UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from ___________ to ___________
Commission File Number:
(Exact name of registrant as specified in its charter)
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| | ||
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
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(Registrant’s former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
| The |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registration was required to submit such files).
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| ☒ | Smaller reporting company | ||
| Emerging growth company | |||
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As of November 14, 2024, there were
GAXOS.AI INC.
FORM 10-Q
SEPTEMBER 30, 2024
TABLE OF CONTENTS
-i-
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common stock and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement.
Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout this Quarterly Report on Form 10-Q. Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, but are not limited to:
| ● | our ability to obtain additional funds for our operations; | |
| ● | our financial performance, including our revenues, cost of revenues, operating expenses, and our ability to attain and sustain profitability; | |
| ● | our ability to attract and retain users; | |
| ● | our ability to attract and retain advertisers; | |
| ● | our ability to compete effectively with existing competitors and new market entrants; | |
| ● | our ability to successfully expand in our existing markets and penetrate new markets; | |
| ● | our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act, or JOBS Act; | |
| ● | our ability to effectively manage our growth, and future expenses; | |
| ● | our ability to maintain, protect, and enhance our intellectual property; | |
| ● | our ability to comply with modified or new laws and regulations applying to our business, competitors and industry; | |
| ● | our ability to attract and retain qualified key management and technical personnel; | |
| ● | other risks and uncertainties, including those listed under the caption “Risk Factors.” |
The foregoing list sets forth some, but not all, of the factors that could affect our ability to achieve results described in any forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits to the Quarterly Report on Form 10-Q, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q is accurate as of the date hereof. Because the risk factors referred to on page 4 of our Annual Report on Form 10-K for the year ended December 31, 2023 could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GAXOS.AI INC.
BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Short-term investments, at fair value | ||||||||
| Investment in equity securities, at fair value | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| LONG-TERM ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Digital currencies | ||||||||
| Total Long-Term Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | - | |||||||
| Total Current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (See Note 7) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock; par value $ | ||||||||
| Common stock; par value $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive income | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to unaudited financial statements.
-1-
GAXOS.AI INC.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| REVENUES | $ | $ | $ | $ | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Impairment loss | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME: | ||||||||||||||||
| Interest income | ||||||||||||||||
| Realized gain on short-term investments | ||||||||||||||||
| Total other income | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| COMPREHENSIVE LOSS: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive income: | ||||||||||||||||
| Unrealized (loss) income on short-term investments | ( | ) | ||||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| NET LOSS PER COMMON SHARE: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE COMMON SHARE OUTSTANDING: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See accompanying notes to unaudited financial statements.
-2-
GAXOS.AI INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(Unaudited)
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||
| Common shares and warrants issued for cash, net | ||||||||||||||||||||||||||||||||
| Sale of pre-funded warrants for cash | - | - | ||||||||||||||||||||||||||||||
| Purchase and cancellation of treasury stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Accretion of stock option expense | - | - | ||||||||||||||||||||||||||||||
| Rounding shares from reverse split | - | - | - | - | - | - | - | |||||||||||||||||||||||||
| Accumulated other comprehensive loss - short-term investments | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, March 31, 2024 | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Common shares issued for warrant exercise | ||||||||||||||||||||||||||||||||
| Accretion of stock option expense | - | - | ||||||||||||||||||||||||||||||
| Accumulated other comprehensive gain - short-term investments | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, June 30, 2024 | ( | ) | ||||||||||||||||||||||||||||||
| Common shares issued for exercise of March 2024 Common Warrants for cash under warrants inducement offer, net | - | |||||||||||||||||||||||||||||||
| Common shares issued for Pre-funded warrant exercises | - | |||||||||||||||||||||||||||||||
| Accretion of stock option expense | - | - | ||||||||||||||||||||||||||||||
| Accumulated other comprehensive gain - short-term investments | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2024 | - | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||
| Additional | Accumulated Other | Total | ||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Comprehensive | Accumulated | Stockholders’ | |||||||||||||||||||||||||||
| # of Shares | Amount | # of Shares | Amount | Capital | Income | Deficit | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2022 | ( | ) | ||||||||||||||||||||||||||||||
| Common shares issued for cash | ||||||||||||||||||||||||||||||||
| Accretion of stock option expense | - | - | ||||||||||||||||||||||||||||||
| Accumulated other comprehensive gain - short-term investments | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ||||||||||||||||||||||||||||||
| Purchase and cancellation of treasury stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Accretion of stock option expense | - | - | ||||||||||||||||||||||||||||||
| Accumulated other comprehensive gain - short-term investments | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, June 30, 2023 | ( | ) | ||||||||||||||||||||||||||||||
| Purchase and cancellation of treasury stock | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Accretion of stock option expense | - | - | ||||||||||||||||||||||||||||||
| Accumulated other comprehensive gain - short-term investments | - | - | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance, September 30, 2023 | - | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||||
See accompanying notes to unaudited financial statements.
-3-
GAXOS.AI INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization expense | ||||||||
| Stock-based compensation | ||||||||
| Impairment loss | ||||||||
| Realized gain on short-term investments | ( | ) | ||||||
| Non-cash transaction fees | ||||||||
| Change in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Deferred revenue | ||||||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of short-term investments | ( | ) | ( | ) | ||||
| Purchase of marketable equity securities | ( | ) | ||||||
| Proceeds from sale of short-term investments | ||||||||
| Increase in capitalized internal-use software development costs | ( | ) | ( | ) | ||||
| Purchase of intangible asset | ( | ) | ||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from the sale of common stock units | ||||||||
| Proceeds from exercise of pre-funded warrants | ||||||||
| Proceeds from sale of pre-funded warrants | ||||||||
| Proceeds from induced exercise of warrants | ||||||||
| Purchase and cancellation of treasury shares | ( | ) | ( | ) | ||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | ||||||||
| NET INCREASE IN CASH | ||||||||
| CASH, beginning of period | ||||||||
| CASH, end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash paid for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Reclassification of deferred offering costs to equity | $ | $ | ||||||
| Unrealized (loss) income on short-term investments | $ | ( | ) | $ | ||||
| Increase in digital currency and accounts payable | $ | $ | ||||||
See accompanying notes to unaudited financial statements.
-4-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 1 – NATURE OF OPERATIONS
Gaxos.ai Inc. (the “Company”) was
incorporated in the state of Wyoming on
On February 28, 2024, a majority of the Company
shareholders granted discretionary authority to the Company’s Board of Directors to amend the Company’s Certificate of Incorporation
to effect one or more consolidations of the Company’s issued and outstanding shares of common stock, pursuant to which the shares
of common stock would be combined and reclassified into on the basis of one share of common stock for each 12 shares of the Company’s
common stock then issued and outstanding (the “Reverse Stock Split”).
On September 23, 2024, the Company formed a wholly-owned subsidiary, RNK Health, LLC (“RNK Health”), a company incorporated under the laws of the State of Delaware as a limited liability company. RNK Health was formed in order to form a partnership and potential relationship with Nekwellness, LLC (“Nekwellness”), a third party, to engage in the proposed business of marketing certain products, including GLP-1 products (GLP-1 is short for glucagon-like peptide-1), TRT (Testosterone replacement therapy) products and other potential products. In October 2024, the Company and Nekwellness entered into an operating agreement (See Note 8 – Subsequent Events).
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and the notes are the representation of the Company’s management, who are responsible for their integrity and objectivity. These accounting policies conform to U.S. generally accepted accounting principles (“US GAAP”) and have been consistently applied in the preparation of the financial statements.
The accompanying unaudited financial statements have been prepared on the basis of continuity of operations, realization of assets and the satisfaction of liabilities and commitments in the ordinary course of business.
Management acknowledges its responsibility for the preparation of the accompanying unaudited financial statements which reflect all adjustments, consisting of normal recurring and non-recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the periods presented.
The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Certain information and note disclosure normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements. These unaudited financial statements should be read in conjunction with the summary of significant accounting policies and notes to the financial statements for the year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 27, 2024.
-5-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Liquidity
Liquidity is the ability of a company to generate
funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. On September
30, 2024, the Company had a cash balance of $
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the unaudited financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying unaudited financial statements include the valuation of investments, valuation of intangible assets and other long-lived assets, estimates of deferred tax valuation allowances and the fair value of stock options issued for services.
Fair Value Measurements and Fair Value of Financial Instruments
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company identified the following assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with Accounting Standards Codification (“ASC”) Topic 820.
The three levels of the fair value hierarchy are as follows:
| ● | Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date. | |
| ● | Level 2 - Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs derived from or corroborated by observable market data. | |
| ● | Level 3 - Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information. |
The carrying amounts reported in the balance sheets for cash, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued expenses approximate their fair market value based on the short-term maturity of these instruments.
-6-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
| September 30, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Short-term investments | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Equity securities | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The Company’s short-term investments are level 1 measurements and are based on the quoted fair value on each date.
Investment in Equity Securities, at Fair Value
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Additions | ||||||||
| Balance, end of period | $ | $ | ||||||
On September 30, 2024, equity securities, at fair
value consisted of
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents. The Company has no cash equivalents as of September 30, 2024 and December 31, 2023.
The Company’s cash is held at major commercial banks, which may at times exceed the Federal Deposit Insurance Corporation (“FDIC”) limit. To date, the Company has not experienced any losses on its invested cash. Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company’s financial condition, results of operations, and cash flows.
On September 30, 2024, the Company had approximately
$
Accounts receivable
The Company adopted ASC 326, “Financial
Instruments - Credit Losses” on January 1, 2023 and recognizes an allowance for losses on accounts receivable in an amount equal
to the estimated probable losses net of recoveries under the current expected credit loss method. The allowance is based on an analysis
of historical bad debt experience, current receivables aging, and expected future write-offs, as well as an assessment of specific identifiable
customer accounts considered at risk or uncollectible. The bad debt expense associated with the allowance for doubtful accounts related
to accounts receivable is recognized in general and administrative expenses. As of September 30, 2024 and December 31, 2023, accounts
receivable amounted to and $
-7-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Short-Term Investments
The Company’s portfolio of short-term investments consists of marketable debt securities which are comprised solely of rated U.S. government securities with maturities of more than three months, but less than one year. The Company classifies these as available-for-sale at purchase date and will reevaluate such designation at each period end date. The Company 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 balance sheets and recorded at fair value, with unrealized gains or losses included in accumulated other comprehensive income (loss) on the balance sheet and as a component of the 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 statements of operations.
An impairment loss may be recognized when the decline in fair value of the debt securities is determined to be other-than-temporary. The Company evaluates its 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 the Company will more likely than not be required to sell the security before recovery of its amortized cost basis.
The Company recorded $(
Investment in Equity Securities, at Fair Value
Equity investments are carried at fair value with unrealized gains or losses which are recorded as net unrealized gain (loss) on equity investments in the accompanying statement of operations and comprehensive loss. Realized gains and losses are determined on a specific identification basis which is recorded in earnings or loss as a net realized gain (loss) on equity investments in the statement of operations and comprehensive loss. The Company reviews investments in equity securities, at fair value, for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered.
Accounting for Digital Currencies and Other Digital Assets
The Company accounts for digital currencies and
other digital assets as indefinite-lived intangible assets and accounts for them at historical cost in accordance with ASC 350, Intangibles - Goodwill
and Other Intangible Assets. Indefinite-lived intangible assets are not subject to amortization but rather evaluated for impairment
annually and more frequently, if events or circumstances change that indicate that it is more likely than not that the asset is impaired
(i.e., if an impairment indicator exists). As a result, the Company only recognizes decreases in the value of its digital currencies and
other digital assets, and any increase in value will be recognized only upon disposition. The Company plans to dispose of cryptocurrency
received as a form of payment into fiat currency and anticipates ownership of cryptocurrency to be minimal. As of September 30, 2024,
the Company’s digital currencies consisted of
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
-8-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Property and equipment includes capitalized internal-use software development costs. Costs incurred to develop internal-use software, including game 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, which currently is three years. 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.
Intangible Assets
Intangible assets, consisting of software licenses
and technology licenses, are carried at cost less accumulated amortization, computed using the straight-line method over the estimated
useful life of
Stock-based Compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation–Stock Compensation”, 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 or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to account for forfeitures as they occur.
Income Taxes
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. 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 the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
When tax returns are filed, it is highly certain
that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about
the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized
in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions
taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured
as the largest amount of tax benefit that is more than
Revenue Recognition
The Company follows Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). This standard establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.
In accordance with ASU Topic 606 - Revenue from Contracts with Customers, the Company recognizes revenue in accordance with that core principle by applying the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
-9-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
The Company plans to generate revenue from the following sources:
| ● | The Company generates revenue from the sale of our in-game items to our customers. Revenue generated from such sales, primarily through the app stores, such as Google Play Store or Apple App Store, is recognized upon delivery of the in-game items to the customer, which is when the Company completes its sole performance obligation. Fees incurred by the Company, such as commissions to the app stores, are recognized in operating expenses. | |
| ● | The Company generates revenue from the sale of health coaching packages to its customers. Health coaching packages consist of a series of lab tests and personal health coaching sessions. Revenues generated from such sales are recognized upon the completion of lab testing and the utilization of health coaching sessions, which is when the Company completes its performance obligation. Any fees paid in advance by the customer are reflected as a contract liabilities until such time as the performance obligation is completed. Fees incurred by the Company, such as the lab testing charges, are recognized in operating expenses. | |
| ● | The Company plans to generate revenue from advertising fees paid by game advertisers, developers, hardware companies, or other strategic partners to the Company for promotion on our platform. Revenues from these fees will be recognized ratably over the agreed upon advertising service period and upon delivery of agreed upon advertising services, which constitutes satisfaction of the performance obligation. |
| ● | The Company plans to generate royalty revenues when a third party sells one of our NFTs on a third-party platform. We will recognize royalty revenue when it is probable that we will collect the royalty fee owed which is typically when we receive notification from the third-party platform that an NFT has been sold, which constitutes satisfaction of the performance obligation. In the instance where the Company will receive royalty payments when a customer disposes of an in-game NFT in the secondary market on a third-party platform or any other payment that is not in fiat currency, the Company will recognize the revenue in accordance with ASC 606-10-32-21, “Noncash Consideration”. The fair value of the non-cash consideration received shall be determined by using the quoted price for such non-cash consideration on the date of the transaction. |
Research and Development
Research and development costs incurred in the development of the Company’s products are expensed as incurred and include costs such as labor and outside development costs, software license fees, materials, and other allocated costs incurred.
Net Loss per Share
The Company computes net loss per share in accordance with ASC 260-10, “Earnings Per Share.” The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per share gives effect to all dilutive potential common shares outstanding during the period using the “as if converted” basis.
Pursuant to ASC 260-10-45, basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period presented. Diluted loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock, common stock equivalents and potentially dilutive securities outstanding during the period.
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Common stock equivalents: | ||||||||
| Warrants | ||||||||
| Stock options | ||||||||
| Total | ||||||||
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
-10-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 3 – SHORT-TERM INVESTMENTS AND INVESTMENT IN EQUITY SECURITIES
Short-Term Investments
| Cost | Cumulative Unrealized Gain | Fair Value | ||||||||||
| US Treasury bills | $ | $ | $ | |||||||||
| Total short-term investments | $ | $ | $ | |||||||||
| Cost | Cumulative Unrealized Gain | Fair Value | ||||||||||
| US Treasury bills | $ | $ | $ | |||||||||
| Total short-term investments | $ | $ | $ | |||||||||
Investment in Equity Securities, at Fair Value
| Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Additions | ||||||||
| Balance, end of period | $ | $ | ||||||
On September 30, 2024, investment in equity securities,
at fair value consisted of
NOTE 4 – PROPERTY AND EQUIPMENT
| Useful life | September 30, 2024 | December 31, 2023 | ||||||||
| Capitalized internal-use software development costs | $ | $ | ||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| $ | $ | |||||||||
During the nine months ended September 30, 2024
and 2023, internal-use software development costs of $
-11-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
NOTE 5 – INTANGIBLE ASSET
| Useful life | September 30, 2024 | December 31, 2023 | ||||||||
| License | $ | $ | ||||||||
| Less: accumulated amortization | ( | ) | ||||||||
| $ | $ | |||||||||
On August 29, 2022, the Company entered into
a Software and Patent License Agreement (the “License Agreement”) with Columbia University (“Columbia”), whereby
the Company obtained a license from Columbia with respect to software and intellectual property rights and patents. In connection with
the License Agreement, Columbia granted to the Company a royalty-bearing, exclusive, worldwide, non-transferable license under the License
Agreement, to discover, develop, manufacture, have made, use, sell, offer to sell, have sold, import, export, distribute, rent or lease
licensed products and copy, use, modify, and create derivative works from licensed software and technical information during the term
of the License Agreement. On August 9, 2023 and effective August 1, 2023, the Company and Columbia University agreed to the termination
of the License Agreement. Based on management’s analysis, the Company determined the Licenses were not commercially viable in the
current competitive landscape. The termination of the Agreement will not have any impact on the Company’s future revenues. Accordingly,
as of June 30, 2023, the Company wrote off the remaining unamortized book value of the intangible asset of $
On March 4, 2024, the Company entered into a Purchase
Agreement with a third party to acquire certain technology and computer code. The Purchase Agreement grants the Company a perpetual, worldwide,
non-exclusive, non-transferable, royalty free, fully paid license to (a) modify and create derivative works from certain technology and
related codebase including, but not limited to, “Habit-tracking Module,” “Administrative Panel,” and related computer
code. The aggregate purchase price was $
For the three months ended September 30, 2024
and 2023, amortization of intangible assets amounted to $
| Year ending September 30: | Amount | |||
| 2025 | $ | |||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| 2029 | ||||
| $ | ||||
NOTE 6 – STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue
Common Stock
2023 Stock Repurchase Plan
On March 20, 2023, the Board of Directors of the
Company approved a stock repurchase program authorizing the purchase of up to $
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GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
Initial Public Offering
On February 17, 2023, the Company completed the
IPO and sold
Capital Raises
March 2024
On March 13, 2024, the Company entered into a
securities purchase agreement (the “March 2024 Purchase Agreement”) with an institutional investor (“the “Purchaser”)
for the issuance and sale in a private placement (the “March 2024 Private Placement”) of aggregate Units consisting of (i)
The March 2024 Common Warrants are exercisable
immediately upon issuance at an exercise price of $
In connection with the March 2024 Private Placement, the Company entered into a registration rights agreement (the “Registration Rights Agreement”), dated as of March 13, 2024, with the Purchaser, pursuant to which the Company agreed to prepare and file a registration statement with the Securities and Exchange Commission (the “SEC”) registering the resale of the securities issued in the March 2024 Private Placement no later than 30 days after the date of the Registration Rights Agreement, and to use its best efforts to have the registration statement declared effective as promptly as practical thereafter, and in any event no later than 60 days following the date of the Registration Rights Agreement (or 90 days following the date of the Registration Rights Agreement in the event of a “full review” by the SEC).
H.C. Wainwright & Co., LLC (“Wainwright”)
acted as the Company’s exclusive placement agent in connection with the March 2024 Private Placement, pursuant to that certain engagement
letter, dated as of March 7, 2024 and as amended on March 13, 2024, between the Company and Wainwright (the “Engagement Letter”).
Pursuant to the Engagement Letter, the Company paid Wainwright (i) a total cash fee equal to
-13-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
| March 15, 2024 | ||||
| Dividend rate | % | |||
| Term (in years) | ||||
| Volatility | % | |||
| Risk—free interest rate | % | |||
The risk-free interest rate is based on the U.S. Treasury rates at the date of issuance with a maturity date approximately equal to the expected life at issuance date. Volatility is based on historical and expected future volatility of the Company’s common stock. The Company has not historically issued any dividends and does not expect to in the future.
September 2024
On September 20, 2024, the Company entered into
an inducement offer agreement with the Holder of the March 2024 Common Warrants to immediately exercise for cash an aggregate
As an inducement to such exercise, the Company
also agreed to issue new unregistered warrants to purchase new Series A common stock purchase warrants (the “New Series A Warrants”)
and new Series B common stock purchase warrants (the “New Series B Warrants”, and together with the Series A Warrants, the
“New Warrants”), as described below, to purchase an aggregate of up to
The Company engaged H.C. Wainwright & Co.,
LLC (the “Placement Agent”) to act as its exclusive placement agent in connection with the transactions summarized above and
has agreed to pay the Placement Agent a cash fee equal to
The amendment to the March 2024 Common Warrants on September 20, 2024 to lower the exercise price thereof and issue new warrants, was considered a modification of the March 2024 Common Warrants under the guidance of ASU 2021-04. The modification is consistent with the “Equity Issuance” classification under that guidance as the reason for the modification was to induce the holders to cash exercise their warrants, resulting in the exercise of the March 2024 Common Warrants on September 20, 2024.
On September 20, 2024, in connection with the
inducement offer agreement, with the Holder of the March 2024 Common Warrants, the Holder exercised the March 2024 Common Warrants for
cash at a reduced exercise price of $
-14-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
On September 20, 2024, the Company calculated
the total fair value of the consideration for the modification of the March 2024 Common Warrants, which includes the incremental fair
value of the March 2024 Common Warrants (determined by comparing the fair values immediately prior to and immediately after the modification).
The fair values were calculated using the Binomial Lattice valuation model, and the Company determined that the total fair value of the
consideration related to the modification of the March 2024 Common Warrants amounted to approximately $
On September 20, 2024, in connection with the
inducement offer agreement issuance of the New Warrants and the September 2024 Placement Agent Warrants, the Company calculated the fair
value of such warrants using the Binomial option-pricing model, and the Company determined that the aggregate total fair value of the
New Warrants and the September 2024 Placement Agent Warrants amounted to approximately $
| September 20, 2024 | ||
| Exercise price | $ | |
| Term (years) | ||
| Expected stock price volatility | ||
| Risk-free rate of interest |
Common Stock Issued for Pre-Funded Warrant Exercises
During the three months ended June 30, 2024, the
Company issued
During the three months ended September 30, 2024,
the Company issued
Stock Warrants
In connection with the IPO, in February 2023,
the Company issued
On March 13, 2024, in connection with the March
2024 Private Placement, the Company issued an aggregate of
On September 20, 2024, in connection with the
inducement offer agreement discussed above , the Company issued an aggregate of
-15-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Balance Outstanding, December 31, 2023 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Balance Outstanding, September 30, 2024 | $ | $ | ||||||||||||||
| Exercisable, September 30, 2024 | $ | $ | ||||||||||||||
2022 Equity Incentive Plan
On March 30, 2022, the Company’s Board
of Directors authorized and adopted the 2022 Equity Incentive Plan (the “2022 Plan”) and reserved an initial
Stock Options
On February 14, 2023, the Company granted aggregate
stock options to purchase
On March 6, 2023, the Company granted stock options
to purchase
On March 5, 2024, the Company granted stock options
to purchase an aggregate of
On March 7, 2024, the Company entered into Advisory
Board Agreements (the Advisory Agreements”) with three members of the Company’s Medical Advisory Board. In connection with
the Advisory Agreements, each medical Board member shall be paid an annual cash fee of $
-16-
GAXOS.AI INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 2024
(Unaudited)
On July 17, 2024, the Company granted stock options
to purchase
| Nine Months Ended September 30, 2024 |
Nine Months Ended September 30, 2023 |
|||||||
| Dividend rate | % | % | ||||||
| Term (in years) | ||||||||
| Volatility | % | % | ||||||
| Risk—free interest rate | % | % |
The expected terms of the options are based on evaluations of historical and expected future employee exercise behavior using the simplified method. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility is based on historical and expected future volatility of the Company’s common stock. The Company has not historically issued any dividends and does not expect to in the future.
During the nine months ended September 30, 2024
and 2023, the Company recognized total stock-based expenses related to stock options of $
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Balance on December 31, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Balance on September 30, 2024 | $ | |||||||||||
| Options exercisable on September 30, 2024 | $ | |||||||||||
| Weighted average fair value of options granted during the period | $ | - | ||||||||||
On September 30, 2024, the aggregate intrinsic
value of options outstanding was $
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Employment Agreement
On February 17, 2023, the Company entered into
an executive employment agreement with Vadim Mats, the Company’s Chief Executive Officer (CEO) in connection with the Company’s
initial public offering (the “IPO”). The term of the agreement will continue for one (1) year from the date
of execution and automatically renews for successive one (1) year periods at the end of each term until either party delivers written
notice of their intent not to review at least 90 days prior to the expiration of the then effective term. Pursuant to the agreement, Mr.
Mats shall receive a base salary at the annual rate of $
NOTE 8 – SUBSEQUENT EVENTS
On September 23, 2024, the Company formed a wholly-owned
subsidiary, RNK Health, a company incorporated under the laws of the State of Delaware as a limited liability company. RNK Health was
formed in order to form a partnership and potential relationship with Nekwellness to engage in the proposed business of marketing certain
products. On October 10, 2024, the Company, RNK Health, and Nekwellness entered into an operating agreement (the “Operating Agreement”)
of RNK Health for the regulation and management of the affairs of RNK Health. On October 10, 2024, the Company, the sole member of RNK
Health, admitted Nekwellness as a member of RNK Health and accordingly, Nekwellness was granted a
Subsequent to September 30, 2024,
-17-
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and plan of operations together with “Summary Financial Data” and our 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, 2023 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 in our Annual Report on Form 10-K as filed with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.
We are a technology-based company that is developing applications aimed at redefining the way we utilize artificial intelligence (“AI”) to optimize the user experience. We are committed to addressing the need for AI solutions in both health and entertainment.
Gaxos Gaming
Our flagship product is our gaming platform called “Gaxos” (the “Platform” or “Gaxos Gaming”), created with a vision to develop, design, acquire, and manage conventional games and to combine these games with unconventional game mechanisms, such as the ability for gamers and developers to utilize artificial intelligence to create and design in-game features, as well as to mint unique in-game features, such as skins, characters, weapons, gear, levels, and virtual lands, in the form of non-fungible tokens, or “NFTs,” that will allow users to have unique experiences and more control over in-game assets.
In 2023, we launched our own proprietary games that are simple and fun to play, and that offer gamers the ability to utilize AI to personalize their gaming experience as well as to mint their own affordable NFTs, with unique and exclusive features, that can be utilized across the network of games and platform that we intend to build. As of December 31, 2023, we have launched four games, Space Striker AI, Brawl Bots, BattleFleet AI, and Jigsaw Puzzle AI. Space Striker AI allows players to engage in a captivating storyline and exciting retro shooting space action in the players AI-generated spaceship. Players can fuse crystals to upgrade their ship parts to craft, clash and conquer the galaxy all within a dynamic free-to-play economy. Brawl Bots immerses users in high-octane battles in real time against other players, in solo play or teams. Each player gets to control their own exclusive Bot character, ensuring a personalized gaming experience. BattleFleet AI is a take on the classic Battleship game with AI elements that allow gamers to design their ships. Jigsaw Puzzle AI lets gamers solve preloaded jigsaw puzzles as well as design and solve new jigsaw puzzles using AI.
In addition to launching our own proprietary games, Gaxos Gaming is developing an artificial intelligence solution for game developers and studios. The solution is intended to offer a transformative generative AI service that empowers the gaming industry to create without limits through dynamic content generation, seamless integration, and personalized solutions. Key features of the product will be:
| - | AI-Powered Creativity: Reduces creative asset development time from hours to minutes, transforming artistic visions into reality with ease. |
| - | Seamless Integration: With plug-and-play functionality for Unity and upcoming support for Unreal Engine, integration is effortless into existing workflows. |
| - | Dynamic Content Generation: User-Generated-Ai-Content (“UGAiC”) feature offers new experiences with each playthrough by letting gamers use AI in real time, fostering a dynamic gaming environment. |
| - | Customized Solutions: From personalized AI models and templates to expert consulting services, offering to include custom solutions to meet unique needs of each developer. |
We expect to launch the artificial intelligence solution in Q4 of 2024.
Gaxos Health
Recently, we began to develop a new initiative, Gaxos Health, which is dedicated to revolutionizing personal health and wellness by developing a suite of innovative AI-powered health optimization solutions. Gaxos Health will integrate AI-driven insights with individual biometric data and health goals to create web and application based personalized wellness strategies for users. We believe that this cutting-edge approach will redefine preventative medicine, offering unparalleled personalization in health and wellness. Gaxos Health solutions will analyze a wide range of health data to provide tailored wellness plans and address the growing demand for personalized health solutions. We believe that this technology is not just a step but a leap forward in empowering individuals to take control of their health and longevity with AI’s precision and intelligence.
We launched the AI-powered health optimization product in the third quarter of 2024.
-18-
Basis of Presentation
The unaudited financial statements contained herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“US GAAP”) and the requirements of the Securities and Exchange Commission (“SEC”).
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates in the accompanying financial statements include valuation of investments, valuation of intangible assets and other long-lived assets, estimates of deferred tax valuation allowances and the fair value of stock options issued for services.
Critical Accounting Estimates
Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We consider the following to be critical accounting estimates.
Intangible assets
Intangible assets, consisting of software licenses and technology licenses, are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life of 5 years, less any impairment charges. We test intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Recoverability of assets is determined by comparing the estimated undiscounted future cash flows of the asset or asset group to their carrying amount. If the carrying value of the assets exceeds their estimated undiscounted future cash flows, an impairment loss would be determined as the difference between the fair value of the assets and its carrying value. Typically, the fair value of the assets would be determined using a discounted cash flow model which would be sensitive to judgments of what constitutes an asset group and certain assumptions such as estimated future financial performance, discount rates, and other assumptions that marketplace participants would use in their estimates of fair value. There have been no material changes in the underlying assumptions and estimates used in these calculations in the relevant period. The accounting estimate related to asset impairments is highly susceptible to change from period to period because it requires management to make assumptions about the existence of impairment indicators and cash flows over future years. These assumptions impact the amount of an impairment, which could materially adversely impact the statements of operations.
Stock-based compensation
Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation–Stock Compensation”, 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 or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. The Company has elected to account for forfeitures as they occur. We recognize compensation costs resulting from the issuance of stock-based awards to employees, non-employees, and directors as an expense in the statements of operations over the requisite service period based on a measurement of fair value for each stock-based award. The fair value of each option granted is estimated as of the date of grant using the Black-Scholes-Merton option-pricing model, net of actual forfeitures. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. The Black-Scholes-Merton option-pricing model includes various assumptions, including the fair market value of our common stock, expected life of stock options, the expected volatility, and the expected risk-free interest rate, among others. These assumptions reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used, stock-based compensation expense, as determined in accordance with authoritative guidance, could have been materially impacted. Furthermore, if we use different assumptions on future grants, stock-based compensation expense could be materially affected in future periods.
-19-
Capital Expenditures
We do not have any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment and software necessary to conduct our operations on an as needed basis.
Results of Operations
Comparison of Our Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023.
Revenue
During the three and nine months ended September 30, 2024, we generated revenues of $2,704 and $2,723, respectively, primarily from the sale of health coaching packages to its customers. Health coaching packages consist of a series of lab tests and personal health coaching sessions. We did not generate during the 2023 periods.
Operating Expenses
During the three months ended September 30, 2024 and 2023, we incurred operating expenses of $908,573 and $873,616, respectively, an increase of $34,957, or 4.0%. During the nine months ended September 30, 2024 and 2023, we incurred operating expenses of $2,806,934 and $3,184,549, respectively, a decrease of $377,615, or 11.9%. For the three and nine months ended September 30, 2024 and 2023, operating expenses consisted of the following:
Research and development expenses
We enter into agreements with third-party developers that require us to make payments for game and software development services. In exchange for our payments, we receive the exclusive publishing and distribution rights to the finished game title and software. During the preliminary project stage and prior to the application development stage of the product, we record any costs incurred by third-party developers as research and development expenses.
We capitalize all development and production service payments to third-party developers as internal-use software development costs and licenses once we reach the application development stage. Prior to this stage, we expense all research and development fees. During the three months ended September 30, 2024 and 2023, we reported research and development expense of $252,657 and $258,405, respectively, a decrease of $5,748, or 2.2%. The decrease is primarily due to a decrease in outside development costs incurred in connection with the development of Gaxos Games offset by an increase in development of the Gaxos Health platforms. During the nine months ended September 30, 2024 and 2023, we reported research and development expense of $684,327 and $630,574, respectively, an increase of $53,753, or 8.5%. The increase is primarily due to an increase in outside development costs incurred in connection with the development of Gaxos Health platforms offset by a decrease in outside development costs incurred in connection with the development of Gaxos Games. We expect research and development expenses to increase in the future as development of Gaxos Games and Gaxos Health accelerates.
General and administrative expenses
| For the Three Months ended September 30, 2024 | For the Three Months ended September 30, 2023 | For the Nine Months ended September 30, 2024 | For the Nine Months ended September 30, 2023 | |||||||||||||
| Compensation and related benefit | $ | 172,502 | $ | 208,365 | $ | 689,565 | $ | 1,202,199 | ||||||||
| Professional fees | 259,167 | 254,553 | 819,528 | 952,431 | ||||||||||||
| Other general and administrative expenses | 224,247 | 152,293 | 613,514 | 346,982 | ||||||||||||
| Total general and administrative expenses | $ | 655,916 | $ | 615,211 | $ | 2,122,607 | $ | 2,501,612 | ||||||||
-20-
Compensation and related benefits
During the three months ended September 30, 2024 and 2023, compensation and related benefits amounted to $172,502 and $208,365, respectively, a decrease of $35,863, or 17.2%. The decrease during the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was primarily attributable to a decrease in executive officer and employee compensation.
During the nine months ended September 30, 2024 and 2023, compensation and related benefits amounted to $689,565 and $1,202,199, respectively, a decrease of $512,634, or 42.6%. The decrease during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was primarily attributable to a decrease in accretion of stock-based compensation related to issuance of stock options to executive officers, directors and employees of $640,537, offset by an increase in executive officer and employee compensation of $127,903.
Professional fees
During the three months ended September 30, 2024 and 2023, we incurred professional fees of $259,167 and $254,553, respectively, an increase of $4,614, or 1.8%, attributable to an increase in advisory fees of $129,500, offset by a decrease in other professional fees of $124,886.
During the nine months ended September 30, 2024 and 2023, we incurred professional fees of $819,528 and $952,431, respectively, a decrease of $132,903, or 13.9%, attributable to a decrease in stock-based consulting fees due to the accretion of stock options expense to consultants of $189,699, and a decrease in investor relations fees of $328,050, offset by an increase in advisory fees of $306,695 and an increase in other professional fees of $78,151.
Other general and administrative expenses
General and administrative expenses consist of advertising and marketing expenses, office expenses, insurance, listing fees, computer and interest expenses, travel expenses, amortization expense, and other general business expenses. During the three months ended September 30, 2024 and 2023, we incurred general and administrative expenses of $224,247 and $152,293, respectively, an increase of $71,954, or 47.2%. During the nine months ended September 30, 2024 and 2023, we incurred general and administrative expenses of $613,514 and $346,982, respectively, an increase of $266,532, or 76.8%. Generally, the increase in other general and administrative expenses during the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023 was primarily attributable to an increase in advertising and marketing expenses and a ramp up of operations which began in February 2023 following the Company’s IPO.
Impairment loss
On August 9, 2023 and effective August 1, 2023, the Company and Columbia University agreed to the termination of the Software and Patent License Agreement between the Company and The Trustees of Columbia University in the City of New York, dated August 29, 2022. Accordingly, as of September 30, 2023, we wrote off the remaining unamortized book value of the intangible asset of $52,363, and during the nine months ended September 30, 2023, recorded an impairment loss of $52,363, which is included in operating expenses on the accompany statement of operations and comprehensive loss.
Loss from operations
During the three months ended September 30, 2024 and 2023, we reported a loss from operations of $905,869 and $873,616, respectively, an increase of $32,253, or 3.7%. During the nine months ended September 30, 2024 and 2023, we reported a loss from operations of $2,804,211 and $3,184,549, respectively, a decrease of $380,338, or 11.9%. The change in loss from operations was due to changes in general and administrative expenses, research and development, and impairment loss as discussed above.
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Other income
During the three months ended September 30, 2024 and 2023, we reported other income of $41,459 and $16,557, respectively, an increase of $24,902, or 150.4%. This increase is attributable to an increase in interest income. During the nine months ended September 30, 2024 and 2023, we reported other income of $218,418 and $37,415, respectively, an increase of $181,003, or 483.8%. This increase is attributable to an increase in interest income of $59,238. Additionally, we recorded a realized gain on short-term investments during the nine months ended September 30, 2024 and 2023 of $121,765 and $0, respectively.
Net loss
During the three months ended September 30, 2024 and 2023, our net loss amounted to $864,410, or a net loss per common share of $0.61 (basic and diluted) and $857,059, or a net loss per common share of $0.85 (basic and diluted), respectively, an increase of $7,351, or 0.86%. During the three months ended September 30, 2024 and 2023, our total comprehensive loss amounted to $864,410 and $815,218, respectively, an increase of $49,192, or 6.0%.
During the nine months ended September 30, 2024 and 2023, our net loss amounted to $2,585,793, or a net loss per common share of $1.95 (basic and diluted) and $3,147,134, or a net loss per common share of $3.20 (basic and diluted), respectively, a decrease of $561,341, or 17.8%. During the nine months ended September 30, 2024 and 2023, our total comprehensive loss amounted to $2,668,279 and $3,067,488, respectively, a decrease of $389,325, or 12.7%.
Liquidity, Capital Resources and Plan of Operations
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. On September 30, 2024, we had a cash balance of $5,227,894, had short-term investments of $1,416,056, and had working capital of $6,525,650.
On March 13, 2024, we entered into a securities purchase agreement (the “March 2024 Purchase Agreement”) with an institutional investor (“the “Purchaser”) for the issuance and sale in a private placement (the “March 2024 Private Placement”) of aggregate Units consisting of (i) 108,000 shares of the Company’s common stock, (ii) series A warrants to purchase up to 628,367 shares of the Company’s common stock (the “Series A Warrants”), and (iii) series B warrants to purchase up to 628,367 shares of the Company’s common stock (the “Series B Warrants” and together with the Series A Warrants, the “March 2024 Common Warrants”). The purchase price of each Unit consisted of one share of the Company’s common stock and associated March 2024 Common Warrants, was $5.57 per Unit for aggregate gross proceeds of $601,560. Additionally, we sold pre-funded warrants to purchase up to 520,367 shares of the Company’s common stock (the “Pre-Funded Warrants”). Pre-funded Warrants are a type of warrant that allows the warrant holder to purchase a specified number of a company’s securities at a nominal exercise price. The purchase price of each Pre-Funded Warrant was $5.569 for aggregate gross proceeds of $2,897,924. In connection with this March 2024 Private Placement, we raised aggregate gross proceeds of $3,499,484 consisting of $601,560 from the sales of common stock units and $2,897,924 from the sale of pre-funded warrants, and we received net proceeds of $3,056,984, net of offering costs paid to the placement agent of $382,500 and legal fees of $60,000, which were netted against the $601,560 of gross proceeds from the sale of common stock units for net proceeds allocated to the sale of common stock units of $159,060. We are using the net proceeds received from the March 2024 Private Placement for general corporate purposes and working capital.
On September 20, 2024, we entered into an inducement offer agreement with the Holder of the March 2024 Common Warrants to immediately exercise for cash an aggregate 1,256,734 of the March 2024 Common Warrants to purchase shares of the Company’s common stock at a reduced exercise price of $2.58 per share for gross proceeds to the Company of $3,242,374 and we received net proceeds of $2,834,843 after deducting placement agent fees of $376,552 and other offering expenses paid by the Company of $30,979. The exercised March 2024 Common Warrants were issued pursuant to a March 2024 Purchase Agreement dated March 13, 2024 by and between the Company and the Holder. Each March 2024 Common Warrant was initially exercisable at an original exercise price of $5.50 per share.
Until such time that the Company implements its growth strategy, we expect to continue to generate operating losses in the foreseeable future, mostly due to corporate overhead, research and development, and costs of being a public company. We believe that our existing working capital and cash on hand will provide sufficient cash to enable the Company to meet its operating needs and debt requirements for the next twelve months from the issuance date of this report.
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Cash Flows from Operating Activities
For the nine months ended September 30, 2024, net cash used in operations was $2,512,166, which primarily resulted from our net loss of $2,585,793, adjusted for the add back of amortization expense of $37,036, stock-based compensation to employees of $84,190, and a realized gain on short-term investments of $121,765, and changes in operating asset and liabilities such as an increase in prepaid expenses and other current assets of $61,477, an increase in accounts payable of $113,406, and an increase in accrued expenses of $19,089.
For the nine months ended September 30, 2023, net cash used in operations was $2,307,697, which primarily resulted from our net loss of $3,147,134, adjusted for the add back of amortization expense of $6,968, stock-based compensation to employees and consultants of $914,426, and impairment loss of $52,363, and changes in operating asset and liabilities such as an increase in prepaid expenses and other current assets of $79,319, a decrease in accounts payable of $65,967, and an increase in accrued expenses of $10,966.
Cash Flows from Investing Activities
For the nine months ended September 30, 2024, net cash provided by investing activities was $842,604, which resulted from proceeds received from the sale of short-term investments of $3,312,205, offset by cash used for the purchase of short-term investments of $2,096,293, the purchase of equity securities of $199,998, an increase in capitalized internal-use software development costs of $23,310, and the purchase of an intangible asset of $150,000.
For the nine months ended September 30, 2023, net cash used in investing activities was $3,515,867, which resulted from the purchase of short-term investments of $3,491,242 and an increase in capitalized software development costs of $24,625. For the nine months ended September 30, 2022, there was no net cash used in investing activities.
Cash Flows from Financing Activities
For the nine months ended September 30, 2024, net cash provided by financing activities was $5,872,746. On March 13, 2024, we entered into the March 2024 Private Placement of aggregate Units consisting of (i) 108,000 shares of the Company’s common stock, (ii) the March 2024 Common Warrants. The purchase price of each Unit consisted of one share of the Company’s common stock and associated March 2024 Common Warrants, was $5.57 per Unit for aggregate gross proceeds of $601,560. Additionally, we sold pre-funded warrants to purchase up to 520,367 shares of the Company’s common stock (the “Pre-Funded Warrants”). Pre-funded Warrants are a type of warrant that allows the warrant holder to purchase a specified number of a company’s securities at a nominal exercise price. The purchase price of each Pre-Funded Warrant was $5.569 for aggregate gross proceeds of $2,897,924. In connection with this March 2024 Private Placement, we raised aggregate gross proceeds of $3,499,484 consisting of $601,560 from the sales of common stock units and $2,897,924 from the sale of pre-funded warrants, and we received net proceeds of $3,056,984, net of offering costs paid to the placement agent of $382,500 and legal fees of $60,000, which were netted against the $601,560 of gross proceeds from the sale of common stock units for net proceeds allocated to the sale of common stock units of $159,060. Additionally, on September 20, 2024, we entered into an inducement offer agreement with the Holder of the March 2024 Common Warrants to immediately exercise for cash an aggregate 1,256,734 of the March 2024 Common Warrants to purchase shares of the Company’s common stock at a reduced exercise price of $2.58 per share for gross proceeds to the Company of $3,242,374 and the Company received net proceeds of $2,834,843 after deducting placement agent fees of $376,552 and other offering expenses paid by the Company of $30,979. Furthermore, during the nine months ended September 30, 2024, we purchased and cancelled 6,846 treasury shares for $19,602, or at an average price of $2.86 per share.
For the nine months ended September 30, 2023, net cash provided by financing activities was $5,908,760. On February 17, 2023, we closed an IPO pursuant to which we issued 1,686,755 of our common stock for gross proceeds of approximately $7 million and net proceeds of $5,958,470, after deducting underwriting discounts and commissions, and offering expenses. Additionally, during the nine months ended September 30, 2023, we purchased and cancelled 105,931 treasury shares for $49,710, or at an average price of $0.469 per share.
Our ultimate success is dependent on our ability to obtain additional financing and generate sufficient cash flow to meet our obligations on a timely basis. We will require significant amounts of capital to sustain operations, and we will need to make the investments we need to execute our longer-term business plan to support new technologies and help advance innovation. Absent generation of sufficient revenue from the execution of our long-term business plan, we will need to obtain debt or equity financing, especially if we experience downturns in our business that are more severe or longer than anticipated, or if we experience significant increases in expense levels resulting from being a publicly-traded company or from operations. Such additional debt or equity financing may not be available to us on favorable terms, if at all. We plan to pursue our plans with respect to the research and development of our products which will require resources beyond those that we currently have, ultimately requiring additional capital from third party sources. However, we believe the net proceeds received in the IPO that closed in February 2023 will be sufficient to meet our financial obligations for at least the next 12 months.
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Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any commitments or contractual obligations.
Recently Issued Accounting Standards Not Yet Effective or Adopted
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material impact on the accompanying unaudited condensed consolidated financial statements.
JOBS Act
On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act 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 chosen to take advantage of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards until those standards would otherwise apply to private companies provided under the JOBS Act. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates for complying with new or revised accounting standards.
Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including, without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of Sarbanes-Oxley and (ii) complying 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, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not required to provide the information required by this Item as we are a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
ITEM 4. CONTROLS AND PROCEDURES
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 and 15d-15(e)) as of September 30, 2024, the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that our disclosure controls and procedures were 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. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report 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, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings, and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition.
ITEM 1A. RISK FACTORS
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, 2023 as filed with the SEC on March 27, 2024 (“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report, except discussed below. 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the fiscal quarter ended September 30,
2024, none of the Company’s directors or executive officers
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ITEM 6. EXHIBITS
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GAXOS.AI INC. | ||
| Dated: November 14, 2024 | By: | /s/ Vadim Mats |
| Name: | Vadim Mats | |
| Title: | Chief Executive Officer and Director (Principal Executive Officer) | |
| Dated: November 14, 2024 | By: | /s/ Steven Shorr |
| Name: | Steven Shorr | |
| Title: | Chief Financial Officer (Principal Financial and Accounting Officer) |
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