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 blockchain, cybersecurity, and social
media company that not only focuses on protecting privacy on personal devices, but also protects user information after it is shared
with others. We believe that one’s right to privacy should not end the moment they click “send” , and that we all deserve
the same right to privacy online that we enjoy in our own living rooms. Our flagship product, DatChat Messenger & Private Social
Network, is a privacy platform and mobile application that gives users the ability to communicate with the privacy and protection they
deserve. Recently. we have expanded our business and product offerings to include the co-development of a mobile-based social metaverse,
known as “The Habytat”, as well as the development of VenVūū, an advertising and non-fungible token (“NFT”)
monetization platform.
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.
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In addition to the foregoing, the application
also provides users with the ability to connect via an encrypted live video chat that also is designed to prevent screenshots or screen
grabs.
The application integrates with iMessage, making
private messages potentially available to hundreds of millions of users.
The Habytat
In June 2022, we formed
a wholly owned subsidiary, SmarterVerse, Inc. (“SmarterVerse”). In July 2022, SmarterVerse entered into a development agreement
with MetaBizz, LLC, an infrastructure firm that creates and develops 4D experiences in the metaverse (“MetaBizz”).
In November 2022, we
launched The Habytat, a virtual space that blends real world and virtual realities into one, in real time, using emerging technology like
virtual and augmented reality, to create a highly immersive 3D environment.
In January 2023, we launched
Geniuz City, the first world within The Habytat. Geniuz City is intended to be a near photo-realistic world that is based on the city
of Miami and its surrounding areas. Geniuz City has been designed in a manner that can enable users to participate in a number of different
activities, such as parties, business conferences, shopping, socializing, and game play.
Currently, once users
download The Habytat application, we plan to grant each user rights to use a designated piece of virtual property in Geniuz City through
the minting and issuance of a unique NFT . NFTs (or non-fungible tokens) are digital assets that can represent a unique real-world asset,
such as art, music, in-game items, videos, or a piece of real estate or virtual property. Users will initially be able to choose the
style of house they want, then start customizing it to represent their personal style and taste. Users will then be able to accumulate
reward points when they visit and interact with such virtual property or invite others to join The Habytat, and such rewards can be used
to enhance, expand, and improve the virtual property.
In addition, we plan to offer users the ability
to have their own pets in the Habytat, which they will need to care for and can train to follow basic obedience commands. Finally, as
described below, we plan to integrate our VenVūū, platform and VenVūū, dynamic NFTs (collectively, VenVūū,”)
into The Habytat, and that such integration will enable us and users to generate advertising-based revenues in The Habytat.
VenVūū
We are currently developing VenVūū,
an advertising and NFT monetization platform. VenVūū is based upon a proprietary metaverse ad network and dynamic NFT technology
which we believe will allow advertisers and landowners to connect in the metaverse. Management believes that metaverse advertising parallels
reality,.and that VenVūū can be considered as a parallel to billboards in the real world or “Google Ads” within
the internet. Through the integration of VenVūū, which advertises in a way similar to a billboard or video screen, we plan
to enable users of The Habytat opportunities to monetize their virtual property rights by directly displaying approved advertisements
on their virtual property. While we currently plan to launch VenVuu in the Habytat, it may also by interoperable within other metaverses
in the future We believe that these features can potentially provide brands with the ability to run campaigns that target the land parcels
they want to reach, simultaneously across multiple metaverses.
Recent Events
On January 10, 2023, we announced that our Board
of Directors has authorized a Stock Repurchase Plan under which the Company may repurchase up to $2,000,000 of the Company’s outstanding
common stock, par value $0.0001 per share. Additionally, the Board has approved EF Hutton to be engaged as the broker to implement the
Repurchase Plan.
As of March 29, 2023, the Company reported that
it has purchased $480,025 shares of common stock at an average price of $0.648 per share.
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Risks and Uncertainties
In February 2022, the Russian Federation and
Belarus commenced a military action with the country of Ukraine. As a result of this action, various nations, including the United States,
have instituted economic sanctions against the Russian Federation and Belarus. Further, the impact of this action and related sanctions
on the world economy is not determinable as of the date of these condensed consolidated financial statements, and the specific impact
on the Company’s financial condition, results of operations, and cash flows is also not determinable as of the date of these financial
statements.
On August 16, 2022, the Inflation Reduction Act
of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise
tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly
traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself,
not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the
shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are
permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same
taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the Treasury (the “Treasury”)
has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.
Management continues to evaluate the impact of
the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect
on the Company’s financial position and results of its operations, the specific impact is not readily determinable as of the date
of these financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis of Presentation
The financial statements contained herein have
been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”)
and the requirements of the Securities and Exchange Commission.
Critical Accounting Policies and Significant
Judgments and Estimates
This management’s discussion and analysis
of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S.
GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements,
and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical
experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these
estimates if conditions differ from our assumptions. While our significant accounting policies are more fully described in Note 1 in the
“Notes to Financial Statements”, we believe the following accounting policies are critical to the process of making significant
judgments and estimates in preparation of our consolidated financial statements.
Use of estimates
The preparation of the financial statements in
conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the 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.
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Short-term investments
The Company considers investments with original
maturities greater than three months and remaining maturities less than one year to be short-term investments. Short-term investments
include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturities between four and twelve
months. Short-term investments are carried at fair value, which is based on quoted market prices for such securities, if available, or
is estimated on the basis of quoted market prices of financial instruments with similar characteristics. For the year ended December 31,
2022, net unrealized gain on short-term investments of $47,672 and realized gain on short-term investments of $28,176 are reported in
other income (expenses) on the consolidated statements of operations.
Accounting for digital currencies and other
digital assets
The Company purchases Ethereum cryptocurrency
(“Ethereum”) and other digital assets and accepts Ethereum as a form of payment for non-fungible tokens sales (NFTs). The
Company accounts for these digital assets held as the result of the purchase or receipt of Ethereum and other digital assets, as indefinite-lived
intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). The Company has ownership
of and control over its digital currencies and digital assets and the Company may use third-party custodial services to secure them. The
digital currencies and digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred
since acquisition. The Company believes that digital currencies and other digital assets meet the definition of indefinite-lived intangible
assets and accounts for them at historical cost less impairment, applying the guidance in ASC 350. The Company monitors any standard-setting,
regulatory or technological developments that may affect the Company’s accounting for digital currencies or its controls and processes
related to digital currencies. Digital currencies are included in long-term assets in the consolidated balance sheet.
The Company determines the fair value of its digital
currencies and other digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices
on the active exchange(s) that it has determined is the principal market for Ethereum (Level 1 inputs) and other digital assets. The Company
performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on
active exchanges, indicate that it is more likely than not that its digital assets are impaired. In determining if an impairment has occurred,
the Company considers the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then current
carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the
amount equal to the difference between their carrying values and the fair value. The impaired digital assets are written down to their
fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains
are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets
held. In determining the gain or loss to be recognized upon sale, the Company calculates the difference between the sales price and carrying
value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within operating
expenses in the consolidated statements of operations. During the year ended December 31, 2022, the Company recorded an impairment loss
of $119,276.
Capitalized software costs
Costs incurred to develop internal-use software including Metaverse
software development, are expensed as incurred during the preliminary project stage. Internal-use software development costs are capitalized
during the application development stage, which is after: (i) the preliminary project stage is completed; and (ii) management authorizes
and commits to funding the project and it is probable the project will be completed and used to perform the function intended. Capitalization
ceases at the point the software project is substantially complete and ready for its intended use, and after all substantial testing is
completed. Upgrades and enhancements are capitalized if it is probable that those expenditures will result in additional functionality.
Amortization is provided for on a straight-line basis over the expected useful life of the internal-use software development costs and
related upgrades and enhancements. When existing software is replaced with new software, the unamortized costs of the old software are
expensed when the new software is ready for its intended use. Software development costs incurred during the year ended December 31, 2022
were expensed since the Metaverse software development project is in the preliminary project stage. Such costs are included in research
and development costs on the accompanying consolidated statement of operations.
Revenue recognition
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 recognizes 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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The Company’s NFT revenues were generated
from the sale of NFTs. The Company accepts Ethereum as a form of payment for NFT sales. The Company’s NFTs exist on the Ethereum
Blockchain under the Company’s VenVuu brand. VenVuu is an iMetaverse advertising platform that allows advertisers and metaverse
landowners to connect using the Company’s proprietary metaverse ad network and dynamic NFT technology. The Company uses the NFT
exchange, OpenSea, to facilitate its sales of NFTs. The Company, through OpenSea, has custody and control of the NFT prior to the delivery
to the customer and records revenue at a point in time when the NFT is delivered to the customer and the customer pays. The Company has
no obligations for returns, refunds or warranty after the NFT sale. The value of the sale is determined based on the value of the Ethereum
crypto currency received as consideration. Each NFT that is generated produces a unique identifying code.
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.
Research and Development
Research and development costs incurred in the
development of the Company’s products are expensed as incurred and includes costs such as outside development costs and other allocated
costs incurred. For the year ended December 31, 2022, research and development costs incurred in the development of the Company’s
software products with a related party were $514,957 and are included in research and development expense – related party on the
accompanying consolidated statements of operations.
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.
Recently Issued Accounting Pronouncements
Refer to the notes to the audited financial statements.
Results of Operations
Revenue
During the years ended December 31, 2022 and 2021, we generated revenues
of $46,214 and $4,445, respectively. For the year ended December 31, 2022, revenues consisted of subscription revenues of $9,820 and revenues
from the sale of NFT’s of $36,394, as compared to $4,445 of revenues from subscriptions for the year ended December 31, 2021. We
do not expect to generate any revenues from the sale of NFT’s in the near future.
Compensation and related expenses
Compensation and related expenses for the years ended December 31,
2022 and 2021, were $6,551,776 and $2,963,294, respectively, an increase of $3,588,482 or 121.1%.Compensation and related expenses include
salaries, stock-based compensation, health insurance and other benefits. The increase in compensation and related expenses is primarily
related to increase in the number of full-time employees, and an increase in stock-based compensation. Stock-based compensation expense
amounted to $3,173,401 and $1,090,027 for the years ended December 31, 2022 and 2021, respectively, and was attributable to the accretion
of stock option expense.
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Marketing and advertising expenses
Marketing and advertising expenses for the years
ended December 31, 2022 and 2021, were $828,736 and $5,090,763, respectively, a decrease of $4,262,027 or 83.7%, primarily due to a decrease
in promotions, branding and digital marketing strategy and social media ads.
Professional and consulting expenses
During the years ended December 31, 2022 and 2021,
we reported professional and consulting fees of $2,285,312 and $2,181,317, respectively, an increase of $103,995 or 4.8%, which are principally
comprised of the following items:
Research and development costs
During the year ended December 31, 2022, we incurred
$514,957 in research and development costs with a related party in connection with the development of our Metaverse software development
project which is in the preliminary stage. We did not incur any research and development costs in the 2021 period.
General and administrative expenses
General and administrative expenses for the years
ended December 31, 2022 and 2021, were $991,882 and $607,621, an increase of $384,261 or 63.2%, primarily attributable to an increase
in insurance expense of $73,743, an increase in computer and internet expense of $23,579, an increase in travel expenses of $97,029, an
increase in conference fees of $42,078, and an increase in rent expense of $16,644. General and administrative expenses primarily consisted
of the following expense categories: insurance, travel, utilities, office related expenses and rent expense.
Impairment loss on intangible assets
During the year ended December 31, 2022, we concluded
that the undiscounted cash flows did not support the carrying values of its intangible assets as of December 31, 2022. We determined the
value of the patents acquired were fully impaired as of December 31, 2022 and recognized an impairment loss on its long-lived intangible
assets of $981,000.
Impairment loss on digital currencies and
other digital assets
During the year ended December 31, 2022, operating
expenses included an impairment charge related to the write down of digital currencies and other digital assets of $119,276. We did not
incur any impairment charges in the 2021 period.
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Loss from Operations
For the year ended December 31, 2022, loss from
operation amounted to $12,226,725 as compared to $10,838,550 for the year ended December 31, 2021, an increase of $1,388,175, or 12.8%.
Other Income (Expense)
During the years ended December 31, 2022 and 2021, we reported other
income of $88,153 and $9,516, respectively. Other income (expense) consisted of interest income, interest expense and unrealized gains
or losses on short-term investments. During the year ended December 31, 2022, other income primarily consisted of interest income of $12,305,
a realized gain on short-term investments of $28,176, and an unrealized gain on short-term investments of $47,672. 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.
Net Loss
For the foregoing reasons, our net loss for the
years ended December 31, 2022 and 2021 was $12,138,572, or ($0.60) per common share (basic and diluted) and $10,829,034, or ($0.71) per
common share (basic and diluted), respectively, an increase of $1,309,538, or 12.1%.
Liquidity, Capital Resources and Plan of Operations
As of December 31, 2022, we had cash totaling
approximately $1,732,956.
We were incorporated on December 4, 2014 and have
generated minimal revenues to date. For the year ended December 31, 2022, we had a net loss of $12,138,572. In addition, we used cash
in operations of $7,258,765 for the year ended December 31, 2022. We have an accumulated deficit of $39,729,118 at December 31, 2022 and
have generated minimal revenues since inception. During the year ended December 31, 2022, the Company has received no net proceeds from
the sale of its securities and no gross proceeds from the exercise of the Company’s Series A warrants. As of December 31, 2022,
we had cash and cash equivalents of $1,732,956. Additionally, on December 31, 2022, we had short-term investments of $11,007,997. Short-term
investments include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturities between four
and twelve months. These events served to mitigate the conditions that historically raised substantial doubt about the Company’s
ability to continue as a going concern.
Our primary uses of cash have been for compensation
and related expenses, fees paid to third parties for professional services, marketing and advertising expenses, and general and administrative
expenses. All funds received have been expended in the furtherance of growing the business. We received funds from the sale of our common
stock and 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.
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.
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Net cash used in operating activities totaled
approximately $7,258,765 and $8,454,504 for the years ended December 31, 2022 and 2021, respectively. Net loss for the years ended December
31, 2022 and 2021 totaled approximately $12,138,572 and $10,829,034, respectively. For the year ended December 31, 2022, net loss was
adjusted for stock-based compensation of $3,173,401, stock-based professional fees of $347,733, amortization expense of $49,783, depreciation
of $127,501, impairment loss of intangible assets of $981,000, and impairment loss on digital currencies and other digital assets of $119,276,
offset by realized and unrealized gains on short-term investments of $75,848, and non-cash revenues from the sale of NFT’s of $36,394,
and operating changes were a net increase of $179,616, primarily due to a decrease in prepaid expenses of $242,221 and accounts payable
and accrued expenses of $61.
Cash Flows from Investing Activities
Net cash used in investing activities amounted
to $11,209,126 and $56,039 for the years ended December 31, 2022, and 2021, respectively. During the year ended December 31, 2022, we
purchased property and equipment of $44,475, purchased digital currencies and other digital assets of $233,245, and we purchased short-term
investments of $20,842,149 and received gross proceeds from the sale of short-term investments of $9,910,000. During the year ended December
31, 2021, we purchased property and equipment of $56,039.
Cash Flows from Financing Activities
Net cash (used in) provided by financing activities
totaled approximately $(203) and $27,643,282 for the nine months ended September 30, 2022, and 2021, respectively. During the nine months
ended September 30, 2022, we repaid related party advances of $203. During the nine months ended September 30, 2021, financing activities
was primarily attributable to net proceeds of approximately $13,671,074 from the sale of common stock, $13,979,370 from the exercise of
Series A warrants and $161,567 of advances from a related party, offset by the repayment of related party advances of $161,229 and the
repayment of related-party notes of $7,500.
Net cash provided by financing activities totaled
approximately $1,112 and $28,019,855 for the years ended December 31, 2022 and 2021, respectively. During the year ended December 31,
2022, financing activities was primarily attributable to proceeds from related party advances of $20,294 offset by the repayment of related
party advances of $19,182. 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.
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 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, 2022, 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.
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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, 2022, 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.
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 Chairman
Peter Shelus 38 Chief Technology Officer and Director
Brett Blumberg 43 Chief Financial Officer
Gabriel Daniels 38 Chief Information Officer
Gianfranco Lopane 37 Head of Business Development
Wayne Linsley 66 Director
Joseph Nelson 39 Director
Carly Schumer 34 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.
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Gabriel Daniels – Chief Information
Officer
Gabriel Daniels has served as 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 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.
Gianfranco Lopane – Head of Business
Development
Gianfranco Lopane has served as our Head of Business
Development since February 2022 and President of our wholly-owned subsidiary, SmarterVerse, since July 2022. Since August 2018, Mr. Lopane
has served as the founder of Generiqo, a NFT, metaverse, and blockchain consulting company. From June 2020 to May 2021, Mr. Lopane served
as a senior account executive at XPO Logistics, Inc. From April 2017 to January 2020, Mr. Lopane served as a co-founder of Real World
Ads, an advertising network company for the metaverse. Mr. Lopane holds a Master’s degree in commerce and marketing from EUDE Business
School in Madrid, Spain.
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. We believe that Mr. Linsley is qualified to serve as a member of our board of directors
because of his experience as a director of public companies and background in financial reporting.
Joseph Nelson – Director
Joseph Nelson has served as a member of our board
of directors since August 2021. Since December 2017, Mr. Nelson has 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. From November 2013 to November 2014, Mr. Nelson worked as an Equity Research Analyst at Maxim Group. 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.
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Carly Schumer – Director
Carly Schumer has served as a member of our board
of directors since August 2021. Since May 2011, Ms. Schumer has worked as a digital consultant at ShmeeLive. 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. Ms.
Schumer holds Bachelor of Art degree in arts, entertainment & media management from Columbia College Chicago. We believe that
Ms. Schumer is qualified to serve as a member of our board of directors because of her experience and background in digital marketing
for e-commerce and public companies.
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.
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.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth for the year ended
December 31, 2022, 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.”
Chief Financial Officer
2) Other compensation was made up of health insurance expenses.
Outstanding Equity
Awards at December 31, 2022
The following table provides information regarding
option awards held by each of our named executive officers that were outstanding as of December 31, 2022. There were no stock awards
or other equity awards outstanding as of December 31, 2022.
OUTSTANDING EQUITY AWARDS AT 2022 FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS
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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, 2022. 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 2022.
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.
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Brett Blumberg Employment Agreement
On February 15, 2022, the Company entered into
an employment agreement (the “Blumberg Employment Agreement”) with Brett Blumberg effective as of February 15, 2022 pursuant