Myseum.AI, Inc.: Form 10-Q for the period ended Sep 30, 2023

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 Quarterly Report on Form 10-Q and the audited financial statements and related notes for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the Securities Exchange Commission, or SEC. 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 Quarterly Report on Form 10-Q. 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 (“Metaverse”), known as “The Habytat”. Recently, we developed, VenVūū, an advertising and non-fungible token (“NFT”) monetization platform. We are no longer developing VenVūū. The Metaverse is a virtual-reality space in which users can interact with a computer-generated environment and other users.

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.

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. The owners of Metabizz, LLC also own Metabizz SAS (together referred to as (“Metabizz”). As of February 2023, based on the Company’s analysis, on February 14, 2023, Metabizz was determined to be a VIE entity in accordance with ASC 810-10-25-22.

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.

Risks and Uncertainties

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 our 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 consolidated financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates include assumptions used in assessing impairment of long-term assets, the valuation of intangible assets, the valuation of digital currencies and other digital assets, the valuation of lease liabilities and related right of use assets, the valuation of deferred tax assets, and the fair value of non-cash equity transactions.

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, we consider 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 our 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 us. The equity owners of Metabizz have only a nominal equity investment at risk, and we absorb or receive a majority of the entity’s expected losses or benefits. We participate significantly in the design of Metabizz. We have 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 our benefit, as evidenced by the fact that the operations of Metabizz consists of development of software and technologies to be used by SmarterVerse and we provide working capital to Metabizz to pay employees and independent contractors to perform the development services on our behalf. Repayment of the working capital advances is not guaranteed by the equity owner of Metabizz. Creditors of Metabizz do not have recourse to our general credit. Accordingly, we are required to consolidate the assets, liabilities, revenues and expenses of Metabizz. Additionally, the managing partner of Metabizz is also the Chief Innovation Officer of SmarterVerse.

Short-term investments

Our portfolio of short-term investments consists of marketable debt securities which are comprised solely of that are highly rated U.S. government securities with maturities of more than three months, but less than one year. We classify these as available-for-sale at purchase date and will reevaluate such designation at each period end date. We may sell these marketable debt securities prior to their stated maturities depending upon changing liquidity requirements. These debt securities are classified as current assets in the consolidated balance sheet and recorded at fair value, with unrealized gains or losses included in accumulated other comprehensive gain (loss) and as a component of the consolidated statements of comprehensive loss. Gains and losses are recognized when realized. Gains and losses are determined using the specific identification method and are reported in other income (expense), net in the consolidated statements of operations. 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.

An impairment loss may be recognized when the decline in fair value of the debt securities is determined to be other-than-temporary. We evaluate our investments for other-than-temporary declines in fair value below the cost basis each quarter, or whenever events or changes in circumstances indicate that the cost basis of the short-term investments may not be recoverable. The evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis, as well as adverse conditions related specifically to the security, such as any changes to the credit rating of the security and the intent to sell or whether we will more likely than not be required to sell the security before recovery of its amortized cost basis.

Accounting for digital currencies and other digital assets

We may purchase Ethereum cryptocurrency (“Ethereum”) and other digital assets and may accept Ethereum as a form of payment for non-fungible tokens sales (NFTs). We account 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”). We have ownership of and control over our digital currencies and digital assets and we 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. We believe 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. We monitor any standard-setting, regulatory or technological developments that may affect our accounting for digital currencies or our controls and processes related to digital currencies. Digital currencies are included in long-term assets in the consolidated balance sheet.

We determine 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. We perform 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, we consider 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, we calculate 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 nine months ended September 30, 2023, we recorded an impairment loss of $23,381.

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. Through September 30, 2023, software development costs incurred 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

We recognize 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. We recognize revenues from subscription fees on our 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.

Our NFT revenues were generated from the sale of NFTs. We accepted Ethereum as a form of payment for NFT sales. Our NFTs exist on the Ethereum Blockchain under our VenVūū brand. VenVūū is a Metaverse advertising platform that allows advertisers and Metaverse landowners to connect using our proprietary Metaverse ad network and dynamic NFT technology. We used the NFT exchange, OpenSea, to facilitate its sales of NFTs. Through OpenSea, we have 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. We have 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. We do not expect to generate revenues from the sale of NFT’s in the future.

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. We have elected to account for forfeitures as they occur.

Research and development

Research and development costs incurred in the development of our products are expensed as incurred and includes costs such as outside development costs and other allocated costs incurred.

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.

Recently Issued Accounting Pronouncements

Refer to the notes to the unaudited consolidated financial statements.

Results of Operations

Revenue

During the three and nine months ended September 30, 2023, we generated revenue in the amount of $175 and $501, respectively, from subscriptions. For the three and nine months ended September 30, 2022, we generated revenue in the amount of $3,540 and $42,296, respectively. For the three months ended September 30, 2022, revenue consisted of revenue from subscriptions of $3,540. For the nine months ended September 30, 2022, revenue consisted of revenue from subscriptions of $5,902 and revenue from the sale of our Venvuu NFT of $36,394.

Operating Expenses

For the three months ended September 30, 2023, operating expenses amounted to $2,542,326 as compared to $2,685,450 for the three months ended September 30 2022, a decrease of $143,124, or 5.3%. For the nine months ended September 30, 2023, operating expenses amounted to $7,355,729 as compared to $8,671,451 for the nine months ended September 30, 2022, a decrease of $1,315,722, or 14.7%.

For the three and nine months ended September 30 2023 and 2022, operating expenses consisted of the following:

Compensation and related expenses

Compensation and related expenses include salaries, stock-based compensation, health insurance and other benefits.

During the three months ended September 30, 2023 and 2022, compensation and related expenses amounted to $1,247,302 and $1,639,886, respectively, a decrease of $392,584, or 23.9%. The decrease was attributable to an increase in other compensation expense of $555,807, offset by a decrease in stock-based compensation of $163,223.

During the nine months ended September 30, 2023 and 2022, compensation and related expenses amounted to $4,177,032 and $5,015,827, respectively, a decrease of $838,795, or 16.7%. The decrease was attributable to a decrease in stock-based compensation of $402,570 and a decrease in other compensation and other related expenses of $436,225.

Marketing and advertising expenses

During the three months ended September 30, 2023 and 2022, marketing and advertising expenses amounted to $219,008 and $65,181, respectively, an increase of $153,827, or 236.0% During the nine months ended September 30, 2023 and 2022, marketing and advertising expenses amounted to $379,410 and $645,825, respectively, a decrease of $266,415, or 41.2%, primarily due to an overall decrease in promotions, branding and digital marketing strategies and social media ads.

Professional and consulting expenses

During the three months ended September 30, 2023 and 2022, we reported professional and consulting expenses of $483,319 and $482,338, respectively, an increase of $981, or 0.2%.

During the nine months ended September 30, 2023 and 2022, we reported professional and consulting expenses of $1,060,396 and $1,947,535, respectively, a decrease of $887,139, or 45.6%. The decrease is attributable to a decrease in consulting fees of $67,144, a decrease in investor relations fees of $310,200, a decrease in legal fees of $227,462, and a decrease in recruiting fees of $322,000, offset be an increase in other professional fees of $39,667.

Research and development costs

During the three months ended September 30, 2023 and 2022, we incurred $380,017 and $258,957 in research and development costs, an increase of $121,060, or 46.7%. During the nine months ended September 30, 2023 and 2022, we incurred $1,064,049 and $258,957 in research and development costs, an increase of $805,092, or 310.9%. Research and development costs were incurred in connection with our Metaverse software development project, including the development of The Habytat which is in the preliminary stage.

General and administrative expenses

During the three months ended September 30, 2023 and 2022, general and administrative expenses amounted to $212,680 and $232,064, a decrease of $19,384, or 8.3%. During the nine months ended September 30, 2023 and 2022, general and administrative expenses amounted to $651,461 and $712,103, a decrease of $60,642, or 8.5%. 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 digital currencies and other digital assets

During the three months ended September 30, 2023 and 2022, operating expenses included an impairment charge related to the write down of digital assets of $0 and $7,024, respectively. During the nine months ended September 30, 2023 and 2022, operating expenses included an impairment charge related to the write down of digital assets of $23,381 and $91,204, respectively.

Loss from Operations

During the three months ended September 30, 2023, loss from operation amounted to $2,542,151 as compared to $2,681,910 during the three months ended September 30, 2022, a decrease of $139,759, or 5.2%. During the nine months ended September 30, 2023, loss from operation amounted to $7,355,228 as compared to $8,629,155 during the nine months ended September 30, 2022, a decrease of $1,273,927, or 14.7%.

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 three months ended September 30, 2023 and 2022, we reported other income (expenses) of $177,571 and $25,205, respectively. During the nine months ended September 30, 2023 and 2022, we reported other income (expenses) of $304,204 and $24,892, respectively. During the nine months ended September 30, 2023, other income primarily consisted of interest income of $6,058, gain on initial consolidation of variable interest entities of $106,538, a realized gain on short-term investments of $239,382, and an unrealized loss on short-term investments of $47,672. During the nine months ended September 30, 2022, other income primarily consisted of interest income of $8,077, a realized gain on short-term investments of $9,702, and an unrealized gain on short-term investments of $7,113.

Net Loss

Due to the foregoing reasons, during the three months ended September 30, 2023 and 2022, our net loss was $2,364,580, or $(1.13) per common share (basic and diluted) and $2,656,705, or $(1.29) per common share (basic and diluted), respectively, a decrease of $292,125, or 11.0%. During the nine months ended September 30, 2023 and 2022, our net loss was $7,051,024, or $(3.40) per common share (basic and diluted) and $8,604,263, or ($4.32) per common share (basic and diluted), respectively, a decrease of $1,553,239, or 18.0%.

Liquidity, Capital Resources and Plan of Operations

As of September 30, 2023, we had cash and cash equivalents of $672,086 and short-term investments of $6,826,759. Short-term investments include U.S. Treasury bills that are all highly rated and have initial maturities between four and twelve months.

As reflected in the accompanying unaudited consolidated financial statements for the nine months ended September 30, 2023, we incurred a net loss of $7,051,024 and used cash in operations of $5,159,510. As of September 30, 2023, we have an accumulated deficit of $46,780,142 and have generated minimal revenues since inception. As of September 30, 2023, we had working capital of $7,307,166, including cash of $672,086 and short-term investments of $6,826,759. These events served to mitigate the conditions that historically raised substantial doubt about our ability to continue as a going concern. We believe our cash and short-term investments will provide sufficient cash flows to meet our obligations for a minimum of twelve months from the date of this filing.

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.

Cash Flow Activities for the Nine Months ended September 30, 2023 and 2022

Cash Flows from Operating Activities

Net cash used in operating activities totaled $5,159,510 and $5,727,584 for the nine months ended September 30, 2023, and 2022, respectively, a decrease of $568,074.

Net cash flow used in operating activities for the nine months ended September 30, 2023 primarily reflected a net loss of $7,051,0241 adjusted for the add-back (reduction) of non-cash items consisting of depreciation of $20,687, amortization of right of use assets of $44,272, accretion of stock-based stock option and common stock expense of $2,183,835, a non-cash gain from initial consolidation of variable interest entities of $(106,568), impairment loss on digital assets of $23,381, and net unrealized and realized gain on short-term investments of $191,710, offset by changes in operating assets and liabilities primarily consisting of a decrease in accounts receivable – related party of $42,000, an increase in prepaid expenses of $61,456, a decrease in accounts payable and accrued expenses of $14,283, and a decrease in operating lease liabilities of $48,808.

Net cash flow used in operating activities for the nine months ended September 30, 2022 primarily reflected a net loss of $8,604,263 adjusted for the add-back of non-cash items consisting of depreciation and amortization of $67,227, stock-based compensation and professional fees from the accretion of stock-based stock option and common stock expense of $2,671,128, unrealized and realized gains on short-term investments, and an impairment loss on digital currencies and other digital assets of $91,204, offset by changes in operating assets and liabilities primarily consisting of a decrease in prepaid expenses of $117,396, a decrease in accounts payable and accrued expenses of $23,386 and a decrease in operating lease liability of $39,027.

Cash Flows from Investing Activities

Net cash provided by (used in) investing activities amounted to $4,496,890 and $(8,242,060) for the nine months ended September 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2023, we purchased short-term investments of $5,363,163 and received gross proceeds from the sale of short-term investments of $9,845,000. Additionally, we received $64,538 in cash upon initial consolidation of variable interest entities and purchased property and equipment of $49,485.

During the nine months ended September 30, 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 $14,394,340 and received gross proceeds from the sale of short-term investments of $6,430,000.

Cash Flows from Financing Activities

Net cash used in financing activities totaled approximately $398,284 and $203 for the nine months ended September 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2023, we repaid related party advances of $1,315, we used cash of $397,969 to purchase 66,944 treasury stock at an average price of $5.94 per share, and we receive $1,000 from the sale of Series B preferred stock.

During the nine months ended September 30, 2022, we repaid related party advances of $203.

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.

We are a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required by this Item.

Evaluation of Disclosure Controls and Procedures

Our principal executive officer and principal financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of September 30, 2023, the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As of September 30, 2023, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework - 2013. Based on this assessment, our management concluded that, as of September 30, 2023, our internal control over financial reporting was not effective because it identified a material weakness. A material weakness is a significant deficiency or a combination of significant deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

• We lack segregation of duties within accounting functions duties as a result of our limited financial resources to support hiring of personnel.
• We lack control over the custody of and accounting for digital currencies and other digital assets accounts.
• The lack of multiples levels of management review on complex business, accounting and financial reporting issues.
• We have not implemented adequate system and manual controls.

Remediation Plans

Management is committed to the remediation of the material weaknesses described above, as well as the improvement of the Company’s overall internal control over financial reporting. Management plans on implementing actions to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses. Remediation efforts include the possible hiring of additional accounting and finance personnel with appropriate expertise to strengthen overall controls and the establishment of disbursement review and approval processes. The material weaknesses will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. Our management will monitor the effectiveness of our remediation plan and will make changes management determines to be appropriate. Until the remediation efforts (including any additional measures management identifies as necessary) are completed, the material weaknesses described above will continue to exist.

Changes in Internal Control over Financial Reporting.

There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 31, 2023 (“Annual Report”). Except as set forth below, there have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

If we fail to comply with the continued listing requirements of The Nasdaq Capital Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

On October 14, 2022, we were notified (the “Notification Letter”) by the Staff of the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) that based on the previous 30 consecutive business days, our listed security no longer met the minimum $1 bid price per share requirement. Therefore, in accordance with the Nasdaq Listing Rules (the “Rules”), the we were provided 180 calendar days, or until April 12, 2023, to regain compliance, and that if we were unable to regain compliance by April 12, 2023, an additional 180-days may be granted, so long as we meet the Nasdaq continued listing requirements (except for the bid price requirement) and notify Nasdaq in writing of our intention to cure the deficiency during the second compliance period.

In accordance with the Notification Letter and Rules, on April 7, 2023, we notified Nasdaq in writing of our intention to cure the deficiency and requested an additional 180-calendar days in order to do so. On April 13, 2023, we were notified (the “Second Notification Letter”) by the Staff that we are eligible for an additional 180 calendar day period, or until October 9, 2023 to regain compliance and cure the deficiency, so long as we meet the Nasdaq continued listing requirements (except for the bid price requirement). On October 4, 2023, the Company received notice from Nasdaq that the Company has regained compliance with the minimum bid price requirement for continued listing on The Nasdaq Capital Market.