UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

Commission File Number: 000-40729

DatChat, Inc.

(Exact name of registrant as specified in its charter)

Nevada		47-2502264
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

65 Church Street, 2nd Floor, New Brunswick, NJ		08901
(Address of principal executive offices)		(Zip Code)

(732) 354-4766

(Registrant’s telephone number, including area code)

	Not applicable
	(Former name, former address and former fiscal year, if changed since last report)

Title of each class		Trading Symbol(s)		Name of Exchange
Common Stock, par value $0.001 per share		DATS DATSW		The Nasdaq Capital Market

Securities registered pursuant to Section 12(b) of the Exchange Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registration was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the issuer’s common stock, $0.0001 par value per share, outstanding at November 10, 2021 was 19,597,419.

DATCHAT, INC.

FORM 10-Q

SEPTEMBER 30, 2021

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
	Condensed Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020	1
	Condensed Statements of Operations for the three and nine months ended September 30, 2021 and 2020 (unaudited)	2
	Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2021 and 2020 (unaudited)	3
	Condensed Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (unaudited)	4
	Notes to Condensed Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17

PART II - OTHER INFORMATION		19
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Mine Safety Disclosures	19
Item 5.	Other Information	19
Item 6.	Exhibits	19

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

●

our ability to obtain additional funds for our operations;

●

our financial performance;

●

risks related to market acceptance of products;

●

intellectual property risks;

●

the impact of government regulation and developments relating to our competitors or our industry;

●

our competitive position;

●

our industry environment;

●

our anticipated financial and operating results, including anticipated sources of revenues;

●

assumptions regarding the size of the available market, benefits of our products, product pricing and timing of product launches;

●

our estimates of our expenses, losses, future revenue and capital requirements, including our needs for additional financing;

●

our ability to attract and retain qualified key management and technical personnel;

●

statements regarding our goals, intensions, plans and expectations, including the introduction of new products and markets; and

●

our cash needs and financing plans.

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

DATCHAT, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2021			2020

ASSETS

CURRENT ASSETS:
Cash	$	25,815,647		$	690,423
Prepaid expenses and other current assets		225,911			25,260

Total Current Assets		26,041,558			715,683

OTHER ASSETS:
Operating lease right-of-use asset, net		7,645			28,632

Total Assets	$	26,049,203		$	744,315

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	265,537		$	119,622
Note payable, current portion		6,042			4,045
Note payable - related party		-			7,500
Operating lease liability		7,645			28,632
Due to related party		532			194

Total Current Liabilities		279,756			159,993

Long-term liabilities:
Note payable, less current		-			1,997
Total long-term liabilities:		-			1,997

Total Liabilities		279,756			161,990


Commitments and Contingencies - (Note 6)

STOCKHOLDERS' EQUITY:
Preferred stock ($0.0001 par value; 20,000,000 shares authorized) Series A Preferred stock ($0.0001 Par Value; 1 Share Authorized; none issued and outstanding at September 30, 2021 and December 31, 2020)		-			-
Common stock ($0.0001 par value; 180,000,000 shares authorized; 19,568,833 and 12,727,820 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively)		1,957			1,273
Common stock to be issued 1,389 and 52,782 shares, at September 30, 2021 and December 31, 2020, respectively)		-			5
Additional paid-in capital		46,256,474			17,342,559
Subscription receivable		(234,543	)		-
Accumulated deficit		(20,254,441	)		(16,761,512	)

Total Stockholders' Equity		25,769,447			582,325

Total Liabilities and Stockholders' Equity	$	26,049,203		$	744,315

See accompanying notes to unaudited condensed financial statements.

DATCHAT, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	For the			For the			For the			For the
	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020

NET REVENUES	$	-		$	-		$	-		$	-

OPERATING EXPENSES:
Compensation and related expenses		640,827			149,067			1,142,342			330,870
Marketing and advertising expenses		286,869			63,966			439,298			146,791
Professional and consulting expenses		605,635			78,727			1,441,963			162,322
General and administrative expenses		318,007			24,007			470,470			67,934

Total operating expenses		1,851,338			315,767			3,494,073			707,917

OTHER INCOME (EXPENSE)
Interest expense		(15	)		(14,107	)		(127	)		(42,455	)
Other income		-			-			-			7,000
Interest income		974			30			1,271			38

Total other income (expense), net		959			(14,077	)		1,144			(35,417	)

NET LOSS	$	(1,850,379	)	$	(329,844	)	$	(3,492,929	)	$	(743,334	)

NET LOSS PER COMMON SHARE:
Basic and diluted	$	(0.12	)	$	(0.02	)	$	(0.25	)	$	(0.06	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic and diluted		15,334,115			13,488,970			13,897,405			13,355,877

See accompanying notes to unaudited condensed financial statements.

DATCHAT, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the Three and Nine Months Ended September 30, 2021 and 2020

(Unaudited)

									Common Stock						Additional									Total
	Preferred Stock				Common Stock				to be issued						Paid-in			Subscription			Accumulated			Stockholders'
	Shares		Amount		Shares		Amount		Shares			Amount			Capital			Receivable			Deficit			Equity

Balance, December 31, 2020		-	$	-		12,727,820	$	1,273		52,782		$	5		$	17,342,559		$	-		$	(16,761,512	)	$	582,325

Sale of common stock, net of offering costs		-		-		403,024		40		1,675			-			1,592,932			-			-			1,592,972

Common stock issued for common stock issuable				-		51,018		5		(51,143	)		(5	)		-			-			-			-

Common stock issued for services		-		-		205,000		21		-			-			469,979			-			-			470,000

Net loss for the period		-		-		-		-		-			-			-			-			(996,771	)		(996,771	)

Balance, March 31, 2021		-		-		13,386,862		1,339		3,314			-			19,405,470			-			(17,758,283	)		1,648,526

Sale of common stock, net of offering costs		-		-		525		-		-			-			(3,735	)		-			-			(3,735	)

Common stock issued for common stock issuable		-		-		1,675		-		(1,675	)		-			-			-			-			-

Common stock to be issued cancelled		-		-		-		-		(250	)		-			(1,000	)		-			-			(1,000	)

Accretion of stock-based compensation		-		-		-		-		-			-			100,000			-			-			100,000

Fractional shares due to reverse split		-		-		21		-		-			-			-			-			-			-

Net loss for the period		-		-		-		-		-			-			-			-			(645,779	)		(645,779	)

Balance, June 30, 2021		-		-		13,389,083		1,339		1,389			-			19,500,735			-			(18,404,062	)		1,098,012

Sale of common stock, net of offering costs		-		-		3,325,551		333		-			-			12,082,504			-			-			12,082,837

Common stock issued for exercise of Series A warrants		-		-		2,854,199		285		-			-			14,213,628			(234,543	)		-			13,979,370

Stock based compensation in connection with stock option grants		-		-		-		-		-			-			359,607			-			-			359,607

Accretion of stock-based compensation		-		-		-		-		-			-			100,000			-			-			100,000

Net loss for the period		-		-		-		-		-			-			-			-			(1,850,379	)		(1,850,379	)

Balance, September 30, 2021		-	$	-		19,568,833	$	1,957		1,389		$	-		$	46,256,474		$	(234,543	)	$	(20,254,441	)	$	25,769,447

									Common Stock				Additional								Total
	Preferred Stock				Common Stock				to be issued				Paid-in			Subscription		Accumulated			Stockholders'
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Receivable		Deficit			Equity (Deficit)

Balance, December 31, 2019		-		-		13,175,356	$	1,318		125	$	-	$	15,440,844		$	-	$	(15,782,042	)		(339,880	)

Sale of common stock, net of offering costs		-		-		52,313		5		18,163		2		281,792			-		-			281,799

Common stock issued for cashless exercise of stock warrants		-		-		111,111		11		-		-		(11	)		-		-			-

Net loss for the period		-		-		-		-		-		-		-			-		(207,962	)		(207,962	)

Balance, March 31, 2020		-		-		13,338,780		1,334		18,288		2		15,722,625			-		(15,990,004	)		(266,043	)

Sale of common stock, net of offering costs		-		-		125		-		84,700		8		324,892			-		-			324,900

Common stock issued for services		-		-		5,000		-		-		-		20,000			-		-			20,000

Net loss for the period		-		-		-		-		-		-		-			-		(205,528	)		(205,528	)

Balance, June 30, 2020		-		-		13,343,905		1,334		102,988		10		16,067,517			-		(16,195,532	)		(126,671	)

Sale of common stock, net of offering costs		-		-		-		-		185,801		19		725,737			-		-			725,756

Net loss for the period		-		-		-		-		-		-		-			-		(329,844	)		(329,844	)

Balance, September 30, 2020		-	$	-		13,343,905	$	1,334		288,789	$	29	$	16,793,254		$	-	$	(16,525,376	)	$	269,241

See accompanying notes to unaudited condensed financial statements.

DATCHAT, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine			For the Nine
	Months Ended			Months Ended
	September 30, 2021			September 30, 2020

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(3,492,929	)	$	(743,334	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of ROU asset		20,987			17,553
Stock-based compensation		1,029,607			6,667
Changes in operating assets and liabilities:
Prepaid expenses		(200,651	)		6,000
Advance deposits		-			(50,000	)
Accounts payable and accrued expenses		145,915			8,173
Operating lease liability		(20,987	)		(17,553	)

NET CASH USED IN OPERATING ACTIVITIES		(2,518,058	)		(772,494	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from a related party		161,567			173,854
Payments on related party advances		(161,229	)		(192,440	)
Repayment of notes payable - related party		(7,500	)		-
Proceeds from notes payable		-			6,042
Repayment of convertible notes payable		-			(6,000	)
Proceeds from exercise of Series A warrants		13,979,370			-
Net proceeds from sale of common stock and common stock to be issued, net of offering costs		13,671,074			1,332,455

NET CASH PROVIDED BY FINANCING ACTIVITIES		27,643,282			1,313,911

NET INCREASE IN CASH		25,125,224			541,417

CASH - beginning of period		690,423			70,774

CASH - end of period	$	25,815,647		$	612,191

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	-		$	1,500
Income taxes	$	-		$	-

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for future services	$	250,000		$	13,333
Subscription receivable from exercise of Series A warrants	$	234,543		$	-

See accompanying notes to unaudited condensed financial statements.

DATCHAT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 and 2020

(Unaudited)

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

DatChat, Inc. (the “Company”) was incorporated in the State of Nevada on December 4, 2014 under the name of YssUp, Inc. On March 4, 2015, the Company’s corporate name was changed to Dat Chat, Inc. In August 2016, the Board of Directors of the Company approved to change the name of the Company from Dat Chat, Inc. to DatChat, Inc. The Company established a fiscal year end of December 31. The Company’s principal business is focused on its mobile messaging application that provides a traditional messaging platform, while providing users with complete privacy and control features for their sent messages. The Company’s mobile messaging application is called DatChat Messenger which is currently a free messaging application. Once the Company achieves critical mass of users, the Company will offer new features and will charge fees and generate revenues from the added features.

On July 28, 2021, the Company filed a certificate of change to the Company’s amended and restated certificate of incorporation, with the Secretary of State of the State of Nevada to effectuate a one-for-two (1:2) reverse stock split (the “Reverse Stock Split”) of the Company’s common stock. Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding stock options, warrants and equity incentive plans. All share and per-share data and amounts have been retroactively adjusted as of the earliest period presented in the unaudited condensed consolidated financial statements to reflect the Reverse Stock Split.

Basis of presentation and liquidity

Management acknowledges its responsibility for the preparation of the accompanying unaudited condensed financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the periods presented. The accompanying condensed unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions of Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements. These unaudited condensed financial statements should be read in conjunction with the summary of significant accounting policies and notes to the financial statements for the year ended December 31, 2020 of the Company which were included in the Company’s current report on Form 1-K as filed with the Securities and Exchange Commission on April 27, 2021.

As reflected in the accompanying unaudited condensed financial statements, the Company has incurred a net loss of $3,492,929 and used cash in operations of $2,518,058, for the nine months ended September 30, 2021. Additionally, the Company has an accumulated deficit of $20,254,441 at September 30, 2021 and has not generated revenues since inception. During the nine months ended September 30, 2021, the Company has received gross proceeds of approximately $13.7 million from the sale of its securities in connection with an initial public offering and gross proceeds of approximately $14.0 million from the exercise of the Company’s Series A warrants (see Note 7). As of September 30, 2021, the Company had working capital of $25,761,802. These events served to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern. The Company believes the proceeds raised during the nine months ended September 30, 2021 will provide sufficient cash flows to meet its obligations for a minimum of twelve months from the date of this filing.

Use of estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates include the valuation of deferred tax assets, and the value of stock-based compensation expenses.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. The reclassified amounts have no impact on the Company’s previously reported financial position or results of operations and relates to the presentation of marketing and advertising expenses separately on the condensed statements of operation previously included in general and administrative expenses.

DATCHAT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 and 2020

(Unaudited)

Cash and cash equivalents

The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. There were no highly liquid debt instruments and other short-term investments as of September 30, 2021 and December 31, 2020. The Company maintains cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit Insurance Corporation ("FDIC"). The Company’s account at this institution is insured by the FDIC up to $250,000. At September 30, 2021 and December 31, 2020, the Company had cash in excess of FDIC limits of approximately $25.5 million and $440,000, respectively. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits.

Fair value measurements and fair value of financial instruments

The carrying value of certain financial instruments, including cash, accounts payable and accrued expenses, notes payable, notes payable – related parties and due to related party are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.

Revenue recognition

The Company will recognize revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company will further analyze its revenue recognition policy when it enters into revenue producing customer contracts.

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 $286,869 and $63,966 for the three months ended September 30, 2021 and 2020, respectively, and $439,298 and $146,791 for the nine months ended September 30, 2021 and 2020, respectively, and are included in marketing and advertising expenses on the statements of operations.

Leases

The Company follows ASC Topic 842, Leases (Topic 842) and applying the package of practical expedients, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. Operating lease right of use assets (“ROU”) assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations.

Income taxes

The Company accounts for income taxes pursuant to the provision of Accounting Standards Codification (“ASC”) 740-10, “Accounting for Income Taxes” (“ASC 740-10”), which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach require the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.

DATCHAT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 and 2020

(Unaudited)

The Company follows the provision of ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, there may be uncertainty about the merits of positions taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured at the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceed the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all more likely than not to be upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.

The Company has adopted ASC 740-10-25, “Definition of Settlement”, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion and examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they are filed.

Stock-based compensation

Stock-based compensation is accounted for based on the requirements of ASC 718 – “Compensation–Stock Compensation”, which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

Basic and diluted net loss per share

Basic net loss per share is computed by dividing the net loss by the weighted average number of common shares during the period. Diluted net loss per share is computed using the weighted average number of common shares and potentially dilutive securities outstanding during the period.

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

	September 30,
	2021		2020
Common stock equivalents:
Common stock warrants		764,927		1,187,500
Common stock options		1,184,200		-
Convertible notes payable		-		750,000
Total		1,949,127		1,937,500

Recent accounting pronouncements

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its financial statements.

DATCHAT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 and 2020

(Unaudited)

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

In January 2019, the Company renewed and extended the term of its lease facility for another three-year period from January 2019 to December 2021 starting with a monthly base rent of $2,567 plus a pro rata share of operating expenses beginning January 2019. The base rent was subject to annual increases beginning the 2^nd and 3^rd lease year as defined in the lease agreement. In addition to the monthly base rent, the Company is charged separately for common area maintenance which is considered a non-lease component. These non-lease component payments are expensed as incurred and are not included in operating lease assets or liabilities. On August 27, 2021, the Company entered into an amendment agreement with the same landlord to modify the lease to relocate and increase the square footage of the lease premises whereby the lease term shall commence on October 1, 2021 (see Note 6).

Right-of- use assets are summarized below:

	September 30, 2021			December 31, 2020
Office lease (36 months)	$	72,609		$	72,609
Less accumulated amortization		(64,964	)		(43,977	)
Right-of-use asset, net	$	7,645		$	28,632

Operating Lease liabilities are summarized below:

	September 30, 2021			December 31, 2020
Office lease	$	72,609		$	72,609
Reduction of lease liability		(64,964	)		(43,977	)
Total lease liability		7,645			28,632
Less: current portion		7,645			28,632
Long term portion of lease liability	$	-		$	-

Minimum lease payments under non-cancelable operating lease at September 30, 2021 are as follows:

Year ended December 31, 2021	$	8,050
Total	$	8,050
Less: present value discount		(405	)
Total operating lease liability	$	7,645

NOTE 3 – RELATED PARTY TRANSACTIONS

Due to Related Party

The Company’s officer, Mr. Darin Myman, from time to time, provides advances to the Company for working capital purposes. At September 30, 2021 and December 31, 2020, the Company had a payable to the officer of $532 and $194, respectively, which is presented as due to related party on the condensed balance sheets. These advances are short-term in nature and non-interest bearing. During the nine months ended September 30, 2021 and 2020, respectively, Mr. Myman provided advances to the Company for working capital purposes totaling of $161,567 and $173,854 and the Company repaid $161,229 and $192,440 of these advances, respectively.

Notes Payable – Related Party

On May 29, 2015, the Company entered into a promissory note agreement, providing for the issuance of a note in the principal amount of $30,000 to a principal stockholder of the Company. The note was due on July 29, 2015. The annual interest rate for the loan is 10%. The Company defaulted to repay the note when it was due. On February 25, 2016, the Company entered into an extension agreement with the lender to extend the maturity date of the note to December 31, 2016. In accordance with the extension agreement, the Company and the lender agree to increase the amount of the principal amount of the note by $5,000 as penalty for the Company’s failure to repay the note on July 29, 2015. In connection with the increase in principal amount of $5,000, the Company recorded non-cash interest expense of $5,000 on February 25, 2016. On October 25, 2017, the Company agreed to pay an additional $5,000 as penalty fee for the extension of maturity date to June 30, 2018. Between October 2018 and November 2018, the Company paid a total principal amount of $10,000. Between March 2019 and December 2019, the Company paid a total principal amount of $13,500. During the year ended December 31, 2020, the Company paid a total principal amount of $9,000. The Company fully paid the principal amount of $7,500 in February 2021. As of September 30, 2021 and December 31, 2020, the principal balance of this note was $0 and $7,500, respectively.

As of September 30, 2021 and December 31, 2020, accrued interest related to the note payable – related party above amounted to $16,364 and $16,282, respectively, and is included in accounts payable and accrued expenses on the accompanying unaudited condensed balance sheets.

DATCHAT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 and 2020

(Unaudited)

NOTE 4 – NOTES PAYABLE

Notes payable to unrelated parties is summarized below:

	As of September 30, 2021			As of December 31, 2020
	(Unaudited)
Principal amount	$	6,042		$	6,042
Less: current portion		(6,042	)		(4,045	)
Notes payable - long term portion	$	-		$	1,997

Minimum principal payments under notes payable to unrelated parties at September 30, 2021 are as follows:

Year ended December 31, 2021	$	4,345
Year ended December 31, 2022		1,697
Total principal payments	$	6,042

Paycheck Protection Program Funding

On May 4, 2020, the Company received federal funding in the amount of $6,042 through the Paycheck Protection Program (the “PPP”). PPP funds have certain restrictions on use of the funding proceeds, and generally must be repaid within two (2) years or May 2022 at 1% interest. The PPP loan may, under circumstances, be forgiven. There shall be no payment due by the Company during the six months period beginning on the date of the note (“Deferral Period”). Commencing one month after the expiration of the Deferral Period, the Company shall pay the lender monthly payments of principal and interest, each in equal amount required to fully repay by the maturity date. If a payment on this note is more than ten days late, the lender shall charge a late fee of up to 5% of the unpaid portion of the regularly scheduled payment. As of December 31, 2020, the principal balance of this note amounted to $6,042 and accrued interest of $40. During the nine months ended September 30, 2021, the Company recognized $45 of interest expense. As of September 30, 2021, the principal balance of this note amounted to $6,042 and accrued interest of $85, which is due in full in May 2022 if not forgiven.

NOTE 5 – STOCKHOLDERS’ EQUITY

Shares Authorized

The authorized capital stock consists of 200,000,000 shares, of which 180,000,000 are shares of common stock and 20,000,000 are shares of preferred stock.

Reverse Stock Split

On July 28, 2021, the Company filed a certificate of change to the Company’s amended and restated certificate of incorporation, with the Secretary of State of the State of Nevada, to effectuate a one-for-two (1:2) reverse stock split of the Company’s common stock. Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding stock options, warrants and equity incentive plans. All share and per-share data and amounts have been retroactively adjusted as of the earliest period presented in the unaudited condensed consolidated financial statements to reflect the Reverse Stock Split.

2021 Omnibus Equity Incentive Plan

On July 26, 2021, the Company adopted the 2021 Omnibus Equity Incentive Plan, and authorized the reservation of 2,000,000 shares of common stock for future issuances under the plan.

Preferred stock

In August 2016, the Company designated 1 share of Series A Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”) and has a stated value equal to $1.00 as may be adjusted for any stock dividends, combinations or splits. Each one (1) share of the Series A Preferred Stock shall have voting rights equal to (x) the total issued and outstanding Common Stock eligible to vote at the time of the respective vote divided by (y) forty-nine one hundredths (0.49) minus (z) the total issued and outstanding Common Stock eligible to vote at the time of the respective vote. The Series A Preferred Stock does not convert into securities of the Company. The Series A Preferred Stock does not contain any redemption provision. In the event of liquidation of the Company, the holder of Series A Preferred shall not have any priority or preferences with respect to any distribution of any assets of the Company and shall be entitled to receive equally with the holders of the Company’s common stock.

DATCHAT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 and 2020

(Unaudited)

Common stock

Sale of Common Stock

During the nine months ended September 30, 2021, the Company sold an aggregate of 405,224 shares of its common stock at $4.00 per common share for gross proceeds of $1,620,896 and net proceeds of $1,589,237 after escrow fees related to private placement sale.

During the nine months ended September 30, 2020, the Company sold 341,102 shares of its common stock at $4.00 per common share for gross proceeds of $1,364,408 and net proceeds of $1,332,455 after escrow fees related to private placement sale. In connection with these sales of common stock, the Company issued 52,438 shares of common stock and there were 288,789 shares of commons stock to be issued as of September 30, 2020.

Initial Public Offering

On August 12, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with EF Hutton, division of Benchmark Investments, LLC, in connection with the initial public offering (the “Offering”) of 3,325,301 shares of the its common stock and Series A warrants (the “Series A Warrants”) to purchase up to 3,325,301 shares of the its common stock for gross proceeds of approximately $13,800,000, before deducting underwriting discounts, commissions, and other offering expenses, including legal expenses related to the Offering of approximately $1,718,000 which are offset against the proceeds in additional paid in capital resulting in net proceeds to the Company of approximately $12.1 million. The Offering closed on August 17, 2021, and the underwriter subsequently exercised its over-allotment option, which closed on August 23, 2021.

The Series A Warrants are exercisable for a period of five years from the date of issuance at an exercise price of $4.98 per share, subject to adjustment as provided therein. The Series A Warrants contain a provision for cashless exercise.

In addition, pursuant to the terms of the Offering, the Company agreed to issue warrants to EF Hutton (the “Representative’s Warrants”) to purchase up to an aggregate of 231,325 shares of common stock, or 8% of the shares of common stock sold in the offering. The Representative’s Warrants are exercisable for a period of five years at any time on or after the six-month anniversary of the date of the Offering at an exercise price of $4.98 per share, subject to adjustment. The Representative’s Warrants contain a provision for cashless exercise.

Common stock for services

In March 2021, the Company issued an aggregate of 105,000 shares of common stock for consulting and professional services rendered. The Company valued these common shares at the fair value of $420,000 or $4.00 per common share based on sales of common stock in the recent private placement. The Company recorded stock-based consulting of $420,000 which is included in professional and consulting expenses in the accompanying unaudited condensed statements of operations for the nine months ended September 30, 2021.

In February 2021, the Company entered into a one-year Advisory Board Agreement with an individual who will act as an advisor to the Company’s Board. In accordance with this agreement the Company issued 100,000 shares of its common stock as consideration for the services provided. The Company valued these common shares at a fair value of $400,000 or $4.00 per common share based on sales of common stock in the recent private placement. The Company recorded stock-based consulting of $250,000 which was included in professional and consulting expenses in the accompanying unaudited condensed statements of operations for the nine months ended September 30, 2021 and the remaining balance of $150,000 as of September 30, 2021 has been deferred and included as a contra-equity account within additional paid in capital and will be amortized into expense over the remaining term of the agreement.

On June 11, 2020, the Company entered into a one-year Advisory Board Agreement with an individual who will act as a member to the Company’s Advisory Board. In accordance with this agreement the Company issued 5,000 shares of its common stock as consideration for the services provided. The Company valued these common shares at the fair value of $20,000 or $4.00 per common share based on sales of common stock in the recent private placement.

DATCHAT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 and 2020

(Unaudited)

Common stock issued upon exercise of Series A Warrants

Between August 27, 2021 and September 30, 2021, the Company received aggregate gross proceeds of $13,979,370 and subscription receivable of $234,543 from the exercise of 2,854,199 Series A Warrants, resulting in an aggregate issuance of 2,854,199 shares of common stock. The Company collected the subscription receivable of $234,543 in October 2021.

Common stock issued upon cashless exercise of warrants

In March 2020, the Company issued 111,111 shares of its common stock in connection with the cashless exercise of 125,000 warrants. The exercise price was based on contractual terms of the related debt.

As of September 30, 2021 and 2020, there were a total of 1,389 and 288,789 shares of common stock to be issued, respectively.

Common Stock Warrants

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

	Number of Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Balance at December 31, 2020		62,500		$	0.40		1.59
Granted		3,556,626		$	4.98		5.00
Exercised		(2,854,199	)	$	4.98		4.90
Balance at September 30, 2021		764,927		$	4.61		4.57
Warrants exercisable at September 30, 2021		533,602		$	4.44		4.42

Common Stock Options

Common stock options for services

On August 13, 2021, the Company granted an aggregate of 285,700 options to purchase the Company’s common stock to an officer, directors and consultants of the Company. The options each have a term of 5 years from the date of grant and are exercisable at an exercise price of $4.15 per share. The options vest six months from date of grant.

On August 24, 2021, the Company granted an aggregate of 530,000 options to purchase the Company’s common stock to officers, employees and consultants of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $6.25 per share. The options vest 25% every six months from date of grant for two years.

On September 28, 2021, the Company granted an aggregate of 18,500 options to purchase the Company’s common stock to an employee and consultants of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $14.25 per share. The options vest 25% every six months from date of grant for two years.

On September 28, 2021, the Company granted an aggregate of 350,000 options to purchase the Company’s common stock to officers and directors of the Company. The options have a term of 5 years from the date of grant and are exercisable at an exercise price of $35 per share. The options vest 25% every six months from date of grant for two years.

The stock options were valued at the grant date using a Black-Scholes option pricing model with the following assumptions: risk-free interest rate ranging from 0.44% to 0.55%, expected dividend yield of 0%, expected option term of 3 years using the simplified method and expected volatility ranging from 159% to 163% based on comparable and calculated volatility. The Company recognized a total stock- based expense of $359,607 of which $215,313 was recorded in compensation and related expenses and $144,294 was recorded in professional and consulting expenses as reflected in the condensed statements of operations during the nine months ended September 30, 2021. A balance of $7,257,591 remains to be expensed over future vesting periods related to unvested stock options issued for services to be expensed over a weighted average period of 1.52 years.

DATCHAT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 and 2020

(Unaudited)

The following is a summary of the Company’s stock option activity is presented below:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Balance at December 31, 2020		—	$	—		—
Granted		1,184,200	$	14.37		5.00
Balance at September 30, 2021		1,184,200	$	14.37		4.90

Options exercisable at end of period		—	$	—
Options expected to vest		1,184,200	$	14.37
Weighted average fair value of options granted during the period			$	6.43

At September 30, 2021, the aggregate intrinsic value of options outstanding were $3,217,988.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

Operating Lease Agreement

In January 2019, the Company renewed and extended the term of its lease facility for another three-year period from January 2019 to December 2021 starting from a monthly base rent of $2,567 plus a pro rata share of operating expenses beginning January 2019 (see Note 2). The base rent is subject to annual increases beginning the 2^nd and 3^rd lease year as defined in the lease agreement. During the nine months ended September 30, 2021 and 2020 rent expense related to this lease was $28,200 and $26,988, respectively, and was included in general and administrative expenses on the accompanying unaudited condensed statements of operations. On August 27, 2021, the Company entered into an amendment agreement with the same landlord to modify the facility lease to relocate and increase the square footage of the lease premises (see Notes 2). The term of the lease shall commence on October 1, 2021 to December 31, 2024 with a new monthly base rent of $7,156 plus a pro rata share of operating expenses beginning January 2022. The base rent will be subject to 3% annual increases beginning the 2^ndand 3^rd lease year as defined in the amended lease agreement.

Consulting Agreement

On February 1, 2021, the Company entered into an Engagement Agreement (the “Agreement”) with a consulting company who acted as an exclusive lead underwriter, financial advisor, placement agent and investment banker of the Company, whereby the consultant assisted the Company to an initial public offering of the Company’s equity, debt or equity derivative instruments (“Offering”). The engagement period shall end on the earlier of i) 12 months from the date of the agreement or ii) the final closing if any of the Offering.

The consultant prepared an Underwriting Agreement (the “Underwriting Agreement”) covering the sale of up to $10 million of equity, equity derivatives, and equity linked instruments of the Company. The Company shall pay compensation of 8% of the total gross proceeds of the Offering and warrants equal to 8% of the aggregate number of shares of common stock sold in the Offering. The warrants will be exercisable during the four- and half-year period commencing 6 months from the effective date of the Offering at a price equal to 110% of the public offering price per share of common stock. In addition, the Company shall pay 10% broker dealer cash fee of the amount of capital raised from private equity placements and 6% broker dealer cash fee of the amount capital raised from debt placements. On August 17, 2021, the Company completed its initial public offering, in which the Company issued 3,325,301 shares of its common stock and Series A warrants (the “Series A Warrants”) to purchase up to 3,325,301 shares of its common stock for gross proceeds of approximately $13,800,000. As such, the Company paid the consulting company 8% of the total gross proceeds of the Offering and warrants equal to 8% of the aggregate number of shares of common stock sold in the Offering (see Note 5).

Marketing Agreement

In September 2021, the Company executed a marketing agreement for various social media marketing and ad campaigns that will run through October 2021 to December 2021. The total marketing fees for this campaign will be approximately $1 million.

DATCHAT, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021 and 2020

(Unaudited)

Employment Agreement

On August 27, 2021, the Company entered into an agreement (the “Employment Agreement”) with Darin Myman effective as of August 15, 2021 pursuant to which Mr. Myman’s (i) base salary will increase to $450,000 per year, and (ii) Mr. Myman shall be entitled to receive an annual bonus in an amount up to $350,000, which annual bonus may be increased by the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”), in its sole discretion, upon the achievement of additional criteria established by the Compensation Committee from time to time (the “Annual Bonus”). In addition, pursuant to the Employment Agreement, upon termination of Mr. Myman’s employment for death or Total Disability (as defined in the Employment Agreement), in addition to any accrued but unpaid compensation and vacation pay through the date of his termination and any other benefits accrued to him under any Benefit Plans (as defined in the Employment Agreement) outstanding at such time and the reimbursement of documented, unreimbursed expenses incurred prior to such termination date (collectively, the “Payments”), Mr. Myman shall be entitled to the following severance benefits: (i) 24 months of his then base salary; (ii) if Mr. Myman elects continuation coverage for group health coverage pursuant to COBRA Rights (as defined in the Employment Agreement), then for a period of 24 months following Mr. Myman’s termination he will be obligated to pay only the portion of the full COBRA Rights cost of the coverage equal to an active employee’s share of premiums (if any) for coverage for the respective plan year; and (iii) payment on a pro-rated basis of any Annual Bonus or other payments earned in connection with any bonus plan to which Mr. Myman was a participant as of the date of his termination (together with the Payments, the “Severance”). Furthermore, pursuant to the Employment Agreement, upon Mr. Myman’s termination (i) at his option (A) upon 90 days prior written notice to the Company or (B) for Good Reason (as defined in the Employment Agreement), (ii) termination by the Company without Cause (as defined in the Employment Agreement) or (iii) termination of Mr. Myman’s employment within 40 days of the consummation of a Change in Control Transaction (as defined in the Employment Agreement), Mr. Myman shall receive the Severance; provided, however, Mr. Myman shall be entitled to a pro-rated Annual Bonus of at least $200,000. In addition, any equity grants issued to Mr. Myman shall immediately vest upon termination of Mr. Myman’s employment by him for Good Reason or by the Company at its option upon 90 days prior written notice to Mr. Myman, without Cause.

NOTE 7 – SUBSEQUENT EVENTS

In October 2021, the Company received aggregate gross proceeds of $142,358 from the exercise of 28,586 Series A Warrants, resulting in an aggregate issuance of 28,586 shares of common stock. Additionally, the Company collected the subscription receivable of $234,543 in October 2021 (see Note 5).

In October 2021, the Company executed a marketing agreement for various social media marketing and ad campaigns that will run through October 2021 to February 2022. The total marketing fees for this campaign will be approximately $3 million.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and plan of operations together with “Summary Financial Data” and our financial statements and the related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this prospectus. All amounts in this report are in U.S. dollars, unless otherwise noted.

Overview

We are a communication software company. We believe that one’s right to privacy should not end the moment they click “send.” Our flagship product, DatChat Messenger & Private Social Network (the “Application”), is a mobile application that gives users the ability to communicate with privacy and protection.

The Application allows users to exercise control over their messages, even after they are sent. Through the Application, users can delete messages that they have sent, on their own device and the recipient’s device as well. There is no set time limit within which they must exercise this choice. A user can elect at any time to delete a message that they previously sent to a recipient’s device.

The Application also enables users to hide secret and encrypted messages behind a cover, which messages can only be unlocked by the recipient and which are automatically destroyed after a fixed number of views or fixed amount of time. Users can decide how long their messages last on the recipient’s device. The Application also includes a screen shot protection system, which makes it virtually impossible for the recipient to screenshot a message or picture before it gets destroyed. In addition, users can delete entire conversations at any time, making it like the conversation never even happened.

The Application integrates with iMessage, making private messages potentially available to hundreds of millions of users.

Recent Events

On July 28, 2021, the Company filed a certificate of change to the Company’s amended and restated certificate of incorporation, with the Secretary of State of the State of Nevada to effectuate a one-for-two (1:2) reverse stock split of the Company’s common stock. Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding stock options, warrants and equity incentive plans. All share and per-share data and amounts have been retroactively adjusted as of the earliest period presented in the unaudited condensed consolidated financial statements to reflect the Reverse Stock Split.

On August 17, 2021, the Company completed its initial public offering (“IPO”), in which we issued 3,325,301 shares of our common stock and Series A warrants (the “Series A Warrants”) to purchase up to 3,325,301 shares of our common stock for gross proceeds of approximately $13,800,000 before deducting underwriting discounts, commissions, and other offering expenses, including legal expenses related to the Offering of approximately $1,718,000 which are offset against the proceeds in additional paid in capital resulting in net proceeds to the Company of approximately $12.1 million.

Basis of Presentation

The financial statements contained herein have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) and the requirements of the Securities and Exchange Commission.

Critical Accounting Policies and Significant Judgments and Estimates

This management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reported period. In accordance with U.S. GAAP, we base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates if conditions differ from our assumptions. While our significant accounting policies are more fully described in Note 1 in the “Notes to Financial Statements”, we believe the following accounting policies are critical to the process of making significant judgments and estimates in preparation of our financial statements.

Use of estimates

Revenue recognition

Stock-based compensation

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718, “Compensation — Stock Compensation” (“ASC 718”), which requires recognition in the financial statements of the cost of employee, non-employee and director services received in exchange for an award of equity instruments over the period the employee, non-employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). ASC 718 also requires measurement of the cost of employee, non-employee, and director services received in exchange for an award based on the grant-date fair value of the award.

Leases

The Company follows ASC Topic 842, Leases (Topic 842) and applying the package of practical expedients, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. Operating lease right of use assets (“ROU”) assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations.

Capital Expenditures

We do not have any contractual obligations for ongoing capital expenditures at this time. We do, however, purchase equipment and software necessary to conduct our operations on an as needed basis.

Quantitative and Qualitative Disclosures about Market Risk

In the ordinary course of our business, we are not exposed to market risk of the sort that may arise from changes in interest rates or foreign currency exchange rates, or that may otherwise arise from transactions in derivatives.

Recently Issued Accounting Pronouncements

Refer to the notes to the audited financial statements.

Results of Operations

Revenue

We did not generate any revenues during the three and nine months ended September 30, 2021 and 2020 and we do not anticipate that we will generate revenue for the foreseeable future. Once we achieve a critical mass of users, we will offer new features and will charge fees in order to generate revenues from these added features.

Cost of goods sold

We remain in developmental stage and, in conjunction with not having any operational revenue, we have incurred no Cost of Goods and Services Sold.

Compensation and related expenses

Compensation and related expenses for the three months ended September 30, 2021 and 2020 were $640,827 and $149,067, respectively, an increase of $491,760 or 330%, and for the nine months ended September 30, 2021 and 2020 were $1,142,342 and $330,870, respectively, an increase of $811,472 or 245%, and relates to salaries, health insurance and other benefits of our four officers and nine full time employees. The increase in compensation is primarily related to increase salaries of our CEO, the hiring of three executive officers and additional employees, and stock-based compensation related to option grants during the third quarter of fiscal 2021.

Marketing and advertising expenses

Marketing and advertising expenses for the three months ended September 30, 2021 and 2020 were $286,869 and $63,966, respectively, an increase of 222,903 or 348%, and for the nine months ended September 30, 2021 and 2020 were $439,298 and $146,791, respectively, an increase of $292,507 or 199%, primarily due to increase in promotions, branding and digital marketing strategy and social media ads.

Professional and consulting expenses

During the three months ended September 30, 2021 and 2020, we reported professional and consulting fees of $605,635 and $78,727, respectively, an increase of $526,908 or 669%. During the nine months ended September 30, 2021 and 2020, we reported professional and consulting fees of $1,441,963 and $162,322, respectively, an increase of $1,279,641 or 788%, which are principally comprised of the following items:

	●	We incurred $504,405 and $70,219 of consulting fees for general advisory consulting, investor relation, technology services, and other incidental services for the three months ended September 30, 2021 and 2020, respectively. During the three months ended September 30, 2021 and 2020, $244,294 and $5,000, respectively, of these services were primarily related to stock based consulting expenses from stock option grants to various consultants of $144,294 and accretion of deferred stock-based consulting fees of $100,000.

	●	We incurred $1,261,609 and $122,230 of consulting fees for general advisory consulting, investor relation, technology services, and other incidental services for the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021 and 2020, $814,294 and $6,667, respectively, of these services were primarily related to stock based consulting expenses from stock option grants to various consultants of $144,294, accretion of deferred stock-based consulting fees of $250,000 and common stock issued for services valued on the date of grant at its estimated fair value using recent sales of common stock of $420,000.

●

The remaining amounts attributed to professional and consulting fees incurred during the three months ended September 30, 2021 and 2020 were primarily attributed to legal and accounting fees which amounted to $101,230 and $8,508, respectively. The remaining amounts attributed to professional and consulting fees incurred during the nine months ended September 30, 2021 and 2020 were primarily attributed to legal and accounting fees which amounted to $180,353 and $40,092, respectively. The increase during the three and nine months ended September 30, 2021 were primarily due to legal and accounting services for our public filings.

General and administrative expenses

General and administrative expenses for the three months ended September 30, 2021 and 2020 were $318,007 and $24,007, an increase of $294,000 or 1,225%. General and administrative expenses for the nine months ended September 30, 2021 and 2020 were $470,470 and $67,934, an increase of $402,536 or 593%. General and administrative expenses primarily consisted of the following expense categories: insurance, travel, utilities, office related expenses, public company expenses, and rent expense. Such increase was primarily attributable to increase in insurance, travel, office expenses, rent, and public company expenses primarily related to our Nasdaq uplisting.

Other Income (Expense)

During the three months ended September 30, 2021 and 2020, we reported other income (expense) of $959 and ($14,077), respectively. During the three months ended September 30, 2021, other income primarily consisted of interest income of $974, offset by interest expense of $15. During the nine months ended September 30, 2021 and 2020, we reported other income (expense) of $1,144 and ($35,417), respectively. During the nine months ended September 30, 2021, other income primarily consisted of interest income of $1,271, offset by interest expense of $127.

For the three and nine months ended September 30, 2020, other expense included other income of $7,000 of economic disaster grant funds, offset by interest expense related to our debts. The decrease in interest expense is primarily attributable due to repayments of debt during the nine months ended September 30, 2021 and in fiscal 2020.

Net Loss

For the foregoing reasons, our net loss for the three months ended September 30, 2021 and 2020 was $1,850,379 and $329,844, respectively, and for the nine months ended September 30, 2021 and 2020, was $3,492,929 and $743,334, respectively.

Liquidity, Capital Resources and Plan of Operations

As of September 30, 2021, we had cash totaling approximately $25,815,647.

We were incorporated on December 4, 2014 and have not generated revenues to date. For the nine months ended September 30, 2021, we had a net loss of $3,492,929 and will require additional capital in order to operate in the normal course of business and implement its business plan. In addition, we used cash in operations of $2,518,058 for the nine months ended September 30, 2021. We have an accumulated deficit of $20,254,441 at September 30, 2021 and have not generated revenues since inception. During the third quarter of fiscal 2021, the Company has received net proceeds of approximately $12.1 million from the sale of its securities in connection with an initial public offering and gross proceeds of approximately $14.0 million from the exercise of the Company’s Series A warrants. These events served to mitigate the conditions that historically raised substantial doubt about the Company’s ability to continue as a going concern.

Net cash used in operating activities totaled approximately $2,518,058 and $772,494 for the nine months ended September 30, 2021 and 2020, respectively. Net loss for the nine months ended September 30, 2021 and 2020 totaled approximately $3,449,572 and $743,334, respectively. For the nine months ended September 30, 2021, stock-based compensation was $1,029,607, amortization expense of $20,987, and operating changes were a net decrease of $119,080 primarily due to increase in prepaid expenses of $200,651 and accounts payable and accrued expenses of $145,915 During the nine months ended September 30, 2020 stock based compensation expense was $6,667 and amortization expense of $17,553. Total accounts payable and accrued expenses increased by $8,173, advance deposits increased by $50,000, prepaid expenses decreased by $6,000 and operating lease liabilities decreased by $17,553 during the nine months ended September 30, 2020.

Net cash provided by financing activities totaled approximately $27,643,282 and $1,313,911 for the nine months ended September 30, 2021 and 2020, respectively. During the nine months ended September 30, 2021, financing activities was primarily attributable to net proceeds of approximately $13,671,074 from the sale of common stock, $13,979,370 from the exercise of Series A warrants and $161,567 of advances from a related party, offset by $161,229 repayment of related party advances and $7,500 repayment of related-party notes. During the nine months ended September 30, 2020, financing activities was primarily attributable to net proceeds of $1,332,455 from the sale of common stock and $173,854 of advances from a related party and proceeds from notes payable of $6,042, offset by $192,440 repayment of related party advances and $6,000 repayment of convertible notes.

Off-Balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

As a smaller reporting company, we are not required to provide the information required by this Item.

Item 4. Controls and Procedures.

(a)

Disclosure Controls and Procedures

We are required to maintain “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e) and 15d-15(e), promulgated by the SEC pursuant to the Exchange Act. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Our management, with the participation of our principal executive officer and principal financial officer, evaluated our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our principal executive officer and principal financial officer concluded that as of September 30, 2021, our disclosure controls and procedures were not effective because of a material weakness in our internal controls over financial reporting. The ineffectiveness of our disclosure controls and procedures were not effective because of the material weaknesses set forth below.

The ineffectiveness of our disclosure controls and procedures was due to the following material weaknesses:

	●	We lack segregation of duties within accounting functions duties as a result of our limited financial resources to support hiring of personnel.

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

	●	We have not implemented adequate system and manual controls.

While we used the services of third-party accountant who is a certified public accountant to provide accounting and financial reporting services to us, we lack both an adequate number of personnel with requisite expertise in the key functional areas of finance and accounting and an adequate number of personnel to properly implement control procedures. In addition, while we have independent directors, we do not have an audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. These factors represent material weaknesses in our internal controls over financial reporting. Although we believe the possibility of errors in our financial statements is remote and expect to continue to use a third-party accountant to address shortfalls in staffing and to assist us with accounting and financial reporting responsibilities in an effort to mitigate the lack of segregation of duties, until such time as we expand our staff with qualified personnel, we expect to continue to report material weaknesses in our internal control over financial reporting.

(b)

Changes in Internal Control over Financial Reporting.

There were no changes in our internal control over financial reporting the quarter ended September 30, 2021 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be subject to litigation and claims arising in the ordinary course of business. We are not currently a party to any material legal proceedings and we are not aware of any pending or threatened legal proceeding against us that we believe could have a material adverse effect on our business, operating results, cash flows or financial condition.

Item 1A. Risk Factors.

Risk factors that affect our business and financial results are discussed in Part II, Item 1A “Risk Factors,” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 as filed with the SEC on September 24, 2021 (“Quarterly Report”). There have been no material changes in our risk factors from those previously disclosed in our Quarterly Report. You should carefully consider the risks described in our Quarterly Report, which could materially affect our business, financial condition or future results. The risks described in our Quarterly Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Between July 1, 2021 and September 30, 2021, the Company sold 250 shares of its common stock at $4.00 per common share for gross proceeds of $1,000 related to the private placement sale.

Unless otherwise indicated, the foregoing securities were offered and issued in reliance on the exemption from registration requirements under the Securities Act afforded by Section 4(a)(2) thereof and/or Rule 506 of Regulation D promulgated thereunder.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit No.		Description of Exhibits

31.1*		Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*		Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*		Cover Page Interactive Data File - the cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, is formatted in Inline XBRL.

*	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DATCHAT, INC.

Dated: November 12, 2021	By:	/s/ Darin Myman
	Name:	Darin Myman
	Title:	Chief Executive Officer (Principal Executive Officer)

Dated: November 12, 2021	By:	/s/ Vadim Mats
	Name:	Vadim Mats
	Title:	Chief Financial Officer (Principal Financial and Accounting Officer)