Myseum.AI, Inc. 10-K

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 lack segregation of duties within accounting functions duties as a result of our limited financial resources to support hiring of personnel. ● The lack of multiples levels of management review on complex business, accounting and financial reporting issues. ● We have not implemented adequate system and manual controls. 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. 26 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. 27 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. 28 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. 29 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 . 30 Compensation Committee . The compensation committee is responsible for reviewing and recommending, among other things: ● the adequacy and form of compensation of the board; ● the compensation of Chief Executive Officer, including base salary, incentive bonus, stock option and other grant, award and benefits upon hiring and on an annual basis; ● the compensation of other senior management upon hiring and on an annual basis; and ● the Company’s incentive compensation and other equity-based plans and recommending changes to such plans to our board of directors, when necessary. 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; ● recommending persons to be nominated for election as directors and to each committee of the board of directors; ● annually reviewing our corporate governance guidelines; and ● monitoring and evaluating the performance of the board of directors and leading the board in an annual self-assessment of its practices and effectiveness. 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. 31 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 $100,000. We refer to these officers as our “named executive officers.”. Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) 1 Non-Equity Incentive Plan Compensation ($) Nonqualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) Darin Myman 2021 $ 422,250 $ 350,000 $ 0 $ 2,796,850 $ 0 $ 0 $ 31,623 $ 3,600,723 Chief Executive Officer 2020 $ 165,026 $ 0 $ 0 $ 0 $ 0 $ 0 $ 24,632 $ 189,658 Peter Shelus 2021 $ 165,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 36,750 $ 201,750 Chief Technology Officer 2020 $ 126,447 $ 0 $ 0 $ 0 $ 0 $ 0 $ 30,727 $ 156,719 1) On September 28, 2021, we granted 250,000 stock options to our CEO. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $35 per share. The options vest 25% every six months from date of grant for two years. 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. Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Balance at December 31, 2020 — $ — — Granted 1,194,200 $ 14.28 4.58 Cancelled (140,000 ) 11.38 4.75 Balance at December 31, 2021 1,054,200 $ 14.66 4.64 Options exercisable at end of period 10,000 $ 6.25 0.65 Options expected to vest 1,044,200 $ 14.74 Weighted average fair value of options granted during the period $ 5.89 32 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. 33 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. 34 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. 35 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 36 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 Directors, Director Nominees, Named Executive Officers and Named Executive Officer Nominees Darin Myman 1,750,275 10.78 % Peter Shelus 1,000,000 6.16 % Brett Blumberg — — Gabriel Daniels — — Wayne D. Linsley — — Joseph Nelson 2,500 — Carly Schumer — — All Director, Director Nominees, Named Executive Officers and Named Executive Officer Nominees as a group (7 persons) 2,756,650 16.98 % * Represents beneficial ownership of less than 1%. (1) The address of each holder listed below, except as otherwise indicated, is 204 Nielsen Street, New Brunswick, New Jersey 08901. (2) The calculation in this column is based upon 19,597,419 shares of common stock outstanding on March 21, 2022. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to the subject securities. Shares of common stock that are currently exercisable or convertible within 60 days of March 21, 2022 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage beneficial ownership of such person, but are not treated as outstanding for the purpose of computing the percentage beneficial ownership of any other person. Securities Authorized for Issuance Under Equity Compensation Plans The following table summarizes information about our equity compensation plans as of December 31, 2021. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Equity compensation plans approved by security holder 736,341 $ 4.59 1,263,659 Equity compensation plans not approved by security holder — — Total 736,341 $ 4.59 1,263,659 37 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 in this Annual Report on Form 10-K. We are not otherwise a party to a current related party transaction, and no transaction is currently proposed, in which the amount of 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 a related person had or will have a direct or indirect material interest. Transactions with Related Persons Except as described below and except for employment arrangements which are described under “executive compensation,” since January 1, 2019, there has not been, nor is there currently proposed, any transaction in which we are or were a participant, the amount involved exceeds the lesser of $120,000 or 1% of the average of the total assets at December 31, 2021 and 2020, and any of our directors, executive officers, holders of more than 5% of our common stock or any immediate family member of any of the foregoing had or will have a direct or indirect material interest. Our Chief Executive Officer, Mr. Darin Myman, from time to time, provides advances to the Company for working capital purposes. At December 31, 2021 and 2020, the Company had a payable to the officer of $203 and $194, respectively, which is presented as due to related party on the balance sheets. These advances are short-term in nature and non-interest bearing. During the years ended December 31, 2021 and 2020, respectively, Mr. Myman provided advances to the Company for working capital purposes totaling of $177,624 and $265,623 and the Company repaid $177,615 and $279,114 of these advances, respectively. On May 29, 2015, we entered into a promissory note agreement, providing for the issuance of a note in the principal amount of $30,000 to Silo Pharma, Inc. The note was due on July 29, 2015. The annual interest rate for the loan is 10%. We defaulted to repay the note when it was due. On February 25, 2016, we entered into an extension agreement with the lender to extend the maturity date of the note to December 31, 2016. In accordance with the extension agreement, the lender and us agreed to increase the amount of the principal amount of the note by $5,000 as penalty for our failure to repay the note on July 29, 2015. In connection with the increase in principal amount of $5,000, we recorded non-cash interest expense of $5,000 on February 25, 2016. On October 25, 2017, we agreed to pay an additional $5,000 as penalty fee for the extension of maturity date to June 30, 2018. Between October 2018 and November 2018, we paid a total principal amount of $10,000. Between March 2019 and December 2019, we paid a total principal amount of $13,500. During the year ended December 31, 2020, we paid a total principal amount of $9,000. As of December 31, 2020 and 2019, the principal balance of this note was $7,500 and $16,500, respectively. This note is currently in default. We fully paid the principal amount of $7,500 in February 2021. As of December 31, 2021 and 2020, accrued interest related to the note payable – related party above amounted to $16,364 and $16,282, respectively, and is included in accounts payable and accrued expenses on the accompanying balance sheets. Related Persons Transaction Policy We have adopted a formal policy regarding approval of transactions with related parties. For purposes of our policy only, a related person transaction is a transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we and any related person are, were or will be participants in which the amount involved exceeds the lesser of $120,000 or one percent of our total assets at year-end for our last two completed fiscal years. Transactions involving compensation for services provided to us as an employee or director are not covered by this policy. A related person is any executive officer, director or beneficial owner of more than 5% of any class of our voting securities, including any of their immediate family members and any entity owned or controlled by such persons. 38 Under the policy, if a transaction has been identified as a related person transaction, including any transaction that was not a related person transaction when originally consummated or any transaction that was not initially identified as a related person transaction prior to consummation, our management must present information regarding the related person transaction to our audit committee, or, if audit committee approval would be inappropriate, to another independent body of our board of directors, for review, consideration and approval or ratification. The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of the related persons, the benefits to us of the transaction and whether the transaction is on terms that are comparable to the terms available to or from, as the case may be, an unrelated third party or to or from employees generally. Under the policy, we will collect information that we deem reasonably necessary from each director, executive officer and, to the extent feasible, significant shareholder to enable us to identify any existing or potential related-person transactions and to effectuate the terms of the policy. In addition, under our code of business conduct and ethics, our employees and directors will have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest. In considering related person transactions, our audit committee, or other independent body of our board of directors, will take into account the relevant available facts and circumstances including, but not limited to: ● the risks, costs and benefits to us; ● the impact on a director’s independence in the event that the related person is a director, immediate family member of a director or an entity with which a director is affiliated; ● the availability of other sources for comparable services or products; and ● the terms available to or from, as the case may be, unrelated third parties or to or from employees generally. The policy requires that, in determining whether to approve, ratify or reject a related person transaction, our audit committee, or other independent body of our board of directors, must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, our best interests and those of our shareholders, as our audit committee, or other independent body of our board of directors, determines in the good faith exercise of its discretion. Director Independence The Nasdaq Stock Market LLC (“Nasdaq”) requires that a majority of our board of directors must be composed of “independent directors,” which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company’s board of directors would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. The board has determined that Wayne D. Linsley, Carly Schumer and Joseph Nelson are “independent”. Our board currently consists of three independent directors and two non-independent directors. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth the aggregate fees billed by D. Brooks and Associates CPAs, P.A. as described below: 2021 2020 Audit Fees $ 62,000 $ 24,700 Audit Related Fees $ – $ – Tax Fees $ – $ – All Other Fees $ – $ – Total $ 62,000 $ 24,700 (1) Audit Fees are paid for professional services rendered for the audit of the Company’s annual consolidated financial statements and reviews of the Company’s unaudited condensed consolidated financial statements. Pre-Approval Policies and Procedures Our Board of Directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by our Board of Directors before the respective services were rendered. Our Board of Directors has considered the nature and amount of fees billed by our independent registered public accounting firm and believe that the provision of services for activities unrelated to the audit is compatible with maintaining their respective independence. 39 PART IV ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: (1) Financial Statements: Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 The consolidated financial statements required by this Item are included beginning at page F-1. (1) Financial Statement Schedules: All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the consolidated financial statements or the notes thereto. (b) Exhibits The following documents are included as exhibits to this report. Exhibit Number Title of Document 3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 filed on July 2, 2021) 3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company’s Form S-1/A filed on August 9, 2021) 3.3 Certificate of Designation of Series A Preferred Stock (Incorporated by reference to Exhibit 3.3 to the Company’s Form S-1/A filed on August 9, 2021) 3.4 Certificate of Amendment to Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.4 to the Company’s Form S-1/A filed on August 9, 2021) 3.5 Certificate of Change to Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.5 to the Company’s Form S-1/A filed on August 9 2021) 4.1 Form of Series A Warrant Agent Agreement including Form of Series A Warrant (Incorporated by reference to Exhibit 4.1 to the Company’s Form S-1/A filed on August 9, 2021) 4.2 Form of Representative’s Warrant (Incorporated by reference to Exhibit 4.2 to the Company’s Form S-1/A filed on August 9, 2021) 4.3 Form of Stock Certificate (Incorporated by reference to Exhibit 4.3 to the Company’s Form S-1/A filed on August 9, 2021) 10.1+ Employment Agreement between the Company and Brett Blumberg (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 16, 2022) 10.2 Media Partnership Plan by and between, Datchat, Inc. and Bartsool Sports (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 13, 2021) 40 10.3 Statement of Work by and between, Datchat, Inc. and IZEA Worldwide, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 24, 2021) 10.4 2021 Equity Incentive Plan and forms of award agreements thereunder (Incorporated by reference to Exhibit 10.2 to the Company’s Form S-1/A filed on August 9, 2021) 23.1* Consent of D. Brooks and Associates CPAs, P.A. 31.1* Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS* Inline XBRL Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 104* Cover Page Interactive Data File – the cover page of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2021 is formatted in Inline XBRL * Filed herewith. + Indicates a management contract or any compensatory plan, contract or arrangement. ITEM 16. FORM 10-K SUMMARY Not applicable. 41 SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 29th day of March, 2022. DATCHAT, INC. /s/ Darin Myman Darin Myman Chief Executive Officer and Director (Principal Executive Officer) /s/ Brett Blumberg Brett Blumberg Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Darin Myman Chief Executive Officer and Director March 29, 2022 (Principal Executive Officer) /s/ Brett Blumberg Chief Financial Officer March 29, 2022 Brett Blumberg (Principal Financial and Accounting Officer) /s/ Peter Shelus Chief Technology Officer and Director March 29, 2022 Peter Shelus /s/ Gabriel Daniels Chief Information Officer March 29, 2022 Gabriel Daniels /s/ Wayne D. Linsley Director March 29, 2022 Wayne D. Linsley /s/ Joseph Nelson Director March 29, 2022 Joseph Nelson /s/ Carly Schumer Director March 29, 2022 Carly Schumer 42 DATCHAT, INC. INDEX TO FINANCIAL STATEMENTS December 31, 2021 and 2020 CONTENTS Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 4048 ) F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of DatChat, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of DatChat, Inc. (the Company) as of December 31, 2021 and 2020, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years ended December 31, 2021 and 2020, and the related notes to the financial statements (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters. D. Brooks and Associates CPAs, P.A. We have served as the Company’s auditors since 2016. Palm Beach Gardens, Florida March 25, 2022 F- 2 DATCHAT, INC. BALANCE SHEETS December 31, 2021 2020 ASSETS CURRENT ASSETS: Cash $ 20,199,735 $ 690,423 Accounts receivable 278 - Prepaid expenses and other current assets 376,973 25,260 Total Current Assets 20,576,986 715,683 OTHER ASSETS: Property and equipment, net 53,720 - Operating lease right-of-use asset, net 184,309 28,632 Total Non-Current Assets 238,029 28,632 Total Assets $ 20,815,015 $ 744,315 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 517,039 $ 119,622 Note payable, current portion - 4,045 Note payable - related party - 7,500 Operating lease liability, current portion 53,897 28,632 Deferred revenues 8,850 - Due to related party 203 194 Total Current Liabilities 579,989 159,993 Long-term liabilities: Note payable, less current - 1,997 Operating lease liability, less current portion 151,012 - Total long-term liabilities: 151,012 1,997 Total Liabilities 731,001 161,990 Commitments and Contingencies - (Note 6) STOCKHOLDERS’ EQUITY: Preferred stock ($ 0.0001 par value; 20,000,000 shares authorized) Series A Preferred stock ($ 0.0001 Par Value; 1 Share Authorized; none issued and outstanding at December 31, 2021 and 2020) - - Common stock ($ 0.0001 par value; 180,000,000 shares authorized; 19,597,419 and 12,727,820 shares issued and outstanding at December 31, 2021 and 2020, respectively) 1,960 1,273 Common stock to be issued 1,389 and 52,782 shares, at December 31, 2021 and 2020, respectively) - 5 Additional paid-in capital 47,672,600 17,342,559 Accumulated deficit ( 27,590,546 ) ( 16,761,512 ) Total Stockholders’ Equity 20,084,014 582,325 Total Liabilities and Stockholders’ Equity $ 20,815,015 $ 744,315 See accompanying notes to financial statements. F- 3 DATCHAT, INC. STATEMENTS OF OPERATIONS For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 NET REVENUES $ 4,445 $ - OPERATING EXPENSES: Compensation and related expenses 2,963,294 494,002 Marketing and advertising expenses 5,090,763 220,881 Professional and consulting expenses 2,100,317 263,245 General and administrative expenses 688,621 106,303 Total operating expenses 10,842,995 1,084,431 OTHER INCOME (EXPENSE) Interest expense ( 127 ) ( 45,499 ) Gain from extinguishment of debt - 143,353 Gain from forgiveness of debt 6,127 - Other income - 7,000 Interest income 3,516 107 Total other income, net 9,516 104,961 NET LOSS $ ( 10,829,034 ) $ ( 979,470 ) NET LOSS PER COMMON SHARE: Basic and diluted $ ( 0.71 ) $ ( 0.07 ) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic and diluted 15,334,338 13,245,088 See accompanying notes to financial statements. F- 4 DATCHAT, INC. STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) For the Years Ended December 31, 2021 and 2020 Common Stock Additional Total Stockholders’ Preferred Stock Common Stock to be issued Paid-in Accumulated Equity Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit) Balance, December 31, 2019 - $ - 13,175,355 $ 1,318 125 $ - $ 15,440,844 $ ( 15,782,042 ) $ ( 339,880 ) Sale of common stock, net of offering costs - - 436,354 44 51,268 5 1,881,626 - 1,881,675 Common stock issued for services - - 5,000 - - - 20,000 - 20,000 Common stock issued for cashless exercise of stock warrants - - 111,111 11 1,389 - ( 11 ) - - Cancellation of repurchase common stock - - ( 1,000,000 ) ( 100 ) - - 100 - - Net loss for the year ended December 31, 2020 - - - - - - - ( 979,470 ) ( 979,470 ) Balance, December 31, 2020 - - 12,727,820 1,273 52,782 5 17,342,559 ( 16,761,512 ) 582,325 Sale of common stock, net of offering costs - - 3,730,525 373 - - 13,670,701 - 13,671,074 Common stock issued for common stock issuable - - 51,018 5 ( 51,393 ) ( 5 ) - - - Common stock issued for exercise of Series A warrants - - 2,882,785 288 - - 14,355,984 - 14,356,272 Common stock issued for services - - 205,000 21 - - 419,979 - 420,000 Stock based compensation in connection with stock option grants - - - - - - 1,533,377 - 1,533,377 Accretion of stock-based compensation for services - - - - - - 350,000 - 350,000 Fractional shares due to reverse split - - 21 - - - - - - Net loss for the year ended December 31, 2021 - - - - - - - ( 10,829,034 ) ( 10,829,034 ) Balance, December 31, 2021 - $ - 19,597,169 $ 1,960 1,389 $ - $ 47,672,600 $ ( 27,590,546 ) $ 20,084,014 See accompanying notes to the financial statements. F- 5 DATCHAT, INC. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) For the Year Ended December 31, 2021 For the Year Ended December 31, 2020 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 10,829,034 ) $ ( 979,470 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of ROU asset 43,221 23,948 Depreciation 2,319 - Gain from extinguishment of debt - ( 143,353 ) Gain from forgiveness of debt ( 6,127 ) - Stock-based compensation 2,303,377 20,000 Changes in operating assets and liabilities: Accounts receivable ( 278 ) - Prepaid expenses ( 351,713 ) ( 19,260 ) Accounts payable and accrued expenses 397,502 26,506 Deferred revenues 8,850 - Operating lease liability ( 22,621 ) ( 23,948 ) NET CASH USED IN OPERATING ACTIVITIES ( 8,454,504 ) ( 1,095,577 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 56,039 ) - NET CASH USED IN INVESTING ACTIVITIES ( 56,039 ) - CASH FLOWS FROM FINANCING ACTIVITIES: Advances from a related party 177,624 265,623 Payments on related party advances ( 177,615 ) ( 279,114 ) Repayment of notes payable - related party ( 7,500 ) ( 9,000 ) Proceeds from notes payable - 6,042 Repayment of convertible notes payable - ( 150,000 ) Proceeds from exercise of Series A warrants 14,356,272 - Net proceeds from sale of common stock and common stock to be issued, net of offering costs 13,671,074 1,881,675 NET CASH PROVIDED BY FINANCING ACTIVITIES 28,019,855 1,715,226 NET INCREASE IN CASH 19,509,312 619,649 CASH - beginning of year 690,423 70,774 CASH - end of year $ 20,199,735 $ 690,423 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ - $ 1,500 Income taxes $ - $ - NON-CASH INVESTING AND FINANCING ACTIVITIES: Advance deposit applied towards repayment of convertible note payable pursuant to the Securities Purchase Agreement $ - $ 100,000 Common stock issued for future services $ 50,000 $ - See accompanying notes to the financial statements. F- 6 DATCHAT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization DatChat, Inc. (the “Company”) was incorporated in the State of Nevada on December 4, 2014 under the name of YssUp, Inc. On March 4, 2015, the Company’s corporate name was changed to Dat Chat, Inc. In August 2016, the Board of Directors of the Company approved to change the name of the Company from Dat Chat, Inc. to DatChat, Inc. The Company established a fiscal year end of December 31. The Company’s principal business is focused on its mobile messaging application that provides a traditional messaging platform, while providing users with complete privacy and control features for their sent messages. The Company’s mobile messaging application is called DatChat Messenger. Once the Company achieves critical mass of users, the Company will offer new features and will charge fees and generate revenues from the added features. 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 (the “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 financial statements to reflect the Reverse Stock Split. Basis of presentation and liquidity As reflected in the accompanying financial statements, the Company has incurred a net loss of $ 10,829,034 and used cash in operations of $ 8,454,504 , for the year ended December 31, 2021. Additionally, the Company has an accumulated deficit of $ 27,590,546 at December 31, 2021 and has generated minimal revenues since inception. During the year ended December 31, 2021, 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 (see Note 5). As of December 31, 2021, the Company had working capital of $ 19,996,997 . These events served to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern. The Company believes the proceeds raised during the year ended December 31, 2021 will provide sufficient cash flows to meet its obligations for a minimum of twelve months from the date of this filing. 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. Reclassifications Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations and relates to the presentation of marketing and advertising expenses separately on the statements of operation previously included in general and administrative expenses. Cash and cash equivalents The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. There were no highly liquid debt instruments and other short-term investments as of December 31, 2021 and 2020. The Company maintains cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company’s account at this institution is insured by the FDIC up to $ 250,000 . At December 31, 2021 and 2020, the Company had cash in excess of FDIC limits of approximately $ 19.9 million and $ 440,000 , respectively. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits. Fair value measurements and fair value of financial instruments The carrying value of certain financial instruments, including cash, accounts payable and accrued expenses, deferred revenues, notes payable, notes payable – related party and due to related party are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. 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. This revenue is initially deferred and is recognized using the straight-line method over the term of the applicable subscription period. Revenue from lifetime subscriptions is deferred over the average estimated expected period of the subscriber relationship, which is currently estimated to be twelve months. As of December 31, 2021 and 2020, deferred revenues amounted to $ 8,850 and $ 0 , respectively. F- 7 DATCHAT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 Advertising Costs The Company applies ASC 720 “Other Expenses” to account for advertising related costs. Pursuant to ASC 720-35-25-1, the Company expenses the advertising costs as they are incurred. Advertising costs were $ 5,090,763 and $ 220,881 for the years ended December 31, 2021 and 2020, respectively, and are included in marketing and advertising expenses on the 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. Income taxes The Company accounts for income taxes pursuant to the provision of Accounting Standards Codification (“ASC”) 740-10, “Accounting for Income Taxes” (“ASC 740-10”), which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach require the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. The Company follows the provision of ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, there may be uncertainty about the merits of positions taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured at the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceed the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all more likely than not to be upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits. The Company has adopted ASC 740-10-25, “Definition of Settlement”, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion and examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they are filed. Stock-based compensation Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation–Stock Compensation ”, which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award. Basic and diluted net loss per share Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares during the period. Diluted net loss per share is computed using the weighted average number of common shares and potentially dilutive securities outstanding during the period. The following were excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact on the Company’s net loss. December 31, 2021 2020 Common stock equivalents: Common stock warrants 736,341 125,000 Common stock options 1,054,200 - Total 1,790,541 125,000 F- 8 DATCHAT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 Recent accounting pronouncements Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its financial statements. NOTE 2 – OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES In January 2019, the Company renewed and extended the term of its lease facility for another three-year period from January 2019 to December 2021 starting with a monthly base rent of $ 2,567 plus a pro rata share of operating expenses beginning January 2019. The base rent was subject to annual increases beginning the 2 nd and 3 rd lease year as defined in the lease agreement. In addition to the monthly base rent, the Company is charged separately for common area maintenance which is considered a non-lease component. These non-lease component payments are expensed as incurred and are not included in operating lease assets or liabilities. On August 27, 2021, the Company entered into an amendment agreement with the same landlord to modify the lease to relocate and increase the square footage of the lease premises whereby the lease term commenced on October 1, 2021 and will end on December 31, 2024 (see Note 6). On August 27, 2021, upon the execution of the amendment agreement, the Company recorded right-of-use assets and operating lease liabilities of $ 198,898 . The remaining lease term for the operating lease is 3 years and the incremental borrowing rate is 18.0 % (based on historical borrowing rates) at December 31, 2021. Right-of- use assets are summarized below: December 31, 2021 December 31, 2020 Office lease (36 months) $ 271,507 $ 72,609 Less accumulated amortization ( 87,198 ) ( 43,977 ) Right-of-use asset, net $ 184,309 $ 28,632 Operating Lease liabilities are summarized below: December 31, 2021 December 31, 2020 Office lease $ 271,507 $ 72,609 Reduction of lease liability ( 66,598 ) ( 43,977 ) Total lease liability 204,909 28,632 Less: current portion 53,897 28,632 Long term portion of lease liability $ 151,012 $ - Minimum lease payments under non-cancelable operating lease at December 31, 2021 are as follows: For the year ended: December 31, 2022 $ 86,520 December 31, 2023 89,193 December 31, 2024 92,100 Total $ 267,813 Less: present value discount ( 62,904 ) Total operating lease liability $ 204,909 NOTE 3 – RELATED PARTY TRANSACTIONS Due to Related Party The Company’s officer, Mr. Darin Myman, from time to time, provides advances to the Company for working capital purposes. At December 31, 2021 and 2020, the Company had a payable to the officer of $ 203 and $ 194 , respectively, which is presented as due to related party on the balance sheets. These advances are short-term in nature and non-interest bearing. During the years ended December 31, 2021 and 2020, respectively, Mr. Myman provided advances to the Company for working capital purposes totaling of $ 177,624 and $ 265,623 and the Company repaid $ 177,615 and $ 279,114 of these advances, respectively. F- 9 DATCHAT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 Notes Payable – Related Party On May 29, 2015, the Company entered into a promissory note agreement, providing for the issuance of a note in the principal amount of $ 30,000 to a principal stockholder of the Company. The note was due on July 29, 2015 . The annual interest rate for the loan is 10 %. The Company defaulted to repay the note when it was due. On February 25, 2016, the Company entered into an extension agreement with the lender to extend the maturity date of the note to December 31, 2016. In accordance with the extension agreement, the Company and the lender agree to increase the amount of the principal amount of the note by $5,000 as penalty for the Company’s failure to repay the note on July 29, 2015. In connection with the increase in principal amount of $5,000, the Company recorded non-cash interest expense of $5,000 on February 25, 2016. On October 25, 2017, the Company agreed to pay an additional $5,000 as penalty fee for the extension of maturity date to June 30, 2018. Between October 2018 and November 2018, the Company paid a total principal amount of $10,000. Between March 2019 and December 2019, the Company paid a total principal amount of $13,500. During the year ended December 31, 2020, the Company paid a total principal amount of $9,000. The Company fully paid the principal amount of $7,500 in February 2021. As of December 31, 2021 and 2020, the principal balance of this note was $ 0 and $ 7,500 , respectively. As of December 31, 2021 and 2020, accrued interest related to the note payable – related party above amounted to $ 16,364 and $ 16,282 , respectively, and is included in accounts payable and accrued expenses on the accompanying balance sheets. NOTE 4 – NOTES PAYABLE Notes payable to unrelated parties is summarized below: As of December 31, 2020 As of December 31, 2020 Principal amount $ - $ 6,042 Less: current portion - ( 4,045 ) Notes payable - long term portion $ - $ 1,997 Paycheck Protection Program Funding On May 4, 2020, the Company received federal funding in the amount of $ 6,042 through the Paycheck Protection Program (the “PPP”). PPP funds have certain restrictions on use of the funding proceeds, and generally must be repaid within two (2) years or May 2022 at 1 % interest. The PPP loan may, under circumstances, be forgiven. There shall be no payment due by the Company during the six months period beginning on the date of the note (“Deferral Period”). Commencing one month after the expiration of the Deferral Period, the Company shall pay the lender monthly payments of principal and interest, each in equal amount required to fully repay by the maturity date. If a payment on this note is more than ten days late, the lender shall charge a late fee of up to 5 % of the unpaid portion of the regularly scheduled payment. As of December 31, 2020, the principal balance of this note amounted to $ 6,042 and accrued interest of $ 40 . During the year ended December 31, 2021, the principal and accrued interest under the PPP loan was forgiven in full. Accordingly, the Company recorded the principal balance and accrued interest for a total of $ 6,127 to gain from forgiveness of debt during the year ended December 31, 2021. NOTE 5 – STOCKHOLDERS’ EQUITY Shares Authorized The authorized capital stock consists of 200,000,000 shares, of which 180,000,000 are shares of common stock and 20,000,000 are shares of preferred stock. Reverse Stock Split 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. 2021 Omnibus Equity Incentive Plan On July 26, 2021, the Company adopted the 2021 Omnibus Equity Incentive Plan, and authorized the reservation of 2,000,000 shares of common stock for future issuances under the plan. F- 10 DATCHAT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 Preferred Stock In August 2016, the Company designated 1 share of Series A Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”) and has a stated value equal to $1.00 as may be adjusted for any stock dividends, combinations or splits. Each one (1) share of the Series A Preferred Stock shall have voting rights equal to (x) the total issued and outstanding Common Stock eligible to vote at the time of the respective vote divided by (y) forty-nine one hundredths (0.49) minus (z) the total issued and outstanding Common Stock eligible to vote at the time of the respective vote . The Series A Preferred Stock does not convert into securities of the Company. The Series A Preferred Stock does not contain any redemption provision. In the event of liquidation of the Company, the holder of Series A Preferred shall not have any priority or preferences with respect to any distribution of any assets of the Company and shall be entitled to receive equally with the holders of the Company’s common stock. As of December 31, 2021 and 2020, there were no Series A Preferred Stock outstanding. Common Stock Sale of Common Stock During the year ended December 31, 2020, the Company sold 487,622 shares of its common stock at $ 4.00 per common share for gross proceeds of $ 1,950,486 and net proceeds of $ 1,881,675 after escrow fees related to private placement sale. In connection with these sales of common stock, the Company issued 436,354 shares of common stock and there were 51,268 shares of commons stock to be issued as of December 31, 2020 and were issued during the year ended December 31, 2021. During the year ended December 31, 2021, the Company sold an aggregate of 405,224 shares of its common stock at $ 4.00 per common share for gross proceeds of $ 1,620,896 and net proceeds of $ 1,589,237 after escrow fees related to private placement sale. As of December 31, 2021 and 2020, there were a total of 1,389 and 52,782 shares of common stock to be issued, respectively. Initial Public Offering On August 12, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with EF Hutton, division of Benchmark Investments, LLC, in connection with the initial public offering (the “Offering”) of 3,325,301 shares of the its common stock and Series A warrants (the “Series A Warrants”) to purchase up to 3,325,301 shares of the its common stock for gross proceeds of $ 13,800,000 , before deducting underwriting discounts, commissions, and other offering expenses, including legal expenses related to the Offering of $ 1,718,163 which are offset against the proceeds in additional paid in capital resulting in net proceeds to the Company of $ 12,081,837 . The Offering closed on August 17, 2021, and the underwriter subsequently exercised its over-allotment option, which closed on August 23, 2021. The Series A Warrants are exercisable for a period of five years from the date of issuance at an exercise price of $ 4.98 per share, subject to adjustment as provided therein. The Series A Warrants contain a provision for cashless exercise. In addition, pursuant to the terms of the Offering, the Company agreed to issue warrants to EF Hutton (the “Representative’s Warrants”) to purchase up to an aggregate of 231,325 shares of common stock, or 8 % of the shares of common stock sold in the offering. The Representative’s Warrants are exercisable for a period of five years at any time on or after the six-month anniversary of the date of the Offering at an exercise price of $ 4.98 per share, subject to adjustment. The Representative’s Warrants contain a provision for cashless exercise. Common Stock for Services On June 11, 2020, the Company entered into a one-year Advisory Board Agreement with an individual who will act as a member to the Company’s Advisory Board. In accordance with this agreement the Company issued 5,000 shares of its common stock as consideration for the services provided. The Company valued these common shares at the fair value of $ 20,000 or $ 4.00 per common share based on sales of common stock in the recent private placement. The Company recorded stock-based consulting of $ 20,000 and was included in professional and consulting as reflected in the accompanying statements of operations for the year ended December 31, 2020. In March 2021, the Company issued an aggregate of 105,000 shares of common stock for consulting and professional services rendered. The Company valued these common shares at the fair value of $ 420,000 or $ 4.00 per common share based on sales of common stock in the recent private placement. The Company recorded stock-based consulting of $ 420,000 which is included in professional and consulting expenses in the accompanying statements of operations for the year ended December 31, 2021. In February 2021, the Company entered into a one-year Advisory Board Agreement with an individual who will act as an advisor to the Company’s Board. In accordance with this agreement the Company issued 100,000 shares of its common stock as consideration for the services provided. The Company valued these common shares at a fair value of $ 400,000 or $ 4.00 per common share based on sales of common stock in the recent private placement. The Company recorded stock-based consulting of $ 350,000 which was included in professional and consulting expenses in the accompanying statements of operations for the year ended December 31, 2021 and the remaining balance of $ 50,000 as of December 31, 2021 has been deferred and included as a contra-equity account within additional paid in capital and will be amortized into expense over the remaining term of the agreement. F- 11 DATCHAT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 Common Stock Issued Upon Exercise of Series A Warrants 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. Common Stock Issued Upon Cashless Exercise of Warrants In March 2020, the Company issued 111,111 shares of its common stock in connection with the cashless exercise of 125,000 warrants. There remains 1,389 shares of common stock issuable related to this cashless exercise as of December 31, 2021 and 2020. The exercise price was based on contractual terms of the related debt. Cancellation of Common Stock and Stock Warrants In October 2020, the Company fully paid the $ 250,000 purchase price in connection with the Securities Purchase Agreement with Spherix entered into in October 2019 which resulted in the cancellation of 1,000,000 shares of the Company’s common stock and 1,125,000 common stock warrants previously owned by Spherix. Common Stock Warrants A summary of the Company’s outstanding stock warrants is presented below: Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Balance at December 31, 2019 1,312,500 $ 0.40 3.00 Exercised ( 125,000 ) $ 0.40 2.26 Canceled ( 1,125,000 ) $ 0.40 2.24 Balance at December 31, 2020 62,500 $ 0.40 1.59 Granted 3,556,626 $ 4.98 4.65 Exercised ( 2,882,785 ) $ 4.98 4.65 Balance at December 31, 2021 736,341 $ 4.59 4.30 Warrants exercisable at December 31, 2021 505,016 $ 4.41 4.14 At December 31, 2021, the aggregate intrinsic value of warrants outstanding was $ 164,375 . Common Stock Options for Services On August 13, 2021, the Company granted an aggregate of 285,700 options to purchase the Company’s common stock to an officer, directors and consultants of the Company. The options each have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4.15 per share. The options vest six months from date of grant. On August 24, 2021, the Company granted an aggregate of 530,000 options to purchase the Company’s common stock to officers, employees and consultants of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 6.25 per share. The options vest 25 % every six months from date of grant for two years . On September 28, 2021, the Company granted an aggregate of 18,500 options to purchase the Company’s common stock to an employee and consultants of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 14.25 per share. The options vest 25 % every six months from date of grant for two years . On September 28, 2021, the Company granted an aggregate of 350,000 options to purchase the Company’s common stock to officers and directors of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 35 per share. The options vest 25 % every six months from date of grant for two years . F- 12 DATCHAT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 On December 26, 2021, the Company granted 10,000 options to purchase the Company’s common stock to an employee of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4 per share. The options vest 25 % every six months from date of grant for two years . On December 24, 2021, the Company entered into a Separation and General Release Agreement (the “Separation Agreement”) with the Company’s former Chief Operating Officer. Pursuant to the Separation Agreement the Company paid a severance fee of $ 35,000 on December 30, 2021. Additionally, 10,000 stock options previously granted in August 2021 vested immediately and shall be exercisable until one year from the initial grant date. The total remaining 140,000 options (115,000 options was granted in August 2021 and 25,000 option was granted in September 2021) which have not vested was forfeited and cancelled. The stock options were valued at the grant date using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate ranging from 0.44 % to 0.98 %, expected dividend yield of 0 %, expected option term of 3 years using the simplified method and expected volatility ranging from 159 % to 163 % based on comparable and calculated volatility. The Company recognized a total stock-based expenses of $ 1,533,377 of which $ 1,090,027 was recorded in compensation and related expenses and $ 443,350 was recorded in professional and consulting expenses as reflected in the statements of operations during the year ended December 31, 2021. A balance of $ 5,251,820 remains to be expensed over future vesting periods related to unvested stock options issued for services to be expensed over a weighted average period of 1.08 years. There was no stock option activity during the year ended December 31, 2020. The following is a summary of the Company’s stock option activity for the year ended December 31, 2021 as presented below: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Balance at December 31, 2020 — $ — — Granted 1,194,200 $ 14.28 4.58 Cancelled ( 140,000 ) 11.38 4.75 Balance at December 31, 2021 1,054,200 $ 14.66 4.64 Options exercisable at end of period 10,000 $ 6.25 0.65 Options expected to vest 1,044,200 $ 14.74 Weighted average fair value of options granted during the period $ 5.89 At December 31, 2021, the aggregate intrinsic value of options outstanding was $ 0 . NOTE 6 – COMMITMENTS AND CONTINGENCIES Operating Lease Agreement In January 2019, the Company renewed and extended the term of its lease facility for another three-year period from January 2019 to December 2021 starting from a monthly base rent of $ 2,567 plus a pro rata share of operating expenses beginning January 2019 (see Note 2). The base rent is subject to annual increases beginning the 2 nd and 3 rd lease year as defined in the lease agreement. During the years ended December 31, 2021 and 2020 rent expense related to this lease was $ 31,693 and $ 36,169 , respectively, and was included in general and administrative expenses on the accompanying statements of operations. On August 27, 2021, the Company entered into an amendment agreement with the same landlord to modify the facility lease to relocate and increase the square footage of the lease premises (see Notes 2). The term of the lease shall commence on October 1, 2021 to December 31, 2024 with a new monthly base rent of $7,156 plus a pro rata share of operating expenses beginning January 2022. The base rent will be subject to 3% annual increases beginning the 2 nd and 3 rd lease year as defined in the amended lease agreement. Rent expense amounted $ 52,294 and $ 36,169 for the years ended December 31, 2021 and 2020, respectively, and was included in general and administrative expenses. Consulting Agreement On February 1, 2021, the Company entered into an Engagement Agreement (the “Agreement”) with a consulting company who acted as an exclusive lead underwriter, financial advisor, placement agent and investment banker of the Company, whereby the consultant assisted the Company to an initial public offering of the Company’s equity, debt or equity derivative instruments (“Offering”). The engagement period shall end on the earlier of i) 12 months from the date of the agreement or ii) the final closing if any of the Offering. F- 13 DATCHAT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 The consultant prepared an Underwriting Agreement (the “Underwriting Agreement”) covering the sale of up to $ 10 million of equity, equity derivatives, and equity linked instruments of the Company. The Company shall pay compensation of 8 % of the total gross proceeds of the Offering and warrants equal to 8 % of the aggregate number of shares of common stock sold in the Offering. The warrants will be exercisable during the four- and half-year period commencing 6 months from the effective date of the Offering at a price equal to 110 % of the public offering price per share of common stock. In addition, the Company shall pay 10 % broker dealer cash fee of the amount of capital raised from private equity placements and 6 % broker dealer cash fee of the amount capital raised from debt placements. On August 17, 2021, the Company completed its initial public offering, in which the Company issued 3,325,301 shares of its common stock and Series A warrants (the “Series A Warrants”) to purchase up to 3,325,301 shares of its common stock for gross proceeds of approximately $ 13,800,000 . As such, the Company paid the consulting company 8 % of the total gross proceeds of the Offering and warrants equal to 8 % of the aggregate number of shares of common stock sold in the Offering (see Note 5). Marketing Agreements In September 2021, the Company executed a marketing agreement for various social media marketing and ad campaigns that ran through October 2021 to December 2021. The total marketing fees for this campaign were approximately $ 1 million and was expensed to marketing and advertising expense during the year ended December 31, 2021. In October 2021, the Company executed a marketing agreement for various social media marketing and ad campaigns that ran through October 2021 to December 2021. The total marketing fees for this campaign will be approximately $ 3 million and was expensed to marketing and advertising expense during the year ended December 31, 2021. Employment Agreement On August 27, 2021, 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. NOTE 7 – INCOME TAXES The Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax assets at December 31, 2021 and 2020 consist of net operating loss carryforwards. The Company has incurred aggregate net operating losses of approximately $ 12,999,886 for income tax purposes as of December 31, 2021. The net operating losses carry forward for United States income taxes, which may be available to reduce future years’ taxable income. Management believes that the realization of the benefits from these losses appears unlikely due to the Company’s limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100 % valuation allowance on the deferred tax asset resulting from the net operating losses to reduce the asset to zero. Management will review this valuation allowance periodically and make adjustments as necessary. The items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2021 and 2020 were as follows: Year Ended December 31, 2021 Year Ended December 31, 2020 Income tax benefit at U.S. statutory rate $ ( 2,274,097 ) $ ( 205,689 ) Income tax benefit – State ( 541,452 ) ( 48,973 ) Non-deductible (income) expenses 598,878 ( 32,073 ) Change in valuation allowance 2,216,671 286,735 Total provision for income tax $ — $ — F- 14 DATCHAT, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 The Company’s approximate net deferred tax asset at December 31, 2021 and 2020 was as follows: Deferred Tax Asset: December 31, 2021 December 31, 2020 Net operating loss carryforward $ 3,379,971 $ 1,163,300 Valuation allowance ( 3,379,971 ) ( 1,163,300 ) Net deferred tax asset $ — $ — On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. The Act decreases the U.S. corporate federal income tax rate from a maximum of 34 % to a flat 21 % effective January 1, 2018. The Act also includes a number of other provisions including, among others, the elimination of net operating loss carrybacks and limitations on the use of future losses, the repeal of the Alternative Minimum Tax regime and the repeal of the domestic production activities deduction. These provisions are not expected to have a material effect on the Corporation. Given the significant complexity of the Act and anticipated additional implementation guidance from the Internal Revenue Service, further implications of the Act may be identified in future periods. Of the $ 12,999,886 of available net operating losses, $ 1,403,306 begin to expire in 2034 and $ 11,596,580 which were generated after the Act’s effective date can be utilized indefinitely subject to annual usage limitations. The Company provided a valuation allowance equal to the deferred income tax asset for the years ended December 31, 2021 and 2020 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The increase in the allowance was $ 2,216,671 and $ 286,735 in years 2021 and 2020. Additionally, the future utilization of the net operating loss carryforward to offset future taxable income may be subject to an annual limitation as a result of ownership changes that could occur in the future. If necessary, the deferred tax assets will be reduced by any carryforward that expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance. The Company does not have any uncertain tax positions or events leading to uncertainty in a tax position. The Company’s 2019, 2020 and 2021 Corporate Income Tax Returns are subject to Internal Revenue Service examination. NOTE 8 – SUBSEQUENT EVENTS On December 26, 2021, the Company approved the grant of 150,000 options to purchase the Company’s common stock to a newly hired employee of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4 per share. The options vest 25% every six months from date of grant for two years. The employee service date shall start on January 10, 2022 or the grant date which is when the Company will start recognizing stock-based expenses. On January 20, 2022, the Company has signed a Letter of Intent to acquire Avila Security Corporation (“Avila Security”) effectuating the Company to secure four issued patents and two pending applications, subject to customary closing conditions. The transaction terms include $ 1 million in cash and the greater of 739,650 shares of restricted common stock or $ 2.5 million of restricted shares of the Company’s common stock based on the previous 30-day average closing share price at closing. In the event of failure to enter into a merger agreement on or before April 19, 2022, the terms of the Letter of Intent shall terminate unless extended by mutual written agreement of both parties. Currently, the transaction has not closed yet. On February 15, 2022, (the “Effective Date”) the Company’s Board of Directors (the “Board”) accepted Chief Financial Officer, Vadim Mats’ resignation, effective immediately. On February 15, 2022, the Board appointed Brett Blumberg as Chief Financial Officer (“CFO”) of the Company. In connection with his appointment as CFO, the parties entered into an Employment Agreement. The CFO’s employment hereunder shall continue until the first anniversary thereof, unless terminated earlier pursuant to Section 5 of the Agreement; provided that, on such first anniversary of the Effective Date and each annual anniversary thereafter (such date and each annual anniversary thereof, a “Renewal Date”), the Agreement shall be deemed to be automatically extended, upon the same terms and conditions, for successive periods of one year, unless either party provides written notice of its intention not to extend the term of the Agreement at least thirty (30) days’ prior to the applicable Renewal Date. The period during which the Employee is employed by the Company hereunder is hereinafter referred to as the “Employment Term”. During the Employment Term, the Company shall pay to CFO an initial base salary at the annual rate of Sixty Thousand ($ 60,000 ) Dollars as compensation. For each twelve (12) month period of the Employment Term, the Employee shall be eligible to receive a bonus (the “Bonus”). However, the decision to provide any Bonus and the amount and terms of any Bonus shall be in the sole and absolute discretion of the Board of Directors of the Company. Any such Bonus shall be payable within one hundred twenty (120) days following the expiration of each annual anniversary. Further, any such Bonus shall be payable at the Company’s sole option in stock or in cash. Additionally, subject to the approval of the Compensation Committee, the CFO will be granted an option (the “Stock Options”) to purchase up to 50,000 shares of the Corporation’s Common Stock at an exercise price equal to the closing price of the Corporation’s Common Stock on the date of grant, under the Corporation’s 2021 Equity Incentive Plan (the “Plan”). The Option will be subject to the terms and conditions of the Plan, as set forth in the Plan and the applicable Incentive Stock Option Agreement. On March 14, 2022, the Company granted an aggregate of 115,000 options to purchase the Company’s common stock to four newly hired employees of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4.00 per share. The options vest 25% every six months from date of grant for two years. F- 15