ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
You should read the following discussion and
analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes
appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed
below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those
discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. All amounts in this
report are in U.S. dollars, unless otherwise noted.
Overview
We are a private messaging, 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 development of our Myseum platform, a secure digital content
management and storage solution for families, groups and individuals. In addition, as a result of our acquisition of RPM Interactive,
Inc. in October 2024, we have repositioned our majority-owned subsidiary, Dragon Interact, Inc. (recently renamed RPM Interactive, Inc.)
away from the development of the Habytat platform to focus on becoming an AI generated publishing company of trivia mobile game apps and
vodcasts/podcasts designed to publish content across hundreds of evergreen topics every day and be distributed to all major streaming
platforms. See “Business – RPM Interactive, Inc.” and “Business – The Habytat.”
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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.
Myseum Social Media Platform
We recently launched our Myseum social media platform,
an innovative social media platform that brings a fresh approach to digital media and content management,
allowing users to create a digital legacy that can be easily shared today and with future generations. Backed by AI technology and proprietary
software, the multi-tiered social media ecosystem enables individuals, families, and other groups to store and share digital content such
as messages, photos, videos, and documents within a highly secure and private family library. Myseum allows users to create amazing
albums and galleries for everyone to see, create special private and secure galleries with limited access, personalize a user’s
newsfeed with updates from other Myseums and leave time released video messages for both now and future generations.
RPM Interactive, Inc.
In October 2024, our majority owned subsidiary,
Dragon Interact, Inc. (“Dragon”), entered into a Share Exchange Agreement with RPM Interactive,
Inc., a Florida corporation (“RPM”), pursuant to which Dragon acquired 100% of the equity interests of RPM, including all
assets of RPM in consideration for the issuance of 3,500,000 restricted shares of Dragon’s common stock. RPM’s assets included
an artificial intelligence (“AI”) tool used for publishing AI-generated consumer gaming and podcasting/vodcasting applications
and certain intellectual property. As part of the acquisition, Dragon has changed its corporate name to RPM Interactive, Inc. (“RPM
Interactive”) and shifted its focus to developing AI-driven podcast and gaming technologies.
Following
the acquisition, in January 2025, we returned 3,500,000 shares of the RPM Interactive common stock held by us to RPM Interactive,
which shares were cancelled and are no longer outstanding on RPM Interactive’s stock ledger. Following these transactions, we hold
9,000,000 shares of the RPM Interactive’s common stock, or approximately 34% of its outstanding shares.
The Habytat
Prior ot the acquisition of RPM, we had developed
and launched, in November 2022, 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. We had further contemplated spinning-off
our Habytat platform business into a new standalone public company pursuant to a distribution of the shares of the our shareholders. As
discussed above, following our acquisition of RPM in October 2024, we ceased our development of the Habytat platform and are evaluating
ways to utilize the technology that had been developed by our subsidiary.
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Recent Events
Return of Subsidiary Shares
In January 2025, we returned 3,500,000 shares
of the Subsidiary’s. common stock held by us to the Subsidiary, which shares were cancelled and are no longer outstanding on the
Subsidiary’s stock ledger. Following this transaction, we held 12.5 million shares of the Subsidiary’s common stock, or approximately
34% of its outstanding shares.
January 2025 Offering
On January 8, 2025, we entered into a securities purchase agreement
with certain institutional investors, pursuant to which we sold 1,200,000 shares of our common stock at a purchase price of $4.25 per
share of Common Stock. Proceeds from the offering were approximately $5.1 million, prior to deducting placement agent’s fees and
other offering expenses payable by the Company. The shares of Common Stock were offered by the Company pursuant to its shelf registration
statement on Form S-3 (File No. 333-268058), which was declared effective by the Securities and Exchange Commission on December 6, 2022,
a base prospectus dated December 6, 2022, and a prospectus supplement dated January 8, 2025. The closing of the offering took place on
January 9, 2025. In addition, pursuant to the terms of the offering, the Company issued to The Benchmark Company, LLC, the exclusive placement
agent for the offering, warrants to purchase up to 60,000 shares of the Company’s common stock, at an exercise price equal
to 100.0% of the offering price per share of Common Stock, or $4.25 per share. The Placement Agent Warrant is exercisable during the four-and-a-half
year period commencing six months after the date of the closing of this Offering.
Basis of Presentation
The financial statements contained herein have
been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”)
and the requirements of the Securities and Exchange Commission.
Critical Estimates
This management’s discussion and analysis
of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S.
GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements,
and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical
experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these
estimates if conditions differ from our assumptions. While our significant accounting policies and significant estimates are more fully
described in Note 2 in the “Notes to Financial Statements”, we believe the following estimates are critical to the process
of making significant judgments and estimates in preparation of our consolidated financial statements.
Capitalized internal-use software costs
We capitalize costs to develop or purchase internal-use software in
accordance with ASC section 350-40, Intangibles — Goodwill and Other — Internal-Use Software.
Costs incurred to develop internal-use software are expensed as incurred during the preliminary project stage. Internal-use software development
costs are capitalized upon purchase and 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 intended function. Capitalization ceases at the point where the software project is substantially complete and ready for
its intended use, and after all substantial testing is completed. Upgrades and enhancements are capitalized if it is probable that those
expenditures will result in additional functionality. Amortization is provided for on a straight-line basis over the expected useful life
of the internal-use software development costs and related upgrades and enhancements. When existing software is replaced with new software,
the unamortized costs of the old software are expensed when the new software is ready for its intended use. Software development costs
incurred during the year ended December 31, 2024 and 2023 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.
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Variable interest entities
Pursuant to ASC 810-10-25-22, an entity
is defined as a VIE if it either lacks sufficient equity to finance its activities without additional subordinated financial support,
or it is structured such that the holders of the voting rights do not substantively participate in the gains and losses of the entity.
When determining whether an entity that meets the definition of a business qualifies for a scope exception from applying VIE guidance,
the Company considers whether: (i) it has participated significantly in the design of the entity, (ii) it has provided more than half
of the total financial support to the entity, and (iii) substantially all of the activities of the VIE are conducted on its behalf. A
VIE is consolidated by its primary beneficiary, the party that has the power to direct the activities that most significantly impact
the VIE’s economic performance and has the right to receive benefits or the obligation to absorb losses of the entity that could
be potentially significant to the VIE. The primary beneficiary assessment must be re-evaluated on an ongoing basis.
Based on the Company’s analysis, on February
14, 2023, Metabizz, LLC, a Florida corporation, and Metabizz SAS, a company incorporated under the laws of Columbia (collectively “Metabizz”),
were determined to be VIE entities in accordance with ASC 810-10-25-22 because the equity owners in Metabizz did not have the
characteristics of a controlling financial interest and the initial equity investments in these entities may be or were insufficient
to meet or sustain its operations without additional subordinated financial support from DatChat. The equity owners of Metabizz had only
a nominal equity investment at risk, and the Company absorbed or received a majority of the entity’s expected losses or benefits.
The Company participated significantly in the design of Metabizz. The Company provided working capital advances to Metabizz to allow
Metabizz to fund its day-to-day obligations. Substantially all of the activities of Metabizz were conducted for the Company’s benefit,
as evidenced by the fact that the operations of Metabizz consisted of development of software and technologies to be used by RPM Interactive
and the Company provided working capital to Metabizz to pay employees and independent contractors to perform the development services
on behalf of the Company. Repayment of the working capital advances is not guaranteed by the equity owner of Metabizz and creditors of
Metabizz do not have recourse against the Company. Accordingly, the Company was required to consolidate the assets, liabilities, revenues
and expenses of Metabizz using the fair value method. Additionally, the managing partner of Metabizz was also the Chief Innovation Officer
of RPM Interactive. Since Metabizz, LLC and Metabizz SAS were considered VIE’s, any noncontrolling interest eliminated in consolidation.
In connection with the initial consolidation of Metabizz, on February 14, 2023 (the initial consolidation date), the Company recorded
a gain on initial consolidation of variable interest entities of $42,737.
On March 31, 2024, based on the Company’s
analysis, the Company deconsolidated Metabizz, LLC and Metabizz SAS. During the three months ended March 31, 2024, the Company ceased
doing business with Metabizz, LLC and Metabizz SAS and will pay technology professionals directly. In connection with the deconsolidation
of Metabizz, LLC and Metabizz SAS, during the nine months ended September 30, 2024, the Company recorded a gain on deconsolidation of
$107.
On August 27, 2024, the Company entered into
an Asset Purchase Agreement with the Seller, pursuant to which it acquired from Seller the Assets (See Note 1) in consideration for the
transfer by the Company of 8,000,000 restricted shares of common stock of RPM Interactive. Accordingly, as of September 30, 2024, the
Company owned 45.5% of RPM Interactive. On August 27, 2024, based on the Company’s analysis, the Company determined that RPM Interactive
met the definition of a VIE under the VIE model, which provides for situations in which control may be demonstrated other than by the
possession of voting rights in RPM Interactive. Based on Company’s analysis, the Company continues to have the power to direct
the activities of RPM Interactive that most significantly impact RPM Interactive’s economic performance and the obligation to absorb
losses of RPM Interactive that could potentially be significant to RPM Interactive or the right to receive benefits from RPM Interactive
that could potentially be significant to RPM Interactive.
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. 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, the
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.
Noncontrolling interests
The Company follows ASC Topic 810, “Consolidation,”
governing the accounting for and reporting of noncontrolling interests (“NCI”) in partially owned consolidated subsidiaries
and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCI be treated as a separate
component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact
be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated
subsidiary be allocated to noncontrolling interests even when such allocation might result in a deficit balance. The net loss attributed
to NCI was separately designated in the accompanying consolidated statements of operations and comprehensive loss. Losses attributable
to NCI in a subsidiary may exceed a NCI’s interests in the subsidiary’s equity. The excess attributable to NCI is attributed
to those interests. NCI shall continue to be attributed their share of losses even if that attribution results in a deficit NCI balance.
The Company allocates certain corporate common
expenses to its subsidiaries based on the ratio of direct subsidiary expenses to total consolidated expenses. Management believes that
this allocation method is reasonable.
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The Company accounts for it noncontrolling interest in RPM Interactive
in accordance with ASC Topic 810-10-45, which requires the Company to present noncontrolling interests as a separate component of total
shareholders’ equity on the consolidated balance sheets and the consolidated net loss attributable to its noncontrolling interest
be clearly identified and presented on the face of the consolidated statements of operations. Through January 10, 2024, the date that
VR Interactive purchased 8,000,000 shares of RPM Interactive from Metabizz LLC, any noncontrolling interest eliminated in consolidation.
Because this change in ownership moved from a consolidated entity (the VIE entities) to a nonconsolidated entity (VR Interactive), subsequent
to January 10, 2024 the Company ceased eliminating the noncontrolling interest in consolidation and recorded an initial negative noncontrolling
interest of $442,361 in total equity for the portion of equity ownership not attributable to DatChat based on the minority interest holders’
ownership interest in the carrying value of RPM Interactive’s equity. Additionally, during the year ended December 31, 2024, the
Company recorded additional initial negative noncontrolling interest of $909,581 in total equity for the portion of additional equity
ownership not attributable to the Company based on this minority interest holders’ ownership interest in the carrying value of RPM
Interactive’s equity. The Company also allocated $785,847 of the net loss of the subsidiary to noncontrolling interest resulting
in a total noncontrolling interest deficit of $2,137,789 as of December 31, 2024.
Recently Issued Accounting Pronouncements
Refer to the notes to the audited financial statements.
Results of Operations
Revenue
During the years ended December 31, 2024 and
2023, we generated revenues of $436 and $672, respectively, which consisted of subscription revenues.
Operating expenses
For the year ended December 31, 2024, operating expenses amounted to
$5,281,339 as compared to $8,784,703 for the year ended December 31 2023, a decrease of $3,503,364, or 39.9%. For the years ended December
31 2024 and 2023, operating expenses consisted of the following:
Year Ended December 31,
Impairment loss on property and equipment and intangible assets - 43,671
Impairment loss on digital currencies and other digital assets - 23,381
Compensation and related expenses
Compensation and related expenses include salaries,
stock-based compensation, health insurance and other benefits.
During the year ended December 31, 2024 and 2023,
compensation and related expenses amounted to $2,320,127 and $4,760,180, respectively, a decrease of $2,440,053, or 51.3%. The decrease
was attributable to a decrease in stock-based compensation of $1,985,961 and a decrease in other compensation and other related expenses
of $454,092 related to a reduction in staff.
Marketing and advertising expenses
During the years ended December 31, 2024 and 2023, marketing and advertising
expenses amounted to $128,656 and $388,444, respectively, a decrease of $259,788, or 67.0%, primarily due to an overall decrease in promotions,
branding and digital marketing strategies and social media ads.
Professional and consulting expenses
During the years ended December 31, 2024 and 2023, we reported professional
and consulting expenses of $1,031,898 and $1,324,640, respectively, a decrease of $292,742, or 22.1%. The decrease is attributable to
a decrease in consulting fees of $96,202, which includes a decrease in stock-based consulting fees of $144,818, offset by an increase
in other consulting fees of $48,616, a decrease in investor relations fees of $224,026, a decrease in legal fees of $27,195, and a decrease
in other professional fees of $43,970, offset by an increase in accounting fees of $98,651.
Research and development costs
During the years ended December 31, 2024 and
2023, we incurred $857,668 and $1,351,415 in research and development costs, a decrease of $493,747, or 36.5%. Research and development
costs were incurred in connection with our Metaverse software development project, including the development of Habytat which is in the
preliminary stage. During the year ended December 31, 2024, we ceased development of our Metaverse software.
General and administrative expenses
During the years ended December 31, 2024 and 2023, general and administrative
expenses amounted to $942,990 and $892,972, an increase of $50,018, or 5.6%. The increases are primarily attributable to an increase in
computer and internet expenses of approximately $54,000.
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Impairment loss on property and equipment
and intangible assets
During the year ended December 31, 2023, we wrote
off the balance of property and equipment held by MetaBizz since the property and equipment was abandoned and no longer being used by
the Company as of December 31, 2023. Accordingly, we recognized an impairment loss on property and equipment of $43,671. We did not recognize
any impairment loss on property and equipment during the year ended December 31, 2024.
Impairment loss on digital currencies and
other digital assets
During the year ended December 31, 2024 and 2023,
operating expenses included an impairment charge related to the write down of digital assets of $0 and $23,381, respectively.
Loss from Operations
During the year ended December 31, 2024, loss from operation amounted
to $5,280,903 as compared to $8,784,031 during the year ended December 31, 2023, a decrease of $3,503,128, or 39.9%.
Other Income (Expense)
Other income (expenses) primarily consisted of interest income, gain
on initial consolidation of variable interest entities, a forerign curreny exchange loss, a gain on deconsolidation of variable interest
entities, and realized gains on short-term investments. During the years ended December 31, 2024 and 2023, we reported other income, net
of $255,896 and $379,061, respectively.
During the year ended December 31, 2024, other
income, net primarily consisted of interest income of $268,754, a gain on deconsolidation of variable interest entities of $107, and
a foreign currency exchange loss of $12,965. During the year ended December 31, 2023, other income, net primarily consisted of interest
income of $384,098, a gain on initial consolidation of variable interest entities of $42,737, a foreign currency exchange loss of $102,
and a realized loss on short-term investments of $47,672.
Net Loss and Net Loss Attributable Common
Shareholders
Due to the foregoing reasons, during the years ended December 31, 2024
and 2023, our net loss was $5,025,007 and $8,404,970, respectively, a decrease of $3,379,963, or 40.2%. During the year ended December
31, 2024 and 2023, we adjusted net loss for the net loss of subsidiary attributable to noncontrolling interest by $785,847 and $0, respectively
Accordingly, during the years ended December 31, 2024 and 2023, our net loss attributable to common shareholders was $4,239,160, or $(1.43)
per common share (basic and diluted) and $8,404,970, or $(4.14) per common share (basic and diluted), respectively, a decrease of $4,165,810,
or 49.6%.
Liquidity, Capital Resources and Plan of Operations
As of December 31, 2024, we had cash and cash
equivalents of $1,196,699 and short-term investments of $2,952,512. Short-term investments include U.S. Treasury bills that are all highly
rated and have initial maturities between four and twelve months.
The accompanying consolidated 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. As of December 31, 2024, we had cash and cash equivalents of $1,196,699, short-term investments of $2,952,512, and working
capital of $3,657,711. Short-term investments include U.S. Treasury zero coupon bills that are all highly rated and have initial maturities
between four and twelve months. Additionally, on January 8, 2025, the Company entered into a securities purchase agreement (the “Purchase
Agreement”) with certain institutional investors pursuant to which the Company agreed to sell to such investors 1,200,000 shares
of common stock of the Company at a purchase price of $4.25 per share of Common Stock (the “Offering”). The closing of the
sales of these securities under the Purchase Agreement took place on January 9, 2025 and we received net proceeds of $4,537,000. Net cash
used in operations was $4,388,385 for the year ended December 31, 2024. Until such time that the Company implements its growth strategy,
it expects 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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Our primary uses of cash have been for research
and development, 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, sale of common stock in our subsidiary, RPM Interactive, 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,
● The cost of being a public company.
Cash Flows from Operating Activities
Net cash used in operating activities totaled
$4,388,385 and $6,529,277 for the years ended December 31, 2024 and 2023, respectively, a decrease of $2,140,892.
Net cash flow used in operating activities for the year ended December
31, 2024 primarily reflected a net loss of $5,025,007, adjusted for the add-back (reduction) of non-cash items consisting of depreciation
and amortization of $23,129, amortization of right of use assets of $73,977, accretion of stock-based stock option and common stock expense
of $123,300, a non-cash gain from deconsolidation of variable interest entities of $(107), foreign currency exchange loss of $12,965,
and non-cash research and development expense of $166,667, offset by changes in operating assets and liabilities primarily consisting
of an increase in prepaid expenses of $9,649, an increase in accounts payable and accrued expenses of $307,568, and a decrease in operating
lease liabilities of $83,674.
Net cash flow used in operating activities for the year ended December
31, 2023 primarily reflected a net loss of $8,404,970 adjusted for the add-back (reduction) of non-cash items consisting of depreciation
and amortization of $28,943, amortization of right of use assets of $60,549, accretion of stock-based stock option and common stock expense
of $2,254,079, a non-cash gain from initial consolidation of variable interest entities of $(42,737), impairment loss on digital assets
of $23,381, impairment of property and equipment of $43,671, and net realized gain on short-term investments of $327,145, offset by changes
in operating assets and liabilities primarily consisting of a decrease in prepaid expenses of $5,797, a decrease in accounts payable and
accrued expenses of $103,741, and a decrease in operating lease liabilities of $67,339.
Cash Flows from Investing Activities
Net cash provided by investing activities amounted
to $2,236,751 and $6,160,932 for the years ended December 31, 2024 and 2023, respectively, a decrease of $3,924,181.
During the years ended December 31, 2024, we
purchased short-term investments of $10,767,288 and received gross proceeds from the sale of short-term investments of $13,004,039.
During the years ended December 31, 2023, we
purchased short-term investments of $8,599,121 and received gross proceeds from the sale of short-term investments of $14,745,000. Additionally,
we received $64,538 in cash upon initial consolidation of variable interest entities and purchased property and equipment amounting to
$49,485.
Cash Flows from Financing Activities
Net cash provided by (used in) financing activities
totaled $2,394,971 and $(398,284) for the years ended December 31, 2024 and 2023, respectively.
During the year ended December 31, 2024, we received
$559,251 from the sale of common stock, net, received $974,198 from the sale of subsidiary common stock, net, and received $861,522 from
the sale of pre-funded warrants.
During the year ended December 31, 2023, we repaid
related party advances of $1,315, we used cash of $397,969 to purchase 66,945 treasury stock at an average price of $5.94 per share,
and we received $1,000 from the sale of Series B preferred stock.
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Off-Balance Sheet Arrangements
We have not entered into any other financial
guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts
that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our financial statements. Furthermore,
we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity,
market risk or credit support to us or engages in leasing, hedging or research and development services with us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
As a smaller reporting company, we are not required
to provide the information required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Our financial statements are contained in pages
F-1 through F-22, which appear at the end of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
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 December 31, 2024, the end of the period covered by this Annual Report on Form 10-K,
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. 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.
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 December 31, 2024, 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 December 31, 2024, 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.
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Specifically, management concluded that the ineffectiveness
of our internal controls over financial reporting was due to the following material weaknesses:
● We have not implemented adequate system and manual controls.
While we used the services of a third-party accountant
to provide accounting and financial reporting services to us, we lack both an adequate number of personnel with requisite expertise in
the key functional areas of finance and accounting and an adequate number of personnel to properly implement internal control over financial
reporting. These factors represent material weaknesses in our internal control over financial reporting. Although we believe the possibility
of errors in our financial statements is remote and expect to continue to use a third-party accountant to address shortfalls in staffing
and to assist us with accounting and financial reporting responsibilities in an effort to mitigate the lack of segregation of duties,
until such time as we expand our staff with qualified personnel, we expect to continue to report material weaknesses in our internal
control over financial reporting.
Attestation Report
of our Registered Public Accounting Firm
This Annual Report on Form 10-K does not include
an attestation report of our registered public accounting firm regarding internal control over financial reporting. As a smaller reporting
company, our management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the
SEC that permit us to provide only management’s report in this annual report.
Changes in Internal Control Over Financial
Reporting
There have been no changes in our internal control
over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
During our last fiscal quarter ended December
31, 2024, none of our directors or executive officers adopted, modified or terminated a “Rule 10b5-1 trading arrangement”
or a “non-Rule 10b5-1 trading arrangement” as such terms are defined under Item 408 of Regulation S K.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS
THAT PREVENT INSPECTIONS
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The following table sets forth the name, age
and positions of our executive officers and directors.
NAME AGE POSITION
Darin Myman 60 Chief Executive Officer and Chairman
Peter Shelus 41 Chief Technology Officer and Director
Brett Blumberg 46 Chief Financial Officer
Wayne Linsley 68 Director
Joseph Nelson 41 Director
Carly Luogameno 36 Director
The business background and certain other information
about our directors and executive officers is set forth below.
Darin Myman - Chief Executive Officer
and Director
Darin Myman has served as Chief Executive Officer
and Chairman of the board of directors since January 2015. Previously, Mr. Myman served as co-founder and Chief Executive Officer of
Wally World Media, Inc., (OTC:WLYW). He also has served as the Chief Executive Officer and a member of PeopleString’s board of
directors since PeopleString’s inception. Mr. Myman developed extensive Internet skills through a variety of positions. He has
executive management and founder experience having served as a co-founder and Chief Executive Officer of BigString Corporation, a publicly
traded company, since October 2005. He also has corporate governance and board experience having served as a member of BigString’s
board of directors since BigString’s inception. Prior to BigString, Mr. Myman was a co-founder and Chief Executive Officer of LiveInsurance.com,
the first online insurance broker that pioneered the electronic storefront for large national insurance agencies. Prior to co-founding
LiveInsurance.com, he served as a Vice President of the online brokerage services unit of Westminster Securities Corporation. We believe
that Mr. Myman is qualified to serve as a member of our board of directors because of his background in business and experience in senior
leadership and as a board member of public companies.
Peter Shelus - Chief Technology Officer
and Director
Peter Shelus is a co-founder of DatChat and has
served as our Chief Technology Officer since January 2016 and a member of our board of directors since December 2022. Mr. Shelus has
over 10 years of ephemeral messaging and mobile video development experience. Mr. Shelus has been at the forefront of the secure messaging
industry, having served as a lead engineer for one of the first ephemeral messaging platforms, “BigString,” where he helped
develop the patented technology that became a cornerstone of self-destructing messaging. Mr. Shelus holds Bachelor of Science degree
in computer science from Rutgers University. We believe that Mr. Shelus is qualified to serve as a member of our board of directors because
of his experience in the secure messaging industry and background in technology engineering and development.
Brett Blumberg – Chief Financial
Officer
Brett Blumberg has served as our Chief Financial
Officer since February 2022. Mr. Blumberg has extensive experience in finance and accounting. He is a certified public accountant and
has been a partner of the public accounting firm Jubran, Shorr & Company since 2015. Mr. Blumberg was a senior accountant at
CohnReznick, LLP from 2013 to 2014. Prior to obtaining his CPA license Mr. Blumberg was a private banker at Wells Fargo and owned and
operated a Mortgage Brokerage/Banking Company, Canyon Financial Group, LLC from 2006 to 2012. He previously worked in recruitment and
talent acquisition for accounting and finance firms from 2000 to 2006. Mr. Blumberg holds a Bachelor of Art degree in economics and psychology
from SUNY Binghamton University.
Wayne D. Linsley – Director
Wayne D. Linsley has served as a member of the
board of directors since August 2021. Mr. Linsley has over 40 years of experience in business management. Since April 2020, Mr. Linsley
has served as a member of the board of directors of Hoth Therapeutics, Inc. (NASDAQ: HOTH), a clinical-stage biopharmaceutical company
and since January 2020, he has served as a member of the board of directors of Silo Pharma, Inc. (NASDAQ: SILO) a biopharmaceutical company
focused on merging traditional therapeutics with psychedelic research. From 2014 to September 2021, Mr. Linsley served as the Vice President
of Operations at CFO Oncall, Inc., a company that provides financial reporting and controller services on an outsourced basis and previously,
from 2012 to 2014, Mr. Linsley worked at CFO Oncall, Inc. as an independent contractor. Mr. Linsley holds Bachelor of Science degree
in Business Administration from Siena College.
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Joseph Nelson – Director
Joseph Nelson has served as a member of our board
of directors since August 2021. Since April 2022, Mr. Nelson has served as Chief Financial Officer of Delta Corp Holdings Limited, a
global, asset-light, fully integrated company engaged in transportation/logistic services, asset management and servicing the maritime
industry supply chain. From December 2017 to March 2022, Mr. Nelson served as the Head of Investor Relations for GasLog Ltd., and GasLog
Partners LP, a leading international owner, operator and manager of liquefied natural gas carriers providing support to many of
the world’s largest energy companies. From November 2014 to November 2017, Mr. Nelson served as an Equity Research Analyst at Credit
Suisse. Mr. Nelson holds a Master of Business Administration degree from New York University’s Stern School of Business; a Bachelor
of Science degree in chemistry and a Bachelor of Art degree in philosophy from the Stevens Institute of Technology. We believe that
Mr. Nelson is qualified to serve as a member of our board of directors because of his experience in investor relations and background
in business and finance.
Carly Luogameno – Director
Carly Luogameno has served as a member of our
board of directors since August 2021. Since May 2011, Mrs. Luogameno has worked as a digital consultant at ShmeeLive. From May 2018 to
June 2020, Mrs. Luogameno served as a digital director for Lust For Life, LLC, a subsidiary of Renewable Energy & Power, Inc. (OTCQB:
RBNW). From August 2013 to September 2015, Mrs. Luogameno served as the Marketing Director for Jerrick Media,(OTC: JMDA, now Creatd,
OTC:VOCL). Mrs. Luogameno has in-depth experience in ecommerce and digital industries with specializations in digital marketing campaign
development, content marketing strategy, SEO and paid media management. Her digital marketing background is rooted in inbound marketing
strategies and her approach focuses on listening to user needs and communicating to them via high quality content in order to attract
return visitors and engagements. Mrs. Luogameno specializes in working with start-up companies, across the technology, healthcare and
fashion industries. Mrs. Luogameno holds Bachelor of Art degree in arts, entertainment & media management from Columbia College Chicago.
Family Relationships
There are no family relationships among any of
our executive officers and directors.
Arrangements between Officers and Directors
Except as set forth herein, to our knowledge,
there is no arrangement or understanding between any of our officers or directors and any other person pursuant to which the officer
or director was selected to serve as an officer or director.
Involvement in Certain Legal Proceedings
We are not aware of any of our directors or officers
being involved in any legal proceedings in the past ten years relating to any matters in bankruptcy, insolvency, criminal proceedings
(other than traffic and other minor offenses), or being subject to any of the items set forth under Item 401(f) of Regulation S-K.
Committees of Our Board of Directors
Our board of directors directs the management
of our business and affairs, as provided by Nevada law, and conducts its business through meetings of the board of directors and its
standing committees. We will have a standing audit committee, compensation committee and nominating and corporate governance committee.
In addition, from time to time, special committees may be established under the direction of the board of directors when necessary to
address specific issues.
Audit Committee. The audit committee is
appointed by the board to assist the board in its duty to oversee the Company’s accounting, financial reporting and internal control
functions and the audit of the Company’s financial statements. The role of the audit committee is to oversee management in the
performance of its responsibility for the integrity of the Company’s accounting and financial reporting and its systems of internal
controls, the performance and qualifications of the Company’s independent auditor, including the independent auditor’s independence,
the performance of the Company’s internal audit function; and the Company’s compliance with legal and regulatory requirements.
36
Our audit committee consists of Wayne D. Linsley,
Carly Luogameno and Joseph Nelson, with Mr. Linsley serving as chair. Our board of directors has affirmatively determined that each meet
the definition of “independent director” under the rules of The Nasdaq Capital Market, and that they meet the independence
standards under Rule 10A-3. Each member of our audit committee meets the financial literacy requirements of Nasdaq rules. In addition,
our board of directors has determined that Wayne D. Linsley qualifies as an “audit committee financial expert,” as such term
is defined in Item 407(d)(5) of Regulation S-K. Our board of directors adopted a written charter for the audit committee, which
is available on our principal corporate website at www.datchat.com.
Compensation Committee. The compensation
committee is responsible for reviewing and recommending, among other things:
● the adequacy and form of compensation of the board;
Our compensation committee will consists of Wayne
D. Linsley, Carly Luogameno and Joseph Nelson, with Mr. Linsley serving as chair. Our board of directors has adopted a written charter
for the compensation committee, which is available on our principal corporate website at www.datchat.com.
Nominating and Corporate Governance Committee. We
do not have a designated nominating and corporate governance committee. Our independent directors, acting as a group, are responsible
for:
Our nominating and corporate governance committee
is responsible for, among other things:
● developing criteria for membership on the board of directors and committees;
● identifying individuals qualified to become members of the board of directors;
● annually reviewing our corporate governance guidelines; and
Our nominating and corporate governance committee
consists of Wayne D. Linsley, Carly Luogameno and Joseph Nelson, with Mr. Linsley serving as chair. Our board of directors has adopted
a written charter for the nominating and corporate governance committee, which is available on our principal corporate website at www.datchat.com.
Insider Trading Policy
We have adopted an insider trading policy governing the purchase, sale
and/or any other disposition of the Company’s securities and material non-public information that is reasonable designed to promote
compliance with insider trading laws, rules, regulations and applicable Nasdaq standards. Our insider trading policy applies to the Company’s
directors, officers, employees of the Company and any other persons, such as consultants, contractors, temporary staff, family members,
and controlled entities who have access to material nonpublic information or are designated by the Company as subject to such policy.
A copy of the Company’s insider trading policy is filed as Exhibit 19.1 to this Annual Report on Form 10-K.
Code of Business and Ethics Conduct
We have adopted a written code of business conduct
and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar functions. A copy of the code posted on our website, www.datchat.com.
In addition, we intend to post on our website all disclosures that are required by law or rules concerning any amendments to, or waivers
from, any provision of the code.
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Anti-hedging
We do not currently have a policy prohibiting
employees, officers, or directors from engaging in transactions that hedge or offset, or are designed to hedge or offset, any decrease
in the market value of the Company’s equity securities.
Changes in Nominating Procedures
None.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth for the year ended
December 31, 2024 and 2023, the compensation awarded to, paid to, or earned by, our Chief Executive Officer and two other most highly
compensated executive officers, whose total compensation during such years exceeded $100,000. We refer to these officers as our “named
executive officers.”
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Outstanding Equity
Awards at December 31, 2024
The following table provides information regarding
option awards held by each of our named executive officers that were outstanding as of December 31, 2024.
STOCK AWARDS Equity Incentive Plan Equity Incentive Plan Awards:
Non-Employee Director Compensation
The following table presents the total compensation
for each person who served as a non-employee member of our Board of Directors and received compensation for such service during
the fiscal year ended December 31, 2024. Other than as set forth in the table and described more fully below, we did not pay any
compensation, make any equity awards or non-equity awards to, or pay any other compensation to any of the non-employee members
of our Board of Directors in 2024.
39
Equity Award Grant Timing
We do not have a written policy in place regarding
the timing of the grant and issuance of stock options in relation to the release of material non-public information. Historically, we
have granted stock option awards on an annual basis and as may otherwise be deemed appropriate by our Board or compensation committee
from time to time based on the facts and circumstances, as applicable. We have not intentionally timed the grant of stock options in anticipation
of the release of material nonpublic information, nor have we intentionally timed the release of material nonpublic information based
on stock option grant dates. During fiscal year 2024, we did not grant stock options (or similar awards) to any of our named executive
officers during the period beginning four business days before and ending one business day after the filing of any Company periodic report
on Form 10-Q or Form 10-K, or the filing or furnishing of any Company Form 8-K that disclosed any material non-public information.
Employment Agreements
On August 27, 2021, we entered into an agreement
(the “Employment Agreement”) with Darin Myman effective as of August 15, 2021 pursuant to which Mr. Myman’s (i) base
salary will increase to $450,000 per year, and (ii) Mr. Myman shall be entitled to receive an annual bonus in an amount up to $350,000,
which annual bonus may be increased by the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”),
in its sole discretion, upon the achievement of additional criteria established by the Compensation Committee from time to time (the
“Annual Bonus”). The term of the Employment Agreement will continue for a period of one year from the effective date and
automatically renews for successive one year periods at the end of each term until either party delivers written notice of their intent
not to review at least six (6) months prior to the expiration of the applicable term. In addition, pursuant to the Employment Agreement,
upon termination of Mr. Myman’s employment for death or Total Disability (as defined in the Employment Agreement), in addition
to any accrued but unpaid compensation and vacation pay through the date of his termination and any other benefits accrued to him under
any Benefit Plans (as defined in the Employment Agreement) outstanding at such time and the reimbursement of documented, unreimbursed
expenses incurred prior to such termination date (collectively, the “Payments”), Mr. Myman shall be entitled to the following
severance benefits: (i) 24 months of his then base salary; (ii) if Mr. Myman elects continuation coverage for group health coverage pursuant
to COBRA Rights (as defined in the Employment Agreement), then for a period of 24 months following Mr. Myman’s termination he will
be obligated to pay only the portion of the full COBRA Rights cost of the coverage equal to an active employee’s share of premiums
(if any) for coverage for the respective plan year; and (iii) payment on a pro-rated basis of any Annual Bonus or other payments earned
in connection with any bonus plan to which Mr. Myman was a participant as of the date of his termination (together with the Payments,
the “Severance”). Furthermore, pursuant to the Employment Agreement, upon Mr. Myman’s termination (i) at his option
(A) upon 90 days prior written notice to the Company or (B) for Good Reason (as defined in the Employment Agreement), (ii) termination
by the Company without Cause (as defined in the Employment Agreement) or (iii) termination of Mr. Myman’s employment within 40
days of the consummation of a Change in Control Transaction (as defined in the Employment Agreement), Mr. Myman shall receive the Severance;
provided, however, Mr. Myman shall be entitled to a pro-rated Annual Bonus of at least $200,000. In addition, any equity grants issued
to Mr. Myman shall immediately vest upon termination of Mr. Myman’s employment by him for Good Reason or by the Company at its
option upon 90 days prior written notice to Mr. Myman, without Cause.
Brett Blumberg Employment Agreement
On February 15, 2022, we entered into an employment
agreement with Brett Blumberg effective as of February 15, 2022 pursuant to which Mr. Blumberg will serve as Chief Financial Officer