Item 7. Management’s Discussion and Analysis
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 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 and gaming metaverse, known as “Habytat”, as well as the development of Museum, an a social network and multi-media
storage platform for consumers and enterprises.
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.
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.
Habytat
In
June 2022, we formed a wholly owned subsidiary, Dragon Interactive, Inc. (formerly, SmarterVerse, Inc.) (“Dragon Interactive”).
In July 2022, Dragon Interactive entered into a development agreement with MetaBizz, LLC, an infrastructure firm that creates and develops
4D experiences in the metaverse (“MetaBizz”). In August 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. Habytat is supported by proprietary artificial intelligence (“AI”) and utilizes a machine
learning engine to develop more realistic looking content, daily rewards, games, and new utilities that are designed to further enhance
the user experience in an engaging way. Our goal is to leverage our patents and develop new technology that leads to more people joining
and seeing the value in the metaverse. Currently, the development agreement is not active.
Each
Habytat user is granted user rights to use a designated piece of virtual property in Geniuz City, the first world within Habytat, through
the minting and issuance of a unique NFT. Geniuz City is designed to be a near photo-realistic world based on Miami’s Wynwood arts
district and its surrounding areas. Geniuz City enables users to visit art galleries, explore the town, interact with other users, take
selfies with famous landmarks, customize their properties and enjoy the culture of Geniuz City.
Users
will be able to customize their virtual property 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 Habytat, and such rewards can be used to enhance,
expand, and improve their virtual property. The official in-world currency of Habytat is the “Nirad,” which can be earned
through participation on the DatChat Social Network+ or Habytat and used to upgrade properties and experiences in Habytat.
As
of March 28, 2024, we had over 140,000 Habytat users.
Mobile
Metaverse
In
May 2023, we launched the open mobile metaverse, Habytat 1.0, as part of our mission to democratize access to the metaverse. We hope
that by making Habytat available via mobile devices and offering free ownership of virtual land and homes, that Habytat will break down
obstacles that previously limited participation, such as the necessity for expensive virtual reality (“VR”) gear or metaverse
properties. We have assembled a team of over twenty game developers, graphic artists and back-end developers to create Habytat 1.0.
- 25 -
HabyPets
In
August 2023, we launched a series of novel AI-powered pets called “HabyPets.” HabyPets provides an interactive experience
within the Habytat world, creating a more immersive and personal experience for users. Supported by Habytat’s proprietary AI and
machine learning engine, HabyPets grow over time from playful companions to mature adult pets. Similar to real-life pets, these AI pets
can be trained by users via a range of behavioral commands, replicating the natural progression of real pets over time. These include,
but are not limited to, catching frisbees, playing with toys, engaging in tug of war, and even participating in thrilling races with
other pets at the park. By actively engaging with their pets, users can establish a connection and provide proper care for their virtual
companions, fostering a realistic experience within the Habytat metaverse.
Myseum
We
are currently developing “Myseum,” a platform that will allow users to create a personal museum designed to easily share
pictures, videos and documents utilizing planned features, such as creating instant sharing spaces at family gatherings, time released
video messages, multi-tiered social media, and secure family document storage and sharing. Currently, Myseum is scheduled to launch in
the second quarter of 2024 and will encompass features and social networking technology designed to unlock and share digital media.
Spin-off
and Name Change
In January 2024, we announced plans to spin-off the
Habytat platform business into a new standalone public company pursuant to a distribution as further discussed below. As of the date of
this Annual Report, we currently own approximately 71.5% of Dragon Interactive, the entity that owns and operates the Habytat platform
business. This marked a significant step forward in our corporate strategy to reposition the Company as a pureplay social media ecosystem
centered around our Myseum assets.
In February 2024, Darin Myman was appointed as President
of SmarterVerse.
In February 2024, SmarterVerse changed its name to
Dragon Interactive Corporation.
If the distribution proceeds, our shareholders will
maintain their current shares in the Company and receive a pro-rata distribution of a portion of our shares of Dragon Interactive. The
proposed distribution remains subject to approval by our board of directors as well as other customary conditions, including the filing
and effectiveness of either a Form S-1 or Form 10 registration statement with the U.S. Securities and Exchange Commission and obtaining
of any other required regulatory approvals. Upon consummation of the proposed distribution, Dragon Interactive would become a standalone
public company with plans seek a listing on a national stock exchange. No assurance can be given that the spin-off and/or the distribution
will occur as anticipated or at all.
Recent
Events
On
January 16, 2024, we entered into an underwriting agreement with EF Hutton LLC, as the representative of the underwriters named therein,
relating to an underwritten public offering of 382,972 shares of our common stock and pre-funded warrants to purchase up 590,000 shares
of our common stock for gross proceeds of approximately $1.8 million, before deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company.
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 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.
- 26 -
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 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 and significant estimates are more fully described in Note 1 in the “Notes to Financial Statements”, we believe
the following estimates are critical to the process of making significant judgments and estimates in preparation of our consolidated
financial statements.
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
internal-use 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, 2023 and 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.
- 27 -
Variable interest entities
Pursuant to ASC 810-10-25-22 , an entity
is defined as a VIE if it either lacks sufficient equity to finance its activities without additional subordinated financial support,
or it is structured such that the holders of the voting rights do not substantively participate in the gains and losses of the entity.
When determining whether an entity that meets the definition of a business qualifies for a scope exception from applying VIE guidance,
the Company considers whether: (i) it has participated significantly in the design of the entity, (ii) it has provided more than half
of the total financial support to the entity, and (iii) substantially all of the activities of the VIE are conducted on its behalf. A
VIE is consolidated by its primary beneficiary, the party that has the power to direct the activities that most significantly impact the
VIE’s economic performance and has the right to receive benefits or the obligation to absorb losses of the entity that could be
potentially significant to the VIE. The primary beneficiary assessment must be re-evaluated on an ongoing basis.
Based on the Company’s analysis, on February
14, 2023, Metabizz, LLC, a Florida corporation, and Metabizz SAS, a company incorporated under the laws of Columbia (collectively “Metabizz”),
were determined to be VIE entities in accordance with ASC 810-10-25-22 because the equity owners in Metabizz do not have the characteristics
of a controlling financial interest and the initial equity investments in these entities may be or are insufficient to meet or sustain
its operations without additional subordinated financial support from DatChat. The equity owners of Metabizz have only a nominal equity
investment at risk, and the Company absorbs or receives a majority of the entity’s expected losses or benefits. The Company participates
significantly in the design of Metabizz. The Company has provided working capital advances to Metabizz to allow Metabizz to fund its day
to day obligations. Substantially all of the activities of Metabizz are conducted for the Company’s benefit, as evidenced by the
fact that the operations of Metabizz consists of development of software and technologies to be used by SmarterVerse and the Company provides
work capital to Metabizz to pay employees and independent contractors to perform the development services on behalf of the Company. Repayment
of the working capital advances is not guaranteed by the equity owner of Metabizz and creditors of Metabizz do not have recourse against
the Company. Accordingly, the Company is required to consolidate the assets, liabilities, revenues and expenses of Metabizz using the
fair value method. Additionally, the managing partner of Metabizz is also the Chief Innovation Officer of SmarterVerse. Since Metabizz,
LLC and Metabizz SAS are considered VIE’s, any noncontrolling interest eliminates in consolidation.
In connection with the initial consolidation of
Metabizz, on February 14, 2023 (the initial consolidation date), the Company recorded a gain on initial consolidation of variable interest
entities of $42,737.
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
We
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, we 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.
- 28 -
Recently
Issued Accounting Pronouncements
Refer
to the notes to the audited financial statements.
Results
of Operations
Revenue
During
the years ended December 31, 2023 and 2022, we generated revenues of $672 and $46,214, 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 $672
of revenues from subscriptions for the year ended December 31, 2023. We do not expect to generate any revenues from the sale of NFT’s
in the near future.
Operating
expenses
For
the year ended December 31, 2023, operating expenses amounted to $8,784,703 as compared to $12,272,939 for the year ended December 31
2022, a decrease of $3,488,236, or 28.4%. For the years ended December 31 2023 and 2022, operating expenses consisted of the following:
Year
Ended December 31,
2023
2022
Compensation
and related expenses
$ 4,760,180
$ 6,551,776
Marketing
and advertising expenses
388,444
828,736
Professional
and consulting expenses
1,324,640
2,285,312
Research
and development
1,351,415
514,957
General
and administrative expenses
892,972
991,882
Impairment
loss on property and equipment and intangible assets
43,671
981,000
Impairment
loss on digital currencies and other digital assets
23,381
119,276
Total
$ 8,784,703
$ 12,272,939
Compensation
and related expenses
Compensation
and related expenses include salaries, stock-based compensation, health insurance and other benefits.
During
the year ended December 31, 2023 and 2022, compensation and related expenses amounted to $4,760,180 and $6,551,776, respectively, a decrease
of $1,791,596, or 27.3%. The decrease was attributable to a decrease in stock-based compensation of $1,170,624 and a decrease in other
compensation and other related expenses of $620,972.
Marketing
and advertising expenses
During
the years ended December 31, 2023 and 2022, marketing and advertising expenses amounted to $388,444 and $828,736, respectively, a decrease
of $440,292, or 53.1%, primarily due to an overall decrease in promotions, branding and digital marketing strategies and social media
ads.
Professional
and consulting expenses
During
the years ended December 31, 2023 and 2022, we reported professional and consulting expenses of $1,324,640 and $2,285,312, respectively,
a decrease of $960,672, or 42.0%. The decrease is attributable to a decrease in consulting fees of $154,396 which includes a decrease
in stock-based consulting fees of $96,431, a decrease in investor relations fees of $295,850, a decrease in legal fees of $224,180, and
a decrease in recruiting fees of $322,000, offset be an increase in other professional fees of $35,754.
Research
and development costs
During
the years ended December 31, 2023 and 2022, we incurred $1,351,415 and $514,957 in research and development costs, an increase of $836,458,
or 162.4%. Research and development costs were incurred in connection with our Metaverse software development project, including the
development of Habytat which is in the preliminary stage.
General
and administrative expenses
During
the years ended December 31, 2023 and 2022, general and administrative expenses amounted to $892,972 and $991,882, a decrease of $98,910,
or 10.0%. The decreases are primarily attributable to a decrease in conference fees and a decrease in other general and administrative
expenses, offset by an increase in travel expense.
Impairment
loss on property and equipment and intangible assets
During
the year ended December 31, 2023, we wrote off the balance of property and equipment held by MetaBizz since the property and equipment
was abandoned and no longer being used by the Company as of December 31, 2023. Accordingly, we recognized an impairment loss on property
and equipment of $43,671.
- 29 -
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 years ended December 31, 2023 and 2022, operating expenses included an impairment charge related to the write down of digital assets
of $23,381 and $119,276, respectively.
Loss
from Operations
During
the year ended December 31, 2023, loss from operation amounted to $8,784,031 as compared to $12,226,725 during the year ended December
31, 2022, a decrease of $3,442,694, or 28.2%.
Other
Income (Expense)
Other
income (expenses) primarily consisted of interest income, gain on initial consolidation of variable interest entities, and realized gain
on short-term investments and unrealized gains or losses on short-term investments. During the years ended December 31, 2023 and 2022,
we reported other income, net of $379,061 and $88,153, respectively. During the year ended December 31, 2023, other income, net primarily
consisted of interest income of $9,281, gain on initial consolidation of variable interest entities of $42,737, and a realized gain on
short-term investments of $327,145. 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.
Net
Loss
Due
to the foregoing reasons, during the years ended December 31, 2023 and 2022, our net loss was $8,404,970, or $(4.14) per common share
(basic and diluted) and $12,138,572, or ($6.04) per common share (basic and diluted), respectively, a decrease of $3,733,602, or 30.8%.
Liquidity,
Capital Resources and Plan of Operations
As
of December 31, 2023, we had cash and cash equivalents of $953,362 and short-term investments of $5,236,781. Short-term investments include
U.S. Treasury bills that are all highly rated and have initial maturities between four and twelve months.
The consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. As reflected in the accompanying consolidated financial statements, we had a net loss of $8,404,970 for the
year ended December 31, 2023. Net cash used in operations was $6,529,277 for the year ended December 31, 2023. Additionally, as of
December 31, 2023, we had an accumulated deficit of $48,134,088 and have generated minimal revenues since inception. As of December 31,
2023, we had working capital of $5,969,447, including cash of $953,362 and short-term investments of $5,236,781. These factors raise substantial
doubt about our ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management
cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or
equity capital. We are seeking to raise capital through additional debt and/or equity financings to fund our operations in the future.
Although we have historically raised capital from sales of common shares, there is no assurance that it will be able to continue to do
so. If we are unable to raise additional capital or secure additional lending in the near future, management expects that the Company
will need to curtail its operations. These consolidated financial statements do not include any adjustments related to the recoverability
and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue
as a going concern.
On January 16, 2024, we entered into an underwriting
agreement (the “Underwriting Agreement”) with EF Hutton LLC (the “Representative”), as the representative of the
underwriters named therein (the “Underwriters”), relating to an underwritten public offering (the “Offering”)
of 382,972 shares of the Company’s common stock (the “Shares”) and pre-funded warrants to purchase up to 590,000 shares
of Common Stock (the “Pre-Funded Warrants”). The public offering price for each share of Common Stock was $1.85 for aggregate
gross proceeds of $708,498, and public offering price for the Pre-Funded Warrants was $1.8499 for each Pre-Funded Warrant for aggregate
gross proceeds of $1,091,441. In connection with this Offering, we raised aggregate gross proceeds of $1,799,939 and received net proceeds
of $1,437,940, net of Underwriters discounts and offering costs of $261,999 and legal fees of $100,000.
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 the 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.
- 30 -
Cash
Flow Activities for the Years ended December 31, 2023 and 2022
Cash
Flows from Operating Activities
Net cash used in operating activities totaled $6,529,277 and $7,258,765
for the years ended December 31, 2023, and 2022, respectively, a decrease of $729,488.
Net
cash flow used in operating activities for the year ended December 31, 2023 primarily reflected a net loss of $8,404,970 adjusted for
the add-back (reduction) of non-cash items consisting of depreciation and amortization of $28,943, amortization of right of use assets
of $60,549, accretion of stock-based stock option and common stock expense of $2,254,079, a non-cash gain from initial consolidation
of variable interest entities of $(42,737), impairment loss on digital assets of $23,381, impairment of property and equipment of $43,671,
and net realized gain on short-term investments of $327,145, offset by changes in operating assets and liabilities primarily consisting
of a decrease in prepaid expenses of $5,797, a decrease in accounts payable and accrued expenses of $103,639, and a decrease in operating
lease liabilities of $67,339.
Net
cash flow used in operating activities for the years ended December 31, 2022 primarily reflected a net loss of $12,138,572, adjusted
s was adjusted for the add-back (reduction) of non-cash items consisting of stock-based compensation of $3,173,401, stock-based professional
fees of $347,733, amortization or right of use assets of $49,783, depreciation and amortization 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 asset and liability
changes 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 provided by (used in) investing activities amounted to $6,160,932 and $(11,209,126) for the years ended December 31, 2023 and 2022,
respectively.
During
the years ended December 31, 2023, we purchased short-term investments of $8,599,121 and received gross proceeds from the sale of short-term
investments of $14,745,000. Additionally, we received $64,538 in cash upon initial consolidation of variable interest entities and purchased
property and equipment amounting to $49,485.
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.
Cash
Flows from Financing Activities
Net
cash (used in) provided by financing activities totaled approximately $(398,284) and $1,112 for the years ended December 31, 2023 and
2022, respectively.
During
the year ended December 31, 2023, we repaid related party advances of $1,315, we used cash of $397,969 to purchase 66,945 treasury stock
at an average price of $5.94 per share, and we received $1,000 from the sale of Series B preferred stock.
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.
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 ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
- 31 -