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 and 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 communication software company. We believe
that one’s right to privacy should not end the moment they click “send.” Our flagship product, DatChat Messenger &
Private Social Network (the “Application”), is a mobile application that gives users the ability to communicate with privacy
and protection.
The Application allows users to exercise control
over their messages, even after they are sent. Through the 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.
The Application integrates with iMessage, making
private messages potentially available to hundreds of millions of users.
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Recent Events
On July 28, 2021, the Company filed a certificate
of change to the Company’s amended and restated certificate of incorporation, with the Secretary of State of the State of Nevada
to effectuate a one-for-two (1:2) reverse stock split of the Company’s common stock. Proportional adjustments for the Reverse Stock
Split were made to the Company’s outstanding stock options, warrants and equity incentive plans. All share and per-share data and
amounts have been retroactively adjusted as of the earliest period presented in the consolidated financial statements to reflect the
Reverse Stock Split.
On August 17, 2021, the Company completed its
initial public offering (“IPO”), in which we issued 3,325,301 shares of our common stock and Series A warrants (the “Series
A Warrants”) to purchase up to 3,325,301 shares of our common stock for gross proceeds of approximately $13,800,000 before deducting
underwriting discounts, commissions, and other offering expenses, including legal expenses related to the Offering of approximately $1,718,000
which are offset against the proceeds in additional paid in capital resulting in net proceeds to the Company of approximately $12.1 million.
Additionally, between August 27, 2021 and October 5, 2021, the Company received aggregate gross proceeds of $14,356,272 from the exercise
of 2,882,785 Series A Warrants, resulting in an aggregate issuance of 2,882,785 shares of common stock.
Basis of Presentation
The financial statements contained herein have
been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”)
and the requirements of the Securities and Exchange Commission.
Critical Accounting Policies and Significant
Judgments and Estimates
This management’s discussion and analysis
of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S.
GAAP. The preparation of these 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 financial statements, and the reported amounts
of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and
on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates if conditions
differ from our assumptions. While our significant accounting policies are more fully described in Note 1 in the “Notes to Financial
Statements”, we believe the following accounting policies are critical to the process of making significant judgments and estimates
in preparation of our financial statements.
Use of estimates
The preparation of the financial statements in
conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements
and during the reporting period. Actual results could materially differ from these estimates. Significant estimates include the valuation
of deferred tax assets, and the value of stock-based compensation expenses.
Revenue recognition
The Company recognizes revenue in accordance
with ASC Topic 606 Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer
of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for
those goods or services. The Company recognize revenues from subscription fees on the Company’s messaging application in the month
they are earned. Annual and lifetime subscription payments received that are related to future periods are recorded as deferred revenue
to be recognized as revenues over the contract term or period. Lifetime subscriptions are being recognized to revenues over a 12-month
period.
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Stock-based compensation
Stock-based compensation is accounted for based
on the requirements of the Share-Based Payment Topic of ASC 718, “Compensation — Stock Compensation” (“ASC 718”),
which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange
for an award of equity instruments over the period the employee, non-employee or director is required to perform the services in exchange
for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee, non-employee, and director
services received in exchange for an award based on the grant-date fair value of the award.
Leases
The Company applied ASC Topic 842, Leases (Topic
842) to arrangements with lease terms of 12 months or more. Operating lease right of use assets (“ROU”) represents the right
to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum
lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental
borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense
for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses
in the statements of operations.
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.
Recently Issued Accounting Pronouncements
Refer to the notes to the audited financial statements.
Results of Operations
Revenue
During the years ended December 31, 2021 and
2020, we generated minimal revenues from operations. For the year ended December 31, 2021, revenues consisted of subscription revenues
of $4,445, as compared to $0 for the year ended December 31, 2020.
Compensation and related expenses
Compensation and related expenses for the years
ended December 31, 2021 and 2020, were $2,963,294 and $494,002, respectively, an increase of $2,469,292 or 500%, and relates to salaries,
health insurance and other benefits of our four officers and nine full time employees. The increase in compensation is primarily related
to increase salaries and bonuses of our CEO, the hiring of three executive officers and additional employees, and stock-based compensation
related to option grants during the third quarter of fiscal 2021.
Marketing and advertising expenses
Marketing and advertising expenses for the years
ended December 31, 2021 and 2020, were $5,090,763 and $220,881, respectively, an increase of $4,869,882 or 2,205%, primarily due to increase
in promotions, branding and digital marketing strategy and social media ads.
Professional and consulting expenses
During the years ended December 31, 2021 and
2020, we reported professional and consulting fees of $2,100,317 and $263,245, respectively, an increase of $1,837,072 or 698%, which
are principally comprised of the following items:
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General and administrative expenses
General and administrative expenses for the years
ended December 31, 2021 and 2020, were $688,621 and $106,303, an increase of $582,318 or 548%. General and administrative expenses primarily
consisted of the following expense categories: insurance, travel, utilities, office related expenses, public company expenses, and rent
expense. Such increase was primarily attributable to increase in insurance, travel, office expenses, rent, and public company expenses
primarily related to our Nasdaq listing.
Other Income (Expense)
During the years ended December 31, 2021 and
2020, we reported other income of $9,516 and $104,961, respectively. During the year ended December 31, 2021, other income primarily
consisted of interest income of $3,516, offset by interest expense of $127 and gain from forgiveness of debt of $6,127. During the year
ended December 31, 2020, other income primarily consisted of gain on extinguishment of a convertible note totaling $143,353, and other
income of $7,000 from grant received from the SBA under the SBA’s Economic Injury Disaster Loan assistance program in light of
the impact of the COVID-19 pandemic in 2020.
Net Loss
For the foregoing reasons, our net loss for the
years ended December 31, 2021 and 2020 was $10,829,034 and $979,470, respectively.
Liquidity, Capital Resources and Plan of Operations
As of December 31, 2021, we had cash totaling
approximately $20,199,735.
We were incorporated on December 4, 2014 and
have generated minimal revenues to date. For the year ended December 31, 2021, we had a net loss of $10,829,034. In addition, we used
cash in operations of $8,454,504 for the year ended December 31, 2021. We have an accumulated deficit of $27,590,546 at December 31,
2021 and have generated minimal revenues since inception. During the year ended, the Company has received net proceeds of approximately
$13.7 million from the sale of its securities in connection with an initial public offering and gross proceeds of approximately $14.4
million from the exercise of the Company’s Series A warrants. These events served to mitigate the conditions that historically
raised substantial doubt about the Company’s ability to continue as a going concern.
Net cash used in operating activities totaled
approximately $8,454,504 and $1,095,577 for the years ended December 31, 2021 and 2020, respectively. Net loss for the years ended December
31, 2021 and 2020 totaled approximately $10,829,034 and $979,470, respectively. For the year ended December 31, 2021, net loss was adjusted
for stock-based compensation of $2,303,377, amortization expense of $43,221, depreciation of $2,319, offset by gain from forgiveness
of debt of $6,127 and operating changes were a net increase of $31,740 primarily due to increase in prepaid expenses of $351,713 and
accounts payable and accrued expenses of $397,502. During the year ended December 31, 2020, net loss was adjusted for stock-based compensation
expense of $20,000 and amortization expense of $23,948, offset by gain from extinguishment of debt of $143,353. Total accounts payable
and accrued expenses increased by $26,506, prepaid expenses increased by $19,260 and operating lease liabilities decreased by $23,948
during the year ended December 31, 2020.
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Net cash used investing activities was $56,039
for the year ended December 31, 2021 as compared to $0 for the year ended December 31, 2020. Net used in investing activities for the
year ended December 31, 2021 consisted of purchases of property and equipment.
Net cash provided by financing activities totaled
approximately $28,019,855 and $1,715,226 for the years ended December 31, 2021 and 2020, respectively. During the year ended December
31, 2021, financing activities was primarily attributable to net proceeds of approximately $13,671,074 from the sale of common stock,
$14,356,272 from the exercise of Series A warrants and $177,624 of advances from a related party, offset by $177,615 repayment of related
party advances and $7,500 repayment of related-party notes. During the year ended December 31, 2020, financing activities was primarily
attributable to net proceeds of $1,881,675 from the sale of common stock and $265,623 of advances from a related party and proceeds from
notes payable of $6,042, offset by $279,114 repayment of related party advances, $150,000 repayment of convertible notes payable and
$9,000 repayment of related-party notes.
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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Our financial statements are contained in pages F-1 through F-15,
which appear at the end of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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, 2021, the end of the period covered by this Annual Report on Form 10-K,
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.
Management’s Report on Internal Control
Over Financial Reporting
We are required to maintain “disclosure
controls and procedures,” as that term is defined in Rule 13a-15(e) and 15d-15(e), promulgated by the SEC pursuant to the Exchange
Act. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed
in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive
officer and principal financial officer, to allow timely decisions regarding required 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. Our management, with the participation of our
principal executive officer and principal financial officer, evaluated our disclosure controls and procedures as of the end of the period
covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer
concluded that as of December 31, 2021, our disclosure controls and procedures were not effective because of a material weakness in our
internal controls over financial reporting. The ineffectiveness of our disclosure controls and procedures were not effective because
of the material weaknesses set forth below.
The ineffectiveness of our disclosure controls
and procedures was due to the following material weaknesses:
● We have not implemented adequate system and manual controls.
While we used the services of third-party accountant
who is a certified public 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 control procedures. In addition, while we have independent directors, we do not have an audit committee, resulting in ineffective
oversight in the establishment and monitoring of required internal controls and procedures. These factors represent material weaknesses
in our internal controls 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.
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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. Management’s
report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the exemption
provided to issuers that are not “large accelerated filers” nor “accelerated filers” under the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
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
None.
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 57 Chief Executive Officer and Director
Peter Shelus 38 Chief Technology Officer and Director
Brett Blumberg 43 Chief Financial Officer
Gabriel Daniels 38 Chief Information Officer
Wayne Linsley 64 Director
Joseph Nelson 37 Director
Carly Schumer 32 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 as a director of the Company since January 2016. Prior to DatChat, Mr. Myman was a co-founder and Chief Executive Officer of Wally
World Media, Inc., a public company. 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.
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Peter Shelus - Chief Technology Officer
and Director Nominee
Peter Shelus is a co-founder of DatChat and has
served as our Chief Technology Officer since January 2016. 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 received a bachelor’s degree in computer science from Rutgers University, where he graduated
with honors.
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 has a B.A. in economics and psychology from SUNY
Binghamton.
Gabriel Daniels – Chief Information
Officer
Gabriel Daniels has been our Chief Information
Officer since March 2021. Since May 2019, Mr. Daniels has served as the Co-Founder, President & CEO of NGD Cybersecurity and Customer
Service Consultants LLC, a Minority-Woman Owned and Veteran Owned Business providing high-level technical, cyber commissioning, customer
service and project management consulting services for companies within the DHS 16 critical infrastructure. From April 2018 to April
2019, Mr. Daniels served as the Cybersecurity Program Manager at Chinook Systems, an engineering firm. From June 2017 to April 2018,
Mr. Daniels worked as a Senior Information Assurance Manager at Navstar Inc., an Information Technology & Services firm. In
addition, since December of 2017, Mr. Daniels has worked as an adjunct professor at Northern Virginia (NoVA) Community College and Lord
Fairfax Community College, where he teaches classes such as introduction to telecommunications, cyberlaw, network attacks, computer crime
and hacking, and computer applications and concepts. Mr. Daniels is a 15-year U.S. Army and Navy veteran. While serving in the Army,
Mr. Daniels aided in the development of the Army’s Strategic Cybersecurity and Cyber’s Incident Handling Response Plans.
Mr. Daniels holds a master’s degree in cybersecurity and a bachelor’s degree in marketing from the University of Maryland
University College.
Wayne D. Linsley – Director
Wayne D. Linsley, one of our independent directors
had, since 2014 to 2021, served as the Vice President of Operations of CFO Oncall, Inc., and from 2011 to 2014 he served as the Director
of Operations of CFO Oncall, Inc., a company that provides financial management and CFO services. Prior to CFO Oncall, Inc., Mr. Linsley
served as the Managing Member of Flagship Advisory & Management Group, LLC, a management consulting firm, from 2010 to 2011. In addition,
since 2019, Mr. Linsley has served as the Chief Executive Officer and sole owner of Executive Outsource Group, Inc., a company that provides
financial reporting services. Mr. Linsley has served in various other capacities including Alternate Channels Manager of Mettel; Director
of Channel Sales of Impsat, USA; National Accounts Manager of Venali, Inc; and Director of Sales of Broadview Networks. Since January
2020, Mr. Linsley has served as a member of the board of directors of Silo Pharma, Inc. (OTCQB: SILO). In addition, since April 2020,
Mr. Linsley has served as a member of the board of directors of Hoth Therapeutics, Inc. (Nasdaq: HOTH). Mr. Linsley received his bachelor
of business administration degree in accounting/business administration from Siena College.
Joseph Nelson – Director
Joseph Nelson, one of our independent directors
has, since December 2017, 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.
Prior to joining GasLog in 2017, Mr. Nelson was an Equity Research Analyst, most recently at Credit Suisse from November 2014 to November
2017, where he covered US listed equities in the oil services and marine transportation sectors. From November 2013 to November 2014,
Mr. Nelson worked as an Equity Research Analyst at Maxim Group, where he covered industrials. Mr. Nelson began his career as a consultant
for the Louis Berger Group (now WSP), a global provider of infrastructure and development solutions, where he worked from 2006 to 2013,
specializing in data analysis. Mr. Nelson has a bachelor of science degree in Chemistry and a bachelor of arts degree in Philosophy from
the Stevens Institute of Technology and an MBA from New York University’s Stern School of Business.
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Carly Schumer – Director
Carly Schumer, one of our independent directors,
since May 2011, worked as a freelance digital consultant. From May 2018 to June 2020, Ms. Schumer served as a digital director for Lust
For Life, LLC, a subsidiary of Renewable Energy & Power, Inc. (OTCQB: RBNW). Ms. Schumer 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. Ms. Schumer specializes in working with start-up
companies, across the technology, healthcare and fashion industries. She is passionate about innovation and newly emerging marketing
trends with a keen eye toward insights and process. She worked as the Marketing Director for Jerrick Media (now Creatd Nasdaq: CRTD)
from inception to its eventual public offering where she was responsible for managing SEO, social and marketing employees and strategies.
Ms. Schumer received a bachelor’s degree in Arts, Entertainment & Media Management from Columbia College.
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.
Our audit committee consists of Wayne D. Linsley,
Carly Schumer 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.
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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 Schumer 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 Schumer 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.
Code of Business Code 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.
Changes in Nominating Procedures
None.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table
sets forth for the year ended December 31, 2021, 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.”.
2) Other compensation was made up of health insurance expenses.
Outstanding Equity Awards at December
31, 2021
The following table provides information regarding
option awards held by each of our named executive officers that were outstanding as of December 31, 2021. There were no stock awards
or other equity awards outstanding as of December 31, 2021.
Balance at December 31, 2020 — $ — —
Weighted average fair value of options granted during the period $ 5.89
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Director Compensation
To date, we have not compensated our directors
for their service to the Company.
Employment Agreements
On August 27, 2021, DatChat, Inc. (the “Company”)
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”). 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.
2021 Equity Incentive Plan
The following is a summary of the material features
of our 2021 Equity Incentive Plan (the “2021 Plan”). This summary is qualified in its entirety by the full text of the 2021
Plan.
Authorized Shares. A total of 2,000,000
shares of our common stock were originally reserved for issuance pursuant to the 2021 Plan. Our board of directors and stockholders adopted
and approved the 2021 Plan on July 26, 2021 (the “Effective Date”).
Types of Awards. The
2021 Plan provides for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights (“SARs”),
restricted stock, restricted stock units (“RSUs”), and other stock-based awards. Items described above in the Section
called “Shares Available” are incorporated herein by reference.
Administration. The
2021 Plan will be administered by our board of directors, or if our board of directors does not administer the 2021 Plan, a committee
or subcommittee of our board of directors that complies with the applicable requirements of Section 16 of the Exchange Act and any other
applicable legal or stock exchange listing requirements (each of our board of directors or such committee or subcommittee, the “plan
administrator”). The plan administrator may interpret the 2021 Plan and may prescribe, amend and rescind rules and make all other
determinations necessary or desirable for the administration of the 2021 Plan, provided that, subject to the equitable adjustment provisions
described below, the plan administrator will not have the authority to reprice or cancel and re-grant any award at a lower exercise,
base or purchase price or cancel any award with an exercise, base or purchase price in exchange for cash, property or other awards without
first obtaining the approval of our stockholders.
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The 2021 Plan permits the plan administrator
to select the eligible recipients who will receive awards, to determine the terms and conditions of those awards, including but not limited
to the exercise price or other purchase price of an award, the number of shares of common stock or cash or other property subject to
an award, the term of an award and the vesting schedule applicable to an award, and to amend the terms and conditions of outstanding
awards.
Restricted Stock and Restricted Stock Units. Restricted
stock and RSUs may be granted under the 2021 Plan. The plan administrator will determine the purchase price, vesting schedule and performance
goals, if any, and any other conditions that apply to a grant of restricted stock and RSUs. If the restrictions, performance goals or
other conditions determined by the plan administrator are not satisfied, the restricted stock and RSUs will be forfeited. Subject to
the provisions of the 2021 Plan and the applicable award agreement, the plan administrator has the sole discretion to provide for the
lapse of restrictions in instalments.
Unless the applicable award agreement provides
otherwise, participants with restricted stock will generally have all of the rights of a stockholder; provided that dividends will only
be paid if and when the underlying restricted stock vests. RSUs will not be entitled to dividends prior to vesting but may be entitled
to receive dividend equivalents if the award agreement provides for them. The rights of participants granted restricted stock or RSUs
upon the termination of employment or service to us will be set forth in the award agreement.
Options. Incentive
stock options and non-statutory stock options may be granted under the 2021 Plan. An “incentive stock option” means
an option intended to qualify for tax treatment applicable to incentive stock options under Section 422 of the Internal Revenue Code.
A “non-statutory stock option” is an option that is not subject to statutory requirements and limitations required for
certain tax advantages that are allowed under specific provisions of the Internal Revenue Code. A non-statutory stock option under
the 2021 Plan is referred to for federal income tax purposes as a “non-qualified” stock option. Each option granted under
the Plan will be designated as a non-qualified stock option or an incentive stock option. At the discretion of the administrator,
incentive stock options may be granted only to our employees, employees of our “parent corporation” (as such term is defined
in Section 424(e) of the Code) or employees of our subsidiaries.
The exercise period of an option may not exceed
ten years from the date of grant and the exercise price may not be less than 100% of the fair market value of a share of common stock
on the date the option is granted (110% of fair market value in the case of incentive stock options granted to ten percent stockholders).
The exercise price for shares of common stock subject to an option may be paid in cash, or as determined by the administrator in its
sole discretion, (i) through any cashless exercise procedure approved by the administrator (including the withholding of shares of common
stock otherwise issuable upon exercise), (ii) by tendering unrestricted shares of common stock owned by the participant, (iii) with any
other form of consideration approved by the administrator and permitted by applicable law or (iv) by any combination of these methods.
The option holder will have no rights to dividends or distributions or other rights of a stockholder with respect to the shares of Common
Stock subject to an option until the option holder has given written notice of exercise and paid the exercise price and applicable withholding
taxes.
In the event of a participant’s termination
of employment or service, the participant may exercise his or her option (to the extent vested as of such date of termination) for such
period of time as specified in his or her option agreement.
Stock Appreciation Rights. SARs
may be granted either alone (a “free-standing SAR”) or in conjunction with all or part of any option granted under the
2021 Plan (a “tandem SAR”). A free-standing SAR will entitle its holder to receive, at the time of exercise, an amount
per share up to the excess of the fair market value (at the date of exercise) of a share of common stock over the base price of the free-standing SAR
(which shall be no less than 100% of the fair market value of the related shares of common stock on the date of grant) multiplied by
the number of shares in respect of which the SAR is being exercised. A tandem SAR will entitle its holder to receive, at the time of
exercise of the SAR and surrender of the applicable portion of the related option, an amount per share up to the excess of the fair market
value (at the date of exercise) of a share of common stock over the exercise price of the related option multiplied by the number of
shares in respect of which the SAR is being exercised. The exercise period of a free-standing SAR may not exceed ten years from
the date of grant. The exercise period of a tandem SAR will also expire upon the expiration of its related option.
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The holder of a SAR will have no rights to dividends
or any other rights of a stockholder with respect to the shares of Common Stock subject to the SAR until the holder has given written
notice of exercise and paid the exercise price and applicable withholding taxes.
In the event of an participant’s termination
of employment or service, the holder of a SAR may exercise his or her SAR (to the extent vested as of such date of termination) for such
period of time as specified in his or her SAR agreement.
Other Stock-Based Awards. The
administrator may grant other stock-based awards under the 2021 Plan, valued in whole or in part by reference to, or otherwise based
on, shares of common stock. The administrator will determine the terms and conditions of these awards, including the number of shares
of common stock to be granted pursuant to each award, the manner in which the award will be settled, and the conditions to the vesting
and payment of the award (including the achievement of performance goals). The rights of participants granted other stock-based awards
upon the termination of employment or service to us will be set forth in the applicable award agreement. In the event that a bonus is
granted in the form of shares of common stock, the shares of common stock constituting such bonus shall, as determined by the administrator,
be evidenced in uncertificated form or by a book entry record or a certificate issued in the name of the participant to whom such grant
was made and delivered to such participant as soon as practicable after the date on which such bonus is payable. Any dividend or dividend
equivalent award issued hereunder shall be subject to the same restrictions, conditions and risks of forfeiture as apply to the underlying
award.
Equitable Adjustment and Treatment of Outstanding Awards Upon
a Change in Control
Equitable Adjustments. In
the event of a merger, consolidation, reclassification, recapitalization, spin-off, spin-out, repurchase, reorganization, special or
extraordinary dividend or other extraordinary distribution (whether in the form of common shares, cash or other property), combination,
exchange of shares, or other change in corporate structure affecting our common stock, an equitable substitution or proportionate adjustment
shall be made in (i) the aggregate number and kind of securities reserved for issuance under the 2021 Plan, (ii) the kind and number
of securities subject to, and the exercise price of, any outstanding options and SARs granted under the 2021 Plan, (iii) the kind, number
and purchase price of shares of common stock, or the amount of cash or amount or type of property, subject to outstanding restricted
stock, RSUs and other stock-based awards granted under the 2021 Plan and (iv) the terms and conditions of any outstanding awards
(including any applicable performance targets). Equitable substitutions or adjustments other than those listed above may also be made
as determined by the plan administrator. In addition, the plan administrator may terminate all outstanding awards for the payment of
cash or in-kind consideration having an aggregate fair market value equal to the excess of the fair market value of the shares of
common stock, cash or other property covered by such awards over the aggregate exercise price, if any, of such awards, but if the exercise
price of any outstanding award is equal to or greater than the fair market value of the shares of common stock, cash or other property
covered by such award, the plan administrator may cancel the award without the payment of any consideration to the participant. With
respect to awards subject to foreign laws, adjustments will be made in compliance with applicable requirements. Except to the extent
determined by the plan administrator, adjustments to incentive stock options will be made only to the extent not constituting a “modification”
within the meaning of Section 424(h)(3) of the Code.
Change in Control. The
2021 Plan provides that, unless otherwise determined by the plan administrator and evidenced in an award agreement, if a “change
in control” (as defined below) occurs and a participant is employed by us or any of our affiliates immediately prior to the consummation
of the change in control, then the plan administrator, in its sole and absolute discretion, may (i) provide that any unvested or unexercisable
portion of an award carrying a right to exercise will become fully vested and exercisable; and (ii) cause the restrictions, deferral
limitations, payment conditions and forfeiture conditions applicable to any award granted under the 2021 Plan to lapse, and the awards
will be deemed fully vested and any performance conditions imposed with respect to such awards will be deemed to be fully achieved at
target performance levels. The administrator shall have discretion in connection with such change in control to provide that all outstanding
and unexercised options and SARs shall expire upon the consummation of such change in control.
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For purposes of the 2021 Plan, a “change
in control” means, in summary, the first to occur of the following events: (i) a person or entity becomes the beneficial owner
of more than 50% of our voting power; (ii) an unapproved change in the majority membership of our board of directors; (iii) a merger
or consolidation of us or any of our subsidiaries, other than (A) a merger or consolidation that results in our voting securities continuing
to represent 50% or more of the combined voting power of the surviving entity or its parent and our board of directors immediately prior
to the merger or consolidation continuing to represent at least a majority of the board of directors of the surviving entity or its parent
or (B) a merger or consolidation effected to implement a recapitalization in which no person is or becomes the beneficial owner of our
voting securities representing more than 50% of our combined voting power; or (iv) stockholder approval of a plan of our complete liquidation
or dissolution or the consummation of an agreement for the sale or disposition of substantially all of our assets, other than (A) a sale
or disposition to an entity, more than 50% of the combined voting power of which is owned by our stockholders in substantially the same
proportions as their ownership of us immediately prior to such sale or (B) a sale or disposition to an entity controlled by our board
of directors. However, a change in control will not be deemed to have occurred as a result of any transaction or series of integrated
transactions following which our stockholders, immediately prior thereto, hold immediately afterward the same proportionate equity interests
in the entity that owns all or substantially all of our assets.
Tax Withholding
Each participant will be required to make arrangements
satisfactory to the plan administrator regarding payment of up to the maximum statutory tax rates in the participant’s applicable
jurisdiction with respect to any award granted under the 2021 Plan, as determined by us. We have the right, to the extent permitted by
applicable law, to deduct any such taxes from any payment of any kind otherwise due to the participant. With the approval of the plan
administrator, the participant may satisfy the foregoing requirement by either electing to have us withhold from delivery of shares of
common stock, cash or other property, as applicable, or by delivering already owned unrestricted shares of common stock, in each case,
having a value not exceeding the applicable taxes to be withheld and applied to the tax obligations. We may also use any other method
of obtaining the necessary payment or proceeds, as permitted by applicable law, to satisfy our withholding obligation with respect to
any award.
Amendment and Termination of the 2021 Plan
The 2021 Plan provides our board of directors
with authority to amend, alter or terminate the 2021 Plan, but no such action impair the rights of any participant with respect to outstanding
awards without the participant’s consent. The plan administrator may amend an award, prospectively or retroactively, but no such
amendment may materially impair the rights of any participant without the participant’s consent. Stockholder approval of any such
action will be obtained if required to comply with applicable law. The 2021 Plan will terminate on the tenth anniversary of the Effective
Date (although awards granted before that time will remain outstanding in accordance with their terms).
Clawback. If we
are required to prepare a financial restatement due to the material non-compliance with any financial reporting requirement, then
the plan administrator may require any Section 16 officer to repay or forfeit to us that part of the cash or equity incentive compensation
received by that Section 16 officer during the preceding three years that the plan administrator determines was in excess of the amount
that such Section 16 officer would have received had such cash or equity incentive compensation been calculated based on the financial
results reported in the restated financial statement. The plan administrator may take into account any factors it deems reasonable in
determining whether to seek recoupment of previously paid cash or equity incentive compensation and how much of such compensation to
recoup from each Section 16 officer (which need not be the same amount or proportion for each Section 16 officer). The amount and form
of the incentive compensation to be recouped shall be determined by the administrator in its sole and absolute discretion
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information
regarding beneficial ownership of shares of our common stock as of March 21, 2022 by (i) each person known to beneficially own more than
5% of our outstanding common stock, (ii) each of our directors, (iii) each of our named executive officers and (iv) all of our directors
and named executive officers as a group. Except as otherwise indicated, the persons named in the table below have sole voting and investment
power with respect to all shares beneficially owned, subject to community property laws, where applicable.
Name Shares Percentage
Brett Blumberg — —
Gabriel Daniels — —
Wayne D. Linsley — —
Joseph Nelson 2,500 —
Carly Schumer — —
* Represents beneficial ownership of less than 1%.
Securities Authorized for Issuance Under
Equity Compensation Plans
The following table
summarizes information about our equity compensation plans as of December 31, 2021.
Equity compensation plans not approved by security holder — —
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The following includes a summary of transactions
during our fiscal years ended December 31, 2021 and December 31, 2020 to which we have been a party, including transactions in which
the amount involved in the transaction exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last
two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than
5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material
interest, other than equity and other compensation, termination, change in control and other arrangements, which are described elsewhere