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 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 communication software company. 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.

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.

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 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 believe that digital currencies and other digital assets meet the definition
of indefinite-lived intangible assets and accounts for them at historical cost
less impairment, applying the guidance in ASC 350, Intangibles – Goodwill and
Other. 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, we believe that we 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 we believe that digital currencies fall.
Accordingly, the FASB staff has researched blockchain technology and
cryptocurrency market activities and the accounting challenges they present. We
monitor any standard-setting, regulatory or technological developments that may
affect our accounting for digital currencies or its controls and processes
related to digital currencies. Digital currencies are included in current assets
in the unaudited condensed balance sheet

Our digital currencies and other digital assets are accounted for as
indefinite-lived intangible assets therefore are not subject to amortization.
Instead, its tested for impairment annually and more frequently, if events or
circumstances change that indicate that it’s more likely than not that the asset
is impaired (i.e., if an impairment indicator exists). As a result, we only
recognize decreases in the value of its digital currencies and other digital
assets, and any increase in value will be recognized only upon disposition. Our
digital currencies and other digital assets are accounted for as intangible
assets.

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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.

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 Months Ended March 31, 2022 compared to Three Months Ended March 31, 2021

Revenues

During the three months ended March 31, 2022, and 2021, we generated revenue in
the amount of $809 and $0, respectively.

Operating Expenses

For the three months ended March 31, 2022, operating expenses amounted to
$3,368,288 as compared to $996,808 for the three months ended March 31, 2021, an
increase of $2,371,480, or 237.9%. For the three months ended March 31, 2022 and
2021, operating expenses consisted of the following:

                                          Three Months Ended
                                               March 31,
                                          2022           2021

Compensation and related expenses $ 1,674,730 $ 279,135
Marketing and advertising expenses 438,242 48,950
Professional and consulting expenses 1,013,682 604,036
General and administrative expenses 241,634 64,687
Total

                                  $ 3,368,288     $ 996,808

Compensation and related expense

Compensation and related expenses for the three months ended March 31, 2022, and
2021 were $1,674,730 and $279,135, respectively, an increase of $1,395,595 or
500.0% and includes salaries, stock-based compensation, health insurance and
other benefits. The increase in compensation is primarily related to increase of
our full-time employees and an increase in stock-based compensation which
amounted to $822,583 and was attributable to the accretion of stock option
expense.

Marketing and advertising expenses

Marketing and advertising expenses for the three months ended March 31, 2022,
and 2021 were $438,242 and $48,950, an increase of $ 389,292 or 795.3%. The
increase was primarily attributable to increase in social media development for
online media advertising.

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Professional and consulting expenses

During the three months ended March 31, 2022, and 2021, we reported professional
and consulting fees of $1,013,682 and $604,036, respectively, an increase of
$409,646 or 67.8%, which are principally comprised of legal, advisory
consulting, investor relation and other incidental services for the three months
ended March 31, 2022, and 2021, respectively. During the three months ended
March 31, 2022, and 2021, we incurred stock-based consulting expense of $202,275
and $470,000, respectively, which was related the accretion of stock option
expense and from the issuance of our common stock. During the three months ended
March 31, 2022, we incurred $322,000 of recruitment fees as compared to $0 for
the three months ended March 31, 2021. Additionally, during the three months
ended March 31, 2022, we incurred investor relations fees of $347,957 and legal
fees of $71,532. We did not incur these fees during the three months ended March
31, 2021.

General and administrative expenses

General and administrative expenses for the three months ended March 31, 2022,
and 2021 were $241,634 and $64,687, an increase of $176,947, or 273.5%. General
and administrative expenses primarily consisted of the following expense
categories: insurance, travel, utilities, office related expenses and rent
expense. Such increase was primarily attributable to increase in conference
related expenses, insurance expense, travel expense, and filing fees.

Loss from Operations

For the three months ended March 31, 2022, loss from operation amounted to
$3,367,479 as compared to $996,808 for the three months ended March 31, 2021, an
increase of $2,370,671, or 237.8%.

Other Income (Expense)

During the three months ended March 31, 2022, and 2021, we reported other income
(expense) of $1,633 and $37, respectively. During the three months ended March
31, 2022, other income consisted of $1,633 of interest income. For the three
months ended March 31, 2021, other income, net included interest income of $134
offset by interest expense of $97.

Net Loss

For the foregoing reasons, for the three months ended March 31, 2022 and 2021,
net loss amounted to $3,365,846, or ($0.17) per common share (basic and diluted)
and $996,771, or $(0.08) per common share (basic and diluted), respectively, an
increase of $2,369,075, or 237.7%.

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 March 31, 2022 and December 31,
2021, we had cash and cash equivalents of $17,742,334 and $20,199,735,
respectively.

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.

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 Three Months Ended March 31, 2022 and 2021

Cash Flows from Operating Activities

Net cash used in operating activities totaled approximately $2,230,851 and
$650,231 for the three months ended March 31, 2022, and 2021, respectively, an
increase of $1,580,620.

Net cash flow used in operating activities for the three months ended March 31,
2022 primarily reflected a net loss of $3,365,846 adjusted for the add-back of
non-cash items consisting of depreciation of $3,537, amortization of right of
use assets of $11,566 and accretion of stock-based stock option and common stock
expense of $1,024,858, offset by changes in operating assets and liabilities
primarily consisting of a decrease in prepaid expenses of $175,968, a decrease
in accounts payable of $67,998, and a decrease in operating lease liabilities of
$12,433.

Net cash flow used in operating activities for the three months ended March 31,
2021 primarily reflected a net loss of $996,771 adjusted for the add-back of
non-cash items consisting of amortization of right of use assets of $6,686 and
accretion of stock-based common stock expense of $470,000, offset by changes in
operating assets and liabilities primarily consisting of an increase in prepaid
expenses of $143,813, an increase in accounts payable of $20,353, and a decrease
in operating lease liabilities of $6,686.

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Cash Flows from Investing Activities

Net cash used in investing activities amounted to $226,347 and $0 for the three
months ended March 31, 2022, and 2021, respectively. During the three months
ended March 31, 2022, we purchased property and equipment of $22,099, and
purchased digital currencies and other digital assets of $204,248.

Cash Flows from Financing Activities

Net cash (used in) provided by financing activities totaled approximately $(203)
and $1,587,908 for the three months ended March 31, 2022, and 2021,
respectively. During the three months ended March 31, 2022, we repaid related
party advances of $203. During the three months ended March 31, 2021, financing
activities was primarily attributable to net proceeds of approximately
$1,592,972 from the sale of common stock and $95,143 of advances from a related
party, offset by the repayment of related party advances of $92,707 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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