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)
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| (Address of principal executive offices) | (Zip code) |
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(Former name, former address and former fiscal year, if changed since last report)
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 | ||
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 |
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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 14, 2024, there were
DATCHAT, INC.
FORM 10-Q
September 30, 2024
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 29, 2024. 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 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; |
| ● | 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 29, 2024, 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, | |||||||
| 2024 | 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments, at fair value | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ||||||||
| Total Current Assets | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset, net | ||||||||
| Total Non-current Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Operating lease liability | ||||||||
| Contract liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 6) | ||||||||
| 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 DatChat, Inc. Stockholders’ Equity | ||||||||
| Noncontrolling interest | ( | ) | ||||||
| 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, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 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 | ||||||||||||||||
| Gain on deconsolidation of variable interest entities | ||||||||||||||||
| Foreign currency exchange loss | ( | ) | ( | ) | ( | ) | ||||||||||
| Realized loss on short-term investments | ( | ) | ||||||||||||||
| Total other income (expenses), net | ||||||||||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss (income) of subsidiary attributable to noncontrolling interest | ( | ) | ||||||||||||||
| NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| COMPREHENSIVE LOSS: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive (loss) gain: | ||||||||||||||||
| Unrealized gain on short-term investments | ( | ) | ||||||||||||||
| Unrealized foreign currency translation gain | ( | ) | ||||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| NET LOSS PER COMMON SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS:: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
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, 2024 AND 2023
(Unaudited)
| Series
B Preferred Stock | Common Stock | Common Stock to be Issued | Additional Paid-in | Treasury Stock | Accumulated Other Comprehensive | Accumulated | Noncontrolling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Gain (Loss) | Deficit | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 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 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares in subsidiary for services | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for cash, net of allocated offering costs of $ | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of pre-funded warrants, net of allocated offering costs of $ | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Cashless exercise of pre-funded warrants | - | - | ( | ) | - | |||||||||||||||||||||||||||||||||||||||||||||||
| Initial recording on noncontrolling interest | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2024 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock based compensation in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based professional fees in connection with stock option grants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares in subsidiary for cash | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2024 | - | ( | ) | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Change in noncontrolling interest from Dragon ownership changes | - | - | - | - | - | - | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Accretion of stock based compensation in connection with stock option grants | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Accretion of stock-based professional fees in connection with stock option grants | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares in subsidiary for cash | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | - | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||
3
| Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series B Preferred Stock | Common Stock | Common Stock to be Issued | Additional Paid-in | Treasury Stock | Other Comprehensive | Accumulated | Noncontrolling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Shares | Amount | Gain | Deficit | Interest | 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 for reverse split | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| 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 and shares | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| 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 and shares | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||
| Sale of Series B preferred stock | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Accumulated other comprehensive gain | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Rounding for reverse split | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||||||||||||||||
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, | ||||||||
| 2024 | 2023 | |||||||
| 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 | ||||||||
| Stock-based professional fees - Dragon Interactive | ||||||||
| Gain from initial consolidation of variable interest entities | ( | ) | ||||||
| Gain on deconsolidation of variable interest entities | ( | ) | ||||||
| Foreign currency exchange loss | ||||||||
| Non-cash research and development expense | ||||||||
| Impairment loss on digital currencies and other digital assets | ||||||||
| Accrued interest included in short-term investments | ( | ) | ||||||
| Unrealized loss on short-term investments | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Accounts payable - 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 | ( | ) | ( | ) | ||||
| Purchase of property and equipment | ( | ) | ||||||
| Increase in cash from consolidation of variable interest entities | ||||||||
| NET CASH PROVIDED BY INVESTING ACTIVITIES | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Repayment of related party advances | ( | ) | ||||||
| Proceeds from sale of Series B preferred stock | ||||||||
| Proceeds from sale of common stock, net | ||||||||
| Proceeds from sale of subsidiary common stock | ||||||||
| Proceeds from sale of pre-funded warrants | ||||||||
| Purchase of treasury stock | ( | ) | ||||||
| NET CASH PROVIDED BY (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: | ||||||||
| Initial recording on noncontrolling interest deficit | $ | $ | ||||||
| Common stock issued for future services | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
5
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
DatChat, Inc. (the “Company”) was incorporated in the State of Nevada on December 4, 2014 under the name of YssUp, Inc. On March 4, 2015, the Company’s corporate name was changed to Dat Chat, Inc. In August 2016, the Board of Directors of the Company approved to change the name of the Company from Dat Chat, Inc. to DatChat, Inc. The Company established a fiscal year end of December 31. The Company 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’s 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, the Company has expanded its business and product offerings to include the co-development of a mobile-based social and gaming metaverse, known as “Habytat”, as well as the development of Museum, a social network and multi-media storage platform for consumers and enterprises.
On June 16, 2022, the Company formed a majority
owned subsidiary, Dragon Interact, Inc., under the name “SmarterVerse, Inc.”, a company incorporated under the laws of the
State of Nevada (“Dragon”). On February 14, 2024, Dragon filed a Certificate of Amendment with the State of Nevada to change
its name from “SmarterVerse, Inc.” to “Dragon Interactive Corporation”. On February 14, 2023, Dragon entered into
a subscription agreement with Metabizz, LLC. In connection with the subscription agreement, Dragon sold Metabizz, LLC
On January 10, 2024, VR Interactive LLC (“VR
Interactive”), a company
On August 27, 2024, the Company entered into an
Asset Purchase Agreement with Judaopta LLC, a Delaware limited liability company (the “Seller”), pursuant to which it acquired
from Seller (i) certain software (the “RenAI Software”), which consists of an artificial intelligence (AI) tool designed used
for media library organization with the ability to tag and rename images for PC and MAC devices using AI with integration to Gemini, OpenAI
and Claude and (ii) certain domain names (the “Assets”) in consideration for the transfer by the Company of
Accordingly, as of September 30, 2024 and December
31, 2023, the Company owns
On February 14, 2023, based on the Company’s analysis, Metabizz, LLC and Metabizz SAS were determined to be variable interest entities (see below). Metabizz, LLC and Metabizz SAS were formed by a group of technology professionals to provide programming services only to Dragon. One of the founders of Metabizz, LLC was the chief technology officer of Dragon. On March 31, 2024, based on the Company’s analysis, the Company deconsolidated Metabizz, LLC and Metabizz SAS. During the three months ended March 31, 2024, the Company ceased doing business with Metabizz, LLC and Metabizz SAS and will pay technology professionals directly.
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
6
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
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.
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, 2023 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 29, 2024.
The Company consolidates its subsidiaries that are wholly-owned and majority owned, and entities that are variable interest entities (“VIE”) where the Company is determined to be the primary beneficiary. The Company’s consolidated financial statements include the accounts of the parent entity. DatChat, Inc., its wholly-owned subsidiary, DatChat Patents II, LLC, and Dragon, which was a majority-owned subsidiary through August 27, 2024 and became a VIE after August 27, 2024, and VIE entities, Metabizz, LLC and Metabizz SAS through March 31, 2024, at which date the Metabizz VIE entities were deconsolidated. All intercompany accounts and transactions have been eliminated in consolidation.
The Company accounts for it noncontrolling interest
in Dragon in accordance with ASC Topic 810-10-45, which requires the Company to present noncontrolling interests as a separate component
of total shareholders’ equity on the consolidated balance sheets and the consolidated net loss attributable to its noncontrolling
interest be clearly identified and presented on the face of the consolidated statements of operations. Through January 10, 2024, the date
that VR Interactive purchased
On March 31, 2024, based on the Company’s
analysis, the Company deconsolidated Metabizz, LLC and Metabizz SAS. During the nine months ended September 30, 2024, the Company ceased
doing business with Metabizz, LLC and Metabizz SAS and will pay technology professionals directly. In connection with the deconsolidation
of Metabizz, LLC and Metabizz SAS, during the nine months ended September 30, 2024, the Company recorded a gain on deconsolidation of
$
7
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
On August 27, 2024, the Company entered into an
Asset Purchase Agreement with the Seller, pursuant to which it acquired from Seller the Assets (See Note 1) in consideration for the transfer
by the Company of
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 did 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 had only a nominal equity
investment at risk, and the Company absorbed or received a majority of the entity’s expected losses or benefits. The Company participated
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 were conducted for the Company’s benefit, as evidenced by the fact
that the operations of Metabizz consisted of development of software and technologies to be used by Dragon and the Company provided working
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 was required to consolidate the assets, liabilities, revenues and expenses of Metabizz using the
fair value method. Additionally, the managing partner of Metabizz was also the Chief Innovation Officer of Dragon. Since Metabizz, LLC
and Metabizz SAS were considered VIE’s, any noncontrolling interest eliminated in consolidation. In connection with the initial
consolidation of Metabizz, on February 14, 2023 (the initial consolidation date), the Company recorded a gain on initial consolidation
of variable interest entities of $
On March 31, 2024, based on the Company’s
analysis, the Company deconsolidated Metabizz, LLC and Metabizz SAS. During the three months ended March 31, 2024, the Company ceased
doing business with Metabizz, LLC and Metabizz SAS and will pay technology professionals directly. In connection with the deconsolidation
of Metabizz, LLC and Metabizz SAS, during the nine months ended September 30, 2024, the Company recorded a gain on deconsolidation of
$
8
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
| September 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Cash | $ | $ | ||||||
| Total assets | $ | $ | ||||||
| Due to the Company and Dragon (eliminates in consolidation) | $ | $ | ||||||
| Total liabilities | $ | $ | ||||||
Going concern
These unaudited consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments
in the normal course of business. As of September 30, 2024, we had cash and cash equivalents of $
As reflected in the accompanying unaudited consolidated
financial statements, the Company had 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, the fair value of assets and liabilities of VIE’s on the initial VIE consolidation date, the allocation of corporate expenses to subsidiaries which impacts noncontrolling interest, 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 $
9
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(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.
| September 30, 2024 | December 31, 2023 | |||||||||||||||||||||||
| 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.
During the three months ended September 30, 2024
and 2023, the Company recorded an unrealized loss on short-term investments of $
10
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
Accounts receivable
The Company recognizes an allowance for losses
on accounts receivable and notes receivable in an amount equal to the estimated probable losses net of recoveries under the current expected
credit loss method. The allowance is based on an analysis of historical bad debt experience, current receivables aging and expected future
write-offs, as well as an assessment of specific identifiable customer accounts and notes receivable considered at risk or uncollectible.
On January 1, 2023, the Company adopted ASC 326, “Financial Instruments - Credit Losses”. In accordance with ASC 326, an allowance
is maintained for estimated forward-looking losses resulting from the possible inability of customers to make the required payments (current
expected losses). The amount of the allowance is determined principally on the basis of past collection experience and known financial
factors regarding specific customers. The expense associated with the allowance for doubtful accounts on accounts receivable is recognized
in general and administrative expenses. As of September 30, 2024 and December 31, 2023, accounts receivable amounted to $
Accounting for digital currencies and other digital assets
The Company accounts for digital currencies and other digital assets held 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.
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, 2024 and 2023, the
Company recorded an impairment loss of and $
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.
11
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
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, 2024 and 2023 were expensed since the Metaverse software development project is in the preliminary project stage. Such costs are included in research and development costs on the accompanying consolidated statement of operations and were incurred with Metabizz (see Note 4).
Impairment of long-lived assets
In accordance with ASC Topic 360, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable, or at least annually. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
Revenue recognition
The Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers, which requires revenue to be recognized in a manner that depicts the transfer of goods or services to customers in amounts that reflect the consideration to which the entity expects to be entitled in exchange for those goods or services.
In accordance with ASU Topic 606 - Revenue from Contracts with Customers, the Company recognizes revenue in accordance with that core principle by applying the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
The Company recognizes revenues from subscription fees on the Company’s messaging application in the month they are earned. Annual and lifetime subscription payments received that are related to future periods are recorded as deferred revenue to be recognized as revenues over the contract term or period. Lifetime subscriptions are being recognized to revenues over the estimated useful life of the subscription of 12 months. During the three and nine months ended September 30 2024 and 2023, all of the Company’s revenue was generated from subscription revenues.
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, 2024 and 2023, research and development costs incurred in
the development of the Company’s software products were $
12
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
On August 27, 2024, the Company entered into an
Asset Purchase Agreement with Judaopta LLC, a Delaware limited liability company (the “Seller”), pursuant to which it acquired
from Seller (i) certain software (the “RenAI Software”), which consists of an artificial intelligence (AI) tool designed used
for media library organization with the ability to tag and rename images for PC and MAC devices using AI with integration to Gemini, OpenAI
and Claude and (ii) certain domain names (the “Assets”) in consideration for the transfer by the Company of
| Amount | ||||
| Fair value of | $ | |||
| Less: gain recognized as difference between fair value of | ( | ) | ||
| Research and development expense recorded, net | $ | |||
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 $
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
13
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
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.
Noncontrolling interests
The Company follows ASC Topic 810, “Consolidation,” governing the accounting for and reporting of noncontrolling interests (“NCI”) in partially owned consolidated subsidiaries and the loss of control of subsidiaries. Certain provisions of this standard indicate, among other things, that NCI be treated as a separate component of equity, not as a liability, that increases and decreases in the parent’s ownership interest that leave control intact be treated as equity transactions rather than as step acquisitions or dilution gains or losses, and that losses of a partially-owned consolidated subsidiary be allocated to noncontrolling interests even when such allocation might result in a deficit balance. The net loss attributed to NCI was separately designated in the accompanying unaudited consolidated statements of operations and comprehensive loss. Losses attributable to NCI in a subsidiary may exceed a NCI’s interests in the subsidiary’s equity. The excess attributable to NCI is attributed to those interests. NCI shall continue to be attributed their share of losses even if that attribution results in a deficit NCI balance.
The Company allocates certain corporate common expenses to its subsidiaries based on the ratio of direct subsidiary expenses to total consolidated expenses. Management believes that this allocation method is reasonable.
14
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(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, 2024 and
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, | ||||||||
| 2024 | 2023 | |||||||
| Common stock equivalents: | ||||||||
| Common stock warrants | ||||||||
| Common stock options | ||||||||
| Total | ||||||||
Reclassifications
Certain line items on the statement of operations
and comprehensive loss for the nine months ended September 30, 2023 have been reclassified to conform to the current period presentation.
Specifically, for the three and nine months ended September 30, 2023, realized gains on short-term investments of $
Recent accounting pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on its financial statements.
NOTE 2 – SHORT-TERM INVESTMENTS
| September 30, 2024 | December 31, 2023 | |||||||||||||||||||||||
| Cost | Unrealized Gain | Fair Value | Cost | Unrealized Gain | Fair Value | |||||||||||||||||||
| US Treasury zero coupon bills | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Total short-term investments | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
As of September 30, 2024, short-term investments mature between October 2024 and January 2025.
15
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
NOTE 3 – 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, 2024 | December 31, 2023 | |||||||
| Office lease | $ | $ | ||||||
| Less accumulated amortization | ( | ) | ( | ) | ||||
| Right-of-use asset, net | $ | $ | ||||||
| September 30, 2024 | December 31, 2023 | |||||||
| Office lease | $ | $ | ||||||
| Reduction of lease liability | ( | ) | ( | ) | ||||
| Total lease liability | ||||||||
| Less: current portion | ||||||||
| Long term portion of lease liability | $ | $ | ||||||
| For the year ended September 30: | ||||
| 2025 | $ | |||
| Total | ||||
| Less: present value discount | ( | ) | ||
| Total operating lease liability | $ | |||
16
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
NOTE 4 – 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. These advances are short-term in nature and non-interest
bearing. During the nine months ended September 30, 2023, the Company repaid $
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 $
Other
See Note 6 for Employment Agreement with the Company’s chief executive officer, Darin Myman.
During the nine months ended September 30, 2024
and 2023, the wife of the Company’s chief executive officer was employed as an executive secretary and earned $
On January 10, 2024, VR Interactive LLC (“VR
Interactive”), a company
17
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
NOTE 5 – STOCKHOLDERS’ EQUITY
Shares Authorized
On September 19, 2023, the Company filed a Certificate
of Change (the “Certificate of Change”) with the Secretary of State of the State of Nevada to effectuate a
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 December 27, 2023, the Company filed a Certificate
of Change (the “Certificate of Change”) with the Secretary of State of the State of Nevada to increase the number of authorized
common stock from
All share and per-share data and amounts have been retroactively adjusted as of the earliest period presented in the consolidated financial statements to reflect the Reverse Stock Split.
The authorized capital stock consists of
2021 Omnibus Equity Incentive Plan
On July 26, 2021, the Company adopted the 2021
Omnibus Equity Incentive Plan, and authorized the reservation of
18
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
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
19
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
Common Stock
Sale of Common Stock and Warrants
On January 16, 2024, the Company entered into
an underwriting agreement (the “Underwriting Agreement”) with EF Hutton LLC (the “Representative”), as the representative
of the underwriters named therein (the “Underwriters”), relating to an underwritten public offering (the “Offering”)
of
The per share exercise price for the Pre-Funded
Warrants was $
The Company is using the net proceeds from the Offering for general corporate purposes, for sales and marketing and for research and development.
The Underwriting Agreement contained customary representations, warranties and covenants made by the Company. It also provided for customary indemnification by each of the Company and the Underwriters, severally and not jointly, for losses or damages arising out of or in connection with the Offering, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and termination provisions. In addition, pursuant to the terms of the Underwriting Agreement, each of the Company’s directors and executive officers entered into “lock-up” agreements with the Representative that generally prohibit, without the prior written consent of the Representative and subject to certain exceptions, the sale, transfer or other disposition of securities of the Company until July 17, 2024. Further, pursuant to the terms of the Underwriting Agreement, the Company agreed for a period of 180-days from the closing date, subject to certain exceptions, not to issue, enter into any agreement to issue or announce the issuance or proposed issuance of any shares of capital stock of the Company or any securities convertible or exercisable or exchangeable for shares of capital stock of the Company; (ii) file any registration statement; (iii) complete any offering of debt securities of the Company, other than entering into a line of credit with a traditional bank, or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company.
On April 3, 2024, Dragon entered into a Securities
Purchase Agreement with an institutional and accredited investor, pursuant to which Dragon agreed to sell an aggregate of
On May 31, 2024, Dragon entered into a Securities
Purchase Agreement with an institutional and accredited investor, pursuant to which Dragon agreed to sell an aggregate of
During September 2024, Dragon entered into a Securities
Purchase Agreement with investors pursuant to which Dragon agreed to sell an aggregate of
20
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
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
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
On January 25, 2024, Dragon entered into a 9-month
consulting agreement with an individual for business development, financial and market due diligence services to be rendered over the
term of the agreement. In connection with this consulting agreement, Dragon issued
Stock Options
2023
On February 3, 2023, the Company granted an aggregate
of
21
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
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 $
2024
During the nine months ended September 30, 2024
and 2023, certain employees were terminated and accordingly,
During the nine months ended September 30, 2024,
accretion of stock-based expense related to stock options amounted to $
| 2023 | ||||
| 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, 2023 | $ | |||||||||||
| Granted | ||||||||||||
| Cancelled | ( | ) | ||||||||||
| Balance on September 30, 2024 | $ | |||||||||||
| Options exercisable on September 30, 2024 | $ | |||||||||||
| Weighted average fair value of options granted during the 2024 period | $ | |||||||||||
On September 30, 2024, the aggregate intrinsic
value of options outstanding was $
22
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
Common Stock Warrants
On January 16, 2024, in connection with the Underwriting
Agreement, the Company sold pre-funded warrants to purchase up to
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Balance on December 31, 2023 | $ | |||||||||||
| Issued | ||||||||||||
| Exercised | ( | ) | ||||||||||
| Balance on September 30, 2024 | ||||||||||||
| Warrants exercisable on September 30, 2024 | $ | |||||||||||
On September 30, 2024, the aggregate intrinsic
value of warrants outstanding was $
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Operating Lease Agreement
See Note 3 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 $
During the nine months ended September 30, 2024
and 2023, the compensation committee of the board of directors of the Company approved and the Company recorded a bonus to the Company’s
chief executive officer in the amount of $
23
DATCHAT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2024 AND 2023
(Unaudited)
Underwriting Engagement Letter
On February 23, 2024, Dragon entered into an engagement
letter agreement (the Agreement”) with EF Hutton LLC (“EF Hutton”), whereby EF Hutton will act as the lead underwriter,
deal manager and investment banker for a proposed initial public offering (the “Offering”) for a period of (i) 12 months from
the date of this Agreement, or (ii) the final closing, if any, of the Offering (the “Engagement Period”); provided, however,
that (a) the Company may terminate this Agreement on or after the 180th day following the date of the Agreement upon fifteen days prior
written notice to EF Hutton, and (b) EF Hutton may terminate the Agreement on or after the 120th day following the date of the Agreement
upon thirty days prior written notice to the Company. During the Engagement Period, the Company also engaged EF Hutton as its placement
agent in a bridge financing with an offering size/transactional size of up to approximately $
NOTE 7 – SUBSEQUENT EVENTS
During October and November 2024, Dragon entered
into a Securities Purchase Agreement with investors pursuant to which Dragon agreed to sell an aggregate of
On October 29, 2024 (the “Closing Date”
and measurement date), Dragon entered into and closed on a Share Exchange Agreement (the “Share Exchange Agreement”) with
(i) RPM Interactive, Inc., a Florida corporation incorporated on August 23, 2024; and (ii) the shareholders of RPM Interactive. Pursuant
to the Share Exchange Agreement, Dragon acquired
Following the sale of Dragon’s common stock
and Share Exchange Agreement above, the Company retains approximately
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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 unaudited 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, 2023 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 and gaming metaverse, known as “Habytat”, as well as the development of Museum, a social network and multi-media storage platform for consumers and enterprises.
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.
Habytat
In June 2022, we formed a majority owned subsidiary, Dragon Interact, Inc. (formerly, SmarterVerse, Inc.) (“Dragon”). In August 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. Habytat is supported by proprietary artificial intelligence (“AI”) and utilizes a machine learning engine to develop more realistic looking content, daily rewards, games, and new utilities that are designed to further enhance the user experience in an engaging way. Our goal is to leverage our patents and develop new technology that leads to more people joining and seeing the value in the metaverse. Currently, the development agreement is not active.
Each Habytat user is granted user rights to use a designated piece of virtual property in Geniuz City, the first world within Habytat, through the minting and issuance of a unique NFT. Geniuz City is designed to be a near photo-realistic world based on Miami’s Wynwood arts district and its surrounding areas. Geniuz City enables users to visit art galleries, explore the town, interact with other users, take selfies with famous landmarks, customize their properties and enjoy the culture of Geniuz City.
Users will be able to customize their virtual property 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 Habytat, and such rewards can be used to enhance, expand, and improve their virtual property. The official in-world currency of Habytat is the “Nirad,” which can be earned through participation on the DatChat Social Network+ or Habytat and used to upgrade properties and experiences in Habytat.
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Mobile Metaverse
In May 2023, we launched the open mobile metaverse, Habytat 1.0, as part of our mission to democratize access to the metaverse. We hope that by making Habytat available via mobile devices and offering free ownership of virtual land and homes, that Habytat will break down obstacles that previously limited participation, such as the necessity for expensive virtual reality (“VR”) gear or metaverse properties. We have assembled a team of over twenty game developers, graphic artists and back-end developers to create Habytat 1.0.
HabyPets
In August 2023, we launched a series of novel AI-powered pets called “HabyPets.” HabyPets provides an interactive experience within the Habytat world, creating a more immersive and personal experience for users. Supported by Habytat’s proprietary AI and machine learning engine, HabyPets grow over time from playful companions to mature adult pets. Similar to real-life pets, these AI pets can be trained by users via a range of behavioral commands, replicating the natural progression of real pets over time. These include, but are not limited to, catching frisbees, playing with toys, engaging in tug of war, and even participating in thrilling races with other pets at the park. By actively engaging with their pets, users can establish a connection and provide proper care for their virtual companions, fostering a realistic experience within the Habytat metaverse.
Myseum
We are currently developing “Myseum,” a platform that will allow users to create a personal museum designed to easily share pictures, videos and documents utilizing planned features, such as creating instant sharing spaces at family gatherings, time released video messages, multi-tiered social media, and secure family document storage and sharing. Currently, Myseum is scheduled to launch in the second half of 2024 and will encompass features and social networking technology designed to unlock and share digital media.
Spin-off and Name Change
In January 2024, we announced plans to spin-off the Habytat platform business into a new standalone public company pursuant to a distribution of the Dragon shares as further discussed below. As of the date of this Quarterly Report, we currently own approximately 45.5% of Dragon, the entity that owns and operates the Habytat platform business. This marked a significant step forward in our corporate strategy to reposition the Company as a pureplay social media ecosystem centered around our Myseum assets.
In February 2024, Dragon changes its name from “SmarterVerse, Inc.” name to “Dragon Interactive Corporation”.
In February 2024, Darin Myman was appointed as President of Dragon.
On August 7, 2024, Dragon filed a Certificate of Amendment with the State of Nevada to change its name from “Dragon Interactive Corporation” to “Dragon Interact, Inc”.
If the share distribution proceeds, it is currently contemplated that our shareholders will maintain their current shares in the Company and receive a pro-rata distribution of a portion of our shares of Dragon. The proposed share distribution remains subject to approval by our board of directors as well as other customary conditions, including the filing and effectiveness of either a Form S-1 or Form 10 registration statement with the U.S. Securities and Exchange Commission and obtaining of any other required regulatory approvals. Upon consummation of the proposed distribution, Dragon would become a standalone public company with plans to list on a national stock exchange. No assurance can be given that the spin-off and/or the distribution will occur as anticipated or at all.
Recent Events
On January 16, 2024, we entered into an underwriting agreement with EF Hutton LLC, as the representative of the underwriters named therein, relating to an underwritten public offering of 382,972 shares of our common stock and pre-funded warrants to purchase up 590,000 shares of our common stock for net proceeds of approximately $1.4 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, which closed on January 16, 2024. As of the date of this report, this agreement has been terminated.
26
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 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 and significant estimates are more fully described in Note 1 in the “Notes to Financial Statements”, we believe the following estimates are critical to the process of making significant judgments and estimates in preparation of our consolidated financial statements.
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, 2024 and 2023 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.
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 did not have the characteristics of a controlling financial interest and the initial equity investments in these entities may be or were insufficient to meet or sustain its operations without additional subordinated financial support from DatChat. The equity owners of Metabizz had only a nominal equity investment at risk, and the Company absorbed or received a majority of the entity’s expected losses or benefits. The Company participated significantly in the design of Metabizz. The Company provided working capital advances to Metabizz to allow Metabizz to fund its day-to-day obligations. Substantially all of the activities of Metabizz were conducted for the Company’s benefit, as evidenced by the fact that the operations of Metabizz consisted of development of software and technologies to be used by Dragon and the Company provided working 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 was required to consolidate the assets, liabilities, revenues and expenses of Metabizz using the fair value method. Additionally, the managing partner of Metabizz was also the Chief Innovation Officer of Dragon. Since Metabizz, LLC and Metabizz SAS were considered VIE’s, any noncontrolling interest eliminated in consolidation. In connection with the initial consolidation of Metabizz, on February 14, 2023 (the initial consolidation date), the Company recorded a gain on initial consolidation of variable interest entities of $42,737.
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On March 31, 2024, based on the Company’s analysis, the Company deconsolidated Metabizz, LLC and Metabizz SAS. During the three months ended March 31, 2024, the Company ceased doing business with Metabizz, LLC and Metabizz SAS and will pay technology professionals directly. In connection with the deconsolidation of Metabizz, LLC and Metabizz SAS, during the nine months ended September 30, 2024, the Company recorded a gain on deconsolidation of $107.
On August 27, 2024, the Company entered into an Asset Purchase Agreement with the Seller, pursuant to which it acquired from Seller the Assets (See Note 1) in consideration for the transfer by the Company of 8,000,000 restricted shares of common stock of Dragon Interact, Inc., a majority-owned subsidiary of the Company. Accordingly, as of September 30, 2024, the Company owns 45.5% of Dragon. On August 27, 2024, based on the Company’s analysis, the Company determined that Dragon met the definition of a VIE under the VIE model, which provides for situations in which control may be demonstrated other than by the possession of voting rights in Dragon. Based on Company’s analysis, the Company continues to have the power to direct the activities of Dragon that most significantly impact Dragon’s economic performance and the obligation to absorb losses of Dragon that could potentially be significant to Dragon or the right to receive benefits from Dragon that could potentially be significant to Dragon.
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. The fair value of each option granted is estimated as of the date of grant using the Black-Scholes-Merton option-pricing model, net of actual forfeitures. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. The Black-Scholes-Merton option-pricing model includes various assumptions, including the fair market value of our common stock, expected life of stock options, the expected volatility, and the expected risk-free interest rate, among others. These assumptions reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used, stock-based compensation expense, as determined in accordance with authoritative guidance, could have been materially impacted. Furthermore, if we use different assumptions on future grants, stock-based compensation expense could be materially affected in future periods.
Recently Issued Accounting Pronouncements
Refer to the notes to the unaudited consolidated financial statements.
Results of Operations
Revenue
During the three months ended September 30, 2024 and 2023, we generated minimal revenues of $62 and $175, respectively. During the nine months ended September 30, 2024 and 2023, we generated minimal revenues of $344 and $501, respectively.
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Operating expenses
For the three months ended September 30, 2024, operating expenses amounted to $1,238,246 as compared to $2,542,326 for the three months ended September 30, 2023, a decrease of $1,304,080, or 51.3%. For the nine months ended September 30, 2024, operating expenses amounted to $4,169,050 as compared to $7,291,928 for the nine months ended September 30 2023, a decrease of $3,122,721, or 42.8%. For the three and nine months ended September 30, 2024 and 2023, operating expenses consisted of the following:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Compensation and related expenses | $ | 461,422 | $ | 1,247,302 | $ | 1,881,682 | $ | 4,177,032 | ||||||||
| Marketing and advertising expenses | 34,134 | 219,008 | 101,734 | 379,410 | ||||||||||||
| Professional and consulting expenses | 222,220 | 483,319 | 726,119 | 1,060,396 | ||||||||||||
| Research and development | 363,472 | 380,017 | 823,448 | 1,000,248 | ||||||||||||
| General and administrative expenses | 156,998 | 212,680 | 636,067 | 651,461 | ||||||||||||
| Impairment loss on digital currencies and other digital assets | - | - | - | 23,381 | ||||||||||||
| Total | $ | 1,238,246 | $ | 2,542,326 | $ | 4,169,050 | $ | 7,291,928 | ||||||||
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, 2024 and 2023, compensation and related expenses amounted to $461,422 and $1,247,302, respectively, a decrease of $785,880, or 63.0%. The decrease was attributable to a decrease in stock-based compensation of $620,976 and an overall decrease in compensation and other related expenses of $164,904.
During the nine months ended September 30, 2024 and 2023, compensation and related expenses amounted to $1,881,682 and $4,177,032, respectively, a decrease of $2,295,350, or 54.9%. The decrease was attributable to a decrease in stock-based compensation of $1,966,364 and an overall decrease in compensation and other related expenses of $328,986.
Marketing and advertising expenses
During the three months ended September 30, 2024 and 2023, marketing and advertising expenses amounted to $34,134 and $219,008, respectively, a decrease of $184,874, or 84.4%. During the nine months ended September 30, 2024 and 2023, marketing and advertising expenses amounted to $101,734 and $379,410, respectively, a decrease of $277,676, or 73.2%. The decrease was 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, 2024 and 2023, we reported professional and consulting expenses of $222,220 and $483,319, respectively, a decrease of $261,099, or 54.0%. The decrease was primarily attributable to a decrease in investor relations of $218,664 and a decrease in stock-based consulting fees of $65,184, offset by an increase in legal fees of $31,710.
During the nine months ended September 30, 2024 and 2023, we reported professional and consulting expenses of $726,119 and $1,060,396, respectively, a decrease of $334,277, or 31.5%. The decrease was primarily attributable to a decrease in investor relations of $263,310, a decrease in stock-based consulting fees of $77,467, and a decrease in other professional fees of $20,978, offset by an increase in accounting fees of $27,478.
29
Research and development expenses
During the three months ended September 30, 2024 and 2023, we incurred $363,472 and $380,017 in research and development expenses, a decrease of $16,545, or 4.4%. During the nine months ended September 30, 2024 and 2023, we incurred $823,448 and $1,000,248 in research and development expenses, a decrease of $176,800, or 17.7%. Research and development costs were incurred in connection with our Metaverse software development project, including the development of Habytat which is in the preliminary stage.
On August 27, 2024, we entered into an Asset Purchase Agreement with Judaopta LLC, a Delaware limited liability company (the “Seller”), pursuant to which it acquired from Seller (i) certain software (the “RenAI Software”), which consists of an artificial intelligence (AI) tool designed used for media library organization with the ability to tag and rename images for PC and MAC devices using AI with integration to Gemini, OpenAI and Claude and (ii) certain domain names (the “Assets”) in consideration for the transfer by the Company of 8,000,000 restricted shares of common stock of Dragon Interact, Inc., a majority-owned subsidiary of the Company. In connection with this asset acquisition, for the three and nine months ended September 30, 2024, we recorded research and development expense of $166,667 since the Company is still in the development stage and spends most of its time and efforts planning, raising capital, and performing research and development and accordingly, the recoverability of the cost was not certain. Research and development expense was calculated as follows:
| Amount | ||||
| Fair value of 8,000,000 shares Dragon shares transferred based on recent sales of Dragon shares at $0.30 per share | $ | 2,400,000 | ||
| Less: gain recognized as difference between fair value of 8,000,000 shares calculated above and allocated costs of investment in Dragon and included in research and development | (2,233,333 | ) | ||
| Research and development expense recorded, net | $ | 166,667 | ||
General and administrative expenses
During the three months ended September 30, 2024 and 2023, general and administrative expenses amounted to $156,998 and $212,680, a decrease of $55,682, or 26.2%. The decrease was primarily attributable to a decrease in travel expenses of $40,212 and a decrease in other general and administrative expenses of $15,470.
During the nine months ended September 30, 2024 and 2023, general and administrative expenses amounted to $636,067 and $651,461, a decrease of $15,394, or 2.4%.
Impairment loss on digital currencies and other digital assets
During the three months ended September 30, 2024 and 2023, operating expenses did not include an impairment charge related to the write down of digital assets. During the nine months ended September 30, 2024 and 2023, operating expenses included an impairment charge related to the write down of digital assets of $0 and $23,381, respectively.
Loss from Operations
During the three months ended September 30, 2024, loss from operation amounted to $1,238,246 as compared to $2,542,151 during the three months ended September 30, 2023, a decrease of $1.303,967, or 51.3%. During the nine months ended September 30, 2024, loss from operation amounted to $4,168,706 as compared to $7,291,427 during the nine months ended September 30, 2023, a decrease of $3,122,721, or 42.8%.
Other Income (Expense)
Other income (expenses) primarily consisted of interest income, gain on initial consolidation of variable interest entities, gain on deconsolidation of variable interest entities, foreign currency exchange loss, and realized gains or losses on short-term investments. During the three months ended September 30, 2024 and 2023, we reported other income, net of $54,726 and $177,571, respectively. During the nine months ended September 30, 2024 and 2023, we reported other income, net of $219,333 and $240,403, respectively.
During the three months ended September 30, 2024, other income, net solely consisted of interest income of $54,726. During the three months ended September 30, 2023, other income, net primarily consisted of interest income of $177,607 and a foreign currency exchange loss of $36.
During the nine months ended September 30, 2024, other income, net primarily consisted of interest income of $232,191, a gain on deconsolidation of variable interest entities of $107, and a foreign currency exchange loss of $12,965. During the nine months ended September 30, 2023, other income, net primarily consisted of interest income of $245,440, a gain on initial consolidation of variable interest entities of $42,737, a foreign currency exchange loss of $102, and a realized loss on short-term investments of $47,672.
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Net Loss and Net Loss Attributable to Common Shareholders
Due to the foregoing reasons, during the three months ended September 30, 2024 and 2023, our net loss was $1,183,458 and $2,364,580, respectively, a decrease of $1,181,122, or 50.0%. During the nine months ended September 30, 2024 and 2023, our net loss was $3,949,373 and $7,051,024, a decrease of $3,101,651, or 44.0%. During the three months ended September 30, 2024 and 2023, after adjusting net loss for net (income) of subsidiary attributable to noncontrolling interest of $(88,343) and $0, respectively, net loss attributable to common shareholders of was $1,271,801, or $(0.42) per common share (basic and diluted) and $2,364,580, or ($1.13) per common share (basic and diluted), respectively, a decrease of $1,092,779, or 46.2%. During the nine months ended September 30, 2024 and 2023, after adjusting net loss for net loss of subsidiary attributable to noncontrolling interest of $566,513 and $0, respectively, our net loss attributable to common shareholders was $3,392,860, or $(1.15) per common share (basic and diluted) and $7,051,024, or ($3.40) per common share (basic and diluted), respectively, a decrease of $3,658,164, or 51.9%.
Liquidity, Capital Resources and Plan of Operations
As of September 30, 2024, we had cash and cash equivalents of $632,497 and short-term investments of $3,919,697. Short-term investments include U.S. Treasury zero coupon bills that are all highly rated and have initial maturities between four and twelve months.
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited consolidated financial statements, we had a net loss of $3,949,373 for the nine months ended September 30, 2024. Net cash used in operations was $3,507,202 for the nine months ended September 30, 2024. Additionally, as of September 30, 2024, we had an accumulated deficit of $51,526,948 and have generated minimal revenues since inception. As of September 30, 2024, we had working capital of $4,226,065, including cash of $632,497 and short-term investments of $3,919,697. These factors raise substantial doubt about our ability to continue as a going concern for a period of twelve months from the issuance date of this report. Management cannot provide assurance that we will ultimately achieve profitable operations or become cash flow positive or raise additional debt and/or equity capital. We are seeking to raise capital through additional debt and/or equity financings to fund our operations in the future. Although we have historically raised capital from sales of common shares, there is no assurance that it will be able to continue to do so. If we are unable to raise additional capital or secure additional lending in the near future, management expects that the Company will need to curtail its operations. These unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
On April 3, 2024, Dragon entered into a Securities Purchase Agreement with an institutional and accredited investor, pursuant to which Dragon agreed to sell an aggregate of 120,000 shares of Dragon’s common stock, par value $0.0001 per share for an aggregate purchase price of $36,000. Following the sale, the Company retained approximately 71.4% ownership of Dragon.
On May 31, 2024, Dragon entered into a Securities Purchase Agreement with an institutional and accredited investor, pursuant to which Dragon agreed to sell an aggregate of 666,660 shares of Dragon’s common stock, par value $0.0001 per share for an aggregate purchase price of $199,998. Following the sale, the Company retained approximately 70.0% ownership of Dragon.
During September 2024, Dragon entered into a Securities Purchase Agreement with investors pursuant to which Dragon agreed to sell an aggregate of 866,666 shares of Dragon’s common stock, par value $0.0001 per share for an aggregate purchase price of $260,000, or $0.30 per share. Following the sale, the Company retains approximately 54.5% ownership of Dragon.
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. |
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Cash Flow Activities for the Nine Months ended September 30, 2024 and 2023
Cash Flows from Operating Activities
Net cash used in operating activities totaled $3,507,202 and $5,159,510 for the nine months ended September 30, 2024, and 2023, respectively, a decrease of $1,652,308.
Net cash flow used in operating activities for the nine months ended September 30, 2024 primarily reflected a net loss of $3,949,373 adjusted for the add-back (reduction) of non-cash items consisting of depreciation and amortization of $17,347, amortization of right of use assets of $54,065, accretion of stock-based stock option and common stock expense of $125,810, a non-cash gain from deconsolidation of variable interest entities of $(107), foreign currency exchange loss of $12,965, and non-cash research and development expense of$166,667, offset by changes in operating assets and liabilities primarily consisting of an increase in prepaid expenses of $59,179, an increase in accounts payable and accrued expenses of 185,469, and a decrease in operating lease liabilities of $60,823.
Net cash flow used in operating activities for the nine months ended September 30, 2023 primarily reflected a net loss of $7,051,024, 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 $(42,737), impairment loss on digital assets of $23,381, net unrealized loss on short-term investments of $47,672, and non-cash accrued interest included in short-term investments of $239,382, offset by changes in operating assets and liabilities primarily consisting of a decrease in accounts payable – related party of $21,801, an increase in prepaid expenses of $61,456, a decrease in accounts payable and accrued expenses of $14,385, and a decrease in operating lease liabilities of $48,808.
Cash Flows from Investing Activities
Net cash provided by investing activities amounted to $1,269,566 and $4,496,890 for the nine months ended September 30, 2024 and 2023, respectively.
During the nine months ended September 30, 2024, we received gross proceeds from the sale of short-term investments of $9,757,175 and purchased short-term investments of $8,487,609.
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.
Cash Flows from Financing Activities
Net cash provided by (used in) financing activities totaled approximately $1,916,771 and $(398,284) for the nine months ended September 30, 2024 and 2023, respectively.
During the nine months ended September 30, 2024, we received $559,251 from the sale of common stock, net, received $495,998 from the sale of subsidiary common stock, net, and received $861,522 from the sale of pre-funded warrants.
During the nine months ended September 30, 2023, we repaid related party advances of $1,315, we used cash of $397,969 to purchase 66,945 treasury stock at an average price of $5.94 per share, and we receive $1,000 from the sale of Series B preferred stock.
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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.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have chosen to take advantage of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards until those standards would otherwise apply to private companies provided under the JOBS Act. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates for complying with new or revised accounting standards.
Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including, without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering, which would be December 31, 2024; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
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
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act, as of the end of the period covered by this report. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were not effective as of September 30, 2024.
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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.
The ineffectiveness of our internal control over financial reporting was due to the following material weaknesses which we identified in our internal control over financial reporting:
| ● | We lack segregation of duties within accounting functions duties as a result of our limited financial resources to support hiring of personnel. |
| ● | The lack of multiples levels of management review on complex business, accounting and financial reporting issues. |
| ● | We have not implemented adequate system and manual controls. |
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, 2023 as filed with the SEC on March 29, 2024 (“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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
Issuer Purchases of Equity Securities
We did not have any common stock repurchases during the quarterly period ended September 30, 2024.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5. OTHER INFORMATION.
Rule 10b5-1 Trading Plans
During the fiscal quarter ended September 30,
2024, none of the Company’s directors or executive officers
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 14, 2024 | /s/ Darin Myman |
| Darin Myman | |
| Chief Executive Officer and Director | |
| (Principal Executive Officer) | |
| Dated: November 14, 2024 | /s/ Brett Blumberg |
| Brett Blumberg | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
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