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 blockchain, cybersecurity, and social media company that not only focuses on protecting privacy on personal devices, but also protects user information after it is shared with others. We believe that one’s right to privacy should not end the moment they click “send” , and that we all deserve the same right to privacy online that we enjoy in our own living rooms. Our flagship product, DatChat Messenger & Private Social Network, is a privacy platform and mobile application that gives users the ability to communicate with the privacy and protection they deserve. Recently. we have expanded our business and product offerings to include the co-development of a mobile-based social metaverse, known as “The Habytat”, as well as the development of VenVūū, an advertising and non-fungible token (“NFT”) monetization platform. DatChat Messenger & Private Social Network Our platform allows users to exercise control over their messages and posts, even after they are sent. Through our 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. - 28 - In addition to the foregoing, the application also provides users with the ability to connect via an encrypted live video chat that also is designed to prevent screenshots or screen grabs. The application integrates with iMessage, making private messages potentially available to hundreds of millions of users. The Habytat In June 2022, we formed a wholly owned subsidiary, SmarterVerse, Inc. (“SmarterVerse”). In July 2022, SmarterVerse entered into a development agreement with MetaBizz, LLC, an infrastructure firm that creates and develops 4D experiences in the metaverse (“MetaBizz”). In November 2022, we launched The Habytat, a virtual space that blends real world and virtual realities into one, in real time, using emerging technology like virtual and augmented reality, to create a highly immersive 3D environment. In January 2023, we launched Geniuz City, the first world within The Habytat. Geniuz City is intended to be a near photo-realistic world that is based on the city of Miami and its surrounding areas. Geniuz City has been designed in a manner that can enable users to participate in a number of different activities, such as parties, business conferences, shopping, socializing, and game play. Currently, once users download The Habytat application, we plan to grant each user rights to use a designated piece of virtual property in Geniuz City through the minting and issuance of a unique NFT . NFTs (or non-fungible tokens) are digital assets that can represent a unique real-world asset, such as art, music, in-game items, videos, or a piece of real estate or virtual property. Users will initially be able to choose the style of house they want, then start customizing it to represent their personal style and taste. Users will then be able to accumulate reward points when they visit and interact with such virtual property or invite others to join The Habytat, and such rewards can be used to enhance, expand, and improve the virtual property. In addition, we plan to offer users the ability to have their own pets in the Habytat, which they will need to care for and can train to follow basic obedience commands. Finally, as described below, we plan to integrate our VenVūū, platform and VenVūū, dynamic NFTs (collectively, VenVūū,”) into The Habytat, and that such integration will enable us and users to generate advertising-based revenues in The Habytat. VenVūū We are currently developing VenVūū, an advertising and NFT monetization platform. VenVūū is based upon a proprietary metaverse ad network and dynamic NFT technology which we believe will allow advertisers and landowners to connect in the metaverse. Management believes that metaverse advertising parallels reality,.and that VenVūū can be considered as a parallel to billboards in the real world or “Google Ads” within the internet. Through the integration of VenVūū, which advertises in a way similar to a billboard or video screen, we plan to enable users of The Habytat opportunities to monetize their virtual property rights by directly displaying approved advertisements on their virtual property. While we currently plan to launch VenVuu in the Habytat, it may also by interoperable within other metaverses in the future We believe that these features can potentially provide brands with the ability to run campaigns that target the land parcels they want to reach, simultaneously across multiple metaverses. Recent Events On January 10, 2023, we announced that our Board of Directors has authorized a Stock Repurchase Plan under which the Company may repurchase up to $2,000,000 of the Company’s outstanding common stock, par value $0.0001 per share. Additionally, the Board has approved EF Hutton to be engaged as the broker to implement the Repurchase Plan. As of March 29, 2023, the Company reported that it has purchased $480,025 shares of common stock at an average price of $0.648 per share. - 29 - Risks and Uncertainties In February 2022, the Russian Federation and Belarus commenced a military action with the country of Ukraine. As a result of this action, various nations, including the United States, have instituted economic sanctions against the Russian Federation and Belarus. Further, the impact of this action and related sanctions on the world economy is not determinable as of the date of these condensed consolidated financial statements, and the specific impact on the Company’s financial condition, results of operations, and cash flows is also not determinable as of the date of these financial statements. On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax. Management continues to evaluate the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position and results of its operations, the specific impact is not readily determinable as of the date of these financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. 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 consolidated 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 consolidated 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 consolidated 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. - 30 - Short-term investments The Company considers investments with original maturities greater than three months and remaining maturities less than one year to be short-term investments. Short-term investments include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturities between four and twelve months. Short-term investments are carried at fair value, which is based on quoted market prices for such securities, if available, or is estimated on the basis of quoted market prices of financial instruments with similar characteristics. For the year ended December 31, 2022, net unrealized gain on short-term investments of $47,672 and realized gain on short-term investments of $28,176 are reported in other income (expenses) on the consolidated statements of operations. Accounting for digital currencies and other digital assets The Company purchases Ethereum cryptocurrency (“Ethereum”) and other digital assets and accepts Ethereum as a form of payment for non-fungible tokens sales (NFTs). The Company accounts for these digital assets held as the result of the purchase or receipt of Ethereum and other digital assets, as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). The Company has ownership of and control over its digital currencies and digital assets and the Company may use third-party custodial services to secure them. The digital currencies and digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition. The Company believes that digital currencies and other digital assets meet the definition of indefinite-lived intangible assets and accounts for them at historical cost less impairment, applying the guidance in ASC 350. The Company monitors any standard-setting, regulatory or technological developments that may affect the Company’s accounting for digital currencies or its controls and processes related to digital currencies. Digital currencies are included in long-term assets in the consolidated balance sheet. The Company determines the fair value of its digital currencies and other digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that it has determined is the principal market for Ethereum (Level 1 inputs) and other digital assets. The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that its digital assets are impaired. In determining if an impairment has occurred, the Company considers the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets held. In determining the gain or loss to be recognized upon sale, the Company calculates the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within operating expenses in the consolidated statements of operations. During the year ended December 31, 2022, the Company recorded an impairment loss of $119,276. Capitalized software costs Costs incurred to develop internal-use software including Metaverse software development, are expensed as incurred during the preliminary project stage. Internal-use software development costs are capitalized during the application development stage, which is after: (i) the preliminary project stage is completed; and (ii) management authorizes and commits to funding the project and it is probable the project will be completed and used to perform the function intended. Capitalization ceases at the point the software project is substantially complete and ready for its intended use, and after all substantial testing is completed. Upgrades and enhancements are capitalized if it is probable that those expenditures will result in additional functionality. Amortization is provided for on a straight-line basis over the expected useful life of the internal-use software development costs and related upgrades and enhancements. When existing software is replaced with new software, the unamortized costs of the old software are expensed when the new software is ready for its intended use. Software development costs incurred during the year ended December 31, 2022 were expensed since the Metaverse software development project is in the preliminary project stage. Such costs are included in research and development costs on the accompanying consolidated statement of operations. 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 recognizes 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. - 31 - The Company’s NFT revenues were generated from the sale of NFTs. The Company accepts Ethereum as a form of payment for NFT sales. The Company’s NFTs exist on the Ethereum Blockchain under the Company’s VenVuu brand. VenV uu is an iMetaverse advertising platform that allows advertisers and metaverse landowners to connect using the Company’s proprietary metaverse ad network and dynamic NFT technology. The Company uses the NFT exchange, OpenSea, to facilitate its sales of NFTs. The Company, through OpenSea, has custody and control of the NFT prior to the delivery to the customer and records revenue at a point in time when the NFT is delivered to the customer and the customer pays. The Company has no obligations for returns, refunds or warranty after the NFT sale. The value of the sale is determined based on the value of the Ethereum crypto currency received as consideration. Each NFT that is generated produces a unique identifying code. 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. Research and Development Research and development costs incurred in the development of the Company’s products are expensed as incurred and includes costs such as outside development costs and other allocated costs incurred. For the year ended December 31, 2022, research and development costs incurred in the development of the Company’s software products with a related party were $514,957 and are included in research and development expense – related party on the accompanying consolidated statements of operations. 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. Recently Issued Accounting Pronouncements Refer to the notes to the audited financial statements. Results of Operations Revenue During the years ended December 31, 2022 and 2021, we generated revenues of $46,214 and $4,445, respectively. For the year ended December 31, 2022, revenues consisted of subscription revenues of $9,820 and revenues from the sale of NFT’s of $36,394, as compared to $4,445 of revenues from subscriptions for the year ended December 31, 2021. We do not expect to generate any revenues from the sale of NFT’s in the near future. Compensation and related expenses Compensation and related expenses for the years ended December 31, 2022 and 2021, were $6,551,776 and $2,963,294, respectively, an increase of $3,588,482 or 121.1%.Compensation and related expenses include salaries, stock-based compensation, health insurance and other benefits. The increase in compensation and related expenses is primarily related to increase in the number of full-time employees, and an increase in stock-based compensation. Stock-based compensation expense amounted to $3,173,401 and $1,090,027 for the years ended December 31, 2022 and 2021, respectively, and was attributable to the accretion of stock option expense. - 32 - Marketing and advertising expenses Marketing and advertising expenses for the years ended December 31, 2022 and 2021, were $828,736 and $5,090,763, respectively, a decrease of $4,262,027 or 83.7%, primarily due to a decrease in promotions, branding and digital marketing strategy and social media ads. Professional and consulting expenses During the years ended December 31, 2022 and 2021, we reported professional and consulting fees of $2,285,312 and $2,181,317, respectively, an increase of $103,995 or 4.8%, which are principally comprised of the following items: ● We incurred $514,469 and $1,657,292 of consulting fees for general advisory consulting, investor relation, technology services, and other incidental services for the year ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022 and 2021, $347,733 and $1,213,350, respectively, related to stock-based consulting expenses from stock option grants to various consultants, accretion of deferred stock-based consulting fees and common stock issued for services. ● The remaining amounts attributed to professional and consulting fees incurred during the years ended December 31, 2021 and 2022 were primarily attributed to legal fees, accounting fees, recruitment fees, and investor relations fees which amounted to $1,770,843 and $524,025, respectively. Research and development costs During the year ended December 31, 2022, we incurred $514,957 in research and development costs with a related party in connection with the development of our Metaverse software development project which is in the preliminary stage. We did not incur any research and development costs in the 2021 period. General and administrative expenses General and administrative expenses for the years ended December 31, 2022 and 2021, were $991,882 and $607,621, an increase of $384,261 or 63.2%, primarily attributable to an increase in insurance expense of $73,743, an increase in computer and internet expense of $23,579, an increase in travel expenses of $97,029, an increase in conference fees of $42,078, and an increase in rent expense of $16,644. General and administrative expenses primarily consisted of the following expense categories: insurance, travel, utilities, office related expenses and rent expense. Impairment loss on intangible assets During the year ended December 31, 2022, we concluded that the undiscounted cash flows did not support the carrying values of its intangible assets as of December 31, 2022. We determined the value of the patents acquired were fully impaired as of December 31, 2022 and recognized an impairment loss on its long-lived intangible assets of $981,000. Impairment loss on digital currencies and other digital assets During the year ended December 31, 2022, operating expenses included an impairment charge related to the write down of digital currencies and other digital assets of $119,276. We did not incur any impairment charges in the 2021 period. - 33 - Loss from Operations For the year ended December 31, 2022, loss from operation amounted to $12,226,725 as compared to $10,838,550 for the year ended December 31, 2021, an increase of $1,388,175, or 12.8%. Other Income (Expense) During the years ended December 31, 2022 and 2021, we reported other income of $88,153 and $9,516, respectively. Other income (expense) consisted of interest income, interest expense and unrealized gains or losses on short-term investments. During the year ended December 31, 2022, other income primarily consisted of interest income of $12,305, a realized gain on short-term investments of $28,176, and an unrealized gain on short-term investments of $47,672. 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. Net Loss For the foregoing reasons, our net loss for the years ended December 31, 2022 and 2021 was $12,138,572, or ($0.60) per common share (basic and diluted) and $10,829,034, or ($0.71) per common share (basic and diluted), respectively, an increase of $1,309,538, or 12.1%. Liquidity, Capital Resources and Plan of Operations As of December 31, 2022, we had cash totaling approximately $1,732,956. We were incorporated on December 4, 2014 and have generated minimal revenues to date. For the year ended December 31, 2022, we had a net loss of $12,138,572. In addition, we used cash in operations of $7,258,765 for the year ended December 31, 2022. We have an accumulated deficit of $39,729,118 at December 31, 2022 and have generated minimal revenues since inception. During the year ended December 31, 2022, the Company has received no net proceeds from the sale of its securities and no gross proceeds from the exercise of the Company’s Series A warrants. As of December 31, 2022, we had cash and cash equivalents of $1,732,956. Additionally, on December 31, 2022, we had short-term investments of $11,007,997. Short-term investments include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturities between four and twelve months. These events served to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern. Our primary uses of cash have been for compensation and related expenses, fees paid to third parties for professional services, marketing and advertising expenses, and general and administrative expenses. All funds received have been expended in the furtherance of growing the business. We received funds from the sale of our common stock and exercise of warrants. The following trends are reasonably likely to result in changes in our liquidity over the near to long term: ● An increase in working capital requirements to finance our current business, ● Cost of research and development, ● Addition of administrative, technical and sales personnel as the business grows, and ● The cost of being a public company. 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. - 34 - Net cash used in operating activities totaled approximately $7,258,765 and $8,454,504 for the years ended December 31, 2022 and 2021, respectively. Net loss for the years ended December 31, 2022 and 2021 totaled approximately $12,138,572 and $10,829,034, respectively. For the year ended December 31, 2022, net loss was adjusted for stock-based compensation of $3,173,401, stock-based professional fees of $347,733, amortization expense of $49,783, depreciation of $127,501, impairment loss of intangible assets of $981,000, and impairment loss on digital currencies and other digital assets of $119,276, offset by realized and unrealized gains on short-term investments of $75,848, and non-cash revenues from the sale of NFT’s of $36,394, and operating changes were a net increase of $179,616, primarily due to a decrease in prepaid expenses of $242,221 and accounts payable and accrued expenses of $61. Cash Flows from Investing Activities Net cash used in investing activities amounted to $11,209,126 and $56,039 for the years ended December 31, 2022, and 2021, respectively. During the year ended December 31, 2022, we purchased property and equipment of $44,475, purchased digital currencies and other digital assets of $233,245, and we purchased short-term investments of $20,842,149 and received gross proceeds from the sale of short-term investments of $9,910,000. During the year ended December 31, 2021, we purchased property and equipment of $56,039. Cash Flows from Financing Activities Net cash (used in) provided by financing activities totaled approximately $(203) and $27,643,282 for the nine months ended September 30, 2022, and 2021, respectively. During the nine months ended September 30, 2022, we repaid related party advances of $203. During the nine months ended September 30, 2021, financing activities was primarily attributable to net proceeds of approximately $13,671,074 from the sale of common stock, $13,979,370 from the exercise of Series A warrants and $161,567 of advances from a related party, offset by the repayment of related party advances of $161,229 and the repayment of related-party notes of $7,500. Net cash provided by financing activities totaled approximately $1,112 and $28,019,855 for the years ended December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, financing activities was primarily attributable to proceeds from related party advances of $20,294 offset by the repayment of related party advances of $19,182. 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. Off-Balance Sheet Arrangements We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our financial statements are contained in pages F-1 through F-22, 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.