ITEM 1A. RISK FACTORS
An investment in our common stock involves
a high degree of risk. You should carefully consider the following risk factors and the other information in this Annual Report on Form
10-K before investing in our common stock. Our business and results of operations could be seriously harmed by any of the following risks.
The risks set out below 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
following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case,
the value and trading price of our common stock could decline, and you may lose all or part of your investment.
Risks Related to our Business and Industry
We have a limited
operating history and have not yet generated any revenues.
Our limited operating
history makes evaluating the business and future prospects difficult, and may increase the risk of your investment. We were incorporated
in 2014, and since then there have been a limited amount of downloads of the Application. To date, we have no revenues. Since inception
through December 31, 2021, we have recorded accumulated losses of approximately $27.6 million. We intend, in the long term, to derive
revenues from advertisement sales, technology licensing, and other forms of revenue. The Application is available for download on certain
mobile platforms and we are developing compatibility on with other platforms. We also continue to develop and refine functions of the
Application.
We have not developed
a strong customer base, and we have not generated sustainable revenue since inception. We cannot assure you that we ever will. We will
incur significant losses in launching products and we may not realize sufficient subscriptions or profits in order to sustain our business.
We have not yet developed
a strong customer base and we have not generated sustainable revenue since inception. We are subject to the substantial risk of failure
facing businesses seeking to develop and commercialize new products and technologies. Maintaining and improving our platform will require
significant capital. We will also incur substantial accounting, legal and other overhead costs as a public company. If our offerings
to customers are unsuccessful, result in insufficient revenue or result in us not being able to sustain revenue, we will be forced to
reduce expenses, which may result in an inability to gain new customers.
We may fail to
develop new products, or may incur unexpected expenses or delays.
Although the Application
is currently available for download, we may need to develop various new technologies, products and product features to remain competitive.
Due to the risks inherent in developing new products and technologies — limited financing, loss of key personnel, and other factors
— we may fail to develop these technologies and products, or may experience lengthy and costly delays in doing so. Although we
are able to license some of our technologies in their current stage of development, we cannot assure that we will be able to develop
new products or enhancements to our existing products in order to remain competitive.
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We are dependent
on the services of certain key management personnel, employees, and advisors. If we are unable to retain or motivate such individuals
or hire qualified personnel, we may not be able to grow effectively.
We depend on the services
of a number of key management personnel, employees, and advisors and our future performance will largely depend on the talents and efforts
of such individuals. We do not currently maintain “key person” life insurance on any of our employees. The loss of one or
more of such key individuals, or failure to find a suitable successor, could hamper our efforts to successfully operate our business
and achieve our business objectives. Our future success will also depend on our ability to identify, hire, develop, motivate and retain
highly skilled personnel. Competition in our industry for qualified employees is intense, and our compensation arrangements may not always
be successful in attracting new employees and/or retaining and motivating our existing employees. Future acquisitions by us may also
cause uncertainty among our current employees and employees of the acquired entity, which could lead to the departure of key individuals.
Such departures could have an adverse impact on the anticipated benefits of an acquisition.
We may face intense
competition and expect competition to increase in the future, which could prohibit us from developing a customer base and generating
revenue.
We are focused on the
mobile application industry, specifically the mobile messaging market, which is already saturated with established companies. Many of
these companies, including Apple Inc., Alphabet Inc., Facebook, Inc., and Snap Inc., already have an established market in our industry.
Most of these companies have significantly greater financial and other resources than us and have been developing their products and
services longer than we have been developing ours.
The Application
is based on new and unproven technologies and is subject to the risks of failure inherent in the development of new products and services.
Because the Application
is based on certain new technologies, it is subject to risks of failure that are particular to new technologies, including the possibility
that:
● the Application may not gain market acceptance;
● the Application may not receive the exposure required to obtain new users; or
● third parties may market superior products or services.
If we are unable
to maintain a good relationship with the markets where the Application is distributed, our business will suffer.
The Apple App Store
is the primary distribution, marketing, promotion and payment platform for the Application. Any deterioration in our relationship with
Apple or any application market place we utilize in the future would harm our business and adversely affect the value of our common stock.
We are subject to Apple’s
standard terms and conditions for application developers, which govern the promotion, distribution and operation of mobile applications
on its platform. Our business would be harmed if:
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We expect to benefit
from Apple’s strong brand recognition and large user base. If Apple loses its market position or otherwise falls out of favor with
mobile users, we would need to identify alternative channels for marketing, promoting and distributing our application, which would consume
substantial resources and may not be effective. In addition, Apple has broad discretion to change their terms of service and other policies
with respect to us and other developers, and those changes may be unfavorable to us. Any such changes in the future could significantly
alter our users experience or how interact within our application, which may harm our business.
In the event that Apple’s
standard terms and conditions become prohibitively costly or unduly burdensome, we plan to host our own servers in a co-location facility
and create a web-based, desktop version of the Application that does not require users to install the Application from the App store.
The mobile application
industry is subject to rapid technological change and, to compete, we must continually enhance the Application.
We must continue to
enhance and improve the performance, functionality and reliability of the Application. The mobile application industry is characterized
by rapid technological change, changes in user requirements and preferences, frequent new product and services introductions embodying
new technologies and the emergence of new industry standards and practices that could render our product and services obsolete. We have
discovered that some of our customers’ desire additional performance and functionality that the Application, and the underlying
technology, does not currently support. Our success will depend, in part, on our ability to both internally develop leading technologies
to enhance the Application, develop new mobile applications and services that address the increasingly sophisticated and varied needs
of our customers, and respond to technological advances and emerging industry standards and practices on a cost-effective and timely
basis. The development of our technology and other proprietary technology involves significant technical and business risks. We may fail
to use new technologies effectively or to adapt our proprietary technology and systems to customer requirements or emerging industry
standards. If we are unable to adapt to changing market conditions, customer requirements or emerging industry standards, we may not
be able to create revenue and expand our business.
Defects in the
Application and the technology powering it may adversely affect our business.
Tools, code, subroutines
and processes contained within the Application may contain defects not yet discovered or contained in updates and new versions. Our introduction
of new mobile applications or updates and new versions with defects or quality problems may result in adverse publicity, reduced downloads
and use, product redevelopment costs, loss of or delay in market acceptance of our products or claims by customers or others against
us. Such problems or claims may have a material and adverse effect on our business, prospects, financial condition and results of operations.
If we fail to
retain current users or add new users, or if our users engage less with the Application, our business would be seriously harmed.
Adding, maintaining,
and engaging daily monthly users will be essential to attaining our growth targets and sustaining operations. If current and potential
users do not perceive our products to be effective and useful, we may not be able to attract new users, retain existing users, or maintain
or increase the frequency and duration of their engagement. In addition, our products typically require high bandwidth data capabilities,
high-end mobile device penetration and high bandwidth capacity cellular networks with large coverage areas. We therefore do not expect
to experience rapid user growth or engagement in countries with low smartphone penetration even if such countries have well-established
and high bandwidth capacity cellular networks. We may also not experience rapid user growth or engagement in regions where, even though
smartphone penetration is high, due to the lack of sufficient cellular based data networks, consumers rely heavily on Wi-Fi and may not
access our products regularly.
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There are many factors
that could negatively affect user retention, growth, and engagement, including if:
● users increasingly engage with competing products instead of ours;
● we are unable to combat hostile or inappropriate usage on our products;
● we fail to provide adequate service to users;
● we are the subject of adverse media reports or other negative publicity; and
● we do not maintain our brand image or our reputation is damaged.
Any decrease to user
retention, growth, or engagement could render our products less attractive to users, advertisers, or partners, and would seriously harm
our business.
There is a risk
that the public will not perceive the privacy protections that we offer to be necessary or useful and therefore would not be interested
in our services.
No matter how effective
our products might be in affording users control over their privacy, the general public may not perceive our products to be necessary
or useful. In general, although people are more aware than in the past of the amount of personal data that is tracked on a daily basis
with the advent of social media and targeted advertising, mere awareness does not necessarily translate into a desire to take affirmative
action with respect to one’s privacy. For us, this could mean that the average person might not feel the need to have the ability
to delete messages that they have sent. While we believe that the general public will recognize the value of our products and feel empowered
to take control of their privacy, it is possible that a great number of people have come to believe that their personal information cannot
be protected and that any attempt to do so would be ineffective. As such, regardless of how effective our products might be, there is
a risk that the general public might deem our products to be unnecessary and will not be drawn to download and use the Application.
Users may not
want to change the way that they send messages and therefore would not be interested in our products.
Our success is dependent
in part on users altering their behavior and changing the way that they send text messages. Although the Application is fully integrated
with iMessage, the Application requires the user to send the message through a separate text bar, which is located below the ordinary
iMessage bar. Even if users have downloaded the Application, it is possible that users will bypass this option when they go to send a
text message. In addition, our user experience may not be received positively, as some users might find it inconvenient to have two text
bars appearing on the screen at the same time when they go to send a text message. The iMessage integration figure does not currently
allow a user to remove the iMessage bar so that only the Application’s bar appears and it is doubtful that Apple would ever allow
such a feature. Moreover, because both text bars are displayed on the screen at the same time, users may inadvertently send a private
message through iMessage that they intended to send through the Application, thereby defeating the data protection and privacy benefits
that the Application offers. If users do not adapt to seeing and typing messages with two texts bars displayed, our user retention may
suffer.
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The characteristics
of the Application, including but not limited to privacy and encryption, may be exploited to facilitate illegal activity; if any of our
users do so or are alleged to have done so, it could adversely affect us and generate negative perception of our products in the marketplace.
For all of the same
reasons that our products are attractive to the general public, the privacy, data protection and encryption features could appeal to
persons and groups engaged in illegal activities due to the ability of the Application to delete messages from a recipient’s phone.
In this context, the Application may be used to facilitate both illegal activity and the destruction of evidence, which could potentially
draw scrutiny from regulators. In addition, the Application could develop a stigma that it is associated with illegal activity and deter
certain people from communicating through the Application.
Negative publicity
could adversely affect our reputation, our business, and our operating results.
Negative publicity about
our company, including about the quality and reliability of our products, content shared by users through the Application, changes to
our products, policies and services, our privacy and security practices, litigation, regulatory activity, the actions of users on the
Application, or user experience with our products, even if inaccurate, could adversely affect our reputation and the confidence in and
the use of our product. Such negative publicity could also have an adverse effect on the size, engagement, and loyalty of our user base
and, in turn, adversely affect our business, results of operations and financial condition.
We expect to derive
substantially all of our revenue from a single product.
We expect to derive
substantially all of our revenue from the Application. As such, the continued growth in market demand for and market acceptance of the
Application is critical to our continued success. Demand for the Application is affected by a number of factors, many of which are beyond
our control, such as continued market acceptance; the timing of development and release of competing new products; consumer preferences;
the development and acceptance of new features, integrations, and capabilities; price or product changes by us or our competitors; technological
changes and developments within the markets we serve; growth, contraction, and rapid evolution of our market; and general economic conditions
and trends. If we are unable to continue to meet demands of our users or trends in preferences or to achieve more widespread market acceptance
of the Application, our business, results of operations, and financial condition could be harmed. Changes in preferences of users may
have a disproportionately greater impact on us than if we offered multiple products. In addition, competitors may develop or acquire
their own tools or software and people may continue to rely on traditional tools and software, such as text message and email, which
would reduce or eliminate the demand for the Application. If demand declines for any of these or other reasons, our business could be
adversely affected.
The Application
depends on effectively operating with mobile operating systems, hardware, networks, regulations, and standards that we do not control.
Changes in our products or to those operating systems, hardware, networks, regulations, or standards may seriously harm our user growth,
retention, and engagement.
Because the Application
is used primarily on mobile devices, the Application must remain interoperable with popular mobile operating systems, Android and iOS.
The owners of such operating systems, Google and Apple, respectively, each provide consumers with products that compete with ours. We
have no control over these operating systems or hardware, and any changes to these systems or hardware that degrade our products’
functionality, or give preferential treatment to competitive products, could seriously harm DatChat usage on mobile devices. Our competitors
that control the operating systems and related hardware the Application runs on could make interoperability of our products with those
mobile operating systems more difficult or display their competitive offerings more prominently than ours. When introducing new products,
it takes time to optimize such products to function with these operating systems and hardware, impacting the popularity of such products,
and we expect this trend to continue. Moreover, our products require high-bandwidth data capabilities. If the costs of data usage increase,
our user growth, retention, and engagement may be seriously harmed.
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We may not successfully
cultivate relationships with key industry participants or develop products that operate effectively with these technologies, systems,
networks, regulations, or standards. If it becomes more difficult for our users to access and use the Application on their mobile devices,
if our users choose not to access or use the Application on their mobile devices, or if our users choose to use mobile products that
do not offer access to the Application, our user growth, retention, and engagement could be seriously harmed.
Moreover, the adoption
of any laws or regulations that adversely affect the popularity or growth in use of the internet or mobile applications, including laws
or regulations that undermine open and neutrally administered internet access, could decrease user demand for the Application and increase
our cost of doing business. For example, in December 2017, the Federal Communications Commission adopted an order reversing net neutrality
protections in the United States, including the repeal of specific rules against blocking, throttling or “paid prioritization”
of content or services by internet service providers. To the extent internet service providers engage in such blocking, throttling or
“paid prioritization” of content or similar actions as a result of this order and the adoption of similar laws or regulations,
our business, financial condition and results of operations could be materially adversely affected.
Risks Related to Information Technology Systems, Intellectual Property and Privacy Laws
We rely on a single
third-party provider, Amazon Web Services (“AWS”), for computing infrastructure, secure network connectivity, and other technology-related
services needed to deliver our products. Any disruption in the services provided by such third-party provider could adversely affect
our business.
Our products are hosted
from, and use computing infrastructure, secure network connectivity, and other technology-related services provided by AWS. We do not
control the operations of this third-party provider or own the equipment used to provide such services. Because we cannot easily switch
our AWS-serviced operations to another cloud provider, any disruption of or interference with our use of AWS, for example, due to natural
disasters, cyber-attacks, terrorist attacks, power losses, telecommunications failures, or similar events, would impact our operations
and may adversely affect our business, financial condition, operating results and cash flows. In addition, AWS has no obligation to renew
its agreement with us on commercially reasonable terms or at all. If we are unable to renew our agreement on commercially reasonable
terms or develop our blockchain capabilities, we may be required to transition to a new provider, and we may incur significant costs
and possible service interruption in connection with doing so.
In addition, Amazon
may take actions beyond our control that could seriously harm our business, including:
● discontinuing or limiting our access to its cloud platform
● increasing pricing terms;
● terminating or seeking to terminate our contractual relationship altogether;
Amazon has broad discretion
to change and interpret its terms of service and other policies with respect to us, and those actions may be unfavorable to us. They
may also alter how we are able to process data on their cloud platform. If Amazon makes changes or interpretations that are unfavorable
to us, our business could be seriously harmed.
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Major network
failures could have an adverse effect on our business.
Our technology infrastructure
is critical to the performance of the Application and customer satisfaction. The Application runs on a complex distributed system, or
what is commonly known as cloud computing. Some elements of this system are operated by third-parties that we do not control and which
would require significant time to replace. We expect this dependence on third parties to continue. Major equipment failures, natural
disasters, including severe weather, terrorist acts, acts of war, cyber-attacks or other breaches of network or information technology
security that affect third-party networks, communications switches, routers, microwave links, cell sites or other third-party equipment
on which we rely, could cause major network failures and/or unusually high network traffic demands that could have a material adverse
effect on our operations or our ability to provide service to our customers. These events could disrupt our operations, require significant
resources to resolve, result in a loss of customers or impair our ability to attract new customers, which in turn could have a material
adverse effect on our business, prospects, results of operations and financial condition. If we experience significant service interruptions,
which could require significant resources to resolve, it could result in a loss of customers or impair our ability to attract new customers,
which in turn could have a material adverse effect on our business, prospects, results of operations and financial condition. In addition,
with the growth of wireless data services, enterprise data interfaces and Internet-based or Internet Protocol enabled applications, wireless
networks and devices are exposed to a greater degree to third-party data or applications over which we have less direct control. As a
result, the network infrastructure and information systems on which we rely, as well as our customers’ wireless devices, may be
subject to a wider array of potential security risks, including viruses and other types of computer-based attacks, which could cause
lapses in our service or adversely affect the ability of our customers to access our service. Such lapses could have a material adverse
effect on our business, prospects, results of operations and financial condition.
If third parties
claim that we infringe their intellectual property, it may result in costly litigation.
We cannot assure you
that third parties will not claim our current or future products or services infringe their intellectual property rights. Any such claims,
with or without merit, could cause costly litigation that could consume significant management time. As the number of product and services
offerings in the mobile application market increases and functionalities increasingly overlap, companies such as ours may become increasingly
subject to infringement claims. Such claims also might require us to enter into royalty or license agreements. If required, we may not
be able to obtain such royalty or license agreements, or obtain them on terms acceptable to us.
We may not be
able to adequately protect our proprietary technology, and our competitors may be able to offer similar products and services which would
harm our competitive position.
Our success, in part,
depends upon our proprietary technology. We have various forms of intellectual property including patent, copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to establish and protect our proprietary rights. Despite these precautions,
third parties could copy or otherwise obtain and use our technology without authorization, or develop similar technology independently.
We also pursue the registration of our domain names, trademarks, and service marks in the United States. We have also filed patent applications.
However, we cannot provide any assurance that patent applications that we file will ultimately result in an issued patent or, if issued,
that they will provide sufficient protections for our technology against competitors. We cannot assure you that the protection of our
proprietary rights will be adequate or that our competitors will not independently develop similar technology, duplicate our products
and services or design around any intellectual property rights we hold.
We could be harmed
by improper disclosure or loss of sensitive or confidential data.
In connection with the
operation of our business, we plan to process and transmit data. Unauthorized disclosure or loss of sensitive or confidential data may
occur through a variety of methods. These include, but are not limited to, systems failure, employee negligence, fraud or misappropriation,
or unauthorized access to or through our information systems, whether by our employees or third parties, including a cyberattack by computer
programmers, hackers, members of organized crime and/or state-sponsored organizations, who may develop and deploy viruses, worms or other
malicious software programs.
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Such disclosure, loss
or breach could harm our reputation and subject us to government sanctions and liability under laws and regulations that protect sensitive
or personal data and confidential information, resulting in increased costs or loss of revenues. It is possible that security controls
over sensitive or confidential data and other practices we and our third-party vendors follow may not prevent the improper access to,
disclosure of, or loss of such information. The potential risk of security breaches and cyberattacks may increase as we introduce new
services and offerings, such as mobile technology. Further, data privacy is subject to frequently changing rules and regulations, which
sometimes conflict among the various jurisdictions in which we provide services. Any failure or perceived failure to successfully manage
the collection, use, disclosure, or security of personal information or other privacy related matters, or any failure to comply with
changing regulatory requirements in this area, could result in legal liability or impairment to our reputation in the marketplace.
Unauthorized breaches
or failures in cybersecurity measures adopted by us and/or included in our products and services could have a material adverse effect
on our business.
Information security
risks have generally increased in recent years, in part because of the proliferation of new technologies and the use of the Internet,
and the increased sophistication and activity of organized crime, hackers, terrorists, activists, cybercriminals and other external parties,
some of which may be linked to terrorist organizations or hostile foreign governments. Cybersecurity attacks are becoming more sophisticated
and include malicious attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions
in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data, substantially damaging
our reputation. Our security systems are designed to maintain the security of our users’ confidential information, as well as our
own proprietary information. Accidental or willful security breaches or other unauthorized access by third parties or our employees,
our information systems or the systems of our third-party providers, or the existence of computer viruses or malware in our or their
data or software could expose us to risks of information loss and misappropriation of proprietary and confidential information, including
information relating to our products or customers and the personal information of our employees.
In addition, we could
become subject to unauthorized network intrusions and malware on our own IT networks. Any theft or misuse of confidential, personal or
proprietary information as a result of such activities or failure to prevent security breaches could result in, among other things, unfavorable
publicity, damage to our reputation, loss of our trade secrets and other competitive information, difficulty in marketing our products,
allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible financial
obligations for liabilities and damages related to the theft or misuse of such information, as well as fines and other sanctions resulting
from any related breaches of data privacy regulations, any of which could have a material adverse effect on our reputation, business,
profitability and financial condition. Furthermore, the techniques used to obtain unauthorized access or to sabotage systems change frequently
and are often not recognized until launched against a target, and we may be unable to anticipate these techniques or to implement adequate
preventative measures.
We may be subject
to stringent and changing laws, regulations, standards, and contractual obligations related to privacy, data protection, and data security.
Our actual or perceived failure to comply with such obligations could adversely affect our business.
We receive, collect,
store, and process certain personally identifiable information about individuals and other data relating to users of the Application.
We have legal and contractual obligations regarding the protection of confidentiality and appropriate use of certain data, including
personally identifiable and other potentially sensitive information about individuals. We may be subject to numerous federal, state,
local, and international laws, directives, and regulations regarding privacy, data protection, and data security and the collection,
storing, sharing, use, processing, transfer, disclosure, disposal and protection of information about individuals and other data, the
scope of which are changing, subject to differing interpretations, and may be inconsistent among jurisdictions or conflict with other
legal and regulatory requirements. We strive to comply with our applicable data privacy and security policies, regulations, contractual
obligations, and other legal obligations relating to privacy, data protection, and data security. However, the regulatory framework for
privacy, data protection and data security worldwide is, and is likely to remain for the foreseeable future, uncertain and complex, and
it is possible that these or other actual or alleged obligations may be interpreted and applied in a manner that we do not anticipate
or that is inconsistent from one jurisdiction to another and may conflict with other legal obligations or our practices. Further, any
significant change to applicable laws, regulations or industry practices regarding the collection, use, retention, security, processing,
transfer or disclosure of data, or their interpretation, or any changes regarding the manner in which the consent of users or other data
subjects for the collection, use, retention, security, processing, transfer or disclosure of such data must be obtained, could increase
our costs and require us to modify our services and features, possibly in a material manner, which we may be unable to complete, and
may limit our ability to receive, collect, store, process, transfer, and otherwise use user data or develop new services and features.
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If we are found in violation
of any applicable laws or regulations relating to privacy, data protection, or security, our business may be materially and adversely
affected and we would likely have to change our business practices and potentially the services and features, integrations or other capabilities
of the Application. In addition, these laws and regulations could impose significant costs on us and could constrain our ability to use
and process data in a commercially desirable manner. In addition, if a breach of data security were to occur or be alleged to have occurred,
if any violation of laws and regulations relating to privacy, data protection or data security were to be alleged, or if we were to discover
any actual or alleged defect in our safeguards or practices relating to privacy, data protection, or data security, the Application may
be perceived as less desirable and our business, financial condition, results of operations and growth prospects could be materially
and adversely affected.
We also expect that
there will continue to be new laws, regulations, and industry standards concerning privacy, data protection, and information security
proposed and enacted in various jurisdictions. For example, the California Consumer Privacy Act (“CCPA”), which came into
force in 2020, provides new data privacy rights for California consumers and new operational requirements for covered companies. Specifically,
the CCPA mandates that covered companies provide new disclosures to California consumers and afford such consumers new data privacy rights
that include, among other things, the right to request a copy from a covered company of the personal information collected about them,
the right to request deletion of such personal information, and the right to request to opt-out of certain sales of such personal information.
The California Attorney General can enforce the CCPA, including seeking an injunction and civil penalties for violations. The CCPA also
provides a private right of action for certain data breaches that is expected to increase data breach litigation. Additionally, a new
privacy law, the California Privacy Rights Act (“CPRA”), was approved by California voters in the November 3, 2020 election.
The CPRA generally takes effect on January 1, 2023 and significantly modifies the CCPA, including by expanding consumers’ rights
with respect to certain personal information and creating a new state agency to oversee implementation and enforcement efforts, potentially
resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply. Some observers have
noted the CCPA and CPRA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could
also increase our potential liability and adversely affect our business. For example, the CCPA has encouraged “copycat” or
other similar laws to be considered and proposed in other states across the country, such as in Virginia, New Hampshire, Illinois and
Nebraska. This legislation may add additional complexity, variation in requirements, restrictions and potential legal risk, require additional
investment in resources to compliance programs, could impact strategies and availability of previously useful data and could result in
increased compliance costs and/or changes in business practices and policies.
Various U.S. federal
privacy laws are potentially relevant to our business, including the Federal Trade Commission Act, Controlling the Assault of Non-Solicited
Pornography and Marketing Act, the Family Educational Rights and Privacy Act, the Children’s Online Privacy Protection Act, and
the Telephone Consumer Protection Act. Any actual or perceived failure to comply with these laws could result in a costly investigation
or litigation resulting in potentially significant liability, injunctions and other consequences, loss of trust by our users, and a material
and adverse impact on our reputation and business.
In addition, the data
protection landscape in the EU is continually evolving, resulting in possible significant operational costs for internal compliance and
risks to our business. The EU adopted the General Data Protection Regulation (“GDPR”), which became effective in May 2018,
and contains numerous requirements and changes from previously existing EU laws, including more robust obligations on data processors
and heavier documentation requirements for data protection compliance programs by companies.
Among other requirements,
the GDPR regulates the transfer of personal data subject to the GDPR to third countries that have not been found to provide adequate
protection to such personal data, including the United States. Recent legal developments in Europe have created complexity and uncertainty
regarding such transfers. For instance, on July 16, 2020, the Court of Justice of the European Union (the “CJEU”) invalidated
the EU-U.S. Privacy Shield Framework (the “Privacy Shield”) under which personal data could be transferred from the European
Economic Area to U.S. entities who had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard
contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism
and potential alternative to the Privacy Shield), it made clear that reliance on such clauses alone may not necessarily be sufficient
in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal
regime applicable in the destination country, including, in particular, applicable surveillance laws and rights of individuals, and additional
measures and/or contractual provisions may need to be put in place; however, the nature of these additional measures is currently uncertain.
The CJEU also states that if a competent supervisory authority believes that the standard contractual clauses cannot be complied with
in the destination country and that the required level of protection cannot be secured by other means, such supervisory authority is
under an obligation to suspend or prohibit that transfer.
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Additionally, the GDPR
greatly increased the European Commission’s jurisdictional reach of its laws and added a broad array of requirements for handling
personal data. EU member states are tasked under the GDPR to enact, and have enacted, certain implementing legislation that adds to and/or
further interprets the GDPR requirements and potentially extends our obligations and potential liability for failing to meet such obligations.
The GDPR, together with national legislation, regulations and guidelines of the EU member states a governing the processing of personal
data, impose strict obligations and restrictions on the ability to collect, use, retain, protect, disclose, transfer and otherwise process
personal data. In particular, the GDPR includes obligations and restrictions concerning the consent and rights of individuals to whom
the personal data relates, security breach notifications and the security and confidentiality of personal data.
Failure to comply with
the GDPR could result in penalties for noncompliance (including possible fines of up to the greater of €20 million and 4% of our
global annual turnover for the preceding financial year for the most serious violations, as well as the right to compensation for financial
or non-financial damages claimed by individuals under Article 82 of the GDPR).
In addition to the GDPR,
the European Commission has another draft regulation in the approval process that focuses on a person’s right to conduct a private
life. The proposed legislation, known as the Regulation of Privacy and Electronic Communications (“ePrivacy Regulation”),
would replace the current ePrivacy Directive. While the text of the ePrivacy Regulation is still under development, a recent European
court decision and regulators’ recent guidance are driving increased attention to cookies and tracking technologies. If regulators
start to enforce the strict approach in recent guidance, this could lead to substantial costs, require significant systems changes, limit
the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase
costs and subject us to additional liabilities. Regulation of cookies and similar technologies may lead to broader restrictions on our
marketing and personalization activities and may negatively impact our efforts to understand users.
Further, in March 2017,
the United Kingdom formally notified the European Council of its intention to leave the EU pursuant to Article 50 of the Treaty on European
Union (“Brexit”). The United Kingdom ceased to be an EU Member State on January 31, 2020, but enacted a Data Protection Act
substantially implementing the GDPR (“U.K. GDPR”), effective in May 2018, which was further amended to align more substantially
with the GDPR following Brexit. It is unclear how U.K. data protection laws or regulations will develop in the medium to longer term
and how data transfers to and from the United Kingdom will be regulated. Some countries also are considering or have enacted legislation
requiring local storage and processing of data that could increase the cost and complexity of delivering our services. Beginning in 2021
when the transitional period following Brexit expired, we are required to comply with both the GDPR and the U.K. GDPR, with each regime
having the ability to fine up to the greater of €20 million (in the case of the GDPR) or £17 million (in the case of the U.K.
GDPR) and 4% of total annual revenue. The relationship between the United Kingdom and the EU in relation to certain aspects of data protection
law remains unclear, including, for example, how data transfers between EU member states and the United Kingdom will be treated and the
role of the United Kingdom’s Information Commissioner’s Office following the end of the transitional period. These changes
could lead to additional costs and increase our overall risk exposure.
Any failure or perceived
failure by us to comply with our posted privacy policies, our privacy-related obligations to users, or any other legal obligations or
regulatory requirements relating to privacy, data protection, or data security, may result in governmental investigations or enforcement
actions, litigation, claims, or public statements against us by consumer advocacy groups, or others and could result in significant liability,
cause our users to lose trust in us, and otherwise materially and adversely affect our reputation and business. Furthermore, the costs
of compliance with, and other burdens imposed by, the laws, regulations, other obligations, and policies that are applicable to the businesses
of our users may limit the adoption and use of, and reduce the overall demand for, the Application. Further, public scrutiny of, or complaints
about, technology companies or their data handling or data protection practices, even if unrelated to our business, industry or operations,
may lead to increased scrutiny of technology companies, including us, and may cause government agencies to enact additional regulatory
requirements, or to modify their enforcement or investigation activities, which may increase our costs and risks. Any of the foregoing
could materially and adversely affect our business, financial condition and results of operations.
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Online applications
are subject to various laws and regulations relating to children’s privacy and protection, which if violated, could subject us
to an increased risk of litigation and regulatory actions.
A variety of laws and
regulations have been adopted in recent years aimed at protecting children using the internet such as the COPPA and Article 8 of the
GDPR. We implement certain precautions to ensure that we do not knowingly collect personal information from children under the age of
13 through the Application. Despite our efforts, no assurances can be given that such measures will be sufficient to completely avoid
allegations of COPPA violations, any of which could expose us to significant liability, penalties, reputational harm and loss of revenue,
among other things. Additionally, new regulations are being considered in various jurisdictions to require the monitoring of user content
or the verification of users’ identities and age. Such new regulations, or changes to existing regulations, could increase the
cost of our operations.
Risks Related to
Our Common Stock and Series A Warrants
The price of our
common stock and our Series A Warrants may fluctuate substantially.
You should consider
an investment in our common stock and Series A Warrants to be risky, and you should invest in our common stock and Series A Warrants
only if you can withstand a significant loss and wide fluctuations in the market value of your investment. Some factors that may cause
the market price of our common stock to fluctuate, in addition to the other risks mentioned in this “Risk Factors” section
and elsewhere in this prospectus, are:
● sale of our common stock by our shareholders, executives, and directors;
● volatility and limitations in trading volumes of our shares of common stock;
● our ability to obtain financing;
● our ability to attract new customers;
● our cash position;
● our inability to enter into new markets or develop new products;
● reputational issues;
● changes in industry conditions or perceptions;
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● departures and additions of key personnel;
● other events or factors, many of which may be out of our control.
In addition, if the
market for stocks in our industry or industries related to our industry, or the stock market in general, experiences a loss of investor
confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition and results
of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful,
could be costly to defend and a distraction to management.
We may acquire
other companies or technologies, which could divert our management’s attention, result in dilution to our stockholders and otherwise
disrupt our operations and adversely affect our operating results.
We may in the future
seek to acquire or invest in businesses, applications and services or technologies that we believe could complement or expand our services,
enhance our technical capabilities or otherwise offer growth opportunities. The pursuit of potential acquisitions may divert the attention
of management and cause us to incur various expenses in identifying, investigating and pursuing suitable acquisitions, whether or not
they are consummated.
In addition, we do not
have any experience in acquiring other businesses. If we acquire additional businesses, we may not be able to integrate the acquired
personnel, operations and technologies successfully, or effectively manage the combined business following the acquisition. We also may
not achieve the anticipated benefits from the acquired business due to a number of factors, including:
● unanticipated costs or liabilities associated with the acquisition;
● diversion of management’s attention from other business concerns;
● the potential loss of key employees;
● use of resources that are needed in other parts of our business; and
In addition, a significant
portion of the purchase price of companies we acquire may be allocated to acquired goodwill and other intangible assets, which must be
assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take
charges to our operating results based on this impairment assessment process, which could adversely affect our results of operations.
Acquisitions could also
result in dilutive issuances of equity securities or the incurrence of debt, which could adversely affect our operating results. In addition,
if an acquired business fails to meet our expectations, our operating results, business and financial position may suffer.
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If research analysts
do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock or Series A Warrants,
our securities’ price and trading volume could decline.
The trading market for
our securities may depend in part on the research and reports that research analysts publish about us and our business. If we do not
maintain adequate research coverage, or if any of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable
research about our business, the price of our common stock and Series A Warrants could decline. If one or more of our research analysts
ceases to cover our business or fails to publish reports on us regularly, demand for our securities could decrease, which could cause
the price of our common stock and Series A Warrants or trading volume to decline.
We may issue additional
equity securities, or engage in other transactions that could dilute our book value or relative rights of our common stock, which may
adversely affect the market price of our common stock and Series A Warrants.
Our board of directors
may determine from time to time that it needs to raise additional capital by issuing additional shares of our common stock or other securities.
Except as otherwise described in this prospectus, we will not be restricted from issuing additional common stock, including securities
that are convertible into or exchangeable for, or that represent the right to receive, shares of our common stock. Because our decision
to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or
estimate the amount, timing, or nature of any future offerings, or the prices at which such offerings may be affected. Additional equity
offerings may dilute the holdings of existing shareholders or reduce the market price of our common stock and Series A Warrants, or all
of them. Holders of our securities are not entitled to pre-emptive rights or other protections against dilution. New investors also may
have rights, preferences and privileges that are senior to, and that adversely affect, then-current holders of our securities. Additionally,
if we raise additional capital by making offerings of debt or preference shares, upon our liquidation, holders of our debt securities
and preference shares, and lenders with respect to other borrowings, may receive distributions of its available assets before the holders
of our common stock.
Market and economic
conditions may negatively impact our business, financial condition and share price.
Concerns over inflation,
energy costs, geopolitical issues, the U.S. mortgage market and a declining real estate market, unstable global credit markets and financial
conditions, and volatile oil prices have led to periods of significant economic instability, diminished liquidity and credit availability,
declines in consumer confidence and discretionary spending, diminished expectations for the global economy and expectations of slower
global economic growth going forward, increased unemployment rates, and increased credit defaults in recent years. Our general business
strategy may be adversely affected by any such economic downturns, volatile business environments and continued unstable or unpredictable
economic and market conditions. If these conditions continue to deteriorate or do not improve, it may make any necessary debt or equity
financing more difficult to complete, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and
on favorable terms could have a material adverse effect on our growth strategy, financial performance, and share price and could require
us to delay or abandon development or commercialization plans.
The ability of
a stockholder to recover all or any portion of such stockholder’s investment in the event of a dissolution or termination may be
limited.
In the event of a dissolution
or termination of the Company, the proceeds realized from the liquidation of the assets of the Company or such subsidiaries will be distributed
among the stockholders, but only after the satisfaction of the claims of third-party creditors of the Company. The ability of a stockholder
to recover all or any portion of such stockholder’s investment under such circumstances will, accordingly, depend on the amount
of net proceeds realized from such liquidation and the amount of claims to be satisfied therefrom. There can be no assurance that the
Company will recognize gains on such liquidation, nor is there any assurance that Common Stock holders will receive a distribution in
such a case.
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We do not intend
to pay cash dividends on our shares of common stock so any returns will be limited to the value of our shares.
We currently anticipate
that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying
any cash dividends for the foreseeable future. Any return to shareholders will therefore be limited to the increase, if any, of our share
price.
We are an “emerging
growth company” and are able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which
could make our common stock less attractive to investors.
We are an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and we have elected
to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not
“emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b)
of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements,
and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any
golden parachute payments not previously approved. In addition, pursuant to Section 107 of the JOBS Act, as an “emerging growth
company” we have elected to 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. As such, our financial statements may
not be comparable to companies that comply with public company effective dates.
We cannot predict if
investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock
less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” 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 $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our initial
public offering; (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.
We may be at risk
of securities class action litigation.
We may be at risk of
securities class action litigation. In the past, small-cap issuers have experienced significant stock price volatility, particularly
when associated with regulatory requirements by governmental authorities, which our industry now increasingly faces. If we face such
litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our
business and results in a decline in the market price of our common stock.
Financial reporting
obligations of being a public company in the United States are expensive and time-consuming, and our management will be required to devote
substantial time to compliance matters.
As a publicly traded
company, we will incur significant additional legal, accounting and other expenses that we did not incur as a privately company. The
obligations of being a public company in the United States require significant expenditures and will place significant demands on our
management and other personnel, including costs resulting from public company reporting obligations under the Exchange Act and the rules
and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”)
the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the listing requirements of the stock exchange on which our securities
are listed. These rules require the establishment and maintenance of effective disclosure and financial controls and procedures, internal
control over financial reporting and changes in corporate governance practices, among many other complex rules that are often difficult
to implement, monitor and maintain compliance with. Moreover, despite recent reforms made possible by the JOBS Act, the reporting requirements,
rules, and regulations will make some activities more time-consuming and costly, particularly after we are no longer an “emerging
growth company.” In addition, we expect these rules and regulations to make it more difficult and more expensive for us to obtain
director and officer liability insurance. Our management and other personnel will need to devote a substantial amount of time to ensure
that we comply with all of these requirements and to keep pace with new regulations, otherwise we may fall out of compliance and risk
becoming subject to litigation or being delisted, among other potential problems.
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If we fail to
comply with the rules under Sarbanes-Oxley related to accounting controls and procedures in the future, or, if we discover material weaknesses
and other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital