Myseum.AI, Inc. 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls Our principal executive officer and principal financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) as of December 31, 2022, the end of the period covered by this Annual Report on Form 10-K, have concluded that our disclosure controls and procedures were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. - 35 - Management’s Report on Internal Control Over Financial Reporting We are required to maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e) and 15d-15(e), promulgated by the SEC pursuant to the Exchange Act. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of December 31, 2022, our disclosure controls and procedures were not effective because of a material weakness in our internal controls over financial reporting. The ineffectiveness of our disclosure controls and procedures were not effective because of the material weaknesses set forth below. The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses: ● We lack segregation of duties within accounting functions duties as a result of our limited financial resources to support hiring of personnel. ● We lack control over the custody of and accounting for digital currencies and other digital assets accounts. ● The lack of multiples levels of management review on complex business, accounting and financial reporting issues. ● We have not implemented adequate system and manual controls. While we used the services of third-party accountant who is a certified public accountant to provide accounting and financial reporting services to us, we lack both an adequate number of personnel with requisite expertise in the key functional areas of finance and accounting and an adequate number of personnel to properly implement control procedures. In addition, while we have independent directors, we do not have an audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. These factors represent material weaknesses in our internal controls over financial reporting. Although we believe the possibility of errors in our financial statements is remote and expect to continue to use a third-party accountant to address shortfalls in staffing and to assist us with accounting and financial reporting responsibilities in an effort to mitigate the lack of segregation of duties, until such time as we expand our staff with qualified personnel, we expect to continue to report material weaknesses in our internal control over financial reporting. This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the exemption provided to issuers that are not “large accelerated filers” nor “accelerated filers” under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. - 36 - PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The following table sets forth the name, age and positions of our executive officers and directors. NAME AGE POSITION Darin Myman 57 Chief Executive Officer and Chairman Peter Shelus 38 Chief Technology Officer and Director Brett Blumberg 43 Chief Financial Officer Gabriel Daniels 38 Chief Information Officer Gianfranco Lopane 37 Head of Business Development Wayne Linsley 66 Director Joseph Nelson 39 Director Carly Schumer 34 Director The business background and certain other information about our directors and executive officers is set forth below. Darin Myman - Chief Executive Officer and Director Darin Myman has served as Chief Executive Officer and Chairman of the board of directors since January 2015. Previously, Mr. Myman served as co-founder and Chief Executive Officer of Wally World Media, Inc., (OTC:WLYW). He also has served as the Chief Executive Officer and a member of PeopleString’s board of directors since PeopleString’s inception. Mr. Myman developed extensive Internet skills through a variety of positions. He has executive management and founder experience having served as a co-founder and Chief Executive Officer of BigString Corporation, a publicly traded company, since October 2005. He also has corporate governance and board experience having served as a member of BigString’s board of directors since BigString’s inception. Prior to BigString, Mr. Myman was a co-founder and Chief Executive Officer of LiveInsurance.com, the first online insurance broker that pioneered the electronic storefront for large national insurance agencies. Prior to co-founding LiveInsurance.com, he served as a Vice President of the online brokerage services unit of Westminster Securities Corporation. We believe that Mr. Myman is qualified to serve as a member of our board of directors because of his background in business and experience in senior leadership and as a board member of public companies. Peter Shelus - Chief Technology Officer and Director Peter Shelus is a co-founder of DatChat and has served as our Chief Technology Officer since January 2016 and a member of our board of directors since December 2022. Mr. Shelus has over 10 years of ephemeral messaging and mobile video development experience. Mr. Shelus has been at the forefront of the secure messaging industry, having served as a lead engineer for one of the first ephemeral messaging platforms, “BigString,” where he helped develop the patented technology that became a cornerstone of self-destructing messaging. Mr. Shelus holds Bachelor of Science degree in computer science from Rutgers University. We believe that Mr. Shelus is qualified to serve as a member of our board of directors because of his experience in the secure messaging industry and background in technology engineering and development. Brett Blumberg – Chief Financial Officer Brett Blumberg has served as our Chief Financial Officer since February 2022. Mr. Blumberg has extensive experience in finance and accounting. He is a certified public accountant and has been a partner of the public accounting firm Jubran, Shorr & Company since 2015. Mr. Blumberg was a senior accountant at CohnReznick, LLP from 2013 to 2014. Prior to obtaining his CPA license Mr. Blumberg was a private banker at Wells Fargo and owned and operated a Mortgage Brokerage/Banking Company, Canyon Financial Group, LLC from 2006 to 2012. He previously worked in recruitment and talent acquisition for accounting and finance firms from 2000 to 2006. Mr. Blumberg holds a Bachelor of Art degree in economics and psychology from SUNY Binghamton University. - 37 - Gabriel Daniels – Chief Information Officer Gabriel Daniels has served as our Chief Information Officer since March 2021. Since May 2019, Mr. Daniels has served as the Co-Founder, President & CEO of NGD Cybersecurity and Customer Service Consultants LLC, a Minority-Woman Owned and Veteran Owned Business providing high-level technical, cyber commissioning, customer service and project management consulting services for companies within the DHS 16 critical infrastructure. From April 2018 to April 2019, Mr. Daniels served as the Cybersecurity Program Manager at Chinook Systems, an engineering firm. From June 2017 to April 2018, Mr. Daniels worked as a Senior Information Assurance Manager at Navstar Inc., an Information Technology & Services firm. In addition, since December of 2017, Mr. Daniels has worked as an adjunct professor at Northern Virginia (NoVA) Community College and Lord Fairfax Community College, where he teaches classes such as introduction to telecommunications, cyberlaw, network attacks, computer crime and hacking, and computer applications and concepts. Mr. Daniels is a 15-year U.S. Army and Navy veteran. While serving in the Army, Mr. Daniels aided in the development of the Army’s Strategic Cybersecurity and Cyber Incident Handling Response Plans. Mr. Daniels holds a master’s degree in cybersecurity and a bachelor’s degree in marketing from the University of Maryland University College. Gianfranco Lopane – Head of Business Development Gianfranco Lopane has served as our Head of Business Development since February 2022 and President of our wholly-owned subsidiary, SmarterVerse, since July 2022. Since August 2018, Mr. Lopane has served as the founder of Generiqo, a NFT, metaverse, and blockchain consulting company. From June 2020 to May 2021, Mr. Lopane served as a senior account executive at XPO Logistics, Inc. From April 2017 to January 2020, Mr. Lopane served as a co-founder of Real World Ads, an advertising network company for the metaverse. Mr. Lopane holds a Master’s degree in commerce and marketing from EUDE Business School in Madrid, Spain. Wayne D. Linsley – Director Wayne D. Linsley has served as a member of the board of directors since August 2021. Mr. Linsley has over 40 years of experience in business management. Since April 2020, Mr. Linsley has served as a member of the board of directors of Hoth Therapeutics, Inc. (NASDAQ: HOTH), a clinical-stage biopharmaceutical company and since January 2020, he has served as a member of the board of directors of Silo Pharma, Inc. (NASDAQ: SILO) a biopharmaceutical company focused on merging traditional therapeutics with psychedelic research. From 2014 to September 2021, Mr. Linsley served as the Vice President of Operations at CFO Oncall, Inc., a company that provides financial reporting and controller services on an outsourced basis and previously, from 2012 to 2014, Mr. Linsley worked at CFO Oncall, Inc. as an independent contractor. Mr. Linsley holds Bachelor of Science degree in Business Administration from Siena College. We believe that Mr. Linsley is qualified to serve as a member of our board of directors because of his experience as a director of public companies and background in financial reporting. Joseph Nelson – Director Joseph Nelson has served as a member of our board of directors since August 2021. Since December 2017, Mr. Nelson has served as the Head of Investor Relations for GasLog Ltd., and GasLog Partners LP, a leading international owner, operator and manager of liquefied natural gas carriers providing support to many of the world’s largest energy companies. From November 2014 to November 2017, Mr. Nelson served as an Equity Research Analyst at Credit Suisse. From November 2013 to November 2014, Mr. Nelson worked as an Equity Research Analyst at Maxim Group. Mr. Nelson holds a Master of Business Administration degree from New York University’s Stern School of Business; a Bachelor of Science degree in chemistry and a Bachelor of Art degree in philosophy from the Stevens Institute of Technology. We believe that Mr. Nelson is qualified to serve as a member of our board of directors because of his experience in investor relations and background in business and finance. - 38 - Carly Schumer – Director Carly Schumer has served as a member of our board of directors since August 2021. Since May 2011, Ms. Schumer has worked as a digital consultant at ShmeeLive. From May 2018 to June 2020, Ms. Schumer served as a digital director for Lust For Life, LLC, a subsidiary of Renewable Energy & Power, Inc. (OTCQB: RBNW). Ms. Schumer has in-depth experience in ecommerce and digital industries with specializations in digital marketing campaign development, content marketing strategy, SEO and paid media management. Her digital marketing background is rooted in inbound marketing strategies and her approach focuses on listening to user needs and communicating to them via high quality content in order to attract return visitors and engagements. Ms. Schumer specializes in working with start-up companies, across the technology, healthcare and fashion industries. Ms. Schumer holds Bachelor of Art degree in arts, entertainment & media management from Columbia College Chicago. We believe that Ms. Schumer is qualified to serve as a member of our board of directors because of her experience and background in digital marketing for e-commerce and public companies. Family Relationships There are no family relationships among any of our executive officers and directors. Arrangements between Officers and Directors Except as set forth herein, to our knowledge, there is no arrangement or understanding between any of our officers or directors and any other person pursuant to which the officer or director was selected to serve as an officer or director. Involvement in Certain Legal Proceedings We are not aware of any of our directors or officers being involved in any legal proceedings in the past ten years relating to any matters in bankruptcy, insolvency, criminal proceedings (other than traffic and other minor offenses), or being subject to any of the items set forth under Item 401(f) of Regulation S-K. Committees of Our Board of Directors Our board of directors directs the management of our business and affairs, as provided by Nevada law, and conducts its business through meetings of the board of directors and its standing committees. We will have a standing audit committee, compensation committee and nominating and corporate governance committee. In addition, from time to time, special committees may be established under the direction of the board of directors when necessary to address specific issues. Audit Committee . The audit committee is appointed by the board to assist the board in its duty to oversee the Company’s accounting, financial reporting and internal control functions and the audit of the Company’s financial statements. The role of the audit committee is to oversee management in the performance of its responsibility for the integrity of the Company’s accounting and financial reporting and its systems of internal controls, the performance and qualifications of the Company’s independent auditor, including the independent auditor’s independence, the performance of the Company’s internal audit function; and the Company’s compliance with legal and regulatory requirements. Our audit committee consists of Wayne D. Linsley, Carly Schumer and Joseph Nelson, with Mr. Linsley serving as chair. Our board of directors has affirmatively determined that each meet the definition of “independent director” under the rules of The Nasdaq Capital Market, and that they meet the independence standards under Rule 10A-3. Each member of our audit committee meets the financial literacy requirements of Nasdaq rules. In addition, our board of directors has determined that Wayne D. Linsley qualifies as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K. Our board of directors adopted a written charter for the audit committee, which is available on our principal corporate website at www.datchat.com . - 39 - Compensation Committee . The compensation committee is responsible for reviewing and recommending, among other things: ● the adequacy and form of compensation of the board; ● the compensation of Chief Executive Officer, including base salary, incentive bonus, stock option and other grant, award and benefits upon hiring and on an annual basis; ● the compensation of other senior management upon hiring and on an annual basis; and ● the Company’s incentive compensation and other equity-based plans and recommending changes to such plans to our board of directors, when necessary. Our compensation committee will consists of Wayne D. Linsley, Carly Schumer and Joseph Nelson, with Mr. Linsley serving as chair. Our board of directors has adopted a written charter for the compensation committee, which is available on our principal corporate website at www.datchat.com . Nominating and Corporate Governance Committee. We do not have a designated nominating and corporate governance committee. Our independent directors, acting as a group, are responsible for: Our nominating and corporate governance committee is responsible for, among other things: ● developing criteria for membership on the board of directors and committees; ● identifying individuals qualified to become members of the board of directors; ● recommending persons to be nominated for election as directors and to each committee of the board of directors; ● annually reviewing our corporate governance guidelines; and ● monitoring and evaluating the performance of the board of directors and leading the board in an annual self-assessment of its practices and effectiveness. Our nominating and corporate governance committee consists of Wayne D. Linsley, Carly Schumer and Joseph Nelson, with Mr. Linsley serving as chair. Our board of directors has adopted a written charter for the nominating and corporate governance committee, which is available on our principal corporate website at www.datchat.com . Code of Business Code and Ethics Conduct We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code posted on our website, www.datchat.com . In addition, we intend to post on our website all disclosures that are required by law or rules concerning any amendments to, or waivers from, any provision of the code. Anti-hedging We do not currently have a policy prohibiting employees, officers, or directors from engaging in transactions that hedge or offset, or are designed to hedge or offset, any decrease in the market value of the Company’s equity securities. Changes in Nominating Procedures None. - 40 - ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth for the year ended December 31, 2022, the compensation awarded to, paid to, or earned by, our Chief Executive Officer and two other most highly compensated executive officers, whose total compensation during such years exceeded $100,000. We refer to these officers as our “named executive officers.” Name and Principal Position Year Salary ($) Bonus ($) Stock Awards ($) Option Awards ($) 1 Non-Equity Incentive Plan Compensation ($) Nonqualified Deferred Compensation Earnings ($) All Other Compensation ($) Total ($) Darin Myman 2022 $ 450,000 $ - $ - $ - $ - $ - $ - $ 450,000 Chief Executive Officer 2021 $ 422,250 $ 350,000 $ - $ 2,796,850 $ - $ - $ 31,623 $ 3,600,723 Brett Blumberg 2022 $ 52,500 - - - - - - $ 52,500 Chief Financial Officer Peter Shelus 2022 $ 268,750 $ - $ - $ - $ - $ - $ - $ 268,750 Chief Technology Officer 2021 $ 165,000 $ - $ - $ - $ - $ - $ 36,750 $ 201,750 1) On September 28, 2021, we granted 250,000 stock options to our CEO. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $35 per share. The options vest 25% every six months from date of grant for two years. 2) Other compensation was made up of health insurance expenses. Outstanding Equity Awards at December 31, 2022 The following table provides information regarding option awards held by each of our named executive officers that were outstanding as of December 31, 2022. There were no stock awards or other equity awards outstanding as of December 31, 2022. OUTSTANDING EQUITY AWARDS AT 2022 FISCAL YEAR-END OPTION AWARDS STOCK AWARDS Name Number of Securities Underlying Unexercised options (#) Exercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock that have not Vested (#) Market Value of Shares or Units of Stock that Have not Vested ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or other Rights that have not Vested ($) Darin Myman 250,000 — — 35.00 9/28/2026 — — — — - 41 - 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. Name Fees earned or paid in cash ($) Stock Awards ($) Option Awards ($) Non-Equity Incentive Plan Compensation ($) Nonqualified deferred compensation earnings ($) All Other Compensation ($) Total ($) Joseph Nelson 36,000 0 0 0 0 0 36,000 Carly Schumer 36,000 0 0 0 0 0 36,000 Wayne Linsley 60,000 0 0 0 0 0 60,000 Employment Agreements On August 27, 2021, DatChat, Inc. (the “Company”) entered into an agreement (the “Employment Agreement”) with Darin Myman effective as of August 15, 2021 pursuant to which Mr. Myman’s (i) base salary will increase to $450,000 per year, and (ii) Mr. Myman shall be entitled to receive an annual bonus in an amount up to $350,000, which annual bonus may be increased by the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”), in its sole discretion, upon the achievement of additional criteria established by the Compensation Committee from time to time (the “Annual Bonus”). In addition, pursuant to the Employment Agreement, upon termination of Mr. Myman’s employment for death or Total Disability (as defined in the Employment Agreement), in addition to any accrued but unpaid compensation and vacation pay through the date of his termination and any other benefits accrued to him under any Benefit Plans (as defined in the Employment Agreement) outstanding at such time and the reimbursement of documented, unreimbursed expenses incurred prior to such termination date (collectively, the “Payments”), Mr. Myman shall be entitled to the following severance benefits: (i) 24 months of his then base salary; (ii) if Mr. Myman elects continuation coverage for group health coverage pursuant to COBRA Rights (as defined in the Employment Agreement), then for a period of 24 months following Mr. Myman’s termination he will be obligated to pay only the portion of the full COBRA Rights cost of the coverage equal to an active employee’s share of premiums (if any) for coverage for the respective plan year; and (iii) payment on a pro-rated basis of any Annual Bonus or other payments earned in connection with any bonus plan to which Mr. Myman was a participant as of the date of his termination (together with the Payments, the “Severance”). Furthermore, pursuant to the Employment Agreement, upon Mr. Myman’s termination (i) at his option (A) upon 90 days prior written notice to the Company or (B) for Good Reason (as defined in the Employment Agreement), (ii) termination by the Company without Cause (as defined in the Employment Agreement) or (iii) termination of Mr. Myman’s employment within 40 days of the consummation of a Change in Control Transaction (as defined in the Employment Agreement), Mr. Myman shall receive the Severance; provided, however, Mr. Myman shall be entitled to a pro-rated Annual Bonus of at least $200,000. In addition, any equity grants issued to Mr. Myman shall immediately vest upon termination of Mr. Myman’s employment by him for Good Reason or by the Company at its option upon 90 days prior written notice to Mr. Myman, without Cause. - 42 - 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 to which Mr. 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. Pursuant to 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 committee. Mr. 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). Upon 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. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding beneficial ownership of shares of our common stock as of March 27, 2023 by (i) each person known to beneficially own more than 5% of our outstanding common stock, (ii) each of our directors, (iii) each of our named executive officers and (iv) all of our directors and named executive officers as a group. Except as otherwise indicated, the persons named in the table below have sole voting and investment power with respect to all shares beneficially owned, subject to community property laws, where applicable. Name Shares Percentage (2) Directors, Director Nominees, Named Executive Officers and Named Executive Officer Nominees (1) Darin Myman(3) 1,951,775 9.56 % Peter Shelus 1,000,000 4.94 % Brett Blumberg — — Wayne D. Linsley(4) 43,750 — Joseph Nelson(4) 43,750 — Carly Schumer(4) 43,750 — All Director, Director Nominees, Named Executive Officers and Named Executive Officer Nominees as a group (6 persons) 3,083,025 15.0 % * Represents beneficial ownership of less than 1%. (1) The address of each holder listed below, except as otherwise indicated, is 204 Neilson Street, New Brunswick, New Jersey 08901. (2) 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 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. (3) Includes 187,500 vested stock options (4) Includes 43,750 of vested stock options - 43 - 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 (a) Weighted average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Equity compensation plans approved by security holder 1,601,200 $ 10.9 1,395,800 Equity compensation plans not approved by security holder — — — Total 1,601,200 $ 10.9 1,395,800 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The following includes a summary of transactions during our fiscal years ended December 31, 2022 and December 31, 2021 to which we have been a party, including transactions in which the amount involved in the transaction exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described elsewhere in this Annual Report on Form 10-K. We are not otherwise a party to a current related party transaction, and no transaction is currently proposed, in which the amount of the transaction exceeds the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years and in which a related person had or will have a direct or indirect material interest. Transactions with Related Persons Except as described below and except for employment arrangements which are described under “executive compensation,” since January 1, 2019, there has not been, nor is there currently proposed, any transaction in which we are or were a participant, the amount involved exceeds the lesser of $120,000 or 1% of the average of the total assets at December 31, 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. Darin Myman, from time to time, provides advances to the Company for working capital purposes. At 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. - 44 - 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 We have adopted a formal policy regarding approval of transactions with related parties. For purposes of our policy only, a related person transaction is a transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships, in which we and any related person are, were or will be participants in which the amount involved exceeds the lesser of $120,000 or one percent of our total assets at year-end for our last two completed fiscal years. Transactions involving compensation for services provided to us as an employee or director are not covered by this policy. A related person is any executive officer, director or beneficial owner of more than 5% of any class of our voting securities, including any of their immediate family members and any entity owned or controlled by such persons. Under the policy, if a transaction has been identified as a related person transaction, including any transaction that was not a related person transaction when originally consummated or any transaction that was not initially identified as a related person transaction prior to consummation, our management must present information regarding the related person transaction to our audit committee, or, if audit committee approval would be inappropriate, to another independent body of our board of directors, for review, consideration and approval or ratification. The presentation must include a description of, among other things, the material facts, the interests, direct and indirect, of the related persons, the benefits to us of the transaction and whether the transaction is on terms that are comparable to the terms available to or from, as the case may be, an unrelated third party or to or from employees generally. Under the policy, we will collect information that we deem reasonably necessary from each director, executive officer and, to the extent feasible, significant shareholder to enable us to identify any existing or potential related-person transactions and to effectuate the terms of the policy. In addition, under our code of business conduct and ethics, our employees and directors will have an affirmative responsibility to disclose any transaction or relationship that reasonably could be expected to give rise to a conflict of interest. In considering related person transactions, our audit committee, or other independent body of our board of directors, will take into account the relevant available facts and circumstances including, but not limited to: ● the risks, costs and benefits to us; ● the impact on a director’s independence in the event that the related person is a director, immediate family member of a director or an entity with which a director is affiliated; ● the availability of other sources for comparable services or products; and ● the terms available to or from, as the case may be, unrelated third parties or to or from employees generally. The policy requires that, in determining whether to approve, ratify or reject a related person transaction, our audit committee, or other independent body of our board of directors, must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, our best interests and those of our shareholders, as our audit committee, or other independent body of our board of directors, determines in the good faith exercise of its discretion. - 45 - Director Independence The Nasdaq Stock Market LLC (“Nasdaq”) requires that a majority of our board of directors must be composed of “independent directors,” which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship, which, in the opinion of the company’s board of directors would interfere with the director’s exercise of independent judgment in carrying out the responsibilities of a director. The board has determined that Wayne D. Linsley, Carly Schumer and Joseph Nelson are “independent”. Our board currently consists of three independent directors and two non-independent directors. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth the aggregate fees billed by D. Brooks and Associates CPAs, P.A. as described below: 2022 2021 Audit Fees $ 68,238 $ 62,000 Audit Related Fees $ – $ – Tax Fees $ – $ – All Other Fees $ – $ – Total $ 68,238 $ 62,000 (1) Audit Fees are paid for professional services rendered for the audit of the Company’s annual consolidated financial statements and reviews of the Company’s unaudited condensed consolidated financial statements. Pre-Approval Policies and Procedures Our Board of Directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by our Board of Directors before the respective services were rendered. Our Board of Directors has considered the nature and amount of fees billed by our independent registered public accounting firm and believe that the provision of services for activities unrelated to the audit is compatible with maintaining their respective independence. - 46 - PART IV ITEM 15. EXHIBIT AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: (1) Financial Statements: Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 4048) F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 The consolidated financial statements required by this Item are included beginning at page F-1. (1) Financial Statement Schedules: All financial statement schedules have been omitted because they are not applicable, not required or the information required is shown in the consolidated financial statements or the notes thereto. - 47 - (b) Exhibits The following documents are included as exhibits to this report. Exhibit Number Title of Document 3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Form S-1 filed on July 2, 2021) 3.2 Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Company’s Form S-1/A filed on August 9, 2021) 3.3 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) 3.4 Certificate of Designation of Series A Preferred Stock (Incorporated by reference to Exhibit 3.3 to the Company’s Form S-1/A filed on August 9, 2021) 3.5 Certificate of Amendment to Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.4 to the Company’s Form S-1/A filed on August 9, 2021) 3.6 Certificate of Change to Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.5 to the Company’s Form S-1/A filed on August 9 2021) 4.1 Form of Series A Warrant Agent Agreement including Form of Series A Warrant (Incorporated by reference to Exhibit 4.1 to the Company’s Form S-1/A filed on August 9, 2021) 4.2 Form of Representative’s Warrant (Incorporated by reference to Exhibit 4.2 to the Company’s Form S-1/A filed on August 9, 2021) 4.3 Form of Stock Certificate (Incorporated by reference to Exhibit 4.3 to the Company’s Form S-1/A filed on August 9, 2021) 10.1 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) 10.2+ Employment Agreement between the Company and Brett Blumberg (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 16, 2022) 10.3 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) 10.4 Statement of Work by and between, Datchat, Inc. and IZEA Worldwide, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 24, 2021) 10.5 2021 Equity Incentive Plan and forms of award agreements thereunder (Incorporated by reference to Exhibit 10.2 to the Company’s Form S-1/A filed on August 9, 2021) 23.1* Consent of D. Brooks and Associates CPAs, P.A. 31.1* Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS* Inline XBRL Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 104* Cover Page Interactive Data File – the cover page of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2022 is formatted in Inline XBRL * Filed herewith. + Indicates a management contract or any compensatory plan, contract or arrangement. ITEM 16. FORM 10-K SUMMARY Not applicable. - 48 - SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 31 st day of March, 2023. DATCHAT, INC. /s/ Darin Myman Darin Myman Chief Executive Officer and Director (Principal Executive Officer) /s/ Brett Blumberg Brett Blumberg Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Darin Myman Chief Executive Officer and Director March 31, 2023 Darin Myman (Principal Executive Officer) /s/ Brett Blumberg Chief Financial Officer March 31, 2023 Brett Blumberg (Principal Financial and Accounting Officer) /s/ Peter Shelus Chief Technology Officer and Director March 31, 2023 Peter Shelus /s/ Gabriel Daniels Chief Information Officer March 31, 2023 Gabriel Daniels /s/ Wayne D. Linsley Director March 31, 2023 Wayne D. Linsley /s/ Joseph Nelson Director March 31, 2023 Joseph Nelson /s/ Carly Schumer Director March 31, 2023 Carly Schumer - 49 - DATCHAT, INC. INDEX TO FINANCIAL STATEMENTS December 31, 2022 and 2021 CONTENTS Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 4048 ) F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Changes in Stockholders’ Equity F-5 Consolidated Statements of Cash Flows F-6 Notes to Consolidated Financial Statements F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of DatChat, Inc. Opinion on the 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 These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters. D. Brooks and Associates CPAs, P.A . We have served as the Company’s auditor since 2016. Palm Beach Gardens, Florida March 31, 2023 F- 2 DATCHAT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, December 31, 2022 2021 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,732,956 $ 20,199,735 Short-term investments, at fair value 11,007,997 - Accounts receivable 384 278 Prepaid expenses 134,752 376,973 Total Current Assets 12,876,089 20,576,986 OTHER ASSETS: Property and equipment, net 79,694 53,720 Digital currencies and other digital assets 23,381 - Operating lease right-of-use asset, net 134,526 184,309 Total Other Assets 237,601 238,029 Total Assets $ 13,113,690 $ 20,815,015 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 404,600 $ 517,039 Operating lease liability, current portion 67,338 53,897 Contract liabilities 186 8,850 Due to related party 1,315 203 Total Current Liabilities 473,439 579,989 LONG-TERM LIABILITIES: Operating lease liability, less current portion 83,675 151,012 Total Long-Term Liabilities 83,675 151,012 Total Liabilities 557,114 731,001 Commitments and Contingencies (Note 8) STOCKHOLDERS’ EQUITY: Preferred stock ($ 0.0001 par value; 20,000,000 shares authorized) Series A Preferred stock ($ 0.0001 Par Value; 1 Share authorized; none issued and outstanding on December 31, 2022 and 2021) - - Common stock ($ 0.0001 par value; 180,000,000 shares authorized; 20,597,169 and 19,597,169 shares issued and outstanding on December 31, 2022 and 2021, respectively) 2,060 1,960 Common stock to be issued ( 1,389 shares on December 31, 2022 and 2021) - - Additional paid-in capital 52,283,634 47,672,600 Accumulated deficit ( 39,729,118 ) ( 27,590,546 ) Total Stockholders’ Equity 12,556,576 20,084,014 Total Liabilities and Stockholders’ Equity $ 13,113,690 $ 20,815,015 See accompanying notes to consolidated financial statements. F- 3 DATCHAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Year Ended December 31, 2022 2021 NET REVENUES $ 46,214 $ 4,445 OPERATING EXPENSES: Compensation and related expenses 6,551,776 2,963,294 Marketing and advertising expenses 828,736 5,090,763 Professional and consulting expenses 2,285,312 2,181,317 Research and development expense - related party 514,957 - General and administrative expenses 991,882 607,621 Impairment loss on intangible asset 981,000 - Impairment loss on digital currencies and other digital assets 119,276 - Total operating expenses 12,272,939 10,842,995 LOSS FROM OPERATIONS ( 12,226,725 ) ( 10,838,550 ) OTHER INCOME (EXPENSE): Interest expense - ( 127 ) Interest income 12,305 3,516 Gain from forgiveness of debt - 6,127 Realized gain on short-term investments 28,176 - Unrealized gain on short-term investments 47,672 - Total other income, net 88,153 9,516 NET LOSS $ ( 12,138,572 ) $ ( 10,829,034 ) NET LOSS PER COMMON SHARE: Basic and diluted $ ( 0.60 ) $ ( 0.71 ) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic and diluted 20,104,268 15,334,338 See accompanying notes to consolidated financial statements. F- 4 DATCHAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 Common Stock Additional Total Preferred Stock Common Stock to be Issued Paid-in Accumulated Stockholders’ Shares Amount Shares Amount Shares Amount Capital Deficit Equity Balance, December 31, 2020 - $ - 12,727,820 $ 1,273 52,782 $ 5 $ 17,342,559 $ ( 16,761,512 ) $ 582,325 Sale of common stock, net of offering costs - - 3,730,525 373 - - 13,670,701 - 13,671,074 Common stock issued for common stock issuable - - 51,018 5 ( 51,393 ) ( 5 ) - - - Common stock issued for exercise of Series A warrants - - 2,882,785 288 - - 14,355,984 - 14,356,272 Common stock issued for services - - 205,000 21 - - 419,979 - 420,000 Stock-based compensation in connection with stock option grants - - - - - - 1,533,377 - 1,533,377 Accretion of stock-based compensation - - - - - - 350,000 - 350,000 Fractional shares due to reverse split - - 21 - - - - - - Net loss for the year - - - - - - - ( 10,829,034 ) ( 10,829,034 ) Balance, December 31, 2021 - - 19,597,169 1,960 1,389 - 47,672,600 ( 27,590,546 ) 20,084,014 Accretion of stock based compensation in connection with stock option grants - - - - - - 3,173,401 - 3,173,401 Accretion of stock-based professional fees in connection with stock option grants and shares - - - - - - 347,733 - 347,733 Shares issued for asset acquisition - - 1,000,000 100 - - 1,089,900 - 1,090,000 Net loss for the year - - - - - - - ( 12,138,572 ) ( 12,138,572 ) Balance, December 31, 2022 - $ - 20,597,169 $ 2,060 1,389 $ - $ 52,283,634 $ ( 39,729,118 ) $ 12,556,576 See accompanying notes to consolidated financial statements. F- 5 DATCHAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 12,138,572 ) $ ( 10,829,034 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 127,501 2,319 Amortization of right of use asset 49,783 43,221 Stock-based compensation 3,173,401 1,090,027 Stock-based professional fees 347,733 1,213,350 Gain from extinguishment of debt - ( 6,127 ) Impairment loss on intangible asset 981,000 - Impairment loss on digital currencies and other digital assets 119,276 - Non-cash digital currency and other digital assets fees 13,739 - Non-cash revenue from sale of Venvuu NFT digital asset ( 36,394 ) - Realized gain on short-term investments ( 28,176 ) - Unrealized gain on short-term investments ( 47,672 ) - Changes in operating assets and liabilities: Accounts receivable ( 106 ) ( 278 ) Prepaid expenses 242,221 ( 351,713 ) Accounts payable and accrued expenses 61 397,502 Contract liabilities ( 8,664 ) 8,850 Operating lease liability ( 53,896 ) ( 22,621 ) NET CASH USED IN OPERATING ACTIVITIES ( 7,258,765 ) ( 8,454,504 ) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of short-term investments 9,910,000 - Purchase of short-term investments ( 20,842,149 ) - Purchases of property and equipment ( 44,475 ) ( 56,039 ) Proceeds from sale of digital currencies and other digital assets 743 - Purchases of digital currencies and other digital assets ( 233,245 ) - NET CASH USED IN INVESTING ACTIVITIES ( 11,209,126 ) ( 56,039 ) CASH FLOWS FROM FINANCING ACTIVITIES: Advances from related party 20,294 177,624 Payments on related party advances ( 19,182 ) ( 177,615 ) Repayment of notes payable - related party - ( 7,500 ) Proceeds from exercise of Series A Warrants - 14,356,272 Net proceeds from the sale of common stock - 13,671,074 NET CASH PROVIDED BY FINANCING ACTIVITIES 1,112 28,019,855 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ( 18,466,779 ) 19,509,312 CASH AND CASH EQUIVALENTS - beginning of year 20,199,735 690,423 CASH AND CASH EQUIVALENTS - end of year $ 1,732,956 $ 20,199,735 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Interest $ - $ - Income taxes $ - $ - NON-CASH INVESTING AND FINANCING ACTIVITIES: Digital currencies used to pay accounts payable $ 112,500 $ - Common stock issued for future services $ - $ 50,000 Subscription receivable from exercise of Series A warrants $ - $ - Issuance of common shares for intangible assets $ 1,090,000 $ - See accompanying notes to consolidated financial statements. F- 6 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization DatChat, Inc. (the “Company”) was incorporated in the State of Nevada on December 4, 2014 under the name of YssUp, Inc. On March 4, 2015, the Company’s corporate name was changed to Dat Chat, Inc. In August 2016, the Board of Directors of the Company approved to change the name of the Company from Dat Chat, Inc. to DatChat, Inc. The Company established a fiscal year end of December 31. The Company is a blockchain, cybersecurity, and social media company that not only focuses on protecting privacy on personal devices, but also protects user information after it is shared with others. The Company believes that one’s right to privacy should not end the moment they click “send.” The Company’s flagship product, DatChat Messenger & Private Social Network, is a mobile application that gives users the ability to communicate with privacy and protection. On 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 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. Liquidity 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 inception. During the year ended December 31, 2021, the Company received net proceeds of approximately $ 13.7 million from the sale of its securities in connection with initial public offering and gross proceeds of approximately $ 14.4 million from the exercise of the Company’s Series A warrants. As of 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. F- 7 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 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 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 . 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. Currently, 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. The Company did not have any financial assets and liabilities measured at fair value on December 31, 2021. December 31, 2022 Description Level 1 Level 2 Level 3 Short-term investments $ 11,007,997 $ - $ - The Company’s short-term investments are level 1 measurements and are based on redemption value at each date. F- 8 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 Short-term investments The Company considers investments with original maturities greater than three months and remaining maturities less than one year to be short-term investments. Short-term investments include U.S. Treasury bills and certificates of deposit that are all highly rated and have initial maturities between four and twelve months. Short-term investments are carried at fair value, which is based on quoted market prices for such securities, if available, or is estimated on the basis of quoted market prices of financial instruments with similar characteristics. For the year ended December 31, 2022, net unrealized gain on short-term investments of $ 47,672 and realized gain on short-term investments of $ 28,176 are reported in other income (expenses) on the consolidated statements of operations. Accounting for digital currencies and other digital assets The Company purchases Ethereum cryptocurrency (“Ethereum”) and other digital assets and accepts Ethereum as a form of payment for non-fungible tokens sales (NFTs). The Company accounts for these digital assets held as the result of the purchase or receipt of Ethereum and other digital assets, as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). The Company has ownership of and control over its digital currencies and digital assets and the Company may use third-party custodial services to secure them. The digital currencies and digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition. The Company believes that digital currencies and other digital assets meet the definition of indefinite-lived intangible assets and accounts for them at historical cost less impairment, applying the guidance in ASC 350. The Company monitors any standard-setting, regulatory or technological developments that may affect the Company’s accounting for digital currencies or its controls and processes related to digital currencies. Digital currencies are included in long-term assets in the consolidated balance sheet. The Company determines the fair value of its digital currencies and other digital assets on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that it has determined is the principal market for Ethereum (Level 1 inputs) and other digital assets. The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that its digital assets are impaired. In determining if an impairment has occurred, the Company considers the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets held. In determining the gain or loss to be recognized upon sale, the Company calculates the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within operating expenses in the consolidated statements of operations. During the year ended December 31, 2022, the Company recorded an impairment loss of $ 119,276 , which consists of an impairment of digital currency of $ 65,289 and impairment of virtual real estate of $ 53,987 . 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. F- 9 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 Capitalized software costs Costs incurred to develop internal-use software including Metaverse software development, are expensed as incurred during the preliminary project stage. Internal-use software development costs are capitalized during the application development stage, which is after: (i) the preliminary project stage is completed; and (ii) management authorizes and commits to funding the project and it is probable the project will be completed and used to perform the function intended. Capitalization ceases at the point the software project is substantially complete and ready for its intended use, and after all substantial testing is completed. Upgrades and enhancements are capitalized if it is probable that those expenditures will result in additional functionality. Amortization is provided for on a straight-line basis over the expected useful life of the internal-use software development costs and related upgrades and enhancements. When existing software is replaced with new software, the unamortized costs of the old software are expensed when the new software is ready for its intended use. Software development costs incurred during the year ended December 31, 2022 were expensed since the Metaverse software development project is in the preliminary project stage. Such costs are included in research and development costs on the accompanying consolidated statement of operations 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 charges. 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 period. The Company’s NFT revenues were generated from the sale of NFTs. The Company accepts Ethereum as a form of payment for NFT sales. The Company’s NFTs exist on the Ethereum Blockchain under the Company’s VenVuu brand. 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. F- 10 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 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 December 31, 2022 2021 Subscription revenues $ 9,820 $ 4,445 NFT revenues 36,394 - Total $ 46,214 $ 4,445 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. Leases The Company applied ASC Topic 842, Leases (Topic 842) to arrangements with lease terms of 12 months or more. Operating lease right of use assets (“ROU”) represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations. Income taxes The Company accounts for income taxes pursuant to the provision of Accounting Standards Codification (“ASC”) 740-10, “Accounting for Income Taxes” (“ASC 740-10”), which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach require the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. The Company follows the provision of ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, there may be uncertainty about the merits of positions taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the 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 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. F- 11 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 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. December 31, 2022 2021 Common stock equivalents: Common stock warrants 673,841 736,341 Common stock options 1,604,200 1,054,200 Total 2,278,041 1,790,541 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 fees. Recent accounting pronouncements Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its financial statements. F- 12 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 NOTE 2 – SHORT-TERM INVESTMENTS On December 31, 2022, the Company’s short-term investments consisted of the following: Cost Unrealized Gain (Loss) Fair Value US Treasury bills $ 10,715,325 48,226 10,763,551 Certificates of deposit 245,000 ( 554 ) 244,446 Total short-term investments $ 10,960,325 47,672 11,007,997 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. Immediately following the merger, Merger Sub I was merged into Avila and Merger Sub I was dissolved and Avila was merged into Merger Sub II. Other than owning certain patents, Avila had no operations or no employees and was not considered a business. Pursuant to ASU 2017-01 and ASC 805, the Company analyzed the Merger Agreement and the business of Avila to determine if the Company acquired a business or acquired assets. Based on this analysis, it was determined that the Company acquired assets. No goodwill was recorded since the Merger Agreement was accounted for as an asset purchase. In accordance with ASC 805, the fair value of the assets acquired is based on either the fair value of the consideration given or the fair value of the assets acquired, whichever is more clearly evident, and thus, more reliably measurable. The Company used the market price of the 1,000,000 common shares issued of $ 1,090,000 as the fair value of the assets acquired since this value was more clearly evident, and thus, more reliable measurable than the fair value of the patents acquired. (see Note 5) NOTE 4 – OPERATING LEASE RIGHT-OF-USE ASSETS AND OPERATING LEASE LIABILITIES In January 2019, the Company renewed and extended the term of its lease facility for another three-year period from January 2019 to December 2021 starting with a monthly base rent of $ 2,567 plus a pro rata share of operating expenses beginning January 2019. The base rent was subject to annual increases beginning the 2 nd and 3 rd lease year as defined in the lease agreement. In addition to the monthly base rent, the Company is charged separately for common area maintenance which is considered a non-lease component. These non-lease component payments are expensed as incurred and are not included in operating lease assets or liabilities. On August 27, 2021, the Company entered into an amendment agreement with the same landlord to modify the facility lease to relocate and increase the square footage of the lease premises. The term of the lease commenced on October 1, 2021 and will expire on December 31, 2024 with a new monthly base rent of $ 7,156 plus a pro rata share of operating expenses beginning January 2022. The base rent will be subject to 3 % annual increases beginning in the 2 nd and 3 rd lease year as defined in the amended lease agreement. For the years ended December 31, 2022 and 2021, rent expense amounted $ 94,924 and $ 78,280 , respectively, and was included in general and administrative expenses. F- 13 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 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, 2022. Right-of- use assets are summarized below: December 31, 2022 December 31, 2021 Office lease $ 198,898 $ 271,507 Less accumulated amortization ( 64,372 ) ( 87,198 ) Right-of-use asset, net $ 134,526 $ 184,309 Operating Lease liabilities are summarized below: December 31, 2022 December 31, 2021 Office lease $ 198,898 $ 271,507 Reduction of lease liability ( 47,885 ) ( 66,598 ) Total lease liability 151,013 204,909 Less: current portion 67,338 53,897 Long term portion of lease liability $ 83,675 $ 151,012 Minimum lease payments under the non-cancelable operating lease on December 31, 2022 are as follows: For the year ended December 31: 2023 $ 89,193 2024 92,100 Total 181,293 Less: present value discount ( 30,280 ) Total operating lease liability $ 151,013 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. During the year ended December 31, 2022, activities related to intangible assets is as follows: For the Year Ended December 31, 2022 Acquisition of patents $ 1,090,000 Less: amortization of patents ( 109,000 ) Less: impairment of patents ( 981,000 ) 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. F- 14 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 NOTE 6 – RELATED PARTY TRANSACTIONS Due to Related Party The Company’s officer, Mr. Darin Myman, from time to time, provides advances to the Company for working capital purposes. On 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 Stock Split. 2021 Omnibus Equity Incentive Plan On July 26, 2021, the Company adopted the 2021 Omnibus Equity Incentive Plan, and authorized the reservation of 2,000,000 shares of common stock for future issuances under the plan. 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 vote. The Series A Preferred Stock does not convert into securities of the Company. The Series A Preferred Stock does not contain any redemption provision. In the event of liquidation of the Company, the holder of Series A Preferred shall not have any priority or preferences with respect to any distribution of any assets of the Company and shall be entitled to receive equally with the holders of the Company’s common stock. As of December 31, 2022 and 2021, there were no Series A Preferred Stock outstanding. F- 15 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 Common Stock 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. The Series A Warrants contain a provision for cashless exercise. In addition, pursuant to the terms of the Offering, the Company agreed to issue warrants to EF Hutton (the “Representative’s Warrants”) to purchase up to an aggregate of 231,325 shares of common stock, or 8 % of the shares of common stock sold in the offering. The Representative’s Warrants are exercisable for a period of five years at any time on or after the six-month anniversary of the date of the Offering at an exercise price of $ 4.98 per share, subject to adjustment. The Representative’s Warrants contain a provision for cashless exercise. Common Stock for Services In March 2021, the Company issued an aggregate of 105,000 shares of common stock for consulting and professional services rendered. The Company valued these common shares at the fair value of $ 420,000 or $ 4.00 per common share based on sales of common stock in the recent private placement. The Company recorded stock-based consulting of $ 420,000 which is included in professional and consulting expenses in the accompanying 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, 2022. 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). F- 16 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 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: Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Balance on December 31, 2020 62,500 $ 0.40 1.59 Granted 3,556,626 4.98 4.65 Exercised ( 2,882,785 ) 4.98 4.65 Balance on December 31, 2021 736,341 4.59 4.30 Cancelled ( 62,500 ) 0.40 - Balance on December 31, 2022 673,841 4.98 3.65 Warrants exercisable on December 31, 2022 673,841 $ 4.98 3.65 On December 31, 2022, the aggregate intrinsic value of warrants outstanding was $ 0 . Stock Options 2021 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). F- 17 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 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. 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. 2022 On December 26, 2021 and effective January 10, 2022, the Company approved the grant of 150,000 options to purchase the Company’s common stock to a newly hired employee of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4 per share. The options vest 25 % every six months from date of grant for two years. The employee service date shall start on January 10, 2022 or the grant date which is when the Company started recognizing stock-based compensation expenses. On January 19, 2022, the Company granted an aggregate of 85,000 options to purchase the Company’s common stock to four newly hired employees of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4.00 per share. The options vest 25 % every six months from date of grant for two years. The employee service date shall start on January 19, 2022 or the grant date which is when the Company started recognizing stock-based compensation expenses. On July 22, 2022, the Company granted an aggregate of 325,000 options to purchase the Company’s common stock to employees and consultants of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 4.00 per share. The options vest 25 % every six months from date of grant for two years. The stock options were valued at the grant date using a Black-Scholes option pricing model which will be recognized as stock-based compensation expense over the vesting period. The 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. During the 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. F- 18 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 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: 2022 2021 Dividend rate — % — % Term (in years) 2 to 3 years 3 years Volatility 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: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Balance on December 31, 2020 — $ — — Granted 1,194,200 14.28 4.58 Cancelled ( 140,000 ) 11.38 4.75 Balance on December 31, 2021 1,054,200 14.66 4.64 Granted 560,000 4.00 5.0 Cancelled ( 10,000 ) 6.25 - Balance on December 31, 2022 1,604,200 $ 10.99 3.91 Options exercisable on December 31, 2022 723,700 $ 11.78 3.69 Options expected to vest 880,500 $ 3.64 Weighted average fair value of options granted during the year $ 1.34 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. F- 19 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 The consultant prepared an Underwriting Agreement (the “Underwriting Agreement”) covering the sale of up to $ 10 million of equity, equity derivatives, and equity linked instruments of the Company. The Company shall pay compensation of 8 % of the total gross proceeds of the Offering and warrants equal to 8 % of the aggregate number of shares of common stock sold in the Offering. The warrants will be exercisable during the four- and half-year period commencing 6 months from the effective date of the Offering at a price equal to 110 % of the public offering price per share of common stock. In addition, the Company shall pay 10 % broker dealer cash fee of the amount of capital raised from private equity placements and 6 % broker dealer cash fee of the amount capital raised from debt placements. On August 17, 2021, the Company completed its initial public offering, in which the Company issued 3,325,301 shares of its common stock and Series A warrants (the “Series A Warrants”) to purchase up to 3,325,301 shares of its common stock for gross proceeds of approximately $ 13,800,000 . As such, the Company paid the consulting company 8 % of the total gross proceeds of the Offering and warrants equal to 8 % of the aggregate number of shares of common stock sold in the Offering (see Note 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, 2021. In October 2021, the Company executed a marketing agreement for various social media marketing and ad campaigns that ran through October 2021 to December 2021. The total marketing fees for this campaign will be approximately $ 3 million and was expensed to marketing and advertising expense during the year ended December 31, 2021. Employment Agreement On August 27, 2021 (the “Effective Date”), the Company entered into an agreement (the “Employment Agreement”) with Darin Myman effective as of August 15, 2021 pursuant to which Mr. Myman’s (i) base salary will increase to $450,000 per year, and (ii) Mr. Myman shall be entitled to receive an annual bonus in an amount up to $350,000, which annual bonus may be increased by the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”), in its sole discretion, upon the achievement of additional criteria established by the Compensation Committee from time to time (the “Annual Bonus”). The Employment Agreement provides for a term of one (1) year (the “ Initial Term ”) from the date of the Effective Date and shall automatically be extended for additional terms of one (1) year each (each a “ Renewal Term ”) unless either party gives prior written notice of non-renewal to the other party no later than six (6) months prior to the expiration of the Initial Term, or the then current Renewal Term, as the case may be. In addition, pursuant to the Employment Agreement, upon termination of Mr. Myman’s employment for death or Total Disability (as defined in the Employment Agreement), in addition to any accrued but unpaid compensation and vacation pay through the date of his termination and any other benefits accrued to him under any Benefit Plans (as defined in the Employment Agreement) outstanding at such time and the reimbursement of documented, unreimbursed expenses incurred prior to such termination date (collectively, the “Payments”), Mr. Myman shall be entitled to the following severance benefits: (i) 24 months of his then base salary; (ii) if Mr. Myman elects continuation coverage for group health coverage pursuant to COBRA Rights (as defined in the Employment Agreement), then for a period of 24 months following Mr. Myman’s termination he will be obligated to pay only the portion of the full COBRA Rights cost of the coverage equal to an active employee’s share of premiums (if any) for coverage for the respective plan year; and (iii) payment on a pro-rated basis of any Annual Bonus or other payments earned in connection with any bonus plan to which Mr. Myman was a participant as of the date of his termination (together with the Payments, the “Severance”). Furthermore, pursuant to the Employment Agreement, upon Mr. Myman’s termination (i) at his option (A) upon 90 days prior written notice to the Company or (B) for Good Reason (as defined in the Employment Agreement), (ii) termination by the Company without Cause (as defined in the Employment Agreement) or (iii) termination of Mr. Myman’s employment within 40 days of the consummation of a Change in Control Transaction (as defined in the Employment Agreement), Mr. Myman shall receive the Severance; provided, however, Mr. Myman shall be entitled to a pro-rated Annual Bonus of at least $200,000. In addition, any equity grants issued to Mr. Myman shall immediately vest upon termination of Mr. Myman’s employment by him for Good Reason or by the Company at its option upon 90 days prior written notice to Mr. Myman, without Cause. 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 period. 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 criteria. F- 20 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 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 follows: Year Ended December 31, 2022 Year Ended December 31, 2021 Income tax benefit at U.S. statutory rate $ ( 2,549,100 ) $ ( 2,274,097 ) Income tax benefit – State ( 606,929 ) ( 541,452 ) Non-deductible (income) expenses 1,170,555 598,878 Change in valuation allowance 1,985,474 2,216,671 Total provision for income tax $ - $ — 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 $ 5,365,445 $ 3,379,971 Valuation allowance ( 5,365,445 ) ( 3,379,971 ) Net deferred tax asset $ $ — 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. F- 21 DATCHAT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 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 grant. 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. 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 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. F-22