through the integration of AI into our technologies for the real estate industry. We expect that our technology services segment will benefit from the current exponential growth of the AI industry, and we believe that we are well-positioned to take advantage of these current trends due to our early adoption of AI for the development of our technologies. Our current technology services segment technologies include: (i) reAlpha, (ii) reAlpha BRAIN; (iii) reAlpha HUMINT, (iv) GENA, (v) reAlpha App and (vi) AiChat’s conversational platform. myAlphie was a previously developed technology included in our technology services segment that was sold on May 17, 2023, and it stopped contributing to our revenues as of such date, except for the revenue generated for the ongoing technical support we are providing to the buyer of myAlphie, Turnit. Our revenue model revolves around our mortgage services, title services and services offered by our subsidiaries, such as AiChat. As we begin to acquire more companies in the homebuying transactions vertical, including, but not limited to, insurance and others that are complementary to our business, we expect to generate revenues by offering such services. We also expect that our reAlpha platform will drive additional customers to these acquired companies through users interacting and buying homes on reAlpha, which will expand their overall potential customer base. To the extent we resume operations of our short-term rental operations, we expect to receive fee-based revenues from customers that would utilize the reAlpha App for participating and investing in our Syndications (as defined below). Rental Business Our rental business segment operations are currently on hold due to current macroeconomic conditions, such as escalating interest rates, inflation, and elevated property prices. We anticipate resuming operations within this segment through the acquisition of properties and Syndications when the prevailing interest rates and other macroeconomic factors align more favorably with such business model. 26 To the extent we resume these operations, we plan to utilize our AI-powered technologies to analyze and acquire short-term rental properties that meet our internal investment criteria, or the “Investment Criteria,” which is analyzed and determined by our technologies, for syndication purposes, which short-term rental properties are referred to as “Target Properties.” Once the Target Properties are acquired, they are prepared for rent and listed on short-term rental sites, and, when warranted, disposed of for profits. We plan to make investing in our Target Properties available to investors via our subsidiary, Roost Enterprises, Inc. (“Rhove”). Rhove, along with Rhove Real Estate 1, LLC, reAlpha Acquisitions Churchill, LLC and future Syndication LLCs (the “Rhove SBU”), will create and manage limited liability companies (each, a “Syndication LLC”) to syndicate one or more of the Target Properties through exempt offerings. Once the Syndication LLCs are in place, Rhove will launch exempted offerings to sell membership interests in such properties to investors, through the purchase of membership interests in the Syndication LLCs, pursuant to Regulation A or Regulation D, each as promulgated under the Securities Act of 1933, as amended (the “Securities Act”) (each, a “Syndication”). We refer to such investors as “Syndicate Members.” To further facilitate the investment process in the Syndication LLCs, our reAlpha App will work parallel with the Syndication process to allow investors to purchase membership interests in those properties and become Syndicate Members. We intend to generate revenue through our property Syndications on the reAlpha App to the extent we resume these operations. Syndicate Members differ significantly to the holders of our common stock. Rights among Syndicate Members may also vary among each other depending on the specific terms and conditions agreed to in the offering documents pursuant to which the holder becomes a Syndicate Member. By becoming a Syndicate Member, the holder will not acquire any rights to the Company’s common stock and, therefore, will not be entitled to vote, receive a dividend or exercise any other rights of a stockholder of the Company. Likewise, acquiring shares of our common stock will not provide the stockholders the status of Syndicate Member. Both Syndicate Members and our stockholders will receive the same quarterly financial metric information of our listed properties through the reAlpha App and the reAlpha website, which will also be available to the general public without a login, concurrently with our condensed consolidated quarterly results (as more fully described under “Segments – Platform Services” above), to the extent we resume these operations. Syndicate members that have access to the reAlpha App will only receive personalized financial information respective to their individual holdings in each of our Syndications. To date, we have not developed a secondary trading market for equity interests in our Syndication LLCs. While the potential establishment of such a market may be considered in the future, we have not made any decisions to develop a secondary trading market at this time. In addition to managing the property operations, whether internally or through third-parties, we will also manage the financial performance of the asset, such as evaluating if the after-repair value or appreciated value of the property is higher than the purchase price, or whether the property is ready to generate the expected profitability. Once our business model is fully implemented, we expect that Syndicate Members will hold up to 100% ownership of the Syndication LLC, and we would generate revenue through fees from the reAlpha App. Recent Developments Acquisition of AiChat Pte. Ltd. On July 12, 2024, we entered into a Business Acquisition and Financing Agreement (the “Acquisition Agreement”) with AiChat (as defined above), a company incorporated in the Republic of Singapore, AiChat10X Pte. Ltd., a Singaporean company (the “Seller”), and Kester Poh Kah Yong (the “Founder”). Under the Acquisition Agreement, we acquired 85% of the outstanding ordinary shares of AiChat, an AI-driven company specializing in conversational customer experience solutions, from the Seller. The remaining 15% of AiChat’s shares will be acquired on June 30, 2025 (the “Acquisition”). In exchange for all of the ordinary shares of AiChat outstanding immediately prior to the execution of the Acquisition Agreement, and pursuant to the terms and subject to the conditions of the Acquisition Agreement, we agreed to pay the Seller an aggregate purchase price of $1,140,000, consisting of: (i) $312,000 in restricted shares of our common stock, based on a 10% discount to the 10 day volume weighted average price (the “VWAP Share Price”) of our common stock as reported on the Nasdaq Capital Market (“Nasdaq”) and issuable to the Seller no later than January 1, 2025 (the “First Tranche Shares”); (ii) $588,000 in restricted shares of our common stock, based on a 10% discount to the VWAP Share Price, subject to any Base Case Adjustment (as defined in the Acquisition Agreement), issuable to the Seller no later than April 1, 2025 (the “Second Tranche Shares”); and (iii) $240,000 in restricted shares of our common stock, calculated at a 5% discount to the VWAP Share Price, issuable to the Seller no later than December 1, 2025 (the “Third Tranche Shares,” and together with the First Tranche Shares and the Second Tranche Shares, the “Tranche Shares”). In addition, we agreed to subscribe for and purchase from AiChat: (i) 55,710 ordinary shares of AiChat as of the Acquisition’s closing date, for a subscription price of $60,000; and (ii) 222,841 ordinary shares of AiChat in accordance with a disbursement scheduled to be determined and agreed to by us, AiChat and the Founder, for a total subscription price of $240,000. 27 The Tranche Shares will be subject to a 90-day restrictive period (the “Restricted Period”) following issuance, during which the Seller cannot sell, transfer, or otherwise dispose of the shares or request their registration under the Securities Act. After the Restricted Period, the shares will be deposited into the Seller’s designated account and then transferred to the Founder based on his beneficial ownership in the Seller. In order to comply with Nasdaq Listing Rule 5635(a), the total Tranche Shares issued cannot exceed 19.99% of our outstanding common stock immediately before the Acquisition Agreement, which equated to 8,860,213 shares (the “Cap Amount”). Any shares issued in excess of this amount will be paid in cash to the Seller, as specified in the Acquisition Agreement. Additionally, we agreed to guarantee certain Singaporean bank loans from AiChat totaling approximately 862,092 Singapore Dollars (SGD). The Acquisition Agreement also includes the assignment of AiChat’s intellectual property rights from the Seller to us. Post-acquisition, the Seller will indemnify us and our affiliates against any liabilities, damages, losses, costs, or expenses arising from third-party claims related to us and the Acquisition. The Acquisition Agreement contains customary representations, warranties, covenants, and conditions for transactions of this nature. Acquisition of Controlling Interest of Hyperfast Title LLC On July 24, 2024, we entered into a Membership Interest Purchase Agreement (the “Hyperfast Purchase Agreement”) with David R. Breschi and Kristen Britton (the “Sellers”). Under this agreement, we acquired 85% of the outstanding membership interests in Hyperfast (as defined above), a Florida-based company specializing in real estate closings and title insurance (the “Hyperfast Acquisition”). The Hyperfast Purchase Agreement includes standard representations, warranties, and covenants typical for transactions of this nature. In conjunction with the Hyperfast Acquisition, we, the Sellers, and Hyperfast signed an Amended and Restated Operating Agreement (as amended from time to time, the “Operating Agreement”). The Operating Agreement outlines several key provisions, including: annual license fees to be paid to the Sellers, contingent on their continued service with Hyperfast; annual management fees based on Hyperfast’s operating margin; a right of first refusal for each Hyperfast member to purchase the interests of any member wishing to sell; and various rights for us, as the managing member, to acquire the Sellers’ membership interests, and for the Sellers to sell their respective interests in Hyperfast, all in accordance with the terms specified in the Operating Agreement. Streeterville Capital, LLC Note Purchase Agreement and Secured Promissory Note On August 14, 2024, we entered into a note purchase agreement (the “Purchase Agreement”) with Streeterville Capital, LLC (“Lender”) pursuant to which we issued and sold to the Lender a secured promissory note in the original principal amount of $5,455,000 (the “Note”). The Note carries an original issue discount of $435,000 and we agreed to pay $20,000 to the Lender to cover its legal fees, accounting costs, due diligence, monitoring and other transaction costs, each of which were deducted from the proceeds of the Note received by us resulting in a purchase price received by us of $5,000,000. Interest under the Note accrues at a rate of 8% per annum, and the unpaid amount of the Note, and any interest, fees, charges and late fees are due 18 months following the date of issuance. The Note and Purchase Agreement include certain material terms, including the Lender’s ability to redeem a portion of the Note from time to time beginning seven months after issuance, events of default and penalties associated therewith, restrictive covenants on our ability to issue securities, subject to exceptions set forth therein, a “most favored nation” provision, among others. In connection with the Note and Purchase Agreement, we, Rhove, and subsequently Be My Neighbor, also entered into security agreements and intellectual security agreements in favor of the Lender, and our U.S. subsidiaries entered into a guaranty in favor of the Lender. We also entered into a placement agency agreement (the “Placement Agency Agreement”) with Maxim Group LLC (“Maxim”), pursuant to which Maxim agreed to serve as lead placement agent on a “reasonable best efforts basis” in connection with the sale of the Note and any additional notes (the “Placement”). Pursuant to the Placement Agency Agreement, we agreed to pay Maxim a cash fee equal to 3.75% of the gross proceeds received by us for the Note and any additional notes and to reimburse Maxim for its reasonable accountable expenses, including legal fees, up to an aggregate amount of $10,000. In addition, if within nine months of a closing of a sale of the Note or any additional notes, we complete any financing of equity or equity-linked capital-raising activity with, or receive proceeds from, any of the investors that were introduced to us by Maxim in connection with the Placement, then we will pay Maxim a cash fee of 3.75% of the proceeds received from such financing. 28 Acquisition of Debt Does Deals, LLC (d/b/a Be My Neighbor) On September 8, 2024 (the “Closing Date”), we entered into a Membership Interest Purchase Agreement (the “BMN Acquisition Agreement”) with Be My Neighbor (as defined above), a Texas limited liability company, along with Christopher Bradley Griffith and Isabel Williams (collectively, the “BMN Sellers” and individually, a “BMN Seller”). Under this agreement, we acquired 100% of the outstanding membership interests in Be My Neighbor, a mortgage brokerage firm (the “BMN Acquisition”). In exchange for all of the membership interests of Be My Neighbor outstanding immediately prior to the execution of the BMN Acquisition Agreement, and pursuant to the terms and subject to the conditions of the BMN Acquisition Agreement, we agreed to pay the BMN Sellers an aggregate purchase price of up to $6,000,000, subject to the adjustments described below to each of the Earn-Out Payments (as defined below) provided in the BMN Acquisition Agreement, consisting of: (i) $1,500,000 in cash paid on the Closing Date, with each BMN Seller receiving a cash amount in proportion to each of their membership interest percentage in Be My Neighbor; (ii) $1,500,000 in restricted shares of our common stock, or 1,146,837 shares of restricted common stock at a price of $1.31 per share, calculated based on the volume weighted average price of the common stock as reported on Nasdaq for the seven consecutive trading days ending on the trading day immediately prior to the Closing Date, to be issued within 90 days from the Closing Date and with each BMN Seller receiving an amount of shares of common stock in proportion to each of their membership interest percentage in Be My Neighbor (the “Buyer Shares”); and (iii) up to an aggregate of $3,000,000 in potential earn-out payments, payable in three tranches of up to $500,000, $1,000,000 and $1,500,000, respectively, in cash or restricted shares of common stock, at our sole discretion, each of which is calculated based on a formula set forth in the BMN Acquisition Agreement and subject to the achievement of certain financial metrics by Be My Neighbor for three successive measurement periods of 12 months, with the first measurement period ending 12 months after the Closing Date (collectively, the “Earn-Out Payments,” and each, an “Earn-Out Payment”). Specifically, each Earn-Out Payment will be payable in full if Be My Neighbor achieves certain revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) thresholds for each of the measurement periods, each of which is payable within 120 days of the end of a measurement period. If Be My Neighbor does not meet the revenue and EBITDA threshold in a measurement period, a pro-rated amount of the Earn-Out Payment for such measurement period will be paid to Be My Neighbor based on the actual revenue and EBITDA achieved and in accordance with the formula set forth in the BMN Acquisition Agreement. Further, if Be My Neighbor exceeds such revenue and EBITDA thresholds during any measurement period, the Earn-Out Payment for such measurement period will not be capped and will be increased accordingly based on the formula set forth in the BMN Acquisition Agreement. The Buyer Shares and any Earn-Out Payment shares (collectively, the “Shares”) will be restricted for 180 days from issuance, during which time the BMN Sellers cannot sell, assign, or transfer them. To comply with Nasdaq Listing Rule 5635(a), the total Shares issued cannot exceed 19.99% of our outstanding common stock immediately before the BMN Acquisition, or 8,880,383 shares (the “Cap Amount”). If the Shares exceed this Cap Amount, we will compensate the BMN Sellers in cash for the excess, according to a formula in the BMN Acquisition Agreement. Launch of reAlpha AI Labs and Investment in Xmore AI On August 15, 2024, we announced the launch of reAlpha AI Labs (“AI Labs”), a research and development initiative to develop, partner with and potentially invest in artificial intelligence (“AI”) startups. We believe that this initiative will provide a platform for early-stage companies, enabling them to accelerate their development and growth. We expect that the products and technologies developed from the partnership and collaboration with such early-stage companies will be used to enhance reAlpha, our generative-AI powered, commission-free home buying platform. Additionally, we plan to partner with universities through AI Labs to further enhance its research and development capabilities. Subsequent to its launch, on September 30, 2024, we announced that AI Labs invested in Xmore AI (“Xmore AI”), a company that provides AI-driven cybersecurity solutions that is developing a software that will consolidate multiple cybersecurity tools into one platform. The aggregate investment amount was $125,000, consisting of $100,000 in cash and $25,000 in the form of in-kind services, as determined by the parties. We believe that this investment in Xmore AI will enhance the cybersecurity capabilities of reAlpha, as well as provide Xmore AI additional funds to continue the development of its cybersecurity software, which will provide AI-driven cybersecurity solutions to enterprises in multiple industries. Recent Legal Challenges to Sales Agents’ Commission Structure Recent developments in the real estate industry have seen increased scrutiny and legal challenges related to the structure of real estate agent commissions. Legal actions and regulatory inquiries have been initiated to examine the fairness, transparency, and potential anticompetitive practices associated with the traditional commission model. Courts and regulatory bodies may be increasingly focused on ensuring transparency in commission structures, potentially leading to reforms that impact the earnings and business models of real estate professionals. Changes in legislation or legal precedents could impact the standard practices of commission-sharing between listing agents and buyer’s agents and may adversely affect our business model and revenues. On October 31, 2023, a federal jury in Missouri found that the National Associations of Realtors (the “NAR”) and certain companies conspired to artificially inflate brokerage commissions, which violates federal antitrust law. The judgment was appealed on October 31, 2023, while these and other plaintiffs have filed similar lawsuits against a number of other large real estate brokerage companies. 29 On or about March 15, 2024, NAR agreed to settle these lawsuits, by agreeing to pay $418 million over approximately four years, and changing certain of its rules surrounding agent commissions. This settlement resolves claims against NAR and nearly every NAR member; all state, territorial and local REALTOR® associations; all association-owned MLSs; and all brokerages with an NAR member as principal whose residential transaction volume in 2022 was $2 billion or below and is subject to court approval. Due to this litigation, and effective as of August 17, 2024, NAR has implemented a new rule that prohibits offers of compensation on MLS listings and requires written agreements between buyers and buyer’s agents. Early indications suggest that these changes are already prompting shifts in industry practices as a result of the NAR lawsuit. For instance, discussions are underway regarding potential changes to rules established by local or state real estate boards or multiple listing services. These changes may necessitate adjustments in brokers’ business models, including alterations in agent and broker compensation structures, as well as requiring buyers to sign separate agreements to compensate their agents . We believe that we are well-positioned to take advantage of some of these potential industry changes. Given that reAlpha will serve as a zero-commission real estate buyer’s agent, we believe that buyers that have access to the platform will choose our platform over seeking agents to conduct their property search and acquisition to avoid paying additional buyer’s agents fees through these separate agreements. Additionally, we expect that our competitors will need to develop mechanisms and plans to enable buyers to negotiate commissions, which may add another layer of complexity into real estate transactions. We believe that reAlpha will remove such layer by offering all these services – including negotiations of fees through our AI negotiation helper – in one platform, while providing buyers with zero-commission fees on all homes purchased through the platform. The NAR litigation and its ramifications, however, remain uncertain and could cause unforeseen turmoil in our industry, the impacts of which could have a negative effect on us as an industry participant. Critical Accounting Policies The following discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States. Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations. These policies and estimates require the application of significant judgment by management. These estimates can be materially affected by changes from period to period as economic factors and conditions outside of our control change. As a result, they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. We believe the current assumptions and other considerations used to estimate amounts reflected in the condensed consolidated financial statements included in this Form 10-Q are appropriate. This Form 10-Q and our Form 10-KT include discussions of our accounting policies, as well as methods and estimates used in the preparation of our audited consolidated financial statements. For further information on our critical accounting policies and estimates, see “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-KT, the notes to our audited consolidated financial statements included in our Form 10-KT and “Note 2 – Summary of Significant Accounting Policies” of our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. Since the filing of our Form 10-KT, we have not experienced a material change to our critical accounting policies or the methods and applications used to develop our accounting estimates. 30 Results of Operations Pursuant to the merger (the “Downstream Merger”) between reAlpha Tech Corp. (the “Former Parent”) and reAlpha Asset Management, Inc. (the “Former Subsidiary”), our Former Parent merged with and into the Former Subsidiary, with the Company surviving the Downstream Merger. Because the Company acquired the Former Parent’s assets and liabilities upon consummation of the merger, the Former Parent’s financials became a part of the consolidated financial statements of the Company. As a result, the financial statements included in this prospectus and discussed herein reflect the operating results of both our Former Parent and the Company prior to March 21, 2023, which was the date on which the Downstream Merger closed, and our combined results, including those of the Former Parent, following the Downstream Merger closing date. Summary Results of Operations Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenue $ 339,227 $ 59,022 $ 422,006 $ 225,300 Cost of Revenue (113,361 ) (30,360 ) (139,687 ) (149,518 ) Gross profit $ 225,866 $ 28,662 $ 282,319 $ 75,782 Operating expense (1,915,486 ) (757,501 ) (4,406,394 ) (2,357,035 ) Operating (loss) income (1,689,620 ) (728,839 ) (4,124,075 ) (2,281,253 ) Other (expense) Income (408,954 ) (48,768 ) (871,856 ) 5,293,189 Net (loss) income (2,098,574 ) (777,607 ) (4,995,931 ) 3,011,936 Three Months Ended September 30, 2024 Compared with Three Months Ended September 30, 2023 Revenue . Revenue was $339,227 during the three months ended September 30, 2024, an increase of $280,205, or 475%, from the comparable 2023 period, which was primarily driven by the growth and integration of recent acquisitions in our technology services segment. This technology service segment growth was mainly due to the performance of our AI conversational platform and mortgage brokerage services, which were recently acquired and integrated into our operations, and which generated $92,595 and $183,128, respectively, during the three months ended September 30, 2024. We have no revenue in our rental business segment. The decrease in revenue compared to the same period in 2023 was due to the sale of properties previously held for the segment’s operations, as a result of putting those operations on hold. Cost of revenue . Cost of revenue was $113,361 for the three months ended September 30, 2024, an increase of $83,001, or 273%, from the comparable 2023 period. The increase was primarily due to the integration of the newly acquired businesses within the technology segment. A significant portion of this increase is attributed to the costs associated with the delivery of our loan brokerage services and AI conversational platform solutions that accounted for $60,145 and $34,967, respectively, for the three months ended September 30, 2024. Operating Expenses . Operating expenses were $1,915,486 during the three months ended September 30, 2024, an increase of $1,157,985, or 153%, from the comparable 2023 period. The increase in operating expenses was primarily due to the integration of the newly acquired businesses within the technology segment. A significant portion of this increase is attributed to salaries of the new employees added as a result of our recent acquisitions of $507,501, marketing, advertising expenses related to our advertising campaign for the reAlpha platform of $212,386, and professional and legal services expenses of $210,670 incurred in connection with our recent acquisitions. 31 Other (Expenses) Income . Other expenses were $408,954 during the three months ended September 30, 2024, an increase of $360,186, or 739%, from the comparable 2023 period. This increase was primarily attributable to the amortization of the commitment fee of $125,000 incurred in connection with the equity facility we have in place with GEM Global Yield LLC SCS and GEM Yield Bahamas Limited (collectively, “GEM”), pursuant to a Share Purchase Agreement between us and GEM, dated December 1, 2022 (the “GEM Agreement”), interest expense of $83,861, and original issue discount of $36,250 which was related to the Note (see “Recent Developments – Streeterville Capital, LLC Note Purchase Agreement and Secured Promissory Note” above for further information). Nine Months Ended September 30, 2024 Compared with Nine Months Ended September 30, 2023 Revenue . Revenue was $422,006 for the nine months ended September 30, 2024, an increase of $196,706, or 87%, from the comparable 2023 period. This growth was driven by the expansion and integration of recent acquisitions within our technology services segment, offset by a decline in revenues from the myAlphie platform following its sale and from the rental business following the sale of properties. The technology services segment’s growth was mainly driven by the contributions of our AI conversational platform and mortgage brokerage services, which generated $92,595 and $183,128, respectively. There was no revenue recorded in our rental business segment during the nine months ended September 30, 2024, which was due to the sale of properties previously held for the segment’s operations as a result of putting those operations on hold. Cost of revenue . Cost of revenue was $139,687 for the nine months ended September 30, 2024, a decrease of $9,831, or 7%, from the comparable 2023 period. A significant portion of the cost of revenue consists of the costs associated with the integration of newly acquired businesses within the technology segment, including expenses for the loan brokerage services and AI conversational platform solutions, which amounted to $60,145 and $34,967, respectively. This increase was partially offset by significant reductions in expenses related to the sale of the myAlphie platform and properties, which lowered related costs. Operating expenses . Operating expenses were $4,406,394 for the nine months ended September 30, 2024, an increase of $2,049,359, or 87%, from the comparable 2023 period. This increase was due to the integration of newly acquired businesses within the technology segment. A significant portion of this increase is attributed to salary expenses, including $920,144 for new employees and additional expenses from the salary adjustments for executive officers, marketing and advertising expenses of $273,458 for the reAlpha platform campaign, and $340,889 in professional and legal services associated with these acquisitions. Other (Expense) Income . Other expenses were $871,856 for the nine months ended September 30, 2024, a decrease of $6,165,045, or 707%, from the comparable 2023 period. This decrease was largely due to a one-time gain of $5,502,774 from the sale of the myAlphie platform during the nine months ended September 30, 2023. Additionally, increases in amortization of the commitment fee of $375,000 incurred in connection with the equity facility we have in place with GEM, interest expenses of $95,473 and an original issue discount of $36,250 related to the Note contributed to our other expenses. These increases were partially offset by a decrease in mortgage interest following the sale of our previously held properties. Segment Results of Operations The following is an analysis of our results by reportable segment for the quarter ended September 30, 2024 compared to the quarter ended September 30, 2023. For further information regarding our reportable business segments, refer to our unaudited condensed financial statements and related notes included elsewhere in this report. Three Months Ended September 30, Percentage Nine Months Ended September 30, Percentage 2024 2023 Change 2024 2023 Change Revenue Technology Services $ 339,227 $ 47,474 615 % $ 422,006 $ 142,538 196 % Rental Business - 11,548 (100 )% - 82,762 (100 )% Total 339,227 59,022 422,006 225,300 Cost of Revenue Technology Services (113,361 ) (30,360 ) 273 % (139,687 ) (137,473 ) 2 % Rental Business - - 0 % - (12,045 ) (100 )% Total (113,361 ) (30,360 ) (139,687 ) (149,518 ) Operating (Loss) Income Technology Services (546,488 ) (31,051 ) 1660 % (661,046 ) (40,604 ) 1528 % Rental Business (64,430 ) (27,447 ) 135 % (193,324 ) (226,079 ) (14 )% Total $ (610,918 ) $ (58,498 ) $ (854,370 ) $ (266,683 ) 32 Three Months Ended September 30, 2024 Compared with Three Months Ended September 30, 2023 Technology Services Revenue . Revenue was $339,227 during the three months ended September 30, 2024, an increase of $291,753, or 615%, from the comparable 2023 period. This increase was primarily driven by revenue generated through the AiChat’s conversational platform solutions, the reAlpha platform and our real estate offerings, including mortgage brokerage and title services, as a result of the integration of our recently acquired businesses. The integration of these services into reAlpha has provided additional sources of potential revenue to this segment. Cost of revenue . Cost of revenue was $113,361 during the three months ended September 30, 2024, an increase of $83,001, or 273%, from the comparable 2023 period. Cost of revenue primarily consists of the direct expenses associated with the delivery of our loan brokerage services and technology solutions. This includes compensation-related expenses for roles directly supporting loan origination and customer interactions, along with other direct costs necessary for fulfilling service transactions. Operating Loss . Operating loss was $546,488 during the three months ended September 30, 2024, an increase of $515,437, or 1,660%, from the comparable 2023 period. This increase was primarily due to higher salaries for employees from acquired companies and an increase in marketing and advertising expenses associated with the marketing campaign for reAlpha platform. Rental Business Revenue . Revenue was $0 during the three months ended September 30, 2024, compared to $11,548 for the comparable 2023 period. Because we sold our properties as a result of putting our short-term rental operations on hold, we do not expect to generate revenue within this segment until, and if, we resume operations in this segment. Operating Loss . Operating loss was $64,430 during the three months ended September 30, 2024, compared to $27,447 for the comparable 2023 period. This increase in operating loss is primarily due to amortization expenses associated with acquired intangible within this segment. Although we are no longer generating revenue in this segment as a result of putting these operations on hold, we are still incurring costs related to the amortization and related expenses resulting from the sale of our previously held properties. Nine Months Ended September 30, 2024 Compared with Nine Months Ended September 30, 2023 Technology Services Revenue . Revenue was $422,006 for the nine months ended September 30, 2024, an increase of $279,468, or 196%, from the comparable 2023 period. This increase was driven by revenue from AiChat’s conversational platform solutions, reAlpha platform and real estate offerings, including mortgage brokerage and title services, following the integration of our recently acquired businesses. This increase in revenue was slightly offset by a decrease in revenue from the myAlphie platform following its sale during the nine months ended September 30, 2023. 33 Cost of revenue . Cost of revenue was $139,687 for the nine months ended September 30, 2024, an increase of $2,214 or 2%, from the comparable 2023 period. Cost of revenue primarily consists of the direct expenses associated with the delivery of our loan brokerage services and technology solutions, including compensation-related expenses for roles supporting loan origination and customer interactions, and other direct costs necessary for fulfilling service transactions. This increase was partially offset by significant reductions in expenses related to the sale of the myAlphie platform, which lowered costs related to such platform. Operating Loss . Operating loss was $661,046, during the nine months ended September 30, 2024, an increase of $620,442, or 1,528%, from the comparable 2023 period. This increase was primarily due to higher salaries for employees from acquired companies, an increase in marketing and advertising expenses associated with the marketing campaign for reAlpha platform and professional fees related to our recent acquisitions, which reflect the necessary investments to support and integrate these new operations. Rental Business Revenue . Revenue was $0 during the nine months ended September 30, 2024, compared to $82,762 for the comparable 2023 period. Because we sold our properties as a result of putting our short-term rental operations on hold, we do not expect to generate revenue within this segment until, and if, we resume operations in this segment. Operating Loss . Operating loss was $193,324 during the nine months ended September 30, 2024, compared to $226,079 for the comparable 2023 period. Although we are no longer generating revenue in this segment as a result of putting these operations on hold, we are still incurring costs related to the amortization and related expenses resulting from the sale of our previously held properties. Additionally, expenses related to property management and maintenance, which were present in the previous reporting period, also contributed to the overall decline. Non-GAAP Financial Measures To supplement our financial information presented in accordance with U.S. GAAP (“GAAP”), we believe “Adjusted EBITDA” and “Net income per share,” both “non-GAAP financial measures,” as such term is defined under the rules of the SEC, are useful in evaluating our operating performance. We use Adjusted EBITDA and Net income per share to evaluate our ongoing operations and for internal planning and forecasting purposes. We believe that these non-GAAP financial measures may be helpful to investors because it provides consistency and comparability with past financial performance. However, these non-GAAP financial measures are presented for supplemental informational purposes only, have limitations as an analytical tool, and should not be considered in isolation or as a substitute for financial information presented in accordance with GAAP. In addition, other companies, including companies in our industry, may calculate similarly titled non-GAAP measures differently or may use other measures to evaluate their performance, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures, and not to rely on any single financial measure to evaluate our business. 34 We reconcile our non-GAAP financial measure of Adjusted EBITDA to our net income, adjusted to exclude interest expense, depreciation and amortization and certain charges or gains resulting from non-recurring events. We reconcile our non-GAAP financial measure of Net income per share to our net income, adjusted to exclude provision for depreciation and amortization of certain intangible assets, share-based compensation and certain charges or gains resulting from non-recurring events. The following tables provide a reconciliation of net income to Adjusted EBITDA and Net income per share, respectively: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Net (Loss) Income $ (2,098,574 ) $ (777,607 ) $ (4,995,931 ) $ 3,011,936 Adjusted to exclude the following Depreciation and amortization 163,439 14,628 304,222 85,874 Gain on sale of myAlphie - - - (5,502,774 ) Interest expense 119,881 31,279 131,723 122,470 Share-based compensation (1) 113,037 - 207,454 356 GEM commitment fee (2) 125,000 - 375,000 - Acquisition related expense (3) 178,678 - 363,426 103,519 Gain on previously held equity (4) 108,382 - (20,663 ) - Original issue discount 36,250 - 36,250 - Adjusted EBITDA $ (1,253,907 ) $ (731,700 ) $ (3,598,519 ) $ (2,178,619 ) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2024 2023 2024 2023 Net (Loss) Income $ (2,098,574 ) $ (777,607 ) $ (4,995,931 ) $ 3,011,936 Adjusted to exclude the following Amortization of intangible assets 126,056 - 254,917 71,245 Gain on sale of myAlphie - - - (5,502,774 ) Share-based compensation (1) 113,037 - 207,454 356 GEM commitment fee (2) 125,000 - 375,000 - Acquisition related expense (3) 178,678 - 363,426 103,519 Gain on previously held equity (4) 108,382 - (20,663 ) - Net income used to compute net income per share, diluted $ (1,447,420 ) $ (777,607 ) $ (3,815,797 ) $ (2,315,718 ) Weighted-average shares used to compute net income (loss) per share, diluted 45,135,287 42,522,091 44,496,055 42,054,625 Net income per share, diluted (0.03 ) (0.02 ) (0.09 ) (0.06 ) ( 1) Compensation provided to employees and board members and for services through share-based awards, which is recognized as a non-cash expense. ( 2) This pertains to the commitment fee of $1 million incurred in connection with the equity facility we have in place with GEM. ( 3) Expenses related to acquisitions, including professional and legal fees, which are excluded from GAAP financial measures to provide a clearer view of ongoing operational performance. ( 4) Represents the gain from the fair value measurement of previously held equity interests, which is recognized as a non-operational item and treated as a non-GAAP measure. 35 Liquidity and Capital Resources Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt services, acquisitions, contractual obligations and other commitments. Our liquidity and capital resources are critical to our ability to execute our business plan and achieve our strategic objectives. Accordingly, to the extent that collections from our short-term rentals, if any, and technologies cannot fund our operations, we intend to utilize equity or debt offerings to raise these funds, although volatility in the capital markets may negatively affect our ability to do so. The cost of capital and historically high-interest rates can also have a direct impact on our ability to raise capital through debt or equity offerings or to pursue acquisitions. Economic environments yielding higher interest rates with more stringent debt terms such as today’s market environment require larger equity commitments. This means that, as larger equity commitments are required, we will have less leverage and may have fewer acquisitions overall. We cannot provide any assurance that we will be able to raise additional funds on acceptable terms, if at all. Our ability to raise additional capital will depend on various factors, including market conditions, investor demand, and our financial performance. We had cash and cash equivalents of approximately $7.0 million as of September 30, 2024 and approximately $6.4 million as of December 31, 2023. Based on our estimates, we believe we do not have sufficient working capital to meet our financial needs for the 12-month period following September 30, 2024. While we anticipate continued operating losses in the near future, we are confident in our strategy to continue investing in the commercialization of our products and technologies and our ability to continue operations. Additionally, we are contemplating to raise capital through an offering of our securities, and we expect that, to the extent such offering is consummated, we will not need additional capital for a period beyond the 12-month period following the offering consummation. We may also receive proceeds from the cash exercises of the warrants issued in connection with the GEM Agreement (the “GEM Warrants”) and the warrants issued in connection with our public offering from November 2023 (the “Follow-On Warrants,” and together with the GEM Warrants, the “Warrants”). We believe the likelihood that any Warrant holders will exercise their warrants, and therefore the amount of cash proceeds that we would receive, is dependent upon the trading price of our common stock. We believe that if the trading price for our common stock is less than $371.90 per share, in the case of the GEM Warrants, or $5.00 per share in the case of the Follow-On Warrants, it is unlikely that the holders of the Warrants will exercise them. While current conditions influencing the exercise of the Warrants make such exercise unlikely, further adjustments to their exercise price may make the Warrants more attractive for investors to exercise. Due to an ongoing dispute with GYBL regarding the GEM Warrants, pursuant to which we have claimed that the GEM Warrants are void and subject to rescission under Section 29(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), there is uncertainty about the enforceability of the GEM Warrants and its terms (see “Note 16 – Subsequent Events” for further information). If the dispute is not resolved through negotiations and the lawsuit is adversely determined against us, we may be required to adjust the GEM Warrants’ exercise price downward significantly, and we may incur penalties under the GEM Agreement and/or other litigation expenses related to the dispute, which could materially adversely impact our financial statements, cash flows and results of operations. See “Note 16 – Subsequent Events” for further information. Further, the Follow-On Warrants contain “full ratchet” anti-dilution provisions that provide for a downward adjustment to its exercise price, subject to a floor price of $1.44 per share, as a result of subsequent offerings, and the share amount issuable pursuant to such warrants would increase such that the aggregate exercise price payable thereunder would equal the aggregate exercise price prior to such adjustment. Our analysis is based on the reported closing price of our common stock as November 11, 2024, which was $1.00 per share. Our business model requires significant capital expenditures to build and maintain the infrastructure and technology required to support our operations. In addition, we may incur additional costs associated with research and development of new products and services, expansion into new markets or geographies, and general corporate overhead. As a result, we may require additional financing in the future to fund these initiatives, which may include additional equity or debt financing or strategic partnerships. We currently do not have any commitments or arrangements for additional financing, and there can be no assurance that we will be able to obtain additional financing on terms acceptable to us, or at all. If we are unable to obtain additional financing when required, we may be forced to reduce the scope of our operations, delay the launch of new products or services, or take other actions that could adversely affect our business, financial condition, and results of operations. We may also be required to seek additional financing on terms that are unfavorable to us, which could result in the dilution of our stockholders’ ownership interests or the imposition of burdensome terms and restrictions. Contractual Commitments and Obligations On August 14, 2024, we entered into the Purchase Agreement with the Lender (each as defined above) to issue and sell a secured promissory note worth $5,455,000 (see “Recent Developments – Streeterville Capital, LLC Note Purchase Agreement and Secured Promissory Note” for further information). As of September 30, 2024, we have incurred $435,000 original issue discount expenses related to the Note. Further, in accordance with the Note and related Purchase Agreement, beginning seven months after issuance, the Lender may redeem up to $545,000 of the Note per month, which amount will be due and payable in cash within three trading days of our receipt of a redemption notice from the Lender. The redemption feature of the Note may require us to make redemption payments at the request of the Lender, which redemptions may have a material adverse effect on our cash flows, results of operations and ability to pay our debts as they come due, and we may not have the required funds to pay such redemptions, which could result in an event of default under the Note. The Note and related Purchase Agreement also contain restrictive covenants on our ability to issue securities, which may further impact our ability to raise capital to meet our redemption payments or other obligations and expenses as they are due. 36 Cash Flows The following table summarizes our cash flows from operating, investing, and financing activities for the periods presented. Nine-month period Particulars September 30, 2024 September 30, 2023 Net cash used in operating activities $ (3,806,090 ) $ (2,825,315 ) Net cash (used in) provided by investing activities $ (368,269 ) $ 400,330 Net cash provided by financing activities $ 4,794,866 $ 105,083 Cash Flows from Operating Activities For the nine months ended September 30, 2024, net cash used in operating activities was $3,806,090, compared to $2,825,315 for the same period in 2023. The increase is primarily due to higher operating expenses, including salaries of $974,004 and professional and legal fees of $340,889, most of which were acquisition-related costs. Cash Flows from Investing Activities For the nine months ended September 30, 2024, net cash used in investing activities was $368,269, whereas for the same period in 2023, net cash provided by investing activities was $400,330. This change in cash flows from investing activities is mainly attributable to increased capitalization of software development costs during the nine months ended September 30, 2024. Cash Flows from Financing Activities For the nine months ended September 30, 2024, net cash provided by financing activities was $4,794,866, compared to $105,083 for the same period in 2023. This increase was primarily in connection with the issuance of the Note (as defined above). In contrast, during the nine months period ended September 30, 2023, proceeds from common stock issuances in connection with our Regulation A offering contributed to financing activities, which issuances were not present in 2024. Off-Balance Sheet Transactions We do not have any off-balance sheet transactions. 37 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide this information.