DATCHAT, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

You should read the following discussion and analysis of our financial condition
and results of operations together with unaudited condensed consolidated
financial statements and the related notes appearing elsewhere in this Quarterly
Report on Form 10-Q. 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 in our Annual Report on Form 10-K as filed with
the SEC on March 29, 2022. All amounts in this report are in U.S. dollars,
unless otherwise noted.



Throughout this Quarterly Report on Form 10-Q, references to "we," "our," "us,"
"the Company" or "DatChat" refer to DatChat, Inc., individually, or as context
requires, collectively with its subsidiaries.



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.” Our flagship product, DatChat Messenger & Private Social Network (the “Application”), is a mobile application that gives users the ability to communicate with privacy and protection.

DatChat Messenger & Private Social Network

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



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



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


The Habytat


We have recently formed a wholly owned subsidiary, SmarterVerse, Inc., and have
entered into a development agreement with MetaBizz, LLC to co-develop a mobile
based social metaverse, to be known as "The Habytat."  A metaverse is 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 highly
immersive 3D environments.



We plan to launch Geniuz City, the first world within The Habytat, in the first
quarter of 2023. Geniuz City will be a near photo-realistic world that is based
on the city of Miami and its surrounding areas. We plan to design Geniuz City in
a manner that will enable users to participate in a number of different
activities, such as parties, business conferences, shopping, socializing, and
game play. Currently, once users download The Habytat application, we plan to
grant each user rights to use a designated piece of virtual property in Geniuz
City through the minting and issuance of a unique NFT. NFTs (or non-fungible
tokens) are digital assets that can represent a unique real-world asset, such as
art, music, in-game items, videos, or a piece of real estate or virtual
property. Finally, as described below, we plan to integrate our VenVuu platform
and VenVuu dynamic NFTs (collectively, VenVuu") into The Habytat, and that such
integration will enable us and users to generate advertising-based revenues
in
The Habytat.



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VenVuu



We are currently developing VenVuu, a metaverse advertising platform. VenVuu is
based upon a proprietary metaverse ad network and dynamic NFT technology which
we believe will allow advertisers and metaverse property holders to connect in
the metaverse. Management believes that metaverse advertising parallels reality
and that VenVuu can be considered as a parallel to billboards in the real world
or "Google Ads" within the internet. Through the integration of VenVuu, which
advertises in a way similar to a billboard or video screen, we plan to enable
users of The Habytat opportunities to monetize their virtual property rights by
directly displaying approved advertisements on their virtual property. While we
currently plan to launch VenVuu in the Habytat, it may also, in the future, be
interoperable within other metaverses.



Basis of Presentation


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



Critical Accounting Policies and Significant Judgments and Estimates



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



 Use of estimates



The preparation of the financial statements in conformity with accounting
principles generally accepted in the U.S. requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, expenses, and the related disclosures at the date of the financial
statements and during the reporting period. Actual results could materially
differ from these estimates. Significant estimates include the useful life of
property and equipment, assumptions used in assessing impairment of long-term
assets, the valuation of deferred tax assets, the estimate of the fair value
lease liability and related right of use asset, and the fair value of non-cash
equity transactions.


Accounting for digital currencies and other digital assets



We purchase Ethereum cryptocurrency ("Ethereum") and other digital assets and
accepts Ethereum as a form of payment for non-fungible tokens sales (NFTs). We
account for these digital assets held as the result of the purchase or receipt
of Ethereum and other digital assets, as indefinite-lived intangible assets in
accordance with ASC 350, Intangibles-Goodwill and Other ("ASC 350"). We have
ownership of and control over our digital currencies and digital assets and we
may use third-party custodial services to secure them. The digital currencies
and digital assets are initially recorded at cost and are subsequently
remeasured, net of any impairment losses incurred since acquisition. 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. There are uncertainties related to
the application of ASC 350 to digital currencies, as it does not appropriately
reflect the economics associated with digital currencies. However, in the
absence of standards that specifically address the accounting for digital
currencies, the Company believes that it must apply existing accounting
standards in accounting for its investment in digital currencies. The FASB does
not have a standard-setting project on digital currencies or other similar
digital assets on its agenda, but an industry trade group has requested that the
FASB address the accounting for cryptocurrencies, a category of digital asset
under which the Company believes that digital currencies fall. Accordingly, the
FASB staff has researched blockchain technology and cryptocurrency market
activities and the accounting challenges they present. The Company monitors any
standard-setting, regulatory or technological developments that may affect the
Company's accounting for digital currencies or its controls and processes
related to digital currencies. Digital currencies are included in current assets
in the unaudited condensed consolidated balance sheet.



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We determine the fair value of our digital currencies and other digital assets
on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement,
based on quoted prices on the active exchange(s) that it has determined is the
principal market for Ethereum (Level 1 inputs) and other digital assets. We
perform an analysis each quarter to identify whether events or changes in
circumstances, principally decreases in the quoted prices on active exchanges,
indicate that it is more likely than not that its digital assets were impaired.
In determining if an impairment has occurred, we consider the lowest market
price quoted on an active exchange since acquiring the respective digital asset.
If the then current carrying value of a digital asset exceeds the fair value, an
impairment loss has occurred with respect to those digital assets in the amount
equal to the difference between their carrying values and the fair value. The
impaired digital assets are written down to their fair value at the time of
impairment and this new cost basis will not be adjusted upward for any
subsequent increase in fair value. Gains are not recorded until realized upon
sale, at which point they are presented net of any impairment losses for the
same digital assets held. In determining the gain or loss to be recognized upon
sale, we calculate the difference between the sales price and carrying value of
the digital assets sold immediately prior to sale. Impairment losses and gains
or losses on sales are recognized within other expense in the unaudited
condensed consolidated statements of operations. During the three and nine
months ended September 30, 2022, we recorded an impairment loss of $7,024 and
$91,204, respectively.



Capitalized 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, 2022 were expensed since the Metaverse software
development project is in the preliminary project stage. Such costs are included
in research and development costs on the accompanying unaudited condensed
consolidated statement of operations.



Revenue recognition



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



Our NFT revenues were generated from the sale of NFTs. The Company accepts
Ethereum as a form of payment for NFT sales. The Company's NFTs exist on the
Ethereum Blockchain under the Company's VenVuu brand. VenVuu is an iMetaverse
advertising platform that allows advertisers and metaverse landowners to connect
using the Company's proprietary metaverse ad network and dynamic NFT technology.
The Company uses the NFT exchange, OpenSea, to facilitate its sales of NFTs. The
Company, through OpenSea, has custody and control of the NFT prior to the
delivery to the customer and records revenue at a point in time when the NFT is
delivered to the customer and the customer pays. The Company has no obligations
for returns, refunds or warranty after the NFT sale. The value of the sale is
determined based on the value of the Ethereum crypto currency received as
consideration. Each NFT that is generated produces a unique identifying code.



                                       20





Research and Development


Research and development costs incurred in the development of the Company's
products are expensed as incurred and includes costs such as outside development
costs and other allocated costs incurred. For the three and nine months ended
September 30, 2022, research and development costs incurred in the development
of the Company's software products were $258,957 and are included in operating
expenses on the accompanying unaudited condensed consolidated statements of
operations.



Stock-based compensation


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



Leases



We applied ASC Topic 842, Leases (Topic 842) to arrangements with lease terms of
12 months or more. Operating lease right of use assets ("ROU") represents the
right to use the leased asset for the lease term and operating lease liabilities
are recognized based on the present value of the future minimum lease payments
over the lease term at commencement date. As most leases do not provide an
implicit rate, we use an incremental borrowing rate based on the information
available at the adoption date in determining the present value of future
payments. Lease expense for minimum lease payments is amortized on a
straight-line basis over the lease term and is included in general and
administrative expenses in the statements of operations.



Recently Issued Accounting Pronouncements

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.



Results of Operations



Three and Nine Months Ended September 30, 2022 compared to Three and Nine Months Ended September 30, 2021


Revenues



During the three and nine months ended September 30, 2022, we generated revenue
in the amount of $3,540 and $42,296, respectively. We did not generate revenues
during the three and nine months ended September 30, 2021. For the three months
ended September 30, 2022, revenue consisted of revenue from subscriptions of
$3,540 and revenue from the sale of Venvuu NFTs of $36,394. For the nine months
ended September 30, 2022, revenue consisted of revenue from subscriptions of
$5,902 and revenue from the sale of Venvuu NFTs of $36,394.



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Operating Expenses


For the three months ended September 30, 2022, operating expenses amounted to
$2,685,450 as compared to $1,851,338 for the three months ended September 30
2021, an increase of $834,112, or 45.5%. For the nine months ended September 30,
2022, operating expenses amounted to $8,671,451 as compared to $3,494,073 for
the nine months ended September 30, 2021, an increase of $5,177,378, or 148.2%.



For the three and nine months ended Sep 30 2022 and 2021, operating expenses consisted of the following:


                                               Three Months Ended               Nine Months Ended
                                                  September 30,                   September 30,
                                              2022            2021            2022            2021

Compensation and related expenses $1,639,886 $640,827 $5,015,827 $1,142,342
Marketing and advertising expenses

              65,181         286,869         645,825         439,298
Professional and consulting expenses           482,338         665,365       1,947,535       1,522,963
Research and development costs - related
party                                          258,957               -         258,957               -
General and administrative expenses            232,064         258,007         712,103         389,470
Impairment loss on digital currencies
and other digital assets                         7,024               -          91,204               -
Total                                      $ 2,685,450     $ 1,851,338     $ 8,671,451     $ 3,494,073



Compensation and related expense

Compensation and related expenses for the three months ended September 30, 2022,
and 2021 were $1,639,886 and $640,827, respectively, an increase of $999,059, or
155.9%, and for the nine months ended September 30, 2022 and 2021 were
$5,015,827 and $1,142,342, respectively, an increase of $3,873,485, or 339.1%.
Compensation and related expenses include salaries, stock-based compensation,
health insurance and other benefits. The increase in compensation and related
expenses is primarily related to increase in the number of full-time employees,
and an increase in stock-based compensation. Stock-based compensation expense
amounted to $787,585 and $2,382,365 for the three and nine months ended
September 30, 2022 and was attributable to the accretion of stock option
expense. During the three and nine months ended September 30, 2021, stock-based
compensation related to the accretion of stock options expense amounted to
$215,313 and $215,313, respectively.



Marketing and advertising expenses

Marketing and advertising expenses for the three months ended September 30,
2022, and 2021 were $65,181 and $286,869, a decrease of $221,688, or 77.3%, and
for the nine months ended September 30, 2022 and 2021 were $645,825 and
$439,298, respectively, an increase of $206,527, or 47.0%. The increase was
primarily attributable to increase in social media development for online media
advertising.


Professional and consulting expenses

During the three months ended September 30, 2022 and 2021, we reported professional and consulting fees of $482,338 and $665,635respectively, a decrease of $183,297, or 27.5%. During the nine months ended September 30, 2022
and 2021, we reported professional and consulting fees of $1,947,535 and
$1,522,963respectively, an increase of $424,572or 27.9%, which are principally comprised of the following items:

? During the three months ended September 30, 2022 and 2021, the decrease in

professional and consulting expenses of $183,297 was attributable to a decrease

in consulting fees for general advisory consulting, investor relations,

technology services, and other incidental services of $148,236a decrease in

accounting fees or $6,039a decrease in recruitment fees of $60,000and a

decrease in other professional fees of $22.199offset by an increase in legal

fees of $53,177. During the three months ended September 30, 2022 and 2021,

$51,204 and $244,294respectively, of these consulting fees was from the

accretion of stock option expense and from the issuance of our common stock

valued on the date of grant at its estimated fair value using recent sales of

common stock on the measurement date.



                                       22




? During the nine months ended September 30, 2022 and 2021, the increase in

professional and consulting expenses of $424,572 was attributable to a decrease

in consulting fees for general advisory consulting, investor relations,

technology services, and other incidental services of $171,885an increase in

accounting fees or $18,184an increase in recruitment fees of $241,000and an

increase in legal fees of $362,495offset by a decrease in other professional

fees of $25,222. During the nine months ended September 30, 2022 and 2021,

$288,763 and $814,294respectively, of these consulting fees was from the

accretion of stock option expense and from the issuance of our common stock

valued on the date of grant at its estimated fair value using recent sales of

   common stock on the measurement date.



Research and development costs



During the three and nine months ended September 30, 2022, we incurred $258,957
in research and development costs with a related party in connection with the
development of our Metaverse software development project which is in the
preliminary stage. We did not incur any research and development costs in the
2021 periods.


General and administrative expenses



During the three months ended September 30, 2022, and 2021, general and
administrative expenses were $232,064 and $258,007, a decrease of $25,943, or
10.1%. During the nine months ended September 30, 2022, and 2021, general and
administrative expenses were $712,103 and $389,470, an increase of $322,633, or
82.8%, primarily attributable to an increase in insurance expense of $64,082, an
increase in computer and internet expense of $48,891, an increase in travel
expenses of $71,970, and an increase in rent expense of $21,751. General and
administrative expenses primarily consisted of the following expense categories:
insurance, travel, utilities, office related expenses and rent expense.



Impairment loss on digital currencies and other digital assets



During the three and nine months ended September 30, 2022, operating expenses
included an impairment charge related to the write down of digital currencies
and other digital assets of $7,024 and $91,204, respectively.



Loss from Operations


For the three months ended September 30, 2022, loss from operation amounted to
$2,681,910 as compared to $1,851,338 for the three months ended September 30,
2021, an increase of $830,572, or 44.9%. For the nine months ended September 30,
2022, loss from operation amounted to $8,629,155 as compared to $3,494,073 for
the nine months ended September 30, 2021, an increase of $5,135,082, or 147.0%.



Other Income (Expense)



During the three months ended September 30, 2022, and 2021, we reported other
income (expense) of $25,205 and $959, respectively. During the nine months ended
September 30, 2022, and 2021, we reported other income (expense) of $24,892 and
$1,144, respectively. Other income (expense) consisted of interest income,
interest expense and unrealized gains or losses on short-term investments.
During the three and nine months ended September 30, 2022, net realized
investment gain of $9,702 is reported in other income (expenses) on the
unaudited condensed consolidated statements of operations. During the three and
ninth months ended September 30, 2022 and 2021, net unrealized investment gains
of $10,844 and $7,113 is reported in other income (expenses) on the unaudited
condensed consolidated statements of operations, respectively.



Net Loss



For the foregoing reasons, for the three months ended September 30, 2022 and
2021, net loss amounted to $2,656,705, or ($0.13) per common share (basic and
diluted) and $1,850,379, or $(0.12) per common share (basic and diluted),
respectively, an increase of $806,326, or 43.6%. For the nine months ended
September 30, 2022 and 2021, net loss amounted to $8,604,263, or ($0.43) per
common share (basic and diluted) and $3,492,929, or $(0.25) per common share
(basic and diluted), respectively, an increase of $5,111,334, or 146.3%.



                                       23




Liquidity, Capital Resources and Plan of Operations



Liquidity is the ability of an enterprise to generate adequate amounts of cash
to meet its needs for cash requirements. As of September 30, 2022 and December
31, 2021, we had cash and cash equivalents of $6,229,888 and $20,199,735,
respectively. Additionally, on September 30, 2022, we had short-term investments
of $7,981,155. Short-term investments include U.S. Treasury bills and
certificates of deposit that are all highly rated and have initial maturities
between four and twelve months.



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. 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,

? Addition of administrative, technical and sales personnel as the business

   grows, and



? The cost of being a public company.




On August 12, 2021, we entered into an underwriting agreement (the "Underwriting
Agreement") with EF Hutton, division of Benchmark Investments, LLC, in
connection with the initial public offering (the "Offering") of 3,325,301 shares
of the its common stock and Series A warrants (the "Series A Warrants") to
purchase up to 3,325,301 shares of the its common stock for gross proceeds of
$13,800,000, before deducting underwriting discounts, commissions, and other
offering expenses, including legal expenses related to the Offering of
$1,718,163 which are offset against the proceeds in additional paid in capital
resulting in net proceeds to the Company of $12,081,837. The Offering closed on
August 17, 2021, and the underwriter subsequently exercised its over-allotment
option, which closed on August 23, 2021.



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



We may need to raise additional funds, particularly if we are unable to generate
positive cash flows from our operations. We estimate that based on current plans
and assumptions, that our available cash will be sufficient to satisfy our cash
requirements under our present operating expectations for the next 12 months
from the date of this quarterly report on Form 10-Q.



Cash Flow Activities for the Nine Months Ended September 30, 2022 and 2021

Cash Flows from Operating Activities

Net cash used in operating activities totaled approximately $5,727,584 and
$2,518,058 for the nine months ended September 30, 2022and 2021, respectively, an increase of $3,209,526.


                                       24





Net cash flow used in operating activities for the nine months ended September
30, 2022 primarily reflected a net loss of $8,604,263 adjusted for the add-back
of non-cash items consisting of depreciation and amortization of $67,227,
stock-based compensation and professional fees from the accretion of stock-based
stock option and common stock expense of $2,671,128, unrealized and realized
gains on short-term investments, and an impairment loss on digital currencies
and other digital assets of $84,180, offset by changes in operating assets and
liabilities primarily consisting of a decrease in prepaid expenses of $117,396,
a decrease in accounts payable and accrued expenses of $23,386 and a decrease in
operating lease liability of $39,027.



Net cash flow used in operating activities for the nine months ended September
30, 2021 primarily reflected a net loss of $3,492,929 adjusted for the add-back
of non-cash items consisting of amortization of right of use assets of $20,987
and accretion of stock-based common stock expense of $1,029,607, offset by
changes in operating assets and liabilities primarily consisting of an increase
in prepaid expenses of $200,651, an increase in accounts payable of $145,915,
and a decrease in operating lease liability of $20,987.



Cash Flows from Investing Activities

Net cash used in investing activities amounted to $8,242,060 and $0 for the nine
months ended September 30, 2022, and 2021, respectively. During the nine months
ended September 30, 2022, we purchased property and equipment of $44,475,
purchased digital currencies and other digital assets of $233,245, and we
purchased short-term investments of $14,394,340 and received gross proceeds from
the sale of short-term investments of $6,430,000.



Cash Flows from Financing Activities



Net cash (used in) provided by financing activities totaled approximately $(203)
and $27,643,282 for the nine months ended September 30, 2022, and 2021,
respectively. During the nine months ended September 30, 2022, we repaid related
party advances of $203. During the nine months ended September 30, 2021,
financing activities was primarily attributable to net proceeds of approximately
$13,671,074 from the sale of common stock, $13,979,370 from the exercise of
Series A warrants and $161,567 of advances from a related party, offset by the
repayment of related party advances of $161,229 and the repayment of
related-party notes of $7,500.



Off-Balance Sheet Arrangements



We have not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
shareholders' equity or that are not reflected in our financial statements.
Furthermore, we do not have any retained or contingent interest in assets
transferred to an unconsolidated entity that serves as credit, liquidity or
market risk support to such entity. We do not have any variable interest in any
unconsolidated entity that provides financing, liquidity, market risk or credit
support to us or engages in leasing, hedging or research and development
services with us.

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