UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from ___________ to ___________
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State or Other Jurisdiction | IRS Employer | |
| of Organization) | Identification Number |
| (Address of principal executive offices) | (Zip code) |
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The | ||||
| The |
Indicate
by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was
required to submit and post such files).
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 | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As
of November 9, 2023, there were
DATCHAT, INC.
FORM 10-Q
September 30, 2023
INDEX
| i |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common stock and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement.
Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout our Annual Report on Form 10-K as filed with the SEC on March 31, 2023. Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, but are not limited to:
| ● | our business strategies; | |
| ● | the timing of regulatory submissions; | |
| ● | our ability to obtain and maintain regulatory approval of our existing product candidates and any other product candidates we may develop, and the labeling under any approval we may obtain; | |
| ● | risks relating to the timing and costs of clinical trials and the timing and costs of other expenses; | |
| ● | risks related to market acceptance of products; | |
| ● | intellectual property risks; | |
| ● | risks associated to our reliance on third party organizations; | |
| ● | our competitive position; | |
| ● | our industry environment; | |
| ● | our anticipated financial and operating results, including anticipated sources of revenues; | |
| ● | assumptions regarding the size of the available market, benefits of our products, product pricing and timing of product launches; | |
| ● | management’s expectation with respect to future acquisitions; | |
| ● | statements regarding our goals, intentions, plans and expectations, including the introduction of new products and markets; | |
| ● | general business and economic conditions, such as inflationary pressures, geopolitical conditions including, but not limited to, the conflict between Russia and the Ukraine, the conflict between Israel and Gaza, and the effects and duration of outbreaks of public health emergencies, such as COVID-19; and | |
| ● | our cash needs and financing plans. |
The foregoing list sets forth some, but not all, of the factors that could affect our ability to achieve results described in any forward-looking statements. You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits our Annual Report on Form 10-K, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q is accurate as of the date hereof. Because the risk factors referred to in our Annual Report on Form 10-K, as filed with the SEC on March 31, 2023, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.
| ii |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DATCHAT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments, at fair value | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Total Current Assets | ||||||||
| OTHER ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Digital currencies and other digital assets | ||||||||
| Operating lease right-of-use asset, net | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Operating lease liability, current portion | ||||||||
| Contract liabilities | ||||||||
| Due to related party | ||||||||
| Total Current Liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Operating lease liability, less current portion | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 8) | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock ($ | ||||||||
| Series A Preferred stock ($ | ||||||||
| Series B Preferred stock ($ | ||||||||
| Common stock ($ | ||||||||
| Common stock to be issued ( | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost ( | ( | ) | ||||||
| Accumulated other comprehensive gain | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
| 1 |
DATCHAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| NET REVENUES | $ | $ | $ | $ | ||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Compensation and related expenses | ||||||||||||||||
| Marketing and advertising expenses | ||||||||||||||||
| Professional and consulting expenses | ||||||||||||||||
| Research and development expense | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Impairment loss on digital currencies and other digital assets | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| LOSS FROM OPERATIONS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest income, net | ||||||||||||||||
| Gain on initial consolidation of variable interest entities | ||||||||||||||||
| Foreign currency loss | ( | ) | ( | ) | ||||||||||||
| Realized gain on short-term investments | ||||||||||||||||
| Unrealized gain (loss) on short-term investments | ( | ) | ||||||||||||||
| Total other income (expenses), net | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| COMPREHENSIVE LOSS: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive (loss) gain: | ||||||||||||||||
| Unrealized (loss) gain on short-term investments | ( | ) | ||||||||||||||
| Unrealized foreign currency translation (loss) gain | ( | ) | ||||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| NET LOSS PER COMMON SHARE: | ||||||||||||||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | ||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
| 2 |
DATCHAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(Unaudited)
| 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, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
| Accretion of stock based compensation in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based professional fees in connection with stock option grants and shares | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for professional services | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive gain | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Rounding | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock based compensation in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based professional fees in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive gain | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for professional services | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock based compensation in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based professional fees in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Sale of Series B preferred stock | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive loss | - | - | - | - | - | - | - | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||
| Rounding for reverse split | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||
| 3 |
| 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 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
| Accretion of stock based compensation in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based professional fees in connection with stock option grants and shares | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock based compensation in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based professional fees in connection with stock option grants and shares | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for asset acquisition | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock based compensation in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based professional fees in connection with stock option grants and shares | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
| 4 |
DATCHAT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of right of use asset | ||||||||
| Stock-based compensation | ||||||||
| Stock-based professional fees | ||||||||
| Gain from initial consolidation of variable interest entities | ( | ) | ||||||
| Impairment loss on digital currencies and other digital assets | ||||||||
| Non-cash digital currency and other digital assets fees | ||||||||
| Non-cash revenue from sale of Venvuu NFT digital asset | ( | ) | ||||||
| Realized gain on short-term investments | ( | ) | ( | ) | ||||
| Unrealized loss on short-term investments | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Accounts receivable - related party | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Contract liabilities | ( | ) | ( | ) | ||||
| Operating lease liability | ( | ) | ( | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from sale of short-term investments | ||||||||
| Purchase of short-term investments, net | ( | ) | ( | ) | ||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Increase in cash from consolidation of variable interest entities | ||||||||
| Purchases of digital currencies and other digital assets | ( | ) | ||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on related party advances | ( | ) | ||||||
| Repayment of advances - related party | ( | ) | ||||||
| Proceeds from sale of Series B preferred stock | ||||||||
| Purchase of treasury stock | ( | ) | ||||||
| NET CASH USED IN FINANCING ACTIVITIES | ( | ) | ( | ) | ||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash | ||||||||
| CASH AND CASH EQUIVALENTS - beginning of period | ||||||||
| CASH AND CASH EQUIVALENTS - end of period | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Common stock issued for future services | $ | $ | ||||||
| Issuance of common shares for intangible assets | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
| 5 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
DatChat, Inc. (“DatChat” or “the Company”) was incorporated in the State of Nevada on December 4, 2014 under the name of YssUp, Inc. On March 4, 2015, the Company’s corporate name was changed to Dat Chat, Inc. In August 2016, the Board of Directors of the Company approved to change the name of the Company from Dat Chat, Inc. to DatChat, Inc. The Company established a fiscal year end of December 31. The Company is a blockchain, cybersecurity, and social media company that not only focuses on protecting privacy on personal devices, but also protects user information after it is shared with others. The Company believes that one’s right to privacy should not end the moment they click “send.” The Company’s flagship product, DatChat Messenger & Private Social Network, is a mobile application that gives users the ability to communicate with privacy and protection.
Recently, the Company has expanded its business and product offerings to include the co-development of a mobile-based social metaverse (“Metaverse”), known as “The Habytat”.. The Metaverse is a virtual-reality space in which users can interact with a computer-generated environment and other users.
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
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
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 $
Basis of presentation
Management acknowledges its responsibility for the preparation of the accompanying unaudited condensed consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its financial position and the results of its operations for the periods presented. The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (the “U.S. GAAP”) for interim financial information and with the instructions Article 8-03 of Regulation S-X. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.
| 6 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
Certain information and note disclosure normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted from these statements pursuant to such accounting principles and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to the financial statements for the year ended December 31, 2022 of the Company which were included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2023.
The Company consolidates its subsidiaries that are wholly-owned, 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.
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.
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.
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 $
| September 30, | February 14, | |||||||
| 2023 | 2023 | |||||||
| Cash | $ | $ | ||||||
| Due from DatChat | ||||||||
| Property and equipment, net | ||||||||
| Total assets | $ | $ | ||||||
| Due to DatChat (eliminates in consolidation) | $ | $ | ||||||
| Total liabilities | $ | $ | ||||||
| 7 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
Liquidity
As
reflected in the accompanying unaudited consolidated financial statements for the nine months ended September 30, 2023, the Company incurred
a net loss of $
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, and the fair value of non-cash equity transactions.
Cash and cash equivalents
The
Company considers all highly liquid debt instruments and other short-term investments with 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 $
| 8 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
Fair value measurements and fair value of financial instruments
The carrying value of certain financial instruments, including cash and cash equivalents, accounts payable and accrued expenses, and due to related party are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
The Company analyzes all financial instruments with features of both liabilities and equity under the Financial Accounting Standard Board’s (the “FASB”) accounting standard for such instruments. Under this standard, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company did not identify any assets or liabilities that are required to be presented on the balance sheet at fair value in accordance with the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820.
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
| Short-term investments | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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.
The
Company recorded $(
Accounting for digital currencies and other digital assets
The Company purchases Ethereum cryptocurrency (“Ethereum”) and other digital assets and accepts Ethereum as a form of payment for non-fungible tokens sales (NFTs). The Company accounts for these digital assets held as the result of the purchase or receipt of Ethereum and other digital assets, as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). The Company has ownership of and control over its digital currencies and digital assets and the Company may use third-party custodial services to secure them. The digital currencies and digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition. The Company believes that digital currencies and other digital assets meet the definition of indefinite-lived intangible assets and accounts for them at historical cost less impairment, applying the guidance in ASC 350. The Company monitors any standard-setting, regulatory or technological developments that may affect the Company’s accounting for digital currencies or its controls and processes related to digital currencies. Digital currencies are included in long-term assets in the consolidated balance sheet.
| 9 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
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
nine months ended September 30, 2023, the Company recorded an impairment loss of $
Property and equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which range from three to five years. Leasehold improvements are depreciated over the shorter of the useful life or lease term including scheduled renewal terms. Maintenance and repairs are charged to expense as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
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 nine months ended September 30, 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 unaudited 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
$
| 10 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Revenue recognition
The Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company recognizes revenues from subscription fees on the Company’s messaging application in the month they are earned. Annual and lifetime subscription payments received that are related to future periods are recorded as deferred revenue to be recognized as revenues over the contract term or period. Lifetime subscriptions are being recognized to revenues over a 12-month period.
The Company’s NFT revenues were generated from the sale of NFTs. The Company 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.
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Subscription revenues | $ | $ | $ | $ | ||||||||||||
| NFT revenues | - | |||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
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 three months ended September 30, 2023 and 2022, research
and development costs incurred in the development of the Company’s software products were $
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 $
| 11 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
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
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.
| 12 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
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 nine months ended September 30, 2023 was $
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.
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Common stock equivalents: | ||||||||
| Common stock warrants | ||||||||
| Common stock options | ||||||||
| Total | ||||||||
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.
| 13 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
NOTE 2 – SHORT-TERM INVESTMENTS
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Cost | Unrealized Gain | Fair Value | Cost | Unrealized Loss | Fair Value | |||||||||||||||||||
| US Treasury bills | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Certificates of deposit | ( | ) | ||||||||||||||||||||||
| Total short-term investments | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Short-term investments mature between October 2023 and February 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
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
| 14 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
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 $
On
August 27, 2021, upon the execution of the amendment agreement, the Company recorded right-of-use assets and operating lease liabilities
of $
| September 30, 2023 | December 31, 2022 | |||||||
| Office lease | $ | $ | ||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Right-of-use asset, net | $ | $ | ||||||
| September 30, 2023 | December 31, 2022 | |||||||
| Office lease | $ | $ | ||||||
| Reduction of lease liability | ( | ) | ( | ) | ||||
| Total lease liability | ||||||||
| Less: current portion | ||||||||
| Long term portion of lease liability | $ | $ | ||||||
| For the year ended September 30: | ||||
| 2024 | $ | |||
| 2025 | ||||
| Total | ||||
| Less: present value discount | ( | ) | ||
| Total operating lease liability | $ | |||
| 15 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
NOTE 5 – INTANGIBLE ASSETS
On
June 29, 2022, in connection with the acquisition of Avila, the Company issued an aggregate of
| For the Year Ended December 31, 2022 | ||||
| Acquisition of patents | $ | |||
| Less: amortization of patents | ( | ) | ||
| Less: impairment of patents | ( | ) | ||
| Intangible assets, net | $ | |||
The
Company periodically evaluates its finite intangible assets for impairment upon occurrence of events or changes in circumstances that
indicate the carrying amount of intangible assets may not be recoverable. The Company concluded that the undiscounted cash flows did
not support the carrying values of its intangible assets as of December 31, 2022. As of December 31, 2022, the Company has no projected
future revenues or cash flows related to the patents and has no current plans to exploit the patents. Accordingly, the Company determined
the value of the patents acquired were fully impaired as of December 31, 2022 and recognized an impairment loss on its long-lived intangible
assets of $
NOTE 6 – RELATED PARTY TRANSACTIONS
Due to Related Party
The
Company’s officer, Mr. Darin Myman, from time to time, provides advances to the Company for working capital purposes. On September
30, 2023 and December 31, 2022, the Company had a payable to the officer of $
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 $
NOTE 7 – STOCKHOLDERS’ EQUITY
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 $
Shares Authorized
The
authorized capital stock consists of
| 16 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
2021 Omnibus Equity Incentive Plan
On
July 26, 2021, the Company adopted the 2021 Omnibus Equity Incentive Plan, and authorized the reservation of
Preferred Stock
Series A Preferred Stock
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
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 $
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
| 17 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
Common Stock
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 $
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
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
On
July 25, 2023, the Company issued
Stock Options
2022
On December 26, 2021 and effective January 10, 2022, the Company approved the grant of
On
January 19, 2022, the Company granted an aggregate of
| 18 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
On
July 22, 2022, the Company granted an aggregate of
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 $
2023
On
February 3, 2023, the Company granted an aggregate of
On
February 3, 2023, the Company granted an aggregate of
On
September 6, 2023, the Company granted an aggregate of
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 $
During
the nine months ended September 30, 2023, certain employees and consultants were terminated. Accordingly,
During
the nine months ended September 30, 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 $
| 19 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
| 2023 | 2022 | |||||
| Dividend rate | % | % | ||||
| Term (in years) | ||||||
| Volatility | % | % | ||||
| Risk—free interest rate | % | % |
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Balance on December 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Cancelled | ( | ) | ( | ) | ||||||||
| Balance on September 30, 2023 | $ | |||||||||||
| Options exercisable on September 30, 2023 | $ | |||||||||||
| Weighted average fair value of options granted during the period | $ | |||||||||||
On
September 30, 2023, the aggregate intrinsic value of options outstanding was $
Common Stock Warrants
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Balance on December 31, 2022 | $ | |||||||||||
| Granted | ||||||||||||
| Balance on September 30, 2023 | ||||||||||||
| Warrants exercisable on September 30, 2023 | $ | |||||||||||
On
September 30, 2023, the aggregate intrinsic value of warrants outstanding was $
| 20 |
DATCHAT, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2023 AND 2022
(Unaudited)
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 $
NASDAQ Notice
On
October 14, 2022, the Company received written notice from Nasdaq that the Company was not in compliance with Nasdaq Listing Rule 5550(a)(2),
as the minimum bid price of our common stock had been below $
NOTE 9 – SUBSEQUENT EVENTS
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 $
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.
| 21 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes for the year ended December 31, 2022 included in our Annual Report on Form 10-K filed with the Securities Exchange Commission, or SEC. 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 Quarterly Report on Form 10-Q. All amounts in this report are in U.S. dollars, unless otherwise noted.
Overview
We are a blockchain, cybersecurity, and social media company that not only focuses on protecting privacy on personal devices, but also protects user information after it is shared with others. We believe that one’s right to privacy should not end the moment they click “send”, and that we all deserve the same right to privacy online that we enjoy in our own living rooms. Our flagship product, DatChat Messenger & Private Social Network, is a privacy platform and mobile application that gives users the ability to communicate with the privacy and protection they deserve. Recently. we have expanded our business and product offerings to include the co-development of a mobile-based social metaverse (“Metaverse”), known as “The Habytat”. Recently, we developed, VenVūū, an advertising and non-fungible token (“NFT”) monetization platform. We are no longer developing VenVūū. The Metaverse is a virtual-reality space in which users can interact with a computer-generated environment and other users.
DatChat Messenger & Private Social Network
Our platform allows users to exercise control over their messages and posts, even after they are sent. Through our 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.
In addition to the foregoing, the application also provides users with the ability to connect via an encrypted live video chat that also is designed to prevent screenshots or screen grabs.
The application integrates with iMessage, making private messages potentially available to hundreds of millions of users.
The Habytat
In June 2022, we formed a wholly owned subsidiary, SmarterVerse, Inc. (“SmarterVerse”). In July 2022, SmarterVerse entered into a development agreement with Metabizz, LLC, an infrastructure firm that creates and develops 4D experiences in the Metaverse. The owners of Metabizz, LLC also own Metabizz SAS (together referred to as (“Metabizz”). As of February 2023, based on the Company’s analysis, on February 14, 2023, Metabizz was determined to be a VIE entity in accordance with ASC 810-10-25-22.
In November 2022, we launched The Habytat, a virtual space that blends real world and virtual realities into one, in real time, using emerging technology like virtual and augmented reality, to create a highly immersive 3D environment.
In January 2023, we launched Geniuz City, the first world within The Habytat. Geniuz City is intended to be a near photo-realistic world that is based on the city of Miami and its surrounding areas. Geniuz City has been designed in a manner that can enable users to participate in a number of different activities, such as parties, business conferences, shopping, socializing, and game play.
Currently, once users download The Habytat application, we plan to grant each user rights to use a designated piece of virtual property in Geniuz City through the minting and issuance of a unique NFT. NFTs (or non-fungible tokens) are digital assets that can represent a unique real-world asset, such as art, music, in-game items, videos, or a piece of real estate or virtual property. Users will initially be able to choose the style of house they want, then start customizing it to represent their personal style and taste. Users will then be able to accumulate reward points when they visit and interact with such virtual property or invite others to join The Habytat, and such rewards can be used to enhance, expand, and improve the virtual property.
In addition, we plan to offer users the ability to have their own pets in the Habytat, which they will need to care for and can train to follow basic obedience commands.
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Risks and Uncertainties
On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.
Management continues to evaluate the impact of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect on our financial position and results of its operations, the specific impact is not readily determinable as of the date of these financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 consolidated 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 consolidated 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 consolidated financial statements.
Use of estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures at the date of the 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 deferred tax assets, and the fair value of non-cash equity transactions.
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, we consider 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.
Based on our 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 us. The equity owners of Metabizz have only a nominal equity investment at risk, and we absorb or receive a majority of the entity’s expected losses or benefits. We participate significantly in the design of Metabizz. We have 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 our benefit, as evidenced by the fact that the operations of Metabizz consists of development of software and technologies to be used by SmarterVerse and we provide working capital to Metabizz to pay employees and independent contractors to perform the development services on our behalf. Repayment of the working capital advances is not guaranteed by the equity owner of Metabizz. Creditors of Metabizz do not have recourse to our general credit. Accordingly, we are required to consolidate the assets, liabilities, revenues and expenses of Metabizz. Additionally, the managing partner of Metabizz is also the Chief Innovation Officer of SmarterVerse.
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Short-term investments
Our portfolio of short-term investments consists of marketable debt securities which are comprised solely of that are highly rated U.S. government securities with maturities of more than three months, but less than one year. We classify these as available-for-sale at purchase date and will reevaluate such designation at each period end date. We 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. We evaluate our 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 we will more likely than not be required to sell the security before recovery of its amortized cost basis.
Accounting for digital currencies and other digital assets
We may purchase Ethereum cryptocurrency (“Ethereum”) and other digital assets and may accept Ethereum as a form of payment for non-fungible tokens sales (NFTs). We account for these digital assets held as the result of the purchase or receipt of Ethereum and other digital assets, as indefinite-lived intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”). We have ownership of and control over our digital currencies and digital assets and we may use third-party custodial services to secure them. The digital currencies and digital assets are initially recorded at cost and are subsequently remeasured, net of any impairment losses incurred since acquisition. We believe 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. We monitor any standard-setting, regulatory or technological developments that may affect our accounting for digital currencies or our controls and processes related to digital currencies. Digital currencies are included in long-term assets in the consolidated balance sheet.
We determine 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. We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that its digital assets are impaired. In determining if an impairment has occurred, we consider the lowest market price quoted on an active exchange since acquiring the respective digital asset. If the then current carrying value of a digital asset exceeds the fair value, an impairment loss has occurred with respect to those digital assets in the amount equal to the difference between their carrying values and the fair value. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains are not recorded until realized upon sale, at which point they are presented net of any impairment losses for the same digital assets held. In determining the gain or loss to be recognized upon sale, we calculate the difference between the sales price and carrying value of the digital assets sold immediately prior to sale. Impairment losses and gains or losses on sales are recognized within operating expenses in the consolidated statements of operations. During the nine months ended September 30, 2023, we recorded an impairment loss of $23,381.
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. Through September 30, 2023, software development costs incurred 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.
Revenue recognition
We recognize revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services. We recognize revenues from subscription fees on our messaging application in the month they are earned. Annual and lifetime subscription payments received that are related to future periods are recorded as deferred revenue to be recognized as revenues over the contract term or period. Lifetime subscriptions are being recognized to revenues over a 12-month period.
Our NFT revenues were generated from the sale of NFTs. We accepted Ethereum as a form of payment for NFT sales. Our NFTs exist on the Ethereum Blockchain under our VenVūū brand. VenVūū is a Metaverse advertising platform that allows advertisers and Metaverse landowners to connect using our proprietary Metaverse ad network and dynamic NFT technology. We used the NFT exchange, OpenSea, to facilitate its sales of NFTs. Through OpenSea, we have 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. We have no obligations for returns, refunds or warranty after the NFT sale. The value of the sale is determined based on the value of the Ethereum crypto currency received as consideration. Each NFT that is generated produces a unique identifying code. We do not expect to generate revenues from the sale of NFT’s in the future.
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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. We have elected to account for forfeitures as they occur.
Research and development
Research and development costs incurred in the development of our products are expensed as incurred and includes costs such as outside development costs and other allocated costs incurred.
Leases
We applied ASC Topic 842, Leases (Topic 842) to arrangements with lease terms of 12 months or more. Operating lease right of use assets (“ROU”) represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the statements of operations.
Recently Issued Accounting Pronouncements
Refer to the notes to the unaudited consolidated financial statements.
Results of Operations
Revenue
During the three and nine months ended September 30, 2023, we generated revenue in the amount of $175 and $501, respectively, from subscriptions. For the three and nine months ended September 30, 2022, we generated revenue in the amount of $3,540 and $42,296, respectively. For the three months ended September 30, 2022, revenue consisted of revenue from subscriptions of $3,540. For the nine months ended September 30, 2022, revenue consisted of revenue from subscriptions of $5,902 and revenue from the sale of our Venvuu NFT of $36,394.
Operating Expenses
For the three months ended September 30, 2023, operating expenses amounted to $2,542,326 as compared to $2,685,450 for the three months ended September 30 2022, a decrease of $143,124, or 5.3%. For the nine months ended September 30, 2023, operating expenses amounted to $7,355,729 as compared to $8,671,451 for the nine months ended September 30, 2022, a decrease of $1,315,722, or 14.7%.
For the three and nine months ended September 30 2023 and 2022, operating expenses consisted of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Compensation and related expenses | $ | 1,247,302 | $ | 1,639,886 | $ | 4,177,032 | $ | 5,015,827 | ||||||||
| Marketing and advertising expenses | 219,008 | 65,181 | 379,410 | 645,825 | ||||||||||||
| Professional and consulting expenses | 483,319 | 482,338 | 1,060,396 | 1,947,535 | ||||||||||||
| Research and development | 380,017 | 258,957 | 1,064,049 | 258,957 | ||||||||||||
| General and administrative expenses | 212,680 | 232,064 | 651,461 | 712,103 | ||||||||||||
| Impairment loss on digital currencies and other digital assets | - | 7,024 | 23,381 | 91,204 | ||||||||||||
| Total | $ | 2,542,326 | $ | 2,685,450 | $ | 7,355,729 | $ | 8,671,451 | ||||||||
Compensation and related expenses
Compensation and related expenses include salaries, stock-based compensation, health insurance and other benefits.
During the three months ended September 30, 2023 and 2022, compensation and related expenses amounted to $1,247,302 and $1,639,886, respectively, a decrease of $392,584, or 23.9%. The decrease was attributable to an increase in other compensation expense of $555,807, offset by a decrease in stock-based compensation of $163,223.
During the nine months ended September 30, 2023 and 2022, compensation and related expenses amounted to $4,177,032 and $5,015,827, respectively, a decrease of $838,795, or 16.7%. The decrease was attributable to a decrease in stock-based compensation of $402,570 and a decrease in other compensation and other related expenses of $436,225.
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Marketing and advertising expenses
During the three months ended September 30, 2023 and 2022, marketing and advertising expenses amounted to $219,008 and $65,181, respectively, an increase of $153,827, or 236.0% During the nine months ended September 30, 2023 and 2022, marketing and advertising expenses amounted to $379,410 and $645,825, respectively, a decrease of $266,415, or 41.2%, primarily due to an overall decrease in promotions, branding and digital marketing strategies and social media ads.
Professional and consulting expenses
During the three months ended September 30, 2023 and 2022, we reported professional and consulting expenses of $483,319 and $482,338, respectively, an increase of $981, or 0.2%.
During the nine months ended September 30, 2023 and 2022, we reported professional and consulting expenses of $1,060,396 and $1,947,535, respectively, a decrease of $887,139, or 45.6%. The decrease is attributable to a decrease in consulting fees of $67,144, a decrease in investor relations fees of $310,200, a decrease in legal fees of $227,462, and a decrease in recruiting fees of $322,000, offset be an increase in other professional fees of $39,667.
Research and development costs
During the three months ended September 30, 2023 and 2022, we incurred $380,017 and $258,957 in research and development costs, an increase of $121,060, or 46.7%. During the nine months ended September 30, 2023 and 2022, we incurred $1,064,049 and $258,957 in research and development costs, an increase of $805,092, or 310.9%. Research and development costs were incurred in connection with our Metaverse software development project, including the development of The Habytat which is in the preliminary stage.
General and administrative expenses
During the three months ended September 30, 2023 and 2022, general and administrative expenses amounted to $212,680 and $232,064, a decrease of $19,384, or 8.3%. During the nine months ended September 30, 2023 and 2022, general and administrative expenses amounted to $651,461 and $712,103, a decrease of $60,642, or 8.5%. The decreases are primarily attributable to a decrease in conference fees and a decrease in other general and administrative expenses, offset by an increase in travel expense.
Impairment loss on digital currencies and other digital assets
During the three months ended September 30, 2023 and 2022, operating expenses included an impairment charge related to the write down of digital assets of $0 and $7,024, respectively. During the nine months ended September 30, 2023 and 2022, operating expenses included an impairment charge related to the write down of digital assets of $23,381 and $91,204, respectively.
Loss from Operations
During the three months ended September 30, 2023, loss from operation amounted to $2,542,151 as compared to $2,681,910 during the three months ended September 30, 2022, a decrease of $139,759, or 5.2%. During the nine months ended September 30, 2023, loss from operation amounted to $7,355,228 as compared to $8,629,155 during the nine months ended September 30, 2022, a decrease of $1,273,927, or 14.7%.
Other Income (Expense)
Other income (expenses) primarily consisted of interest income, gain on initial consolidation of variable interest entities, and realized gain on short-term investments and unrealized gains or losses on short-term investments. During the three months ended September 30, 2023 and 2022, we reported other income (expenses) of $177,571 and $25,205, respectively. During the nine months ended September 30, 2023 and 2022, we reported other income (expenses) of $304,204 and $24,892, respectively. During the nine months ended September 30, 2023, other income primarily consisted of interest income of $6,058, gain on initial consolidation of variable interest entities of $106,538, a realized gain on short-term investments of $239,382, and an unrealized loss on short-term investments of $47,672. During the nine months ended September 30, 2022, other income primarily consisted of interest income of $8,077, a realized gain on short-term investments of $9,702, and an unrealized gain on short-term investments of $7,113.
Net Loss
Due to the foregoing reasons, during the three months ended September 30, 2023 and 2022, our net loss was $2,364,580, or $(1.13) per common share (basic and diluted) and $2,656,705, or $(1.29) per common share (basic and diluted), respectively, a decrease of $292,125, or 11.0%. During the nine months ended September 30, 2023 and 2022, our net loss was $7,051,024, or $(3.40) per common share (basic and diluted) and $8,604,263, or ($4.32) per common share (basic and diluted), respectively, a decrease of $1,553,239, or 18.0%.
Liquidity, Capital Resources and Plan of Operations
As of September 30, 2023, we had cash and cash equivalents of $672,086 and short-term investments of $6,826,759. Short-term investments include U.S. Treasury bills that are all highly rated and have initial maturities between four and twelve months.
As reflected in the accompanying unaudited consolidated financial statements for the nine months ended September 30, 2023, we incurred a net loss of $7,051,024 and used cash in operations of $5,159,510. As of September 30, 2023, we have an accumulated deficit of $46,780,142 and have generated minimal revenues since inception. As of September 30, 2023, we had working capital of $7,307,166, including cash of $672,086 and short-term investments of $6,826,759. These events served to mitigate the conditions that historically raised substantial doubt about our ability to continue as a going concern. We believe our cash and short-term investments will provide sufficient cash flows to meet our obligations for a minimum of twelve months from the date of this filing.
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Our primary uses of cash have been for compensation and related expenses, fees paid to third parties for professional services, marketing and advertising expenses, and general and administrative expenses. All funds received have been expended in the furtherance of growing the business. We received funds from the sale of our common stock and the exercise of warrants. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
| ● | An increase in working capital requirements to finance our current business, | |
| ● | Cost of research and development, |
| ● | Addition of administrative, technical and sales personnel as the business grows, and |
| ● | The cost of being a public company. |
Cash Flow Activities for the Nine Months ended September 30, 2023 and 2022
Cash Flows from Operating Activities
Net cash used in operating activities totaled $5,159,510 and $5,727,584 for the nine months ended September 30, 2023, and 2022, respectively, a decrease of $568,074.
Net cash flow used in operating activities for the nine months ended September 30, 2023 primarily reflected a net loss of $7,051,0241 adjusted for the add-back (reduction) of non-cash items consisting of depreciation of $20,687, amortization of right of use assets of $44,272, accretion of stock-based stock option and common stock expense of $2,183,835, a non-cash gain from initial consolidation of variable interest entities of $(106,568), impairment loss on digital assets of $23,381, and net unrealized and realized gain on short-term investments of $191,710, offset by changes in operating assets and liabilities primarily consisting of a decrease in accounts receivable – related party of $42,000, an increase in prepaid expenses of $61,456, a decrease in accounts payable and accrued expenses of $14,283, and a decrease in operating lease liabilities of $48,808.
Net cash flow used in operating activities for the nine months ended September 30, 2022 primarily reflected a net loss of $8,604,263 adjusted for the add-back of non-cash items consisting of depreciation and amortization of $67,227, stock-based compensation and professional fees from the accretion of stock-based stock option and common stock expense of $2,671,128, unrealized and realized gains on short-term investments, and an impairment loss on digital currencies and other digital assets of $91,204, offset by changes in operating assets and liabilities primarily consisting of a decrease in prepaid expenses of $117,396, a decrease in accounts payable and accrued expenses of $23,386 and a decrease in operating lease liability of $39,027.
Cash Flows from Investing Activities
Net cash provided by (used in) investing activities amounted to $4,496,890 and $(8,242,060) for the nine months ended September 30, 2023 and 2022, respectively.
During the nine months ended September 30, 2023, we purchased short-term investments of $5,363,163 and received gross proceeds from the sale of short-term investments of $9,845,000. Additionally, we received $64,538 in cash upon initial consolidation of variable interest entities and purchased property and equipment of $49,485.
During the nine months ended September 30, 2022, we purchased property and equipment of $44,475, purchased digital currencies and other digital assets of $233,245, and we purchased short-term investments of $14,394,340 and received gross proceeds from the sale of short-term investments of $6,430,000.
Cash Flows from Financing Activities
Net cash used in financing activities totaled approximately $398,284 and $203 for the nine months ended September 30, 2023 and 2022, respectively.
During the nine months ended September 30, 2023, we repaid related party advances of $1,315, we used cash of $397,969 to purchase 66,944 treasury stock at an average price of $5.94 per share, and we receive $1,000 from the sale of Series B preferred stock.
During the nine months ended September 30, 2022, we repaid related party advances of $203.
Off-Balance Sheet Arrangements
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
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 September 30, 2023, the end of the period covered by this Quarterly Report on Form 10-Q, 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.
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 September 30, 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 September 30, 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.
| ● | We lack segregation of duties within accounting functions duties as a result of our limited financial resources to support hiring of personnel. |
| ● | We lack control over the custody of and accounting for digital currencies and other digital assets accounts. |
| ● | The lack of multiples levels of management review on complex business, accounting and financial reporting issues. |
| ● | We have not implemented adequate system and manual controls. |
Remediation Plans
Management is committed to the remediation of the material weaknesses described above, as well as the improvement of the Company’s overall internal control over financial reporting. Management plans on implementing actions to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses. Remediation efforts include the possible hiring of additional accounting and finance personnel with appropriate expertise to strengthen overall controls and the establishment of disbursement review and approval processes. The material weaknesses will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded, through testing, that these controls are effective. Our management will monitor the effectiveness of our remediation plan and will make changes management determines to be appropriate. Until the remediation efforts (including any additional measures management identifies as necessary) are completed, the material weaknesses described above will continue to exist.
Changes in Internal Control over Financial Reporting.
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 31, 2023 (“Annual Report”). Except as set forth below, there have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual 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.
If we fail to comply with the continued listing requirements of The Nasdaq Capital Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.
On October 14, 2022, we were notified (the “Notification Letter”) by the Staff of the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) that based on the previous 30 consecutive business days, our listed security no longer met the minimum $1 bid price per share requirement. Therefore, in accordance with the Nasdaq Listing Rules (the “Rules”), the we were provided 180 calendar days, or until April 12, 2023, to regain compliance, and that if we were unable to regain compliance by April 12, 2023, an additional 180-days may be granted, so long as we meet the Nasdaq continued listing requirements (except for the bid price requirement) and notify Nasdaq in writing of our intention to cure the deficiency during the second compliance period.
In accordance with the Notification Letter and Rules, on April 7, 2023, we notified Nasdaq in writing of our intention to cure the deficiency and requested an additional 180-calendar days in order to do so. On April 13, 2023, we were notified (the “Second Notification Letter”) by the Staff that we are eligible for an additional 180 calendar day period, or until October 9, 2023 to regain compliance and cure the deficiency, so long as we meet the Nasdaq continued listing requirements (except for the bid price requirement). On October 4, 2023, the Company received notice from Nasdaq that the Company has regained compliance with the minimum bid price requirement for continued listing on The Nasdaq Capital Market.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On July 25, 2023, we issued 19,802 of our 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.
On August 4, 2023, we issued 2,000,000 of Series B preferred stock for aggregate cash of $1,000.
The above securities were issued in reliance upon the exemptions provided by Section 4(a)(2) under the Securities Act of 1933, as amended.
Issuer Purchases of Equity Securities
On January 6, 2023, our Board of Directors authorized a stock repurchase plan to repurchase up to $2,000,000 of our issued and outstanding common stock, from time to time, with such program to be in place until December 31, 2023. Through September 30, 2023, the Company purchased 66,944 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 unaudited consolidated balance sheet on September 30, 2023.
We did not have any common stock repurchases during the quarterly period ended September 30, 2023.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| DATCHAT, INC. | |
| Dated: November 13, 2023 | /s/ Darin Myman |
| Darin Myman | |
| Chief Executive Officer and Director | |
| (Principal Executive Officer) | |
| Dated: November 13, 2023 | /s/ Brett Blumberg |
| Brett Blumberg | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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