NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Organization
and Description of Business
|
The accompanying condensed consolidated
financial statements include PeerStream, Inc. and its wholly owned subsidiaries, A.V.M Software, Inc., Paltalk Software Inc.,
Paltalk Holdings, Inc., Tiny Acquisition Inc., Camshare, Inc., Fire Talk LLC and Vumber LLC (collectively, the “Company,”
“we,” “our” or “us”).
The Company is an innovator in communications
applications and software designed to provide enhanced security and privacy capabilities for transmitting video, voice, text and
data. 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.
The
condensed consolidated financial statements included in this report have been prepared on a going concern basis in accordance
with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the Securities
and Exchange Commission (the “SEC”) for interim financial information. The Company has not included certain information
and notes required by GAAP for complete financial statements pursuant to those rules and regulations, although it believes that
the disclosure included herein is adequate to make the information presented not misleading. The condensed consolidated financial
statements contained herein should be read in conjunction with the Company’s audited consolidated financial statements and
the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with
the SEC on March 22, 2019 (the “Form 10-K”).
In
the opinion of management, the accompanying unaudited condensed consolidated financial information contains all normal and recurring
adjustments necessary to fairly present the condensed consolidated balance sheet, results of operations, cash flows and changes
in the stockholders’ equity of the Company for the interim periods presented. The Company’s historical results are
not necessarily indicative of future operating results and the results for the three months ended March 31, 2019 are not necessarily
indicative of results for the year ending December 31, 2019, or for any other period.
Reclassifications
Certain
prior period amounts have been reclassified for comparative purposes to conform to the current presentation. These reclassifications
have no impact on the previously reported net loss.
PEERSTREAM,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2.
|
Summary
of Significant Accounting Policies
|
For
a detailed discussion about the Company’s significant accounting policies, see the Form 10-K.
During the three months ended March 31,
2019, there were no significant changes made to the Company’s significant accounting policies.
Significant
Estimates and Assumptions
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period.
Significant estimates relied upon in preparing
these financial statements include the estimates used to determine the fair value of the stock options issued in share-based payment
arrangements, collectability of the Company’s accounts receivable, measurements of proportional performance under certain
service contracts and the valuation allowance on deferred tax assets. Management evaluates these estimates on an ongoing basis.
Changes in estimates are recorded in the period in which they become known. The Company bases estimates on historical experience
and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from the Company’s
estimates.
Recent
Accounting Pronouncements
In January 2017, the FASB issued Accounting
Standards Update (“ASU”) 2017-04,
Intangibles - Goodwill and Other (Topic 350)
: Simplifying the Accounting
for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires
a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard, which will be effective for the Company
beginning in the first quarter of fiscal year 2020, is required to be applied prospectively. Early adoption is permitted for interim
or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the
impact this standard will have on its condensed consolidated financial statements.
In June 2019, the FASB issued an ASU to
simplify several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of Topic 718,
Compensation—Stock Compensation
(“Topic 718”), to include share-based payment transactions for acquiring
goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific
guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based
payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all
share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own
operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments
used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to
customers as part of a contract accounted for under ASC No. 606,
Revenue from Contracts with Customers
(“ASC 606”).
The amendments in this ASU became effective for the Company on January 1, 2019. The Company adopted this guidance, and its adoption
did not have any significant impact on the Company’s consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred
loss impairment methodology in current GAAP with a methodology that utilizes expected credit losses to provide for an allowance
for credit losses for financial instruments and requires consideration of a broader range of reasonable and supportable information
to inform credit loss estimates. The amendments in this ASU require a financial asset (or a group of financial assets) measured
at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation
account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount
expected to be collected on the financial asset. The income statement includes the measurement of credit losses for newly recognized
financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
The amendments affect entities holding financial assets and net investment in leases that are not accounted for at fair value
through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet
credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual
right to receive cash. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods within
those annual periods with early adoption permitted for fiscal years beginning after December 31, 2018 and interim periods within
such year. The Company is currently evaluating the impact of this guidance on its condensed consolidated financial statements.
PEERSTREAM,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue
In accordance with ASC No. 606, revenue from
contracts with customers is recognized when control of the promised services is transferred to the customers in an amount that
reflects the consideration the Company expects to receive in exchange for those services. Sales tax is excluded from reported revenue.
The Company has elected the practical expedient allowable by the guidance to not disclose information about remaining performance
obligations pertaining to contracts that have an original expected duration of one year or less.
Subscription
Revenue
The Company generates subscription revenue
primarily from monthly premium subscription services. Subscription revenues are presented net of refunds, credits, and known and
estimated credit card chargebacks. During the three months ended March 31, 2019 and 2018, subscriptions were offered in durations
of one-, three-, six- and twelve- month terms. All subscription fees, however, are paid by credit card at the origination of the
subscription regardless of the term of the subscription. Revenues from multi-month subscriptions are recognized on a straight-line
basis over the period where the service is offered to the customer, indicated by length of the subscription term purchased. The
unearned portion of subscription revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets.
The deferred revenue at December 31, 2018 was $1,468,571, of which approximately $709,044 was subsequently recognized as subscription
revenue during the three months ended March 31, 2019. The ending balance of deferred revenue at March 31, 2019 was $1,489,465.
In addition, the Company offers virtual
gifts and micro-transactions to its users. Users may purchase credits in $5, $10 or $20 increments that can be redeemed for a host
of virtual gifts such as a rose, a beer or a car, among other items. These gifts are given among users to enhance communication
and are typically redeemed within 30 days of purchase. Upon purchase, the virtual gifts are credited to the users’ account
and is under the users’ control. Virtual gift and micro-transaction revenue are recognized upon the users’ utilization
of such at the fixed transaction price and included in subscription revenue in the accompanying condensed consolidated statements
of operations. Virtual gift and micro-transaction revenue was approximately $1,420,834 and $2,010,477 for the three months ended
March 31, 2019 and 2018, respectively.
Advertising
Revenue
The Company generates advertising revenue from the display of advertisements on its products through contractual
agreements with third parties that are based on the number of advertising impressions delivered. Measurements of impressions include
when a customer clicks an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external
website via an advertisement by clicking on or through the application (CPA basis). Advertising revenue is dependent upon traffic
as well as the advertising inventory placed on the Company’s products.
Technology
Service Revenue
Revenue under the Company’s technology
services agreement with ProximaX Limited (“ProximaX”) is recognized based upon proportional performance using labor
hours as the unit of measurement. The contractual upfront fee included $5.0 million and was paid in the Ethereum cryptocurrency
and subsequently converted into U.S. dollars. The upfront fee also included 216.0 million XPX tokens. The total upfront fee is
recognized as revenue under the input method based on proportional performance using labor hours as the unit of measurement. The
unearned portion is presented as deferred technology service revenue in the accompanying condensed consolidated balance sheets.
Revisions to the Company’s estimates may result in increases or decreases to revenues and income and are reflected in the
condensed consolidated financial statements in the periods in which they are first identified. If the Company’s estimates
indicate that a contract loss will be incurred, a loss provision is recorded in the period in which the loss first becomes probable
and reasonably estimable. Contract losses are determined to be the amount by which the estimated costs of the contract exceed
the estimated total revenues that will be generated by the contract and are included in cost of revenues in the Company’s
condensed consolidated statement of operations. There were no contract losses for the periods presented.
The remaining $5.0 million in payments
under the technology services agreement will be recognized as revenue upon the Company’s fulfillment of contractually defined
milestones and payments are received.
Digital
Tokens
Digital
tokens consist of XPX tokens received in connection with the technology services agreement with ProximaX. Given that there is
limited precedent regarding the classification and measurement of cryptocurrencies and other digital tokens under current GAAP,
the Company has determined to account for these tokens as indefinite-lived intangible assets in accordance with ASC 350,
Intangibles-Goodwill
and Other
until further guidance is issued by the FASB.
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. If, at the time of an impairment
test, the carrying amount of an intangible asset exceeds its fair value, an impairment loss in an amount equal to the excess is
recognized. Fair value of the digital tokens is based on the quoted market prices on the Kryptono Exchange.
PEERSTREAM,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.
|
Discontinued
Operations
|
On January 31, 2019, the Company entered
into an Asset Purchase Agreement with The Dating Company, LLC, pursuant to which the Company sold substantially all of the assets
related to its online dating services business under the domain names FirstMet, 50more, and The Grade (collectively, the “Dating
Services Business”) 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 the Company’s post-closing indemnification obligations. The closing of the asset sale was effective
as of January 31, 2019.
The following table summarizes the carrying
amount of the Dating Services Business as of January 31, 2019:
Prepaid expenses
|
|
$
|
19,053
|
|
Intangible assets
|
|
|
1,353,776
|
|
Assets
|
|
|
1,372,829
|
|
Deferred revenue
|
|
|
599,599
|
|
Net assets sold
|
|
$
|
773,230
|
|
In the first quarter of 2019, management determined
that the disposal of the Dating Services Business met the criteria for presentation as discontinued operations. Accordingly, the
results of the Dating Services Business are presented as discontinued operations in our condensed consolidated statements of operations
and are excluded from continuing operations for all periods presented. In addition, the assets and liabilities of the Dating Services
Business are classified as held for sale in our condensed consolidated balance sheets for all periods presented.
The
following table summarizes the carrying amounts of major classes of Dating Services Business assets and liabilities classified
as held for sale.
|
|
December 31,
2018
|
|
Prepaid expenses
|
|
$
|
19,053
|
|
Other current assets held for sale
|
|
|
19,053
|
|
Intangible assets
|
|
|
1,436,499
|
|
Total assets held for sale
|
|
$
|
1,455,552
|
|
Deferred revenue
|
|
$
|
617,410
|
|
Total liabilities held for sale
|
|
$
|
617,410
|
|
The operations of the Dating Services Business
are included in our results as discontinued operations through January 31, 2019, the date of sale.
The following table summarizes the major
line items included in loss from discontinued operations for the Dating Services Business.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
440,225
|
|
|
$
|
1,677,646
|
|
Costs of revenue
|
|
|
(115,338
|
)
|
|
|
(266,401
|
)
|
Sales and marketing expense
|
|
|
(270,200
|
)
|
|
|
(1,024,013
|
)
|
Product development expense
|
|
|
(76,845
|
)
|
|
|
(422,319
|
)
|
General and administrative expense
|
|
|
(82,722
|
)
|
|
|
(283,416
|
)
|
Loss from discontinued operations
|
|
$
|
(104,880
|
)
|
|
$
|
(318,503
|
)
|
PEERSTREAM,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
following table summarizes the major line items included in cash flows from discontinued operations of the Dating Services Business.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net cash used in operating activities
|
|
$
|
(198,957
|
)
|
|
$
|
(128,682
|
)
|
Net cash provided by investing activities
|
|
|
1,600,000
|
|
|
|
-
|
|
Net cash used in financing activities
|
|
|
-
|
|
|
|
-
|
|
Net cash provided by (used in) discontinued operations
|
|
$
|
1,401,043
|
|
|
$
|
(128,682
|
)
|
4.
|
Property
and Equipment, Net
|
Property
and equipment, net consisted of the following at March 31, 2019 and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Computer equipment
|
|
$
|
3,706,017
|
|
|
$
|
3,706,017
|
|
Website development
|
|
|
2,784,168
|
|
|
|
2,685,093
|
|
Furniture and fixtures
|
|
|
89,027
|
|
|
|
89,027
|
|
Leasehold improvements
|
|
|
32,726
|
|
|
|
32,726
|
|
Total property and equipment
|
|
|
6,611,939
|
|
|
|
6,512,863
|
|
Less: Accumulated depreciation
|
|
|
(6,023,567
|
)
|
|
|
(5,934,952
|
)
|
Total property and equipment, net
|
|
$
|
588,372
|
|
|
$
|
577,911
|
|
Depreciation expense for the three months
ended March 31, 2019 was $88,614, as compared to $99,990 for the three months ended March 31, 2018.
The
Company only holds property and equipment in the United States.
5.
|
Intangible
Assets, Net
|
Intangible
assets, net consisted of the following at March 31, 2019 and December 31, 2018:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Patents
|
|
$
|
50,000
|
|
|
$
|
(24,375
|
)
|
|
$
|
25,625
|
|
|
$
|
50,000
|
|
|
$
|
(23,750
|
)
|
|
$
|
26,250
|
|
Trade names, trademarks product names, URLs
|
|
|
555,000
|
|
|
|
(404,854
|
)
|
|
|
150,146
|
|
|
|
555,000
|
|
|
|
(390,979
|
)
|
|
|
164,021
|
|
Internally developed software
|
|
|
1,990,000
|
|
|
|
(1,935,905
|
)
|
|
|
54,095
|
|
|
|
1,990,000
|
|
|
|
(1,927,988
|
)
|
|
|
62,012
|
|
Subscriber/customer relationships
|
|
|
2,279,000
|
|
|
|
(1,688,725
|
)
|
|
|
590,275
|
|
|
|
2,279,000
|
|
|
|
(1,647,060
|
)
|
|
|
631,940
|
|
Total intangible assets
|
|
$
|
4,874,000
|
|
|
$
|
(4,053,859
|
)
|
|
$
|
820,141
|
|
|
$
|
4,874,000
|
|
|
$
|
(3,989,777
|
)
|
|
$
|
884,223
|
|
Amortization expense for the three months ended March 31, 2019 was $64,082, as compared to $137,771 for
the three months ended March 31, 2018. The estimated aggregate amortization expense for each of the next five years will be $192,250
in 2019, $246,681 in 2020, $184,667 in 2021, $149,944 in 2022 and $46,599 in 2023.
PEERSTREAM,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6.
|
Accrued
Expenses and Other Current Liabilities
|
Accrued
expenses and other current liabilities consisted of the following at March 31, 2019 and December 31, 2018:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
|
|
Compensation, benefits and payroll taxes
|
|
$
|
79,813
|
|
|
$
|
355,300
|
|
Other accrued expenses
|
|
|
294,867
|
|
|
|
382,645
|
|
Total accrued expenses and other current liabilities
|
|
$
|
374,680
|
|
|
$
|
737,945
|
|
The Company’s provision for income
taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision
with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual
effective tax rate and records cumulative adjustments as necessary.
For the three months ended March 31, 2019,
the Company recorded an income tax benefit from continuing operations of $158,990 on a pre-tax loss of $75,275. As a result of
the gain recorded in discontinued operations in connection with the sale of the Dating Services Business, the Company was able
to record an income tax benefit in continuing operations under the intra-period allocation guidance. As such, our effective tax
rate of 211.21% differed from the statutory rate of 21%.
For the three months ended March 31, 2018, the Company recorded an income tax benefit from continuing
operations of $0 on a pre-tax loss of $490,151. The effective tax rate for the three months ended March 31, 2018 was 0.0%. The
effective tax rate differs from the statutory rate of 21% as the Company concluded that its deferred tax assets were not realizable
on a more-likely-than-not basis.
The PeerStream, Inc. Amended and Restated
2011 Long-Term Incentive Plan (the “2011 Plan”) was terminated as to future awards on May 16, 2016. A total of 181,604
shares of the Company’s common stock may be issued pursuant to outstanding options awarded under the 2011 Plan; however,
no additional awards may be granted under such plan. The PeerStream, Inc. 2016 Long-Term Incentive Plan (the “2016 Plan”)
was adopted by the Company’s stockholders on May 16, 2016 and permits the Company to award stock options (both incentive
stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, performance
awards, dividend equivalent rights, and other stock-based awards and cash-based incentive awards to its employees (including an
employee who is also a director or officer under certain circumstances), non-employee directors and consultants. The maximum number
of shares of common stock that may be issued pursuant to awards under the 2016 Plan is 1,300,000 shares, 100% of which may be
issued pursuant to incentive stock options. In addition, the maximum number of shares of common stock that may be issued under
the 2016 Plan may be increased by an indeterminate number of shares of common stock underlying outstanding awards issued under
the 2011 Plan that are forfeited, expired, cancelled or settled in cash. As of March 31, 2019, there were 413,290 shares available
for future issuance under the 2016 Plan.
Stock
Options
The
following table summarizes the assumptions used in the Black-Scholes pricing model to estimate the fair value of the options granted
during the following period:
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
Expected volatility
|
|
|
165.0 – 175.0
|
%
|
Expected life of option
|
|
|
5.0-6.3
|
|
Risk free interest rate
|
|
|
2.5
|
%
|
Expected dividend yield
|
|
|
0.0
|
%
|
PEERSTREAM,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The expected life of the options is the
period of time over which employees and non-employees are expected to hold their options prior to exercise. The expected life
of the options has been determined using the “simplified” method as prescribed by Staff Accounting Bulletin 110, which
uses the midpoint between the vesting date and the end of the contractual term. The volatility of the Company’s common stock
is calculated using the Company’s historical volatilities beginning at the grant date and going back for a period of time
equal to the expected life of the award. The Company estimates potential forfeitures of stock awards and adjusts recorded stock-based
compensation expense accordingly. The Company estimates pre-vesting forfeitures primarily based on the Company’s historical
experience and adjusts pre-vesting forfeitures to reflect actual forfeitures as the stock-based awards vest.
The following table summarizes stock option
activity during the three months ended March 31, 2019:
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
Stock Options:
|
|
|
|
|
|
|
Outstanding at January 1, 2019
|
|
|
1,037,797
|
|
|
$
|
5.12
|
|
Granted
|
|
|
50,437
|
|
|
|
4.14
|
|
Expired or canceled, during the period
|
|
|
(21,187
|
)
|
|
|
4.55
|
|
Forfeited, during the period
|
|
|
(4,302
|
)
|
|
|
2.44
|
|
Outstanding at March 31, 2019
|
|
|
1,062,745
|
|
|
$
|
5.09
|
|
Exercisable at March 31, 2019
|
|
|
633,709
|
|
|
$
|
7.60
|
|
On
March 31, 2019, the aggregate intrinsic value of stock options that were outstanding and exercisable was $238,293 and $124,821,
respectively. On March 31, 2018, the aggregate intrinsic value of stock options that were outstanding and exercisable was $2,458,362
and $920,452, respectively. The intrinsic value for stock options is calculated based on the exercise price of the underlying
awards and the fair value of such awards as of the period-end date.
During the three months ended March 31, 2019,
the Company granted options to employees to purchase an aggregate 50,437 shares of common stock at exercise prices ranging from
$3.85 to $4.55 per share. The options vest on the grant date or between one and four years and have a term of ten years.
The
aggregate fair value for the options granted during the three months ended March 31, 2019 was $187,429. The aggregate fair value
for the options granted during the three months ended March 31, 2018 was $422,550.
Stock-based
compensation expense for the Company’s stock options included in the condensed consolidated statements of operations is
as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of revenue
|
|
$
|
361
|
|
|
$
|
690
|
|
Sales and marketing expense
|
|
|
45
|
|
|
|
1,252
|
|
Product development expense
|
|
|
89,743
|
|
|
|
6,387
|
|
General and administrative expense
|
|
|
177,002
|
|
|
|
195,512
|
|
Total stock compensation expense
|
|
$
|
267,151
|
|
|
$
|
203,841
|
|
At
March 31, 2019, there was $1,105,740 of total unrecognized compensation expense related to stock options, which is expected to
be recognized over a weighted average period of 1.6 years.
PEERSTREAM,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restricted
Stock Awards
The
following table summarizes restricted stock award activity for the three months ended March 31, 2019:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
RSAs
|
|
|
Fair Value
|
|
Restricted Stock Awards:
|
|
|
|
|
|
|
Unvested at January 1, 2019
|
|
|
79,286
|
|
|
$
|
20.29
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Expired or canceled, during the period
|
|
|
-
|
|
|
|
-
|
|
Forfeited, during the period
|
|
|
-
|
|
|
|
-
|
|
Unvested at March 31, 2019
|
|
|
79,286
|
|
|
$
|
20.29
|
|
At
March 31, 2019, there was $370,748 of total unrecognized compensation expense related to unvested restricted stock awards, which
is expected to be recognized over a weighted average period of 0.5 years.
Stock-based compensation expense relating to
restricted stock awards for the three months ended March 31, 2019 and 2018 was $185,374, respectively.
9.
|
Net
Income (Loss) Per Share
|
Basic
net income (loss) per share of common stock is computed based upon the number of weighted average shares of common stock outstanding
as defined by ASC Topic 260,
Earnings Per Share
. Diluted net income (loss) per share of common stock includes the dilutive
effects of stock options and stock equivalents. To the extent stock options are antidilutive, they are excluded from the calculation
of diluted net loss per share of common stock.
For the three months ended March 31, 2019,
1,062,745 shares upon the exercise of outstanding stock options and 79,286 shares of unvested restricted stock were not included
in the computation of diluted net income per share because their inclusion would be anti-dilutive.
For
the three months ended March 31, 2018, 1,049,701 shares upon the exercise of outstanding stock options and 158,571 shares of unvested
restricted stock were not included in the computation of diluted net loss per share because their inclusion would be antidilutive.
Operating
Leases
On January 18, 2016, the Company entered
into a lease agreement for office space located at 122 East 42nd Street in New York, NY and paid a security deposit in the amount
of $37,000. The term of the lease runs until May 30, 2019. The Company’s monthly office rent payments under the lease are
currently approximately $12,800 per month.
On June 7, 2016, the Company entered into
a lease agreement with Jericho Executive Center LLC for office space at 30 Jericho Executive Plaza in Jericho, New York, which
commenced on September 1, 2016 and runs through November 30, 2021. The Company’s monthly office rent payments under the
lease are currently approximately $5,900 per month.
On September 18, 2017, the Company entered
into a lease agreement for a second office space located at 122 East 42nd Street in New York, NY that expires on July 31, 2019
and paid a security deposit in the amount of $8,000. The Company’s monthly office rent payments under the lease are currently
approximately $4,000 per month.
As of March 31, 2019, the Company had
no long-term leases that were classified as financing leases. As of March 31, 2019, the Company did not have additional operating
and financing leases that have not yet commenced.
PEERSTREAM,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Total operating lease expenses for the
three months ended March 31, 2019 was $81,816 and is recorded in general and administrative expense on the consolidated statements
of operations.
|
|
Three Months
Ended
|
|
|
|
March 31,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
48,692
|
|
Right-of-use assets obtained in exchange for new lease obligations:
|
|
|
|
|
Operating leases
|
|
$
|
-
|
|
Weighted Average Remaining Lease Term
|
|
|
|
|
Operating leases
|
|
|
2.1
|
|
Weighted Average Discount Rate
|
|
|
|
|
Operating leases
|
|
|
3.6
|
%
|
11.
|
Commitments and Contingencies
|
Legal
Proceedings
On
December 16, 2016, a wholly owned subsidiary of the Company, Paltalk Holdings, Inc., filed a patent infringement lawsuit in Delaware
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. In 2018, Valve Corporation moved to transfer the litigation from Delaware to the Western
District of Washington. Such motion was granted by the court.
Riot
Games, Inc. has filed a total of four inter partes reviews at the Patent Trial and Appeal Board (“PTAB”) of the United
States Patent and Trademark Office, two per patent held by Paltalk Holdings, Inc., seeking to have the Paltalk Holdings, Inc.
patents declared invalid. The PTAB held a hearing on February 13, 2019 in connection with the previously announced patent infringement
lawsuit against Riot Games, Inc. and Valve Corporation patent office and is expected to rule on these motions by May 15, 2019.
The
Company may be included in legal proceedings, claims and assessments arising in the ordinary course of business. The Company evaluates
the need for a reserve for specific legal matters based on the probability of an unfavorable outcome and the reasonability of
an estimable loss. No reserve was deemed necessary as of March 31, 2019.
Stock Repurchase Authorization
On April 29, 2019, our board of directors approved
a cash stock repurchase program for up to $500,000 of our common stock. The authorization is effective immediately and expires
one year from the date of the board’s approval. Pursuant to the board’s authorization, stock repurchases may be made
through a variety of methods, including open market or privately negotiated transactions. The timing and number of shares repurchased,
if any, will depend on a variety of factors, including price, general business and market conditions, and alternative investment
opportunities. The repurchase program does not obligate us to repurchase any specific number of shares and may be suspended or
discontinued at any time.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion
and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements
with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and
certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction
with: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three months ended
March 31, 2019 and 2018, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2018
included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission
(the “SEC”) on March 22, 2019 and (iii) the discussion under the caption “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of the Form 10-K. Aside from certain information as of
December 31, 2018, all amounts herein are unaudited.
Forward-Looking
Statements
In addition to historical financial information,
the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See
“Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated
in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors”
in the Form 10-K.
Recent
Developments
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 (the “Dating Services Business”)
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.
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.
In March 2018, we launched our proprietary
software business centered around the development of PSP and Backchannel. In addition, we also began providing professional services
to customize and integrate our software solutions to meet client needs. In late March 2018, we secured our first software licensing
and implementation client, ProximaX Limited (“ProximaX”), by entering into a technology services agreement related
to the development and implementation of PSP into ProximaX’s proprietary blockchain protocol. We are seeking to grow our
software licensing and technology implementation business by securing additional clients to license PSP and/or Backchannel, as
well as implement these products into their existing systems, and to develop new software and services for license.
We also operate a leading network of consumer applications that we believe 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.
Our consumer applications generate revenue principally from subscription fees and advertising arrangements. As of April 19, 2019,
our consumer applications were supported by a large user database with approximately 108,100 active subscribers worldwide, which
excludes active subscribers to our Dating Services Business, which was sold in January 2019.
We believe that the scale of our subscriber
base presents a competitive advantage in the video social networking industry and growth opportunities to advance existing products
with up-sell opportunities and build future brands with cross-sell offers.
Our continued growth depends on the expansion
of our software licensing and implementation services business, attracting new consumer application users through the introduction
of new applications and features and further penetration of our existing markets. Our principal growth strategy is to continue
investing in the development of proprietary software, expand our sales and marketing efforts with respect to such software, and
increase our consumer application user base through advertising campaigns that we run through internet and mobile advertising
networks.
Operational
Highlights and Objectives
During
the three months ended March 31, 2019, we executed key components of our objectives:
|
●
|
completed
the sale of our dating assets to The Dating Company, LLC in order to focus on our core video applications and secure communications
technology solutions;
|
|
●
|
entered into a partnership consisting of Telefonica USA, Inc., in collaboration with its cybersecurity affiliate ElevenPaths, and Rivetz International SEZC, to offer next generation zero trust architecture for private and secure communications serving government and enterprise applications; and
|
|
●
|
continued to post significant milestones in the development of PeerStream Protocol (“PSP”), with
a live deployment of a software component of PSP made available on the ProximaX Limited Sirius platform’s public blockchain
test net.
|
For
the near term, our business objectives include:
|
●
|
completing
development of PSP for a full commercial deployment, along with scaling up go-to-market efforts with the goal of building adoption
and revenue;
|
|
●
|
enhancing our technology implementation services and developing our resources in anticipation of customer demand;
|
|
●
|
deploying a
commercial version of Backchannel to accompany PSP in offering what we believe will be a complete communications security
solution to the market;
|
|
●
|
implementing
several enhancements to our live video chat applications focused around new user acquisition, retention and monetization designed
to increase usage and revenue opportunities;
|
|
●
|
enhancing our live video streaming content and increasing its exposure within our suite of applications;
|
|
●
|
continuing
to take steps towards listing our common stock on a national securities exchange; and
|
|
●
|
continuing
to defend our intellectual property.
|
Sources
of Revenue
Through the end of the first quarter of
2018, our sources of revenue were limited to subscription, advertising and other fees generated from users of our video chat and
dating products. Beginning in April 2018, we started generating revenue through proprietary software licensing and technology
implementation services as a result of our technology services agreement with ProximaX.
Consumer
Applications
Subscription
Revenue
Our
video chat platforms generate revenue primarily through subscription fees. Our tiers of subscriptions provide users with unlimited
video windows and levels of status within the community. Multiple subscription tiers are offered in different durations depending
on the product from one-, six- and twelve- month terms, which continue to vary as we continue to test and optimize length and
pricing. Longer-term plans (those with durations longer than one month) are generally available at discounted monthly rates. Levels
of membership benefits are offered in tiers, with the least membership benefits in the lowest paid tier and the most membership
benefits in the highest paid tier. Our membership tiers are “Plus,” “Extreme,” “VIP” and “Prime”
for Paltalk and “Pro,” “Extreme” and “Gold” for Camfrog. We also hold occasional promotions
that offer discounted subscriptions and virtual gifts.
We
recognize revenue from monthly premium subscription services beginning in the month in which the subscriptions are originated.
Revenues from multi-month subscriptions are recognized on a gross and straight-line basis over the length of the subscription
period. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying consolidated balance
sheets.
We also offer virtual gifts and micro-transactions to our users. Users may purchase credits that can be
redeemed for a host of virtual gifts such as a rose, a beer, or a car, among other items. Micro-transactions allow users to increase
the visibility of their profile and messages by paying for such services. Virtual gift and micro-transaction revenue are recognized
upon the users’ utilization of the virtual gift and included in subscription revenue.
Advertising
Revenue
We generate a portion of our revenue through advertisements on our video platforms. Advertising revenue
is dependent upon the volume of advertising impressions viewed by active users as well as the advertising inventory we place on
our products. We recognize advertising revenue as earned on a click-through, impression, registration or subscription basis. Measurements
of impressions include when a user clicks on an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers
for an external website via an advertisement by clicking on or through our application (CPA basis).
Technology
Services Revenue
Technology services revenue is generated
under service agreements that we negotiate with our clients that describe the scope of the development, integration, engineering,
licensing or other integration services that we will provide. Similar to our technology services agreement with ProximaX, we expect
that any future agreements are likely to contain pricing terms that are customized based on the needs of the client, and may provide
for compensation in the form of cash or cryptocurrency tokens or a mix of cash and cryptocurrency tokens. In addition, we expect
that we will generate technology services revenue from our software solutions, such as PSP, through licenses to our clients that
may be bundled into service packages with our technology implementation services clients or provided separately on a standalone
basis. We also intend to generate technology services revenue by offering support services to licensees of our software for additional
service fees.
Costs
and Expenses
Cost
of revenue.
Cost of revenue consists primarily of compensation (including stock-based compensation) and other employee-related
costs for personnel engaged in data center and customer care functions, credit card processing fees, hosting fees, and data center
rent and bandwidth costs. Beginning in April 2018, cost of revenue also includes compensation and other employee-related
costs for technical personnel and subcontracting costs relating to technology service revenue. We expect to experience corresponding
growth in our cost of revenue as our software licensing and technology implementation services business grows.
Sales
and marketing expense.
Sales and marketing expense consists primarily of advertising expenditures and compensation (including
stock-based compensation) and other employee-related costs for personnel engaged in sales and sales support functions. Advertising
and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which primarily
consists of partner-related payments to those who direct traffic to our brands.
We
expect sales and marketing expense to potentially increase in future periods if we gain positive market feedback and expand our
efforts in executing our software licensing and technology implementation services strategy.
Product
development expense.
Product development expense, which relates to the development of technology of our applications, consists
primarily of compensation (including stock-based compensation) and other employee-related costs that are not capitalized for personnel
engaged in the design, testing and enhancement of service offerings as well as amortization of capitalized website development
costs.
As
a result of the launch of our software licensing and technology implementation services business, we anticipate product development
expense to increase in future periods as we expect to hire additional developers dedicated to the internal development of new
software and technologies we plan to offer for license.
General
and administrative expense.
General and administrative expense consists primarily of compensation (including stock-based compensation)
and other employee-related costs for personnel engaged in executive management, finance, legal, tax, human resources and facilities
costs and fees for other professional services. General and administrative expense also includes depreciation of property and
equipment and amortization of intangible assets.
Key
Metrics
Our
management relies on certain non-GAAP and/or unaudited performance indicators to manage and evaluate our business. The key performance
indicators set forth below help us evaluate growth trends, establish budgets, measure the effectiveness of our advertising and
marketing efforts and assess operational efficiencies. We also discuss net cash used in operating activities under the ‟Results
of Operations” and ‟Liquidity and Capital Resources” sections below. Active subscribers, subscription bookings
and Adjusted EBITDA are discussed below.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Active subscribers (as of period end)
|
|
|
108,100
|
|
|
|
115,950
|
|
Subscription bookings
|
|
$
|
3,025,249
|
|
|
$
|
3,784,506
|
|
Net cash used in operating activities
|
|
$
|
(2,787,027
|
)
|
|
$
|
(543,031
|
)
|
Net income (loss)
|
|
$
|
646,615
|
|
|
$
|
(808,655
|
)
|
Adjusted EBITDA
|
|
$
|
499,990
|
|
|
$
|
133,886
|
|
Adjusted EBITDA as percentage of total revenues
|
|
|
10.3
|
%
|
|
|
3.3
|
%
|
Active
Subscribers
Active
subscribers means users of our consumer applications that have prepaid a fee, redeemed credits or received an upgrade from another
user as a gift for current unlocked application features such as enhanced voice and video access, elevated status in the community
or unrestricted communication on our applications and whose subscription period has not yet expired. The metrics for active subscribers
are based on internally-derived metrics across all platforms through which our applications are accessed. We assess the performance
of our consumer applications by measuring active subscribers because we believe that this metric is the most reliable way to understand
user engagement on our platform and estimate the future operational performance of our applications. We also believe that measuring
active subscribers helps management estimate future subscription revenue. Because active subscribers generate the majority of
our subscription revenue, as the number of active subscribers to our consumer applications increases, the amount of subscription
revenue generated from our consumer applications also increases. Active subscribers is distinguished from active users, which
represents the total number of free and paid users across all platforms during a certain period who access our various applications.
We believe that active users are important to our operations because advertising revenue is largely dependent upon the volume
of advertising impressions viewed by active users.
Active subscribers worldwide in both periods
presented excludes active subscribers to the Dating Services Business, which was sold in January 2019.
Subscription
Bookings
Subscription
bookings is a financial measure representing the aggregate dollar value of subscription fees received during the period. We calculate
subscription bookings as subscription revenue recognized during the period plus the change in deferred subscription revenue recognized
during the period. We record subscription revenue from subscription fees as deferred subscription revenue and then recognize that
revenue ratably over the length of the subscription term. Our management uses subscription bookings internally in analyzing our
financial results to assess operational performance and to assess the effectiveness of, and plan future, user acquisition campaigns.
We believe that this financial measure is useful in evaluating the performance of our consumer applications because we believe,
as compared to subscription revenue, it is a better indicator of the subscription activity in a given period. We believe that
both management and investors benefit from referring to subscription bookings in assessing our performance and when planning,
forecasting and analyzing future periods.
While the factors that affect subscription
bookings and subscription revenue are generally the same, certain factors may affect subscription bookings more or less than such
factors affect subscription revenue in any period. While we believe that subscription bookings is useful in evaluating our business,
it should be considered as supplemental in nature and it is not meant to be a substitute for subscription revenue recognized in
accordance with GAAP.
Subscription bookings in both periods
presented excludes subscription bookings from the Dating Services Business, which was sold in January 2019.
Adjusted
EBITDA
Adjusted EBITDA is a non-GAAP financial measure.
Adjusted EBITDA is defined as net income (loss) adjusted to exclude net income (loss) from discontinued operations, interest income,
net, income tax expense, depreciation and amortization expense and stock-based compensation expense.
We
present Adjusted EBITDA because it is a key measure used by our management and Board of Directors to understand and evaluate our
core operating performance and trends, to develop short- and long-term operational plans and to allocate resources to expand our
business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period
comparisons of the cash operating income generated by our business. We believe that Adjusted EBITDA is useful to investors and
others to understand and evaluate our operating results, and it allows for a more meaningful comparison between our performance
and that of competitors.
Limitations
of Adjusted EBITDA
Our
use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation
from or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
|
●
|
Adjusted
EBITDA does not reflect cash capital expenditures for assets underlying depreciation and amortization expense that may need to
be replaced or for new capital expenditures;
|
|
●
|
Adjusted
EBITDA does not reflect our working capital requirements;
|
|
●
|
Adjusted
EBITDA does not consider the potentially dilutive impact of stock-based compensation; and
|
|
●
|
other
companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative
measure.
|
Because of these limitations, you should
consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our
other GAAP results. The following table presents a reconciliation of net income (loss), the most directly comparable financial
measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Reconciliation of Net income (loss) to Adjusted EBITDA:
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
646,615
|
|
|
$
|
(808,655
|
)
|
Net (income) loss from discontinued operations
|
|
|
(562,900
|
)
|
|
|
318,503
|
|
Interest income, net
|
|
|
(29,957
|
)
|
|
|
(2,938
|
)
|
Income tax benefit
|
|
|
(158,990
|
)
|
|
|
-
|
|
Depreciation and amortization expense
|
|
|
152,697
|
|
|
|
237,761
|
|
Stock-based compensation expense
|
|
|
452,525
|
|
|
|
389,215
|
|
Adjusted EBITDA
|
|
$
|
499,990
|
|
|
$
|
133,886
|
|
Results
of Operations
During the first quarter of 2019, we
began to separately report the results of the Dating Services Business as a discontinued operation in our consolidated
statements of operations and present the related assets and liabilities as held for sale in our consolidated balance sheets.
These changes have been applied for all periods presented. Unless otherwise noted, amounts and percentages for all periods
discussed below reflect the results of operations and financial condition from our continuing operations. Refer to Note 3 of
our Notes to Condensed Consolidated Financial Statements for additional information on discontinued operations.
The
following table sets forth condensed consolidated statements of operations data for each of the periods indicated as a percentage
of total revenues:
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
19.5
|
%
|
|
|
18.3
|
%
|
Sales and marketing expense
|
|
|
7.7
|
%
|
|
|
9.0
|
%
|
Product development expense
|
|
|
36.4
|
%
|
|
|
42.4
|
%
|
General and administrative expense
|
|
|
38.5
|
%
|
|
|
42.4
|
%
|
Total costs and expenses
|
|
|
102.2
|
%
|
|
|
112.1
|
%
|
Loss from continuing operations
|
|
|
(2.2
|
)%
|
|
|
(12.1
|
)%
|
Interest income, net
|
|
|
0.6
|
%
|
|
|
0.1
|
%
|
Loss from continuing operations before provision for income taxes
|
|
|
(1.5
|
)%
|
|
|
(12.0
|
)%
|
Provision for income taxes
|
|
|
3.3
|
%
|
|
|
-
|
|
Net income (loss) from continuing operations
|
|
|
1.7
|
%
|
|
|
(12.0
|
)%
|
Net income (loss) from discontinued operations
|
|
|
11.6
|
%
|
|
|
(7.8
|
)%
|
Net income (loss)
|
|
|
13.3
|
%
|
|
|
(19.9
|
)%
|
Three
Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018
Revenue
Revenue increased to $4,873,175 for the
three months ended March 31, 2019 from $4,070,404 for the three months ended March 31, 2018. The increase was driven by $1,748,330
of revenue generated under the technology services agreement with ProximaX, offset by a decline of $833,051 in subscription revenue
primarily as a result of a 6.8% decline in active subscribers, as well as a decrease of $112,508 in advertising revenue across
all products.
The
following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenues for the
three months ended March 31, 2019 and the three months ended March 31, 2018, the increase or decrease between those periods, the
percentage increase or decrease between those periods and the percentage of total revenues that each represented for those periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Revenue
|
|
|
|
Three Months Ended
|
|
|
$
|
|
|
%
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
Increase
|
|
|
Increase
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
2019
|
|
|
2018
|
|
Subscription revenue
|
|
$
|
3,004,355
|
|
|
$
|
3,837,406
|
|
|
$
|
(833,051
|
)
|
|
|
(21.7
|
)%
|
|
|
61.7
|
%
|
|
|
94.3
|
%
|
Advertising revenue
|
|
|
120,490
|
|
|
|
232,998
|
|
|
|
(112,508
|
)
|
|
|
(48.3
|
)%
|
|
|
2.5
|
%
|
|
|
5.7
|
%
|
Technology service revenue
|
|
|
1,748,330
|
|
|
|
-
|
|
|
|
1,748,330
|
|
|
|
100.0
|
%
|
|
|
35.9
|
%
|
|
|
-
|
%
|
Total revenues
|
|
$
|
4,873,175
|
|
|
$
|
4,070,404
|
|
|
$
|
802,771
|
|
|
|
19.7
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Subscription Revenue
– Our
subscription revenue for the three months ended March 31, 2019 decreased by $833,051, or 21.7%, as compared to the three months
ended March 31, 2018. The decrease in subscription revenue was mainly driven by lower virtual gift transaction volume for both
Patalk and Camfrog products, corresponding to lower monthly active usage. In addition, a decrease in active subscribers of 7,850,
or 6.8%, contributed to a decrease in subscription revenue. Finally, we believe that lower reseller volume led to reduced revenue
in international markets.
Advertising Revenue –
Our
advertising revenue for the three months ended March 31, 2019 decreased by $112,508, or 48.3%, as compared to the three months
ended March 31, 2018. The decrease in advertising revenue primarily resulted from a 21.2% decline in active users. We also believe
the decrease was related to challenges in the digital advertising industry due to a greater emphasis on fraud control, resulting
in lower demand and pricing.
Technology Service Revenue –
For the three months ended March 31, 2019, we generated $1,748,330 of technology service revenue in exchange for providing
certain development and related services to ProximaX to facilitate the integration of PSP into ProximaX’s proprietary blockchain
protocol that is currently under development. Technology service revenue is generated through software licensing and technology
implementation services, which we began providing in March 2018, and consequently, we did not generate any technology service
revenue for the three months ended March 31, 2018.
Costs
and Expenses
Total costs and expenses for the three
months ended March 31, 2019 reflect an increase in costs and expenses of $414,914, or 9.1%, as compared to the three months ended
March 31, 2018. The following table presents our costs and expenses for the three months ended March 31, 2019 and 2018, the increase
between those periods, the percentage increase between those periods and the percentage of total revenues that each represented
for those periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Revenue
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
$
|
|
|
%
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
Increase
|
|
|
Increase
|
|
|
2019
|
|
|
2018
|
|
Cost of revenue
|
|
$
|
952,219
|
|
|
$
|
745,626
|
|
|
$
|
206,593
|
|
|
|
27.7
|
%
|
|
|
19.5
|
%
|
|
|
18.3
|
%
|
Sales and marketing expense
|
|
|
377,151
|
|
|
|
365,979
|
|
|
|
11,172
|
|
|
|
3.1
|
%
|
|
|
7.7
|
%
|
|
|
9.0
|
%
|
Product development expense
|
|
|
1,771,565
|
|
|
|
1,726,596
|
|
|
|
44,969
|
|
|
|
2.6
|
%
|
|
|
36.4
|
%
|
|
|
42.4
|
%
|
General and administrative expense
|
|
|
1,877,472
|
|
|
|
1,725,292
|
|
|
|
152,180
|
|
|
|
8.8
|
%
|
|
|
38.5
|
%
|
|
|
42.4
|
%
|
Total costs and expenses
|
|
$
|
4,978,407
|
|
|
$
|
4,563,494
|
|
|
$
|
414,914
|
|
|
|
9.1
|
%
|
|
|
102.2
|
%
|
|
|
112.1
|
%
|
Cost of revenue -
Our cost of revenue
for the three months ended March 31, 2019 increased by $206,593, or 27.7%, as compared to the three months ended March 31, 2018.
The increase for the three months ended March 31, 2019 was primarily driven by an increase of approximately $191,300 in compensation
paid to our technical personnel and consulting services related to technology service revenue. Further, there was an increase in
compensation expense of approximately $46,900 due to an increased headcount in system administration support. These increases were
offset by a decrease of approximately $91,900 related to Paltalk product hosting expenses.
Sales and marketing expense
- Our
sales and marketing expense for the three months ended March 31, 2019 increased by $11,172, or 3.1%, as compared to the three
months ended March 31, 2018. The slight increase in sales and marketing expense for the three months ended March 31, 2019 was
primarily due to an increase in marketing expenses of approximately $31,700 related to our video properties.
As a result of the launch of our software
licensing and technology implementation services business, we expect sales and marketing expense to increase in future periods
as we expect to incur marketing and advertising expense and hire additional sales and marketing personnel to help build brand
awareness and grow this aspect of our business.
Product development expense
- Our product
development expense for the three months ended March 31, 2019 increased by $44,969, or 2.6%, as compared to the three months ended
March 31, 2018. The increase was primarily due to an increase in salary and stock compensation expense of approximately $147,100
due to newly hired personnel and stock option grants for employees in the product development department, offset by a decrease
in consulting expenses of approximately $110,700 related to the Paltalk product.
General and administrative expense
-
Our general and administrative expense for the three months ended March 31, 2019 increased by $152,180, or 8.8%, as compared to
the three months ended March 31, 2018. The increase in general and administrative expense for the three months ended March 31,
2019 was primarily due to an increase of approximately $159,000 in legal fees mainly related to the sale of the Dating Services
Business.
Non-Operating
Income
The following table presents the components
of non-operating income for the three months ended March 31, 2019 and the three months ended March 31, 2018, the increase or decrease
between those periods, the percentage increase or decrease between those periods and the percentage of total revenues that each
represented for those periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
Revenue
|
|
|
|
Three
Months Ended
|
|
|
|
|
|
%
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
Increase
|
|
|
Increase
|
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
2019
|
|
|
2018
|
|
Interest
income, net
|
|
$
|
29,957
|
|
|
$
|
2,938
|
|
|
$
|
27,019
|
|
|
|
919.6
|
%
|
|
|
0.6
|
%
|
|
|
0.1
|
%
|
Gain
on sale from discontinued operations
|
|
|
826,770
|
|
|
|
-
|
|
|
|
826,770
|
|
|
|
100.0
|
%
|
|
|
17.0
|
%
|
|
|
-
|
%
|
Loss
from discontinued operations
|
|
|
(104,880
|
)
|
|
|
(318,503
|
)
|
|
|
213,623
|
|
|
|
(67.1
|
)%
|
|
|
(2.2
|
)%
|
|
|
(7.8
|
)%
|
Total
non-operating income (loss)
|
|
$
|
751,847
|
|
|
$
|
(315,565
|
)
|
|
$
|
1,067,412
|
|
|
|
-
|
%
|
|
|
15.4
|
%
|
|
|
(7.7
|
)%
|
Non-operating income
for the three months ended March 31, 2019 was $751,847, a net increase of $1,067,412, as compared to non-operating loss of $315,565 for the three months ended March 31, 2018. The increase in non-operating income was driven by the gain on the sale
of the Dating Services Business, along with interest income accrued from cash held in interest-bearing accounts during the
period.
Income Taxes
Our provision for income taxes consists of
federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the
effective rate that it expects to achieve for the full year. For the three months ended March 31, 2019 and 2018, the Company recorded
an income tax benefit from continuing operations of $158,990 and $0, respectively.
As of March 31, 2019, our conclusion regarding the realizability of our U.S. deferred tax assets did not
change and we have recorded a full valuation allowance against them.
Liquidity
and Capital Resources
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Condensed Consolidated
Statements of Cash Flows Data:
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
$
|
(2,787,027
|
)
|
|
$
|
(543,031
|
)
|
Net cash provided by (used in) investing
activities
|
|
|
1,500,925
|
|
|
|
(79,950
|
)
|
Net cash provided
by (used in) financing activities
|
|
|
-
|
|
|
|
-
|
|
Net decrease
in cash and cash equivalents
|
|
$
|
(1,286,102
|
)
|
|
$
|
(622,981
|
)
|
Currently, our primary source of liquidity is cash on hand and cash flows from continuing operations,
and we believe that our cash balance and our expected cash flow from operations will be sufficient to meet all of our financial
obligations for the twelve months from the date of this report. As of March 31, 2019, we had $5,269,274 of cash and cash equivalents.
In the future, it is possible that we
will need additional capital to fund our operations, particularly growth initiatives, which we expect we would raise through a
combination of equity offerings, debt financings, other third-party funding and other collaborations and strategic alliances.
We may also attempt to raise capital through dispositions of our assets, such as our recent sale of the Dating Services Business
in January 2019. To raise additional funds through dispositions, we may in the future seek to sell all or a portion of our XPX
tokens or Vumber or certain of our patents, which we refer to collectively as our non-core properties. Our need to generate additional
capital will largely depend on future capital requirements, which in turn will depend on many factors including our growth rate,
headcount, sales and marketing activities, research and development efforts and the introduction of new features, products, acquisitions
and continued user engagement.
Our primary use of working capital is related
to product development resources in order to maintain and create new products, services and applications for our clients and users.
In particular, a significant portion of our working capital has been allocated to the development of PSP and Backchannel. In the
future, we may also seek to grow our business by expending our capital resources to fund strategic investments and partnership
opportunities.
Operating
Activities
Net cash used in operating activities
was $2,787,027 for the three months ended March 31, 2019, as compared to net cash used in operating activities of $543,031 for
the three months ended March 31, 2018. The increase in net cash used in operating activities of $2,243,996 was mainly a result
of a one-time payment of residual liabilities in connection to the sale of the Dating Services Business as well as the payments
of related legal fees.
Significant
items impacting cash flow in the three months ended March 31, 2018 included significant cash outlays relating to legal fees.
Investing
Activities
Net cash provided by (used in) investing activities for the three months ended March 31, 2019 and 2018
was $1,500,925 and $(79,950), respectively. The increase in net cash provided by investing activities for the three months ended
March 31, 2019 was primarily the result of proceeds from the sale of the Dating Services Business.
Financing
Activities
We did not have any net cash provided
by (used in) financing activities for the three months ended March 31, 2019 and 2018.
Off-Balance
Sheet Arrangements
As
of March 31, 2019, we did not have any off-balance sheet arrangements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. In designing
and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Based
on the evaluation as of March 31, 2019, we determined that we maintain effective disclosure controls and procedures.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange
Act) during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART
II: OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
On
December 16, 2016, a wholly owned subsidiary of the Company, Paltalk Holdings, Inc., filed a patent infringement lawsuit in Delaware
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. In 2018, Valve Corporation moved to transfer the litigation from Delaware to the Western
District of Washington which was granted by the court.
On
November 2, 2017, Riot Games, Inc. filed a total of four petitions for
inter partes
review with the United States Patent
and Trademark Office, two per patent held by Paltalk Holdings, Inc., seeking to have the Paltalk Holdings, Inc. patents declared
invalid. On May 15, 2018, inter partes review was instituted, and on February 13, 2019, the Patent Trial and Appeal Board (the
“PTAB”) held a hearing on the matter. Pursuant to U.S. patent laws and subject to certain exceptions, a final determination
by the PTAB as to the validity of the patents will be issued by May 15, 2019.
To
our knowledge, other than as described above, there are no material pending legal proceedings to which we are a party or of which
any of our property is the subject.
ITEM
1A. RISK FACTORS
There
were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” in the Form 10-K. For more information
concerning our risk factors, please see “Item 1A. Risk Factors” in the Form 10-K.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered
Sale of Equity Securities
There
were no sales of unregistered securities during the quarter ended March 31, 2019 that were not previously reported on a Current
Report on Form 8-K.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES
None.
ITEM
5. OTHER INFORMATION
Judy Krandel Resignation
On April 30, 2019, Judy Krandel announced
that she is resigning from her position as our Chief Financial Officer, effective May 6, 2019. Following Ms. Krandel’s resignation,
Alexander Harrington will assume the role of principal financial officer.
Concurrent with the announcement of Ms.
Krandel’s resignation, we entered into a Consulting Agreement with Ms. Krandel (the “Consulting Agreement”),
effective May 6, 2019, pursuant to which Ms. Krandel will perform certain transitional services for the Company for a term lasting
until the Consulting Agreement is terminated by either party (the “Advisory Period”). Upon effectiveness of the Consulting
Agreement, Ms. Krandel’s employment agreement, dated November 14, 2016, will automatically terminate and have no further
force or effect. Pursuant to the Consulting Agreement, Ms. Krandel will be entitled to receive $5,000 each month during the Advisory
Period. In the event that a change of control (as defined in the Consulting Agreement) occurs during the Advisory Period or within
30 days following the termination or cessation of the Advisory Period, Ms. Krandel will be entitled to receive a gross payment
of $50,000. Ms. Krandel will also be entitled to receive certain commissions for securing new clients for the Company’s
secured communication business as set forth in the Consulting Agreement. The Consulting Agreement contains customary non-solicitation,
non-disparagement, confidentiality and indemnification provisions.
Pursuant to the Consulting Agreement, subject
to the approval of our compensation committee, as soon as practicable after the effective date of the Consulting Agreement, the
Company and Ms. Krandel will (i) cancel Ms. Krandel’s option award agreement, dated November 15, 2016, related to the award
of a stock option representing the right to purchase 142,857 shares of common stock and (ii) enter into a revised option agreement
granting Ms. Krandel a stock option representing the right to purchase up to 142,857 shares of common stock at an exercise price
equal to the greater of (a) $3.55 per share and (b) the fair market value of our common stock on the date of grant (the “Revised
Option Agreement”). The Consulting Agreement provides that, if the Revised Option Agreement is approved by our compensation
committee, the Revised Option Agreement will provide that such stock option shall vest as follows: (i) 50% of such stock option
will fully vest on the date of grant, (ii) 25% of such stock option will vest on May 15, 2019 and (iii) the remaining 25% of such
stock option will vest in 12 equal installments on the 15th day of each month, with the first tranche vesting on June 15, 2019
and the last tranche vesting on May 15, 2020.
The foregoing description of the Consulting
Agreement is qualified in its entirety by reference to the full text of the Consulting Agreement, a copy of which is filed as
Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated by reference herein.
Stock Repurchase Authorization
On April 29, 2019, our board of directors approved a cash stock repurchase program for up to $500,000
of our common stock. The authorization is effective immediately and expires one year from the date of the board’s approval.
Pursuant to the board’s authorization, stock repurchases may be made through a variety of methods, including open market
or privately negotiated transactions. The timing and number of shares repurchased, if any, will depend on a variety of factors,
including price, general business and market conditions, and alternative investment opportunities. The repurchase program does
not obligate us to repurchase any specific number of shares and may be suspended or discontinued at any time.
ITEM
6. EXHIBITS
(a)
Exhibits required by Item 601 of Regulation S-K.
Exhibit
Number
|
|
Description
|
2.1#
|
|
Agreement and Plan
of Merger, dated September 13, 2016, by and among PeerStream, Inc., SAVM Acquisition Corporation, A.V.M. Software, Inc. and
Jason Katz (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of the Company filed on September 14,
2016 by the Company with the SEC).
|
2.2#
|
|
Asset Purchase Agreement, by and between PeerStream, Inc. and The Dating Company, LLC, dated as of January 31, 2019 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of the Company filed on February 4, 2019 by the Company with the SEC).
|
3.1
|
|
Certificate of Incorporation,
dated July 19, 2005 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-172202)
of the Company filed on February 11, 2011 by the Company with the SEC).
|
3.2
|
|
Certificate of Amendment
of Certificate of Incorporation, dated November 20, 2007 (incorporated by reference to Exhibit 3.2 to the Registration Statement
on Form S-1 (File No. 333-172202) of the Company filed on February 11, 2011 by the Company with the SEC).
|
3.3
|
|
Certificate of Amendment
to Certificate of Incorporation, dated March 8, 2016 (incorporated by reference to Exhibit 3.3 to the Annual Report on Form
10-K filed on March 14, 2016 by the Company with the SEC).
|
3.4
|
|
Certificate of Amendment
to Certificate of Incorporation, dated May 19, 2016 (incorporated by reference to Exhibit 3.4 to the Quarterly Report on Form
10-Q of the Company filed on August 11, 2016 by the Company with the SEC).
|
3.5
|
|
Certificate of Amendment to Certificate of Incorporation, dated January 5, 2019 (incorporated by reference to Exhibit 3.5 to the Annual Report on Form 10-K filed on March 28, 2019 by the Company with the SEC).
|
3.6
|
|
Certificate of Amendment to Certificate of Incorporation, dated May 25, 2019 (incorporated by reference to Exhibit 3.6 to the Quarterly Report on Form 10-Q of the Company filed on August 8, 2019 by the company with the SEC).
|
3.7
|
|
Certificate of Amendment to Certificate of Incorporation, effective March 12, 2019 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of the Company filed on March 13, 2019 by the Company with the SEC).
|
3.8
|
|
Amended and Restated
By-Laws of PeerStream, Inc., as amended April 19, 2012 (incorporated by reference to Exhibit 3.1 to the Current Report on
Form 8-K (File No. 000-52176) of the Company filed April 25, 2012 by the Company with the SEC).
|
3.9
|
|
Amendment No. 1 to the Amended and Restated By-Laws of PeerStream, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of the Company filed September 11, 2019 by the Company with the SEC).
|
3.10
|
|
Amendment No. 2 to the Amended and Restated By-Laws of PeerStream, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of the Company filed on March 13, 2019 by the Company with the SEC).
|
4.1
|
|
Specimen Stock Certificate of PeerStream, Inc. (incorporated by reference to Exhibit 4.2 to Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-226003) of the Company filed on November 27, 2018 by the Company with the SEC).
|
10.1*
|
|
Consulting Agreement, by and between PeerStream, Inc. and Judy Krandel, effective as of May 6, 2019
|
31.1*
|
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
|
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1**
|
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
101*
|
|
The following materials
from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (eXtensible
Business Reporting Language), (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations,
(iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statements of
Cash Flows and (v) Notes to Condensed Consolidated Financial Statements.
|
|
#
|
Schedules and exhibits
have been omitted pursuant to Item 601(b)(2) of Regulation S-K. PeerStream, Inc. hereby undertakes to furnish supplemental
copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.
|
|
**
|
The certification
attached as Exhibit 32.1 is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by
reference into any filing of PeerStream, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act
of 1934, as amended, whether made before or after the date of the Quarterly Report on Form 10-Q, irrespective of any general
incorporation language contained in such filing.
|