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, 2023, the end of the period covered by this Annual Report on Form 10-K, have concluded that our disclosure controls and procedures were not effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. As of December 31, 2023, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework - 2013 . Based on this assessment, our management concluded that, as of December 31, 2023, our internal control over financial reporting was not effective because it identified a material weakness. A material weakness is a significant deficiency or a combination of significant deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, management concluded that the ineffectiveness of our internal controls over financial reporting was due to the following material weaknesses: ● We lack segregation of duties within accounting functions duties as a result of our limited financial resources to support hiring of personnel. ● The lack of multiples levels of management review on complex business, accounting and financial reporting issues. ● We have not implemented adequate system and manual controls. While we used the services of a third-party accountant to provide accounting and financial reporting services to us, we lack both an adequate number of personnel with requisite expertise in the key functional areas of finance and accounting and an adequate number of personnel to properly implement internal control over financial reporting. These factors represent material weaknesses in our internal control 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. Attestation Report of our Registered Public Accounting Firm 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. As a smaller reporting company, our management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report . 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 During our last fiscal quarter ended December 31, 2023, none of our directors or executive officers adopted , modified or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” as such terms are defined under Item 408 of Regulation S K. ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. - 32 - 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 59 Chief Executive Officer and Chairman Peter Shelus 40 Chief Technology Officer and Director Brett Blumberg 45 Chief Financial Officer Wayne Linsley 67 Director Joseph Nelson 40 Director Carly Luogameno 35 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. 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. Joseph Nelson – Director Joseph Nelson has served as a member of our board of directors since August 2021. Since April 2022, Mr. Nelson has served as Chief Financial Officer of Delta Corp Holdings Limited, a global, asset-light, fully integrated company engaged in transportation/logistic services, asset management and servicing the maritime industry supply chain. From December 2017 to March 2022, Mr. Nelson 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. 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. - 33 - Carly Luogameno – Director Carly Luogameno has served as a member of our board of directors since August 2021. Since May 2011, Mrs. Luogameno has worked as a digital consultant at ShmeeLive. From May 2018 to June 2020, Mrs. Luogameno served as a digital director for Lust For Life, LLC, a subsidiary of Renewable Energy & Power, Inc. (OTCQB: RBNW). From August 2013 to September 2015, Mrs. Luogameno served as the Marketing Director for Jerrick Media,(OTC: JMDA, now Creatd, OTC:VOCL). Mrs. Luogameno 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. Mrs. Luogameno specializes in working with start-up companies, across the technology, healthcare and fashion industries. Mrs. Luogameno holds Bachelor of Art degree in arts, entertainment & media management from Columbia College Chicago. 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 Luogameno 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 . 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 Luogameno 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 . - 34 - 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 Luogameno 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. Board Diversity Matrix Our nominating and corporate governance committee is committed to promoting diversity on our Board of Directors. We have surveyed our current directors and asked each director to self-identify their race, ethnicity, and gender using one or more of the below categories. The results of this survey are included in the matrix below: Board Diversity Matrix (As of March 28, 2024) Total Number of Directors 5 Part I: Gender Identity Female Male Non-Binary Did Not Disclose Gender Directors 1 4 Part II: Demographic Background African American or Black Alaskan Native or Native America Asian Hispanic or Latinx Native Hawaiian or Pacific Islander White 1 3 Two or More Races or Ethnicities LGBTQ+ 1 Did Not Disclose Demographic Background - 35 - ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth for the year ended December 31, 2023 and 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 2023 $ 450,000 $ 300,000 $ - $ - $ - $ - $ - $ 750,000 Chief Executive Officer 2022 $ 450,000 $ - $ - $ - $ - $ - $ - $ 450,000 Brett Blumberg 2023 $ 60,000 - - $ 15,543 - - - $ 75,543 Chief Financial Officer 2022 $ 52,500 - - - - - - $ 52,500 Peter Shelus 2023 $ 275,000 $ - $ - $ - $ - $ - $ - $ 275,000 Chief Technology Officer 2022 $ 268,750 $ - $ - $ - $ - $ - $ - $ 268,750 (1) As required by SEC rules, the amounts in this column reflect the grant date or modification date fair value as required by FASB ASC Topic 718. A discussion of the assumptions and methodologies used to calculate these amounts is contained in the notes to our financial statements under “Shareholders’ Deficit”. In September 2023, Mr. Blumberg received 5,000 stock options to purchase 5,000 shares of restricted stock at $15.00 per share. Outstanding Equity Awards at December 31, 2023 The following table provides information regarding option awards held by each of our named executive officers that were outstanding as of December 31, 2023. STOCK AWARDS Name Number of Securities Underlying Unexercised options (#) Exercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) 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 25,000 — — 350.00 9/28/2026 — — — — Brett Blumberg 5,000 — — 15.00 9/06/2028 — — — — - 36 - 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, 2023. 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 2023. 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 13,322 0 0 0 49,322 Carly Luogameno 36,000 0 13,322 0 0 0 49,322 Wayne Linsley 60,000 0 13,322 0 0 0 73,322 (1) As required by SEC rules, the amounts in this column reflect the grant date or modification date fair value as required by FASB ASC Topic 718. A discussion of the assumptions and methodologies used to calculate these amounts is contained in the notes to our financial statements under “Shareholders’ Deficit”. In February 2023, each director received 2,500 stock options to purchase 2,500 shares of restricted stock at $12.50 per share. Employment Agreements On August 27, 2021, we 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 term of the 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 six (6) months prior to the expiration of the applicable term. 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. Brett Blumberg Employment Agreement On February 15, 2022, we entered into an 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 “Blumberg Employment Agreement”). 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. - 37 - 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 28, 2024 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) 201,428 9.56 % Peter Shelus 100,000 4.94 % Brett Blumberg (5) 5,000 — Wayne D. Linsley (4) 7,500 — Joseph Nelson (4) 7,500 — Carly Luogameno (4) 7,500 — All Director, Director Nominees, Named Executive Officers and Named Executive Officer Nominees as a group (6 persons) 328,928 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 28, 2024. 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 28, 2024 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 25,000 vested stock options. (4) Includes 7,500 of vested stock options. (5) Includes 5,000 of vested stock options. Securities Authorized for Issuance Under Equity Compensation Plans The following table summarizes information about our equity compensation plans as of December 31, 2023. 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 158,670 $ 105.30 141,330 Equity compensation plans not approved by security holder — — — Total 158,670 $ 105.30 141,330 - 38 - ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The following includes a summary of transactions during our fiscal years ended December 31, 2023 and 2022 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, 2023 and 2022, 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. On December 31, 2023 and 2022, the Company had a payable to Mr. Myman of $0 and $1,315, 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 year ended December 31, 2023, the Company repaid $1,315. 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. - 39 - Independence of the Board of Directors Our board of directors undertook a review of the independence of our directors and considered whether any director has a relationship with us that could compromise that director’s ability to exercise independent judgment in carrying out that director’s responsibilities. Our board of directors has affirmatively determined that Wayne D. Linsley, Carly Luogameno and Joseph Nelson are each an “independent director,” as defined under Nasdaq rules. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth the aggregate fees billed by Salberg & Company, P.A. for the year ended December 31, 2023, and D. Brooks and Associates CPAs, P.A. for the year ended December 31, 2022 as described below: 2023 2022 Audit Fees $ 78,600 $ 68,238 Audit Related Fees $ – $ – Tax Fees $ – $ – All Other Fees $ – $ – Total $ 78,600 $ 68,238 Audit Fees: Audit fees consist of fees billed for the professional services rendered to us for the audit of our annual consolidated financial statements for the years ended December 31, 2023 and 2022, reviews of the quarterly financial statements during the periods, the issuance of consent and comfort letters in connection with registration statement filings, and all other services that are normally provided by the accounting firm in connection with statutory and regulatory filings and engagements. 2023 audit fees include approximately $78,600 in Salberg & Company, P.A. fees in connection with the audits and quarterly reviews for the year ended December 31, 2023 and approximately $68,238 in D. Brooks and Associates fees in connection with the quarterly reviews, audit consents and registration statement consents for the year ended December 31, 2022. Audit-Related Fees: Fees not included in audit fees that are billed by the auditor for assurance and related services that are reasonably related to the performance of the audit of the financial statements. Tax Fees: Fees for professional services rendered for tax compliance, tax advice, and tax planning. All Other Fees: All other fees billed by the auditor for products and services not included in the foregoing categories. Pre-Approval Policies and Procedures In accordance with Sarbanes-Oxley, our audit committee charter requires the audit committee to pre-approve all audit and permitted non-audit services provided by our independent registered public accounting firm, including the review and approval in advance of our independent registered public accounting firm’s annual engagement letter and the proposed fees contained therein. The audit committee has the ability to delegate the authority to pre-approve non-audit services to one or more designated members of the audit committee. If such authority is delegated, such delegated members of the audit committee must report to the full audit committee at the next audit committee meeting all items pre-approved by such delegated members. In the fiscal years ended December 31, 2023 and 2022 all of the services performed by our independent registered public accounting firm were pre-approved by the audit committee. - 40 - PART IV ITEM 15. EXHIBITS 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: 106) F-2 Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 4048) F-4 Consolidated Balance Sheets F-5 Consolidated Statements of Operations F-6 Consolidated Statements of Changes in Stockholders’ Equity F-7 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-9 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. - 41 - (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 Designation of Series B Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 7, 2023) 3.6 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) 3.7 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) 3.8 Certificate of Change to Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on September 19, 2023) 3.9 Certificate of Correction to Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed on November 13, 2023) 3.10 Certificate of Change to Amended and Restated Articles of Incorporation (Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 28, 2023) 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) 4.4 2021 Equity Incentive Plan and forms of award agreements thereunder (Incorporated by reference to Exhibit 10.2 to the Company’s Form S-1/A filed on August 9, 2021) 4.5 Amended and Restated 2021 Omnibus Equity Incentive Plan (Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed on November 13, 2023) 4.6 Underwriting Agreement dated January 16, 2024 between DatChat, Inc. and EF Hutton LLC (Incorporated by reference to Exhibit 1.1 to the Company’s Form 8-K filed on January 19, 2024) 4.7 Form of Pre-Funded Warrant (included as Exhibit A to Exhibit 1.1) (Incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on January 19, 2024) 4.8* Description of Registrant’s Securities 10.1+ Employment Agreement between the Company and Brett Blumberg (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on February 16, 2022) 10.2 Form of Subscription and Investment Representation Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 7, 2023) 21.1* Subsidiaries 23.1* Consent of Salberg & Company, P.A. 23.2* Consent of D. Brooks 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 97.1* DatChat, Inc. Clawback Policy 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, 2023 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. - 42 - SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 29th day of March, 2024. 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) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, Darin Myman, as his or her attorney-in-fact, with full power of substitution and resubstitution, for him or her in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Darin Myman Chief Executive Officer and Director March 29, 2024 Darin Myman (Principal Executive Officer) /s/ Brett Blumberg Chief Financial Officer March 29, 2024 Brett Blumberg (Principal Financial and Accounting Officer) /s/ Peter Shelus Chief Technology Officer and Director March 29, 2024 Peter Shelus /s/ Wayne D. Linsley Director March 29, 2024 Wayne D. Linsley /s/ Joseph Nelson Director March 29, 2024 Joseph Nelson /s/ Carly Luogameno Director March 29, 2024 Carly Luogameno - 43 - DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023 and 2022 CONTENTS Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 106 ) F-2 Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 4048) F-4 Consolidated Balance Sheets F-5 Consolidated Statements of Operations F-6 Consolidated Statements of Changes in Stockholders’ Equity F-7 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-9 F- 1 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of: DatChat, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheet of DatChat, Inc. and subsidiaries and consolidated entities (the “Company”) as of December 31, 2023, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered operating losses since inception and in fiscal 2023 has a net loss of $8,404,970 and cash used in operations of $6,529,277. The Company also had an accumulated deficit as of December 31, 2023 of $48,134,088. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s Plans in regards to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 audit 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 consolidated 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 internal control over financial reporting. As part of our audit, 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. 2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7326 Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920 www.salbergco.com • info@salbergco.com Member National Association of Certified Valuation Analysts • Registered with the PCAOB Member CPAConnect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality F- 2 Our audit included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below 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 consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Accounting Treatment of Certain Entities As described in footnote 1 “Variable Interest Entities” to the consolidated financial statements, the Company consolidated the two Metabizz entities as variable interest entities (VIE) starting in February 2023. The determination of whether an entity is a variable interest entity, whether the Company is the primary beneficiary, when to start consolidation into the Company and the initial consolidation accounting including any fair value valuations of the initial assets and liabilities to be consolidated on the initial consolidation date, can be a complex analysis that involves significant quantitative and qualitative judgments. We identified the above determinations as a critical audit matter. Auditing management’s analysis and judgments regarding the above determinations was especially challenging. The primary procedures we performed to address this critical audit matter included (a) reviewed authoritative and interpretive literature about variable interest entities, (b) audited management’s analysis as to whether the Metabizz entities were variable interest entities and whether the Company is the primary beneficiary, (c) audited management’s analysis of when to begin consolidation, (d) audited management’s valuation of the fair value of assets and liabilities to be consolidated on the initial consolidation date and (e) audited management’s analysis as to the initial consolidation accounting. We agreed with management’s conclusions. /s/ Salberg & Company, P.A. SALBERG & COMPANY, P.A. We have served as the Company’s auditor since 2023 . Boca Raton, Florida March 29, 2024 2295 NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7326 Phone: (561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920 www.salbergco.com • info@salbergco.com Member National Association of Certified Valuation Analysts • Registered with the PCAOB Member CPAConnect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality F- 3 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 the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2022 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 the results of its operations and its cash flows for the years ended December 31, 2022 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. /s/ D. Brooks and Associates CPAs, P.A. D. Brooks and Associates CPAs, P.A. We have served as the Company’s auditor since 2016. Palm Beach Gardens, Florida March 31, 2023, except for the evaluation of the retroactive effect of the reverse stock split described in Note 1, which is as of March 29, 2024 F- 4 DATCHAT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, December 31, 2023 2022 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 953,362 $ 1,732,956 Short-term investments, at fair value 5,236,781 11,007,997 Accounts receivable 183 384 Prepaid expenses 185,675 134,752 Total Current Assets 6,376,001 12,876,089 OTHER ASSETS: Property and equipment, net 56,565 79,694 Digital currencies and other digital assets - 23,381 Operating lease right-of-use asset, net 73,977 134,526 Total Other Assets 130,542 237,601 Total Assets $ 6,506,543 $ 13,113,690 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 322,762 $ 404,600 Operating lease liability, current portion 83,674 67,338 Contract liabilities 118 186 Due to related party - 1,315 Total Current Liabilities 406,554 473,439 LONG-TERM LIABILITIES: Operating lease liability, less current portion - 83,675 Total Long-Term Liabilities - 83,675 Total Liabilities 406,554 557,114 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 designated; none issued and outstanding on December 31, 2023 and 2022) - - Series B Preferred stock ($ 0.0001 Par Value; 2,000,000 Share designated; 2,000,000 and none issued and outstanding on December 31, 2023 and 2022, respectively) 200 - Common stock ($ 0.0001 par value; 180,000,000 shares authorized; 2,103,321 and 2,059,717 shares issued and 2,036,376 and 2,059,717 shares outstanding on December 31, 2023 and 2022, respectively) 210 206 Common stock to be issued ( 139 shares on December 31, 2023 and 2022) - - Additional paid-in capital 54,597,083 52,285,488 Treasury stock, at cost ( 66,945 and 0 shares on December 31, 2023 and 2022, respectively) ( 397,969 ) - Accumulated other comprehensive gain 34,553 - Accumulated deficit ( 48,134,088 ) ( 39,729,118 ) Total Stockholders’ Equity 6,099,989 12,556,576 Total Liabilities and Stockholders’ Equity $ 6,506,543 $ 13,113,690 See accompanying notes to consolidated financial statements. F- 5 DATCHAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS For the Year Ended December 31, 2023 2022 NET REVENUES $ 672 $ 46,214 OPERATING EXPENSES: Compensation and related expenses 4,760,180 6,551,776 Marketing and advertising expenses 388,444 828,736 Professional and consulting expenses 1,324,640 2,285,312 Research and development expense 1,351,415 514,957 General and administrative expenses 892,972 991,882 Impairment loss on property and equipment and intangible asset 43,671 981,000 Impairment loss on digital currencies and other digital assets 23,381 119,276 Total operating expenses 8,784,703 12,272,939 LOSS FROM OPERATIONS ( 8,784,031 ) ( 12,226,725 ) OTHER INCOME (EXPENSES): Interest income, net 9,281 12,305 Gain on initial consolidation of variable interest entities 42,737 - Foreign currency loss ( 102 ) - Realized gain on short-term investments 327,145 28,176 Unrealized gain (loss) on short-term investments - 47,672 Total other income (expenses), net 379,061 88,153 NET LOSS $ ( 8,404,970 ) $ ( 12,138,572 ) COMPREHENSIVE LOSS: Net loss $ ( 8,404,970 ) $ ( 12,138,572 ) Other comprehensive (loss) gain: Unrealized (loss) gain on short-term investments 47,518 - Unrealized foreign currency translation loss ( 12,965 ) - Comprehensive loss $ ( 8,370,417 ) $ ( 12,138,572 ) NET LOSS PER COMMON SHARE: Basic and diluted $ ( 4.14 ) $ ( 6.04 ) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic and diluted 2,028,584 2,010,427 See accompanying notes to consolidated financial statements. F- 6 DATCHAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Series B Preferred Stock Common Stock Common Stock to be Issued Additional Paid-in Treasury Stock Accumulated other Comprehensive Accumulated Total Stockholders’ Shares Amount Shares Amount Shares Amount Capital Shares Amount Gain Deficit Equity Balance, December 31, 2021 - $ - 1,959,717 $ 196 139 $ - $ 47,674,364 - $ - $ - $ ( 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 - - 100,000 10 - - 1,089,990 - - - - 1,090,000 Net loss for the year - - - - - - - - - - ( 12,138,572 ) ( 12,138,572 ) Balance, December 31, 2022 - - 2,059,717 206 139 - 52,285,488 - - - ( 39,729,118 ) 12,556,576 Accretion of stock based compensation in connection with stock option grants - - - - - - 2,002,777 - - - - 2,002,777 Accretion of stock-based professional fees in connection with stock option grants and shares - - - - - - 108,022 - - - - 108,022 Issuance of common stock for prepaid professional services - - 34,102 3 - - 199,997 - - - - 200,000 Sale of Series B preferred stock 2,000,000 200 - - - - 800 - - - - 1,000 Purchase of treasury stock - - - - - - - 66,945 ( 397,969 ) - - ( 397,969 ) Accumulated other comprehensive gain - - - - - - - - - 34,553 - 34,553 Rounding for reverse split - - 9,502 1 - - ( 1 ) - - - - - Net loss for the year - - - - - - - - - - ( 8,404,970 ) ( 8,404,970 ) Balance, December 31, 2023 2,000,000 $ 200 2,103,321 $ 210 139 $ - $ 54,597,083 66,945 $ ( 397,969 ) $ 34,553 $ ( 48,134,088 ) $ 6,099,989 See accompanying notes to consolidated financial statements. F- 7 DATCHAT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Year Ended December 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ ( 8,404,970 ) $ ( 12,138,572 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 28,943 127,501 Amortization of right of use asset 60,549 49,783 Stock-based compensation 2,002,777 3,173,401 Stock-based professional fees 251,302 347,733 Gain from initial consolidation of variable interest entities ( 42,737 ) - Impairment loss on property and equipment and intangible asset 43,671 981,000 Impairment loss on digital currencies and other digital assets 23,381 119,276 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 ( 327,145 ) ( 28,176 ) Unrealized loss on short-term investments - ( 47,672 ) Changes in operating assets and liabilities: Accounts receivable 201 ( 106 ) Accounts receivable - related party - - Prepaid expenses 5,797 242,221 Accounts payable and accrued expenses ( 103,639 ) 61 Contract liabilities ( 68 ) ( 8,664 ) Operating lease liability ( 67,339 ) ( 53,896 ) NET CASH USED IN OPERATING ACTIVITIES ( 6,529,277 ) ( 7,258,765 ) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of short-term investments 14,745,000 9,910,000 Purchase of short-term investments, net ( 8,599,121 ) ( 20,842,149 ) Purchases of property and equipment ( 49,485 ) ( 44,475 ) Increase in cash from consolidation of variable interest entities 64,538 - Proceeds from sale of digital currencies and other digital assets - 743 Purchases of digital currencies and other digital assets - ( 233,245 ) NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 6,160,932 ( 11,209,126 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from related party advances - 20,294 Repayment of related party advances ( 1,315 ) ( 19,182 ) Proceeds from sale of Series B preferred stock 1,000 - Purchase of treasury stock ( 397,969 ) - NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ( 398,284 ) 1,112 NET DECREASE IN CASH AND CASH EQUIVALENTS ( 766,629 ) ( 18,466,779 ) Effect of exchange rate changes on cash ( 12,965 ) - CASH AND CASH EQUIVALENTS - beginning of year 1,732,956 20,199,735 CASH AND CASH EQUIVALENTS - end of year $ 953,362 $ 1,732,956 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 $ 200,000 $ - Issuance of common shares for intangible assets $ - $ 1,090,000 Increase in short-term investments and accumulated other comprehensive gain $ 47,518 $ - See accompanying notes to consolidated financial statements. F- 8 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 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 secure messaging, metaverse, and social media company that not only focuses on protecting privacy on personal devices, but also protects user information after it is shared with others. The Company believes that one’s right to privacy should not end the moment they click “send.” The Company’s flagship product, DatChat Messenger & Private Social Network, is a mobile application that gives users the ability to communicate with privacy and protection. On June 16, 2022, the Company formed a wholly-owned subsidiary, SmarterVerse, Inc. (“SmarterVerse”), a company incorporated under the laws of the State of Nevada. On February 14, 2023, SmarterVerse entered into a subscription agreement with Metabizz, LLC. In connection with the subscription agreement, SmarterVerse sold Metabizz, LLC 8,000,000 shares of its common stock for $ 800 , which was 40 % of the issued and outstanding common shares of SmarterVerse. On October 2, 2023, pursuant to the Stock Purchase Agreement, SmarterVerse issued DatChat an additional 12,000,000 shares of its common stock for $ 500,000 in SmarterVerse expenses paid to MetaBizz on behalf of SmarterVerse Inc. by DatChat, Inc. Accordingly, as of December 31, 2023, Dat Chat, Inc. owns 75 % of SmarterVerse. Based on the Company’s analysis, on February 14, 2023, Metabizz, LLC was determined to be a variable interest entity (see below). Metabizz, LLC was formed by a group of technology professionals to provide programming services only to SmarterVerse. One of the founders was the chief technology officer of SmarterVerse. 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 100,000 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. On September 19, 2023, the Company filed a Certificate of Change (the “Certificate of Change”) with the Secretary of State of the State of Nevada to effectuate a 1-for-10 reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding and authorized shares of common stock, par value $ 0.0001 per share (“Common Stock”). The Reverse Stock Split became effective on September 19, 2023. Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding stock options, warrants and equity incentive plans, and authorized shares. On December 27, 2023, the Company filed a Certificate of Change (the “Certificate of Change”) with the Secretary of State of the State of Nevada to increase the number of authorized common stock from 18,000,000 shares to 180,000,000 shares. 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. Basis of presentation The Company consolidates its subsidiaries that are wholly-owned and majority owned, and entities that are variable interest entities (“VIE”) where the Company is determined to be the primary beneficiary. The Company’s consolidated financial statements include the accounts of its wholly-owned subsidiaries, DatChat, Inc., DatChat Patents II, LLC, its majority owned subsidiary, SmarterVerse, and VIE entities, Metabizz, LLC and Metabizz SAS (collectively the “Company”). All intercompany accounts and transactions have been eliminated in consolidation. The Company accounts for it noncontrolling interest in SmarterVerse 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. However, since Metabizz, LLC and Metabizz SAS are consolidated as VIE’s, any noncontrolling interest eliminates in consolidation. Variable interest entities Pursuant to ASC 810-10-25-22 , an entity is defined as a VIE if it either lacks sufficient equity to finance its activities without additional subordinated financial support, or it is structured such that the holders of the voting rights do not substantively participate in the gains and losses of the entity. When determining whether an entity that meets the definition of a business qualifies for a scope exception from applying VIE guidance, the Company considers whether: (i) it has participated significantly in the design of the entity, (ii) it has provided more than half of the total financial support to the entity, and (iii) substantially all of the activities of the VIE are conducted on its behalf. A VIE is consolidated by its primary beneficiary, the party that has the power to direct the activities that most significantly impact the VIE’s economic performance and has the right to receive benefits or the obligation to absorb losses of the entity that could be potentially significant to the VIE. The primary beneficiary assessment must be re-evaluated on an ongoing basis. F- 9 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 Based on the Company’s analysis, on February 14, 2023, Metabizz, LLC, a Florida corporation, and Metabizz SAS, a company incorporated under the laws of Columbia (collectively “Metabizz”), were determined to be VIE entities in accordance with ASC 810-10-25-22 because the equity owners in Metabizz do not have the characteristics of a controlling financial interest and the initial equity investments in these entities may be or are insufficient to meet or sustain its operations without additional subordinated financial support from DatChat. The equity owners of Metabizz have only a nominal equity investment at risk, and the Company absorbs or receives a majority of the entity’s expected losses or benefits. The Company participates significantly in the design of Metabizz. The Company has provided working capital advances to Metabizz to allow Metabizz to fund its day to day obligations. Substantially all of the activities of Metabizz are conducted for the Company’s benefit, as evidenced by the fact that the operations of Metabizz consists of development of software and technologies to be used by SmarterVerse and the Company provides work capital to Metabizz to pay employees and independent contractors to perform the development services on behalf of the Company. Repayment of the working capital advances is not guaranteed by the equity owner of Metabizz and creditors of Metabizz do not have recourse against the Company. Accordingly, the Company is required to consolidate the assets, liabilities, revenues and expenses of Metabizz using the fair value method. Additionally, the managing partner of Metabizz is also the Chief Innovation Officer of SmarterVerse. Since Metabizz, LLC and Metabizz SAS are considered VIE’s, any noncontrolling interest eliminates in consolidation. In connection with the initial consolidation of Metabizz, on February 14, 2023 (the initial consolidation date), the Company recorded a gain on initial consolidation of variable interest entities of $ 42,737 . The Company’s consolidated balance sheets included the following assets and liabilities from its VIEs: December 31, February 14, 2023 2023 Cash $ 5,862 $ 64,538 Total assets $ 5,862 $ 64,538 Due to DatChat and SmarterVerse (eliminates in consolidation) $ 1,023,746 $ 21,801 Total liabilities $ 1,023,746 $ 21,801 Going concern As reflected in the accompanying consolidated financial statements, the Company had a net loss of $ 8,404,970 for the year ended December 31, 2023. Net cash used in operations was $ 6,529,277 for the year ended December 31, 2023. Additionally, as of December 31, 2023, the Company had an accumulated deficit of $ 48,134,088 and has generated minimal revenues since inception. As of December 31, 2023, the Company had working capital of $ 5,969,447 , including cash of $ 953,362 and short-term investments of $ 5,236,781 . Additionally, on January 16, 2024, the Company entered into an underwriting agreement with EF Hutton LLC (the “Representative”), as the representative of the underwriters named therein (the “Underwriters”), relating to an underwritten public offering (the “Offering”) of 382,972 shares of the Company’s common stock, and pre-funded warrants to purchase up to 590,000 shares of the Company’s common stock. In connection with this Offering, the Company received net proceeds of $ 1,437,940 (See Note 10). These factors raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. The Company is seeking to raise capital through additional debt and/or equity financings to fund our operations in the future. Although the Company has historically raised capital from sales of common shares, there is no assurance that it will be able to continue to do so. If the Company is unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. These consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 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 lease liabilities and related right of use assets, the valuation of short-term investments, the valuation of deferred tax assets, the fair value of assets and liabilities of VIE’s on the initial VIE consolidation date, and the fair value of non-cash equity transactions. F- 10 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 Cash and cash equivalents The Company considers all highly liquid debt instruments and other short-term investments with maturities 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, 2023 and 2022, the Company had cash in excess of FDIC limits of approximately $ 446,379 and $ 1,406,033 , 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, the 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 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, 2023 and 2022. December 31, 2023 December 31, 2022 Description Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Short-term investments $ 5,236,781 $ - $ - $ 11,007,997 $ - $ - The Company’s short-term investments are level 1 measurements and are based on redemption value at each date. Short-term investments The Company’s portfolio of short-term investments consists of marketable debt securities which are comprised solely of highly rated U.S. government securities with maturities of more than three months, but less than one year. The Company classifies these as available-for-sale at purchase date and will reevaluate such designation at each period end date. The Company may sell these marketable debt securities prior to their stated maturities depending upon changing liquidity requirements. These debt securities are classified as current assets in the consolidated balance sheet and recorded at fair value, with unrealized gains or losses included in accumulated other comprehensive gain (loss) and as a component of the consolidated statements of comprehensive loss. Gains and losses are recognized when realized. Gains and losses are determined using the specific identification method and are reported in other income (expense), net in the consolidated statements of operations. 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. An impairment loss may be recognized when the decline in fair value of the debt securities is determined to be other-than-temporary. The Company evaluates its investments for other-than-temporary declines in fair value below the cost basis each quarter, or whenever events or changes in circumstances indicate that the cost basis of the short-term investments may not be recoverable. The evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below the cost basis, as well as adverse conditions related specifically to the security, such as any changes to the credit rating of the security and the intent to sell or whether the Company will more likely than not be required to sell the security before recovery of its amortized cost basis. During the year ended December 31, 2023, the Company recorded an unrealized gain of $ 34,553 , which is included in accumulated other comprehensive gain on the accompanying consolidated balance sheet and as a component of the consolidated statements of comprehensive loss. During the year ended December 31, 2023 and 2022, the Company recorded an unrealized gain on short-term investments of $ 0 and $ 47,672 , which was reflected on the accompanying consolidated statements of operation and comprehensive loss. Accounts receivable The Company recognizes an allowance for losses on accounts receivable and notes receivable in an amount equal to the estimated probable losses net of recoveries under the current expected credit loss method. The allowance is based on an analysis of historical bad debt experience, current receivables aging and expected future write-offs, as well as an assessment of specific identifiable customer accounts and notes receivable considered at risk or uncollectible. On January 1, 2023, the Company adopted ASC 326, “Financial Instruments - Credit Losses”. In accordance with ASC 326, an allowance is maintained for estimated forward-looking losses resulting from the possible inability of customers to make required payments (current expected losses). The amount of the allowance is determined principally on the basis of past collection experience and known financial factors regarding specific customers. The expense associated with the allowance for doubtful accounts on accounts receivable is recognized in general and administrative expenses. As of December 31, 2023 and 2022, accounts receivable amounted to $ 183 and $ 384 , respectively, and for the years ended December 31, 2023 and 2022, the Company did not recognize any bad debt expense. F- 11 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 Accounting for digital currencies and other digital assets The Company purchased Ethereum cryptocurrency (“Ethereum”) and other digital assets and accepted 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 years ended December 31, 2023 and 2022, the Company recorded an impairment loss of $ 23,381 and $ 119,276 , respectively, which consists of the impairment of virtual real estate and digital currencies. Based on the Company’s impairment analysis, the decrease in value of the virtual real estate and digital currencies, which was based on the lowest market price quoted on an active exchange, was deemed to be other than temporary. Additionally, the Company determined that it will not utilize its virtual real estate. Property and equipment Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three to five years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Capitalized internal-use 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 years ended December 31, 2023 and 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 Metabizz (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 Note 5 for additional information regarding intangible assets). F- 12 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 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. In accordance with ASU Topic 606 - Revenue from Contracts with Customers , the Company recognizes revenue in accordance with that core principle by applying the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation. 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 the estimated useful life of the subscription of 12 months. The Company’s NFT revenues were generated from the sale of NFTs. The Company accepted Ethereum as a form of payment for NFT sales. The Company’s NFTs existed on the Ethereum Blockchain under the Company’s VenVuu brand. VenVuu is a Metaverse advertising platform that allows advertisers and Metaverse landowners to connect using the Company’s proprietary Metaverse ad network and dynamic NFT technology. The Company used 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 was determined based on the value of the Ethereum crypto currency received as consideration. Each NFT generated produces a unique identifying code. The Company does not expect to generate revenues from the sale of NFT’s in the future. The Company tracks its revenue by product. The following table summarizes revenue by product for the years ended December 31, 2023 and 2022: For the Year Ended December 31, 2023 2022 Subscription revenues $ 672 $ 9,820 NFT revenues - 36,394 Total $ 672 $ 46,214 Research and Development Research and development costs incurred in the development of the Company’s products are expensed as incurred and include costs such as outside development costs, salaries and other allocated costs incurred. During the years ended December 31, 2023 and 2022, research and development costs incurred in the development of the Company’s software products were $ 1,351,415 and $ 514,957 , respectively. Research and development costs are included in research and development expense 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 $ 388,444 and $ 828,736 for the years ended December 31, 2023 and 2022, respectively, and are included in marketing and advertising expenses on the consolidated statements of operations. F- 13 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 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 requires 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. 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. The Company has elected to account for forfeitures as they occur. Foreign currency translation The reporting currency of the Company is the U.S. dollar. Except for Metabizz SAS, the functional currency of the Company is the U.S. dollar. The functional currency of the Company’s VIE, Metabizz SAS, is the Columbian Peso (“COP”). For Metabizz SAS, results of operations and cash flows are translated at average exchange rates during the period, assets and liabilities are translated at the unified exchange rate at the end of the period, and equity is translated at historical exchange rates. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive loss. The cumulative translation adjustment and effect of exchange rate changes on cash for the year ended December 31, 2023 was $ 12,965 . Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency included in the results of operations as incurred. For Metabizz SAS, which is located in Columbia, asset and liability accounts on December 31, 2023 were translated at 0.0002582 COP to $1.00, which was the exchange rate on the balance sheet date, and results of operations and cash flows are translated at the average exchange rates during the period of 0.00023415 COP to $1.00. F- 14 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 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, 2023 2022 Common stock equivalents: Common stock warrants 67,385 67,385 Common stock options 158,670 160,420 Total 226,055 227,805 Recent accounting pronouncements Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its financial statements. NOTE 2 – SHORT-TERM INVESTMENTS On December 31, 2023 and 2022, the Company’s short-term investments consisted of the following: December 31, 2023 December 31, 2022 Cost Unrealized Gain Fair Value Cost Unrealized Gain (Loss) Fair Value US Treasury bills $ 5,189,263 $ 47,518 $ 5,236,781 $ 10,715,325 $ 48,226 $ 10,763,551 Certificates of deposit - - - 245,000 ( 554 ) 244,446 Total short-term investments $ 5,189,263 $ 47,518 $ 5,236,781 $ 10,960,325 $ 47,672 $ 11,007,997 As of December 31, 2023, short-term investments mature between January 2024 and May 2024. 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 100,000 shares (the “ Acquisition Shares ”) of the Company’s common stock. These shares were valued at $ 1,090,000 , or $ 10.90 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 100,000 common shares issued of $ 1,090,000 as the fair value of the assets acquired since this value was more clearly evident, and thus, a more reliable measurable than the fair value of the patents acquired. (see Note 5) F- 15 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 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, 2023 and 2022, rent expense amounted to $ 95,310 and $ 94,924 , respectively, and were included in general and administrative expenses. On August 27, 2021, upon the execution of the amendment agreement, the Company recorded right-of-use assets and operating lease liabilities of $ 198,898 . The remaining lease term for the operating lease is 12 months as of December 31, 2023 and the incremental borrowing rate is 18.0 % (based on historical borrowing rates). Right-of- use assets are summarized below: December 31, 2023 December 31, 2022 Office lease $ 198,898 $ 198,898 Less accumulated amortization ( 124,921 ) ( 64,372 ) Right-of-use asset, net $ 73,977 $ 134,526 Operating Lease liabilities are summarized below: December 31, 2023 December 31, 2022 Office lease $ 198,898 $ 198,898 Reduction of lease liability ( 115,224 ) ( 47,885 ) Total lease liability 83,674 151,013 Less: current portion 83,674 67,338 Long term portion of lease liability $ - $ 83,675 Minimum lease payments under the non-cancelable operating lease on December 31, 2023 are as follows: For the year ended December 31: 2024 $ 92,100 Total 92,100 Less: present value discount ( 8,426 ) Total operating lease liability $ 83,674 NOTE 5 – INTANGIBLE ASSETS On June 29, 2022, in connection with the acquisition of Avila, the Company issued an aggregate of 100,000 shares of the Company’s common stock. These shares were valued at $ 1,090,000 , or $ 10.90 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 $ - F- 16 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 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 . 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, 2023 and 2022, the Company had a payable to the officer of $0 and $ 1,315 , respectively, which is presented as due to related party on the consolidated balance sheets. These advances are short-term in nature and non-interest bearing. During the year ended December 31, 2023, the Company repaid $ 1,315 . Research and Development On July 19, 2022, the Company entered into a software development agreement with Metabizz. On February 14, 2023, the Company began consolidating Metabizz as VIEs. For the period from January 1, 2023 to date of consolidation (February 14, 2023), the Company paid Metabizz $ 185,600 for software development services which is included in research and development expense on the accompanying consolidated statements of operations. Other See Note 8 for Employment Agreement with the Company’s chief executive officer, Darin Myman . During the years ended December 31, 2023 and 2022, the wife of the Company’s chief executive officer was employed as an executive secretary and earned $ 72,000 and $ 51,500 , respectively. NOTE 7 – STOCKHOLDERS’ EQUITY Shares Authorized On September 19, 2023, the Company filed a Certificate of Change (the “Certificate of Change”) with the Secretary of State of the State of Nevada to effectuate a 1-for-10 reverse stock split (the “Reverse Stock Split”) of the Company’s issued and outstanding and authorized shares of common stock, par value $ 0.0001 per share (“Common Stock”). The Reverse Stock Split became effective on September 19, 2023. Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding stock options, warrants and equity incentive plans, and authorized shares. On November 9, 2023, the Company filed a Certificate of Correction with the Secretary of State of the State of Nevada to correct a typographical error contained in the Certificate of Change that was filed with the Secretary of State of the State of Nevada on September 19, 2023 in order to effectuate the Reverse Stock Split. The Certificate of Change incorrectly stated that the authorized shares of preferred stock, par value $ 0.0001 per share following the change was 1,000,000 . The Reverse Stock Split had no impact on the number of authorized shares of preferred, par value $ 0.0001 , which remains unchanged at 20,000,000 shares. On December 27, 2023, the Company filed a Certificate of Change (the “Certificate of Change”) with the Secretary of State of the State of Nevada to increase the number of authorized common stock from 18,000,000 shares to 180,000,000 shares. 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. 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. F- 17 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 2021 Omnibus Equity Incentive Plan On July 26, 2021, the Company adopted the 2021 Omnibus Equity Incentive Plan, and authorized the reservation of 200,000 shares of common stock for future issuances under the plan. The Plan provides that the Company may grant options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards or any combination of the foregoing. 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 300,000 shares from 200,000 . On November 10, 2023, the board of directors of the Company approved the adoption of the Amended and Restated 2021 Omnibus Equity Incentive Plan, the sole purpose of which was to remove any inadvertent references to the Company being a Delaware corporation or the 2021 Omnibus Equity Incentive Plan being governed under Delaware law and to properly state that the Company is a Nevada corporation and that the 2021 Omnibus Equity Incentive Plan is governed by Nevada law. Preferred Stock Series A Preferred Stock In August 2016, the Company designated one share of Series A Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), which 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, 2023 and 2022, there were no Series A Preferred Stock outstanding. Series B Preferred Stock On August 4, 2023, the Board filed the Certificate of Designation of Preferences (“COD”), Rights and Limitations of Series B Preferred Stock (the “Series B COD”) with the Secretary of State of the State of Nevada designating 2,000,000 shares of preferred stock as Series B (the “Series B Preferred”). The outstanding shares of Series B Preferred Stock shall have 10 votes per share and shall vote together with the outstanding shares of the Company’s common stock as a single class exclusively with respect to the Authorized Stock Increase (as defined in the Series B COD) and shall not be entitled to vote on any other matter. The shares of Series B Preferred Stock shall be voted, without action by the holder, on the Authorized Stock Increase in the same proportion as shares of Common Stock are voted (excluding any shares of Common Stock that are not voted) on the Authorized Stock Increase. The Series B Preferred shall not have the right to vote and/or consent on any matter other than an Authorized Stock Increase Proposal. The Series B Preferred Stock shall not be entitled to participate in any distribution of assets or rights upon any liquidation, dissolution or winding up of the Company, shall not be convertible into Common Stock or any other security of the Company, and shall not be entitled to any dividends or distributions. The outstanding shares of Series B preferred shall be redeemed in whole, but not in part (i) if such redemption is ordered by the board of directors, or (ii) automatically and effective immediately after the effectiveness of an anticipated Authorized Stock increase. The aggregate consideration payable for the outstanding Series B Preferred redeemed in the redemption shall be $ 10 in cash (the “Redemption Price”). From and after the time at which the shares of Series B Preferred Stock is called for Redemption (whether automatically or otherwise) in accordance with Series B COD, such shares of Series B Preferred Stock shall cease to be outstanding, and the only right of the former holder of such shares of Series B Preferred Stock, as such, will be to receive the applicable Redemption Price. The shares of Series B Preferred Stock redeemed by the Company pursuant to the Series B COD shall be automatically retired and restored to the status of an authorized but unissued share of Preferred Stock, effective immediately after such Redemption. On August 4, 2023, the Company issued 2,000,000 of Series B preferred for aggregate cash of $ 1,000 . Common Stock Common Stock Issued for Acquisition Pursuant to the Merger Agreement, in 2022, the Company acquired all the issued and outstanding shares of Avila in consideration of the issuance of an aggregate of 100,000 shares of the Company’s common stock. These shares were value at $ 1,090,000 , or $ 10.90 per share, based on the quoted closing price of the Company’s common stock on the measurement date (See Note 3). F- 18 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 2023 Stock Repurchase Plan 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, during the year ended December 31, 2023, the Company purchased 66,945 shares of its common stock for $ 397,969 , or at an average price of $ 5.94 per share, which has been reflected as treasury stock on the accompanying consolidated balance sheet on December 31, 2023. Common Stock Issued for Professional Services 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 10,000 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 $ 40.00 per common share based on sales of common stock in the recent private placement. During the year ended December 31, 2022, the Company recorded stock-based consulting fees of $ 50,000 , which was included in professional and consulting expenses in the accompanying statements of operations. On March 6, 2023, the Company entered into a six-month consulting agreement with an entity for investor relations services. In connection with this consulting agreement, the Company issued 14,300 restricted common shares of the Company to the consultant. These shares vest immediately. These shares were valued at $ 100,000 , or $ 6.99 per common share, based on the quoted closing price of the Company’s common stock on the measurement date. In connection with this consulting agreement, during the year ended December 31, 2023, the Company recorded stock-based professional fees of $ 100,000 . On July 25, 2023, the Company issued 19,802 of its common shares pursuant to a one-year consulting agreement. These shares were valued at $ 100,000 , or a per share price of $ 5.05 , based on the quoted closing price of the Company’s common stock on the measurement date. In connection with these shares, during the year ended December 31, 2023, the Company recorded stock-based professional fees of $ 43,280 with the remaining $ 56,720 recorded as a prepaid asset as of December 31, 2023, which will be amortized into stock-based professional fees over the remaining term. Stock Options 2022 On December 26, 2021 and effective January 10, 2022, the Company approved the grant of 15,000 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 $ 40.00 per share. The options vest 25 % every six months from date of grant for two years. The employee service date shall start on January 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 8,500 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 $ 40.00 per share. The options vest 25 % every six months from date of grant for two years. The employee service date started 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 32,500 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 $ 40.00 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 records stock-based compensation expense over the vesting period. Upon cancellation of unvested stock options, the fair value of these cancelled options will be reversed. 2023 On February 3, 2023, the Company granted an aggregate of 7,500 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 $ 12.50 per share. The options vest six months from date of grant. 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. F- 19 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 On February 3, 2023, the Company granted an aggregate of 21,500 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 $ 12.50 per share. The options vest 25 % every six months from date of grant for 2 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. On September 6, 2023, the Company granted an aggregate of 10,000 options to purchase the Company’s common stock to the Company’s chief financial officer ( 5,000 options) and to an employee of the Company ( 5,000 options). The options each have a term of 5 years from the date of grant and are exercisable at an exercise price of $ 15.00 per share. The options vest immediately. 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 2023 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 $ 185,628 , or an average of $ 4.76 per option. and records stock-based compensation expense over the vesting period. Upon cancellation of unvested stock options, the fair value of these cancelled options will be reversed. During the year ended December 31, 2023, certain employees and consultants were terminated. Accordingly, 33,775 unvested options were forfeited and $ 133,190 of previously recognized stock-based compensation and $ 26,144 of previously recognized stock-based professional fees was reversed. During the year ended December 31, 2023, accretion of stock-based expense related to stock options, which is net of the reversal of previously recognized stock-based expense due to forfeiture, amounted to $ 2,110,799 of which $ 2,002,777 was recorded in compensation and related expenses and $ 108,022 was recorded in professional and consulting expenses as reflected in the consolidated statements of operations. During the year ended December 31, 2022, the Company recognized total stock-based expenses related to stock options of $ 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 statements of operations. As of December 31, 2023, a balance of $ 94,606 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 0.68 years. During the years ended December 31, 2023 and 2022, 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 historical volatility: 2023 2022 Dividend rate — % — % Term (in years) 3 years 2 to 3 years Volatility 137.0 % to 168.0 % 155.8 % to 160.0 % Risk—free interest rate 3.96 % - 4.73 % 1.53 % to 2.93 % The following is a summary of the Company’s stock option activity for the years ended December 31, 2023 and 2022 as presented below: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Balance on December 31, 2021 105,420 $ 146.60 4.64 Granted 56,000 40.00 - Cancelled ( 1,000 ) ( 62.50 ) - Balance on December 31, 2022 160,420 109.90 3.91 Granted 39,000 13.14 - Cancelled ( 40,750 ) 35.35 - Balance on December 31, 2023 158,670 $ 105.30 3.12 Options exercisable on December 31, 2023 136,795 $ 116.87 3.03 Weighted average fair value of options granted during the 2023 period $ 4.76 On December 31, 2023, the aggregate intrinsic value of options outstanding was $ 0 . F- 20 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 Common Stock Warrants During the year ended December 31, 2022, 6,250 warrants expired and were cancelled pursuant to its terms. A summary of the Company’s outstanding stock warrants, including 44,252 Series A public warrants, is presented below: Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Balance on December 31, 2021 73,635 $ 45.90 4.30 Cancelled ( 6,250 ) Balance on December 31, 2022 67,385 49.80 3.65 Granted - - - Balance on December 31, 2023 67,385 49.80 2.65 Warrants exercisable on December 31, 2023 67,385 $ 49.80 2.65 On December 31, 2023, the aggregate intrinsic value of warrants outstanding was $ 0 . NOTE 8 – COMMITMENTS AND CONTINGENCIES Operating Lease Agreement See Note 4 for disclosure on the Company’s operating lease for its offices. Employment 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 may 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. During the years ended December 31, 2023 and 2022, the compensation committee of the board of directors of the Company approved and the Company recorded a bonus to the Company’s chief executive officer in the amount of $ 300,000 and $ 0 , respectively. 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, 2023 and 2022 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. F- 21 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 The Company has incurred aggregate net operating losses of approximately $ 26,782,280 for income tax purposes as of December 31, 2023. 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, 2023 and 2022 were as follows: Year Ended December 31, 2023 Year Ended December 31, 2022 Income tax benefit at U.S. statutory rate $ ( 1,765,044 ) $ ( 2,549,100 ) Income tax benefit – State ( 420,248 ) ( 606,929 ) Non-deductible (income) expenses 587,344 1,170,555 Change in valuation allowance 1,597,948 1,985,474 Total provision for income tax $ - $ - The Company’s approximate net deferred tax asset on December 31, 2023 and 2022 was as follows: Deferred Tax Asset: December 31, 2023 December 31, 2022 Net operating loss carryforward $ 6,963,393 $ 5,365,445 Valuation allowance ( 6,963,393 ) ( 5,365,445 ) Net deferred tax asset $ - $ - Of the $ 26,782,280 of available net operating losses, $ 1,403,306 begins to expire in 2034 and $ 25,378,974 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, 2023 and 2022 because it was not known whether future taxable income will be sufficient to utilize the loss carryforward. The increase in the allowance was $ 1,597,948 and $ 1,985,474 in years 2023 and 2022. 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, 2022 and 2023 Corporate Income Tax Returns are subject to Internal Revenue Service examination. NOTE 10 – SUBSEQUENT EVENTS Related Party Transaction On January 10, 2024, VR Interactive LLC (“VR Interactive”), a company 45 % owned by Darin Myman, the Company’s CEO and 3.75 % owned by Peter Shelus, the Company’s chief technology officer and director, purchased 8,000,000 shares of SmarterVerse from the MetaBizz shareholders for cash amounting to $ 120,000 . Mr. Myman is partner in VR Interactive. Therefore, VR Interactive, a related party, became a 25 % non-controlling interest in SmarterVerse. SmarterVerse Name Change On February 14, 2024, SmarterVerse filed a Certificate of Amendment with the State of Nevada to change its name to Dragon Interactive Corporation. Sale of Common Stock and Warrants On January 16, 2024, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with EF Hutton LLC (the “Representative”), as the representative of the underwriters named therein (the “Underwriters”), relating to an underwritten public offering (the “Offering”) of 382,972 shares of the Company’s common stock (the “Shares”) and pre-funded warrants to purchase up to 590,000 shares of Common Stock (the “Pre-Funded Warrants”). The public offering price for each share of Common Stock was $ 1.85 for aggregate gross proceeds of $ 708,498 , and public offering price for the Pre-Funded Warrants was $ 1.8499 for each Pre-Funded Warrant for aggregate gross proceeds of $ 1,091,441 . In connection with this Offering, the Company raised aggregate gross proceeds of $ 1,799,939 and received net proceeds of $ 1,437,940 , net of Underwriters discounts and offering costs of $ 261,999 and legal fees of $ 100,000 . F- 22 DATCHAT, INC. AND SUBSIDIARIES AND CONSOLIDATED ENTITIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2023 and 2022 The per share exercise price for the Pre-Funded Warrants was $ 0.0001 and the Pre-Funded Warrants were exercisable immediately. The Underwriters immediately exercised the 590,000 Pre-Funded Warrants and the Underwriters received 589,981 shares of Common Stock since the exercise was cashless. The Pre-Funded Warrants are not and will not be listed for trading on any national securities exchange or other nationally recognized trading system. The Company intends to use the net proceeds from the Offering (excluding any proceeds from any Pre-Funded Warrant exercises) for general corporate purposes, for sales and marketing and for research and development. The Underwriting Agreement contains customary representations, warranties and covenants made by the Company. It also provides for customary indemnification by each of the Company and the Underwriters, severally and not jointly, for losses or damages arising out of or in connection with the Offering, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and termination provisions. In addition, pursuant to the terms of the Underwriting Agreement, each of the Company’s directors and executive officers have entered into “lock-up” agreements with the Representative that generally prohibit, without the prior written consent of the Representative and subject to certain exceptions, the sale, transfer or other disposition of securities of the Company until July 17, 2024. Further, pursuant to the terms of the Underwriting Agreement, the Company has agreed for a period of 180-days from the closing date, subject to certain exceptions, not to issue, enter into any agreement to issue or announce the issuance or proposed issuance of any shares of capital stock of the Company or any securities convertible or exercisable or exchangeable for shares of capital stock of the Company; (ii) file any registration statement; (iii) complete any offering of debt securities of the Company, other than entering into a line of credit with a traditional bank, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company. Executive Bonus On January 24, 2024, the compensation committee of the board of directors of the Company approved and the Company paid a one-time bonus to the Company’s chief executive officer in the amount of $ 300,000 . SmarterVerse Shares for Services On January 25, 2024, SmarterVerse entered into a 21-month consulting agreement with an individual for business development, financial and market due diligence services to be rendered over the term of the agreement. In connection with this consulting agreement, SmarterVerse issued 1,500,000 of its shares for services to be rendered. F- 23