Myseum.AI, Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________ Commission File No. 001-40729 DATCHAT, INC. (Exact name of registrant as specified in its charter) Nevada 47-2502264 (State or Other Jurisdiction IRS Employer of Organization) Identification Number 204 Nielsen Street , 1 st Floor New Brunswick , NJ 08901 (Address of principal executive offices) (Zip code) (732) 374-3529 (Registrant’s telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report.) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $0.0001 per share DATS The Nasdaq Stock Market LLC Series A Warrants, each warrant exercisable for one share of Common Stock at an exercise price of $4.98 per share DATSW The Nasdaq Stock Market LLC Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ Number of shares of common stock outstanding as of November 11, 2022 was 20,597,419 . DATCHAT, INC. FORM 10-Q September 30, 2022 INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Condensed Consolidated Balance Sheets - As of September 30, 2022 (unaudited) and December 31, 2021 1 Condensed Consolidated Statements of Operations - For the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited) 2 Condensed Consolidated Statements of Changes in Stockholders’ Equity – For the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited) 3 Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended September 30, 2022 and 2021 (unaudited) 4 Notes to Unaudited Condensed Consolidated Financial Statements 5 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 25 Item 4. Controls and Procedures 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings 27 Item 1A. Risk Factors 27 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Mine Safety Disclosures 28 Item 5. Other Information 28 Item 6. Exhibits 29 Signatures 30 i CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common stock and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout our Annual Report on Form 10-K as filed with the SEC on March 29, 2022. Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, but are not limited to: ● our business strategies; ● the timing of regulatory submissions; ● our ability to obtain and maintain regulatory approval of our existing product candidates and any other product candidates we may develop, and the labeling under any approval we may obtain; ● risks relating to the timing and costs of clinical trials and the timing and costs of other expenses; ● risks related to market acceptance of products; ● intellectual property risks; ● risks associated to our reliance on third party organizations; ● our competitive position; ● our industry environment; ● our anticipated financial and operating results, including anticipated sources of revenues; ● assumptions regarding the size of the available market, benefits of our products, product pricing and timing of product launches; ● management’s expectation with respect to future acquisitions; ● statements regarding our goals, intentions, plans and expectations, including the introduction of new products and markets; and ● our cash needs and financing plans. The foregoing list sets forth some, but not all, of the factors that could affect our ability to achieve results described in any forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits our Annual Report on Form 10-K, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q is accurate as of the date hereof. Because the risk factors referred to on page 4 of our Annual Report on Form 10-K, as filed with the SEC on March 29, 2022, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements. ii PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DATCHAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, December 31, 2022 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 6,229,888 $ 20,199,735 Short-term investments 7,981,155 - Accounts receivable 192 278 Prepaid expenses 259,577 376,973 Total Current Assets 14,470,812 20,576,986 OTHER ASSETS: Property and equipment, net 85,468 53,720 Digital currencies and other digital assets 52,104 - Intangible assets, net 1,035,500 - Operating lease right-of-use asset, net 147,883 184,309 Total Other Assets 1,320,955 238,029 Total Assets $ 15,791,767 $ 20,815,015 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 381,153 $ 517,039 Operating lease liability, current portion 63,678 53,897 Contract liabilities 3,853 8,850 Due to related party - 203 Total Current Liabilities 448,684 579,989 LONG-TERM LIABILITIES: Operating lease liability, less current portion 102,204 151,012 Total Long-Term Liabilities 102,204 151,012 Total Liabilities 550,888 731,001 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 September 30, 2022 and December 31, 2021) - - Common stock ($ 0.0001 par value; 180,000,000 shares authorized; 20,597,419 and 19,597,419 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively) 2,060 1,960 Common stock to be issued ( 1,389 shares at September 30, 2022 and December 31, 2021) - - Additional paid-in capital 51,433,628 47,672,600 Accumulated deficit ( 36,194,809 ) ( 27,590,546 ) Total Stockholders' Equity 15,240,879 20,084,014 Total Liabilities and Stockholders' Equity $ 15,791,767 $ 20,815,015 See accompanying notes to unaudited condensed consolidated financial statements. 1 DATCHAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended For the Nine Months Ended September 30, September 30, 2022 2021 2022 2021 NET REVENUES $ 3,540 $ - $ 42,296 $ - OPERATING EXPENSES: Compensation and related expenses 1,639,886 640,827 5,015,827 1,142,342 Marketing and advertising expenses 65,181 286,869 645,825 439,298 Professional and consulting expenses 482,338 665,635 1,947,535 1,522,963 Research and development expense - related party 258,957 - 258,957 - General and administrative expenses 232,064 258,007 712,103 389,470 Impairment loss on digital currencies and other digital assets 7,024 - 91,204 - Total operating expenses 2,685,450 1,851,338 8,671,451 3,494,073 LOSS FROM OPERATIONS ( 2,681,910 ) ( 1,851,338 ) ( 8,629,155 ) ( 3,494,073 ) OTHER INCOME (EXPENSE) Interest expense - ( 15 ) - ( 127 ) Interest income 4,659 974 8,077 1,271 Realized gain on short-term investments 9,702 - 9,702 - Unrealized gain on short-term investments 10,844 - 7,113 - Total other income, net 25,205 959 24,892 1,144 NET LOSS $ ( 2,656,705 ) $ ( 1,850,379 ) $ ( 8,604,263 ) $ ( 3,492,929 ) NET LOSS PER COMMON SHARE: Basic and diluted $ ( 0.13 ) $ ( 0.12 ) $ ( 0.43 ) $ ( 0.25 ) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic and diluted 20,597,419 15,334,115 19,938,078 13,897,405 See accompanying notes to unaudited condensed consolidated financial statements. 2 DATCHAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 (Unaudited) Common Stock Additional Total Preferred Stock Common Stock to be Issued Paid-in Subscription Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Receivable Deficit Equity Balance, December 31, 2021 - $ - 19,597,419 $ 1,960 1,389 $ - $ 47,672,600 $ - $ ( 27,590,546 ) $ 20,084,014 Accretion of stock based compensation in connection with stock option grants - - - - - - 822,583 - - 822,583 Accretion of stock-based professional fees in connection with stock option grants and shares - - - - - - 202,275 - - 202,275 Net loss for the period - - - - - - - - ( 3,365,846 ) ( 3,365,846 ) Balance, March 31, 2022 - - 19,597,419 1,960 1,389 - 48,697,458 - ( 30,956,392 ) 17,743,026 Accretion of stock based compensation in connection with stock option grants - - - - - - 772,196 - - 772,196 Accretion of stock-based professional fees in connection with stock option grants and shares - - - - - - 35,285 - - 35,285 Shares issued for asset acquisition - - 1,000,000 100 - - 1,089,900 - - 1,090,000 Net loss for the period - - - - - - - - ( 2,581,712 ) ( 2,581,712 ) Balance, June 30, 2022 - - 20,597,419 2,060 1,389 - 50,594,839 - ( 33,538,104 ) 17,058,795 Accretion of stock based compensation in connection with stock option grants - - - - - - 787,585 - - 787,585 Accretion of stock-based professional fees in connection with stock option grants and shares - - - - - - 51,204 - - 51,204 Net loss for the period - - - - - - - - ( 2,656,705 ) ( 2,656,705 ) Balance, September 30, 2022 - $ - 20,597,419 $ 2,060 1,389 $ - $ 51,433,628 $ - $ ( 36,194,809 ) $ 15,240,879 Common Stock Additional Total Preferred Stock Common Stock to be Issued Paid-in Subscription Accumulated Stockholders' Shares Amount Shares Amount Shares Amount Capital Receivable Deficit Equity 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 - - 403,024 40 1,675 - 1,592,932 - - 1,592,972 Common stock issued for common stock issuable - - 51,018 5 ( 51,143 ) ( 5 ) - - - - Common stock issued for services - - 205,000 21 - - 469,979 - - 470,000 Net loss for the period - - - - - - - - ( 996,771 ) ( 996,771 ) Balance, March 31, 2021 - - 13,386,862 1,339 3,314 - 19,405,470 - ( 17,758,283 ) 1,648,526 Sale of common stock, net of offering costs - - 525 - - - ( 3,735 ) - - ( 3,735 ) Common stock issued for common stock issuable - - 1,675 - ( 1,675 ) - - - - - Common stock to be issued cancelled - - - - ( 250 ) - ( 1,000 ) - ( 1,000 ) Accretion of stock-based compensation - - - - - - 100,000 - 100,000 Fractional shares due to reverse split - - 21 - - - - - - - Net loss for the period - - - - - - - - ( 645,779 ) ( 645,779 ) Balance, June 30, 2021 - $ - 13,389,083 $ 1,339 1,389 $ - $ 19,500,735 $ - $ ( 18,404,062 ) $ 1,098,012 Sale of common stock, net of offering costs - - 3,325,551 333 - - 12,082,504 - - 12,082,837 Common stock issued for exercise of Series A warrants - - 2,854,199 285 - - 14,213,628 ( 234,543 ) - 13,979,370 Stock-based compensation in connection with stock option grants - - - - - - 359,607 - 359,607 Accretion of stock-based compensation - - - - - - 100,000 - 100,000 Net loss for the period - - - - - - - - ( 1,850,379 ) ( 1,850,379 ) Balance, September 30, 2021 - $ - 19,568,833 $ 1,957 1,389 $ - $ 46,256,474 $ ( 234,543 ) $ ( 20,254,441 ) $ 25,769,447 See accompanying notes to unaudited condensed consolidated financial statements. 3 DATCHAT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 8,604,263 ) $ ( 3,492,929 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 67,227 - Amortization of right of use asset 36,426 20,987 Stock-based compensation 2,382,364 215,313 Stock-based professional fees 288,764 814,294 Impairment loss on digital currencies and other digital assets 91,204 - Non-cash digital currency and other digital assets fees 13,831 - Non-cash revenue from sale of Venvuu NFT digital asset ( 36,394 ) - Realized gain on short-term investments ( 9,702 ) - Unrealized gain on short-term investments ( 7,113 ) - Changes in operating assets and liabilities: Accounts receivable 86 - Prepaid expenses 117,396 ( 200,651 ) Accounts payable and accrued expenses ( 23,386 ) 145,915 Contract liabilities ( 4,997 ) - Operating lease liability ( 39,027 ) ( 20,987 ) NET CASH USED IN OPERATING ACTIVITIES ( 5,727,584 ) ( 2,518,058 ) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of short-term investments 6,430,000 - Purchase of short-term investments, net ( 14,394,340 ) - Purchases of property and equipment ( 44,475 ) - Purchase of digital currencies and other digital assets ( 233,245 ) - NET CASH USED IN INVESTING ACTIVITIES ( 8,242,060 ) - CASH FLOWS FROM FINANCING ACTIVITIES: Advances from related party - 161,567 Payments on related party advances ( 203 ) ( 161,229 ) Repayment of notes payable - related party - ( 7,500 ) Proceeds from exercise of Series A Warrants - 13,979,370 Net proceeds from the sale of common stock - 13,671,074 NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ( 203 ) 27,643,282 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 13,969,847 ) 25,125,224 CASH AND CASH EQUIVALENTS - beginning of period 20,199,735 690,423 CASH AND CASH EQUIVALENTS - end of period $ 6,229,888 $ 25,815,647 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ - $ - Income taxes $ - $ - NON-CASH INVESTING AND FINANCING ACTIVITIES: Digital currencies used to pay accounts payable $ 112,500 $ - Common stock issued for future services $ - $ 250,000 Subscription receivable from exercise of Series A warrants $ - $ 234,543 Issuance of common shares for intangible assets $ 1,090,000 $ - See accompanying notes to unaudited condensed consolidated financial statements. 4 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) 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 is a blockchain, cybersecurity, and social media company that not only focuses on protecting privacy on personal devices, but also protects user information after it is shared with others. The Company believes that one’s right to privacy should not end the moment they click “send.” The Company’s flagship product, DatChat Messenger & Private Social Network, is a mobile application that gives users the ability to communicate with privacy and protection. On June 29, 2022, the Company, DatChat Patents I, Inc., a Nevada corporation and wholly-owned subsidiary of DatChat that was formed on June 23, 2022 (“Merger Sub I”), DatChat Patents II, LLC, a Nevada limited liability company and wholly-owned subsidiary of DatChat that was formed on June 23, 2022 (“Merger Sub II”), and Avila Security Corporation, a Delaware corporation (“Avila”), entered into an agreement and plan of merger (the “Merger Agreement”). Pursuant to the Merger Agreement, the Company acquired all the issued and outstanding shares of Avila in consideration for the issuance of 1,000,000 shares (the “Acquisition Shares”) of the Company’s restricted stock. The acquisition included intellectual property rights in blockchain based digital rights management and object sharing technology, including encrypted WebRTC real-time video and audio streaming communications. Immediately following the merger, Merger Sub I was merged into Avila and Merger Sub I was dissolved and Avila was merged into Merger Sub II. (See Note 3). On June 16, 2022, the Company formed a wholly owned subsidiary, SmarterVerse, Inc. (“SmarterVerse”), a company incorporated under the laws of the State of Nevada. 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 unaudited condensed consolidated financial statements to reflect the Reverse Stock Split. Basis of presentation Management acknowledges its responsibility for the preparation of the accompanying unaudited condensed consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the periods presented. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Certain information and note disclosure normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to the financial statements for the year ended December 31, 2021 of the Company which were included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2022. The unaudited condensed consolidated financial statements of the Company include the accounts of DatChat and its wholly owned subsidiaries, DatChat Patents II, LLC and SmarterVerse. All intercompany accounts and transactions have been eliminated in consolidation. Liquidity As reflected in the accompanying condensed consolidated financial statements, for the nine months ended September 30, 2022 and 2021, the Company incurred a net loss of $ 8,604,263 and $ 3,492,929 , respectively. Additionally, for the nine months ended September 30, 2022 and 2021, the Company used cash in operations of $ 5,727,584 and $ 2,518,058 , respectively. On September 30, 2022, the Company has an accumulated deficit of $ 36,194,809 and has generated minimal revenues since inception. During the year ended December 31, 2021, the Company received net proceeds of approximately $ 13.7 million from the sale of its securities in connection with initial public offering and gross proceeds of approximately $ 14.4 million from the exercise of the Company’s Series A warrants. As of September 30, 2022, the Company had working capital of $ 14,022,128 . 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. 5 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) Use of estimates The preparation of the condensed consolidated 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 useful life of property and equipment and intangible assets, assumptions used in assessing impairment of long-term assets, the valuation of intangible assets, the valuation of digital currencies and other digital assets, the valuation of deferred tax assets, the estimate of the fair value lease liability and related right of use asset, and the fair value of non-cash equity transactions. Cash and cash equivalents The Company considers all highly liquid debt instruments and other short-term investments with an original maturity of three months or less, when purchased, to be cash equivalents. 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 . On September 30, 2022 and December 31, 2021, the Company had cash in excess of FDIC limits of approximately $ 5,979,888 and $ 19,949,735 , 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 and cash equivalents, accounts payable and accrued expenses, 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. The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820. ASC 825-10 “Financial Instruments”, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date. The Company did not elect to apply the fair value option to any outstanding instruments. Short-term investments The Company considers investments with original maturities greater than three months and remaining maturities less than one year to be short-term investments. Short-term investments include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturities between four and twelve months. Short-term investments are carried at fair value, which is based on quoted market prices for such securities, if available, or is estimated on the basis of quoted market prices of financial instruments with similar characteristics. For the three and nine months ended September 30, 2022, net realized investment gains of $ 9,702 are reported in other income (expenses) on the unaudited condensed consolidated statements of operations. For the three and ninth months ended September 30, 2022 and 2021, net unrealized investment gains of $ 10,844 and $ 7,113 are reported in other income (expenses) on the unaudited condensed consolidated statements of operations, respectively. 6 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) Accounting for digital currencies and other digital assets The Company purchases Ethereum cryptocurrency (“Ethereum”) and other digital assets and accepts Ethereum as a form of payment for non-fungible tokens sales (NFTs). The Company accounts for these digital assets held as the result of the purchase or receipt of Ethereum and other digital assets, as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). The Company has ownership of and control over its digital currencies and digital assets and the Company may use third-party custodial services to secure them. The digital currencies and digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition. The Company believes that digital currencies and other digital assets meet the definition of indefinite-lived intangible assets and accounts for them at historical cost less impairment, applying the guidance in ASC 350. The Company monitors any standard-setting, regulatory or technological developments that may affect the Company’s accounting for digital currencies or its controls and processes related to digital currencies. Digital currencies are included in long-term assets in the unaudited condensed consolidated balance sheet. The Company determines the fair value of its digital currencies and other digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that it has determined is the principal market for Ethereum (Level 1 inputs) and other digital assets. The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that its digital assets are impaired. In determining if an impairment has occurred, the Company considers the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets held. In determining the gain or loss to be recognized upon sale, the Company calculates the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within operating expenses in the unaudited condensed consolidated statements of operations. During the three and nine months ended September 30, 2022, the Company recorded an impairment loss of $ 7,026 and $ 91,204 , respectively. Property and equipment Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three to five years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Capitalized software costs Costs incurred to develop internal-use software including Metaverse software development, are expensed as incurred during the preliminary project stage. Internal-use software development costs are capitalized during the application development stage, which is after: (i) the preliminary project stage is completed; and (ii) management authorizes and commits to funding the project and it is probable the project will be completed and used to perform the function intended. Capitalization ceases at the point the software project is substantially complete and ready for its intended use, and after all substantial testing is completed. Upgrades and enhancements are capitalized if it is probable that those expenditures will result in additional functionality. Amortization is provided for on a straight-line basis over the expected useful life of the internal-use software development costs and related upgrades and enhancements. When existing software is replaced with new software, the unamortized costs of the old software are expensed when the new software is ready for its intended use. Software development costs incurred during the nine months ended September 30, 2022 were expensed since the Metaverse software development project is in the preliminary project stage. Such costs are included in research and development costs on the accompanying unaudited condensed consolidated statement of operations and were incurred with a related party (see Note 6). 7 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) Intangible assets Intangible assets, consisting of patents, are carried at cost less accumulated amortization, computed using the straight-line method over the estimated useful life, less any impairment charges. Impairment of long-lived assets In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. Revenue recognition The Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company recognize revenues from subscription fees on the Company’s messaging application in the month they are earned. Annual and lifetime subscription payments received that are related to future periods are recorded as deferred revenue to be recognized as revenues over the contract term or period. Lifetime subscriptions are being recognized to revenues over a 12-month period. The Company’s NFT revenues were generated from the sale of NFTs. The Company accepts Ethereum as a form of payment for NFT sales. The Company’s NFTs exist on the Ethereum Blockchain under the Company’s VenVuu brand. VenVuu is an iMetaverse advertising platform that allows advertisers and metaverse landowners to connect using the Company’s proprietary metaverse ad network and dynamic NFT technology. The Company uses the NFT exchange, OpenSea, to facilitate its sales of NFTs. The Company, through OpenSea, has custody and control of the NFT prior to the delivery to the customer and records revenue at a point in time when the NFT is delivered to the customer and the customer pays. The Company has no obligations for returns, refunds or warranty after the NFT sale. The value of the sale is determined based on the value of the Ethereum crypto currency received as consideration. Each NFT that is generated produces a unique identifying code. The Company tracks its revenue by product. The following table summarizes revenue disaggregation by product for the three and nine months ended September 30, 2022 and 2021: For the Three Months Ended September 30, For the Nine Months Ended September 30, 2022 2021 2022 2021 Subscription revenues $ 3,540 $ - $ 5,902 $ - NFT revenues - - 36,394 - Total $ 3,540 $ - $ 42,296 $ - 8 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) Research and Development Research and development costs incurred in the development of the Company’s products are expensed as incurred and includes costs such as outside development costs and other allocated costs incurred. For the three and nine months ended September 30, 2022, research and development costs incurred in the development of the Company’s software products with a related party were $ 258,957 and are included in operating expenses on the accompanying unaudited condensed consolidated statements of operations. 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 advertising costs as they are incurred. Advertising costs were $ 65,181 and $ 286,869 for the three months ended September 30, 2022 and 2021, respectively, and $ 645,825 and $ 439,298 for the nine months ended September 30, 2022 and 2021, respectively, and are included in marketing and advertising expenses on the accompanying condensed statement 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. Capital expenditures We do not have any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment and software necessary to conduct our operations on an as needed basis. 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. 9 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) 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. September 30, 2022 2021 Common stock equivalents: Common stock warrants 673,841 764,927 Common stock options 1,614,200 1,184,200 Total 2,288,041 1,949,127 Reclassification Certain reclassifications have been made in the unaudited condensed consolidated financial statements to conform to the current year presentation. Such reclassifications had no impact on the Company’ previously reported consolidated financial position or results of operations. Specifically, on the unaudited condensed consolidated statements of operations, certain operating expenses that were classified as general and administrative expenses were reclassified to professional and consulting fees. 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 10 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) NOTE 2 – SHORT-TERM INVESTMENTS On September 30, 2022, the Company’s short-term investments consisted of the following: Cost Unrealized Gain (Loss) Fair Value US Treasury bills $ 6,749,042 $ 6,038 $ 6,755,080 Certificates of deposit 1,225,000 1,075 1,226,075 Total short-term investments $ 7,974,042 $ 7,113 $ 7,981,155 NOTE 3 – ACQUISITION On June 29, 2022, the Company, DatChat Patents I, Inc., a Nevada corporation and wholly-owned subsidiary of DatChat that was formed on June 23, 2022 (“ Merger Sub I ”), DatChat Patents II, LLC, a Nevada limited liability company and wholly-owned subsidiary of DatChat that was formed on June 23, 2022 (“ Merger Sub II ”), and Avila Security Corporation, a Delaware corporation (“ Avila ”), entered into an agreement and plan of merger (the “ Merger Agreement ”). Pursuant to the Merger Agreement, the Company acquired all the issued and outstanding shares of Avila in consideration of the issuance of an aggregate of 1,000,000 shares (the “ Acquisition Shares ”) of the Company’s common stock. These shares were valued at $ 1,090,000 , or $ 1.09 per share, based on the quoted closing price of the Company’s common stock on the measurement date. The acquisition included intellectual property rights in blockchain based digital rights management and object sharing technology, including encrypted WebRTC real-time video and audio streaming communications. Immediately following the merger, Merger Sub I was merged into Avila and Merger Sub I was dissolved and Avila was merged into Merger Sub II. Other than owning certain patents, Avila had no operations or no employees and was not considered a business. Pursuant to ASU 2017-01 and ASC 805, the Company analyzed the Merger Agreement and the business of Avila to determine if the Company acquired a business or acquired assets. Based on this analysis, it was determined that the Company acquired assets. No goodwill was recorded since the Merger Agreement was accounted for as an asset purchase. In accordance with ASC 805, the fair value of the assets acquired is based on either the fair value of the consideration given or the fair value of the assets acquired, whichever is more clearly evident, and thus, more reliably measurable. The Company used the market price of the 1,000,000 common shares issued of $ 1,090,000 as the fair value of the assets acquired since this value was more clearly evident, and thus, more reliably measurable than the fair value of the patents acquired. (see Note 5) NOTE 4 – 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 facility lease to relocate and increase the square footage of the lease premises. The term of the lease commenced on October 1, 2021 and will expire on 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 in the 2 nd and 3 rd lease year as defined in the amended lease agreement. For the three months ended September 30, 2022 and 2021, rent expense amounted $ 25,285 and $ 17,920 , respectively. For the nine months ended September 30, 2022 and 2021, rent expense amounted to $ 70,816 and $ 49,500 , respectively, and was included in general and administrative expenses. 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) on December 31, 2021. 11 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) Right-of- use assets are summarized below: September 30, 2022 December 31, 2021 Office lease (36 months) $ 198,898 $ 271,507 Less accumulated amortization ( 51,015 ) ( 87,198 ) Right-of-use asset, net $ 147,883 $ 184,309 Operating Lease liabilities are summarized below: September 30, 2022 December 31, 2021 Office lease $ 204,909 $ 271,507 Reduction of lease liability ( 39,027 ) ( 66,598 ) Total lease liability 165,882 204,909 Less: current portion 63,678 53,897 Long term portion of lease liability $ 102,204 $ 151,012 Minimum lease payments under the non-cancelable operating lease on September 30, 2022 are as follows: 2022 (remainder of year) $ 22,113 2023 89,193 2024 92,100 Total 203,406 Less: present value discount ( 37,524 ) Total operating lease liability $ 165,882 NOTE 5 – INTANGIBLE ASSETS On September 30, 2022 and December 31, 2021, intangible asset consisted of the following: Useful life September 30, 2022 December 31, 2021 Patents 5 years $ 1,090,000 $ - Less: accumulated amortization ( 54,500 ) - $ 1,035,500 $ - On June 29, 2022, in connection with the acquisition of Avilla, the Company issued an aggregate of 1,000,000 shares of the Company’s common stock. These shares were valued at $ 1,090,000 , or $ 1.09 per share, based on the quoted closing price of the Company’s common stock on the measurement date. The acquisition included patents for intellectual property rights in blockchain based digital rights management and object sharing technology, including encrypted WebRTC real-time video and audio streaming communications (See Note 3). 12 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) For the nine months ended September 30, 2022 and 2021, amortization of intangible assets amounted to $ 54,500 . Amortization of intangible assets attributable to future periods is as follows: Year ending September 30: Amount 2023 $ 218,000 2024 218,000 2025 218,000 2026 218,000 2027 163,500 $ 1,035,500 NOTE 6 – 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. On September 30, 2022 and December 31, 2021, the Company had a payable to the officer of $ 0 and $ 203 , respectively, which is presented as due to related party on the condensed balance sheets. These advances are short-term in nature and non-interest bearing. During the nine months ended September 30, 2022 and 2021, respectively, Mr. Myman provided advances to the Company for working capital purposes totaling of $ 0 and $ 161,567 and the Company repaid $ 203 and $ 161,229 of these advances, respectively. Research and Development On July 19, 2022, the Company entered into a software development agreement with Metabizz LLC (“Metabizz”), a company whose managing partner is also the Chief Innovation Officer of Smarterverse, the Company’s wholly-owned subsidiary. During the three and nine ended September 30, 2022, the Company paid Metabizz $ 258,957 for software development services which is included in research and development expense – related party on the accompanying unaudited condensed consolidated statements of operations. NOTE 7 – 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. 13 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) 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. 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 September 30, 2022, and 2021, there were no shares of Series A Preferred Stock outstanding. Common Stock Sale of Common Stock During the nine months ended September 30, 2021, the Company sold an aggregate of 404,974 shares of its common stock at $ 4.00 per common share for gross proceeds of $ 1,619,896 and net proceeds of $ 1,588,237 after escrow fees related to private placement sale. 14 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) 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 approximately $ 13,800,000 , before deducting underwriting discounts, commissions, and other offering expenses, including legal expenses related to the Offering of approximately $ 1,718,000 which are offset against the proceeds in additional paid in capital resulting in net proceeds to the Company of $ 12,082,837 . 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 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 unaudited condensed statements of operations for the nine months ended September 30, 2021. In February 2021, the Company entered into a one-year Advisory Board Agreement with an individual who will function 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. For the nine months ended September 30, 2022 and 2021, the Company recorded stock-based consulting of $ 50,000 and $ 250,000 which was included in professional and consulting expenses in the accompanying unaudited condensed statements of operations. Common Stock Issued for Acquisition Pursuant to the Merger Agreement, the Company acquired all the issued and outstanding shares of Avila in consideration of the issuance of an aggregate of 1,000,000 shares (the “ Acquisition Shares ”) of the Company’s common stock. These shares were value at $ 1,090,000 , or $ 1.09 per share, based on the quoted closing price of the Company’s common stock on the measurement date (See Note 3). 15 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) Common Stock Warrants The following is a summary of the Company’s stock warrant activity for the nine months ended September 30, 2022: Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Balance on December 31, 2021 736,341 $ 4.59 4.30 Warrants expired ( 62,500 ) 0.40 Balance on September 30, 2022 673,841 $ 4.98 3.90 Warrants exercisable on September 30, 2022 673,841 $ 4.98 3.90 Stock Options On December 26, 2021 and effective January 10, 2022, 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 started recognizing stock-based compensation expenses. On January 19, 2022, the Company granted an aggregate of 85,000 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. The employee service date shall start on January 19, 2022 or the grant date which is when the Company started recognizing stock-based compensation expenses. On July 22, 2022, the Company granted an aggregate of 325,000 options to purchase the Company’s common stock to 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 $ 4.00 per share. The options vest 25 % every six months from date of grant for two years. The stock options were valued at the grant date using a Black-Scholes option pricing model which will be recognized as stock-based compensation expense over the vesting period. The stock options were valued at the grant date using a Black-Scholes option pricing model with the following assumptions: risk-free interest rates ranging from 1.53 % to 2.93 %, expected dividend yield of 0 %, expected option term of three years using the simplified method, and expected volatilities ranging from 155.9 % to 160.0 % based on the calculated volatility of comparable companies. During the nine months ended September 30, 2022, the Company recognized total stock-based expenses related to stock options of $ 2,621,129 of which $ 2,382,364 was recorded in compensation and related expenses and $ 238,764 was recorded in professional and consulting expenses as reflected in the unaudited condensed statements of operations. A balance of $ 3,382,372 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 1.30 years. 16 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2022 AND 2021 (Unaudited) The following is a summary of the Company’s stock option activity for the nine months ended September 30, 2022: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Balance on December 31, 2021 1,054,200 $ 14.66 4.64 Granted 560,000 4.00 5.00 Balance on September 30, 2022 1,614,200 $ 10.96 4.13 Options exercisable on September 30, 2022 731,200 $ 11.73 3.89 Options expected to vest 883,000 $ 8.86 Weighted average fair value of options granted during the period $ 1.34 On September 30, 2022, the aggregate intrinsic value of options outstanding was $ 0 . NOTE 8 – COMMITMENTS AND CONTINGENCIES Operating Lease Agreement See Note 4 for disclosure on the Company’s operating lease for its offices. Employment Agreements On August 27, 2021 (the “Effective Date”), 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”). The Employment Agreement provides for a term of one (1) year (the “ Initial Term ”) from the date of the Effective Date and shall automatically be extended for additional terms of one (1) year each (each a “ Renewal Term ”) unless either party gives prior written notice of non-renewal to the other party no later than six (6) months prior to the expiration of the Initial Term, or the then current Renewal Term, as the case may be. 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. 17 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. You should read the following discussion and analysis of our financial condition and results of operations together with unaudited condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K as filed with the SEC on March 29, 2022. All amounts in this report are in U.S. dollars, unless otherwise noted. Throughout this Quarterly Report on Form 10-Q, references to “we,” “our,” “us,” “the Company” or “DatChat” refer to DatChat, Inc., individually, or as context requires, collectively with its subsidiaries. Overview We are a blockchain, cybersecurity, and social media company that not only focuses on protecting privacy on personal devices, but also protects user information after it is shared with others. We believe that one’s right to privacy should not end the moment they click “send.” Our flagship product, DatChat Messenger & Private Social Network (the “Application”), is a mobile application that gives users the ability to communicate with privacy and protection. DatChat Messenger & Private Social Network The Application allows users to exercise control over their messages, even after they are sent. Through the Application, users can delete messages that they have sent, on their own device and the recipient’s device as well. There is no set time limit within which they must exercise this choice. A user can elect at any time to delete a message that they previously sent to a recipient’s device. The Application also enables users to hide secret and encrypted messages behind a cover, which messages can only be unlocked by the recipient and which are automatically destroyed after a fixed number of views or fixed amount of time. Users can decide how long their messages last on the recipient’s device. The Application also includes a screen shot protection system, which makes it virtually impossible for the recipient to screenshot a message or picture before it gets destroyed. In addition, users can delete entire conversations at any time, making it like the conversation never even happened. The Application integrates with iMessage, making private messages potentially available to hundreds of millions of users. The Habytat We have recently formed a wholly owned subsidiary, SmarterVerse, Inc., and have entered into a development agreement with MetaBizz, LLC to co-develop a mobile based social metaverse, to be known as “The Habytat.” A metaverse is a virtual space that blends real world and virtual realities into one, in real time, using emerging technology like virtual and augmented reality, to create highly immersive 3D environments. We plan to launch Geniuz City, the first world within The Habytat, in the first quarter of 2023. Geniuz City will be a near photo-realistic world that is based on the city of Miami and its surrounding areas. We plan to design Geniuz City in a manner that will enable users to participate in a number of different activities, such as parties, business conferences, shopping, socializing, and game play. Currently, once users download The Habytat application, we plan to grant each user rights to use a designated piece of virtual property in Geniuz City through the minting and issuance of a unique NFT. NFTs (or non-fungible tokens) are digital assets that can represent a unique real-world asset, such as art, music, in-game items, videos, or a piece of real estate or virtual property. Finally, as described below, we plan to integrate our VenVuu platform and VenVuu dynamic NFTs (collectively, VenVuu”) into The Habytat, and that such integration will enable us and users to generate advertising-based revenues in The Habytat. 18 VenVuu We are currently developing VenVuu, a metaverse advertising platform. VenVuu is based upon a proprietary metaverse ad network and dynamic NFT technology which we believe will allow advertisers and metaverse property holders to connect in the metaverse. Management believes that metaverse advertising parallels reality and that VenVuu can be considered as a parallel to billboards in the real world or “Google Ads” within the internet. Through the integration of VenVuu, which advertises in a way similar to a billboard or video screen, we plan to enable users of The Habytat opportunities to monetize their virtual property rights by directly displaying approved advertisements on their virtual property. While we currently plan to launch VenVuu in the Habytat, it may also, in the future, be interoperable within other metaverses. Basis of Presentation The financial statements contained herein have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) and the requirements of the Securities and Exchange Commission. Critical Accounting Policies and Significant Judgments and Estimates This management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates if conditions differ from our assumptions. While our significant accounting policies are more fully described in Note 1 in the “Notes to condensed consolidated financial Statements”, we believe the following accounting policies are critical to the process of making significant judgments and estimates in preparation of our financial statements. Use of estimates The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates include the useful life of property and equipment, assumptions used in assessing impairment of long-term assets, the valuation of deferred tax assets, the estimate of the fair value lease liability and related right of use asset, and the fair value of non-cash equity transactions. Accounting for digital currencies and other digital assets We purchase Ethereum cryptocurrency (“Ethereum”) and other digital assets and accepts Ethereum as a form of payment for non-fungible tokens sales (NFTs). We account for these digital assets held as the result of the purchase or receipt of Ethereum and other digital assets, as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). We have ownership of and control over our digital currencies and digital assets and we may use third-party custodial services to secure them. The digital currencies and digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition. The Company believes that digital currencies and other digital assets meet the definition of indefinite-lived intangible assets and accounts for them at historical cost less impairment, applying the guidance in ASC 350. There are uncertainties related to the application of ASC 350 to digital currencies, as it does not appropriately reflect the economics associated with digital currencies. However, in the absence of standards that specifically address the accounting for digital currencies, the Company believes that it must apply existing accounting standards in accounting for its investment in digital currencies. The FASB does not have a standard-setting project on digital currencies or other similar digital assets on its agenda, but an industry trade group has requested that the FASB address the accounting for cryptocurrencies, a category of digital asset under which the Company believes that digital currencies fall. Accordingly, the FASB staff has researched blockchain technology and cryptocurrency market activities and the accounting challenges they present. The Company monitors any standard-setting, regulatory or technological developments that may affect the Company’s accounting for digital currencies or its controls and processes related to digital currencies. Digital currencies are included in current assets in the unaudited condensed consolidated balance sheet. 19 We determine the fair value of our digital currencies and other digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that it has determined is the principal market for Ethereum (Level 1 inputs) and other digital assets. We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that its digital assets were impaired. In determining if an impairment has occurred, we consider the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets held. In determining the gain or loss to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within other expense in the unaudited condensed consolidated statements of operations. During the three and nine months ended September 30, 2022, we recorded an impairment loss of $7,024 and $91,204, respectively. Capitalized software costs Costs incurred to develop internal-use software including Metaverse software development, are expensed as incurred during the preliminary project stage. Internal-use software development costs are capitalized during the application development stage, which is after: (i) the preliminary project stage is completed; and (ii) management authorizes and commits to funding the project and it is probable the project will be completed and used to perform the function intended. Capitalization ceases at the point the software project is substantially complete and ready for its intended use, and after all substantial testing is completed. Upgrades and enhancements are capitalized if it is probable that those expenditures will result in additional functionality. Amortization is provided for on a straight-line basis over the expected useful life of the internal-use software development costs and related upgrades and enhancements. When existing software is replaced with new software, the unamortized costs of the old software are expensed when the new software is ready for its intended use. Software development costs incurred during the nine months ended September 30, 2022 were expensed since the Metaverse software development project is in the preliminary project stage. Such costs are included in research and development costs on the accompanying unaudited condensed consolidated statement of operations. Revenue recognition We will recognize 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. We will further analyze its revenue recognition policy when it enters revenue producing customer contracts. Our NFT revenues were generated from the sale of NFTs. The Company accepts Ethereum as a form of payment for NFT sales. The Company’s NFTs exist on the Ethereum Blockchain under the Company’s VenVuu brand. VenV uu is an iMetaverse advertising platform that allows advertisers and metaverse landowners to connect using the Company’s proprietary metaverse ad network and dynamic NFT technology. The Company uses the NFT exchange, OpenSea, to facilitate its sales of NFTs. The Company, through OpenSea, has custody and control of the NFT prior to the delivery to the customer and records revenue at a point in time when the NFT is delivered to the customer and the customer pays. The Company has no obligations for returns, refunds or warranty after the NFT sale. The value of the sale is determined based on the value of the Ethereum crypto currency received as consideration. Each NFT that is generated produces a unique identifying code. 20 Research and Development Research and development costs incurred in the development of the Company’s products are expensed as incurred and includes costs such as outside development costs and other allocated costs incurred. For the three and nine months ended September 30, 2022, research and development costs incurred in the development of the Company’s software products were $258,957 and are included in operating expenses on the accompanying unaudited condensed consolidated statements of operations. Stock-based compensation Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718, “Compensation — Stock Compensation” (“ASC 718”), which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee, non-employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee, non-employee, and director services received in exchange for an award based on the grant-date fair value of the award. Leases We 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, we use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations. Recently Issued Accounting Pronouncements 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. Results of Operations Three and Nine Months Ended September 30, 2022 compared to Three and Nine Months Ended September 30, 2021 Revenues During the three and nine months ended September 30, 2022, we generated revenue in the amount of $3,540 and $42,296, respectively. We did not generate revenues during the three and nine months ended September 30, 2021. For the three months ended September 30, 2022, revenue consisted of revenue from subscriptions of $3,540 and revenue from the sale of Venvuu NFTs of $36,394. For the nine months ended September 30, 2022, revenue consisted of revenue from subscriptions of $5,902 and revenue from the sale of Venvuu NFTs of $36,394. 21 Operating Expenses For the three months ended September 30, 2022, operating expenses amounted to $2,685,450 as compared to $1,851,338 for the three months ended September 30 2021, an increase of $834,112, or 45.5%. For the nine months ended September 30, 2022, operating expenses amounted to $8,671,451 as compared to $3,494,073 for the nine months ended September 30, 2021, an increase of $5,177,378, or 148.2%. For the three and nine months ended September 30 2022 and 2021, operating expenses consisted of the following: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Compensation and related expenses $ 1,639,886 $ 640,827 $ 5,015,827 $ 1,142,342 Marketing and advertising expenses 65,181 286,869 645,825 439,298 Professional and consulting expenses 482,338 665,365 1,947,535 1,522,963 Research and development costs – related party 258,957 - 258,957 - General and administrative expenses 232,064 258,007 712,103 389,470 Impairment loss on digital currencies and other digital assets 7,024 - 91,204 - Total $ 2,685,450 $ 1,851,338 $ 8,671,451 $ 3,494,073 Compensation and related expense Compensation and related expenses for the three months ended September 30, 2022, and 2021 were $1,639,886 and $640,827, respectively, an increase of $999,059, or 155.9%, and for the nine months ended September 30, 2022 and 2021 were $5,015,827 and $1,142,342, respectively, an increase of $3,873,485, or 339.1%. Compensation and related expenses include salaries, stock-based compensation, health insurance and other benefits. The increase in compensation and related expenses is primarily related to increase in the number of full-time employees, and an increase in stock-based compensation. Stock-based compensation expense amounted to $787,585 and $2,382,365 for the three and nine months ended September 30, 2022 and was attributable to the accretion of stock option expense. During the three and nine months ended September 30, 2021, stock-based compensation related to the accretion of stock options expense amounted to $215,313 and $215,313, respectively. Marketing and advertising expenses Marketing and advertising expenses for the three months ended September 30, 2022, and 2021 were $65,181 and $286,869, a decrease of $221,688, or 77.3%, and for the nine months ended September 30, 2022 and 2021 were $645,825 and $439,298, respectively, an increase of $206,527, or 47.0%. The increase was primarily attributable to increase in social media development for online media advertising. Professional and consulting expenses During the three months ended September 30, 2022 and 2021, we reported professional and consulting fees of $482,338 and $665,635, respectively, a decrease of $183,297, or 27.5%. During the nine months ended September 30, 2022 and 2021, we reported professional and consulting fees of $1,947,535 and $1,522,963, respectively, an increase of $424,572, or 27.9%, which are principally comprised of the following items: ● During the three months ended September 30, 2022 and 2021, the decrease in professional and consulting expenses of $183,297 was attributable to a decrease in consulting fees for general advisory consulting, investor relations, technology services, and other incidental services of $148,236, a decrease in accounting fees of $6,039, a decrease in recruitment fees of $60,000, and a decrease in other professional fees of $22,199, offset by an increase in legal fees of $53,177. During the three months ended September 30, 2022 and 2021, $51,204 and $244,294, respectively, of these consulting fees was from the accretion of stock option expense and from the issuance of our common stock valued on the date of grant at its estimated fair value using recent sales of common stock on the measurement date. 22 ● During the nine months ended September 30, 2022 and 2021, the increase in professional and consulting expenses of $424,572 was attributable to a decrease in consulting fees for general advisory consulting, investor relations, technology services, and other incidental services of $171,885, an increase in accounting fees of $18,184, an increase in recruitment fees of $241,000, and an increase in legal fees of $362,495, offset by a decrease in other professional fees of $25,222. During the nine months ended September 30, 2022 and 2021, $288,763 and $814,294, respectively, of these consulting fees was from the accretion of stock option expense and from the issuance of our common stock valued on the date of grant at its estimated fair value using recent sales of common stock on the measurement date. Research and development costs During the three and nine months ended September 30, 2022, we incurred $258,957 in research and development costs with a related party in connection with the development of our Metaverse software development project which is in the preliminary stage. We did not incur any research and development costs in the 2021 periods. General and administrative expenses During the three months ended September 30, 2022, and 2021, general and administrative expenses were $232,064 and $258,007, a decrease of $25,943, or 10.1%. During the nine months ended September 30, 2022, and 2021, general and administrative expenses were $712,103 and $389,470, an increase of $322,633, or 82.8%, primarily attributable to an increase in insurance expense of $64,082, an increase in computer and internet expense of $48,891, an increase in travel expenses of $71,970, and an increase in rent expense of $21,751. General and administrative expenses primarily consisted of the following expense categories: insurance, travel, utilities, office related expenses and rent expense. Impairment loss on digital currencies and other digital assets During the three and nine months ended September 30, 2022, operating expenses included an impairment charge related to the write down of digital currencies and other digital assets of $7,024 and $91,204, respectively. Loss from Operations For the three months ended September 30, 2022, loss from operation amounted to $2,681,910 as compared to $1,851,338 for the three months ended September 30, 2021, an increase of $830,572, or 44.9%. For the nine months ended September 30, 2022, loss from operation amounted to $8,629,155 as compared to $3,494,073 for the nine months ended September 30, 2021, an increase of $5,135,082, or 147.0%. Other Income (Expense) During the three months ended September 30, 2022, and 2021, we reported other income (expense) of $25,205 and $959, respectively. During the nine months ended September 30, 2022, and 2021, we reported other income (expense) of $24,892 and $1,144, respectively. Other income (expense) consisted of interest income, interest expense and unrealized gains or losses on short-term investments. During the three and nine months ended September 30, 2022, net realized investment gain of $9,702 is reported in other income (expenses) on the unaudited condensed consolidated statements of operations. During the three and ninth months ended September 30, 2022 and 2021, net unrealized investment gains of $10,844 and $7,113 is reported in other income (expenses) on the unaudited condensed consolidated statements of operations, respectively. Net Loss For the foregoing reasons, for the three months ended September 30, 2022 and 2021, net loss amounted to $2,656,705, or ($0.13) per common share (basic and diluted) and $1,850,379, or $(0.12) per common share (basic and diluted), respectively, an increase of $806,326, or 43.6%. For the nine months ended September 30, 2022 and 2021, net loss amounted to $8,604,263, or ($0.43) per common share (basic and diluted) and $3,492,929, or $(0.25) per common share (basic and diluted), respectively, an increase of $5,111,334, or 146.3%. 23 Liquidity, Capital Resources and Plan of Operations Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. As of September 30, 2022 and December 31, 2021, we had cash and cash equivalents of $6,229,888 and $20,199,735, respectively. Additionally, on September 30, 2022, we had short-term investments of $7,981,155. Short-term investments include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturities between four and twelve months. Our primary uses of cash have been for compensation and related expenses, fees paid to third parties for professional services, marketing and advertising expenses, and general and administrative expenses. All funds received have been expended in the furtherance of growing the business. We received funds from the sale of our common stock. The following trends are reasonably likely to result in changes in our liquidity over the near to long term: ● An increase in working capital requirements to finance our current business, ● Addition of administrative, technical and sales personnel as the business grows, and ● The cost of being a public company. On August 12, 2021, we 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. We may need to raise additional funds, particularly if we are unable to generate positive cash flows from our operations. We estimate that based on current plans and assumptions, that our available cash will be sufficient to satisfy our cash requirements under our present operating expectations for the next 12 months from the date of this quarterly report on Form 10-Q. Cash Flow Activities for the Nine Months Ended September 30, 2022 and 2021 Cash Flows from Operating Activities Net cash used in operating activities totaled approximately $5,727,584 and $2,518,058 for the nine months ended September 30, 2022, and 2021, respectively, an increase of $3,209,526. 24 Net cash flow used in operating activities for the nine months ended September 30, 2022 primarily reflected a net loss of $8,604,263 adjusted for the add-back of non-cash items consisting of depreciation and amortization of $67,227, stock-based compensation and professional fees from the accretion of stock-based stock option and common stock expense of $2,671,128, unrealized and realized gains on short-term investments, and an impairment loss on digital currencies and other digital assets of $84,180, offset by changes in operating assets and liabilities primarily consisting of a decrease in prepaid expenses of $117,396, a decrease in accounts payable and accrued expenses of $23,386 and a decrease in operating lease liability of $39,027. Net cash flow used in operating activities for the nine months ended September 30, 2021 primarily reflected a net loss of $3,492,929 adjusted for the add-back of non-cash items consisting of amortization of right of use assets of $20,987 and accretion of stock-based common stock expense of $1,029,607, offset by changes in operating assets and liabilities primarily consisting of an increase in prepaid expenses of $200,651, an increase in accounts payable of $145,915, and a decrease in operating lease liability of $20,987. Cash Flows from Investing Activities Net cash used in investing activities amounted to $8,242,060 and $0 for the nine months ended September 30, 2022, and 2021, respectively. During the nine months ended September 30, 2022, we purchased property and equipment of $44,475, purchased digital currencies and other digital assets of $233,245, and we purchased short-term investments of $14,394,340 and received gross proceeds from the sale of short-term investments of $6,430,000. Cash Flows from Financing Activities Net cash (used in) provided by financing activities totaled approximately $(203) and $27,643,282 for the nine months ended September 30, 2022, and 2021, respectively. During the nine months ended September 30, 2022, we repaid related party advances of $203. During the nine months ended September 30, 2021, financing activities was primarily attributable to net proceeds of approximately $13,671,074 from the sale of common stock, $13,979,370 from the exercise of Series A warrants and $161,567 of advances from a related party, offset by the repayment of related party advances of $161,229 and the repayment of related-party notes of $7,500. Off-Balance Sheet Arrangements We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required by this Item. 25 ITEM 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures 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 September 30, 2022, our disclosure controls and procedures were not effective because of a material weakness in our internal controls over financial reporting. The ineffectiveness of our disclosure controls and procedures were not effective because of the material weaknesses set forth below. The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses: ● We lack segregation of duties within accounting functions duties as a result of our limited financial resources to support hiring of personnel. ● We lack control over the custody of and accounting for digital currencies and other digital assets accounts. ● 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 a third-party accountant to provide accounting and financial reporting services to us, we lack both an adequate number of personnel with requisite expertise in the key functional areas of finance and accounting and an adequate number of personnel to properly implement control 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. Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting the quarter ended September 30, 2022 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 26 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results. ITEM 1A. RISK FACTORS. Our business, financial condition, results of operations, and cash flows may be impacted by a number of factors, many of which are beyond our control, including those set forth in our most recent Annual Report on Form 10-K and in our other filings with the SEC, the occurrence of any one of which could have a material adverse effect on our actual results. There have been no material changes in our risk factors from those previously disclosed in our Annual Report on Form 10-K, other than as described below: If we fail to comply with the continued listing requirements of The Nasdaq Capital Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted. On October 14, 2022, we received written notice from the Nasdaq Stock Market, LLC (“Nasdaq”) that we were not in compliance with Nasdaq Listing Rule 5550(a)(2), as the minimum bid price of our common stock had been below $1.00 per share for 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810, we have a period of 180 calendar days, or until April 12, 2023, to regain compliance with the minimum bid price requirement. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least 10 consecutive business days during this 180 calendar day period. In the event we do not regain compliance by April 12, 2023, we may be eligible for an additional 180 calendar day grace period if we meet the continued listing standards, with the exception of bid price, for The Nasdaq Capital Market, and we provide written notice to Nasdaq of our intention to cure the deficiency during the second compliance period. Although we may effect a reverse stock split of our issued and outstanding common stock in the future, there can be no assurance that such reverse stock split will enable us to regain compliance with the Nasdaq minimum bid price requirement. If we are unable to regain compliance with the Nasdaq minimum bid price requirement and Nasdaq delists our common stock and we are unable to obtain listing on another national securities exchange, a reduction in some or all of the following may occur, each of which could have a material adverse effect on our stockholders: ● the liquidity of our common stock; ● the market price of our common stock; ● our ability to obtain financing for the continuation of our operations; ● the number of institutional and general investors that will consider investing in our common stock; ● the number of investors in general that will consider investing in our common stock; ● the number of market makers in our common stock; ● the availability of information concerning the trading prices and volume of our common stock; and ● the number of broker-dealers willing to execute trades in shares of our common stock. We may not be successful in our metaverse strategy and investments, which could adversely affect our business, reputation, or financial results. We believe the metaverse, an embodied internet where people have immersive experiences beyond two-dimensional screens, is the next evolution in social technology. We recently announced our plan to develop The Habytat, a mobile based social metaverse. We expect this will be a complex, evolving, and long-term initiative that will involve the development of new and emerging technologies and collaboration with other companies, developers, partners, and other participants. However, the metaverse may not develop in accordance with our expectations, and market acceptance of features, products, or services we build for The Habytat is uncertain. In addition, we have limited experience with virtual and augmented reality technology, which may enable other companies to compete more effectively than us. We may be unsuccessful in our research and product development efforts, including if we are unable to develop relationships with key participants in the metaverse or develop products that operate effectively with metaverse technologies, products, systems, networks, or standards. Our metaverse efforts may also divert resources and management attention from other areas of our business. 27 In addition, as our efforts to develop The Habytat evolve, we may be subject to a variety of existing or new laws and regulations in the United States and international jurisdictions, including in the areas of privacy, safety, competition, content regulation, consumer protection, and e-commerce, which may delay or impede the development of our products and services, increase our operating costs, require significant management time and attention, or otherwise harm our business. As a result of these or other factors, our metaverse strategy and investments may not be successful in the foreseeable future, or at all, which could adversely affect our business, reputation, or financial results. The Habytat is currently under development and no assurance can be given that it will be accepted by others or generate sufficient interest. The Habytat, our social metaverse platform, is currently under development. It is our intent that The Habytat will feature a virtual world containing immersive experiences in intelligent retail, social networking, gaming and the use of NFTs to grant property rights, boasting a wide range of “online + offline” and “virtual + reality” scenarios. We aim to continue researching and developing different applications for our social metaverse platform in order to generate continual interest in our social metaverse platform, including, but not limited to, our proprietary metaverse ad network and dynamic NFT technology. If we do not generate sufficient interest in our social metaverse platform we will not attract enough advertisers to make it profitable. The Habytat and VenVuu are both based on new and unproven technologies and therefore are subject to the risks of failure inherent in the development of new products and services. Because both The Habytat and VenVuu are based on certain new technologies, they are subject to risks of failure that are particular to new technologies, including the possibility that: ● The Habytat and/or VenVuu may not gain market acceptance; ● proprietary rights of third parties may preclude us from marketing a new product or service; ● The Habytat and/or VenVuu may not receive the exposure required to obtain new users; or ● third parties may market superior products or services. We may not be able to adequately evaluate the risks associated with our planned social metaverse and advertising platforms. The Habytat and VevVuu may not be successful and may expose us to legal, regulatory, and other risks. Given the nascent and evolving nature of the metaverse, digital assets and blockchain technology, we may be unable to accurately anticipate or adequately address such risks or the potential impact of such risks. The occurrence of any such risks could materially and adversely affect our business, financial condition, results of operations, reputation, and prospects. It is difficult to predict how the legal and regulatory framework around such digital assets and services will develop and how such developments will impact our business and our platforms. The launch of The Habytat and VevVuu also subjects us to risks similar to those associated with any new platform offering, including, but not limited to, our ability to accurately anticipate market demand and acceptance, our ability to successfully launch these initiatives, technical issues with the operation of The Habytat and/or VenVuu, and legal and regulatory risks as discussed above. We believe these risks may be heightened with respect to both of these initiatives, as metaverse assets and services, NFTs and other digital assets and services are still considered relatively novel concepts. If we fail to accurately anticipate or manage the risks associated with The Habytat and VenVuu, or if we directly or indirectly become subject to disputes, liability, or other legal or regulatory issues in connection with either of these initiatives, they may not be successful and our business, financial condition, results of operations, reputation, and prospects could be materially harmed. Digital ecosystems, including offerings of digital assets, is evolving, and uncertain, and new regulations or policies may materially adversely affect our development. The technologies supporting the metaverse and NFTs, like blockchain and NFTs, are new and rapidly evolving. If we fail to explore new advancements in these technologies and apply them innovatively to keep our products and services competitive, we may not experience significant growth of our business. Regulation of digital assets is currently underdeveloped and likely to rapidly evolve as government agencies take greater interest in them. Regulation also varies significantly among international, federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative and executive bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions, which may severely impact the permissibility of NFTs generally and the technology behind them or the means of transacting in or transferring them. The regulatory regime governing blockchain technologies, NFTs, and other digital assets is uncertain, and new regulations or policies may materially adversely affect our development and our value if we materially embrace digital assets in the future. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. ITEM 5. OTHER INFORMATION. None. 28 ITEM 6. EXHIBITS. Exhibit No. Description of Exhibits 2.1 Agreement and Plan of Merger, dated as of June 29, 2022, by and among DatChat, Inc., DatChat Patents I, Inc., DatChat Patents II, LLC, and Avila Security Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 5, 2022). 31.1* Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2** Certification of Principal Financial Officer Pursuant to 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.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE * Inline XBRL Taxonomy Extension Presentation Linkbase Document 104* Cover Page Interactive Data File - the cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, is formatted in Inline XBRL * Filed herewith. ** Furnished herewith. 29 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. DATCHAT, INC. Dated: November 14, 2022 /s/ Darin Myman Darin Myman Chief Executive Officer and Director (Principal Executive Officer) Dated: November 14, 2022 /s/ Brett Blumberg Brett Blumberg Chief Financial Officer (Principal Financial and Accounting Officer) 30