1-SA 1 datc-20190630_1sa.htm FORM 1-SA FOR PERIOD ENDED JUNE 30, 2019

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-SA

SEMIANNUAL REPORT PURSUANT TO REGULATION A

For the fiscal semiannual period ended:

June 30, 2019

DATCHAT, INC.

(Exact name of issuer as specified in its charter)

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

65 Church Street, Second Floor, New Brunswick, New Jersey 08901

(Full mailing address of principal executive offices)

(732) 354-4766

(Issuer’s telephone number, including area code)

Item 1. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Revenue

The Company did not generate any revenues during the six months ended June 30, 2019 and 2018 and we do not anticipate that we will generate revenue for the foreseeable future.

Cost of Goods Sold

The Company remains in developmental stage and, in conjunction with not having any operational revenue, it has incurred no Cost of Goods and Services Sold.

General and administrative expenses

General and administrative expenses for the six months ended June 30, 2019 and 2018 were $189,169 and $105,079. As reflected in the table below, general and administrative expenses primarily consisted of the following expense categories: marketing, advertising and promotion, insurance and rent expenses. The other general and administrative expenses primarily consisted of payments for travel, internet and other office expenses, none of which is significant individually.

	Six months ended June 30,
		2019		2018
Marketing, advertising and promotion	$	98,080	$	23,345
Amortization of software development cost		-		26,882
Rent/Lease expense		17,130		19,267
Insurance		43,065		12,552
Other general and administrative expenses		30,894		23,033
Total general and administrative expenses	$	189,169	$	105,079

Professional and consulting fees

During the six months ended June 30, 2019 and 2018, the Company reported professional and consulting fees of $90,426 and $3,274,510, respectively which are principally comprised of the following items:

During the six months ended June 30, 2019 and 2018, the Company incurred $45,949 and $92,786 in audit and legal fees related to the Company’s annual audit of its financial statements for the six months ended June 30, 2019 and 2018, and legal fees resulting from work on the Company’s various regulatory and financing matters.

The Company incurred $41,569 and $3,179,554 of consulting fees primarily related to stock-based compensation expense from the issuance of shares of common stock to consultants for sales, marketing, investor relation and other incidental services for the six months ended June 30, 2019 and 2018, respectively.

The remaining amounts attributed to professional fees incurred by the Company during the six months ended June 30, 2019 are attributed to various types of professional fees, none of which is significant individually.

-1-

Compensation expenses

Compensation expenses to for the six months ended June 30, 2019 and 2018 were $255,899 and $157,594, respectively, relates to salaries of our three officers and hiring of additional employees.

Other Expense, net

During the six months ended June 30, 2019 and 2018, the Company reported other expense of $5,447,536 $135,019, respectively. Other expense includes interest expense and amortization of original issue discounts on notes payable of $46,967 and loss on debt extinguishment of $5,400,569 pursuant to a Forbearance and Exchange Agreement with a note holder.

At June 30, 2019 the aggregate outstanding balances on the Company’s borrowings was $324,500. The Company has classified these borrowings as notes payable, related parties of $24,500. Additionally, the Company has outstanding balance of $300,000 from the issuance of convertible notes as of June 30, 2019.

Net Loss

For the foregoing reasons, the Company’s net loss for the six months ended June 30, 2019 and 2018, was $5,983,030 and $3,672,202, respectively.

Liquidity, Capital Resources and Plan of Operations

As of June 30, 2019, we had cash totaling approximately $90,000.

Going Concern Consideration

As reflected in the accompanying financial statements, the Company has no revenue generating operations and has a net loss since inception of approximately $15.2 million. In addition, there is a working capital deficiency of approximately $414,000 as of June 30, 2019. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Management believes that actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity for the Company to continue as a going concern.

Net cash used in operating activities totaled approximately $509,000 and $316,000 for the six months ended June 30, 2019 and 2018, respectively. Net loss for the six months ended June 30, 2019 and 2018 totaled approximately $5,983,000 and $3,672,000, respectively. Loss on debt extinguishment for the six months ended June 30, 2019 was approximately $5,400,000 and total amortization expense of $32,000. Total accounts payable and accrued expenses increased by approximately $52,000 and operating lease liabilities decreased approximately $9,500 during the six months ended June 30, 2019. Stock based compensation expense for the six months ended June 30, 2018 was approximately $3,134,000 and total amortization expense of $154,000. Total accounts payable and accrued expenses increased by approximately $7,000 and advance deposits increased by approximately $61,000 during the six months ended June 30, 2018.

-2-

Net cash provided by financing activities totaled approximately $399,000 and $318,000 for the six months ended June 30, 2019 and 2018, respectively. During the six months ended June 30, 2019, financing activities was primarily attributable to net proceeds of approximately $192,248 from the sale of common stock and $207,497 collection of subscription receivable and $110,000 of advance from a related party offset by $111,000 total repayment of related party advances and note payable-related party. During the six months ended June 30, 2018, financing activities consisted of net proceeds of approximately $173,000 from the sale of common stock, $240,000 from the issuance of convertible note payable and $5,590 of advances from a related party offset by $14,965 repayment of related party advances and $85,300 repayment of notes.

Capital Expenditures

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

Off-Balance Sheet Arrangements

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

Quantitative and Qualitative Disclosures about Market Risk

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

Recently Issued Accounting Pronouncements

Refer to the notes to the unaudited condensed financial statements.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies affect the significant judgments and estimates used in the preparation of the 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 financial statements and during the reporting period. Actual results could materially differ from these estimates. Significant estimates include the valuation of deferred tax assets, valuation of warrants issued with debt and the value of stock-based compensation and fees.

-3-

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 consolidated financial statements of the cost of 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). ASC 718 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.

Pursuant to ASC Topic 505-50, “Equity Based Payments to Non-employees”, for share-based payments to consultants and other third-parties, compensation expense is determined at the measurement date. The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the measurement date.

Software development costs

The Company develops software and applications which are being provided to customers for free in order to deliver revenue producing products. Software development costs include costs to develop software to be used to meet internal needs and applications used to deliver the Company’s services. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be 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 three years 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.

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. The updated guidance is effective for interim and annual periods beginning after December 15, 2018.

On January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases and; (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

Operating lease right of use assets (“ROU”) assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the condensed statements of operations.

-4-

Item 2. Other Information

None

Item 3. Financial Statements

DATCHAT, INC.

INDEX TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

June 30, 2019 and 2018

CONTENTS

Financial Statements:

Condensed Balance Sheets - As of June 30, 2019 (Unaudited) and December 31, 2018		F-1

Condensed Statements of Operations - For the Six months ended June 30, 2019 and 2018 (Unaudited)		F-2

Condensed Statement of Changes in Stockholders’ Deficit - For the six months ended June 30, 2019 and 2018 (Unaudited)		F-3

Condensed Statements of Cash Flows – For the Six months ended June 30, 2019 and 2018 (Unaudited)		F-4

Notes to Unaudited Condensed Financial Statements		F-5

-5-

DATCHAT, INC.

CONDENSED BALANCE SHEETS

	June 30,			December 31,
	2018			2018
	(Unaudited)
ASSETS

CURRENT ASSETS:
Cash	$	90,072		$	199,253
Prepaid expenses		6,000			6,000

Total Current Assets		96,072			205,253

OTHER ASSETS:
Operating lease right-of-use assets, net		63,041			—

Total Assets	$	159,113		$	205,253

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts payable and accrued expenses	$	152,065		$	100,366
Convertible notes payable, net of debt discount		300,000			277,808
Notes payable - related parties		24,500			30,000
Operating lease liabilities, current portion		21,901			—
Due to related party		11,433			6,289

Total Current Liabilities		509,899			414,463

Long-term liaibilites:
Operating lease liabilities, less current portion		41,140			—
Total Liabilities		551,039			414,463


Commitments and Contingencies - (Note 6)

STOCKHOLDERS' DEFICIT:
Preferred stock ($0.0001 par value; 20,000,000 shares authorized)
Series A Preferred stock ($0.0001 Par Value; 1 Share Authorized;
0 and 1 share issued and outstanding
at June 30, 2018 and December 31, 2017, respectively)		—			—
Common stock ($0.0001 par value; 180,000,000 shares authorized;
26,010,678 and 23,840,606 shares issued and outstanding
at June 30, 2019 and December 31, 2018, respectively)		2,601			2,384
Common stock to be issued 14,831 and 80,232 shares,
at June 30, 2019 and December 31, 2018, respectively)		1			8
Additional paid-in capital		14,813,208			9,220,601
Subscription receivable		—			(207,497	)
Accumulated deficit		(15,207,736	)		(9,224,706	)

Total Stockholders' Deficit		(391,926	)		(209,210	)

Total Liabilities and Stockholders' Deficit	$	159,113		$	205,253

See accompanying notes to unaudited condensed financial statements

F-6

DATCHAT, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Six			For the Six
	Months Ended			Months Ended
	June 30, 2019			June 30, 2018

NET REVENUES	$	—		$	—

OPERATING EXPENSES:
Compensation		255,899			157,594
Professional and consulting		90,426			3,274,510
General and administrative		189,169			105,079

Total operating expenses		535,494			3,537,183

OTHER INCOME (EXPENSE)
Interest expense		(46,967	)		(135,031	)
Loss on debt extinguishment		(5,400,569	)		—
Interest income		—			12

Total other income (expense), net		(5,447,536	)		(135,019	)

NET LOSS	$	(5,983,030	)	$	(3,672,202	)

NET LOSS PER COMMON SHARE:
Basic and diluted	$	(0.24	)	$	(0.19	)

WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING:
Basic and diluted		24,909,713			19,494,750

See accompanying notes to unaudited condensed financial statements

F-7

DATCHAT, INC.

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

For the Six Months Ended June 30, 2019 and 2018

(Unaudited)

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

Balance, December 31, 2017		1			—		19,494,750		1,949		4,258,205		426		7,626,708		(3,592,500	)		—		(4,310,873	)		(274,290	)

Sale of common stock, net of offering costs		—			—		—		—		87,651		9		172,631		—			—		—			172,640

Return of preferred stock		(1	)		—		—		—		—		—		—		—			—		—			—

Beneficial conversion in connection with issuance of convertible notes payable and warrants		—			—		—		—		—		—		240,000		—			—		—			240,000

Common stock to be issued for prepaid services		—			—		—		—		550,000		55		1,099,945		2,034,167			—		—			3,134,167

Net loss for the period		—			—		—		—		—		—		—		—			—		(5,983,030	)		(5,983,030	)

Balance, June 30, 2018		—		$	—		19,494,750	$	1,949		4,895,856	$	490	$	9,139,284	$	(1,558,333	)	$	—	$	(10,293,903	)	$	(2,710,513	)

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

Balance, December 31, 2018		—		—		23,840,606	$	2,384	$	80,232		$	8		$	9,220,601	$	—	$	(207,497	)	$	(9,224,706	)		(209,210	)

Sale of common stock, net of offering costs		—		—		—		—		104,671			10			192,238		—		—			—			192,248

Collection of subscription receivable		—		—		—		—		—			—			—		—		207,497			—			207,497

Common stock issued for common stock issuable				—		170,072		17		(170,072	)		(17	)		—		—		—			—			—

Issuance of common stock in connection with forbearance and exchange agreement		—		—		2,000,000		200		—			—			5,400,369		—		—			—			5,400,569

Net loss for the period		—		—		—		—		—			—			—		—		—			(5,983,030	)		(5,983,030	)

Balance, June 30, 2019		—	$	—		26,010,678	$	2,601		14,831		$	1		$	14,813,208	$	—	$	—		$	(15,207,736	)	$	(391,926	)

See accompanying notes to unaudited condensed financial statements

F-8

DATCHAT, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six			For the Six
	Months Ended			Months Ended
	June 30, 2019			June 30, 2018

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(5,983,030	)	$	(3,672,202	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of software development cost		—			26,882
Amortization of ROU asset		9,568			—
Amortization of debt discount		22,192			127,397
Loss on debt extinguishment		5,400,569			—
Stock-based compensation and fees		—			3,134,167
Changes in operating assets and liabilities:
Accounts payable and accrued expenses		51,699			6,508
Advance deposits		—			61,321
Operating lease liabilities		(9,568	)		—

NET CASH USED IN OPERATING ACTIVITIES		(508,570	)		(315,927	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from a related party		110,241			5,590
Payments on related party advances		(105,097	)		(14,965	)
Net proceeds from convertible notes payable		—			240,000
Repayment of notes payable - related parties		(5,500	)		(18,300	)
Repayment of convertible notes payable		—			(67,000	)
Collection of subscription receivable		207,497			—
Proceeds from sale of common stock
and common stock to be issued		192,248			172,640

NET CASH PROVIDED BY FINANCING ACTIVITIES		399,389			317,965

NET INCREASE (DECREASE) IN CASH		(109,181	)		2,038

CASH - beginning of period		199,253			43,443

CASH - end of period	$	90,072		$	45,481

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

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for future services	$	—		$	1,558,333
Debt discount in connection with convertible notes	$	—		$	240,000
Operating lease right-of-use assets and operating lease liabilities recorded upon adoption of ASC 842	$	72,609		$	—

See accompanying notes to unaudited condensed financial statements

F-9

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

Basis of presentation and going concern

As reflected in the accompanying financial statements, the Company has incurred a net loss of $5,983,030 and net cash used in operations of $508,570, respectively, for the six months ended June 30, 2019. Additionally, the Company has an accumulated deficit of $15,207,736 at June 30, 2019 and has not generated revenues since inception. These circumstances cause substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to further implement its business plan, raise capital, and generate revenues. Currently, management is seeking capital to implement its business plan. Management believes that the actions presently being taken provide the opportunity for the Company to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Certain information and footnote disclosures normally included in the unaudited financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these unaudited condensed financial statements are adequate to make the information presented therein not misleading. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole.

Use of estimates

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

Cash and cash equivalents

The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. The Company maintains cash and cash equivalent balances at one financial institution that is insured by the Federal Deposit Insurance Corporation. The Company’s account at this institution is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As of June 30, 2019, the Company has not reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits.

F-10

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair value measurements and fair value of financial instruments

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

Revenue recognition

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

Advertising Costs

The Company applies ASC 720 “Other Expenses” to account for advertising related costs. Pursuant to ASC 720-35-25-1, the Company expenses the advertising costs when the first time the advertising takes place. Advertising costs were $98,080 and $23,345 for the six months ended June 30, 2019 and 2018, respectively, and are included in general and administrative expenses on the statement of operations.

Leases

F-11

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income taxes

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

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

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

Stock-based compensation

F-12

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Software development costs

The Company released its application on July 8, 2015 and consequently, the Company incurred software developments expenses which consisted primarily of consulting fees and salaries for software programming services in the amount of $107,467 and $98,849 during the six months ended June 30, 2019 and 2018, respectively.

Impairment of long-lived assets

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. The Company did not record any impairment losses during the six months ended June 30, 2019 and 2018.

Basic and diluted net loss per share

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

The following were excluded from the computation of diluted shares outstanding as they would have had an anti-dilutive impact on the Company’s net loss. In periods where the Company has a net loss, all dilutive securities are excluded.

	June 30, 2019		June 30, 2018

Common stock equivalents:
Stock warrants		2,625,000		1,875,000
Convertible notes payable		1,500,000		1,620,000
Total		4,125,000		3,495,000

F-13

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Recent accounting pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods and is applied retrospectively. The Company elected to apply the transition provisions as of January 1, 2019, the date of adoption, and recorded lease ROU assets and related liabilities on the consolidated balance sheet related to our operating leases.

In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation”. The update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC Topic 718. An entity shall account for the effects of a modification described in ASC paragraphs 718-20-35-3 through 35-9, unless all the following are met: (1) The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The provisions of this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company’s adoption of this guidance on January 1, 2018 did not have a material impact on the Company’s results of operations, financial position and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of the stock-based compensation guidance in ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU No. 2018-07 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted, but entities may not adopt prior to adopting the new revenue recognition guidance in ASC 606. The adoption of this guidance had no material impact on its accounting and disclosures.

In August 2018, the FASB issued ASU 2018-13, “Changes to Disclosure Requirements for Fair Value Measurements”, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company will be evaluating the impact this standard will have on the Company’s financial statements.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

F-14

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

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

In January 2019, the Company renewed and extended the term of its lease facility for another three year period from January 2019 to December 2021 starting from a monthly base rent of $2,567 plus a pro rata share of operating expenses beginning January 2019. The base rent is subject to annual increases beginning the 2^nd and 3^rd lease year as defined in the lease agreement. In addition to the monthly base rent, the Company is charged separately for common area maintenance which is considered a non-lease component. These non-lease component payments are expensed as incurred and are not included in operating lease assets or liabilities.

In adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or less. On January 1, 2019, upon adoption of ASC Topic 842, the Company recorded right-of-use assets and lease liabilities of $72,609.

Right-of- use assets are summarized below:

	June 30, 2019
	(Unaudited)
Office lease (36 months)	$	72,609
Less accumulated amortization		(9,568	)
Right-of-use assets, net	$	63,041

Operating Lease liabilities are summarized below:

	June 30, 2019
	(Unaudited)
Office lease	$	72,609
Reduction of lease liability		(9,568	)
Total lease liabilities		63,041
Less: current portion		(21,901	)
Long term portion of lease liability	$	41,140

Minimum lease payments under non-cancelable operating lease at June 30, 2019 are as follows:

Year ended December 31, 2019 (remainder of year)	$	15,400
Year ended December 31, 2020		31,500
Year ended December 31, 2021		32,200
Total	$	79,100
Less: present value discount		(16,059	)
Total operating lease liability	$	63,041

F-15

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

NOTE 3 – RELATED PARTY TRANSACTIONS

The Company’s officer, Mr. Darin Myman, from time to time, provided advances to the Company for working capital purposes. At June 30, 2019 and December 31, 2018, the Company had a payable to the officer of $11,433 and $6,289, respectively. These advances were short-term in nature and non-interest bearing. During the six months ended June 30, 2019, Mr. Myman provided advances to the Company for working capital purposes for a total of $110,241 and the Company repaid $105,097 of these advances.

On May 29, 2015, the Company entered into a promissory note agreement, providing for the issuance of a note in the principal amount of $30,000 to a principal stockholder of the Company. The note was due on July 29, 2015. The annual interest rate for the loan is 10%. The Company defaulted to repay the note when it was due. On February 25, 2016, the Company entered into an extension agreement with the lender to extend the maturity date of the note to December 31, 2016. In accordance to the extension agreement, the Company and the lender agree to increase the amount of the principal amount of the note by $5,000 as penalty for the Company’s failure to repay the note on July 29, 2015. In connection with the increase in principal amount of $5,000, the Company recorded non-cash interest expense of $5,000 on February 25, 2016. On October 25, 2017, the Company agreed to pay an additional $5,000 as penalty fee for the extension of maturity date to June 30, 2018. Between October 2018 and November 2018, the Company paid a total principal amount of $10,000. Between March 2019 and May 2019, the Company paid a total principal amount of $5,500. As of June 30, 2019 and December 31, 2018, the principal balance of this note was $24,500 and $30,000, respectively. This note is currently in default.

NOTE 4 – CONVERTIBLE AND NON-CONVERTIBLE NOTES PAYABLE

Convertible notes payable consisted of the following:

	June 30, 2019 (Unaudited)		December 31, 2018
Convertible notes payable	$	300,000	$	300,000
Debt discount		—		(22,192	)
Total convertible notes payable	$	300,000	$	277,808

On January 26, 2018, the Company issued a senior convertible promissory note to an unrelated party for a principal amount of $300,000. The senior convertible promissory note and all accrued interest were due on January 26, 2019. The Company paid issuance costs of $60,000 in connection with this note payable which is being amortized over the term of the note. Any amount of principal or interest on this note which was not paid when due would bear interest at the rate of 18% per annum from the due date thereof until the same was paid. The note holder had the right from the date of issuance of this note to convert any outstanding unpaid principal amount and accrued interest into the Company’s common stock at a conversion price equal to $0.20 per share. The conversion price, however, was subject to full ratchet anti-dilution in the event that the Company issues any securities at a per share price lower than the conversion price then in effect. Additionally, in connection with the issuance of this note, the Company had granted the note holder 1,500,000 five year warrants to purchase shares of the Company’s common stock at an exercise price of $0.20 per share subject to applicable adjustments including full ratchet anti-dilution in the event that the Company issue any securities at a per share price lower than the exercise price then in effect. The Company recorded amortization of debt discount and original issuance cost of $22,192 and $127,397 during the six months ended June 30, 2019 and 2018, respectively, and has been included in interest expense on the statement of operations.

F-16

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

NOTE 4 – CONVERTIBLE AND NON-CONVERTIBLE NOTES PAYABLE (CONTINUED)

On January 26, 2019, the Company entered into a Forbearance and Exchange Agreement (the “Agreement”), whereby the Company failed to repay a convertible note issued on January 26, 2018 for $300,000 and the Company obtained a forbearance of the maturity date default. The note holder agreed to forbear from declaring a breach of transaction, declaring an occurrence of any event of default and demanding any amounts due until the earlier of February 5, 2019. In exchange for the forbearance, the Company agreed to cancel the previously issued detached warrant to acquire 1,500,000 shares of common stock and reissue 5 year new warrants to acquire 2,250,000 shares of common stock at an exercise price of $0.20 per share subject to full ratchet anti-dilution in the event that the Company issues any securities at a per share price lower than the exercise price then in effect. The Company also acknowledges and agrees that the convertible note is in default. On April 5, 2019, the Company entered into a Second Forbearance and Exchange Agreement (the “Second Agreement”) whereby the Company agreed to exchange the original note for a new note with a principal amount of $300,000 and 2,000,000 shares of the Company’s common stock. If the Company fails to pay the outstanding principal and accrued interest under the new note by August 26, 2019, then the principal of the new note shall be increased to an amount equal to 150% of the then principal amount or equal to $450,000. The annual interest rate for the new note is 18%. The note holder shall have the right to convert any outstanding unpaid principal amount and accrued interest under the new note into the Company’s common stock at a conversion price equal to $0.20 per share. The conversion price, however, is subject to full ratchet anti-dilution in the event that the Company issues any securities at a per share price lower than the conversion price then in effect. Pursuant to the Second Agreement, the Company also granted the note holder a put to require the Company to purchase 200,000 shares of common stock from the note holder for a price of $1.50 upon the occurrence of a certain event such as the sales of any assets, grants of any licenses, consummates any offering in exchange for cash or other consideration or otherwise any event in which the Company receives any cash payment or consideration as defined in the Second Agreement.

The Company valued the 2 million common shares at the fair value of $4,000,000 or $2.00 per common share based on the sale of common stock in the recent private placement. Additionally, the Company accounted for the additional grant of 750,000 warrants and valued on the grant date at approximately $1.87 per warrant or a total of $1,400,569 using a Black-Scholes option pricing model. The Company accounted for this transaction under ASC 407-50-40 Debt Modification and Extinguishments and recorded loss on debt extinguishment of $5,400,569 during the six months ended June 30, 2019.

Additionally, in accordance with ASU 2017-11, the down round feature relating to the conversion feature whereby the conversion price is subject to full ratchet anti-dilution in the event that the Company issues any securities at a per share price lower than the conversion price then in effect, such down round feature down is no longer classified as liabilities and embedded conversion options with down round features are no longer bifurcated. The Company shall recognize the value of the effect of a down round feature in an equity-classified freestanding financial instrument each time it is triggered.

Non-convertible notes payable consisted of the following:

	June 30, 2019 (Unaudited)		December 31, 2018
Notes payable – related party (see Note 3)		24,500		30,000
Total notes payable	$	24,500	$	30,000

As of June 30, 2019 and December 31, 2018, accrued interest related to these notes amounted to $47,690 and $21,341, respectively, and was included in accounts payable and accrued expenses in the accompanying balance sheets.

F-17

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

NOTE 5 – STOCKHOLDERS’ DEFICIT

Shares Authorized

In August 2016, the Board of Directors of the Company approved and authorized an amendment to its articles of incorporation to designate 20,000,000 shares of preferred stock. Consequently, the authorized capital stock consists of 200,000,000 shares, of which 180,000,000 are shares of common stock and 20,000,000 are shares of preferred stock.

Preferred stock

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

Common stock

Sale of Common Stock

During the six months ended June 30, 2019, the Company sold 104,671 shares of its common stock at $2.00 per common share for gross proceeds of $209,342 and net proceeds of $192,248 after escrow fees related to the private placement sale.

During the six months ended June 30, 2019, the Company issued 170,072 shares of common stock and there were 14,831 shares of common stock to be issued as of June 30, 2019.

During the six months ended June 30, 2019, the Company collected subscription receivable of $207,497 through payment of compensation expenses on the Company’s behalf pursuant to a securities purchase agreement executed on August 8, 2018.

Common stock issued in connection with Forbearance and Exchange Agreement

On April 5, 2019, the Company entered into a Second Forbearance and Exchange Agreement whereby the Company agreed to exchange the original note for a new note with a principal amount of $300,000 and 2,000,000 shares of the Company’s common stock (see Note 4). The Company valued the 2 million common shares at the fair value of $4,000,000 or $2.00 per common share based on the sale of common stock in the recent private placement and was recorded to loss on debt extinguishment during the six months ended June 30, 2019.

F-18

DATCHAT, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 2019 AND 2018

NOTE 5 – STOCKHOLDERS’ DEFICIT (CONTINUED)

Common Stock Warrants

A summary of the Company’s outstanding stock warrants as of June 30, 2019 and changes during the period presented below:

	Number of Warrants			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Balance at December 31, 2018		1,875,000		$	0.20		3.97
Cancelled		(1,500,000	)		0.20		3.58
Granted		2,250,000			0.20		5.00
Balance at June 30, 2019		2,625,000		$	0.20		4.37
Warrants exercisable at June 30, 2019		2,625,000		$	0.20		4.7
Weighted average fair value of warrants granted during the six months ended June 30, 2019				$	1.87

In January 2019, in connection with the Forbearance and Exchange Agreement (see Note 4), the Company agreed to cancel the previously issued detached warrant to acquire 1,500,000 shares of common stock related to a convertible note dated in January 2018 and reissue 5 year new warrants to acquire 2,250,000 shares of common stock at an exercise price of $0.20 per share subject to full ratchet anti-dilution in the event that the Company issues any securities at a per share price lower than the exercise price then in effect. The Company accounted for the additional grant of 750,000 warrants and valued on the grant date at approximately $1.87 per warrant or a total of $1,400,569 using a Black-Scholes option pricing model. The Company accounted for this transaction under ASC 407-50-40 Debt Modification and Extinguishments and recorded loss on debt extinguishment of $1,400,569 during the six months ended June 30, 2019.

NOTE 6 – COMMITMENTS AND CONTINGENCIES

NOTE 7 – SUBSEQUENT EVENTS

Between July 2019 and August 2019, the Company paid back related party notes for a total principal amount of $4,000 (see Note 3).

Between January 2019 and September 2019, the Company sold 74,295 shares of its common stock at $2.00 per common share for gross proceeds of $148,590.

F-19

Item 4. Exhibits

Item Number		Exhibit
2.1		Amended and Restated Articles of Incorporation
2.2		Amended and Restated Bylaws
2.3		Certificate of Designation of Series A Preferred Stock
3.1		Form of Stock Certificate
4.1		Form of Subscription Agreement

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SIGNATURES

Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	DATCHAT, INC.

By	/s/ Darin Myman
	Darin Myman, Chief Executive Officer, Chief Financial Officer, and Director
	Date: September 30, 2019

Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.

/s/ Darin Myman

Darin Myman, Chief Executive Officer, Chief Financial Officer, and Director

Date: September 30, 2019

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