What changed in this filing

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Item 9A. Controls and Procedures

2023-03-31 compared with 2022-03-29 · 1201 added, 989 removed, 553 unchanged (80% of the section changed)

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and procedures was due to the following material weaknesses:

We lack segregation of duties within accounting functions duties as a result of our limited financial

resources to support hiring of personnel.

The lack of multiples levels of management review on complex business, accounting and financial reporting

● 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.

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OTHER INFORMATION

DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT

DISCLOSURE REGARDING FOREIGN JURISDICTIONS

THAT PREVENT INSPECTIONS

Not applicable.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth the name, age and positions of

our executive officers and directors.

Chief Executive Officer and Director

DIRECTORS, EXECUTIVE OFFICERS AND

CORPORATE GOVERNANCE

The following table sets forth the name, age

and positions of our executive officers and directors.

Chief Executive Officer and Chairman

Chief Technology Officer and Director

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Chief Information Officer

Gianfranco Lopane

Head of Business Development

Wayne Linsley

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Carly Schumer

The business background and certain other information about our directors

and executive officers is set forth below.

The business background and certain other information

about our directors and executive officers is set forth below.

Darin Myman - Chief Executive Officer

Darin Myman has served as Chief Executive Officer

and as a director of the Company since January 2016.

Prior to DatChat, Mr.

Myman was a co-founder and Chief Executive Officer of Wally

World Media, Inc., a public company.

He also has served as the Chief Executive Officer and a member of PeopleString’s board of

directors since PeopleString’s inception.

and Chairman of the board of directors since January 2015.

Previously, Mr.

Myman served as co-founder and Chief Executive Officer of Wally

World Media, Inc., (OTC:WLYW).

He also has served as the Chief Executive Officer and a member of PeopleString’s board of directors

since PeopleString’s inception.

Myman developed extensive Internet skills through a variety of positions.

executive management and founder experience having served as a co-founder and Chief Executive Officer of BigString Corporation, a publicly

traded company, since October 2005.

He also has corporate governance and board experience having served as a member of BigString’s

board of directors since BigString’s inception.

He has executive management

and founder experience having served as a co-founder and Chief Executive Officer of BigString Corporation, a publicly traded company,

since October 2005.

He also has corporate governance and board experience having served as a member of BigString’s board of directors

since BigString’s inception.

Prior to BigString, Mr.

Myman was a co-founder and Chief Executive Officer of LiveInsurance.com,

the first online insurance broker that pioneered the electronic storefront for large national insurance agencies.

Prior to co-founding

LiveInsurance.com, he served as a Vice President of the online brokerage services unit of Westminster Securities Corporation.

Myman was a co-founder and Chief Executive Officer of LiveInsurance.com, the

first online insurance broker that pioneered the electronic storefront for large national insurance agencies.

Prior to co-founding LiveInsurance.com,

he served as a Vice President of the online brokerage services unit of Westminster Securities Corporation.

We believe that Mr.

qualified to serve as a member of our board of directors because of his background in business and experience in senior leadership and

as a board member of public companies.

Peter Shelus - Chief Technology Officer

and Director Nominee

Peter Shelus is a co-founder of DatChat and has

served as our Chief Technology Officer since January 2016.

Shelus has over 10 years of ephemeral messaging and mobile video development

Shelus has been at the forefront of the secure messaging industry, having served as a lead engineer for one of the first

ephemeral messaging platforms, “BigString,” where he helped develop the patented technology that became a cornerstone of

self-destructing messaging.

Shelus received a bachelor’s degree in computer science from Rutgers University, where he graduated

Brett Blumberg – Chief Financial Officer

served as our Chief Technology Officer since January 2016 and a member of our board of directors since December 2022.

over 10 years of ephemeral messaging and mobile video development experience.

Shelus has been at the forefront of the secure messaging

industry, having served as a lead engineer for one of the first ephemeral messaging platforms, “BigString,” where he helped

develop the patented technology that became a cornerstone of self-destructing messaging.

Shelus holds Bachelor of Science degree

in computer science from Rutgers University.

We believe that Mr.

Shelus is qualified to serve as a member of our board of directors because

of his experience in the secure messaging industry and background in technology engineering and development.

Brett Blumberg – Chief Financial

Brett Blumberg has served as our Chief Financial

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talent acquisition for accounting and finance firms from 2000 to 2006.

Blumberg has a B.A.

in economics and psychology from SUNY

Blumberg holds a Bachelor of Art degree in economics and psychology

from SUNY Binghamton University.

Gabriel Daniels – Chief Information

Gabriel Daniels has been our Chief Information

Gabriel Daniels has served as our Chief Information

Officer since March 2021.

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While serving in the Army,

Daniels aided in the development of the Army’s Strategic Cybersecurity and Cyber’s Incident Handling Response Plans.

Daniels aided in the development of the Army’s Strategic Cybersecurity and Cyber Incident Handling Response Plans.

Daniels holds a master’s degree in cybersecurity and a bachelor’s degree in marketing from the University of Maryland

University College.

Gianfranco Lopane – Head of Business

Gianfranco Lopane has served as our Head of Business

Development since February 2022 and President of our wholly-owned subsidiary, SmarterVerse, since July 2022.

Since August 2018, Mr.

has served as the founder of Generiqo, a NFT, metaverse, and blockchain consulting company.

From June 2020 to May 2021, Mr.

Lopane served

as a senior account executive at XPO Logistics, Inc.

From April 2017 to January 2020, Mr.

Lopane served as a co-founder of Real World

Ads, an advertising network company for the metaverse.

Lopane holds a Master’s degree in commerce and marketing from EUDE Business

School in Madrid, Spain.

Linsley – Director

Linsley, one of our independent directors

had, since 2014 to 2021, served as the Vice President of Operations of CFO Oncall, Inc., and from 2011 to 2014 he served as the Director

of Operations of CFO Oncall, Inc., a company that provides financial management and CFO services.

Prior to CFO Oncall, Inc., Mr.

served as the Managing Member of Flagship Advisory & Management Group, LLC, a management consulting firm, from 2010 to 2011.

since 2019, Mr.

Linsley has served as the Chief Executive Officer and sole owner of Executive Outsource Group, Inc., a company that provides

financial reporting services.

Linsley has served in various other capacities including Alternate Channels Manager of Mettel;

of Channel Sales of Impsat, USA;

National Accounts Manager of Venali, Inc;

and Director of Sales of Broadview Networks.

Since January

Linsley has served as a member of the board of directors of Silo Pharma, Inc.

In addition, since April 2020,

Linsley has served as a member of the board of directors of Hoth Therapeutics, Inc.

Linsley received his bachelor

of business administration degree in accounting/business administration from Siena College.

Linsley has served as a member of the

board of directors since August 2021.

Linsley has over 40 years of experience in business management.

Since April 2020, Mr.

has served as a member of the board of directors of Hoth Therapeutics, Inc.

HOTH), a clinical-stage biopharmaceutical company

and since January 2020, he has served as a member of the board of directors of Silo Pharma, Inc.

SILO) a biopharmaceutical company

focused on merging traditional therapeutics with psychedelic research.

From 2014 to September 2021, Mr.

Linsley served as the Vice President

of Operations at CFO Oncall, Inc., a company that provides financial reporting and controller services on an outsourced basis and previously,

from 2012 to 2014, Mr.

Linsley worked at CFO Oncall, Inc.

as an independent contractor.

Linsley holds Bachelor of Science degree

in Business Administration from Siena College.

We believe that Mr.

Linsley is qualified to serve as a member of our board of directors

because of his experience as a director of public companies and background in financial reporting.

Joseph Nelson – Director

Joseph Nelson, one of our independent directors

has, since December 2017, served as the Head of Investor Relations for GasLog Ltd.

and GasLog Partners LP, a leading international

owner, operator and manager of liquefied natural gas carriers providing support to many of the world’s largest energy companies.

Prior to joining GasLog in 2017, Mr.

Nelson was an Equity Research Analyst, most recently at Credit Suisse from November 2014 to November

2017, where he covered US listed equities in the oil services and marine transportation sectors.

From November 2013 to November 2014,

Nelson worked as an Equity Research Analyst at Maxim Group, where he covered industrials.

Nelson began his career as a consultant

for the Louis Berger Group (now WSP), a global provider of infrastructure and development solutions, where he worked from 2006 to 2013,

specializing in data analysis.

Nelson has a bachelor of science degree in Chemistry and a bachelor of arts degree in Philosophy from

the Stevens Institute of Technology and an MBA from New York University’s Stern School of Business.

Joseph Nelson has served as a member of our board

of directors since August 2021.

Since December 2017, Mr.

Nelson has served as the Head of Investor Relations for GasLog Ltd., and GasLog

Partners LP, a leading international owner, operator and manager of liquefied natural gas carriers providing support to many of

the world’s largest energy companies.

From November 2014 to November 2017, Mr.

Nelson served as an Equity Research Analyst at Credit

From November 2013 to November 2014, Mr.

Nelson worked as an Equity Research Analyst at Maxim Group.

Nelson holds a Master

of Business Administration degree from New York University’s Stern School of Business;

a Bachelor of Science degree in chemistry

and a Bachelor of Art degree in philosophy from the Stevens Institute of Technology.

We believe that Mr.

Nelson is qualified to

serve as a member of our board of directors because of his experience in investor relations and background in business and finance.

Carly Schumer – Director

Carly Schumer, one of our independent directors,

since May 2011, worked as a freelance digital consultant.

From May 2018 to June 2020, Ms.

Schumer served as a digital director for Lust

For Life, LLC, a subsidiary of Renewable Energy & Power, Inc.

Schumer has in-depth experience in ecommerce and

digital industries with specializations in digital marketing campaign development, content marketing strategy, SEO and paid media management.

Her digital marketing background is rooted in inbound marketing strategies and her approach focuses on listening to user needs and communicating

to them via high quality content in order to attract return visitors and engagements.

Schumer specializes in working with start-up

companies, across the technology, healthcare and fashion industries.

She is passionate about innovation and newly emerging marketing

trends with a keen eye toward insights and process.

She worked as the Marketing Director for Jerrick Media (now Creatd Nasdaq:

from inception to its eventual public offering where she was responsible for managing SEO, social and marketing employees and strategies.

Schumer received a bachelor’s degree in Arts, Entertainment & Media Management from Columbia College.

Carly Schumer has served as a member of our board

of directors since August 2021.

Since May 2011, Ms.

Schumer has worked as a digital consultant at ShmeeLive.

From May 2018 to June 2020,

Schumer served as a digital director for Lust For Life, LLC, a subsidiary of Renewable Energy & Power, Inc.

Schumer has in-depth experience in ecommerce and digital industries with specializations in digital marketing campaign development, content

marketing strategy, SEO and paid media management.

Her digital marketing background is rooted in inbound marketing strategies and her

approach focuses on listening to user needs and communicating to them via high quality content in order to attract return visitors and

Schumer specializes in working with start-up companies, across the technology, healthcare and fashion industries.

Schumer holds Bachelor of Art degree in arts, entertainment & media management from Columbia College Chicago.

We believe that

Schumer is qualified to serve as a member of our board of directors because of her experience and background in digital marketing

for e-commerce and public companies.

Family Relationships

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committee is responsible for reviewing and recommending, among other things:

● the adequacy and

form of compensation of the board;

● the compensation

of Chief Executive Officer, including base salary, incentive bonus, stock option and other

grant, award and benefits upon hiring and on an annual basis;

● the compensation

of other senior management upon hiring and on an annual basis;

● the Company’s

incentive compensation and other equity-based plans and recommending changes to such plans

to our board of directors, when necessary.

● the adequacy and form of compensation of the board;

● the compensation of Chief Executive Officer, including base

salary, incentive bonus, stock option and other grant, award and benefits upon hiring and on an annual basis;

● the compensation of other senior management upon hiring and

on an annual basis;

● the Company’s incentive compensation and other equity-based

plans and recommending changes to such plans to our board of directors, when necessary.

Our compensation committee will consists of Wayne

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is responsible for, among other things:

● developing criteria

for membership on the board of directors and committees;

● identifying individuals

qualified to become members of the board of directors;

● recommending persons

to be nominated for election as directors and to each committee of the board of directors;

● annually reviewing

our corporate governance guidelines;

monitoring and evaluating the performance

of the board of directors and leading the board in an annual self-assessment of its practices and effectiveness.

● developing criteria for membership on the board of directors

and committees;

● identifying individuals qualified to become members of the

board of directors;

● recommending persons to be nominated for election as directors

and to each committee of the board of directors;

● annually reviewing our corporate governance guidelines;

● monitoring and evaluating the performance of the board of

directors and leading the board in an annual self-assessment of its practices and effectiveness.

Our nominating and corporate governance committee

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from, any provision of the code.

We do not currently have a policy prohibiting

employees, officers, or directors from engaging in transactions that hedge or offset, or are designed to hedge or offset, any decrease

in the market value of the Company’s equity securities.

Changes in Nominating Procedures

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Summary Compensation Table

The following table

sets forth for the year ended December 31, 2021, the compensation awarded to, paid to, or earned by, our Chief Executive Officer

and two other most highly compensated executive officers, whose total compensation during such years exceeded $100,000.

We refer to these

officers as our “named executive officers.”.

Name and Principal

Incentive Plan

The following table sets forth for the year ended

December 31, 2022, the compensation awarded to, paid to, or earned by, our Chief Executive Officer and two other most highly compensated

executive officers, whose total compensation during such years exceeded $100,000.

We refer to these officers as our “named executive

Name and Principal Position

Non-Equity Incentive Plan Compensation

Nonqualified Deferred Compensation

All Other Compensation

Chief Executive Officer

Brett Blumberg

Chief Financial Officer

Chief Technology Officer

1) On September 28, 2021, we granted 250,000 stock options

The options have a term of 5 years from the date of grant and are exercisable

at an exercise price of $35 per share.

The options vest 25% every six months from date of

grant for two years.

2) Other compensation was made up of health insurance

Outstanding Equity Awards at December

1) On September 28, 2021, we granted 250,000 stock options to

The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $35 per share.

vest 25% every six months from date of grant for two years.

2) Other compensation was made up of health insurance expenses.

Outstanding Equity

Awards at December 31, 2022

The following table provides information regarding

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or other equity awards outstanding as of December 31, 2022.

Balance at December 31, 2020

Balance at December 31, 2021

Options exercisable at end of period

Options expected to vest

Weighted average fair value of options granted during the period

Director Compensation

To date, we have not compensated our directors

for their service to the Company.

OUTSTANDING EQUITY AWARDS AT 2022 FISCAL YEAR-END

OPTION AWARDS

Incentive Plan

Unexercisable

Incentive Plan

that have not

Non-Employee Director Compensation

The following table presents the total compensation

for each person who served as a non-employee member of our Board of Directors and received compensation for such service during

the fiscal year ended December 31, 2022.

Other than as set forth in the table and described more fully below, we did not pay any

compensation, make any equity awards or non-equity awards to, or pay any other compensation to any of the non-employee members

of our Board of Directors in 2022.

Incentive Plan

compensation earnings

All Other Compensation

Joseph Nelson

Carly Schumer

Wayne Linsley

Employment Agreements

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Myman, without Cause.

2021 Equity Incentive Plan

The following is a summary of the material features

of our 2021 Equity Incentive Plan (the “2021 Plan”).

This summary is qualified in its entirety by the full text of the 2021

Authorized Shares .

A total of 2,000,000

shares of our common stock were originally reserved for issuance pursuant to the 2021 Plan.

Our board of directors and stockholders adopted

and approved the 2021 Plan on July 26, 2021 (the “Effective Date”).

Types of Awards .

2021 Plan provides for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights (“SARs”),

restricted stock, restricted stock units (“RSUs”), and other stock-based awards.

Items described above in the Section

called “Shares Available” are incorporated herein by reference.

Administration .

2021 Plan will be administered by our board of directors, or if our board of directors does not administer the 2021 Plan, a committee

or subcommittee of our board of directors that complies with the applicable requirements of Section 16 of the Exchange Act and any other

applicable legal or stock exchange listing requirements (each of our board of directors or such committee or subcommittee, the “plan

administrator”).

The plan administrator may interpret the 2021 Plan and may prescribe, amend and rescind rules and make all other

determinations necessary or desirable for the administration of the 2021 Plan, provided that, subject to the equitable adjustment provisions

described below, the plan administrator will not have the authority to reprice or cancel and re-grant any award at a lower exercise,

base or purchase price or cancel any award with an exercise, base or purchase price in exchange for cash, property or other awards without

first obtaining the approval of our stockholders.

The 2021 Plan permits the plan administrator

to select the eligible recipients who will receive awards, to determine the terms and conditions of those awards, including but not limited

to the exercise price or other purchase price of an award, the number of shares of common stock or cash or other property subject to

an award, the term of an award and the vesting schedule applicable to an award, and to amend the terms and conditions of outstanding

Restricted Stock and Restricted Stock Units .

stock and RSUs may be granted under the 2021 Plan.

The plan administrator will determine the purchase price, vesting schedule and performance

goals, if any, and any other conditions that apply to a grant of restricted stock and RSUs.

If the restrictions, performance goals or

other conditions determined by the plan administrator are not satisfied, the restricted stock and RSUs will be forfeited.

the provisions of the 2021 Plan and the applicable award agreement, the plan administrator has the sole discretion to provide for the

lapse of restrictions in instalments.

Unless the applicable award agreement provides

otherwise, participants with restricted stock will generally have all of the rights of a stockholder;

provided that dividends will only

be paid if and when the underlying restricted stock vests.

RSUs will not be entitled to dividends prior to vesting but may be entitled

to receive dividend equivalents if the award agreement provides for them.

The rights of participants granted restricted stock or RSUs

upon the termination of employment or service to us will be set forth in the award agreement.

stock options and non-statutory stock options may be granted under the 2021 Plan.

An “incentive stock option” means

an option intended to qualify for tax treatment applicable to incentive stock options under Section 422 of the Internal Revenue Code.

A “non-statutory stock option” is an option that is not subject to statutory requirements and limitations required for

certain tax advantages that are allowed under specific provisions of the Internal Revenue Code.

A non-statutory stock option under

the 2021 Plan is referred to for federal income tax purposes as a “non-qualified” stock option.

Each option granted under

the Plan will be designated as a non-qualified stock option or an incentive stock option.

At the discretion of the administrator,

incentive stock options may be granted only to our employees, employees of our “parent corporation” (as such term is defined

in Section 424(e) of the Code) or employees of our subsidiaries.

The exercise period of an option may not exceed

ten years from the date of grant and the exercise price may not be less than 100% of the fair market value of a share of common stock

on the date the option is granted (110% of fair market value in the case of incentive stock options granted to ten percent stockholders).

The exercise price for shares of common stock subject to an option may be paid in cash, or as determined by the administrator in its

sole discretion, (i) through any cashless exercise procedure approved by the administrator (including the withholding of shares of common

stock otherwise issuable upon exercise), (ii) by tendering unrestricted shares of common stock owned by the participant, (iii) with any

other form of consideration approved by the administrator and permitted by applicable law or (iv) by any combination of these methods.

The option holder will have no rights to dividends or distributions or other rights of a stockholder with respect to the shares of Common

Stock subject to an option until the option holder has given written notice of exercise and paid the exercise price and applicable withholding

In the event of a participant’s termination

of employment or service, the participant may exercise his or her option (to the extent vested as of such date of termination) for such

period of time as specified in his or her option agreement.

Stock Appreciation Rights .

may be granted either alone (a “free-standing SAR”) or in conjunction with all or part of any option granted under the

2021 Plan (a “tandem SAR”).

A free-standing SAR will entitle its holder to receive, at the time of exercise, an amount

per share up to the excess of the fair market value (at the date of exercise) of a share of common stock over the base price of the free-standing SAR

(which shall be no less than 100% of the fair market value of the related shares of common stock on the date of grant) multiplied by

the number of shares in respect of which the SAR is being exercised.

A tandem SAR will entitle its holder to receive, at the time of

exercise of the SAR and surrender of the applicable portion of the related option, an amount per share up to the excess of the fair market

value (at the date of exercise) of a share of common stock over the exercise price of the related option multiplied by the number of

shares in respect of which the SAR is being exercised.

The exercise period of a free-standing SAR may not exceed ten years from

the date of grant.

The exercise period of a tandem SAR will also expire upon the expiration of its related option.

The holder of a SAR will have no rights to dividends

or any other rights of a stockholder with respect to the shares of Common Stock subject to the SAR until the holder has given written

notice of exercise and paid the exercise price and applicable withholding taxes.

In the event of an participant’s termination

of employment or service, the holder of a SAR may exercise his or her SAR (to the extent vested as of such date of termination) for such

period of time as specified in his or her SAR agreement.

Other Stock-Based Awards .

administrator may grant other stock-based awards under the 2021 Plan, valued in whole or in part by reference to, or otherwise based

on, shares of common stock.

The administrator will determine the terms and conditions of these awards, including the number of shares

of common stock to be granted pursuant to each award, the manner in which the award will be settled, and the conditions to the vesting

and payment of the award (including the achievement of performance goals).

The rights of participants granted other stock-based awards

upon the termination of employment or service to us will be set forth in the applicable award agreement.

In the event that a bonus is

granted in the form of shares of common stock, the shares of common stock constituting such bonus shall, as determined by the administrator,

be evidenced in uncertificated form or by a book entry record or a certificate issued in the name of the participant to whom such grant

was made and delivered to such participant as soon as practicable after the date on which such bonus is payable.

Any dividend or dividend

equivalent award issued hereunder shall be subject to the same restrictions, conditions and risks of forfeiture as apply to the underlying

Equitable Adjustment and Treatment of Outstanding Awards Upon

a Change in Control

Equitable Adjustments .

the event of a merger, consolidation, reclassification, recapitalization, spin-off, spin-out, repurchase, reorganization, special or

extraordinary dividend or other extraordinary distribution (whether in the form of common shares, cash or other property), combination,

exchange of shares, or other change in corporate structure affecting our common stock, an equitable substitution or proportionate adjustment

shall be made in (i) the aggregate number and kind of securities reserved for issuance under the 2021 Plan, (ii) the kind and number

of securities subject to, and the exercise price of, any outstanding options and SARs granted under the 2021 Plan, (iii) the kind, number

and purchase price of shares of common stock, or the amount of cash or amount or type of property, subject to outstanding restricted

stock, RSUs and other stock-based awards granted under the 2021 Plan and (iv) the terms and conditions of any outstanding awards

(including any applicable performance targets).

Equitable substitutions or adjustments other than those listed above may also be made

as determined by the plan administrator.

In addition, the plan administrator may terminate all outstanding awards for the payment of

cash or in-kind consideration having an aggregate fair market value equal to the excess of the fair market value of the shares of

common stock, cash or other property covered by such awards over the aggregate exercise price, if any, of such awards, but if the exercise

price of any outstanding award is equal to or greater than the fair market value of the shares of common stock, cash or other property

covered by such award, the plan administrator may cancel the award without the payment of any consideration to the participant.

respect to awards subject to foreign laws, adjustments will be made in compliance with applicable requirements.

Except to the extent

determined by the plan administrator, adjustments to incentive stock options will be made only to the extent not constituting a “modification”

within the meaning of Section 424(h)(3) of the Code.

Change in Control .

2021 Plan provides that, unless otherwise determined by the plan administrator and evidenced in an award agreement, if a “change

in control” (as defined below) occurs and a participant is employed by us or any of our affiliates immediately prior to the consummation

of the change in control, then the plan administrator, in its sole and absolute discretion, may (i) provide that any unvested or unexercisable

portion of an award carrying a right to exercise will become fully vested and exercisable;

and (ii) cause the restrictions, deferral

limitations, payment conditions and forfeiture conditions applicable to any award granted under the 2021 Plan to lapse, and the awards

will be deemed fully vested and any performance conditions imposed with respect to such awards will be deemed to be fully achieved at

target performance levels.

The administrator shall have discretion in connection with such change in control to provide that all outstanding

and unexercised options and SARs shall expire upon the consummation of such change in control.

For purposes of the 2021 Plan, a “change

in control” means, in summary, the first to occur of the following events:

(i) a person or entity becomes the beneficial owner

of more than 50% of our voting power;

(ii) an unapproved change in the majority membership of our board of directors;

(iii) a merger

or consolidation of us or any of our subsidiaries, other than (A) a merger or consolidation that results in our voting securities continuing

to represent 50% or more of the combined voting power of the surviving entity or its parent and our board of directors immediately prior

to the merger or consolidation continuing to represent at least a majority of the board of directors of the surviving entity or its parent

or (B) a merger or consolidation effected to implement a recapitalization in which no person is or becomes the beneficial owner of our

voting securities representing more than 50% of our combined voting power;

or (iv) stockholder approval of a plan of our complete liquidation

or dissolution or the consummation of an agreement for the sale or disposition of substantially all of our assets, other than (A) a sale

or disposition to an entity, more than 50% of the combined voting power of which is owned by our stockholders in substantially the same

proportions as their ownership of us immediately prior to such sale or (B) a sale or disposition to an entity controlled by our board

of directors.

However, a change in control will not be deemed to have occurred as a result of any transaction or series of integrated

transactions following which our stockholders, immediately prior thereto, hold immediately afterward the same proportionate equity interests

in the entity that owns all or substantially all of our assets.

Tax Withholding

Each participant will be required to make arrangements

satisfactory to the plan administrator regarding payment of up to the maximum statutory tax rates in the participant’s applicable

jurisdiction with respect to any award granted under the 2021 Plan, as determined by us.

We have the right, to the extent permitted by

applicable law, to deduct any such taxes from any payment of any kind otherwise due to the participant.

With the approval of the plan

administrator, the participant may satisfy the foregoing requirement by either electing to have us withhold from delivery of shares of

common stock, cash or other property, as applicable, or by delivering already owned unrestricted shares of common stock, in each case,

having a value not exceeding the applicable taxes to be withheld and applied to the tax obligations.

We may also use any other method

of obtaining the necessary payment or proceeds, as permitted by applicable law, to satisfy our withholding obligation with respect to

Amendment and Termination of the 2021 Plan

The 2021 Plan provides our board of directors

with authority to amend, alter or terminate the 2021 Plan, but no such action impair the rights of any participant with respect to outstanding

awards without the participant’s consent.

The plan administrator may amend an award, prospectively or retroactively, but no such

amendment may materially impair the rights of any participant without the participant’s consent.

Stockholder approval of any such

action will be obtained if required to comply with applicable law.

The 2021 Plan will terminate on the tenth anniversary of the Effective

Date (although awards granted before that time will remain outstanding in accordance with their terms).

are required to prepare a financial restatement due to the material non-compliance with any financial reporting requirement, then

the plan administrator may require any Section 16 officer to repay or forfeit to us that part of the cash or equity incentive compensation

received by that Section 16 officer during the preceding three years that the plan administrator determines was in excess of the amount

that such Section 16 officer would have received had such cash or equity incentive compensation been calculated based on the financial

results reported in the restated financial statement.

The plan administrator may take into account any factors it deems reasonable in

determining whether to seek recoupment of previously paid cash or equity incentive compensation and how much of such compensation to

recoup from each Section 16 officer (which need not be the same amount or proportion for each Section 16 officer).

The amount and form

of the incentive compensation to be recouped shall be determined by the administrator in its sole and absolute discretion

Brett Blumberg Employment Agreement

On February 15, 2022, the Company entered into

an employment agreement (the “Blumberg Employment Agreement”) with Brett Blumberg effective as of February 15, 2022 pursuant

Blumberg will serve as Chief Financial Officer of the Company.

The term of the Blumberg Employment Agreement will continue

for a period of one year from the Effective Date and automatically renews for successive one year periods at the end of each term until

either party delivers written notice of their intent not to review at least 30 days prior to the applicable renewal date.

the terms of the Blumberg Employment Agreement, Mr.

Blumberg (i) shall receive an annual base salary of $60,000 (effective as of February

15, 2022), (ii) shall be entitled to earn a bonus, subject to the sole discretion of the Company’s Board and (iii) shall be eligible

to receive awards pursuant to the Company’s equity incentive plans, subject to the sole discretion of the Company’s compensation

Blumberg is also entitled to participate in any and all Employee Benefit Plans (as defined in the Blumberg Employment

Agreement), from time to time, that are then in effect along with vacation, sick and holiday pay in accordance with the Company’s

policies established and in effect from time to time.

The Blumberg Employment Agreement may be terminated by either the Company or Mr.

Blumberg at any time and for any reason upon 10 days prior written notice.

Upon termination of the Blumberg Employment Agreement, Mr.

Blumberg shall be entitled to (i) any equity award that has vested prior to the termination date, (ii) reimbursement of expenses incurred

on or prior to such termination date and (iii) such employee benefits to which Mr.

Blumberg may be entitled as of the termination date

(collectively, the “Accrued Amounts”).

The Blumberg Employment Agreement shall also terminate upon Mr.

Blumberg’s death

or the Company may terminate Mr.

Blumberg’s employment upon his Disability (as defined in the Blumberg Employment Agreement).

the termination of Mr.

Blumberg’s employment for death or Disability, Mr.

Blumberg shall be entitled to receive the Accrued Amounts.

The Blumberg Employment Agreement also contains covenants prohibiting Mr.

Blumberg from disclosing confidential information with respect

to the Company.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL

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power with respect to all shares beneficially owned, subject to community property laws, where applicable.

Directors, Director Nominees, Named

Executive Officers and Named Executive Officer Nominees

Percentage (2)

Directors, Director Nominees, Named Executive Officers and Named Executive Officer Nominees (1)

Darin Myman(3)

Brett Blumberg

Gabriel Daniels

Joseph Nelson(4)

Carly Schumer(4)

All Director, Director Nominees, Named Executive Officers

and Named Executive Officer Nominees as a group (7 persons)

All Director, Director Nominees, Named Executive Officers and Named Executive Officer Nominees as a group (6 persons)

* Represents beneficial ownership of less than 1%.

The address of each holder listed below, except as otherwise indicated, is 204 Nielsen Street, New

Brunswick, New Jersey 08901.

(1) The address of each holder listed below, except as otherwise

indicated, is 204 Neilson Street, New Brunswick, New Jersey 08901.

The calculation in this column is based upon 20,234,066 shares of common stock outstanding on March 27, 2023.

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment

power with respect to the subject securities.

Shares of common stock that are currently exercisable or convertible within 60 days

of March 21, 2022 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage

beneficial ownership of such person, but are not treated as outstanding for the purpose of computing the percentage beneficial ownership

of any other person.

Securities Authorized for Issuance Under

Equity Compensation Plans

The following table

summarizes information about our equity compensation plans as of December 31, 2021.

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to the subject securities.

Shares of common stock that are currently exercisable or convertible within 60 days of March 27, 2023 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage beneficial ownership of such person, but are not treated as outstanding for the purpose of computing the percentage beneficial ownership of any other person.

Includes 187,500 vested stock options

Includes 43,750 of vested stock options

Securities Authorized for Issuance Under Equity

Compensation Plans

The following table summarizes information about

our equity compensation plans as of December 31, 2022.

Plan Category

Number of securities to

be issued upon exercise

of outstanding options,

warrants and rights

securities to

outstanding options, warrants

Weighted average

outstanding options,

warrants and rights

Number of securities remaining

available for future issuance under

outstanding options, warrants

securities remaining available for future

issuance under

equity compensation plans

(excluding securities reflected in

Equity compensation plans approved by security

Equity compensation plans approved by security holder

Equity compensation plans not approved by security holder

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Except as described below and except for employment

arrangements which are described under “executive compensation,” since January 1, 2019, there has not been, nor is there

currently proposed, any transaction in which we are or were a participant, the amount involved exceeds the lesser of $120,000 or 1% of

the average of the total assets at December 31, 2021 and 2020, and any of our directors, executive officers, holders of more than 5%

of our common stock or any immediate family member of any of the foregoing had or will have a direct or indirect material interest.

arrangements which are described under “executive compensation,” since January 1, 2019, there has not been, nor is there currently

proposed, any transaction in which we are or were a participant, the amount involved exceeds the lesser of $120,000 or 1% of the average

of the total assets at December 31, 2022 and 2021, and any of our directors, executive officers, holders of more than 5% of our common

stock or any immediate family member of any of the foregoing had or will have a direct or indirect material interest.

Our Chief Executive Officer, Mr.

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to the officer of $1,315 and $203, respectively, which is presented as due to related party on the balance sheets.

These advances are short-term

in nature and non-interest bearing.

These advances are

short-term in nature and non-interest bearing.

During the years ended December 31, 2022 and 2021, respectively, Mr.

Myman provided advances to the

Company for working capital purposes totaling of $177,624 and $265,623 and the Company repaid $177,615 and $279,114 of these advances,

Myman provided advances

to the Company for working capital purposes totaling of $20,294 and $177,624 and the Company repaid $19,182 and $177,615 of these advances,

respectively.

On May 29, 2015, we entered into a promissory

note agreement, providing for the issuance of a note in the principal amount of $30,000 to Silo Pharma, Inc.

The note was due on July

The annual interest rate for the loan is 10%.

We defaulted to repay the note when it was due.

On February 25, 2016, we entered

into an extension agreement with the lender to extend the maturity date of the note to December 31, 2016.

In accordance with the extension

agreement, the lender and us agreed to increase the amount of the principal amount of the note by $5,000 as penalty for our failure to

repay the note on July 29, 2015.

In connection with the increase in principal amount of $5,000, we recorded non-cash interest expense

of $5,000 on February 25, 2016.

On October 25, 2017, we agreed to pay an additional $5,000 as penalty fee for the extension of maturity

date to June 30, 2018.

Between October 2018 and November 2018, we paid a total principal amount of $10,000.

Between March 2019 and December

2019, we paid a total principal amount of $13,500.

During the year ended December 31, 2020, we paid a total principal amount of $9,000.

As of December 31, 2020 and 2019, the principal balance of this note was $7,500 and $16,500, respectively.

This note is currently in

We fully paid the principal amount of $7,500 in February 2021.

As of December 31, 2021 and 2020, accrued interest

related to the note payable – related party above amounted to $16,364 and $16,282, respectively, and is included in accounts payable

and accrued expenses on the accompanying balance sheets.

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 year ended December 31, 2022, the Company paid Metabizz $514,957

for software development services which is included in research and development expense – related party on the accompanying consolidated

statements of operations.

Related Persons Transaction Policy

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of directors, will take into account the relevant available facts and circumstances including, but not limited to:

● the risks, costs

and benefits to us;

● the impact on

a director’s independence in the event that the related person is a director, immediate

family member of a director or an entity with which a director is affiliated;

● the availability

of other sources for comparable services or products;

● the terms available

to or from, as the case may be, unrelated third parties or to or from employees generally.

● the risks, costs and benefits to us;

● the impact on a director’s independence in the event

that the related person is a director, immediate family member of a director or an entity with which a director is affiliated;

● the availability of other sources for comparable services

● the terms available to or from, as the case may be, unrelated

third parties or to or from employees generally.

The policy requires that, in determining whether

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as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which,

in the opinion of the company’s board of directors would interfere with the director’s exercise of independent judgment in carrying out

the responsibilities of a director.

in the opinion of the company’s board of directors would interfere with the director’s exercise of independent judgment in

carrying out the responsibilities of a director.

The board has determined that Wayne D.

Linsley, Carly Schumer and Joseph Nelson are “independent”.

Linsley, Carly Schumer and Joseph Nelson are

“independent”.

Our board currently consists of three independent directors and two non-independent directors.

6 unchanged sentences

All Other Fees

(1) Audit Fees are paid for professional services rendered

for the audit of the Company’s annual consolidated financial statements and reviews

of the Company’s unaudited condensed consolidated financial statements.

(1) Audit Fees are paid for professional services rendered for

the audit of the Company’s annual consolidated financial statements and reviews of the Company’s unaudited condensed consolidated

financial statements.

Pre-Approval Policies and Procedures

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EXHIBIT AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

(a) The following documents are filed as part of this report:

(1) Financial Statements:

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB Firm ID:

Consolidated Balance Sheets

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Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company’s Form S-1/A filed on August 9, 2021)

Amendment No.1 to Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on October 26, 2022)

Certificate of Designation of Series A Preferred Stock (Incorporated by reference to Exhibit 3.3 to the Company’s Form S-1/A filed on August 9, 2021)

4 unchanged sentences

Form of Stock Certificate (Incorporated by reference to Exhibit 4.3 to the Company’s Form S-1/A filed on August 9, 2021)

Agreement between the Company and Brett Blumberg (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed

on February 16, 2022)

Partnership Plan by and between, Datchat, Inc.

and Bartsool Sports (Incorporated by reference to Exhibit 10.1 to the Company’s

Form 8-K filed on October 13, 2021)

of Work by and between, Datchat, Inc.

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 Form 8-K Filed on July 5, 2022)

Employment Agreement between the Company and Brett Blumberg (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 16, 2022)

Media Partnership Plan by and between, Datchat, Inc.

and Bartsool Sports (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 13, 2021)

Statement of Work by and between, Datchat, Inc.

and IZEA Worldwide, Inc.

(Incorporated by reference to Exhibit 10.1 to the Company’s

Form 8-K filed on September 24, 2021)

(Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 24, 2021)

2021 Equity Incentive Plan and forms of award agreements thereunder (Incorporated by reference to Exhibit 10.2 to the Company’s Form S-1/A filed on August 9, 2021)

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Inline XBRL Taxonomy Extension Definition Linkbase Document

Cover Page Interactive Data File – the cover page of the Registrant’s Annual Report on

Form 10-K for the year ended December 31, 2021 is formatted in Inline XBRL

Cover Page Interactive Data File – the cover page of the

Registrant’s Annual Report on Form 10-K for the year ended December 31, 2022 is formatted in Inline XBRL

* Filed herewith.

Indicates a management contract or any compensatory plan, contract or arrangement.

+ Indicates a management contract or any compensatory plan,

contract or arrangement.

FORM 10-K SUMMARY

Not applicable.

Pursuant to the requirements of Section 13 and

15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf

by the undersigned, thereunto duly authorized on this 29th day of March, 2022.

Pursuant to the requirements

of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed

on its behalf by the undersigned, thereunto duly authorized on this 31 st day of March, 2023.

DATCHAT, INC.

41 unchanged sentences

Notes to Consolidated Financial Statements F-7

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING

To the Board of Directors and

Stockholders of DatChat, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets

of DatChat, Inc.

(the Company) as of December 31, 2021 and 2020, and the related statements of operations, stockholders’ equity

(deficit), and cash flows for the years ended December 31, 2021 and 2020, and the related notes to the financial statements (collectively

referred to as the financial statements).

In our opinion, the financial statements present

fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations

and its cash flows for the years ended December 31, 2021 and 2020, in conformity with accounting principles generally accepted in the

United States of America.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated

balance sheets of DatChat, Inc.

(the Company) as of December 31, 2022 and 2021, and the related consolidated statements of operations,

stockholders’ equity, and cash flows for the years ended December 31, 2022 and 2021, and related notes (collectively referred to

as the consolidated financial statements).

In our opinion, the consolidated financial statements

present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021 the results of its operations

and its cash flows for the years ended December 31, 2022 and 2021 in conformity with accounting principles generally accepted in the United

States of America.

Basis for Opinion

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Accordingly, we express no such opinion.

Our audits included performing procedures to

assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that

respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well

as evaluating the overall presentation of the financial statements.

Our audits included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

6 unchanged sentences

Brooks and Associates CPAs, P.A .

We have served as the Company’s auditors since

We have served as the Company’s auditor

Palm Beach Gardens, Florida

March 31, 2023

BALANCE SHEETS

DATCHAT, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

CURRENT ASSETS:

Cash and cash equivalents

Short-term investments, at fair value

Accounts receivable

Prepaid expenses and other current

Prepaid expenses

Total Current Assets

1 unchanged sentence

Property and equipment, net

Operating lease right-of-use asset,

Total Non-Current Assets

Digital currencies and other digital assets

Operating lease right-of-use asset, net

Total Other Assets

LIABILITIES AND STOCKHOLDERS’ EQUITY

1 unchanged sentence

Accounts payable and accrued expenses

Note payable, current portion

Note payable - related party

Operating lease liability, current portion

Deferred revenues

Contract liabilities

Due to related party

1 unchanged sentence

LONG-TERM LIABILITIES:

Note payable, less current

Operating lease liability, less

current portion

Operating lease liability, less current portion

Total Long-Term Liabilities

3 unchanged sentences

Preferred stock ($ 0.0001 par value;

20,000,000 shares authorized) Series A Preferred stock ($ 0.0001 Par Value;

20,000,000 shares authorized)

Series A Preferred stock ($ 0.0001 Par Value;

1 Share authorized;

none issued and outstanding at December 31, 2021 and 2020)

none issued and outstanding on December 31, 2022 and 2021)

Common stock ($ 0.0001 par value;

180,000,000 shares authorized;

19,597,419 and 12,727,820 shares issued and outstanding at December 31, 2021 and 2020, respectively)

Common stock to be issued 1,389 and 52,782 shares, at December 31, 2021 and 2020, respectively)

20,597,169 and 19,597,169 shares issued and outstanding on December 31, 2022 and 2021, respectively)

Common stock to be issued ( 1,389 shares on December 31, 2022 and 2021)

Additional paid-in capital

3 unchanged sentences

Total Stockholders’ Equity

Total Liabilities and Stockholders’

See accompanying notes to

financial statements.

Total Liabilities and Stockholders’ Equity

See accompanying notes to consolidated financial statements.

DATCHAT, INC.

STATEMENTS OF OPERATIONS

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Year Ended

OPERATING EXPENSES:

2 unchanged sentences

Professional and consulting expenses

Research and development expense - related party

General and administrative expenses

Impairment loss on intangible asset

Impairment loss on digital currencies and other digital assets

Total operating expenses

LOSS FROM OPERATIONS

OTHER INCOME (EXPENSE):

Interest expense

Gain from extinguishment of debt

Gain from forgiveness of debt

Interest income

Gain from forgiveness of debt

Realized gain on short-term investments

Unrealized gain on short-term investments

Total other income, net

$ ( 10,829,034 )

$ ( 979,470 )

NET LOSS PER COMMON SHARE:

2 unchanged sentences

Basic and diluted

See accompanying notes to

financial statements.

See accompanying notes to consolidated financial statements.

DATCHAT, INC.

STATEMENT OF CHANGES IN STOCKHOLDERS’

EQUITY (DEFICIT)

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021

Stockholders’

Preferred Stock

Balance, December 31, 2019

$ ( 15,782,042 )

$ ( 339,880 )

Sale of common stock, net of offering costs

Common stock issued for services

Common stock issued for cashless exercise of stock warrants

Cancellation of repurchase common stock

( 1,000,000 )

Net loss for the year ended December

Stockholders’

Balance, December 31, 2020

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Common stock issued for services

Stock based compensation in connection with stock option

Accretion of stock-based compensation for services

Stock-based compensation in connection with stock option grants

Accretion of stock-based compensation

Fractional shares due to reverse split

Net loss for the year ended December

Net loss for the year

( 10,829,034 )

2 unchanged sentences

( 27,590,546 )

See accompanying notes to the financial statements.

Accretion of stock based compensation in connection with stock option grants

Accretion of stock-based professional fees in connection

with stock option grants and shares

Shares issued for asset acquisition

Net loss for the year

( 12,138,572 )

Balance, December 31, 2022

$ ( 39,729,118 )

See accompanying notes to consolidated financial statements.

DATCHAT, INC.

CONDENSED STATEMENTS OF CASH FLOWS

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

1 unchanged sentence

$ ( 10,829,034 )

Adjustments to reconcile net loss to net cash used in operating

Amortization of ROU asset

Gain from extinguishment of debt

Gain from forgiveness of debt

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

Amortization of right of use asset

Stock-based compensation

Stock-based professional fees

Gain from extinguishment of debt

Impairment loss on intangible asset

Impairment loss on digital currencies and other digital assets

Non-cash digital currency and other digital assets fees

Non-cash revenue from sale of Venvuu NFT digital asset

Realized gain on short-term investments

Unrealized gain on short-term investments

Changes in operating assets and liabilities:

2 unchanged sentences

Accounts payable and accrued expenses

Deferred revenues

Contract liabilities

Operating lease liability

3 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sale of short-term investments

Purchase of short-term investments

( 20,842,149 )

Purchases of property and equipment

Proceeds from sale of digital currencies and other digital assets

Purchases of digital currencies and other digital assets

NET CASH USED IN INVESTING ACTIVITIES

( 11,209,126 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Advances from a related party

Advances from related party

Payments on related party advances

Repayment of notes payable - related party

Proceeds from notes payable

Repayment of convertible notes payable

Proceeds from exercise of Series A Warrants

Net proceeds from sale of common

stock and common stock to be issued, net of offering costs

NET CASH PROVIDED BY FINANCING

NET INCREASE IN CASH

CASH - beginning of year

CASH - end of year

Net proceeds from the sale of common stock

NET CASH PROVIDED BY FINANCING ACTIVITIES

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

( 18,466,779 )

CASH AND CASH EQUIVALENTS - beginning of year

CASH AND CASH EQUIVALENTS - end of year

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

1 unchanged sentence

NON-CASH INVESTING AND FINANCING ACTIVITIES:

Advance deposit applied towards repayment

of convertible note payable pursuant to the Securities Purchase Agreement

Digital currencies used to pay accounts payable

Common stock issued for future services

See accompanying notes to the financial statements.

TO FINANCIAL STATEMENTS

Subscription receivable from exercise of Series A warrants

Issuance of common shares for intangible assets

See accompanying notes to consolidated financial statements.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(the “Company”) was incorporated in the State of Nevada on December 4, 2014 under the name of YssUp, Inc.

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.

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING

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.

Company’s principal business is focused on its mobile messaging application that provides a traditional messaging platform, while

providing users with complete privacy and control features for their sent messages.

The Company’s mobile messaging application

is called DatChat Messenger.

Once the Company achieves critical mass of users, the Company will offer new features and will charge fees

and generate revenues from the added features.

July 28, 2021, the Company filed a certificate of change to the Company’s amended and restated certificate of incorporation, with

the Secretary of State of the State of Nevada to effectuate a one-for-two (1:2) reverse stock split (the “Reverse Stock Split”)

of the Company’s common stock.

Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding

stock options, warrants and equity incentive plans.

All share and per-share data and amounts have been retroactively adjusted as of the

earliest period presented in the financial statements to reflect the Reverse Stock Split.

of presentation and liquidity

reflected in the accompanying financial statements, the Company has incurred a net loss of $ 10,829,034 and used cash in operations of

$ 8,454,504 , for the year ended December 31, 2021.

Additionally, the Company has an accumulated deficit of $ 27,590,546 at December

31, 2021 and has generated minimal revenues since inception.

During the year ended December 31, 2021, the Company has received net proceeds

of approximately $ 13.7 million from the sale of its securities in connection with an initial public offering and gross proceeds of approximately

$ 14.4 million from the exercise of the Company’s Series A warrants (see Note 5).

As of December 31, 2021, the Company had working

capital of $ 19,996,997 .

These events served to mitigate the conditions that historically raised substantial doubt about the Company’s

ability to continue as a going concern.

The Company believes the proceeds raised during the year ended December 31, 2021 will provide

sufficient cash flows to meet its obligations for a minimum of twelve months from the date of this filing.

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.

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 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.

adjustments for the Reverse Stock Split were made to the Company’s outstanding stock options, warrants and equity incentive plans.

All share and per-share data and amounts have been retroactively adjusted as of the earliest period presented in the consolidated financial

statements to reflect the Reverse Stock Split.

On 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 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).

Other than owning certain patents, Avila had no

operations or no employees and was not considered a business.

Basis of presentation

The 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.

As reflected in the accompanying consolidated

financial statements, for the years ended December 31, 2022 and 2021, the Company incurred a net loss of $ 12,138,572 and $ 10,829,034 ,

respectively.

Additionally, for the years ended December 31, 2022 and 2021, the Company used cash in operations of $ 7,258,765 and $ 8,454,504 ,

respectively.

As of December 31, 2022, the Company has an accumulated deficit of $ 39,729,118 and has generated minimal revenues since

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 December 31, 2022, the Company had working capital of $ 12,402,650 .

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.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

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 consolidated financial

statements and during the reporting period.

Actual results could materially differ from these estimates.

Significant estimates include the valuation of deferred tax assets, and the value of stock-based compensation expenses.

Reclassifications

prior period amounts have been reclassified to conform to the current period presentation.

The reclassified amounts have no impact on

the Company’s previously reported financial position or results of operations and relates to the presentation of marketing and

advertising expenses separately on the statements of operation previously included in general and administrative expenses.

and cash equivalents

Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased,

to be cash equivalents.

There were no highly liquid debt instruments and other short-term investments as of December 31, 2021 and

The Company maintains cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit

Insurance Corporation (“FDIC”).

Significant estimates include

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, 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 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 .

December 31, 2021 and 2020, the Company had cash in excess of FDIC limits of approximately $ 19.9 million and $ 440,000 , respectively.

To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the

financial institution in which it holds deposits.

value measurements and fair value of financial instruments

carrying value of certain financial instruments, including cash, accounts payable and accrued expenses, deferred revenues, notes payable,

notes payable – related party and due to related party are carried at historical cost basis, which approximates their fair values

because of the short-term nature of these instruments.

Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers, which requires revenue to be recognized

in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity

expects to be entitled in exchange for those goods or services.

The Company recognizes revenues from subscription fees on the Company’s

messaging application in the month they are earned.

This revenue is initially deferred and is recognized using the straight-line method

over the term of the applicable subscription period.

Revenue from lifetime subscriptions is deferred over the average estimated expected

period of the subscriber relationship, which is currently estimated to be twelve months.

As of December 31, 2021 and 2020, deferred revenues

amounted to $ 8,850 and $ 0 , respectively.

TO FINANCIAL STATEMENTS

On December 31, 2022 and 2021, the Company had

cash in excess of FDIC limits of approximately $ 1,406,033 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.

Any material loss that the Company may experience in the future could have an adverse effect on its ability to pay its operational expenses

or make other payments and may require the Company to move its cash to other high quality financial institutions.

t he Company is reviewing its bank relationships in order to mitigate its risk to ensure that

its exposure is limited or reduced to the FDIC protection limits.

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.

The following table represents the Company’s

fair value hierarchy of its financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022.

Company did not have any financial assets and liabilities measured at fair value on December 31, 2021.

December 31, 2022

Short-term investments

The Company’s short-term investments are

level 1 measurements and are based on redemption value at each date.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

Company applies ASC 720 “Other Expenses” to account for advertising related costs.

Pursuant to ASC 720-35-25-1, the Company

expenses the advertising costs as they are incurred.

Advertising costs were $ 5,090,763 and $ 220,881 for the years ended December 31,

2021 and 2020, respectively, and are included in marketing and advertising expenses on the statements of operations.

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.

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.

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.

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.

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

Treasury bills and certificates of deposit that are all highly rated and have initial maturities between four and twelve

Short-term investments are carried at fair value, which is based on quoted market prices for such securities, if available, or

is estimated on the basis of quoted market prices of financial instruments with similar characteristics.

For the year ended December 31,

2022, net unrealized gain on short-term investments of $ 47,672 and realized gain on short-term investments of $ 28,176 are reported in

other income (expenses) on the consolidated statements of operations.

Accounting for digital currencies and other digital assets

The Company purchases Ethereum cryptocurrency

(“Ethereum”) and other digital assets and accepts Ethereum as a form of payment for non-fungible tokens sales (NFTs).

Company accounts for these digital assets held as the result of the purchase or receipt of Ethereum and other digital assets, as indefinite-lived

intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”).

The Company has ownership

of and control over its digital currencies and digital assets and the Company may use third-party custodial services to secure them.

The digital currencies and digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses

incurred since acquisition.

The Company believes that digital currencies and other digital assets meet the definition of indefinite-lived

intangible assets and accounts for them at historical cost less impairment, applying the guidance in ASC 350.

The Company monitors any

standard-setting, regulatory or technological developments that may affect the Company’s accounting for digital currencies or its

controls and processes related to digital currencies.

Digital currencies are included in long-term assets in the consolidated balance

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

Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same

digital assets held.

In determining the gain or loss to be recognized upon sale, the Company calculates the difference between the sales

price and carrying value of the digital assets sold immediately prior to sale.

Impairment losses and gains or losses on sales are recognized

within operating expenses in the consolidated statements of operations.

During the year ended December 31, 2022, the Company recorded

an impairment loss of $ 119,276 , which consists of an impairment of digital currency of $ 65,289 and impairment of virtual real estate of

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.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

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;

management authorizes and commits to funding the project and it is probable the project will be completed and used to perform the function

Capitalization ceases at the point the software project is substantially complete and ready for its intended use, and after

all substantial testing is completed.

Upgrades and enhancements are capitalized if it is probable that those expenditures will result

in additional functionality.

Amortization is provided for on a straight-line basis over the expected useful life of the internal-use software

development costs and related upgrades and enhancements.

When existing software is replaced with new software, the unamortized costs of

the old software are expensed when the new software is ready for its intended use.

Software development costs incurred during the year

ended December 31, 2022 were expensed since the Metaverse software development project is in the preliminary project stage.

are included in research and development costs on the accompanying consolidated statement of operations and were incurred with a related

party (see Note 6).

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

Based on the Company’s impairment analysis, management determined that an intangible impairment charge was required for

the year ended December 31, 2022 and accordingly, the Company recorded an impairment loss of $ 981,000 .

See Notes 3 and 5 for additional

information regarding intangible assets.

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 recognizes revenues from subscription fees on the Company’s messaging application in the month

they are earned.

Annual and lifetime subscription payments received that are related to future periods are recorded as deferred revenue

to be recognized as revenues over the contract term or period.

Lifetime subscriptions are being recognized to revenues over a 12-month

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.

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.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

The Company tracks its revenue by product.

The following table summarizes

revenue by product for the years December 31, 2022 and 2021:

For the Years Ended

Subscription revenues

Research and Development

Research and development costs incurred in the

development of the Company’s products are expensed as incurred and includes costs such as outside development costs and other allocated

costs incurred.

For the year ended December 31, 2022, research and development costs incurred in the development of the Company’s

software products with a related party were $ 514,957 and are included in research and development expense – related party on the

accompanying consolidated statements of operations.

Advertising Costs

The Company applies ASC 720 “Other Expenses”

to account for advertising related costs.

Pursuant to ASC 720-35-25-1, the Company expenses the advertising costs as they are incurred.

Advertising costs were $ 828,736 and $ 5,090,763 for the years ended December 31, 2022 and 2021, respectively, and are included in marketing

and advertising expenses on the consolidated statements of operations.

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.

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 consolidated 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

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.

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.

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.

and diluted net loss per share

net loss per share is computed by dividing the net loss by the weighted average number of common shares during the period.

loss per share is computed using the weighted average number of common shares and potentially dilutive securities outstanding during

following were excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact on the Company’s

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.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

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 consolidated

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.

Common stock equivalents:

1 unchanged sentence

Common stock options

TO FINANCIAL STATEMENTS

Reclassification

Certain reclassifications have been made in the

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 consolidated statements of operations,

certain operating expenses that were classified as general and administrative expenses were reclassified to professional and consulting

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.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

accounting pronouncements

does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect

on its financial statements.

2 – OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES

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.

to the monthly base rent, the Company is charged separately for common area maintenance which is considered a non-lease component.

non-lease component payments are expensed as incurred and are not included in operating lease assets or liabilities.

On August 27,

2021, the Company entered into an amendment agreement with the same landlord to modify the lease to relocate and increase the square

footage of the lease premises whereby the lease term commenced on October 1, 2021 and will end on December 31, 2024 (see Note 6).

August 27, 2021, upon the execution of the amendment agreement, the Company recorded right-of-use assets and operating lease liabilities

of $ 198,898 .

The remaining lease term for the operating lease is 3 years and the incremental borrowing rate is 18.0 % (based on historical

borrowing rates) at December 31, 2021.

use assets are summarized below:

Office lease (36 months)

NOTE 2 – SHORT-TERM INVESTMENTS

On December 31, 2022, the Company’s short-term

investments consisted of the following:

US Treasury bills

Certificates of deposit

Total short-term investments

Short-term investments mature between January

2023 to October 2023.

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.

following the merger, Merger Sub I was merged into Avila and Merger Sub I was dissolved and Avila was merged into Merger Sub

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 reliable measurable than the fair value of the patents acquired.

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 years ended December 31, 2022 and 2021, rent expense amounted $ 94,924 and

$ 78,280 , respectively, and was included in general and administrative expenses.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

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 39 months and the incremental borrowing rate is 18.0 % (based on historical borrowing rates) on December 31,

Right-of- use assets are summarized below:

Less accumulated amortization

Right-of-use asset, net

Lease liabilities are summarized below:

Operating Lease liabilities are summarized below:

Reduction of lease liability

2 unchanged sentences

Long term portion of lease liability

lease payments under non-cancelable operating lease at December 31, 2021 are as follows:

For the year ended:

December 31, 2022

December 31, 2023

December 31, 2024

Minimum lease payments under the non-cancelable

operating lease on December 31, 2022 are as follows:

For the year ended December 31:

present value discount

Total operating lease liability

3 – RELATED PARTY TRANSACTIONS

to Related Party

Company’s officer, Mr.

Darin Myman, from time to time, provides advances to the Company for working capital purposes.

31, 2021 and 2020, the Company had a payable to the officer of $ 203 and $ 194 , respectively, which is presented as due to related party

on the balance sheets.

These advances are short-term in nature and non-interest bearing.

During the years ended December 31, 2021 and

2020, respectively, Mr.

Myman provided advances to the Company for working capital purposes totaling of $ 177,624 and $ 265,623 and the

Company repaid $ 177,615 and $ 279,114 of these advances, respectively.

TO FINANCIAL STATEMENTS

DECEMBER 31, 2021 and 2020

Payable – Related Party

May 29, 2015, the Company entered into a promissory note agreement, providing for the issuance of a note in the principal amount of $ 30,000

to a principal stockholder of the Company.

The note was due on July 29, 2015 .

The annual interest rate for the loan is 10 %.

defaulted to repay the note when it was due.

On February 25, 2016, the Company entered into an extension agreement with the lender to

extend the maturity date of the note to December 31, 2016.

In accordance with the extension agreement, the Company and the lender agree

to increase the amount of the principal amount of the note by $5,000 as penalty for the Company’s failure to repay the note on

July 29, 2015.

In connection with the increase in principal amount of $5,000, the Company recorded non-cash interest expense of $5,000

on February 25, 2016.

On October 25, 2017, the Company agreed to pay an additional $5,000 as penalty fee for the extension of maturity

date to June 30, 2018.

Between October 2018 and November 2018, the Company paid a total principal amount of $10,000.

Between March 2019

and December 2019, the Company paid a total principal amount of $13,500.

During the year ended December 31, 2020, the Company paid a

total principal amount of $9,000.

The Company fully paid the principal amount of $7,500 in February 2021.

As of December 31, 2021 and

2020, the principal balance of this note was $ 0 and $ 7,500 , respectively.

of December 31, 2021 and 2020, accrued interest related to the note payable – related party above amounted to $ 16,364 and $ 16,282 ,

respectively, and is included in accounts payable and accrued expenses on the accompanying balance sheets.

4 – NOTES PAYABLE

payable to unrelated parties is summarized below:

Principal amount

current portion

Notes payable - long term portion

Protection Program Funding

May 4, 2020, the Company received federal funding in the amount of $ 6,042 through the Paycheck Protection Program (the “PPP”).

PPP funds have certain restrictions on use of the funding proceeds, and generally must be repaid within two (2) years or May 2022 at

1 % interest.

The PPP loan may, under circumstances, be forgiven.

There shall be no payment due by the Company during the six months period

beginning on the date of the note (“Deferral Period”).

Commencing one month after the expiration of the Deferral Period,

the Company shall pay the lender monthly payments of principal and interest, each in equal amount required to fully repay by the maturity

If a payment on this note is more than ten days late, the lender shall charge a late fee of up to 5 % of the unpaid portion of the

regularly scheduled payment.

As of December 31, 2020, the principal balance of this note amounted to $ 6,042 and accrued interest of $ 40 .

During the year ended December 31, 2021, the principal and accrued interest under the PPP loan was forgiven in full.

Accordingly, the

Company recorded the principal balance and accrued interest for a total of $ 6,127 to gain from forgiveness of debt during the year ended

NOTE 5 – INTANGIBLE ASSETS

On June 29, 2022, in connection with the acquisition

of Avila, 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).

The Company was amortizing the patents over 5 years.

year ended December 31, 2022, activities related to intangible assets is as follows:

For the Year Ended

December 31, 2022

5 – STOCKHOLDERS’ EQUITY

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.

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.

Omnibus Equity Incentive Plan

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.

TO FINANCIAL STATEMENTS

Acquisition of patents

amortization of patents

impairment of patents

Intangible assets, net

The Company periodically evaluates its finite

intangible assets for impairment upon occurrence of events or changes in circumstances that indicate the carrying amount of intangible

assets may not be recoverable.

The Company concluded that the undiscounted cash flows did not support the carrying values of its intangible

assets as of December 31, 2022.

As of December 31, 2022, the Company has no projected future revenues or cash flows related to the patents

and has no current plans to exploit the patents.

Accordingly, the Company determined the value of the patents acquired were fully impaired

as of December 31, 2022 and recognized an impairment loss on its long-lived intangible assets of $ 981,000 .

For the year ended December 31, 2022, amortization

of intangible assets amounted to $ 109,000 , which was included in general and administrative expenses on the accompanying consolidated

statements of operations.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

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 .

NOTE 6 – RELATED PARTY TRANSACTIONS

Due to Related Party

The Company’s officer, Mr.

from time to time, provides advances to the Company for working capital purposes.

On December 31, 2022 and 2021, the Company had a payable

to the officer of $ 1,315 and $ 203 , respectively, which is presented as due to related party on the balance sheets.

These advances are

short-term in nature and non-interest bearing.

During the years ended December 31, 2022 and 2021, respectively, Mr.

Myman provided advances

to the Company for working capital purposes totaling of $ 20,294 and $ 177,624 and the Company repaid $ 19,182 and $ 177,615 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 year ended December 31, 2022, the Company paid Metabizz $ 514,957

for software development services which is included in research and development expense – related party on the accompanying 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.

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

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.

On December 19, 2022, Company held its 2022 annual meeting of stockholders, and the shareholders approved to amend the Company’s

2021 Omnibus Equity Incentive Plan to increase the number of shares reserved for issuance thereunder to 3,000,000 shares from 2,000,000 .

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

The Series A Preferred Stock does not convert into securities of the Company.

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.

of December 31, 2021 and 2020, there were no Series A Preferred Stock outstanding.

of Common Stock

the year ended December 31, 2020, the Company sold 487,622 shares of its common stock at $ 4.00 per common share for gross proceeds of

$ 1,950,486 and net proceeds of $ 1,881,675 after escrow fees related to private placement sale.

In connection with these sales of common

stock, the Company issued 436,354 shares of common stock and there were 51,268 shares of commons stock to be issued as of December 31,

2020 and were issued during the year ended December 31, 2021.

the year ended December 31, 2021, the Company sold an aggregate of 405,224 shares of its common stock at $ 4.00 per common share for gross

proceeds of $ 1,620,896 and net proceeds of $ 1,589,237 after escrow fees related to private placement sale.

of December 31, 2021 and 2020, there were a total of 1,389 and 52,782 shares of common stock to be issued, respectively.

Public Offering

August 12, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with EF Hutton, division

of Benchmark Investments, LLC, in connection with the initial public offering (the “Offering”) of 3,325,301 shares of the

its common stock and Series A warrants (the “Series A Warrants”) to purchase up to 3,325,301 shares of the its common stock

for gross proceeds of $ 13,800,000 , before deducting underwriting discounts, commissions, and other offering expenses, including legal

expenses related to the Offering of $ 1,718,163 which are offset against the proceeds in additional paid in capital resulting in net proceeds

to the Company of $ 12,081,837 .

The Offering closed on August 17, 2021, and the underwriter subsequently exercised its over-allotment

option, which closed on August 23, 2021.

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.

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.

Stock for Services

June 11, 2020, the Company entered into a one-year Advisory Board Agreement with an individual who will act as a member to the Company’s

Advisory Board.

In accordance with this agreement the Company issued 5,000 shares of its common stock as consideration for the services

The Company valued these common shares at the fair value of $ 20,000 or $ 4.00 per common share based on sales of common stock

in the recent private placement.

The Company recorded stock-based consulting of $ 20,000 and was included in professional and consulting

as reflected in the accompanying statements of operations for the year ended December 31, 2020.

March 2021, the Company issued an aggregate of 105,000 shares of common stock for consulting and professional services rendered.

Company valued these common shares at the fair value of $ 420,000 or $ 4.00 per common share based on sales of common stock in the recent

private placement.

The Company recorded stock-based consulting of $ 420,000 which is included in professional and consulting expenses

in the accompanying statements of operations for the year ended December 31, 2021.

February 2021, the Company entered into a one-year Advisory Board Agreement with an individual who will act as an advisor to the Company’s

In accordance with this agreement the Company issued 100,000 shares of its common stock as consideration for the services provided.

The Company valued these common shares at a fair value of $ 400,000 or $ 4.00 per common share based on sales of common stock in the recent

private placement.

The Company recorded stock-based consulting of $ 350,000 which was included in professional and consulting expenses

in the accompanying statements of operations for the year ended December 31, 2021 and the remaining balance of $ 50,000 as of December

31, 2021 has been deferred and included as a contra-equity account within additional paid in capital and will be amortized into expense

over the remaining term of the agreement.

TO FINANCIAL STATEMENTS

The Series A Preferred Stock does not contain any

redemption provision.

In the event of liquidation of the Company, the holder of Series A Preferred shall not have any priority or preferences

with respect to any distribution of any assets of the Company and shall be entitled to receive equally with the holders of the Company’s

common stock.

As of December 31, 2022 and 2021, there were no Series A Preferred Stock outstanding.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

Stock Issued Upon Exercise of Series A Warrants

August 27, 2021 and October 5, 2021, the Company received aggregate gross proceeds of $ 14,356,272 from the exercise of 2,882,785 Series

A Warrants, resulting in an aggregate issuance of 2,882,785 shares of common stock.

Stock Issued Upon Cashless Exercise of Warrants

March 2020, the Company issued 111,111 shares of its common stock in connection with the cashless exercise of 125,000 warrants.

remains 1,389 shares of common stock issuable related to this cashless exercise as of December 31, 2021 and 2020.

The exercise price

was based on contractual terms of the related debt.

of Common Stock and Stock Warrants

October 2020, the Company fully paid the $ 250,000 purchase price in connection with the Securities Purchase Agreement with Spherix entered

into in October 2019 which resulted in the cancellation of 1,000,000 shares of the Company’s common stock and 1,125,000 common

stock warrants previously owned by Spherix.

Stock Warrants

summary of the Company’s outstanding stock warrants is presented below:

Balance at December 31, 2019

( 1,125,000 )

Balance at December 31, 2020

Sale of Common Stock

During the year ended December 31, 2021, the Company

sold an aggregate of 405,224 shares of its common stock at $ 4.00 per common share for gross proceeds of $ 1,620,896 and net proceeds of

$ 1,589,237 after escrow fees related to private placement sale.

As of December 31, 2022 and 2021, there were a

total of 1,389 shares of common stock to be issued.

Initial Public Offering

On August 12, 2021, the Company entered into an

underwriting agreement (the “Underwriting Agreement”) with EF Hutton, division of Benchmark Investments, LLC, in connection

with the initial public offering (the “Offering”) of 3,325,301 shares of the its common stock and Series A warrants (the “Series

A Warrants”) to purchase up to 3,325,301 shares of the its common stock for gross proceeds of $ 13,800,000 , before deducting underwriting

discounts, commissions, and other offering expenses, including legal expenses related to the Offering of approximately $ 1,718,000 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.

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 statements of operations for the

year ended December 31, 2021.

In February 2021, the Company entered into a one-year

Advisory Board Agreement with an individual who will act as an advisor to the Company’s Board.

In accordance with this agreement

the Company issued 100,000 shares of its common stock as consideration for the services provided.

The Company valued these common shares

at a fair value of $ 400,000 or $ 4.00 per common share based on sales of common stock in the recent private placement.

The Company recorded

stock-based consulting of $ 350,000 which was included in professional and consulting expenses in the accompanying statements of operations

for the year ended December 31, 2021 and the remaining balance of $ 50,000 as of December 31, 2021 was deferred and included as a contra-equity

account within additional paid in capital and was amortized into professional and consulting expenses during the year ended December 31,

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).

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

Common Stock Issued Upon Exercise of Series A Warrants

Between August 27, 2021 and October 5, 2021, the

Company received aggregate gross proceeds of $ 14,356,272 from the exercise of 2,882,785 Series A Warrants, resulting in an aggregate issuance

of 2,882,785 shares of common stock.

Common Stock Warrants

A summary of the Company’s outstanding stock

warrants is presented below:

Exercise Price

Balance on December 31, 2020

( 2,882,785 )

Balance at December 31, 2021

Warrants exercisable at December 31, 2021

December 31, 2021, the aggregate intrinsic value of warrants outstanding was $ 164,375 .

Stock Options for Services

August 13, 2021, the Company granted an aggregate of 285,700 options to purchase the Company’s common stock to an officer, directors

and consultants of the Company.

The options each have a term of 5 years from the date of grant and are exercisable at an exercise price

of $ 4.15 per share.

The options vest six months from date of grant.

August 24, 2021, the Company granted an aggregate of 530,000 options to purchase the Company’s common stock to officers, employees

and consultants of the Company.

The options have a term of 5 years from the date of grant and are exercisable at an exercise price of

$ 6.25 per share.

The options vest 25 % every six months from date of grant for two years .

September 28, 2021, the Company granted an aggregate of 18,500 options to purchase the Company’s common stock to an employee and

consultants of the Company.

The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 14.25

The options vest 25 % every six months from date of grant for two years .

September 28, 2021, the Company granted an aggregate of 350,000 options to purchase the Company’s common stock to officers and

directors of the Company.

The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 35 per

Balance on December 31, 2021

Balance on December 31, 2022

Warrants exercisable on December 31, 2022

On December 31, 2022, the aggregate intrinsic

value of warrants outstanding was $ 0 .

Stock Options

On August 13, 2021, the Company granted an aggregate

of 285,700 options to purchase the Company’s common stock to an officer, directors and consultants of the Company.

The options each

have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4.15 per share.

The options vest six months

from date of grant.

On August 24, 2021, the Company granted an aggregate

of 530,000 options to purchase the Company’s common stock to officers, employees and consultants of the Company.

The options have

a term of 5 years from the date of grant and are exercisable at an exercise price of $ 6.25 per share.

The options vest 25 % every six months

from date of grant for two years.

On December 24, 2021, pursuant to a separation agreement, 115,000 unvested option were cancelled due

to termination of an employee.

On September 28, 2021, the Company granted an

aggregate of 18,500 options to purchase the Company’s common stock to an employee and consultants of the Company.

The options have

a term of 5 years from the date of grant and are exercisable at an exercise price of $ 14.25 per share.

The options vest 25 % every six

months from date of grant for two years.

On September 28, 2021, the Company granted an

aggregate of 350,000 options to purchase the Company’s common stock to officers and directors of the Company.

The options have a

term of 5 years from the date of grant and are exercisable at an exercise price of $ 35 per share.

The options vest 25 % every six months

from date of grant for two years.

On December 24, 2021, pursuant to a separation agreement, 25,000 unvested options were cancelled due

to termination of an employee (see below).

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

On December 24, 2021, the Company entered into

a Separation and General Release Agreement (the “Separation Agreement”) with the Company’s former Chief Operating Officer.

Pursuant to the Separation Agreement the Company paid a severance fee of $ 35,000 on December 30, 2021.

Additionally, 10,000 stock options

previously granted in August 2021 vested immediately and shall be exercisable until one year from the initial grant date.

The total remaining

140,000 options ( 115,000 options was granted in August 2021 and 25,000 option was granted in September 2021) which have not vested was

forfeited and cancelled.

On December 26, 2021, the Company granted 10,000

options to purchase the Company’s common stock to an employee of the Company.

The options have a term of 5 years from the date of

grant and are exercisable at an exercise price of $ 4 per share.

The options vest 25 % every six months from date of grant for two years.

TO FINANCIAL STATEMENTS

The 2021 stock option grants were valued at the

respective grant dates using a Black-Scholes option pricing model using the assumptions discussed below.

In connection with the stock

option grants, the Company valued these stock options at a fair value of $ 7,139,392 and will record stock-based compensation expense over

the vesting period.

Upon cancellation of unvested stock options, the fair value of these cancelled option will be reversed.

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

The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4 per share.

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 2022 stock option grants were valued at the

respective grant dates using a Black-Scholes option pricing model using the assumptions discussed below.

In connection with the stock

option grants, the Company valued these stock options at a fair value of $ 751,681 and will record stock-based compensation expense over

the vesting period.

Upon cancellation of unvested stock options, the fair value of these cancelled option will be reversed.

During the year ended December 31, 2021, accretion

of stock-based expense related to stock options amounted to $ 1,533,377 of which $ 1,090,027 was recorded in compensation and related expenses

and $ 443,350 was recorded in professional and consulting expenses as reflected in the consolidated statements of operations.

year ended December 31, 2022, accretion of stock-based expense related to stock options amounted to $ 3,471,134 of which $ 3,173,401 was

recorded in compensation and related expenses and $ 297,733 was recorded in professional and consulting expenses as reflected in the consolidated

statements of operations.

As of December 31, 2022, a balance of $ 2,532,367 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 1.05 years.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

December 26, 2021, the Company granted 10,000 options to purchase the Company’s common stock to an employee of the Company.

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 .

December 24, 2021, the Company entered into a Separation and General Release Agreement (the “Separation Agreement”) with

the Company’s former Chief Operating Officer.

Pursuant to the Separation Agreement the Company paid a severance fee of $ 35,000

on December 30, 2021.

Additionally, 10,000 stock options previously granted in August 2021 vested immediately and shall be exercisable

until one year from the initial grant date.

The total remaining 140,000 options (115,000 options was granted in August 2021 and 25,000

option was granted in September 2021) which have not vested was forfeited and cancelled.

stock options were valued at the grant date using a Black-Scholes option pricing model with the following assumptions:

risk-free interest

rate ranging from 0.44 % to 0.98 %, expected dividend yield of 0 %, expected option term of 3 years using the simplified method and expected

volatility ranging from 159 % to 163 % based on comparable and calculated volatility.

The Company recognized a total stock-based expenses

of $ 1,533,377 of which $ 1,090,027 was recorded in compensation and related expenses and $ 443,350 was recorded in professional and consulting

expenses as reflected in the statements of operations during the year ended December 31, 2021.

A balance of $ 5,251,820 remains to be

expensed over future vesting periods related to unvested stock options issued for services to be expensed over a weighted average period

of 1.08 years.

was no stock option activity during the year ended December 31, 2020.

The following is a summary of the Company’s stock option

activity for the year ended December 31, 2021 as presented below:

Balance at December 31, 2020

Balance at December 31, 2021

Options exercisable at end of period

The stock options were valued at the grant date

using a Black-Scholes option pricing model with the following assumptions.

The simplified method was used for the expected option term

and expected volatility was based on comparable and calculated volatility:

Dividend rate

Term (in years)

155.8 % to 160.0 %

159.0 % to 163.0 %

Risk—free interest rate

1.53 % to 2.93 %

0.44 % to 0.98 %

The following is a summary of the Company’s

stock option activity for the years ended December 31, 2022 and 2021 as presented below:

Balance on December 31, 2020

Balance on December 31, 2021

Balance on December 31, 2022

Options exercisable on December 31, 2022

Options expected to vest

Weighted average fair value of options granted during the period

December 31, 2021, the aggregate intrinsic value of options outstanding was $ 0 .

6 – COMMITMENTS AND CONTINGENCIES

Lease Agreement

January 2019, the Company renewed and extended the term of its lease facility for another three-year period from January 2019 to December

2021 starting from a monthly base rent of $ 2,567 plus a pro rata share of operating expenses beginning January 2019 (see Note 2).

base rent is subject to annual increases beginning the 2 nd and 3 rd lease year as defined in the lease agreement.

During the years ended December 31, 2021 and 2020 rent expense related to this lease was $ 31,693 and $ 36,169 , respectively, and was included

in general and administrative expenses on the accompanying statements of operations.

On August 27, 2021, the Company entered into an

amendment agreement with the same landlord to modify the facility lease to relocate and increase the square footage of the lease premises

(see Notes 2).

The term of the lease shall commence on October 1, 2021 to December 31, 2024 with a new monthly base rent of $7,156 plus

a pro rata share of operating expenses beginning January 2022.

The base rent will be subject to 3% annual increases beginning the 2 nd

and 3 rd lease year as defined in the amended lease agreement.

Rent expense amounted $ 52,294 and $ 36,169 for the years

ended December 31, 2021 and 2020, respectively, and was included in general and administrative expenses.

February 1, 2021, the Company entered into an Engagement Agreement (the “Agreement”) with a consulting company who acted

as an exclusive lead underwriter, financial advisor, placement agent and investment banker of the Company, whereby the consultant assisted

the Company to an initial public offering of the Company’s equity, debt or equity derivative instruments (“Offering”).

The engagement period shall end on the earlier of i) 12 months from the date of the agreement or ii) the final closing if any of the

TO FINANCIAL STATEMENTS

Weighted average fair value of options granted during the year

On December 31, 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.

Consulting Agreement

On February 1, 2021, the Company entered into

an Engagement Agreement (the “Agreement”) with a consulting company who acted as an exclusive lead underwriter, financial

advisor, placement agent and investment banker of the Company, whereby the consultant assisted the Company to an initial public offering

of the Company’s equity, debt or equity derivative instruments (“Offering”).

The engagement period shall end on the

earlier of i) 12 months from the date of the agreement or ii) the final closing if any of the Offering.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

consultant prepared an Underwriting Agreement (the “Underwriting Agreement”) covering the sale of up to $ 10 million of equity,

equity derivatives, and equity linked instruments of the Company.

The Company shall pay compensation of 8 % of the total gross proceeds

of the Offering and warrants equal to 8 % of the aggregate number of shares of common stock sold in the Offering.

The warrants will be

exercisable during the four- and half-year period commencing 6 months from the effective date of the Offering at a price equal to 110 %

of the public offering price per share of common stock.

In addition, the Company shall pay 10 % broker dealer cash fee of the amount of

capital raised from private equity placements and 6 % broker dealer cash fee of the amount capital raised from debt placements.

17, 2021, the Company completed its initial public offering, in which the Company issued 3,325,301 shares of its common stock and Series

A warrants (the “Series A Warrants”) to purchase up to 3,325,301 shares of its common stock for gross proceeds of approximately

$ 13,800,000 .

As such, the Company paid the consulting company 8 % of the total gross proceeds of the Offering and warrants equal to 8 %

of the aggregate number of shares of common stock sold in the Offering (see Note 5).

September 2021, the Company executed a marketing agreement for various social media marketing and ad campaigns that ran through October

2021 to December 2021.

The total marketing fees for this campaign were approximately $ 1 million and was expensed to marketing and advertising

expense during the year ended December 31, 2021.

October 2021, the Company executed a marketing agreement for various social media marketing and ad campaigns that ran through October

2021 to December 2021.

The total marketing fees for this campaign will be approximately $ 3 million and was expensed to marketing and

advertising expense during the year ended December 31, 2021.

August 27, 2021, the Company entered into an agreement (the “Employment Agreement”) with Darin Myman effective as of August

15, 2021 pursuant to which Mr.

The consultant prepared an Underwriting Agreement

(the “Underwriting Agreement”) covering the sale of up to $ 10 million of equity, equity derivatives, and equity linked instruments

of the Company.

The Company shall pay compensation of 8 % of the total gross proceeds of the Offering and warrants equal to 8 % of the

aggregate number of shares of common stock sold in the Offering.

The warrants will be exercisable during the four- and half-year period

commencing 6 months from the effective date of the Offering at a price equal to 110 % of the public offering price per share of common

In addition, the Company shall pay 10 % broker dealer cash fee of the amount of capital raised from private equity placements and

6 % broker dealer cash fee of the amount capital raised from debt placements.

On August 17, 2021, the Company completed its initial public

offering, in which the Company issued 3,325,301 shares of its common stock and Series A warrants (the “Series A Warrants”)

to purchase up to 3,325,301 shares of its common stock for gross proceeds of approximately $ 13,800,000 .

As such, the Company paid the

consulting company 8 % of the total gross proceeds of the Offering and warrants equal to 8 % of the aggregate number of shares of common

stock sold in the Offering (see Note 7).

Marketing Agreements

In September 2021, the Company executed a marketing

agreement for various social media marketing and ad campaigns that ran through October 2021 to December 2021.

The total marketing fees

for this campaign were approximately $ 1 million and was expensed to marketing and advertising expense during the year ended December 31,

In October 2021, the Company executed a marketing

agreement for various social media marketing and ad campaigns that ran through October 2021 to December 2021.

The total marketing fees

for this campaign will be approximately $ 3 million and was expensed to marketing and advertising expense during the year ended December

Employment Agreement

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

Myman’s (i) base salary will increase to $450,000 per year, and (ii) Mr.

Myman shall be entitled

to receive an annual bonus in an amount up to $350,000, which annual bonus may be increased by the Compensation Committee of the Board

of Directors of the Company (the “Compensation Committee”), in its sole discretion, upon the achievement of additional criteria

established by the Compensation Committee from time to time (the “Annual Bonus”).

In addition, pursuant to the Employment

Agreement, upon termination of Mr.

Myman’s employment for death or Total Disability (as defined in the Employment Agreement), in

addition to any accrued but unpaid compensation and vacation pay through the date of his termination and any other benefits accrued to

him under any Benefit Plans (as defined in the Employment Agreement) outstanding at such time and the reimbursement of documented, unreimbursed

expenses incurred prior to such termination date (collectively, the “Payments”), Mr.

Myman shall be entitled to the following

severance benefits:

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

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”),

Myman shall be entitled to the following severance benefits:

(i) 24 months of his then base salary;

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”).

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

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;

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

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’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.

7 – INCOME TAXES

Company maintains deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying

amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The deferred tax assets

at December 31, 2021 and 2020 consist of net operating loss carryforwards.

Company has incurred aggregate net operating losses of approximately $ 12,999,886 for income tax purposes as of December 31, 2021.

net operating losses carry forward for United States income taxes, which may be available to reduce future years’ taxable income.

Management believes that the realization of the benefits from these losses appears unlikely due to the Company’s limited operating

history and continuing losses for United States income tax purposes.

Accordingly, the Company has provided a 100 % valuation allowance

on the deferred tax asset resulting from the net operating losses to reduce the asset to zero.

Management will review this valuation

allowance periodically and make adjustments as necessary.

items accounting for the difference between income taxes at the effective statutory rate and the provision for income taxes for the years

ended December 31, 2021 and 2020 were as follows:

NASDAQ Notice

On October 14, 2022, the Company received written

notice from Nasdaq that the Company was 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, the Company has 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 the Company’s 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 the Company does not regain compliance by April 12, 2023, the Company may be eligible

for an additional 180 calendar day grace period if it meets the continued listing standards, with the exception of bid price, for The

Nasdaq Capital Market, and the Company provides written notice to Nasdaq of its intention to cure the deficiency during the second compliance

Although the Company may effect a reverse stock split of its issued and outstanding common stock in the future, there can be no

assurance that such reverse stock split will enable the Company to regain compliance with the Nasdaq minimum bid price requirement.

The Company intends to actively monitor the minimum

bid price of its common stock and may, as appropriate, consider available options to regain compliance with the Rule.

There can be no

assurance that the Company will be able to regain compliance with the Rule or will otherwise be in compliance with other NASDAQ listing

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

NOTE 9 – INCOME TAXES

The Company maintains deferred tax assets and

liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial

reporting purposes and the amounts used for income tax purposes.

The deferred tax assets on December 31, 2022 and 2021 consist of net

operating loss carryforwards.

The net deferred tax asset has been fully offset by a valuation allowance because of the uncertainty of

the attainment of future taxable income.

The Company has incurred aggregate net operating

losses of approximately $ 20,636,324 for income tax purposes as of December 31, 2022.

The net operating losses carry forward for United

States income taxes, which may be available to reduce future years’ taxable income.

Management believes that the realization of

the benefits from these losses appears unlikely due to the Company’s limited operating history and continuing losses for United

States income tax purposes.

Accordingly, the Company has provided a 100 % valuation allowance on the deferred tax asset resulting from

the net operating losses to reduce the asset to zero.

Management will review this valuation allowance periodically and make adjustments

as necessary.

The items accounting for the difference between

income taxes at the effective statutory rate and the provision for income taxes for the years ended December 31, 2022 and 2021 were as

Income tax benefit at U.S.

6 unchanged sentences

Total provision for income tax

TO FINANCIAL STATEMENTS

DECEMBER 31, 2021 and 2020

Company’s approximate net deferred tax asset at December 31, 2021 and 2020 was as follows:

The Company’s approximate net deferred tax asset on December

31, 2022 and 2021 was as follows:

Deferred Tax Asset:

December 31, 2022

December 31, 2021

Net operating loss carryforward

3 unchanged sentences

Net deferred tax asset

December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law.

The Act decreases the U.S.

corporate federal

income tax rate from a maximum of 34 % to a flat 21 % effective January 1, 2018.

The Act also includes a number of other provisions including,

among others, the elimination of net operating loss carrybacks and limitations on the use of future losses, the repeal of the Alternative

Minimum Tax regime and the repeal of the domestic production activities deduction.

These provisions are not expected to have a material

effect on the Corporation.

Given the significant complexity of the Act and anticipated additional implementation guidance from the Internal

Revenue Service, further implications of the Act may be identified in future periods.

the $ 12,999,886 of available net operating losses, $ 1,403,306 begin to expire in 2034 and $ 11,596,580 which were generated after the

Act’s effective date can be utilized indefinitely subject to annual usage limitations.

Company provided a valuation allowance equal to the deferred income tax asset for the years ended December 31, 2021 and 2020 because

it was not known whether future taxable income will be sufficient to utilize the loss carryforward.

The increase in the allowance was

$ 2,216,671 and $ 286,735 in years 2021 and 2020.

Additionally,

the future utilization of the net operating loss carryforward to offset future taxable income may be subject to an annual limitation

as a result of ownership changes that could occur in the future.

If necessary, the deferred tax assets will be reduced by any carryforward

that expires prior to utilization as a result of such limitations, with a corresponding reduction of the valuation allowance.

Company does not have any uncertain tax positions or events leading to uncertainty in a tax position.

The Company’s 2019, 2020

and 2021 Corporate Income Tax Returns are subject to Internal Revenue Service examination.

8 – SUBSEQUENT EVENTS

December 26, 2021, the Company approved the grant of 150,000 options to purchase the Company’s common stock to a newly hired employee

of the Company.

The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4 per share.

options vest 25% every six months from date of grant for two years.

The employee service date shall start on January 10, 2022 or the

grant date which is when the Company will start recognizing stock-based expenses.

January 20, 2022, the Company has signed a Letter of Intent to acquire Avila Security Corporation (“Avila Security”)

effectuating the Company to secure four issued patents and two pending applications, subject to customary closing conditions.

transaction terms include $ 1 million in cash and the greater of 739,650 shares of restricted common stock or $ 2.5 million of

restricted shares of the Company’s common stock based on the previous 30-day average closing share price at closing.

event of failure to enter into a merger agreement on or before April 19, 2022, the terms of the Letter of Intent shall terminate

unless extended by mutual written agreement of both parties.

Currently, the transaction has not closed yet.

February 15, 2022, (the “Effective Date”) the Company’s Board of Directors (the “Board”) accepted Chief

Financial Officer, Vadim Mats’ resignation, effective immediately.

On February 15, 2022, the Board appointed Brett Blumberg as

Chief Financial Officer (“CFO”) of the Company.

In connection with his appointment as CFO, the parties entered into an Employment

The CFO’s employment hereunder shall continue until the first anniversary thereof, unless terminated earlier pursuant

to Section 5 of the Agreement;

provided that, on such first anniversary of the Effective Date and each annual anniversary thereafter

(such date and each annual anniversary thereof, a “Renewal Date”), the Agreement shall be deemed to be automatically extended,

upon the same terms and conditions, for successive periods of one year, unless either party provides written notice of its intention

not to extend the term of the Agreement at least thirty (30) days’ prior to the applicable Renewal Date.

The period during which

the Employee is employed by the Company hereunder is hereinafter referred to as the “Employment Term”.

During the Employment

Term, the Company shall pay to CFO an initial base salary at the annual rate of Sixty Thousand ($ 60,000 ) Dollars as compensation.

For each twelve (12) month period of the Employment Term, the Employee shall be eligible to receive a bonus (the “Bonus”).

However, the decision to provide any Bonus and the amount and terms of any Bonus shall be in the sole and absolute discretion of the

Board of Directors of the Company.

Any such Bonus shall be payable within one hundred twenty (120) days following the expiration of each

annual anniversary.

Further, any such Bonus shall be payable at the Company’s sole option in stock or in cash.

Additionally, subject

to the approval of the Compensation Committee, the CFO will be granted an option (the “Stock Options”) to purchase up to

50,000 shares of the Corporation’s Common Stock at an exercise price equal to the closing price of the Corporation’s Common

Stock on the date of grant, under the Corporation’s 2021 Equity Incentive Plan (the “Plan”).

The Option will be subject

to the terms and conditions of the Plan, as set forth in the Plan and the applicable Incentive Stock Option Agreement.

March 14, 2022, the Company granted an aggregate of 115,000 options to purchase the Company’s common stock to four newly hired

employees of the Company.

The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4.00

The options vest 25% every six months from date of grant for two years.

Of the $ 20,636,324 of available net operating

losses, $ 1,403,306 begins to expire in 2034 and $ 19,233,018 which were generated after 2018 can be utilized indefinitely subject to annual

usage limitations.

The Company provided a valuation allowance equal

to the deferred income tax asset for the years ended December 31, 2022 and 2021 because it was not known whether future taxable income

will be sufficient to utilize the loss carryforward.

The increase in the allowance was $ 1,985,474 and $ 2,216,671 in years 2022 and 2021.

Additionally, the future utilization of the net

operating loss carryforward to offset future taxable income may be subject to an annual limitation as a result of ownership changes that

could occur in the future.

If necessary, the deferred tax assets will be reduced by any carryforward that expires prior to utilization

as a result of such limitations, with a corresponding reduction of the valuation allowance.

The Company does not have any uncertain tax positions

or events leading to uncertainty in a tax position.

The Company’s 2020, 2021 and 2022 Corporate Income Tax Returns are subject to

Internal Revenue Service examination.

DATCHAT, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

DECEMBER 31, 2022 and

NOTE 10 – SUBSEQUENT EVENTS

2023 Stock Repurchase Program

On January 6, 2023, the Board of Directors of

the Company approved a stock repurchase program authorizing the purchase of up to $ 2 million of the Company’s common stock (the

“2023 Stock Repurchase Program”).

In connection with the 2023 Stock Repurchase Program, As of March 29, 2023, the Company

purchased 480,025 shares of its common stock for $ 311,174 , or at an average price of $ 0.648 per share.

Stock Options

On February 3, 2023, the Company granted an aggregate

of 75,000 options to purchase the Company’s common stock to the Company’s board of directors.

The options each have a term

of 5 years from the date of grant and are exercisable at an exercise price of $ 1.25 per share.

The options vest six months from date of

On February 3, 2023, the Company granted an aggregate

of 215,000 options to purchase the Company’s common stock to an officers, employees and consultants of the Company.

each have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 1.25 per share.

The options vest 25 % every

six months from date of grant for 2 years.

Non-controlling Interest

On February 14, 2023, the Company wholly-owned

subsidiary, SmarterVerse, entered into a subscription agreement with Metabizz, a company whose managing partner is also the Chief Innovation

Officer of SmarterVerse.

In connection with the subscription agreement, SmarterVerse sold Metabizz 8,000,000 shares of its common stock

for $ 800 , which is 40 % of the issued and outstanding common shares if SmarterVerse.

The Company will account for it noncontrolling interest

in accordance with ASC Topic 810-10-45, which requires the Company to present noncontrolling interests as a separate component of total

shareholders’ equity on the consolidated balance sheets and the consolidated net loss attributable to its noncontrolling interest

be clearly identified and presented on the face of the consolidated statements of operations.

Common Shares Issued for Services

On March 6, 2023, the Company entered into a 6-month

Marketing Services Agreement with a company to provided promotional services to the Company.

In accordance with this agreement, the Company

issued 143,000 shares of its common stock as consideration for the services provided.

The Company valued these common shares at a fair

value of $ 98,670 or $ 0.69 per common share based on the quoted closing price of the Company’s common stock on the measurement date.

The Company shall record stock-based professional fees over the term of the agreement.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures