DatChat(DATS) - 2024 Q4 - Annual Report

Part I Business DatChat, Inc. is a private messaging, cybersecurity, and social media company focused on user privacy and secure digital content management, while also developing AI-generated mobile game apps and podcasts - The company's core business is a privacy-focused messaging platform, DatChat Messenger, which allows users to delete messages from recipient devices and protects against screenshots[21][22] - DatChat has expanded its business by launching the Myseum social media platform for secure digital content storage and acquiring RPM Interactive, Inc. to enter the AI-generated gaming and podcasting market[20][25][26] - Following the acquisition of RPM Interactive in October 2024, the company ceased development of its Habytat metaverse platform to refocus resources on AI-driven technologies[20][28] - The company holds 15 issued patents related to its encryption and digital asset technologies as of March 28, 2024, with these patents set to expire in 2036[41] - As of March 26, 2025, the company has 10 full-time employees and utilizes external professionals for various operational tasks[47] Risk Factors The company faces significant risks due to its limited operating history, lack of revenue, recurring net losses, intense competition, and dependence on third-party platforms - The company has a limited operating history with minimal revenues and significant net losses, reporting a net loss of $5,025,007 in 2024 and $8,404,970 in 2023[51] - DatChat faces intense competition from large, well-resourced companies such as Apple, Alphabet (Google), Meta (Facebook), and Snap Inc[56] - The business is heavily reliant on third-party services, including the Apple App Store for distribution and Amazon Web Services (AWS) for its entire computing infrastructure, posing risks from potential disruptions or unfavorable policy changes[57][75] - The company's metaverse strategy through its Habytat platform was unsuccessful, leading to the cessation of its development, highlighting risks associated with investing in new and unproven technologies[98] - As an "emerging growth company," DatChat is subject to reduced public company reporting requirements, which could make its common stock less attractive to some investors[126] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[142] Cybersecurity The company's cybersecurity program, led by the Chief Technology Officer, employs a multi-faceted approach to manage risks and utilizes third-party service providers and external audits - The cybersecurity team, led by the CTO, uses a multi-pronged approach including an enterprise risk management program, security reviews, vulnerability management, and internal 'red team' simulations to manage threats[143] - The company supplements its internal security with external audits, a bug bounty program, and a vendor risk management program, also engaging third-party cybersecurity consultants and professional service firms[144][145] Properties The company's principal executive office lease terminated on December 31, 2024, and it is currently leasing the space on a month-to-month basis - The company's office lease expired on December 31, 2024, and it is now leasing the space on a month-to-month basis[148] Legal Proceedings The company is not currently aware of any legal proceedings or claims that would have a material adverse effect on its business, financial condition, or operating results - The company is not currently a party to any material legal proceedings[149] Mine Safety Disclosures This item is not applicable to the company - Not applicable[150] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock and Series A Warrants are listed on the Nasdaq Capital Market, with 1,439 shareholders of record as of March 26, 2025, and no cash dividends paid or anticipated - Common stock and Series A Warrants are traded on the Nasdaq Capital Market under symbols DATS and DATSW[152] - As of March 26, 2025, there were 1,439 shareholders of record[153] - The company has never paid cash dividends and does not intend to in the foreseeable future[154] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2024, DatChat's net loss decreased to $5.0 million from $8.4 million in 2023, primarily due to a 39.9% reduction in operating expenses, with liquidity bolstered by a January 2025 stock offering Fiscal Year 2024 vs. 2023 Financial Performance | Financial Metric | FY 2024 ($) | FY 2023 ($) | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | 436 | 672 | (236) | (35.1%) | | Total Operating Expenses | 5,281,339 | 8,784,703 | (3,503,364) | (39.9%) | | Loss from Operations | (5,280,903) | (8,784,031) | 3,503,128 | 39.9% | | Net Loss | (5,025,007) | (8,404,970) | 3,379,963 | 40.2% | | Net Loss Attributable to Common Shareholders | (4,239,160) | (8,404,970) | 4,165,810 | 49.6% | | Net Loss Per Share (Basic & Diluted) | (1.43) | (4.14) | 2.71 | 65.5% | - The significant decrease in operating expenses was mainly due to a $2.44 million (51.3%) reduction in compensation expenses (from lower stock-based compensation and staff cuts), a $0.26 million (67.0%) decrease in marketing, and a $0.49 million (36.5%) drop in R&D costs after ceasing development of the Metaverse software[184][185][187] - As of December 31, 2024, the company had $1.2 million in cash and cash equivalents and $3.0 million in short-term investments, with a subsequent stock offering in January 2025 raising net proceeds of $4.5 million, which management believes is sufficient to fund operations for the next 12 months[196][197] - Net cash used in operating activities decreased to $4.4 million in 2024 from $6.5 million in 2023[199] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, DatChat is not required to provide this information - The company is not required to provide this information as it qualifies as a smaller reporting company[208] Financial Statements and Supplementary Data This section references the consolidated financial statements and related notes, which are included at the end of the Form 10-K report, starting from page F-1 - The company's audited financial statements are located in pages F-1 through F-22 of the report[209] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[210] Controls and Procedures Management concluded that as of December 31, 2024, the company's disclosure controls and procedures and its internal control over financial reporting were not effective due to identified material weaknesses - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024[211] - Internal control over financial reporting was also deemed not effective due to material weaknesses[213] - Identified material weaknesses include: lack of segregation of duties, insufficient levels of management review, and inadequate system/manual controls, primarily due to limited personnel[214][219] Other Information During the last fiscal quarter, no directors or executive officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement - No directors or officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement in the fourth quarter of 2024[217] Part III Directors, Executive Officers and Corporate Governance This section provides biographical information for the company's executive officers and directors, detailing the composition of the Board's committees and the adoption of a code of business conduct and an insider trading policy - The executive team includes Darin Myman (CEO), Peter Shelus (CTO), and Brett Blumberg (CFO)[222] - The Board has three independent directors: Wayne D. Linsley, Joseph Nelson, and Carly Luogameno, who comprise the entirety of the Audit, Compensation, and Nominating and Corporate Governance committees[234][235][236] - The company has adopted a formal code of business conduct and ethics and an insider trading policy[237][238] Executive Compensation For fiscal year 2024, CEO Darin Myman's total compensation was $750,000, with details on other executive salaries and employment agreements provided Named Executive Officer Compensation (2024) | Name and Principal Position | Year | Salary ($) | Bonus ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Darin Myman, CEO | 2024 | 450,000 | 300,000 | 750,000 | | Brett Blumberg, CFO | 2024 | 60,000 | - | 60,000 | | Peter Shelus, CTO | 2024 | 275,000 | - | 275,000 | - CEO Darin Myman's employment agreement provides for a $450,000 base salary and a potential annual bonus up to $350,000, including severance benefits equal to 24 months of base salary upon certain termination events[248] - CFO Brett Blumberg's employment agreement provides for an annual base salary of $60,000[249] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 26, 2025, CEO Darin Myman beneficially owned 4.65% of the company's common stock, with all directors and named executive officers as a group owning 7.64% Security Ownership of Management (as of March 26, 2025) | Name | Shares | Percentage | | :--- | :--- | :--- | | Darin Myman (CEO) | 200,000 | 4.65% | | Peter Shelus (CTO) | 100,000 | 2.34% | | All Directors & NEOs as a group (6 persons) | 327,500 | 7.64% | - As of December 31, 2024, there were 485,430 securities remaining available for future issuance under the company's equity compensation plans[254] Certain Relationships and Related Transactions, and Director Independence The company disclosed a related party transaction involving VR Interactive LLC, an entity partially owned by the CEO and CTO, and confirmed the independence of three Board members - On January 10, 2024, VR Interactive LLC, an entity partially owned by the CEO and CTO, purchased 8,000,000 shares of subsidiary RPM Interactive for $120,000, becoming a 25% non-controlling interest holder[258][309] - The Board of Directors has determined that Wayne D. Linsley, Carly Luogameno, and Joseph Nelson are independent directors[262] Principal Accountant Fees and Services The company paid its principal accountant, Salberg & Company, P.A., total fees of $102,100 in fiscal year 2024, primarily for audit services, all pre-approved by the audit committee Accountant Fees | Fee Type | 2024 ($) | 2023 ($) | | :--- | :--- | :--- | | Audit Fees | 91,200 | 78,600 | | Audit Related Fees | 10,900 | – | | Tax Fees | – | – | | All Other Fees | – | – | | Total | 102,100 | 78,600 | - All audit and non-audit services provided by the independent registered public accounting firm were pre-approved by the audit committee[266] Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the 10-K report, including references to the consolidated financial statements and notes on omitted schedules - This section provides an index of the financial statements and a list of all exhibits filed with the 10-K report[269][273] Form 10-K Summary This item is not applicable to the company - Not applicable[275]