Company
Overview
We are a communications software
innovator developing enhanced security and privacy solutions for video, voice, and text applications and data transmission.
Our offerings target consumer, government and enterprise clients. Using multi-layered encryption, blockchain technology and
other recent innovations, we are developing our proprietary PeerStream Protocol (“PSP”) to offer clients maximal
data security and confidentiality over distributed or decentralized networks. We also recently launched our Backchannel
product suite in private beta, which includes cross platform applications, middleware and software development kits
(“SDKs”) designed to offer a highly secure end user communication experience when coupled with PSP. For 20 years,
we have built and continue to operate innovative consumer applications, including Paltalk and Camfrog, two of the largest
live video social communities. The Company has a long history of technology innovation and holds 26 patents. We were
incorporated under the laws of the State of Delaware in 2005. Our principal executive office is located at 122 East
42
nd
Street, Suite 2600, New York, New York 10168.
Our Services and Products
Secure Communications Software Licensing
On March 8, 2018, we launched our proprietary
software business, centered around the development of PSP and Backchannel. These efforts are supported by nearly 20 years of multimedia
streaming expertise and a battle-tested technology platform that has facilitated the delivery of billions of multimedia messages
to hundreds of millions of users. We believe we have the experience and ability to support corporate and government clients in
integrating PSP and Backchannel to power highly secure communications of voice video and data with controls for privacy and confidentiality
over networks that would otherwise provide an insecure environment.
How PSP Works
. PSP is a configurable
software solution designed to provide maximal data security and confidentiality for multimedia communications that is offered to
enterprise and government agencies whose computing networks operate on distributed or geographically decentralized environments.
PSP’s binary streaming and routing protocol is primarily designed to provide real-time data streaming and messaging
channels for applications and devices that require the transmission of sensitive data or multi-point communications, emphasizing
management of the identity of the sender and receiver, confidentiality of the transmitted content and configurable controls for
administrators.
PSP supports several security features
that we believe exceed what is commonly available in the market today. For example, PSP supports end-to-end encryption, which
permits only the sender and recipient to encrypt and decrypt messages. However, end-to-end encryption does not provide a
complete communications security solution, since routing and storing content and IP addresses
are all points of vulnerability. Accordingly, we have designed PSP to add incremental innovations that address the security of
the data transport process, providing successive layers of encryption with each network node traversed in transit. Furthermore,
by adding a variation of “Onion Routing” virtual circuitry, which is a technique for encapsulating messages in layers
of encryption similar to the layers of an onion, the path of communications on the PSP network is obfuscated from the point of
origin to the destination, further masking the addressable identities. The communications are all ephemeral and servers in the
network are blind to the full path of the communication, permitting security minded clients to operate in a “zero trust environment,”
or an environment with safety measures that preserve security without relying on owned, controlled or even trusted network nodes.
We believe in the aggregate the capabilities of PSP greatly reduce the risk of cloning, eavesdropping and wiretapping privileged
and confidential communications, identity and data.
PSP can operate on traditional distributed
networks or on third party blockchain networks, of both the public and permissioned varieties. For instance, PSP is currently being
integrated into the ProximaX blockchain protocol, which is a next generation decentralized platform led by blockchain pioneer Lon
Wong. Because PSP includes security measures that permit clients to transmit over networks without placing trust in the network
nodes with respect to confidential content or routing information, a decentralized public blockchain network can potentially become
as secure as a private network. We believe the large potential scale of these public blockchain networks is a significant benefit
in respect to content delivery throughput and cost efficiency. We also believe that blockchain networks also tend to be more resilient
to cyberattacks than traditional networks that route data through a centralized third-party provider because of massive redundancy.
Status of PSP Development
. We have
separated our PSP development progress into three stages based on our internal development roadmap. The first stage consisted mainly
of the initial design and architectural planning work related to PSP and is complete. The two remaining development stages are
expected to be completed in the first and third quarter of 2019, respectively. The second development stage relates principally
to the completion of PSP’s ability to provide instructions to the node ecosystem of an existing blockchain network, as well
as ensuring that PSP can be readily integrated with private distributed networks as well as widely-adopted blockchain protocols
other than the ProximaX blockchain protocol. The third development stage relates principally to the completion and launch of the
full-feature PSP product, as well as the launch of client-side software development kits and application programming interfaces.
Although we hope to complete the development of PSP within the timeframes specified in our development roadmap, PSP is a new form
of technology and its development may be subject to unanticipated delays.
Backchannel is the Front-end Counterpart
to PSP
. Backchannel is our branded framework designed
to be an easy-to-integrate end user facing set of applications and utilities accessing PSP’s capabilities that provide a
best-of-breed secure video-enabled mobile messaging solution for enterprise and government end users. Backchannel provides cross-platform
applications, SDK’s and middleware for multiple use cases and applications covering desktop, mobile, server and internet
of things (IOT) applications. Accordingly, Backchannel may be used by clients as a branded application, a private labeled application
bearing client branding or a set of SDKs integrated into and powering a third-party application.
Our Backchannel-branded mobile communication
solution automatically accesses PSP’s distributed security model, which, as described above, uses a variation of onion routing
so that network nodes are unable to trace the origin and destination of messages or determine the participating device IP addresses.
On some mobile device handsets, Backchannel also will be able to access the mobile trusted execution environment for hardware-based
encryption and subscriber identity module identity attestation frameworks to further augment the chain of trust. In addition, Backchannel
has the capability of leveraging cryptographically generated identities that are not tied to one’s personal information,
and is able to interoperate with blockchain technologies to provide decentralized messaging and one-to-one live video streaming
with enhanced privacy control.
Technology Implementation Services
In addition to developing and licensing
our suite of secure communications software, we also began providing professional services to customize and integrate our software
solutions to meet client needs in March 2018. For instance, on March 21, 2018, we entered into a technology services agreement
with ProximaX whereby we agreed to provide certain development and related services to ProximaX to facilitate the implementation
of PSP into ProximaX’s proprietary blockchain protocol that is currently under development. We plan to continue to offer
a full suite of strategy consulting, implementation and support services to our clients looking to harness the superior scalability
and security of our software solutions.
Consumer Applications
We operate a leading network of consumer
applications that create a unique social media enterprise where users can meet, see, chat, broadcast and message in real time in
a secure environment with others in our network. The proprietary technology underlying our products allows us to operate thousands
of simultaneous streams, including on mobile platforms, which support interactions on a one-on-one, one-to-many and many-to-many
basis. Furthermore, our technology is supported by 80 technologists, four technology centers and a portfolio of 26 issued patents.
Live Video Chat
. We have three existing
products in the video chat space: Paltalk, Camfrog and Tinychat. The major revenue-generating live video chat products are Paltalk
and Camfrog. Each product enables individuals to self-organize around topics and users with common affinities. Tinychat enables
adaptations of our video technology for alternative uses and opportunities in the future.
Paltalk and Camfrog are our major video
chat applications and are both leading providers of live video social networking applications available on Windows, Mac OS, iOS,
Android and other tablet devices. Together, these products power one of the world’s largest global collections of video based
communities, with proprietary technology to host thousands of simultaneous live group conversations on topics such as politics,
financial markets, music and dating. Our proprietary client server technology helps maintain high quality video and audio, even
as many users simultaneously watch a particular broadcaster. Paltalk and Camfrog both have hundreds of millions of registered users
and attract a demographically and geographically diverse user base, with users in over 180 different countries. Paltalk users are
approximately one-third domestic and two-thirds international, and Camfrog users have an even larger international presence, with
a particular concentration in Southeast Asia.
Telecommunications
. We own and operate
a small telecommunications services provider called Vumber that enables users to have multiple phone numbers in any area code through
which calls can be forwarded to a user’s existing cell phone or land line telephone number. Vumber serves both the retail
and small business community. Vumber not only allows individuals to communicate while protecting privacy, but also gives business
professionals the ability to add a new business line with any chosen area code to their cell phones. Vumber provides an in-depth
data analytics platform that can track, record and analyze calls to gain new insights into one’s business.
Product Payment Options
. Our users
have a variety of methods by which to purchase product subscriptions across all of our platforms. Users can pay by credit card,
PayPal, Western Union, check, local e-wallet providers, or complete an in-app purchase through the Apple App Store or Google Play
for Android users.
Apple retains 30% of the revenue that
is generated from sales on our iPhone application through in-app purchases in the United States. Google also retains 30% of the
revenue that is generated from sales on Android applications via Google wallet through in-app purchases in the United States.
All of our credit card transactions are
processed through various payment providers. Video chat users in certain international territories also have an option to purchase
through local resellers. Local resellers prepay in bulk for services and debit the prepaid balance as one-time subscriptions and
virtual currency are sold to end users. Regardless of which payment method is utilized, users may access our products through any
of the gateways we offer.
Company Business Strategy
Grow PeerStream Business-to-Business
Solutions in Secure Communications
On March 21, 2018, as a first step in launching
a business-to-business enterprise and commercializing PSP, we entered into a technology services agreement with ProximaX whereby
we agreed to provide licensed software and certain development services to ProximaX to facilitate the implementation of PSP into
ProximaX’s proprietary blockchain protocol that is currently under development. As integration of PSP into the ProximaX platform
is presently in testing, and we are nearing sufficient completion of the technology to ramp up our commercialization efforts, we
plan to build on this platform as one means of expanding the market opportunity for our secure communications solutions.
The cybersecurity market is large and growing
rapidly, and the segment that addresses secure communications is attracting more interest as high profile communication hacks and
data breaches gain media publicity. We believe PSP and Backchannel present a differentiated solution to this market with additional
layers of security that are not commonly offered. We intend to commence marketing and customer discovery for these products in
the first and second quarter of 2019, with full commercialization in the latter half of the year. We believe client prospects to
be large organizations with widely distributed lines of confidential communication, including foreign and domestic governments,
mobile carriers, large corporations and communications service providers of various types. We expect to approach this market through
direct sales and channel partnerships.
Although PSP is initially being designed
to be integrated into the ProximaX blockchain protocol, we are presently modifying it to be integrated with other widely-adopted
blockchain protocols or into traditional distributed system architectures. Although the adaptation of PSP to blockchain protocols
and system architectures outside of the ProximaX protocol would require custom development, we have taken steps to minimize the
amount of effort that such development would entail. In addition, we expect to make a version of PSP open source, these modifications
would not need to be completed by PeerStream. At that time, any developer would be able to take the PSP code and undertake custom
modifications to integrate it into other systems.
Enhance Existing Live Video Chat Applications
We plan to enhance our existing live video
chat applications in 2019, which we anticipate will include several initiatives intended to improve usage and revenue potential.
We plan to add incentives for loyal or valuable users to enhance retention and overall user activity in the products. We also intend
to improve our product and marketing capabilities on mobile, to enhance monetization and our ability to acquire new users on mobile
platforms. In addition, we expect to increase the quality and quantity of live streaming entertainment content and broaden the
distribution across our user base. Finally, in 2019 we anticipate making significant progress in integrating certain technical
functions of Paltalk and Camfrog, which will reduce operating costs and speed time-to-market of future enhancements.
Defend our Intellectual Property
We have a portfolio of 26 issued patents.
We have successfully defended our intellectual property in the past and have generated tens of millions of dollars in licensing
fees for the use of our patents. In 2016, we commenced an enforcement action related to two of our patents against Riot Games,
Inc. and Valve Corporation for infringement of U.S. Patent Nos. 5,822,523 and 6,226,686 with respect to their online games League
of Legends and Defense of the Ancients 2. These two patents were previously asserted against, and then licensed to, Microsoft,
Sony, and Activision. For additional information concerning the status of these proceedings, see “Item 3. Legal Proceedings”
herein.
Sale of Non-Core Assets
On
January 31, 2019, we entered into an Asset Purchase Agreement with The Dating Company, LLC, pursuant to which we sold substantially
all of the assets related to our online dating services business under the domain names FirstMet, 50more, and The Grade for a
cash purchase price of $1.6 million, with $100,000 of the purchase price to be held in an escrow account to secure certain of
our post-closing indemnification obligations. The closing of the asset sale was effective as of January 31, 2019.
Marketing
Strategy
We invest in advertising and marketing
primarily for the purpose of acquiring users for our consumer applications. We adapt our marketing expenditures and channels as
we gather the data to analyze the success of our campaigns. We primarily advertise through internet and mobile advertising networks
and run hundreds of campaigns at any given time, targeting various audiences of users, and focusing on campaigns that we believe
will produce a positive return over the lifetime of new users. We also generate new sign-ups organically, as people find our sites
and applications through brand recognition and word of mouth, search engines and product review websites.
In addition, we expect to be expanding our marketing efforts in support of our secure communications solutions
business line. We expect that this marketing effort will include trade show exhibition, event hosting or sponsorship, content marketing,
digital and print media, and more. We anticipate that these marketing efforts will begin the process of establishing the PeerStream
brand as a leader in the secure communications segment of cybersecurity.
Competition
and Our Industry
Competition in the industries in which
we compete remains fierce. The markets for secure communications software, technology implementation services and consumer applications
are extremely dynamic and are undergoing constant change. We believe this environment creates significant opportunities for us
as well as our direct and indirect competitors. Our principal competitors consist of:
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Secure Communications Software Licensing:
Adeya SA, Commdex, Ercom, IVCi LLC, KoolSpan, Ribbon Communications Inc. and Wickr;
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Technology Implementation Services: IBM,
Accenture, Cognizant, Deloitte Touche Tohmatsu Limited, Wipro Limited, as well as Virtusa, Saksoft, Mindtree, Larsen & Toubro
Infotech Limited, ConsenSys, Vanbex Group and CanYa.; and
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Consumer Applications: YouNow, Live.me,
BIGO Live, Live.ly, Houseparty, Facebook Live, YouTube Live, Instagram Live, and Twitch.
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Many of our competitors have substantially
greater financial, managerial, technological and other resources than we do. In addition, there are relatively few barriers to
entry into the industries in which we operate, and, as a result, any organization that has adequate financial resources and access
to technical expertise and skilled personnel may become one of our competitors.
In order to compete effectively, we seek
to offer software, services and applications that are differentiated from existing products, superior in quality and more appealing
than those of our competitors. We believe that our software offerings, including PSP and Backchannel, will compete favorably against
secured communications tools offered by our competitors due to their ability to scale easily, their cost-efficiency and their innovative
technology. Within consumer applications, we believe that we have the tools and expertise to attract new users through Facebook
and other sources at a lower cost per subscriber than certain of our traditional competitors.
Although we believe we have the capability
to compete effectively in our industries, our competitors may offer products, services and applications that we do not provide
with more desirable features or at lower prices, and they may be able to devote greater resources to the development, promotion,
sale and support of their products. In addition, many of our competitors have more extensive customer bases and broader customer
relationships than we have, including relationships with our potential customers.
Governmental Regulations
We
are subject to a number of U.S. federal and state laws and regulations that affect companies conducting business on the internet,
many of which are still evolving and being litigated in the courts and could be interpreted in ways that could harm our business.
These laws and regulations may involve user privacy, data protection, content, intellectual property, distribution, electronic
contracts and other communications, competition, protection of minors, consumer protection, taxation and online payment services.
In particular, we are subject to federal and state laws regarding privacy and protection of user data, which are constantly evolving
and can be subject to significant change. We are also subject to diverse and evolving laws and regulations in other countries
in which we operate. The application and interpretation of these laws and regulations are often uncertain, particularly in the
new and rapidly-evolving industry in which we operate. Because our applications are accessible worldwide and used by residents
of some foreign countries, foreign jurisdictions may claim that we must comply with foreign laws, even in jurisdictions in which
we have no local business entity, employees or infrastructure.
We
are also subject to federal laws and regulations regarding content, privacy and the protection of user data, including The Communications
Decency Act of 1996, as amended (“The Communications Decency Act”), The Children’s Online Privacy Protection
Act of 1998, as amended, The Digital Millennium Copyright Act, The Electronic Communications Privacy Act of 1986, as amended,
the USA PATRIOT Act of 2001, and the Controlling the Assault of Non-Solicited Pornography And Marketing (“CAN-SPAM”)
Act of 2003, among others. The Digital Millennium Copyright Act limits our liability as an online service provider for linking
to or hosting third-party content that infringes copyrights. The Communications Decency Act provides statutory protections to
online service providers like us who distribute third-party content. The Children’s Online Privacy Protection Act restricts
the ability of online service providers to collect personal information from children under 13. Congress, the Federal Trade Commission
(“FTC”) and many states have promulgated laws and regulations regarding email advertising, including the CAN-SPAM
Act. Any changes in these laws or judicial interpretations narrowing the protections of these laws may subject us to increased
risk, increased costs of compliance, and limits on the operation of certain parts of our business.
Growing
public concern about privacy and the use of personal information may subject us to increased regulatory scrutiny. The FTC has,
over the last few years, begun investigating companies that have used personally identifiable information in a deceptive or unfair
manner or in violation of a posted privacy policy. On May 25, 2018, the European Union implemented a new privacy directive called
the Global Data Protection Regulation (“GDPR”) that imposes additional new regulatory scrutiny on our business in
that geographic region with possible financial consequences for noncompliance. If we are accused of violating the terms of our
privacy policy or implementing unfair privacy practices, we may be forced to expend significant financial and managerial resources
to defend against an FTC or GDPR enforcement action. Our user database holds the personal information of our users and subscribers
residing in the United States and other countries, and we could be sued by those users if any of the information is misappropriated.
Any failure by us to adequately protect our users’ privacy and data could also result in loss of user confidence in our
consumer applications and services and ultimately in a loss of active subscribers, which could adversely affect our business.
In
addition, virtually every U.S. state has passed laws requiring notification to users when there is a security breach for personal
data resulting in unauthorized disclosure, many of which are modeled on California’s Information Practices Act. There are
a number of legislative proposals pending before the U.S. Congress and various state legislative bodies concerning data protection
that could, if adopted, have an adverse effect on our business. We are unable to determine if and when such legislation may be
adopted. Many jurisdictions, including the European Union, have adopted breach notification and other data protection notification
laws designed to prevent unauthorized disclosure of personally identifiable information. The introduction of new privacy and data
breach laws and the interpretation of existing privacy and data breach laws in the United States, Europe and other foreign jurisdictions
is constantly evolving. There is a risk that new laws may be introduced or existing laws may be applied in a way that would conflict
our current data protection practices or prevent the transfer of data between countries in which we operate.
In
addition, rising concern about the use of social networking technologies for illegal conduct may in the future produce legislation
or other governmental action that could require changes to our applications or restrict or impose additional costs upon the conduct
of our business. These regulatory and legislative developments, including excessive taxation, may prevent or significantly limit
our ability to expand our business.
We
may also become subject to laws or regulations in the future that limit our ability to accept bitcoin or other cryptocurrencies
as a form of payment or to otherwise hold bitcoin or other cryptocurrencies. As cryptocurrencies have grown in both popularity
and market size, governments around the world have reacted differently to cryptocurrencies, with certain governments deeming cryptocurrency
offerings and cryptocurrency exchanges illegal, while others have allowed their use and trade. Governments may in the future curtail
or outlaw the acquisition or use of cryptocurrencies or the exchange of cryptocurrencies for fiat currencies. Ownership of, holding,
trading in or participating in offerings of cryptocurrencies may then be considered illegal and subject to sanction. Governments
may also take regulatory action that may increase the cost and/or subject companies that transact in or hold cryptocurrencies
to additional regulation.
Employees
As
of March 14, 2019, we had 42 employees. We believe that our future success depends in part on our continued ability to hire, assimilate
and retain qualified personnel. We attract and retain employees by offering training, bonus opportunities, competitive salaries
and a comprehensive benefits package.
The
risks below are those that we believe are the material risks that we currently face, but are not the only risks facing us and
our business. If any of these risks actually occur, our business, financial condition and results of operations could be materially
adversely affected.
Risks
Related to Our Business
We may face significant challenges in
growing our secure communications software licensing and technology implementation services businesses.
In March 2018, we launched
our proprietary software business centered around the development of PSP and Backchannel, and we also began providing services
related to the implementation of our proprietary software solutions. These new lines of business pose risks and challenges that
could materially impact our business, financial condition and results of operations. Currently, all of the revenue generated from
these endeavors has been derived from our technology services agreement with ProximaX that is related to the implementation of
PSP into ProximaX’s proprietary blockchain protocol. However, the success of our new ventures substantially depends upon
our ability to expand our client base beyond ProximaX, and our failure to do so would have a material negative impact on our ability
to generate revenue and our financial condition.
In addition, our management
only recently determined to shift our corporate focus towards providing secured communications solutions and implementation services.
While we have expanded our staff with individuals with more experience in these industries and closely scrutinize individuals we
engage, we cannot provide assurance that we will be able to retain or continue to hire well-qualified and experienced individuals
or that our assessment of individuals we retain will be correct.
Our utilization and development of blockchain-based
software and technologies could have a material adverse effect on our business, financial condition or results of operations.
The first implementation of our secured communications
software is substantially dependent on blockchain technology, a rapidly evolving technology in which we have limited operational
history or experience. Though PSP may be implemented without blockchain, our significant emphasis on blockchain technology subjects
us to risks associated with the use of new and novel technologies, including technical, operational, financial, regulatory, legal
and reputational risks, as well as the risk that we may be unable to timely develop our blockchain-based software or technologies
or market, license or sell our blockchain-based software or technologies successfully or profitably. We cannot provide any assurance
that we will be able to retain or continue to hire well-qualified individuals with experience in the blockchain industry or that
our assessment of individuals we retain will be correct. These individuals may be unfamiliar with the requirements of being involved
in a public company which could cause us to have to expend time and resources helping them become familiar with such requirements.
This could be expensive and time-consuming and could lead to various regulatory issues which may adversely affect our operations.
ProximaX may not have sufficient resources
to make payments to us upon our completion of the remaining performance milestones under our technology services agreement.
Under our technology services agreement with
ProximaX, we are entitled to receive up to two additional $2.5 million payments from ProximaX upon the completion of certain development
milestones set forth in the agreement. ProximaX has the option to pay us either in cash or certain highly liquid cryptocurrencies
that were accepted by ProximaX in its initial coin offering. However, since the time that ProximaX completed its initial coin offering
in April 2018, the market price of most cryptocurrencies has declined substantially. For instance, the market price of Ethereum,
the principal cryptocurrency that ProximaX accepted in its initial coin offering, has declined by approximately 80% from a closing
price of $670.81 as of April 30, 2018 to approximately $133 as of March 14, 2019.
As a result of the general decline in cryptocurrency
prices, we expect that ProximaX, as a recently formed entity with limited capital, may not have sufficient cash or liquid assets
to pay us at the time these milestones have been completed. Cryptocurrency prices may never return to historical highs or to a
level that would allow ProximaX to seek additional financing or fulfill its obligations to us through cryptocurrency payments.
As a result, we may need to restructure the
payment terms of our technology services agreement. However, there can be no assurance that we will be able to do so on terms that
are economically favorable to us, or at all. If we are unable to restructure the payment terms of the technology services agreement
and ProximaX is unable to fulfill its obligations thereunder, we may have limited legal or other recourse.
Any failure by ProximaX to pay us amounts owed
under the technology services agreement when due would adversely affect our future results of operation.
The
further development and acceptance of blockchain technologies, which are part of a new and rapidly changing industry, are subject
to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain
technologies or assets would have a material adverse effect on our business.
The
growth of the blockchain industry in general, as well as the blockchain networks on which our technologies may rely, is subject
to a high degree of uncertainty. The factors affecting the further development of the blockchain industry and networks, include,
without limitation:
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worldwide
growth in the adoption and use of blockchain and distributed ledger technologies, including
cryptocurrencies and digital tokens, cryptosecurities and digital tokens;
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government
and quasi-government regulation of blockchain assets, including cryptocurrencies, and
their use, or restrictions on or regulation of access to and operation of blockchain
networks or similar systems;
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the
maintenance and development of the open-source software protocol of blockchain networks;
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changes
in consumer demographics and public tastes and preferences;
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general
economic conditions and the regulatory environment relating to cryptocurrencies; and
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a
decline in the popularity or acceptance of blockchain-based technologies, including cryptocurrencies
and tokens.
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The
blockchain industry as a whole is in its infancy and has been characterized by rapid changes and innovations. Although it has
experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and
usage of blockchain networks and blockchain assets may materially adversely affect our business plans, financial results and prospects.
The
success of our consumer applications is principally dependent on our active subscribers and our engagement with our user base.
As of March 14, 2019,
our applications supported an active subscriber base of approximately 109,500 active subscribers worldwide which excludes
active subscribers to our former dating applications that were sold in January 2019.
However, compared to
the total number of users in any given period, only a small portion of our users are active subscribers or purchasers of virtual
currency. We primarily generate revenue through the sale of subscriptions and virtual currency to this small portion of users and
secondarily generate revenue through paid advertisements. Accordingly, the success of our consumer applications is substantially
dependent on our ability to convert our users into active subscribers and to sell our users virtual currency.
Users
discontinue the use of our applications in the ordinary course of business, and to sustain our revenue levels, we must attract,
retain and increase the number of users or more effectively monetize our existing users. Falling user retention, growth or engagement
could also make our applications less attractive to advertisers, which could harm our business.
There
are a number of factors that could negatively impact user retention, growth and engagement, including, among other things:
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users
may adopt competing products instead of ours;
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we
may fail to introduce new products and services or those we introduce may be poorly received;
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our
products may fail to operate effectively on mobile or other platforms;
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we
may be unable to combat spam or other hostile or inappropriate usage on our products;
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there
may be adverse changes in user sentiment about the quality or usefulness of our existing
products;
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there
may be concerns about the privacy implications, safety or security of our products;
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technical
or other problems may frustrate the experience of our users, particularly if those problems
prevent us from delivering our products in a fast and reliable manner;
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we
may fail to provide adequate service to our users;
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we
or other companies in our industry may be the subject of adverse media reports or other
negative publicity;
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we
may not maintain our brand image or our reputation may be damaged; and
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we
may be subject to denial of service or other attacks from hackers that result in service
downtime.
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To
retain existing users, and particularly those users who are paying subscribers, we must devote significant resources so that our
applications retain their interest. If we fail to grow or sustain the number of our users, or if the rates at which we attract
and retain existing users declines or the rate at which users become paying subscribers declines, it could have a material adverse
effect on our business, results of operations or financial condition.
We operate in intensely competitive industries and any failure to attract new clients and users could
diminish or suspend our development and possibly cease our operations.
The industries in which we compete are highly competitive and have few barriers to entry. If we are unable
to efficiently and effectively attract new users or clients as a result of intense competition or a saturated market, we may not
be able to continue the provision, development and enhancement of our software, services and applications or become profitable
on a consistent basis in the future.
Important
factors affecting our ability to successfully compete include:
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the
usefulness, novelty, performance and reliability of our products compared to our competitors;
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the
timing and market acceptance of our products, including developments and enhancements
of our competitors’ products;
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our
ability to effectively monetize our services and products and the availability of free
or cheaper alternatives from our competitors;
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our
ability to hire and retain talented employees, including technical employees, executives,
and marketing experts;
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the
success of our customer service and support efforts;
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our
reputation and brand strength compared to our competitors;
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with
respect to consumer applications, competition for acquiring users that could result in
increased user acquisition costs;
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reliance
upon the platforms through which our consumer applications are accessed and the platform
owner’s ability to control our activities on such platforms;
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the
effectiveness of the marketing and advertisement of our services and products;
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our
ability to maintain advertisers’ interests in advertising through our products;
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our
ability to innovate in the ever-changing industries in which we operate;
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changes
as a result of new legislation or regulation within our industries; and
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acquisitions
or consolidations within our industries.
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Many
of our current and potential competitors offer similar services, have longer operating histories, significantly
greater capital, financial, technical, marketing and other resources and, with respect to our consumer applications, larger
user or subscriber bases than we do. These factors may allow our competitors to more quickly respond to new or emerging
technologies and changes in client or consumer preferences. These competitors may engage in more extensive research and
development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing strategies that may
allow them to build larger user bases consisting of greater numbers of clients or paying users. Our competitors may provide
services or develop applications and software that are equal or superior to our services or applications and software or that
achieve greater market or industry acceptance. It is possible that a new product or service developed or offered by one of
our competitors could gain rapid scale at the expense of existing brands through harnessing a new technology or distribution
channel, creating a new approach to servicing clients or connecting people.
Certain entities that we do not directly compete with but that have large or dominant positions in one
or more markets could use those positions to gain a competitive advantage against us in areas where we operate by beginning to
provide secured communications software and implementation services or by integrating competing video chat or social media platforms
into products they control, such as search engines, web browsers or mobile device operating systems.
With
respect to consumer applications, costs for consumers to switch between products in the video chat industry are generally low,
and consumers have a propensity to try new products to connect with new people. As a result, new entrants and business models
are likely to continue to emerge in our industry. These activities could attract users and subscribers away from our applications
and reduce our market share.
If we are unable to effectively compete, we may fail to obtain new clients for our products or our users
may discontinue the use of our products and we may lose active subscribers, either of which would have a material adverse effect
on our business, results of operations and financial condition.
We
are subject to risks related to holding cryptocurrencies and accepting cryptocurrencies as a form of payment.
We
have formed strategic partnerships with third parties and entered into service agreements that provided us with cryptocurrencies
as compensation for our services. Cryptocurrencies are not considered legal tender or backed by any government and have experienced
price volatility, technological glitches and various law enforcement and regulatory interventions. The use of cryptocurrency
such as bitcoin has been prohibited or effectively prohibited in some countries. If we fail to comply with prohibitions applicable
to us, we could face regulatory or other enforcement actions and potential fines and other consequences.
As
part of our strategy of forming strategic alliances with blockchain companies, we may make limited investments in initial coin
or token offerings or negotiate that we receive cryptocurrency tokens as compensation for services. For instance, as part of our
technology services agreement with ProximaX, a portion of our compensation was paid in XPX tokens. The prices of cryptocurrency
tokens, including our XPX tokens, are typically highly volatile and subject to exchange rate risks, as well as the risk that regulatory
or other developments may adversely affect their value. As of December 31, 2018 at approximately 5:00 PM, Eastern Time, our 216.0
million XPX tokens had an aggregate fair value of $1.0 million and a book value of $0.8 million. However, our XPX tokens will
be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than
not that the asset is impaired. As a result, fluctuations in the market value of XPX tokens could cause us to record an impairment
charge on the value of our XPX tokens, which would directly impact our balance sheet and statements of operations. We currently
expect to hold our XPX tokens until at least June 2, 2019, at which time we may determine to opportunistically resell the tokens
in open market transactions from time to time.
In
particular, our XPX tokens may experience periods of extreme volatility due to (i) XPX tokens having a very limited trading history,
(ii) the limited public supply of XPX tokens, (iii) a lack of adoption of XPX tokens by cryptocurrency holders, including a lack
of adoption of cryptocurrencies generally due to the expense of mining cryptocurrencies in the current cryptocurrency price environment
and (iv) XPX tokens trading on a limited number of cryptocurrency exchanges, all of which have limited operating histories. Speculators
and investors who seek to profit from trading and holding XPX tokens currently account for a significant portion of XPX token demand.
Such speculation regarding the potential future appreciation in the value of XPX tokens may artificially inflate their price. Fluctuations
in the value of our XPX tokens or any other cryptocurrencies that we hold may also lead to fluctuations in the value of our common
stock. In addition, because of the limited trading volumes in XPX tokens on these cryptocurrency exchanges, converting our holdings
to fiat currency would likely take an extended period of time. If exchanges where XPX tokens trade were to cease operations or
no longer quote XPX tokens, there would be no trading platform for XPX tokens and it would likely be impossible to convert XPX
tokens into fiat currency.
In
addition, there is substantial uncertainty regarding the future legal and regulatory requirements relating to cryptocurrency or
transactions utilizing cryptocurrency. For instance, governments may in the near future curtail or outlaw the acquisition, use
or redemption of cryptocurrencies. Ownership of, holding or trading in cryptocurrencies may then be considered illegal and subject
to sanction. These uncertainties, as well as future accounting and tax developments, or other requirements relating to cryptocurrency,
could have a material adverse effect on our business.
The
cryptocurrency exchanges on which our XPX tokens trade have limited operating histories and, in most cases, are largely unregulated
and, therefore, may be more exposed to fraud and failure than established, regulated exchanges for traditional securities and
other products. To the extent that any of these exchanges are involved in fraud or experience security failures or other operational
issues, it may result in a reduction in the trading price, or the loss or destruction of, our XPX tokens.
The
cryptocurrency exchanges on which the XPX tokens trade have limited operating histories and, in most cases, are largely unregulated.
Furthermore, these cryptocurrency exchanges do not provide the public with significant information regarding their ownership structure,
management team, corporate practices or regulatory compliance. As a result, the marketplace may lose confidence in or may experience
problems relating to one or more of these exchanges. Cryptocurrency exchanges may impose daily, weekly, monthly or customer-specific
transaction or distribution limits, or they may suspend withdrawals entirely, rendering the exchange of XPX tokens for other digital
assets or for fiat currency difficult or impossible.
Over
the past few years, a number of cryptocurrency exchanges have been closed due to fraud, failure or security breaches. In many
of these instances, the customers of such exchanges were not compensated or made whole for the partial or complete losses of their
account balances in such exchanges. The Kryptono Exchange, which is the principal exchange for the XPX tokens, launched in June
2018 and is less likely to have the infrastructure and capitalization that make larger cryptocurrency exchanges more stable. As
a result, the Kryptono Exchange may be at risk for cybersecurity attacks or may suffer from a greater exposure to technical failure.
A
lack of stability in the Kryptono Exchange or the other exchanges upon which XPX tokens trade and their closure or temporary shutdown
due to fraud, business failure, hackers or malware, or government-mandated regulation could result in us losing all or a portion
of our XPX tokens or may reduce confidence in the XPX tokens and result in greater volatility in their pricing. If the XPX tokens
are delisted from the Kryptono Exchange or any other cryptocurrency exchange, or if any of the cryptocurrency exchanges that list
XPX tokens shut down or cease to continue operations, there may cease to be a liquid market for XPX tokens. These potential consequences
could also have a material adverse impact on the trading price of our common stock and our financial results. Moreover, the majority
of the cryptocurrency exchanges that list XPX tokens operate outside of the United States. Accordingly, in the event of fraud,
we may have difficulty successfully pursuing claims against these exchanges in the courts of the countries in which they are organized.
Currently,
there are no regulated trading markets for our XPX tokens or the other tokens that we hold, and therefore our ability to sell
such tokens may be limited.
As
of the date of this report, the online trading platforms on which the tokens we hold trade, including, with respect to our XPX
tokens, the Kryptono Exchange, currently do not qualify as registered exchanges within the meaning of federal securities laws
or regulated alternative trading systems. To the extent the tokens trading on these platforms meet the definition of a security
under federal securities laws, the platform is generally required to register with the SEC as a national securities exchange or
be exempt from such registration requirements. The failure of these platforms to register as national securities exchanges or
properly comply with registration exemptions could result in the SEC bringing an enforcement action seeking to prohibit, suspend
or limit their operations. In such event, the tokens we hold may be tradable on a very limited range of venues, or not at all,
and there may be periods where trading activity in tokens that we hold is minimal or non-existent. These potential consequences
could have a material adverse impact on the trading price of the tokens that we hold and could render the exchange of our tokens
for other digital assets or fiat currency difficult or impossible.
Our proprietary software and technology may not function properly.
The
software and technology that we develop, including PSP and Backchannel, may not function properly, which would have a material
adverse effect on our business plans, operations and financial condition. PSP and Backchannel are still under development, but
if the underlying technology does not work as anticipated, we may be unable to develop alternatives to these products. PSP and
Backchannel are planned to be the initial proprietary technologies offered by us to provide secured communications solutions,
and accordingly, any problems in their functionality would have a direct material adverse effect on our reputation and our plans
and expectations for revenues from software licensing. PSP, Backchannel and other technologies that we develop may malfunction
because of internal problems or as a result of cyber-attacks or external security breaches. Any such technological problems would
have a material adverse effect on the prospects of our business.
Our
XPX tokens and other cryptocurrencies that we hold may be subject to loss, theft or restriction on access.
There
is a risk that some or all of our cryptocurrencies could be lost or stolen. Access to our coins could also be restricted by cybercrime.
We currently hold all of our XPX tokens and other cryptocurrencies in cold storage. Cold storage refers to any cryptocurrency
wallet that is not connected to the internet. Cold storage is generally more secure but is not ideal for quick or regular transactions.
We expect to continue to hold the majority of our cryptocurrencies in cold storage to reduce the risk of malfeasance, but this
risk cannot be eliminated.
Hackers
or malicious actors may launch attacks to steal, compromise or secure cryptocurrencies, such as by attacking the cryptocurrency
network source code, exchange servers, third party platforms, cold and hot storage locations or software, or by other means. We
are in control and possession of one of the more substantial holdings of XPX tokens, and we may in the future hold substantial
positions in other cryptocurrencies. As we increase in size, we may become a more appealing target of hackers, malware, cyber-attacks
or other security threats. Any of these events may adversely affect our operations and, consequently, our investments and profitability.
The loss or destruction of a private key required to access our digital wallets may be irreversible and we may be denied access
for all time to our cryptocurrency holdings or the holdings of others. Our loss of access to our private keys or our experience
of a data loss relating to our digital wallets could adversely affect our investments and assets.
Cryptocurrencies
are controllable only by the possessor of both the unique public and private keys relating to the local or online digital wallet
in which they are held, which wallet’s public key or address is reflected in the network’s public blockchain. We will
publish the public key relating to digital wallets in use when we verify the receipt of transfers and disseminate such information
into the network, but we will need to safeguard the private keys relating to such digital wallets. To the extent such private
keys are lost, destroyed or otherwise compromised, we will be unable to access our cryptocurrency coins and such private keys
may not be capable of being restored by any network. Any loss of private keys relating to digital wallets used to store our cryptocurrencies
could have a material adverse effect on our business, prospects or operations and the value of any XPX tokens or other cryptocurrencies
we hold for our own account.
Because
there has been limited precedent set for financial accounting of cryptocurrencies and other digital assets, the determination
that we have made for how to account for our XPX tokens and any other digital assets we may acquire may be subject to change.
Because there has been
limited precedent set for the accounting classification and measurement of cryptocurrency and other digital tokens and related
revenue recognition, it is unclear how companies may in the future be required to account for digital asset transactions and assets
and related revenue recognition. We are currently accounting for our XPX tokens as indefinite-lived intangible assets in accordance
with Accounting Standard Codification No. 350: Intangibles—Goodwill and Other. Indefinite-lived intangible assets are recorded
at cost and are not subject to amortization, but shall be tested for impairment annually and more frequently if events or changes
in circumstances indicate that it is more likely than not that the asset is impaired. However, a change in regulatory or financial
accounting standards could result in the necessity to change our accounting methods and restate our financial statements.
Such a restatement could adversely affect the accounting for our XPX tokens or other cryptocurrencies that we may acquire and may
more generally negatively impact our business, prospects, financial condition and results of operation.
Our
mobile applications are substantially dependent on interaction with mobile platforms and operating systems that we do not control.
A
portion of our revenue, primarily our revenue from mobile platforms, is derived from the Apple iOS platform and the Google Android
platform. Although we believe that we have a good relationship with Apple and Google, any deterioration in our relationship with
either could materially harm our business, results of operations or financial condition.
We
are subject to each of Apple’s and Google’s standard terms and conditions for application developers, which govern
the promotion, distribution and operation of our applications on their respective storefronts. Each of Apple and Google has broad
discretion to change its standard terms and conditions. In addition, these standard terms and conditions can be vague and subject
to changing interpretations by Apple or Google. In addition, each of Apple and Google has the right to prohibit a developer from
distributing applications on the storefront if the developer violates the standard terms and conditions. In the event that either
Apple or Google ever determines that we are in violation of its standard terms and conditions and prohibits us from distributing
our applications on its storefront, it could materially harm our business, results of operations or financial condition.
The
number of people who access the internet through devices other than personal computers, including smart phones, cell phones and
handheld tablets, has increased dramatically in the past few years and is projected to continue to increase. Accordingly, we are
substantially dependent on interoperability with popular mobile platforms that we do not control, including the Apple App Store
and the Google Play Store, and a portion of our revenue is derived from these two digital storefronts. There have been occasions
in the past when these digital storefronts were unavailable for short periods of time or where there have been issues with the
in-App purchasing functionality from the storefront. In the event that either the Apple App Store or the Google Play Store is
unavailable or if in-App purchasing functionality from the storefront is non-operational for a prolonged period of time, it could
have a material adverse effect on our business, results of operations or financial condition.
In
addition, each of the Apple App Store and Google Play Store provides consumers with products that compete with ours. If either
of these platforms give preferential treatment to competitive products, it could seriously harm the usage of our products on mobile
devices.
Our
business depends on developing, establishing and maintaining strong brands. If we are unable to maintain and enhance our brands,
we may be unable to expand or retain our user and paying subscriber bases.
We believe that developing, establishing and maintaining awareness of our application brands is critical
to our efforts to achieve widespread acceptance of our applications and is an important element to expanding our client and subscriber
bases. Successful promotion of our application brands will depend largely on the effectiveness of our advertising and marketing
efforts and on our ability to provide reliable and useful applications at competitive prices. If clients and users do not perceive
our products to be of high quality, or if our products are not favorably received by clients and users, the value of our brands
could diminish, thereby decreasing the attractiveness of our software, services and applications to clients and users. In addition,
advertising and marketing activities may not yield increased revenue, and even if they do, any increased revenue may not offset
the expenses we incurred in building our brands.
If we fail to successfully promote and maintain our application brands, or incur substantial expenses
in unsuccessfully attempting to promote and maintain our brands, we may fail to attract enough new clients or subscribers or retain
our existing clients and subscribers to the extent necessary to realize a sufficient return on our advertising and marketing activities,
and it could have a material adverse effect on our business, results of operations or financial condition.
We
may conduct a portion of our operations through informal relationships, partnerships, strategic alliances or joint ventures, and
our failure to continue such relationships or resolve any material disagreements with these third parties could have a material
adverse effect on the success of these operations, our financial condition and our results of operations.
We
may conduct a portion of our operations through partnerships, strategic alliances or joint ventures. For instance, as part of
our blockchain strategy, we are exploring forming partnerships with blockchain companies and identifying potential strategic equity
or small investments in blockchain companies. As part of this strategy, we entered into our technology services agreement with
ProximaX and we may enter into similar arrangements in the future.
In
the future, we may depend on third parties for elements of these arrangements that are important to the success of the relationship,
such as the development of features or technologies to be incorporated into our applications. The performance of these third party
obligations or the ability of third parties to meet their obligations under these arrangements would be outside of our control.
If these third parties do not meet or satisfy their obligations under these arrangements, the performance and success of these
arrangements, and their value to us, would be adversely affected. If our current or future partners are unable to meet their obligations,
we may be forced to undertake the obligations ourselves and/or incur additional expenses in order to have some other party perform
such obligations. In such cases we may also be required to seek legal enforcement of our rights, the outcome of which would be
uncertain. If any of these events occur, they may adversely impact us, our financial performance and results of operations, and/or
adversely impact our ability to enter into similar relationships in the future.
Strategic
arrangements with third parties could involve risks not otherwise present when we directly manage our operations, including, for
example:
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third
parties may share certain approval rights over major decisions within the scope of the
relationship;
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the
possibility that these third parties might become insolvent or bankrupt;
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the possibility that we may incur liabilities as a result of an action taken by one of these third parties;
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these third parties may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; and
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disputes between us and these third parties may result in litigation or arbitration that would increase our expenses, delay or terminate projects and prevent our officers and directors from focusing their time and effort on our business.
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If our goodwill or other intangible
assets become impaired, we may be required to record a significant charge to earnings, which could seriously harm our operating
results.
We are required to
test goodwill for impairment at least annually or more frequently if there are indicators that the carrying amount of the goodwill
exceeds its carried value. As of December 31, 2018, we had recorded a total of $13.1 million of goodwill, $2.3 million of other
intangible assets and $0.8 million of digital tokens. An adverse change in domestic or global market conditions, particularly
if such change has the effect of changing one of our critical assumptions or estimates made in connection with the impairment
testing of goodwill or intangible assets, could result in a change to the estimation of fair value that could result in an impairment
charge to our goodwill or other intangible assets. If we divest or discontinue product categories or products that we previously
acquired, or if the value of those parts of our business become impaired, we also may need to evaluate the carrying value of our
goodwill. Any such material charges may have a negative impact on our operating results.
As
the distribution of our products through application stores increases, we may incur additional fees from the developers of application
stores.
As the user base
of our consumer applications continues to shift to mobile solutions, we increasingly rely on the Apple iOS and Google Android
platforms to distribute our products. While our products are free to download from these stores, we offer our users the
opportunity to purchase paid memberships and certain premium features through our products. We determine the prices at which
these memberships and features are sold and, in exchange for facilitating the purchase of these memberships and features
through our products to users who download our products from these stores, we pay Apple or Google, as applicable, a share,
which is currently 30% of the revenue we receive from these transactions. In the future, other distribution platforms that we
utilize may charge us fees for the distribution of our applications. As the distribution of our products through application
stores increases, the amount of fees that we must pay to the developers of these application stores will also increase.
Unless we find a way to offset these fees, our business, financial condition and results of operations could be adversely
affected.
Our
future success is dependent, in part, on the performance and continued service of our executive officers. Without their continued
service, we may be forced to interrupt or eventually cease our operations.
We
are dependent to a great extent upon the experience, abilities and continued service of Alexander Harrington, our Chief Executive
Officer, and Jason Katz, our Chairman of the Board of Directors and Chief Operating Officer. The loss of the services of these
individuals would substantially affect our business or operations and could have a material adverse effect on our business, results
of operations or financial condition.
Our
subscription metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies
in those metrics may seriously harm and negatively affect our reputation and our business.
We
regularly review metrics, including our active subscribers, to evaluate growth trends, measure our performance, and make strategic
decisions. These metrics are calculated using internal Company data and have not been validated by an independent third party.
While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement,
there are inherent challenges in measuring how our products are used across large populations globally.
Some
of our demographic data may be incomplete or inaccurate. For example, because users self-report their dates of birth, our age-demographic
data may differ from our users’ actual ages. If our users provide us with incorrect or incomplete information regarding
their age or other attributes, then our estimates may prove inaccurate.
In
addition, our business strategy is guided by data analytics that we compute internally based on data collection, data processing,
cloud-based platforms, statistical projections and forecasting, mobile computing, social media analytics and other applications
and technologies. We use these internally derived data analytics to guide decisions concerning the development and modification
of features on our applications, monetization strategies for our applications and the development of new applications, among other
things. Our new Backchannel application is designed not to collect any personally identifiable information. As a result, Backchannel
will not allow us this analytical opportunity, which could cause our business to suffer.
The
inability to accurately derive our metrics or data analytics could result in incorrect business decisions and inefficiencies.
For instance, if a significant understatement or overstatement of our active subscribers were to occur, we may expend resources
to implement unnecessary business measures or fail to take required actions to attract a sufficient number of subscribers to satisfy
our growth strategies. If advertisers or investors do not perceive our subscription, geographic or other demographic metrics to
be accurate representations of our user base, or if we discover material inaccuracies in our subscription, geographic or other
demographic metrics, our reputation may be seriously harmed. At the same time, advertisers may be less willing to allocate their
budgets or resources to our products, which could seriously harm our business, results of operation or financial condition.
Because
we recognize revenue from subscriptions over the subscription term, the full impact of downturns or upturns in subscription sales
may not be immediately reflected in our results of operations or financial condition.
We
recognize subscription revenue from customers monthly over the subscription term, and subscriptions are generally offered in durations
of one-, three-, six-, twelve-, and fifteen-month terms, depending on the particular product. As a result, much of the subscription
revenue we report in each period is deferred revenue from subscription agreements entered into during previous periods. Consequently,
a decline in new or renewed subscriptions in any one quarter will negatively affect our revenue in future quarters. In addition,
we might not be able to immediately adjust our costs and expenses to reflect these reduced revenues. Accordingly, the effect of
significant downturns in user acceptance of our applications may not be fully reflected in our results of operations until future
periods. Our subscription model also makes it difficult for us to quickly increase our revenue through additional sales in any
period, as revenue from new subscribers must be recognized over the subscription term. As a result, you should not rely on the
amount of subscription revenue generated in prior quarters as an indication of future results.
The
online live video industry is characterized by rapid technological change and the development of enhancements and new applications,
and if we fail to keep pace with technological developments or launch new applications, our business may be adversely affected.
The
online live video industry is characterized by rapid change, and our future success is dependent upon our ability to adopt and
innovate. To attract new users and increase revenues from existing users, we need to enhance, add new features to and improve
our existing applications and introduce new applications in the future. The success of any enhancements or new features and applications
depends on several factors, including timely completion, introduction and market acceptance. Building a new brand or product is
generally an iterative process that occurs over a meaningful period of time and involves considerable resources and expenditures,
and we may expend significant time and resources developing and launching an application that may not result in revenues in the
anticipated timeframe or at all, or may not result in revenue growth that is sufficient to offset increased expenses. If we are
unable to successfully develop enhancements, new features or new applications to meet user trends and preferences, our business
and operating results could be adversely affected.
In
addition, our applications are designed to operate on a variety of network, hardware and software platforms using internet tools
and protocols and we need to continuously modify and enhance our applications to keep pace with technological changes. If we are
unable to respond in a timely and cost-effective manner, our current and future applications may become less marketable and less
competitive or even obsolete.
If
we are unable to protect our intellectual property rights, we may be unable to compete with competitors developing similar technologies.
Historically,
our defense of our intellectual property rights has been a significant aspect of our business and has meaningfully contributed
to our results of operations. Accordingly, our success and ability to compete are often dependent upon the development of intellectual
property for our applications.
We
aim to protect our confidential proprietary information, in part, by entering into confidentiality agreements and invention assignment
agreements with all our employees, consultants, advisors and any third parties who access or contribute to our proprietary know-how,
information, or technology. We also rely on trademark, copyright, patent, trade secret, and domain-name-protection laws to protect
our proprietary rights. In the United States and internationally, we have filed various applications to protect aspects of our
intellectual property, and we currently hold a number of issued patents in multiple jurisdictions. In the future we may acquire
additional patents or patent portfolios, which could require significant cash expenditures. However, third parties may knowingly
or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held by us, and pending and future
trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available
in every country in which we operate or intend to operate our business.
In
any of these cases, we may be required to expend significant time and expense to prevent infringement or to enforce our rights.
Although we have taken measures to protect our proprietary rights, others may offer products or concepts that are substantially
similar to ours and compete with our business. If we are unable to protect our proprietary rights or prevent unauthorized use
or appropriation by third parties, the value of our brand and other intangible assets may be diminished, and competitors may be
able to more effectively mimic our service and methods of operations. Any of these events could seriously harm our business.
If
our use of the NEM blockchain protocol is limited, it could materially or permanently disrupt our blockchain initiatives.
We
have selected the NEM blockchain protocol to power our core blockchain infrastructure, including our in-development blockchain-based
application Backchannel. We are not party to any agreement with the NEM Foundation to use the NEM technology, and no person, business,
governmental authority or other entity or authority of any kind has any obligation to provide any financial, technical or other
support to the continued operation or development of the NEM blockchain protocol. If the NEM blockchain protocol were to become
unavailable to us in its current form and functionality for any reason, we would need to use a different blockchain protocol to
power our applications, which could delay the launch of Backchannel or other blockchain initiatives on a long-term or permanent
basis.
We
plan to continue expanding our operations internationally and may be subject to increased business and economic risks that could
seriously harm our business.
Presently,
we derive a significant portion of revenue from international territories and we plan to continue expanding our business operations
abroad. In addition, we rely on outsourced services based in Russia, India and elsewhere. We may enter new international markets
where we have limited or no experience in marketing, selling and deploying our products. If we fail to deploy or manage our operations
in international markets successfully, our business may suffer. As our international operations increase our operating results
may become more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. In addition,
we are subject to a variety of risks inherent in doing business internationally, including:
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political,
social, and economic instability;
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risks
related to the legal and regulatory environment in foreign jurisdictions, including with
respect to privacy, and unexpected changes in laws, regulatory requirements, and enforcement;
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potential
damage to our brand and reputation due to compliance with local laws, including potential
censorship and requirements to provide user information to local authorities;
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fluctuations
in currency exchange rates;
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higher
levels of credit risk and payment fraud;
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complying
with multiple tax jurisdictions;
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reduced
protection for intellectual-property rights in some countries;
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difficulties
in staffing and managing global operations and the increased travel, infrastructure and
compliance costs associated with multiple international locations;
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regulations
that might add difficulties in repatriating cash earned outside the United States and
otherwise preventing us from freely moving cash;
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import
and export restrictions and changes in trade regulation;
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complying
with statutory equity requirements;
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complying
with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in
other jurisdictions;
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the
impact of the United Kingdom’s pending exit from the European Union; and
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export
controls and economic sanctions administered by the Department of Commerce Bureau of
Industry and Security and the Treasury Department’s Office of Foreign Assets Control.
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If
we are unable to expand internationally and manage the complexity of our global operations successfully, our business could be
seriously harmed.
A portion of our revenue is dependent
on third-party resellers, the efforts of which we do not control.
We are dependent on
the efforts of third parties who resell our subscriptions for a portion of our revenue. In particular, video chat users in certain
international territories have an option to purchase subscriptions through local resellers. These local resellers prepay in bulk
for services and debit the prepaid balance as one-time subscriptions and virtual currency are sold to end users.
We do not control the
efforts of these resellers. If they fail to market or sell our subscriptions successfully, merge or consolidate with other businesses,
declare bankruptcy or depart from their respective industries, our business could be harmed. If we are unable to maintain or replace
our contractual relationships with resellers, efficiently manage our relationships with them or establish new contractual relationships
with other third parties, we may fail to retain subscribers or acquire potential new subscribers and may experience delays and
increased costs in adding or replacing subscribers that were lost, any of which could materially affect our business, operating
results and financial condition.
Foreign
governments restricting access to our applications could materially adversely impact our business.
We
have continued to focus on increasing the international presence of our applications by expanding the localized and translated
versions for additional international countries that are culturally aligned with our products. Foreign data protection, privacy,
consumer protection, content regulation, and other laws and regulations are often more restrictive than those in the United States.
Foreign governments may censor our products in their countries, restrict access to our products from their countries entirely,
or impose other restrictions that may affect their citizens’ ability to access our products for an extended period of time
or even indefinitely. If foreign governments think we are violating their laws, or for other reasons, they may seek to restrict
access to our products, which would give our competitors an opportunity to penetrate geographic markets that we cannot access.
As a result, our ability to grow our international user base would be impaired, and we may not be able to maintain or grow our
revenue as anticipated and our business could be seriously harmed.
Our
mobile applications rely on high-bandwidth data capabilities, which are subject to hardware, networks, regulations and standards
that we do not control.
Our
mobile applications require high-bandwidth data capabilities. If the costs of data usage increase or access to cellular networks
is limited, our user growth and retention on mobile platforms may be seriously harmed. Additionally, to deliver high-quality video
and other content over mobile cellular networks, our products must work well with a range of mobile technologies, systems, networks,
regulations and standards that we do not control, and any changes to those mobile technologies, systems, networks, regulations
or standards could impact the usability of our mobile applications, which would materially adversely affect our business, results
of operations or financial condition.
Our
business depends in large part upon the availability of cost-effective advertising space through a variety of media and keeping
pace with trends in consumer behavior.
We
depend upon the availability of advertising space through a variety of media, including third-party applications on platforms
such as Facebook, to recruit new users and subscribers, generate activity from existing users and subscribers and direct traffic
to our application. Historically, we have had to increase our marketing expenditures in order to attract and retain users and
sustain our growth. The availability of advertising space varies, and a shortage of advertising space in any particular media
or on any particular platform, or the elimination of a particular medium on which we advertise, could limit our ability to generate
new subscribers, generate activity from existing subscribers or direct traffic to our applications, any of which could have a
material adverse effect on our business, results of operations and financial condition. In addition, evolving consumer behavior
can affect the availability of profitable marketing opportunities. For example, as consumers communicate less via email and more
via text messaging and other virtual means, the reach of email campaigns designed to attract new and repeat users (and retain
current users) for our applications is adversely impacted. To continue to reach potential users and grow our business, we must
devote more of our overall marketing expenditures to newer advertising channels, which may be unproven and undeveloped, and we
may not be able to continue to manage and fine-tune our marketing efforts in response to these trends.
Interruption,
maintenance or failure of our programming code, servers or technological infrastructure could hurt our ability to effectively
provide our applications, which could damage our reputation and harm our results of operations.
The
availability of our applications depends on the continued operation of our programming code, databases, servers and technological
infrastructure. Any damage to, or failure of, our systems could result in interruptions in service for our applications, which
could damage our brands and have a material adverse effect on our business, results of operations or financial condition. Our
systems are vulnerable to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures,
computer viruses, computer denial of service attacks or other attempts to harm our systems. Some of our systems are not fully
redundant, and our disaster recovery planning cannot account for all eventualities.
In addition, from
time to time we experience limited periods of server downtime due to maintenance or enhancements. If our applications are unavailable
during these periods of downtime or if our users are unable to access our applications within a reasonable amount of time, users
may not return to our applications in the future, or at all. As our user base and the volume and types of information shared on
our applications continues to grow, we will need an increasing amount of technology infrastructure, including network capacity
and computing power, to continue to satisfy our users’ needs. It is possible that we may fail to effectively scale and grow
our technology infrastructure to accommodate these increased demands. Any failure to support and scale our technology infrastructure
could adversely impact the reputation of our brands and harm our results of operations.
Security
breaches, computer viruses and computer hacking attacks could harm our business, results of operations or financial condition.
We
receive, process, store and transmit a significant amount of personal user and other confidential information, including credit
card information, and enable our users to share their personal information with each other. In some cases, we retain third party
vendors to store this information. We continuously develop and maintain systems to protect the security, integrity and confidentiality
of this information, but cannot guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties
will not gain unauthorized access to this information despite our efforts. If any such event were to occur, we may not be able
to remedy the event, and we may have to expend significant capital and resources to mitigate the impact of such an event, and
to develop and implement protections to prevent future events of this nature from occurring.
Security
breaches, computer malware and computer hacking attacks have become more prevalent in our industry, have occurred on our systems
in the past, and may occur on our systems in the future. Although it is difficult to determine what, if any, harm may directly
result from an interruption or attack, any security breach caused by hacking, including efforts to gain unauthorized access to
our applications, servers or websites, or to cause intentional malfunctions or loss or corruption of data, software, hardware
or other computer equipment, and the inadvertent transmission of computer viruses could harm our business, financial condition
and results of operations. If a breach of our security (or the security of our vendors and partners) occurs, the perception of
the effectiveness of our security measures and our reputation may be harmed, we could lose current and potential users and the
recognition of our various brands and their competitive positions could be diminished, any or all of which could adversely affect
our business, financial condition and results of operations.
Spammers
may attempt to use our products to send targeted and untargeted spam messages to users, which may embarrass or annoy users and
make our products less user friendly. We cannot be certain that the technologies that we have developed to repel spamming attacks
will be able to eliminate all spam messages from our products. Our actions to combat spam may also require diversion of significant
time and focus of our engineering team from improving our products. As a result of spamming activities, our users may use our
products less or stop using them altogether, and result in continuing operational cost to us.
Similarly,
terror and other criminal groups may use our products to promote their goals and encourage users to engage in terror and other
illegal activities. We expect that as more people use our products, these groups will increasingly seek to misuse our products.
Although we invest resources to combat these activities, including by suspending or terminating accounts we believe are violating
our Terms of Service, we expect these groups will continue to seek ways to act inappropriately and illegally on our products.
Combating these groups requires our engineering team to divert significant time and focus from improving our products. In addition,
we may not be able to control or stop our products from becoming the preferred application of use by these groups, which may become
public knowledge and seriously harm our reputation or lead to lawsuits or attention from regulators. If these activities increase,
our reputation, user growth and user engagement, and operational cost structure could be seriously harmed.
If
there are changes in laws or regulations regarding privacy and the protection of user data, or if we fail to comply with such
laws or regulations, we may face claims brought against us by regulators or users that could adversely affect our business, results
of operations or financial condition.
State,
federal and international laws and regulations govern the collection, use, retention, sharing and security of data that we receive
from and about our users. These laws can be particularly restrictive in countries outside of the United States. In addition, the
application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving
industries in which we operate.
Any
failure, or perceived failure, by us to comply with such laws and regulations, including Federal Trade Commission requirements
or industry self-regulatory principles, could result in proceedings or actions against us by governmental entities or others,
which could potentially have an adverse effect on our business. As a result of such a failure, or perceived failure, we may be
subject to a claim or class-action lawsuit regarding our online services. The successful assertion of a claim against us, or a
regulatory action against us, could result in significant monetary damages, diversion of management resources and require us to
make significant payments and incur substantial legal expenses. Any claims with respect to violation of privacy or misappropriation
of user data brought against us may have a material adverse effect on our business, results of operations and financial condition.
Several
proposals are pending before federal, state, and foreign legislative and regulatory bodies or have recently been enacted that
could significantly affect our business. For example, the GDPR in the European Union, which went into effect on May 25, 2018,
required us to change our policies and procedures regarding the handling of personal and sensitive data in the European Union.
The failure to comply with the GDPR could, in certain instances, result in penalties of up to 4% of our worldwide revenues. As
a result, a failure to comply with the GDPR could seriously harm our business.
Continued
privacy concerns may result in new or amended laws and regulations. Future laws and regulations with respect to the collection,
compilation, use and publication of information and consumer privacy could result in limitations on our operations, increased
compliance or litigation expense, adverse publicity or loss of revenue, which any of which could have a material adverse effect
on our business, financial condition and results of operations. It is also possible that we could be prohibited from collecting
or disseminating certain types of data, which could affect our ability to meet our users’ needs.
Changes
in laws or regulations that impact the use of the internet, including internet neutrality laws, could adversely affect our business,
results of operations or financial condition.
The
adoption of any laws or regulations that adversely affect the growth or use of the internet, including laws governing internet
neutrality, could decrease the demand for our products and increase our cost of doing business. Current Federal Communications
Commission “open internet rules” prohibit internet providers in the United States from impeding access to most content,
or otherwise unfairly discriminating against content providers like us. These rules also prohibit mobile providers from entering
into arrangements with specific content providers for faster or better access over their data networks. The European Union similarly
requires equal access to internet content. If the Federal Communications Commission, Congress, the European Union or courts modify
these open internet rules, mobile providers may be able to limit our users’ ability to access our applications or make our
applications a less attractive alternative to our competitors’ applications, which could materially adversely affect our
business, results of operations and financial condition.
We
have faced, and we expect that we will continue to face, chargeback liability when our credit card providers resolve chargebacks
in favor of their customers. We cannot accurately anticipate the extent of these liabilities, and if not properly addressed, these
liabilities could increase our operating expenses or preclude us from accepting certain credit cards as a method of payment, either
of which would materially adversely affect our results of operations and financial condition.
We
depend on the ability to accept credit and debit card payments from our subscribers and our ability to maintain the good standing
of our merchant account with our credit card providers to process subscription payments. In the event that one of our customers
initiates a billing dispute and one of our credit card providers resolves the dispute in the customer’s favor, the transaction
is normally “charged back” to us and the purchase price is credited or otherwise refunded to the customer. In addition,
under current credit card practices, a merchant is liable for fraudulent credit card transactions when, as is the case with the
transactions we process, that merchant does not obtain a cardholder’s signature.
We
have suffered losses and we expect that we will continue to suffer losses as a result of subscriptions placed with fraudulent
credit card data, as well as users who chargeback their purchases. Any failure to adequately control fraudulent credit card transactions
or keep our chargebacks under an acceptable threshold would result in significantly higher credit card-related costs and, therefore,
materially increase our operating expenses.
If
we are subject to intellectual property infringement claims, it could cause us to incur significant expenses, pay substantial
damages or royalties and prevent us from offering our applications.
From
time to time, third parties may claim that our applications infringe or violate their intellectual property rights. Any claims
of infringement could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay
substantial damages and prevent us from using licensed technology that may be fundamental to our applications. Even if we were
to prevail, any litigation regarding intellectual property could be costly and time-consuming and divert the attention of our
management and key personnel from our business operations. We maintain insurance to protect against intellectual property infringement
claims and resulting litigation, but such insurance may not cover or may not be sufficient to cover all potential claims, liability
or expenses. We may also be obligated to indemnify our business partners in any such litigation, which could further exhaust our
resources. Furthermore, as a result of an intellectual property challenge, we may be prevented from offering our applications
unless we enter into royalty, license or other agreements. We may not be able to obtain such agreements at all or on terms acceptable
to us, and as a result, we may be precluded from offering our applications and services.
We
may make acquisitions in the future, which could require significant management attention, disrupt our business, dilute our stockholders
and seriously harm our business.
As
part of our business strategy, we have made and intend to make acquisitions to add specialized employees and complementary companies,
products and technologies. In the future, we may not be able to find other suitable acquisition candidates, and we may not be
able to complete acquisitions on favorable terms, if at all. Our previous and future acquisitions may not achieve our goals, and
any future acquisitions we complete could be viewed negatively by users, advertisers or investors. In addition, if we fail to
successfully close transactions or integrate new teams, or integrate the products and technologies associated with these acquisitions
into our company, our business could be seriously harmed. Any integration process may require significant time and resources,
and we may not be able to manage the process successfully. We may not successfully evaluate or use the acquired products, technology
and personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may
also incur unanticipated liabilities that we assume as a result of acquiring companies. We may have to pay cash, incur debt or
issue equity securities to pay for any acquisition, any of which could negatively impact our business and financial condition.
Issuing equity to finance any such acquisitions would also dilute our existing stockholders. Incurring debt would increase our
fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.
We
face certain risks related to the physical and emotional safety of users and third parties.
We
cannot control the actions of our users in their communications or physical actions. There is a possibility that users or third
parties could be physically or emotionally harmed following interaction with another user. We warn our users that we do not screen
other users and, given our lack of physical presence, we do not take any action to ensure personal safety on a meeting between
users or subscribers arranged following contact initiated via our applications or ensure personal safety of our users against
self-harming following contact with other users initiated via our applications. If an unfortunate incident of this nature occurred
in a meeting of two people following contact initiated on our applications or that of one of our competitors, any resulting negative
publicity could materially and adversely affect us or the online video chat industry in general. Any such incident involving our
applications could damage our reputation and our brand, which could have a material adverse effect on our business, results of
operations or financial condition. In addition, the affected users or third parties could initiate legal action against us, which
could divert management attention from operations, cause us to incur significant expenses, whether we are successful or not, and
damage our reputation.
We
may be liable as a result of information retrieved from or transmitted over the internet.
We
may be sued for defamation, civil rights infringement, negligence, copyright or trademark infringement, invasion of privacy, personal
injury, product liability or under other legal theories relating to information that is published or made available on our websites
or applications. These types of claims have been brought, sometimes successfully, against online services in the past. We also
offer messaging services on our applications and we send emails directly and through third parties to our users, which may subject
us to potential risks, such as liabilities or claims resulting from unsolicited email or spamming, lost or misdirected messages,
security breaches, illegal or fraudulent use of email or personal information or interruptions or delays in email service. Our
insurance does not specifically provide for coverage of these types of claims and, therefore, may be inadequate to protect us
against them. In addition, we could incur significant costs in investigating and defending such claims, even if we ultimately
are not held liable. If any of these events occur, our revenue could be materially adversely affected or we could incur significant
additional expense, and the market price of our securities may decline.
We
may need additional capital to execute our business plan. If we do not obtain additional financing, it could have a material adverse
effect on our business, results of operations or financial condition.
We
might need to raise additional capital or financing through debt or equity offerings to support our expansion, marketing efforts
and application development programs in the future. We might require additional capital or financing to:
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expand our software licensing and technology implementation services business;
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hire
and retain talented employees, including technical employees, executives, and marketing
experts;
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effectuate
our long-term growth strategy and expand our application development programs; and
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market
and advertise our applications to attract more paying subscribers.
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We
may be unable to obtain future capital or financing on favorable terms or at all. If we cannot obtain additional capital or financing,
we may need to reduce, defer or cancel application development programs, planned initiatives, marketing or advertising expenses
or costs and expenses. The failure to obtain necessary additional capital or financing on favorable terms, if at all, could have
a material adverse effect on our business, results of operations or financial condition.
We
may not be effective in protecting our internet domain names.
We
currently hold various internet domain names related to our brands and in the future may acquire new internet domain names. The
regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish
additional top level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As
a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore,
the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear.
We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of our existing trademarks and other proprietary rights or those we may seek to acquire. Any such inability to protect
ourselves could cause us to lose a significant portion of our members and paying subscribers to our competitors.
Risks
Related to Ownership of Our Common Stock
Our
results of operations are volatile and difficult to predict, and our stock price may decline if we fail to meet the expectations
of stockholders.
Our
revenue and results of operations could vary significantly from period-to-period and year-to-year and may fail to match our past
performance because of a variety of factors, many of which are outside of our control. Any of these events could cause the market
price of our common stock to fluctuate. Factors that may contribute to the variability of our results of operations include:
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our shift in focus towards the utilization and development of blockchain-based applications and technologies
and the launch of our software licensing and technology implementation services business;
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changes
in expectations as to our future financial performance;
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announcements
by us or our competitors of significant contracts, acquisitions, strategic partnerships
or capital commitments;
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market
acceptance of our new applications and enhancements to our existing applications;
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the
amount of advertising and marketing that is available and spent on user acquisition campaigns;
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disruptions
in the availability of our applications on third party platforms;
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actual
or perceived violations of privacy obligations and compromises of subscriber data;
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the
entrance of new competitors in our market whether by established companies or the entrance
of new companies;
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additions
or departures of key personnel and the cost of attracting and retaining application developers
and other software engineers; and
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general
market conditions, including market volatility.
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Given
the rapidly evolving industries in which we operate, our historical results of operations may not be useful in predicting our
future results of operations. In addition, metrics available from third parties regarding our industry and the performance of
our applications may not be indicative of our future financial performance.
Our
common stock is usually thinly traded, you may be unable to sell at or near ask prices or at all and the price of our common stock
may be volatile.
The
shares of our common stock have usually been thinly-traded on the OTCQB Marketplace (the “OTCQB”), meaning that the
number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or
non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively
unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence
sales volume. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or
non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support
continuous sales without an adverse effect on stock price. In addition, we may experience unusual or infrequent trading events
that cause the price of our common stock to fluctuate wildly. For example, in February 2017, a number of third party publications
reported that the trading price of our common stock increased by over 100% when investors inadvertently purchased our common stock
thinking it was the common stock of Snap Inc., a camera company that, among other things, owns the application Snapchat.
A
broader or more active public trading market for our common stock may not develop or be sustained, and the current trading level
of our common stock may not be sustained. Due to these conditions, you may be unable to sell your common stock at or near ask
prices or at all if you desire to sell shares of common stock.
Because
of the limited trading market for our common stock, and because of the possible price volatility, you may not be able to sell
your shares of common stock when you desire to do so. The inability to sell your shares in a rapidly declining market may substantially
increase your risk of loss because of such illiquidity and because the price for our common stock may suffer greater declines
because of its price volatility.
The
ownership of our common stock is significantly concentrated in a small number of investors, some of whom are affiliated with our
Board of Directors and management, which could prevent stockholders from having input on the course of our operations or otherwise
lead to actual or potential conflicts of interest.
As
of March 14, 2019, Jason Katz, our Chairman of the Board of Directors and Chief Operating Officer, beneficially owned approximately
10.2% of our outstanding common stock, including shares of common stock held directly by Mr. Katz’s spouse, and The J. Crew
Delaware Trust A, a trust formed by Mr. Katz for the benefit of certain of his family members, also beneficially owned approximately
34.3% of our outstanding common stock as of March 14, 2019. Mr. Katz is not a beneficiary of the trust and does not hold
voting or dispositive power over the shares held by the trust.
Mr.
Katz, The J. Crew Delaware Trust A and others that have significant beneficial ownership of our common shares have substantial
influence regarding matters submitted for stockholder approval, including proposals regarding:
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any
merger, consolidation or sale of all or substantially all of our assets;
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the
election of members of our Board of Directors; and
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any
amendment to our Certificate of Incorporation, as amended (the “Certificate of Incorporation”).
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The
current or increased ownership position of any of these stockholders and/or their respective affiliates could delay, deter or
prevent a change of control or adversely affect the price that investors might be willing to pay in the future for our common
shares. In addition, the interests of these stockholders and/or their respective affiliates may significantly differ from the
interests of our other stockholders and they may vote the common shares they beneficially own in ways with which our other stockholders
disagree.
The
issuance of shares upon the exercise of stock options and unvested shares of restricted common stock may cause immediate and substantial
dilution to our existing stockholders.
As
of December 31, 2018, we had approximately 611,810 shares of common stock that were issuable upon the exercise of vested
outstanding stock options. The issuance of shares upon the exercise of these options may result in substantial dilution to the
equity interest and voting power of holders of our common stock.
In
the future, we may also issue additional shares of common stock or other securities convertible into or exchangeable for shares
of common stock. Our Certificate of Incorporation currently authorizes us to issue up to 25,000,000 shares of common stock, of
which 6,868,679 were outstanding as of December 31, 2018, which includes 79,286 unvested restricted shares, and 10,000,000 shares
of preferred stock with such designations, preferences and rights as determined by our Board of Directors, of which none were
outstanding as of December 31, 2018. The issuance of additional shares of our common stock may substantially dilute the ownership
interests of our existing stockholders. Furthermore, sales of a substantial amount of our common stock in the public market, or
the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability
to raise additional capital through the sale of our securities.
Our
Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain
types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability
to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or stockholders.
Our
Certificate of Incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will
be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of our Company, (ii) action
asserting a claim of breach of a fiduciary duty owed by any director, officer, employee, agent, or stockholder of our Company
to the Company or the Company’s stockholders, (iii) action asserting a claim against the Company or any director, officer,
employee, agent, or stockholder of the Company arising pursuant to any provision of the Delaware General Corporation Law (the
“DGCL”) or our Certificate of Incorporation or our Amended and Restated By-Laws, as amended (the “By-Laws”),
or (iv) action asserting a claim against the Company or any director, officer, employee, agent, or stockholder of the Company
governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our
capital stock shall be deemed to have notice of and to have consented to the provisions of our amended and restated certificate
of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a
judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage
such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of
our Certificate of Incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions
or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely
affect our business and financial condition.
Our
Certificate of Incorporation, as amended, includes provisions limiting the personal liability of our directors for breaches of
fiduciary duty under the DGCL.
Our
Certificate of Incorporation contains a provision eliminating a director’s personal liability to the fullest extent permitted
by the DGCL for monetary damages resulting from a breach of fiduciary duty; provided that such provision will not eliminate or
limit a director’s liability for:
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any
breach of the director’s duty of loyalty;
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acts
or omissions not in good faith or which involve intentional misconduct or a knowing violation
of the law;
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Section
174 of the DGCL (unlawful dividends); or
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any
transaction from which the director derives an improper personal benefit.
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The
principal effect of the limitation on liability provision is that a stockholder will be unable to prosecute an action for monetary
damages against a director unless the stockholder can demonstrate a basis for liability for which indemnification is not available
under the DGCL. This provision, however, should not limit or eliminate our rights or any stockholder’s rights to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a director’s fiduciary duty. This provision will
not alter a director’s liability under federal securities laws. The inclusion of this provision in our Certificate of Incorporation
may discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties,
even though such an action, if successful, might otherwise have benefited us and our stockholders.
Delaware
law and our Certificate of Incorporation and By-Laws contain anti-takeover provisions that could delay or discourage takeover
attempts that stockholders may consider favorable.
Under
our Certification of Incorporation, our Board of Directors is authorized to issue shares of preferred stock in one or more series
and to fix the voting powers, preferences and the qualifications, limitations or restrictions of the preferred stock. Accordingly,
we may issue shares of preferred stock with a preference over our common stock with respect to dividends or distributions on liquidation
or dissolution, or that may otherwise adversely affect the voting or other rights of the holders of common stock. Issuances of
preferred stock, depending upon the rights, preferences and designations of the preferred stock, may have the effect of delaying,
deterring or preventing a change of control, even if that change of control might benefit our stockholders.
We
are also subject to Section 203 of the DGCL, which generally prohibits a public Delaware corporation from engaging in a “business
combination” with an “interested stockholder” for a period of three years after the date of the transaction
in which the person became an interested stockholder, unless (i) prior to the date of the transaction, the Board of Directors
of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested
stockholder; (ii) the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons
who are directors and also officers and (b) shares owned by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii)
on or subsequent to the date of the transaction, the business combination is approved by the Board of Directors and authorized
at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
If
we fail to remain current on our reporting requirements, we could be removed from the OTCQB, which would limit the ability of
broker-dealers to sell our common stock and the ability of stockholders to sell their common stock in the secondary market.
Companies
trading on the OTCQB must be reporting issuers under Section 12 of the Exchange Act, and must be current in their filings under
the Exchange Act to maintain price quotation privileges on the OTCQB. If we fail to remain current on our reporting requirements,
we could be removed from the OTCQB. As a result, the liquidity for our common stock could be adversely affected by limiting the
ability of broker-dealers to sell our common stock and the ability of stockholders to sell their common stock in the secondary
market.
Because
we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return
on investment unless you sell your common stock for a price greater than that which you paid for it.
We
do not anticipate that we will declare or pay any dividends on our common stock in the foreseeable future. Consequently, stockholders
will only realize an economic gain on their investment in our common stock if the price appreciates. Stockholders should not purchase
our common stock expecting to receive cash dividends. Because we currently do not pay dividends, and there may be limited trading
in our common stock, stockholders may not have any manner to liquidate or receive any payment on their common stock. Therefore,
our failure to pay dividends may cause stockholders to not see any return on their common stock even if we are successful in our
business operations. In addition, because we do not pay dividends we may have trouble raising additional funds which could affect
our ability to expand our business operations.
Investor
relations activities, nominal “float” and supply and demand factors may affect the price of our common stock.
We
have engaged an investor relations firm to create investor awareness for our Company. These campaigns may include non-deal road
shows and personal, video and telephone conferences with investors and prospective investors in which our business and business
practices are described. We provide compensation to our investor relations firm, and may in the future provide compensation to
additional investor relations firms or financial advisory firms, for these services, and pay for newsletters, websites, mailings
and email campaigns that are produced by third parties based upon publicly available information concerning us. We do not intend
to review or approve of the content of such analyst reports or other writings and communications that are based upon analysts’
own research or methods. Investor relations firms are generally required to disclose when they are compensated for their efforts
and the source of such compensation, but whether such disclosure is made or in compliance with applicable laws is not under our
control. In addition, investors in the Company may, from time to time, take steps to encourage investor awareness through similar
activities that may be undertaken at the expense of such investors. Investor awareness activities may also be suspended or discontinued
which may impact the trading market of our common stock.
The
SEC and the Financial Industry Regulatory Authority enforce various statutes and regulations intended to prevent manipulative
or deceptive devices in connection with the purchase or sale of any security and carefully scrutinize trading patterns and company
news and other communications for false or misleading information, particularly in cases where the hallmarks of “pump and
dump” activities may exist, such as rapid share price increases or decreases. We and our stockholders may be subjected to
enhanced regulatory scrutiny due to the fact that our affiliates hold a majority of our outstanding common stock and we have a
limited number of shares of common stock that are publicly available for resale. The limited trading markets in which our shares
of common stock may be offered or sold have often been associated with improper activities concerning penny-stocks, such as the
OTCQB or the pink sheets.
The
Supreme Court of the United States has stated that manipulative action is a term of art connoting intentional or willful conduct
designed to deceive or defraud investors by controlling or artificially affecting the price of securities. Often times, manipulation
is associated by regulators with forces that upset the supply and demand factors that would normally determine trading prices.
Securities regulators have often cited thinly-traded markets, small numbers of holders and awareness campaigns as components of
their claims of price manipulation and other violations of law when combined with manipulative trading, such as wash sales, matched
orders or other manipulative trading timed to coincide with false or touting press releases. There can be no assurance that our
activities or the activities of third parties, or the small number of potential sellers or small percentage of stock in our public
float, or determinations by purchasers or holders as to when or under what circumstances or at what prices they may be willing
to buy or sell stock, will not artificially impact (or would be claimed by regulators to have affected) the normal supply and
demand factors that determine the price of our common stock.
If
we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report
our financial results or prevent fraud and our business may be harmed and our stock price may be adversely impacted.
Effective
internal controls over financial reporting are necessary for us to provide reliable financial reports and to effectively prevent
fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act
of 2002 (the “Sarbanes-Oxley Act”) requires management to evaluate and assess the effectiveness of our internal control
over financial reporting. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously
evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of
our internal controls over financial reporting, we could be subject to litigation or regulatory scrutiny and investors could lose
confidence in the accuracy and completeness of our financial reports. In the past, our management has determined that we did not
maintain effective internal control over financial reporting due to certain material weaknesses. Although management has since
determined that our disclosure controls and procedures are effective, we cannot provide any assurance that in the future we will
be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control
over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business
may be harmed and our stock price may decline.