Myseum.AI, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with and our 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 We are a communication software company. We believe that one’s right to privacy should not end the moment they click “send.” Our flagship product, DatChat Messenger & Private Social Network (the “Application”), is a mobile application that gives users the ability to communicate with privacy and protection. The Application allows users to exercise control over their messages, even after they are sent. Through the Application, users can delete messages that they have sent, on their own device and the recipient’s device as well. There is no set time limit within which they must exercise this choice. A user can elect at any time to delete a message that they previously sent to a recipient’s device. The Application also enables users to hide secret and encrypted messages behind a cover, which messages can only be unlocked by the recipient and which are automatically destroyed after a fixed number of views or fixed amount of time. Users can decide how long their messages last on the recipient’s device. The Application also includes a screen shot protection system, which makes it virtually impossible for the recipient to screenshot a message or picture before it gets destroyed. In addition, users can delete entire conversations at any time, making it like the conversation never even happened. The Application integrates with iMessage, making private messages potentially available to hundreds of millions of users. 21 Recent Events On July 28, 2021, the Company filed a certificate of change to the Company’s amended and restated certificate of incorporation, with the Secretary of State of the State of Nevada to effectuate a one-for-two (1:2) reverse stock split of the Company’s common stock. Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding stock options, warrants and equity incentive plans. All share and per-share data and amounts have been retroactively adjusted as of the earliest period presented in the consolidated financial statements to reflect the Reverse Stock Split. On August 17, 2021, the Company completed its initial public offering (“IPO”), in which we issued 3,325,301 shares of our common stock and Series A warrants (the “Series A Warrants”) to purchase up to 3,325,301 shares of our common stock for gross proceeds of approximately $13,800,000 before deducting underwriting discounts, commissions, and other offering expenses, including legal expenses related to the Offering of approximately $1,718,000 which are offset against the proceeds in additional paid in capital resulting in net proceeds to the Company of approximately $12.1 million. Additionally, between August 27, 2021 and October 5, 2021, the Company received aggregate gross proceeds of $14,356,272 from the exercise of 2,882,785 Series A Warrants, resulting in an aggregate issuance of 2,882,785 shares of common stock. Basis of Presentation The financial statements contained herein have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) and the requirements of the Securities and Exchange Commission. Critical Accounting Policies and Significant Judgments and Estimates This management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates if conditions differ from our assumptions. While our significant accounting policies are more fully described in Note 1 in the “Notes to Financial Statements”, we believe the following accounting policies are critical to the process of making significant judgments and estimates in preparation of our financial statements. Use of estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates include the valuation of deferred tax assets, and the value of stock-based compensation expenses. Revenue recognition The Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company recognize revenues from subscription fees on the Company’s messaging application in the month they are earned. Annual and lifetime subscription payments received that are related to future periods are recorded as deferred revenue to be recognized as revenues over the contract term or period. Lifetime subscriptions are being recognized to revenues over a 12-month period. 22 Stock-based compensation Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718, “Compensation — Stock Compensation” (“ASC 718”), 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, non-employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee, non-employee, and director services received in exchange for an award based on the grant-date fair value of the award. Leases The Company applied ASC Topic 842, Leases (Topic 842) to arrangements with lease terms of 12 months or more. Operating lease right of use assets (“ROU”) represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations. Capital Expenditures We do not have any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment and software necessary to conduct our operations on an as needed basis. Recently Issued Accounting Pronouncements Refer to the notes to the audited financial statements. Results of Operations Revenue During the years ended December 31, 2021 and 2020, we generated minimal revenues from operations. For the year ended December 31, 2021, revenues consisted of subscription revenues of $4,445, as compared to $0 for the year ended December 31, 2020. Compensation and related expenses Compensation and related expenses for the years ended December 31, 2021 and 2020, were $2,963,294 and $494,002, respectively, an increase of $2,469,292 or 500%, and relates to salaries, health insurance and other benefits of our four officers and nine full time employees. The increase in compensation is primarily related to increase salaries and bonuses of our CEO, the hiring of three executive officers and additional employees, and stock-based compensation related to option grants during the third quarter of fiscal 2021. Marketing and advertising expenses Marketing and advertising expenses for the years ended December 31, 2021 and 2020, were $5,090,763 and $220,881, respectively, an increase of $4,869,882 or 2,205%, primarily due to increase in promotions, branding and digital marketing strategy and social media ads. Professional and consulting expenses During the years ended December 31, 2021 and 2020, we reported professional and consulting fees of $2,100,317 and $263,245, respectively, an increase of $1,837,072 or 698%, which are principally comprised of the following items: ● We incurred $1,657,292 and $173,485 of consulting fees for general advisory consulting, investor relation, technology services, and other incidental services for the year ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021 and 2020, $1,213,350 and $20,000, respectively, of these services were primarily related to stock based consulting expenses from stock option grants to various consultants of $443,350 and accretion of deferred stock-based consulting fees of $350,000 and common stock issued for services valued on the date of grant at its estimated fair value using recent sales of common stock of $420,000. 23 ● The remaining amounts attributed to professional and consulting fees incurred during the years ended December 31, 2021 and 2020 were primarily attributed to legal, accounting fees and investor fees which amounted to $443,025 and $89,760, respectively. The increase during the years ended December 31, 2021 were primarily due to legal and accounting services for our public filings related to our Nasdaq listing. General and administrative expenses General and administrative expenses for the years ended December 31, 2021 and 2020, were $688,621 and $106,303, an increase of $582,318 or 548%. General and administrative expenses primarily consisted of the following expense categories: insurance, travel, utilities, office related expenses, public company expenses, and rent expense. Such increase was primarily attributable to increase in insurance, travel, office expenses, rent, and public company expenses primarily related to our Nasdaq listing. Other Income (Expense) During the years ended December 31, 2021 and 2020, we reported other income of $9,516 and $104,961, respectively. During the year ended December 31, 2021, other income primarily consisted of interest income of $3,516, offset by interest expense of $127 and gain from forgiveness of debt of $6,127. During the year ended December 31, 2020, other income primarily consisted of gain on extinguishment of a convertible note totaling $143,353, and other income of $7,000 from grant received from the SBA under the SBA’s Economic Injury Disaster Loan assistance program in light of the impact of the COVID-19 pandemic in 2020. Net Loss For the foregoing reasons, our net loss for the years ended December 31, 2021 and 2020 was $10,829,034 and $979,470, respectively. Liquidity, Capital Resources and Plan of Operations As of December 31, 2021, we had cash totaling approximately $20,199,735. We were incorporated on December 4, 2014 and have generated minimal revenues to date. For the year ended December 31, 2021, we had a net loss of $10,829,034. In addition, we used cash in operations of $8,454,504 for the year ended December 31, 2021. We have an accumulated deficit of $27,590,546 at December 31, 2021 and have generated minimal revenues since inception. During the year ended, the Company has received net proceeds of approximately $13.7 million from the sale of its securities in connection with an initial public offering and gross proceeds of approximately $14.4 million from the exercise of the Company’s Series A warrants. These events served to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern. Net cash used in operating activities totaled approximately $8,454,504 and $1,095,577 for the years ended December 31, 2021 and 2020, respectively. Net loss for the years ended December 31, 2021 and 2020 totaled approximately $10,829,034 and $979,470, respectively. For the year ended December 31, 2021, net loss was adjusted for stock-based compensation of $2,303,377, amortization expense of $43,221, depreciation of $2,319, offset by gain from forgiveness of debt of $6,127 and operating changes were a net increase of $31,740 primarily due to increase in prepaid expenses of $351,713 and accounts payable and accrued expenses of $397,502. During the year ended December 31, 2020, net loss was adjusted for stock-based compensation expense of $20,000 and amortization expense of $23,948, offset by gain from extinguishment of debt of $143,353. Total accounts payable and accrued expenses increased by $26,506, prepaid expenses increased by $19,260 and operating lease liabilities decreased by $23,948 during the year ended December 31, 2020. 24 Net cash used investing activities was $56,039 for the year ended December 31, 2021 as compared to $0 for the year ended December 31, 2020. Net used in investing activities for the year ended December 31, 2021 consisted of purchases of property and equipment. Net cash provided by financing activities totaled approximately $28,019,855 and $1,715,226 for the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, financing activities was primarily attributable to net proceeds of approximately $13,671,074 from the sale of common stock, $14,356,272 from the exercise of Series A warrants and $177,624 of advances from a related party, offset by $177,615 repayment of related party advances and $7,500 repayment of related-party notes. During the year ended December 31, 2020, financing activities was primarily attributable to net proceeds of $1,881,675 from the sale of common stock and $265,623 of advances from a related party and proceeds from notes payable of $6,042, offset by $279,114 repayment of related party advances, $150,000 repayment of convertible notes payable and $9,000 repayment of related-party notes. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide the information required by this item. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements are contained in pages F-1 through F-15, which appear at the end of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE None.