Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 22
Item 1C. Cybersecurity 23
Item 2. Properties 23
Item 3. Legal Proceedings 23
Item 4. Mine Safety Disclosures 23
Item 6. [Reserved] 24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9A. Controls and Procedures 32
Item 9B. Other Information 32
Item 9C. Disclosure Regarding Foreign Jurisdiction that Prevent Inspections 32
Part III 33
Item 10. Directors, Executive Officers and Corporate Governance 33
Item 11. Executive Compensation 36
Item 14. Principal Accountant Fees and Services 40
Item 15. Exhibit and Financial Statement Schedules 41
Signatures 43
i
CAUTIONARY
NOTE ON FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Any statements in this Annual Report on Form 10-K about our expectations, beliefs, plans, objectives, assumptions or future
events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through
the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,”
“intend,” “plan” and “would.” For example, statements concerning financial condition, possible or
assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common
stock and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees
of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity,
performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied
by any forward-looking statement.
Any
forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout this Annual Report on
Form 10-K. Some of the risks, uncertainties and assumptions that could cause actual results to differ materially from estimates or projections
contained in the forward-looking statements include, but are not limited to:
● our business strategies;
● the timing of regulatory submissions;
● risks related to market acceptance of products;
● intellectual property risks;
● risks associated to our reliance on third party organizations;
● our competitive position;
● our industry environment;
● management’s expectation with respect to future acquisitions;
● our cash needs and financing plans.
The
foregoing list sets forth some, but not all, of the factors that could affect our ability to achieve results described in any forward-looking
statements. You should read this Annual Report on Form 10-K and the documents that we reference herein and have filed as exhibits to
the Annual Report on Form 10-K, completely and with the understanding that our actual future results may be materially different from
what we expect. You should assume that the information appearing in this Annual Report on Form 10-K is accurate as of the date hereof.
Because the risk factors referred to on page 6 of this Annual Report on Form 10-K, could cause actual results or outcomes to differ materially
from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking
statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we
undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement
is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to
predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
We qualify all of the information presented in this Annual Report on Form 10-K, and particularly our forward-looking statements, by these
cautionary statements.
ii
RISK
FACTOR SUMMARY
Our
business is subject to significant risks and uncertainties that make an investment in us speculative and risky. Below we summarize what
we believe are the principal risk factors but these risks are not the only ones we face, and you should carefully review and consider
the full discussion of our risk factors in the section titled “Risk Factors,” together with the other information in this
Annual Report on Form 10-K. If any of the following risks actually occurs (or if any of those listed elsewhere in this Annual Report
on Form 10-K occur), our business, reputation, financial condition, results of operations, revenue, and future prospects could be seriously
harmed. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important
factors that adversely affect our business. Further, any forward-looking statement speaks only as of the date on which it is made, and
except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after
the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and
it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any
forward-looking statements. We qualify all of the information presented in this Annual Report on Form 10-K, and particularly our forward-looking
statements, by these cautionary statements.
Risks
Related to our Business and Industry
● We have a limited operating history
Risks
Related to Information Technology Systems, Intellectual Property and Privacy Laws
● Major network failures could have an adverse effect on our business.
Risks
Related to Our Common Stock and Series A Warrants
iii
PART
I
ITEM
1. BUSINESS
Overview
We
are a blockchain, cybersecurity, and social media company that not only focuses on protecting privacy on personal devices, but also protects
user information after it is shared with others. We believe that one’s right to privacy should not end the moment they click “send”,
and that we all deserve the same right to privacy online that we enjoy in our own living rooms. Our flagship product, DatChat Messenger
& Private Social Network, is a privacy platform and mobile application that gives users the ability to communicate with the privacy
and protection they deserve. Recently, we have expanded our business and product offerings to include the co-development of a mobile-based
social and gaming metaverse, known as “Habytat”, as well as the development of Museum, an a social network and multi-media
storage platform for consumers and enterprises.
DatChat
Messenger & Private Social Network
Our
platform allows users to exercise control over their messages and posts, even after they are sent. Through our application, users can
delete messages that they have sent, on their own device and the recipient’s device as well. There is no set time limit within
which they must exercise this choice. A user can elect at any time to delete a message that they previously sent to a recipient’s
device.
The
application also enables users to hide secret and encrypted messages behind a cover, which messages can only be unlocked by the recipient
and which are automatically destroyed after a fixed number of views or fixed amount of time. Users can decide how long their messages
last on the recipient’s device. The application also includes a screen shot protection system, which makes it virtually impossible
for the recipient to screenshot a message or picture before it gets destroyed. In addition, users can delete entire conversations at
any time, making it like the conversation never even happened.
In
addition to the foregoing, the application also provides users with the ability to connect via an encrypted live video chat that also
is designed to prevent screenshots or screen grabs. The application integrates with iMessage, making private messages potentially available
to hundreds of millions of users.
Habytat
In
June 2022, we formed a wholly owned subsidiary, Dragon Interactive, Inc. (formerly, SmarterVerse, Inc.) (“Dragon Interactive”).
In July 2022, Dragon Interactive entered into a development agreement with MetaBizz, LLC, an infrastructure firm that creates and develops
4D experiences in the metaverse (“MetaBizz”). In August 2022, we launched the “Habytat”, a virtual space that
blends real world and virtual realities into one, in real time, using emerging technology like virtual and augmented reality, to create
a highly immersive 3D environment. Habytat is supported by proprietary artificial intelligence (“AI”) and utilizes a machine
learning engine to develop more realistic looking content, daily rewards, games, and new utilities that are designed to further enhance
the user experience in an engaging way. Our goal is to leverage our patents and develop new technology that leads to more people joining
and seeing the value in the metaverse. The development agreement with MetaBizz is no longer active.
Each
Habytat user is granted user rights to use a designated piece of virtual property in Geniuz City, the first world within Habytat, through
the minting and issuance of a unique NFT. Geniuz City is designed to be a near photo-realistic world based on Miami’s Wynwood arts district
and its surrounding areas. Geniuz City enables users to visit art galleries, explore the town, interact with other users, take selfies
with famous landmarks, customize their properties and enjoy the culture of Geniuz City.
Users
will be able to customize their virtual property to represent their personal style and taste. Users will then be able to accumulate reward
points when they visit and interact with such virtual property or invite others to join Habytat, and such rewards can be used to enhance,
expand, and improve their virtual property. The official in-world currency of Habytat is the “Nirad,” which can be earned
through participation on the DatChat Social Network+ or the Habytat and used to upgrade properties and experiences in Habytat.
As
of March 28, 2024, we had over 140,000 Habytat users.
Mobile
Metaverse
In
May 2023, we launched the open mobile metaverse, Habytat 1.0, as part of our mission to democratize access to the metaverse. We hope
that by making Habytat available via mobile devices and offering free ownership of virtual land and homes, that Habytat will break down
obstacles that previously limited participation, such as the necessity for expensive virtual reality (“VR”) gear or metaverse
properties. We have assembled a team of over twenty game developers, graphic artists and back-end developers to create Habytat 1.0.
-1-
HabyPets
In
August 2023, we launched a series of novel AI-powered pets called “HabyPets.” HabyPets provides an interactive experience
within the Habytat world, creating a more immersive and personal experience for users. Supported by Habytat’s proprietary AI and machine
learning engine, HabyPets grow over time from playful companions to mature adult pets. Similar to real-life pets, these AI pets can be
trained by users via a range of behavioral commands, replicating the natural progression of real pets over time. These include, but are
not limited to, catching frisbees, playing with toys, engaging in tug of war, and even participating in thrilling races with other pets
at the park. By actively engaging with their pets, users can establish a connection and provide proper care for their virtual companions,
fostering a realistic experience within the Habytat metaverse.
Myseum
We
are currently developing “Myseum,” a platform that will allow users to create a personal museum designed to easily share
pictures, videos and documents utilizing planned features, such as creating instant sharing spaces at family gatherings, time released
video messages, multi-tiered social media, and secure family document storage and sharing. Currently, Myseum is scheduled to launch in
the second quarter of 2024 and will encompass features and social networking technology designed to unlock and share digital media.
Spin-off
and Name Change
In January 2024, we announced plans to spin-off the
Habytat platform business into a new standalone public company pursuant to a distribution as further discussed below. As of the date of
this Annual Report, we currently own approximately 71.5% of Dragon Interactive, the entity that owns and operates the Habytat Platform
business. This marked a significant step forward in our corporate strategy to reposition the Company as a pureplay social media ecosystem
centered around our Myseum assets.
In February 2024, Darin Myman was appointed as President
of SmarterVerse.
In February 2024, SmarterVerse changed its name to
Dragon Interactive Corporation.
If the distribution proceeds, our shareholders will
maintain their current shares in the Company and receive a pro-rata distribution of a portion of our shares of Dragon Interactive. The
proposed distribution remains subject to approval by our board of directors as well as other customary conditions, including the filing
and effectiveness of either a Form S-1 or Form 10 registration statement with the U.S. Securities and Exchange Commission and obtaining
of any other required regulatory approvals. Upon consummation of the proposed distribution, Dragon Interactive would become a standalone
public company with plans seek a listing on a national stock exchange. No assurance can be given that the spin-off and/or the distribution
will occur as anticipated or at all.
Competition
DatChat
Messenger & Private Social Network
The
current market for mobile messenger applications is highly competitive, and we expect that it will remain competitive. There are currently
several large companies that provide mobile messenger applications and we expect several more competitors to enter into this market in
the next few years. Well-established competitors include Snapchat, WhatsApp, Facebook Messenger, Facebook, Telegram, MeWe, Confide and
Apple iMessage. We believe that it is the range of privacy and security features that we offer that sets us apart from our competitors.
Our
flagship applications are the DatChat Privacy Platform and Private Encrypted Social Network, which address the needs of consumers and
businesses to communicate with increased levels of privacy and control over messages and social posts, even after they are sent or shared.
In addition, we are developing a blockchain-based, decentralized communications platform that is being designed to allow consumers and
businesses to connect directly with each other.
-2-
Observing
that mobile messaging and social media users are drawn to several different messaging platforms by specific capabilities, we set out
to create the application to consolidate popular messaging and social media features such as group chats, emoticons and video sharing,
offer new and unique features such as being able to “nuke” a conversation to remove all traces of it from all parties involved,
and deliver increased levels of privacy and security. As public concerns over privacy in an ever-expanding digital society grow, the
application offers comfort to its users with extensive control over their messages and posts, even after they are sent or shared. The
application allows users to not only control how long or how many times a message or post may be viewed by the recipient, but also allows
the sender to erase the message or entire conversation after it is sent. Our goal is to make the application a leader in the mobile secure
messaging and social media market based upon our proprietary technology and enhanced privacy and security features. We intend to roll
out additional features including video chat, attachments, unique social posts and other features to enhance the messaging and social
media experience.
Software
and Development
DatChat
Messenger & Private Social Network
Our
ability to compete depends in large part on our continuous commitment to research and development, our ability to rapidly introduce new
features and functionality and our ability to improve proven applications for established markets in which we have competitive advantages.
We intend to work closely with our customers to continuously enhance the performance, functionality, usability, reliability and flexibility
of the application.
Our
software and development team is responsible for the design enhancements, development, testing and certification of the application.
In addition, we may, in the future, utilize third parties for our automated testing, managed upgrades, software development and other
technology services. We are also developing video messages and video messages containing hidden messages embedded in the video stream.
We anticipate that the video messaging currently under development will allow users to change the number of views allowed or destruct
the message after being sent, in addition to setting the message to auto-self-destruct. We are also in the process of developing a private
and encrypted social wall/network.
Habytat
and HabyPets
Our
software and development is led by SmarterVerse’s Chief Technology Officer, Rene J. Palacio Mongui, and Chief Operating Officer,
Ingrith Gartner Salazar. The software and development team is responsible for the engineering, development, design, integration and testing
of the Habytat metaverse and the HabyPets AI platform.
Marketing
and Monetization
DatChat
Messenger & Private Social Network
The
application is currently offered for free on Apple’s App Store and Google Play. Initial marketing is expected to consist of
public relations, “cost-per-install” campaigns, social media marketing using the Facebook’s ad platform and other readily
available advertising platforms.
We
anticipate utilizing social influencers and additional public relations strategies to promote the application on a global basis,
which also includes making the application available for use in other languages.
We
also plan to add in-app purchases such as user customization features, unique emoticons, stickers and long form video messages to monetize the
application.
We
anticipate monetizing the application with a subscription-based service for small and medium size businesses. In the future,
we may develop other mobile applications and services for consumers once our user base reaches a level at which we deem it to be economically
feasible. No assurance can be given that we will successfully develop new or future applications that will be embraced by users or generate
revenue.
-3-
Intellectual
Property Portfolio
DatChat
Messenger & Private Social Network
We
strive to protect and enhance the proprietary technology and inventions that are commercially important to our business, including seeking,
maintaining and defending patent rights. Our policy is to seek to protect our proprietary position through a combination of intellectual
property rights in the United States, including patents, trademarks, copyrights, trade secret laws and internal procedures. Our commercial
success will depend in part on our ability to protect our intellectual property and proprietary technologies.
As of March 28, 2024, we had 11 issued patents,
no notices of allowance and 3 filed patent applications in the United States relating to our encryption technologies, blockchain platform
and digital assets. Our issued patents will expire in 2036. In addition, we plan to continue expanding and strengthening our IP portfolio
with additional patent applications in the future. We may not be able to obtain protection for our intellectual property, and our existing
and future patents, trademarks, and other intellectual property rights may not provide us with competitive advantages or distinguish our
products and services from those of our competitors. Our pending patent application and future applications may not result in the issuance
of patents, and any resulting issued patents may have claims narrower than those in our patent applications. Additionally, our current
and future patents, trademarks, and other intellectual property rights may be contested, circumvented, or found unenforceable or invalid,
and we may not be able to prevent third parties from infringing them. Our internal controls may not always be effective at preventing
unauthorized parties from obtaining our intellectual property and proprietary technologies.
Other
companies that own patents, copyrights, trademarks, trade secrets, and other intellectual property rights related to the mobile, encryption,
blockchain, communication, privacy, internet, and other technology-related industries frequently enter into litigation based on allegations
of infringement, misappropriation, and other violations of intellectual property or other rights. Third parties, including our competitors,
may make claims from time to time that we have infringed their patents, trademarks, copyrights, trade secrets, or other intellectual
property rights. As our business grows and competition rises, the risk of facing claims related to intellectual property and litigation
matters will likely increase.
Our
Privacy Policy
Privacy
and security are the foundations of our Company. We recognize that this is why users are drawn to the application and that our users
care deeply about how their personal information is collected, used and shared. When you read our Privacy Policy, we hope that you notice
that it has been written to advance our core principles and protect the integrity of the application.
When
users sign up for the application, they are required to provide us with certain personal information such as their name, email address
and phone number. We take commercially reasonable and appropriate measures to protect this personal information from accidental loss,
misuse, and unauthorized access, disclosure, alteration, or destruction, taking into account the risks involved in processing and the
nature of such data, and comply with applicable laws and regulations. We do not currently transfer any personal information to third-parties
that do not act on our behalf, and we will not do so without users’ opt-in consent. Similarly, we do not currently collect sensitive
personal information from users without opt-in consent. We may disclose personal information to certain types of third-party companies,
but only to the extent needed to enable them to provide such services. The types of companies that may receive personal information and
their functions are: marketing assistance, analytics and reporting, customer support, email and SMS delivery, cloud infrastructure, and
systems monitoring. All such third parties function as our agents, performing services at our instruction and on our behalf pursuant
to contracts which require them to provide at least the same level of privacy protection as is required by our Privacy Policy. In addition,
we may be required to disclose personal information in response to lawful requests by public authorities, including for the purpose of
meeting national security or law enforcement requirements. We may also disclose personal information to other third parties when compelled
to do so by government authorities or required by law or regulation including, but not limited to, in response to court orders and subpoenas.
-4-
With
respect to retention of personal information, we may only retain such users’ personal information in a form that identifies them
only for as long as it serves the purpose(s) for which it was initially collected as stated in our Privacy Policy, or subsequently authorized.
We may continue processing users’ personal information for longer periods, but only for the time and to the extent such processing
reasonably serves the purposes of statistical analysis, and subject to the protection of our Privacy Policy. After such time periods
have expired, we may either delete the personal information or retain it in a form such that it does not identify the user personally.
Most
importantly, when users send an encrypted message through the application, we may only temporarily process and store the message in its
encrypted form. We do not (and cannot) read our users’ encrypted messages and we delete our users’ messages as soon as they
have been successfully self-destructed or deleted. Our end-to-end encryption ensures that we will never have access to the contents of
our users’ messages. Moreover, we recognize the privacy rights of our users and are committed to complying with data protection
laws to the extent they apply to us, and to assist our users in exercising their rights under applicable law. For example, users may
exercise their rights pursuant to the EU General Data Protection Regulation (“GDPR”) or Section 1798.83 of the California
Civil Code, simply by submitting a request via email to privacy@DatChat.com.
Employees
As
of March 28, 2024, we have a total of 12 full-time employees. We have established a network of external professionals and consultants
to which we outsource various research and development and operational tasks in an effort to minimize administrative overhead. We are
not a party to any collective bargaining agreements. We believe that we maintain good relations with our employees.
Our
Corporate Information
DatChat,
Inc. was initially incorporated in Nevada on December 4, 2014 under the name YssUp, Inc. On March 4, 2015, an amendment to our articles
of incorporation was filed with the Nevada Secretary of State, changing YssUp, Inc.’s name to “DatChat, Inc.” On September
22, 2016, amended and restated articles of incorporation were filed with the Nevada Secretary of State in order to, among other things,
authorize the Company to issue preferred stock.
Available
Information
Our
website address is www.datchat.com. The contents of, or information accessible through, our website are not part of this Annual
Report on Form 10-K, and our website address is included in this document as an inactive textual reference only. We make our filings
with the U.S. Securities and Exchange Commission (“SEC”), including our Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, available free of charge on our website as soon as reasonably
practicable after we file such reports with, or furnish such reports to, the SEC. The public may read and copy the materials we file
with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an internet site that
contains reports, proxy and information statements and other information. The address of the SEC’s website is www.sec.gov.
The information contained in the SEC’s website is not intended to be a part of this filing.
-5-
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 minimal
revenues. As reflected in the accompanying consolidated financial statements, for the years ended December 31, 2023 and 2022, we incurred
a net loss of $8,404,970 and $12,138,572, respectively. Additionally, for the years ended December 31, 2023 and 2022, we used cash in
operations of $6,529,277 and $7,258,765, respectively. As of December 31, 2023, we has an accumulated deficit of $48,134,088. 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 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.
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.
-6-
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 marketplace 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:
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.
-7-
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.
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.
-8-
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.
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 limited number of products.
Currently,
we expect to derive substantially all of our revenue from a limited number of products and applications. As such, the continued growth
in market demand for and market acceptance of the product or application is critical to our continued success. Demand for our products
or the applications 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 our products and applications, 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
our products and applications. If demand declines for any of these or other reasons, our business could be adversely affected.
-9-
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.
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.
-10-
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.