Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion and analysis summarizes the significant factors affecting our operating results, financial condition, liquidity
and cash flows as of and for the periods presented below. The following discussion and analysis should be read in conjunction with our
financial statements and the related notes thereto included elsewhere in this report. The discussion contains forward-looking statements
that are based on the beliefs of management, as well as assumptions made by, and information currently available to, management. Actual
results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this report, particularly in the sections titled ” Item 1. Risk Factors” and
“Special Note Regarding Forward-Looking Statements.”
Overview
Asset
Entities is a technology company providing social media marketing and content delivery services across Discord, TikTok, and other social
media platforms. We also design, develop and manage servers for communities on Discord. Based on the rapid growth of our Discord servers
and social media following, we have developed three categories of services: (1) our Discord investment education and entertainment services,
(2) social media and marketing services, and (3) our AE.360.DDM services. All of our services are based on our effective use of Discord
as well as other social media including TikTok, Twitter, Instagram, and YouTube.
Our
Discord investment education and entertainment service is designed primarily by and for enthusiastic Generation Z, or Gen Z, retail investors,
creators and influencers. Gen Z is commonly considered to be people born between 1997 and 2012. Our investment education and entertainment
service focuses on stock, real estate, cryptocurrency, and NFT community learning programs designed for the next generation. While we
believe that Gen Z will continue to be our primary market, our recently-expanded Discord server offering features education and entertainment
content covering real estate investments, which is expected to appeal strongly to older generations as well. Our current combined server
user membership is approximately 260,000 as of March 2023.
Our
social media and marketing services utilize our management’s social influencer backgrounds by offering social media and marketing
campaign services to business clients. Our team of social influencer independent contractors, which we call our “SiN” or
“Social Influencer Network”, can perform social media and marketing campaign services to expand our clients’ Discord
server bases and drive traffic to their businesses, as well as increase membership in our own servers.
39
Our
“AE.360.DDM, Design Develop Manage” service, or “AE.360.DDM”, is a suite of services to individuals and companies
seeking to create a server on Discord. We believe we are the first company to provide “Design, Develop and Manage,” or DDM,
services for any individual, company, or organization that wishes to join Discord and create their own community. With our AE.360.DDM
rollout, we are uniquely positioned to offer DDM services in the growing market for Discord servers.
We
believe that we are a leading provider of all of these services, and that demand for all of our services will continue to grow. We
expect to experience rapid revenue growth from our services. We believe that we have built a scalable and sustainable business
model and that our competitive strengths position us favorably in each aspect of our business.
Our
revenue depends on the number of paying subscribers to our Discord servers. During the years ended December 31, 2022 and 2021, we received
revenue from 622 and 8,694 Asset Entities Discord server paying subscribers, respectively.
Our
Historical Performance
The Company had an accumulated deficit of $627,118
at December 31, 2022 and a net loss of $645,255 during the year ended December 31, 2022. However, in February 2023, the Company
completed an equity offering which generated net proceeds of $6.6 million. Consequently, the Company’s existing cash resources
and the cash received from the equity offering are expected to provide sufficient funds to carry out the Company’s planned operations
through the next 12 months.
Impact of COVID-19 Pandemic
The
current global pandemic of a novel strain of coronavirus, or COVID-19, and the global measures taken to combat it, may have an adverse
effect on our business. Public health authorities and governments at local, national and international levels have announced various
measures to respond to the pandemic. Some measures that directly or indirectly impact our business include voluntary or mandatory quarantines,
restrictions on travel and limiting gatherings of people in public places.
We
believe that we have fully complied with all federal, state and local requirements relating to COVID-19. We have undertaken various measures
in an effort to mitigate the spread of COVID-19. From our founding, we have been a highly efficient remote-first company, which has been
able to continue to function as normal even with pandemic-related stay at home orders and other regulations. We have also exploited certain
trends related to the COVID-19 pandemic, including its acceleration of global growth in virtual services. However, the COVID-19 pandemic
has adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets.
The resulting global deterioration in economic conditions and financial volatility may have an adverse impact on discretionary consumer
spending or investing, could also impact our business and demand for our services.
As
events are rapidly changing, we cannot predict how long the effects of the COVID-19 pandemic and the efforts to contain it could disrupt
our operations or the full extent of that disruption. Governments could take additional restrictive measures to combat the pandemic
that could further impact our business or the economy in the geographies in which we operate. It is also possible that the impact of
the pandemic and response on our customers, users, and markets will persist for some time after governments ease their restrictions.
The
extent to which the pandemic may impact our results will depend on future developments, which are highly uncertain and cannot
be predicted as of the date of this report, including new information that may emerge concerning the severity of the pandemic and
steps taken to contain the pandemic or treat its impact, among others. Nevertheless, the pandemic and the current financial,
economic and capital markets environment, and future developments in the global supply chain and other areas present material uncertainty
and risk with respect to our performance, financial condition, results of operations and cash flows. See also “Item 1A. Risk
Factors – Risks Related to Our Business and Industry – The COVID-19 pandemic may cause a material adverse effect on our business ”
above.
40
Principal
Factors Affecting Our Financial Performance
Our
operating results are primarily affected by the following factors:
● our
ability to acquire new customers and users or retain existing customers and users;
● our
ability to offer competitive pricing;
● our
ability to broaden product or service offerings;
● industry
demand and competition;
● our
ability to leverage technology and use and develop efficient processes;
● our
ability to attract and retain talented employees and contractors; and
● market
conditions and our market position.
Emerging
Growth Company
We
qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions
from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
● have
an auditor report on our internal controls over financial reporting pursuant to Section 404(b)
of the Sarbanes-Oxley Act;
● comply
with any requirement that may be adopted by the Public Company Accounting Oversight Board
regarding mandatory audit firm rotation or a supplement to the auditor’s report providing
additional information about the audit and the financial statements (i.e., an auditor discussion
and analysis);
● submit
certain executive compensation matters to stockholder advisory votes, such as “say-on-pay”
and “say-on-frequency;” and
● disclose
certain executive compensation related items such as the correlation between executive compensation
and performance and comparisons of the chief executive officer’s compensation to median
employee compensation.
In
addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging
growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable
to those of companies that comply with such new or revised accounting standards.
We
will remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which
our total annual gross revenues exceed $1,235,000,000, (ii) the date that we become a “large accelerated filer” as defined
in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds
$700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued
more than $1 billion in non-convertible debt during the preceding three year period.
Recent
Developments
Initial
Public Offering
On
February 2, 2023, we entered into the Underwriting Agreement with Boustead, as representative of the underwriters named on Schedule 1
thereto, relating to the IPO of the IPO Shares. Pursuant to the Underwriting Agreement, in exchange for Boustead’s firm commitment
to purchase the IPO Shares, the Company agreed to sell the IPO Shares to Boustead at the IPO Price of $4.65 (93% of the public offering
price per share of $5.00, after deducting underwriting discounts and commissions and before deducting a 0.75% non-accountable expense
allowance). The Company also granted Boustead a 45-day over-allotment option to purchase up to an additional 225,000 shares of Class
B Common Stock at the IPO Price, less the non-accountable expense allowance, from the Company, representing 15% of the IPO Shares. Pursuant
to the Underwriting Agreement, on February 7, 2023, the Company issued Boustead the Representative’s Warrant. The Representative’s
Warrant will have an exercise price of $6.25 per share, which is equal to 125% of the public offering price, subject to adjustment, a
cashless exercise provision, and may be exercised at any time for five years following the date of issuance.
41
The
closing of the IPO took place on February 7, 2023. At the closing, the Company sold the IPO Shares for total gross proceeds of $7,500,000.
After deducting underwriting discounts and commissions, the non-accountable expense allowance, and other expenses from the IPO, the Company
received net proceeds of approximately $6.6 million. The Company also issued the Representative’s Warrant to Boustead for the purchase
of 105,000 shares of Class B Common Stock.
The
IPO Shares were offered and sold, and the Representative’s Warrant was issued, pursuant to the Registration Statement, initially
filed with the SEC on September 2, 2022, and declared effective by the SEC on February 2, 2023, and the final prospectus, dated February
2, 2023, filed with the SEC on February 6, 2023 pursuant to Rule 424(b)(4) of the Securities Act. The Company intends to use the net
proceeds from the IPO for investment in corporate infrastructure, marketing and promotion of Discord communities, social campaigns, and
the Company’s “AE.360.DDM” Discord design, development and management service, expansion of “SiN”, the
Company’s social influencer network, increasing staff and company personnel, and general working capital, operating, and other
corporate expenses.
We
also agreed to provide Boustead the Right of First Refusal for two years following the consummation of the IPO to act as financial advisor,
lead managing underwriter, book runner, placement agent, or to act as joint advisor, managing underwriter, book runner, or placement
agent on at least equal economic terms, on any public or private financing (debt or equity), merger, business combination, recapitalization
or sale of some or all of the equity or assets of the Company. In the event that we engage Boustead to provide such services, Boustead
will be compensated consistent with the Boustead Engagement Letter, as described below, unless we mutually agree otherwise.
Under
the Boustead Engagement Letter, during the 12-month period following the termination or expiration of the Boustead Engagement letter,
which will occur no earlier than February 7, 2024 (see below), we must also compensate Boustead for any transaction with a party, including
any investor in a private placement in which Boustead served as placement agent or in the IPO, or any party who became aware of the Company
or who became known to the Company prior to the termination or expiration of the Boustead Engagement Letter. Such party will include,
but not be limited to, Company officers, directors, employees, consultants, advisors, shareholders, members, and partners. The Boustead
Engagement Letter will expire upon the later to occur of February 7, 2024 (12 months from the completion date of the IPO) or mutual written
agreement of the Company and Boustead.
Under
the Boustead Engagement Letter, in connection with a transaction as to which Boustead duly exercises the Right of First Refusal or is
entitled to the Tail Rights, Boustead shall receive compensation as follows:
● other
than normal course of business activities, as to any sale, merger, acquisition, joint venture,
strategic alliance, license, research and development, or other similar agreements, Boustead
will accrue compensation under a percentage fee of the Aggregate Consideration (as defined
in the Boustead Engagement Letter) calculated as follows:
o 10.0%
for Aggregate Consideration of less than USD$10,000,000; plus
o 8.0%
for Aggregate Consideration between $10,000,000 - $25,000,000; plus
o 6.0%
for Aggregate Consideration between $25,000,001 - $50,000,000; plus
o 4.0%
for Aggregate Consideration between $50,000,001 - $75,000,000; plus
o 2.0%
for Aggregate Consideration between $75,000,001 - $100,000,000; plus
o 1.0%
for Aggregate Consideration above $100,000,000;
● for
any investment transaction including any common stock, preferred stock, ordinary shares,
convertible stock, LLC or LP memberships, debt, convertible debentures, convertible debt,
debt with warrants, stock warrants, stock options (excluding issuances to Company employees),
stock purchase rights, or any other securities convertible into common stock, any form of
debt instrument involving any form of equity participation, and including the conversion
or exercise of any securities sold in any transaction, Boustead shall receive upon each investment
transaction closing a success fee, payable in (i) cash, equal to 7% of the gross amount to
be disbursed to the Company from each such investment transaction closing, plus (ii) a non-accountable
expense allowance equal to 1% of the gross amount to be disbursed to the Company from each
such investment transaction closing, plus (iii) warrants equal to 7% of the gross amount
to be disbursed to the Company from each such investment transaction closing, including shares
issuable upon conversion or exercise of the securities sold in any transaction, and in the
event that warrants or other rights are issued in the investment transaction, 7% of the shares
issuable upon exercise of the warrants or other rights, and in the event of a debt or convertible
debt financing, warrants to purchase an amount of Company stock equal to the 7% of the gross
amount or facility received by the Company in a debt financing divided by the warrant exercise
share. The warrant exercise price will be the lower of: 1.) the fair market value price per
share of the Company’s common stock as of each such financing closing date; 2.) the
price per share paid by investors in each respective financing; 3.) in the event that convertible
securities are sold in the financing, the conversion price of such securities; or 4.) in
the event that warrants or other rights are issued in the financing, the exercise price of
such warrants or other rights;
42
● any
such warrants will be transferable in accordance with FINRA rules and SEC regulations, exercisable
from the date of issuance and for a term of five years, contain cashless exercise provisions,
be non-callable and non-cancelable with immediate piggy-back registration rights, have customary
anti-dilution provisions and any future stock issuances, etc., at a price(s) below the exercise
price per share, at terms no less favorable than the terms of any warrants issued to participants
in the related transaction, and provide for automatic exercise immediately prior to expiration;
and
● reasonable
out-of-pocket expenses in connection with the performance of its services, regardless of
whether a transaction occurs.
Pursuant
to the Underwriting Agreement, as of February 3, 2023, we are subject to a lock-up agreement that prevents, subject to certain exceptions,
selling or transferring any of our shares of capital stock of the Company for up to 12 months. In addition, our officers, directors and
beneficial owners of approximately 78.0% of our common stock agreed to be locked up for a period of 12 months. Holders of approximately
7.2% of our outstanding common stock agreed to be locked up for a period of nine months, and a holder of approximately 2.3% of our outstanding
Class B Common Stock prior to this offering has agreed to be locked up for a period of six months with respect to approximately 0.9%
of the outstanding common stock held by such holder, subject to certain exceptions. The remaining shares are not subject to lock-up provisions
or such lock-up provisions have been waived.
The
Underwriting Agreement and Boustead Engagement Letter contain other customary representations, warranties and covenants by the Company,
customary conditions to closing, indemnification obligations of the Company and Boustead, including for liabilities under the Securities
Act, other obligations of the parties, and termination provisions. The representations, warranties and covenants contained in the Underwriting
Agreement and Boustead Engagement Letter were made only for purposes of such agreement and as of specific dates, were solely for the
benefit of the parties to such agreement, and may be subject to limitations agreed upon by the contracting parties.
In
addition, the Registration Statement registered for resale a total of 1,500,000 shares of Class B Common Stock by the selling stockholders
named in the Registration Statement. Any sales of these shares occurred at a fixed price of $5.00 per share until the Class B Common
Stock was listed on Nasdaq on February 3, 2023. Thereafter, these sales will occur at fixed prices, at market prices prevailing at the
time of sale, at prices related to prevailing market prices, or at negotiated prices. The Company will not receive any proceeds from
the sale of Class B Common Stock by the selling stockholders. The Company has no knowledge of whether any of the shares of Class B Common
Stock that may be sold by the selling stockholders have been sold.
In
total, the Registration Statement registered for sale shares of Class B Common Stock with a maximum aggregate offering price of $8,625,000,
representing the right to sell up to 1,725,000 shares of Class B Common Stock at the IPO Price upon full exercise of the over-allotment
option; the Representative’s Warrant; shares of Class B Common Stock underlying the Representative’s Warrant with a maximum
aggregate offering price of $754,687.50, representing rights to purchase up to 120,750 shares of Class B Common Stock at the exercise
price of $6.25 per share, upon full exercise of the over-allotment option; and 1,500,000 shares of Class B Common Stock on
behalf of certain selling stockholders. As of the date of this report, the IPO Shares were sold for aggregate gross proceeds of
$7,500,000 and the Representative’s Warrant was issued with the right to purchase up to 105,000 shares of Class B Common Stock
at $6.25 per share for gross proceeds of up to $656,250. As of the date of this report, the underwriter’s over-allotment option
has not been exercised and the securities issuable upon exercise of the Representative’s Warrant have not been sold.
The
Company’s officers, directors, and certain stockholders who, prior to the IPO, held shares of Class B Common Stock or the Class
A Common Stock, have agreed, subject to certain exceptions, not to offer, issue, sell, contract to sell, encumber, grant any option for
the sale of or otherwise dispose of any shares of Class A Common Stock or Class B Common Stock or other securities convertible into or
exercisable or exchangeable for shares of Class A Common Stock or Class B Common Stock for a period of 6 months, 9 months or 12 months,
as applicable, without the prior written consent of Boustead.
43
A
copy of each of the Underwriting Agreement and the Representative’s Warrant is filed as Exhibit 10.24 and Exhibit 4.5 to this
Annual Report, respectively, and the description above is qualified in its entirety by reference to each such exhibit.
As
of December 31, 2022, we had used none of the proceeds from the IPO because the proceeds from the IPO were not received until February
7, 2023.
As
of the date of this report, none of the proceeds from the IPO were used to make direct or indirect payments to any of our directors or
officers, any of their associates, any persons owning 10% or more of any class of our equity securities, or any of our affiliates, or
direct or indirect payments to any others other than for the direct costs of the offering
There
has not been, and we do not expect, any material change in the planned use of proceeds from the IPO as described in the Registration
Statement.
Management
Agreements
Under
the employment letter agreement between the Company and the Company’s Chief Executive Officer and President, Arshia Sarkhani, dated
as of April 21, 2022, the term of the agreement commenced as of the closing of the IPO on February 7, 2023, and will continue for two
years unless terminated earlier in accordance with its terms. During the term of the agreement, the Company will pay Mr. Sarkhani an
annual salary of $240,000 and an initial cash bonus of $10,000. Mr. Sarkhani will be eligible to receive an annual cash bonus as determined
by the board of directors of the Company. Pursuant to the employment letter agreement, following the closing of the IPO, on February
7, 2023, the Company entered into its standard form of restricted stock award agreement with Mr. Sarkhani granting restricted stock under
the Plan in the amount of 200,000 shares of Class B Common Stock to vest equally over three years on each anniversary of the agreement.
Upon a change of control of the Company, all of the shares will vest immediately. Under the employment letter agreement, Mr. Sarkhani
will be eligible to participate in standard benefits plans offered to similarly-situated employees by the Company from time to time,
subject to plan terms and generally applicable Company policies. The employment letter agreement also has certain confidentiality and
non-competition provisions. The Company previously entered into its standard form of directors and officers indemnification agreement
with Mr. Sarkhani, and provided standard directors and officers liability insurance, in accordance with the employment letter agreement.
Under
the employment letter agreement between the Company and the Company’s Chief Experience Officer, Derek Dunlop, dated as of April
21, 2022, the term of the agreement commenced as of the closing of the IPO on February 7, 2023, and will continue for two years unless
terminated earlier in accordance with its terms. During the term of the agreement, the Company will pay Mr. Dunlop an annual salary of
$220,000 and an initial cash bonus of $10,000. Mr. Dunlop will be eligible to receive an annual cash bonus as determined by the Company’s
board of directors. Pursuant to the employment letter agreement, following the closing of the IPO, on February 7, 2023, the Company entered
into its standard form of restricted stock award agreement with Mr. Dunlop granting restricted stock under the Plan in the amount of
225,500 shares of Class B Common Stock to vest equally over three years on each anniversary of the agreement. Upon a change of control
of the Company, all of the shares will vest immediately. Under the employment letter agreement, Mr. Dunlop will be eligible to participate
in standard benefits plans offered to similarly-situated employees by the Company from time to time, subject to plan terms and generally
applicable Company policies. The employment letter agreement also has certain confidentiality and non-competition provisions. The Company
previously entered into its standard form of directors and officers indemnification agreement with Mr. Dunlop, and provided standard
directors and officers liability insurance, in accordance with the employment letter agreement.
Under
the employment letter agreement between the Company and the Company’s Chief Financial Officer, Treasurer and Secretary, Matthew
Krueger, dated as of April 21, 2022, the term of the agreement commenced as of the closing of the IPO on February 7, 2023, and will continue
for two years unless terminated earlier in accordance with its terms. During the term of the agreement, the Company will pay Mr. Krueger
an annual salary of $180,000 and an initial cash bonus of $25,000. Mr. Krueger will be eligible to receive an annual cash bonus
as determined by the Company’s board of directors. Pursuant to the employment letter agreement, following the closing of the IPO,
on February 7, 2023, the Company entered into its standard form of restricted stock award agreement with Mr. Krueger granting restricted
stock under the Plan in the amount of 198,000 shares of Class B Common Stock to vest equally over three years on each anniversary of
the agreement. Upon a change of control of the Company, all of the shares will vest immediately. Under the employment letter agreement,
Mr. Krueger will be eligible to participate in standard benefits plans offered to similarly-situated employees by the Company from time
to time, subject to plan terms and generally applicable Company policies. The employment letter agreement also has certain confidentiality
and non-competition provisions. The Company previously entered into its standard form of directors and officers indemnification agreement
with Mr. Krueger, and provided standard directors and officers liability insurance, in accordance with the employment letter agreement.
44
Each
of the above employment letter agreements may be terminated by the Company only for “cause”. “Cause” is defined
as (a) conviction of or plea of guilty or nolo contendere to a felony under the laws of the United States or any state thereof; (b) commission
of fraud or embezzlement on the Company or any of its subsidiaries; (c) willful act or omission which results in an assessment of a civil
or criminal penalty against the Company or any of its subsidiaries that causes material financial or reputational harm to the Company
or any of its subsidiaries; (d) any intentional act of dishonesty resulting or intending to result in personal gain or enrichment at
the expense of the Company or any of its subsidiaries; (e) a violation by of law (whether statutory, regulatory or common law), causing
a material financial harm or material reputational harm to the Company or any of its subsidiaries; (f) a material violation of the Company’s
(or any of its subsidiaries’) bona fide, written equal employment opportunity, antidiscrimination, anti-harassment, or anti-retaliation
policies; (g) material breach of this agreement; (h) the consistent abuse of alcohol, prescription drugs or controlled substances, which
interferes with the performance of the officer’s duties to the Company; (i) failure to execute the duties and responsibilities
of the officer position which the officer holds; (j) a breach or default of the officer’s obligations to the Company or under the
agreement; or (k) excessive absenteeism other than for reasons of illness. Each officer may terminate such officer’s employment
letter agreement at will.
In
addition, the term of, and compensation provided under, each of the employment letter agreements with the Company’s Chief Marketing
Officer, Jackson Fairbanks, Executive Vice-Chairman, Kyle Fairbanks, Chief Operating Officer, and Arman Sarkhani, and the consulting
agreement with the Company’s Executive Chairman, Michael Gaubert, commenced upon the closing of the IPO.
See
“Item 11. Executive Compensation – Executive Employment and Consulting Agreements ” and “Item 11. Executive
Compensation – 2022 Equity Incentive Plan ” for important related disclosures.
Results
of Operations
The
following table summarizes our results of operations for the fiscal years ended December 31, 2022 and 2021.
Year Ended
Consolidated Operations Data
December 31,
2022
December 31,
2021
Revenues
$ 343,106
$ 829,618
Operating expenses
Contract labor
155,232
160,251
General and administrative
462,971
119,369
Management compensation
370,158
535,127
Total operating expenses
988,361
814,747
Income (loss) from operations
(645,255 )
14,871
Net income (loss)
$ (645,255 )
$ 14,871
Revenues .
Our revenues decreased 58.6% to approximately $0.8 million for the fiscal year ended December 31, 2022 from approximately $0.8 million
for the fiscal year ended December 31, 2021. This decrease was primarily due to a decrease in subscription revenue as a result of a decrease
in the number of paying subscribers to 622 for the fiscal year ended December 31, 2022 from 8,694 for the fiscal year ended December
31, 2021. There was no material difference in the Company’s subscription pricing structure between these periods. During the fiscal
year ended December 31, 2021, COVID-19-related social and economic restrictions, the relative unavailability of vaccines and vaccine
hesitancy, particularly for members of Generation Z, and the emergence of interest in meme stocks and other market developments resulted
in more use of online services like Discord in general, and increased interest from members of Generation Z in services like ours in
particular. Conversely, during the nine months ended fiscal year ended December 31, 2022, the relaxation of COVID-19-related restrictions
on social and work life and the wide availability of COVID-19 vaccines for most individuals reduced interest in online use of Discord
and services like ours. As a result, we experienced a decrease in subscriptions and related revenues.
45
Operating Expenses .
Our total operating expenses increased 21.3% to approximately $1.0 million for the fiscal year ended December 31, 2022 from approximately
$0.8 million for the fiscal year ended December 31, 2021. This increase was primarily due to an increase in costs associated with the
IPO.
Income (Loss) From
Operations . Our loss from operations of approximately $0.6 million for the fiscal year ended December 31, 2022 was a change from
income from operations of $14,871 for the fiscal year ended December 31, 2021. This decrease was primarily due to a decrease in subscription
revenue and an increase in costs associated with the IPO.
Net Income (Loss) . Our net loss
of approximately $0.6 million for the fiscal year ended December 31, 2022 was a change from net income of $14,871 for the fiscal year
ended December 31, 2021. This change was primarily due to a decrease in subscription revenue and an increase in costs associated with
the IPO.
Liquidity and Capital Resources
As of December 31, 2022 and December 31, 2021, we had cash consisting
of $137,177 and $33,731, respectively. To date, we have financed our operations primarily through contributed capital and sales of our
services. In June 2022 and October 2022 we raised a total of $750,000 in gross proceeds from private placements of shares of common stock,
before fees and expenses, and in February 2023 we raised approximately $6.6 million in net proceeds from the IPO. We believe that our
current levels of cash will be sufficient to meet our anticipated cash needs for our operations and cash payment obligations for both
the fiscal year ended December 31, 2023 and in the long-term beyond this period, including our anticipated costs associated with being
a public reporting company. We may, however, in the future require additional cash resources due to changing business conditions, implementation
of our strategy to expand our business, or other investments or acquisitions we may decide to pursue. If our own financial resources are
insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit
facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would
result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our
operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds
on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
Going
Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. The Company had an accumulated deficit of $627,118 at
December 31, 2022 and a net loss of $645,255 during the year ended December 31, 2022. However, in February 2023, the Company completed
an equity offering which generated net proceeds of $6.6 million. Consequently, the Company’s existing cash resources and the cash
received from the equity offering are expected to provide sufficient funds to carry out the Company’s planned operations through
the next 12 months.
The
Company’s ability to continue as a going concern is dependent upon its ability to generate profitable operations in the future
and/or obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when
they come due. Management has plans to seek additional capital through public offerings, private equity offerings, debt financings, and
government or other third-party funding. These plans, if successful, will mitigate the factors which raise substantial doubt about the
Company’s ability to continue as a going concern.
However,
the sale of additional equity securities could result in dilution to the Company’s stockholders. The incurrence of indebtedness
would result in increased debt service obligations and could require the Company to agree to operating and financial covenants that would
restrict the Company’s operations. Financing may not be available in amounts or on terms acceptable to the Company, if at all.
Any failure by the Company to raise additional funds on terms favorable to the Company, or at all, could limit the Company’s ability
to expand the Company’s business operations and could harm the Company’s overall business prospects.
46
Summary
of Cash Flow
The
following table provides detailed information about our net cash flow for the periods presented:
Years Ended
December 31,
2022
2021
Net cash provided by (used in) operating activities
$ (602,829 )
$ 23,370
Net cash provided by (used in) investing activities
-
-
Net cash provided by (used in) financing activities
706,275
-
Net change in cash
103,446
23,370
Cash at beginning of period
33,731
10,361
Cash at end of period
$ 137,177
$ 33,731
Net cash provided by operating activities was $23,370 for the year
ended December 31, 2021, as compared to net cash used in operating activities of $602,829 for the year ended December 31, 2022. The change
was primarily due to an increase in costs associated with the IPO.
We
had no net cash provided by or used in investing activities for the years ended December 31, 2022 and 2021.
Net cash provided by financing activities was $706,275 for the year
ended December 31, 2022, as compared to no net cash provided by or used in financing activities for the year ended December 31, 2021.
The change was primarily due to the issuance of Class B Common Stock to unaffiliated investors.
Contractual
Obligations
During
the fiscal years ended December 31, 2022 and 2021, we had no significant cash requirements for capital expenditures or other cash needs
under any contractual or other obligations.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical
Accounting Policies
This
discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared
in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial
statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses incurred during the reporting
periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting
policies are described in more detail in the notes to our financial statements included with this report, we believe that the following
accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant
areas involving management’s judgments and estimates. We believe our most critical accounting policies and estimates relate to
the following:
Revenue
Recognition
The
Company recognizes revenue utilizing the following steps: (i) Identify the contract, or contracts, with a customer; (ii) Identify the
performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance
obligations in the contract; (v) Recognize revenue when the Company satisfies a performance obligation.
47
Subscriptions
Subscription
revenue is related to a single performance obligation that is recognized over time when earned. Subscriptions are paid in advance and
can be purchased on a monthly, quarterly, or annual basis. Any quarterly or annual subscription revenue is recognized as a contract liability
expensed over the contracted service period.
Marketing
Revenue
related to marketing campaign contracts with customers are normally of a short duration, typically less than two (2) weeks.
AE.360.DDM
Contracts
Revenue
related to AE.360.DDM contracts with customers are normally of a short duration, typically less than one (1) week.
Income
Taxes
As
described in more detail in “Item 1. Business – Corporate Structure and History – Formation and Merger into Asset
Entities Inc. ”, the business now conducted by the Company was operated as a partnership from August 1, 2020 until October 19,
2020, when it was reorganized as a limited liability company, or LLC, and that LLC was merged into the Company on March 28, 2022. Prior
to that date, the partnership and the subsequent LLC were not subject to federal income tax and all income, deductions, gains and losses
were attributed to the partners or members. Consequently, no provision was made for federal income taxes payable in respect of the year
ended December 31, 2021.
The
Company adopted FASB ASC 740, Income Taxes, at its inception. Under FASB ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets, including tax loss and credit carryforwards, and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities.
The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. No deferred tax assets or liabilities were recognized as of December 31, 2022
or December 31, 2021.
Recent
Accounting Pronouncements
In
June 2022, the FASB issued ASU 2022-03, ASC Subtopic “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities
Subject to Contractual Sale Restrictions”. These amendments clarify that a contractual restriction on the sale of an equity security
is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The amendments
in this update are effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning
after December 15, 2023. Early adoption is permitted. The Company is currently assessing the impact of the adoption of this standard
on its consolidated financial statements.
In June 2016, the FASB issued ASU No.
2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The amendments
in this Update affect loans, debt securities, trade receivables, and any other financial assets that have the contractual right to receive
cash. The ASU requires an entity to recognize expected credit losses rather than incurred losses for financial assets. For public entities,
the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
For the Company which is a smaller reporting company, ASU No. 2019-10 extends the effective dates for two years. The Company will adopt
this standard beginning January 1, 2023. The Company is currently evaluating the effect of the adoption of this standard on the consolidated
financial statements and related disclosures.
The
Company has considered all other recently issued accounting pronouncements and does not believe the adoption of such pronouncements will
have a material impact on its financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
full text of our audited consolidated financial statements begins on page F-1 of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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