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, 2025 and 2024, we incurred a net loss of $3,040,119 and $5,025,007,
respectively. Additionally, for the years ended December 31, 2025 and 2024, we used cash in operations of $4,267,074 and $4,811,145, respectively.
As of December 31, 2025, we had working capital of $3,045,399. 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.
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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 and social
sharing platform industries, which is already saturated with established companies. Many of these companies, including Apple Inc., Alphabet
Inc., Facebook, Inc., Snap Inc., TikTok, iCloud Shared Photo, Pinterest, Google Photos, Amazon Drive, Photobucket and Shutterfly, 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 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:
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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 they 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.
There are many factors that could negatively affect
user retention, growth, and engagement, including if:
● users increasingly engage with competing products instead of ours;
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● we are unable to combat hostile or inappropriate usage of 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 in 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 will 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 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 the 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.
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 the 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.
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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 by, 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.
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.
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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.
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.
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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, 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.
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.
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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.
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.
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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.
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.
Myseum is currently under development and
no assurance can be given that it will be accepted by others or generate sufficient interest.
Myseum, our new platform, is being designed to
allow for the preservation and sharing of pictures, video, and documents in a secured network utilizing our recently patented technology
that enabled us with the preservation of data, including storage, sharing, and secure control of data on social media technology platforms
and digital archives. We aim to continue researching and developing different applications for our Myseum platform in order to generate
continual interest in this platform. If we do not generate sufficient interest in our Myseum platform we will not attract enough advertisers
to make it profitable.
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Myseum is based on new and unproven technologies
and therefore is subject to the risks of failure inherent in the development of new products and services.
Because Myseum is based on certain new technologies,
it is subject to risks of failure that are particular to new technologies, including the possibility that:
● Myseum may not gain market acceptance;
● Myseum may not receive the exposure required to obtain new users; or
● third parties may market superior products or services.
We may not be able to adequately evaluate
the risks associated with our planned social metaverse and advertising platforms.
Myseum may not be successful and may expose us
to legal, regulatory, and other risks. Given the nascent and evolving nature of the metaverse, digital assets and blockchain technology,
we may be unable to accurately anticipate or adequately address such risks or the potential impact of such risks. The occurrence of any
such risks could materially and adversely affect our business, financial condition, results of operations, reputation, and prospects.
It is difficult to predict how the legal and regulatory framework around such digital assets and services will develop and how such developments
will impact our business and our platforms. The launch of Myseum subjects us to risks similar to those associated with any new platform
offering, including, but not limited to, our ability to accurately anticipate market demand and acceptance, our ability to successfully
launch these initiatives, technical issues with the operation of Myseum and legal and regulatory risks as discussed above. If we fail
to accurately anticipate or manage the risks associated with Myseum or if we directly or indirectly become subject to disputes, liability,
or other legal or regulatory issues in connection with either of these initiatives, they may not be successful and our business, financial
condition, results of operations, reputation, and prospects could be materially harmed.
Our business is subject to risks generally
associated with the metaverse and digital entertainment industry.
We are susceptible to market conditions and risks
associated with the metaverse and digital entertainment industry, including the popularity, customers’ preferences, and potential
regulations, all of which are difficult to predict and are beyond our control.
In addition, economic conditions that negatively
impact discretionary consumer spending, including inflation, slower growth, unemployment levels, tax rates, interest rates, energy prices,
declining consumer confidence, recession and other macroeconomic conditions, including those resulting from COVID-19 and from geopolitical
issues and uncertainty, could have a material adverse impact on our business and results of operations.
If we fail to retain users or add new users,
or if our users decrease their level of engagement with Myseum, revenue, bookings, and operating results will be harmed.
Our business plan assumes that the demand for
social media offerings, specifically, the adoption of a platform for sharing and preserving of media. However, if this market shrinks
or grows more slowly than anticipated, or if demand for Myseum does not grow as quickly as we anticipate, whether as a result of competition,
product obsolescence, budgetary constraints of our developers, creators, and users, technological changes, unfavorable economic conditions,
uncertain geopolitical or regulatory environments or other factors, we may not be able to increase our revenue and bookings sufficiently
to ever achieve profitability and our stock price would decline.
The multitude of other social media platforms,
media sharing, and other interactive experiences is high, making it difficult to retain users who are dissatisfied with Myseum and seek
other social media options. These and other factors may lead users to switch to another entertainment option rapidly, which can interfere
with our ability to forecast usage and would negatively affect our user retention, growth, and engagement. Falling user retention, growth,
or engagement rates could harm our business.
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We face intense competition for our products
and services.
There are numerous technology companies seeking
ways to support efforts to enter the social media business. Additionally, social media has become more readily recognized as a method
of sharing media and as such, more competitors are seeking to enter this marketplace. These technologies are subject to rapidly changing
technological developments, shifting organizational priorities and requirements, frequent introductions of new products and services,
and increased marketing and sales activities of other industry participants.
Many competitors exist in the overlapping areas
of social media and traditional digital marketing, data analytics, and digital transformation. Many of our current and potential competitors
have a significantly larger market presence, greater name recognition, access to more potential customers and substantially greater financial,
technical, sales and marketing, management, support, and other resources than we have. As a result, many of our competitors can respond
more quickly than we can to new or changing opportunities and technologies, and may devote greater resources to the marketing, promotion
and sale of their products than we can.
Our costs are continuing to grow, and some
of our investments, particularly our investments in virtual and augmented reality, have the effect of reducing our operating margin and
profitability. If our investments are not successful longer-term, our business and financial performance will be harmed.
Operating our business is costly, and we expect
our expenses to continue to increase in the future as we add users and broaden our user base, as users increase the amount and types of
content they consume and the data they share with us, for example as we continue to expand our technical infrastructure, as we continue
to invest in new and unproven technologies, and as we continue our efforts to focus on privacy, safety, security, and content review.
We are also continuing to increase our investments in new platforms and technologies, including as part of our efforts related to building
the metaverse. Some of these investments, particularly our significant investments in virtual and augmented reality, have generated only
limited revenue and is anticipated to reduce our operating margin and profitability, and we expect the adverse financial impact of such
investments to continue for the foreseeable future.
Our industry is subject to rapid technological
change, and if we do not adapt to, and appropriately allocate our resources among, emerging technologies and business models, our business
may be negatively impacted.
Technology changes rapidly in the entertainment
industry. We must continually anticipate and adapt to emerging technologies and business models to stay competitive. Forecasting the financial
impact these changing technologies and business models may have is inherently uncertain and volatile. Supporting a new technology or business
model may require affiliating with a new business or technology vendor, and such affiliation may be on terms that are less favorable to
us than those for traditional technologies or business models. If we invest in the development of content offerings that incorporate a
new technology or business model that does not achieve significant popularity, whether because of competition or otherwise, we may not
recover the often substantial costs of developing and marketing those content offerings, or recover the opportunity cost of diverting
company resources away from other content and product offerings. In the near and longer term, we expect to take advantage of broader trends
such as the growth of the metaverse in the digital economy and the associated increase in importance of technologies such as blockchains,
virtual reality and augmented reality. We may not be successful in allocating our resources to these new areas and may not recover the
costs and opportunity costs of investing in these opportunities instead of others. Further, our competitors may adapt to these or other
emerging technologies or business models more quickly or effectively than we do.
If, on the other hand, we elect not to pursue
the development of content offerings or other opportunities incorporating a new technology, or otherwise elect not to pursue new business
models that achieve significant success and popularity, it may have adverse consequences to our business. It may take significant time
and expenditures to shift financial and personnel resources to that technology or business model, and it may be more difficult to compete
against existing companies that incorporate that technology or business model effectively.
16
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 Annual Report on
Form 10-K, 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;
● 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.
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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.
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 Annual Report on Form 10-K, 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,