On October 7, 2016, Snap Interactive, Inc. (“Snap”) completed its previously announced merger with A.V.M. Software, Inc. (d/b/a Paltalk) (“AVM”), pursuant to which SAVM Acquisition Corporation, Snap’s wholly owned subsidiary, merged with and into AVM, with AVM surviving as a wholly owned subsidiary of Snap (the “AVM Merger”). As a result of the AVM Merger, the former shareholders of AVM received shares of Snap’s common stock representing approximately 77.9% of the outstanding shares of common stock of the post-AVM Merger combined company, and Snap’s former shareholders retained approximately 22.1% of the outstanding shares of common stock of the post-AVM Merger combined company, in each case including unvested shares of restricted stock in the total number of shares of common stock outstanding. In connection with the consummation of the AVM Merger, Snap fully repaid its outstanding 12% Senior Secured Convertible Note due February 13, 2017 in the original aggregate principal amount of $3,000,000.

The AVM Merger has been accounted for as a “reverse merger” under the acquisition method of accounting for business combinations with AVM being treated as the accounting acquirer of Snap. As such, the historical financial statements of AVM are treated as the historical financial statements of the combined company. Accordingly, the financial results for the quarterly period ended September 30, 2017 presented in this Form 10-Q reflect the operations of the combined company. These results for the quarterly period ended September 30, 2017 are compared to the financial results for pre-AVM Merger AVM for the quarterly period ended September 30, 2016.

For additional information, see the Notes to our Condensed Consolidated Financial Statements set forth in this Quarterly Report on Form 10-Q.

Unless the context otherwise indicates, all references in this Quarterly Report on Form 10-Q to “Snap,” “we,” “our,” “us,” and the “Company” refer to the post-AVM Merger combined company and its subsidiaries on a consolidated basis.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on current expectations, estimates, forecasts and assumptions and are subject to risks and uncertainties. Words such as “anticipate,” “assume,” “began,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “would” and variations of such words and similar expressions are intended to identify such forward-looking statements. All forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following:

For a more detailed discussion of these and other factors that may affect our business, see the discussion in “Item 1A. Risk Factors” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and the risk factors set forth in (i) our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, which was filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2017 and (ii) our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, which was filed with the SEC on August 8, 2017.22, 2019. We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this report, except to the extent required by applicable securities laws.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SNAP INTERACTIVE,PEERSTREAM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements.

PEERSTREAM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PEERSTREAM, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PEERSTREAM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

SNAP INTERACTIVE,PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On October 7, 2016, Snap Interactive,The accompanying condensed consolidated financial statements include PeerStream, Inc. and its wholly owned subsidiary, Snap Mobile Limited (collectively, “SNAP”), completed a business combination with privately-heldsubsidiaries, A.V.M. Software, Inc. and its wholly owned subsidiaries,, Paltalk Software Inc., Paltalk Holdings, Inc., Tiny Acquisition Inc., Camshare, Inc., Vumber LLC and Fire Talk LLC and Vumber LLC (collectively, “AVM”) in accordance with the terms of an Agreement and Plan of Merger (the “AVM Merger Agreement”), by and among SNAP, SAVM Acquisition Corporation, SNAP’s former wholly owned subsidiary, AVM and Jason Katz, pursuant to which AVM merged with and into SAVM Acquisition Corporation, with AVM surviving as a wholly owned subsidiary of SNAP (the “AVM Merger”“Company,” “we,” “our” or “us”).

Under U.S. generally accepted accounting principles (“GAAP”), the AVM Merger is treated as a “reverse merger” under the acquisition method of accounting. For accounting purposes, AVM is considered to have acquired SNAP. Consequently, the historical financial statements reflect the operations and financial condition of AVM and operating results of SNAP are reported beginning on the closing date of the AVM Merger (collectively, the “Company”).

The Company is an Interneta communications software company. Under its registered trademarks,innovator developing enhanced security and privacy solutions for multimedia communication 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 offer our Backchannel product suite, 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 developshas a long history of technology innovation and operates computer software that enables spontaneous global real time audio/video conversation via the internet and operates a portfolio of dating applications. holds 26 patents.

The condensed consolidated financial statements included in this report have been prepared on a going concern basis in accordance with GAAPgenerally 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 normally included in annualand 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, 2016,2018, filed with the SEC on March 28, 201722, 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 and ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of results for the year ending December 31, 2017,2019, or for any other period.

Reverse Stock SplitReclassifications

The Company completed a 1-for-35 reverse stock split which became effective at the close of regular trading hours on January 5, 2017 and the Company’s common stock began trading on a post-reverse stock split basis at the opening of regular trading hours on January 6, 2017. Except as otherwise provided herein, all share and per-shareCertain prior period amounts of the Company’s common stock and stock options have been adjustedreclassified for comparative purposes to give effectconform to the reverse stock split for all periods presented.current presentation. These reclassifications have no impact on the previously reported net income (loss).

For a detailed discussion about the Company’s significant accounting policies, see the Form 10-K.

During the ninesix months ended SeptemberJune 30, 2017,2019, there were no materialsignificant changes made to the Company’s significant accounting policies from those disclosed in the Form 10-K. Certain significant accounting policies relied on in the preparation of the accompanying unaudited condensed consolidated financial statements are as follows: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.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Significant estimates relied upon in preparing these financial statements include the estimates used to determine the fair value of the Company’s common stock up until the time of the AVM Merger, stock options issued in share basedshare-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.

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements

In May 2014,January 2017, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09,Revenue from Contracts with Customers, which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued ASU 2016-08,Revenue Recognition - Principal versus Agent (reporting revenue gross versus net). Also, in April 2016, the FASB issued ASU 2016-10,Revenue from Contracts with Customers Identifying Performance Obligations and Licensing, and in May 2016 the FASB issued ASU 2016-12,Revenue Recognition – New Scope Improvements and Practical Expedients. These standards are effective for interim and annual periods beginning after December 15, 2017, and may be adopted earlier. The revenue standards are required to be adopted by taking either a full retrospective or a modified retrospective approach. The Company is currently evaluating the impact the standards will have on the Company’s condensed consolidated financial statements and determining the transition method, including the period of adoption, that it will apply.

In February 2016, the FASB issued ASU No. 2016-02,LeasesAccounting Standards Update (“ASU 2016-02”ASU”), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective for interim and annual periods beginning after December 15, 2018. Early adoption of ASU 2016-02 is permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting ASU 2016-02 on the condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01,Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company expects no impact from adopting this guidance and will adopt this on a prospective basis.

In January 2017, the FASB issued 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 iswill be effective for the interim and annual periodCompany beginning after December 15, 2019,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 May 2017,June 2016, the FASB issued ASU 2017-09,2016-13,Compensation – Stock CompensationFinancial Instruments—Credit Losses (Topic 718) Scope326): Measurement of Modification Accounting(“Credit Losses on Financial Instruments (“ASU 2017-09”2016-13”). ASU 2017-09 provides guidance about which changes2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that utilizes expected credit losses to the terms of conditionsprovide for an allowance for credit losses for financial instruments and requires consideration of a share based payment awardbroader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require an entitya financial asset (or a group of financial assets) measured at amortized cost basis to apply modification accounting. An entity shouldbe presented at the net amount expected to be collected. The allowance for credit losses is a valuation account forthat is deducted from the effects of a modification unless allamortized cost basis of the followingfinancial 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 met: 1) thenot accounted for at fair value ofthrough 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 modified award isscope that have the same as the fair value of the original award; 2) the vesting conditions of the modified award are the same as the vesting conditions of the original award; and 3) the classification of the modified award as an equity instrument or liability instrument is the same as the classification of the original award. The guidancecontractual right to receive cash. ASU 2016-13 is effective for annual periods beginning after December 15, 2017, including2019, and interim periods within those periods.annual periods with early adoption permitted for fiscal years beginning after December 31, 2018 and interim periods within such year. The Company expects no impact from adoptingadopted this guidance, and will adopt thisits adoption did not have any significant impact on the Company’s condensed consolidated financial statements and related disclosures.

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 six months ended June 30, 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 prospective basis.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 $1,150,454 was subsequently recognized as subscription revenue during the six months ended June 30, 2019. The ending balance of deferred revenue at June 30, 2019 was $1,477,367. 

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In addition, the Company offers virtual gifts 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 are under the users’ control. Virtual gift revenue is 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 revenue was approximately $1,478,239 and $2,899,073 for the three and six months ended June 30, 2019, respectively. Virtual gift revenue was approximately $1,742,423 and $3,752,923 for the three and six months ended June 30, 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 (the “ProximaX Agreement”) with ProximaX Limited (“ProximaX”) is recognized based upon proportional performance using labor hours as the unit of measurement. Pursuant to the terms of the ProximaX Agreement, ProximaX agreed to pay the Company, among other things, up to an aggregate of $10.0 million of cash or certain highly liquid cryptocurrencies in exchange for the Company’s services, $5.0 million of which was paid in May 2018, $2.5 million of which was due upon completion the second development milestone set forth in the ProximaX Agreement and $2.5 million of which was due upon completion of the third development milestone set forth in the ProximaX Agreement. The contractual upfront fee 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 was recognized as revenue under the input method based on proportional performance using labor hours as the unit of measurement. The portion of the upfront fee that remained unrecognized as of the termination of the ProximaX Agreement was $1,631,105 and was recognized as revenue upon such termination.

In the second quarter of 2019, the Company completed, and ProximaX accepted delivery of, the work constituting the second development milestone under the ProximaX Agreement. During the final stages of delivery of the second milestone, ProximaX informed the Company that capital constraints made it unable to pay the Company the $2.5 million as stipulated under the ProximaX Agreement. Accordingly, the Company and ProximaX entered into an agreement, effective June 24, 2019, to terminate the ProximaX Agreement (the “Termination Agreement”) and provide for payment terms for the $2.5 million due under the ProximaX Agreement. Since there is no assurance of collectability on the remaining payments, revenue will be recognized as the payments under the Termination Agreement 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.

During the second quarter of 2019, the Company sold 16,604,747 digital tokens for $56,100. The loss recorded of approximately $8,000 was immaterial in respect to the condensed consolidated financial statements. 

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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 operations of the Dating Services Business are included in our results as discontinued operations through January 31, 2019, the date of sale.

The following tables summarize the major line items included in loss from discontinued operations for the Dating Services Business:

Property and equipment, net consisted of the following at SeptemberJune 30, 20172019 and December 31, 2016:2018:

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Depreciation expense for the three and ninesix months ended SeptemberJune 30, 20172019 was $101,801$88,820 and $355,348,$177,435, respectively, as compared to $120,294$106,148 and $321,167, respectively,$206,138 for the three and ninesix months ended SeptemberJune 30, 2016. During May 2017, the Company disposed of approximately $17,000 of computer equipment and furniture and fixtures in relation to a relocation of its corporate office, which is reflected on the condensed consolidated balance sheets in property and equipment, net. 2018, respectively.

The Company only holds property and equipment in the United States.  

On October 7, 2016, AVM completed the AVM Merger with SNAP, pursuant to which SAVM Acquisition Corporation, SNAP’s former wholly owned subsidiary, merged with and into AVM, with AVM surviving as a wholly owned subsidiary of SNAP.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company finalized the original valuation and as part of a revision for the AVM Merger, the Company made an adjustment to increase the fair value of the deferred revenue at the acquisition date by $234,144, offset by a decrease in deferred tax liability of $1,452,339, with a corresponding decrease to goodwill reflected in the accompanying condensed consolidated financial statements. Additionally, the change to the provisional amount resulted in amortization of deferred revenue of $65,000 during the three and nine months ended September 30, 2017.(Unaudited)

Intangible assets, net consisted of the following at SeptemberJune 30, 20172019 and December 31, 2016:2018: 

Amortization expense for the three and ninesix months ended SeptemberJune 30, 20172019 was $421,188$64,083 and $1,263,563,$128,165, respectively, as compared to $137,771$421,189 and $413,317, respectively,$842,372 for the three and ninesix months ended SeptemberJune 30, 2016.2018, respectively. The estimated aggregate amortization expense for each of the next five years and thereafter will be $419,934 in 2017, $1,599,719 in 2018, $1,087,333$128,167 in 2019, $592,681$246,681 in 2020, $444,167$184,667 in 2021, $149,944 in 2022 and $197,796 thereafter.$46,599 in 2023.

Accrued expenses and other current liabilities consisted of the following at SeptemberJune 30, 20172019 and December 31, 2016:2018:

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. As of June 30, 2019, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.

For the three months ended June 30, 2019, the Company recorded an income tax provision of $163,490 from continuing operations. The Company recorded an income tax provision for state and local taxes and reversed the income tax benefit recorded during the three months ended March 31, 2019 as the intra-period allocation guidance no longer applies as the Company reported income from both continuing and discontinued operations. For the six-months ended June 30, 2019, the Company recorded an income tax provision of $4,500. The effective tax rate for the three and six months ended June 30, 2019 was 35.9% and 1.18%, respectively.

For the three and six months ended June 30, 2018, the Company recorded an income tax provision from continuing operations of $15,500 and $15,500, respectively. The effective tax rate for the three and six months ended June 30, 2018 was (0.80%) and (0.56%), respectively. The effective tax rate differs from the statutory rate of 21% as no benefit has been provided to current year pre-tax losses as the Company concluded its deferred tax assets are not realizable on a more-likely-than-not basis.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Snap Interactive,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 deliveredissued pursuant to outstanding options awarded under the 2011 Plan,Plan; however, no additional awards may be granted under such plan. The Snap Interactive,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. On May 25, 2017, the Company’s stockholders approved an amendment to the 2016 Plan to increase theThe maximum number of shares issuableof 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 1,300,000 shares.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 SeptemberJune 30, 2017,2019, there were 665,378418,346 shares available for future issuance under the 2016 Plan.

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)On April 29, 2019, we implemented a stock repurchase plan to repurchase up to $500 thousand of our common stock for cash. The repurchase plan expires on April 29, 2020. There were no repurchased shares of our common stock as of June 30, 2019.

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 periods:period:

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 is adjustedadjusts pre-vesting forfeitures to reflect actual forfeitures as the stock basedstock-based awards vest.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables summarizetable summarizes stock option activity during the ninesix months ended SeptemberJune 30, 2017:2019:

During the nine months ended September 30, 2017,On May 7, 2019, in connection with Judy Krandel’s resignation as an officer and employee of the Company, the Company (i) entered into an option cancellation and release agreements with three employees,agreement, pursuant to which each of the parties agreed to cancel outstanding options to purchase an aggregate of 77,312 shares of common stock of the Company at exercise prices ranging from $4.55 to $21.00 per share. In exchange for the cancellation of the options, the Company granted the employees replacement options to purchase an aggregate of 64,600 shares of common stock of the Company at exercise prices ranging from $3.36 to $6.00 per share. The incremental value of the modified options comparedcanceled Ms. Krandel’s option award agreement, dated November 15, 2016, related to the original options, both valued on the respective modification date,award of $55,055 is being recognized over the vesting terms of the options.

On April 13, 2017, the Company’s Board of Directors awarded Alexander Harrington, Chief Executive Officer, (i) a stock option representing the right to purchase 80,000142,857 shares of common stock and (ii) entered 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 $3.63$3.55 per share with the shares underlying this(the “Revised Option Agreement”). The stock option vesting 25%subject to the Revised Option Agreement vests: (i) 50% on the six month anniversary of the date of grant, (ii) 25% on May 15, 2019 and (iii) 25% in 12 equal installments on the 15th day of each month, with the first tranche vesting on June 15, 2019 and the remaining three trancheslast tranche vesting on eachMay 15, 2020. The Company accounted for these agreements as an option modification and recognized approximately $115,000 of the first, second and third anniversaries of the first vesting date, and (ii) a stock option representing the right to purchase 24,000 shares of common stock at an exercise price equal to $3.63 per share,compensation expense in connection with the shares underlying this stock option vesting based on the Company’s achievementagreements.

At June 30, 2019, there was $810,526 of certain performance goalstotal unrecognized compensation expense related to its annual revenues. In addition, on April 13, 2017, the Company’s Boardstock options, which is expected to be recognized over a weighted average period of Directors awarded Jason Katz, Chief Operating Officer and Chairman of the Board of Directors, a stock option representing the right to purchase 70,000 shares of common stock at an exercise price equal to $3.63 per share, with (i) 17,500 of the underlying shares vesting based on the Company’s achievement of certain performance goals related to its earnings before interest, tax, depreciation, and amortization and (ii) 52,500 of the underlying shares vesting based on the Company’s achievement of certain performance goals related to its annual revenues.1.3 years.

On May 5, 2017, the Compensation Committee of the Company’s Board of Directors awarded each of Mr. Harrington and Eric Sackowitz, Chief Technology Officer, a stock option representing the right to purchase 28,571 shares of common stock at an exercise price equal to $3.36 per share. The shares underlying these stock options vest in four equal installments on each anniversary of the date of grant.

On SeptemberJune 30, 2017,2019, the aggregate intrinsic value of stock options that were outstanding and exercisable was $17,565$154,514 and $9,972,$99,340, respectively. On SeptemberJune 30, 2016,2018, the aggregate intrinsic value of stock options that were outstanding and exercisable was $235,860$2,923,478 and $225,170,$1,400,918, 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.

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the ninesix months ended SeptemberJune 30, 2017,2019, the Company granted options to employees to purchase an aggregate 58,696193,294 shares of common stock at exercise prices ranging from $3.34$3.55 to $4.50.$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 ninesix months ended SeptemberJune 30, 20172019 was $966,560.$337,598. The aggregate fair value for the options granted during the ninesix months ended SeptemberJune 30, 20162018 was $87,000.$522,774.

Stock-based compensation expense for the Company’s stock options included in the condensed consolidated statements of operations is as follows:

At September 30, 2017, there was $1,171,251 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 3.0 years.PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Stock Awards

The following table summarizes restricted stock award activity for the ninesix months ended SeptemberJune 30, 2017:2019:

At SeptemberJune 30, 2017,2019, there was $1,482,991$185,374 of total unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over a weighted average period of 1.80.3 years.

Stock-based compensation expense relating to restricted stock awards included in general and administrative expense for the three and ninesix months ended SeptemberJune 30, 20172019 was $185,374 and $556,122,$370,748, respectively, as compared to $0$185,374 and $370,746 for the three and ninesix months ended SeptemberJune 30, 2016.2018, respectively.

Common Stock

On May 18, 2017, we announced a stock repurchase plan to repurchase up to $1.0 million of our common stock for cash. The repurchase plan was automatically terminated pursuant to its terms on September 11, 2017 in connection with the public announcement of the proposed merger with LiveXLive. At the time of the termination of the repurchase plan, we had repurchased an aggregate of 2,346 shares of our common stock for an aggregate purchase price of $7,038.

Basic net lossincome (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.Share. Diluted net lossincome (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.

The weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s common stockholder’s consists of the following:

For the three and ninesix months ended SeptemberJune 30, 2017, 817,0202018, 1,063,509 shares upon the exercise of outstanding stock options and 264,286158,571 shares of unvested restricted stock were not included in the computation of diluted net loss per share because their inclusion would be antidilutive. For the three months ended September 30, 2016, diluted net income per share did not include the effect of any shares issuable upon the exercise of stock options as the exercise price of these options were not less than the average market price during the period.

For the nine months ended September 30, 2016, 71,700 shares upon the exercise of outstanding stock options were not included in the computation of diluted net loss per share because their inclusion would be antidilutive. 

SNAP INTERACTIVE,Operating Leases

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 expired 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.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Operating Lease Agreements

As result of the AVM Merger,On May 1, 2019, the Company entered into a lease agreement for an additional office space located at 320 W 37th122 East 42nd Street 13th Floor,in New York, NY 10018.and paid a $133,968 security deposit in the form of a letter of credit. The term of the lease originally ranruns until March 4, 2022.April 26, 2023. The Company’s monthly office rent payments under the lease wereare currently approximately $26,000$33,492 per month.

On March 3, 2017,May 1, 2019, the Company entered into ana sublease agreement with Telecom Infrastructure Corp. for office space located at 122 East 42nd Street in New York, NY, pursuant to terminatewhich Telecom Infrastructure Corp. is required to pay the lease for this office space. Under the termsCompany $11,164 a month. The term of the lease termination agreement,sublease runs until April 26, 2023.

As of June 30, 2019, the Company vacatedhad no long-term leases that were classified as financing leases. As of June 30, 2019, the offices by May 31, 2017Company did not have additional operating and agreed to forfeit its security deposit of $200,659.financing leases that have not yet commenced. 

Total rent, utilities, real estate tax expense and commercial rent tax expense relating to operating lease agreementsexpense for the three and ninesix months ended SeptemberJune 30, 2017 were approximately $91,0002019 was $178,305 and $263,000, respectively, as compared to $33,460is recorded in general and $314,055, respectively, foradministrative expense on the three and nine months ended September 30, 2016.unaudited condensed statements of operations.

Capital Lease AgreementsLegal Proceedings

As resultOn December 16, 2016, a wholly owned subsidiary of the AVM Merger,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 Company acquired five three-year capital lease agreements with Hewlett Packard Financial Services Company. The Company’s monthly payments under these capital leases are approximately $7,600.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. On May 14, 2019, the PTAB rejected the validity of the patents. The Company recognizes these leases onis currently pursuing an appeal of the condensed consolidated balance sheet under accrued expenses and other current liabilities.PTAB’s ruling.

Litigation, Claims and Assessments

The Company may be a partyincluded 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 SeptemberJune 30, 2017.2019.

Restricted Awards Vesting

On October 7, 2017, an aggregate of 105,715 shares of restricted stock held by Clifford Lerner, a member of the Company’s Board of Directors, vested. Pursuant to the terms of Mr. Lerner’s restricted stock awards, the Company withheld an aggregate of 43,405 of the vesting shares of restricted stock to satisfy Mr. Lerner’s tax withholding obligations incurred in connection with the vesting of the shares of restricted stock.

Terminated LiveXLive Merger Agreement

On September 6, 2017, the Company entered into an Agreement and Plan of Merger with LiveXLive Media, Inc. (“LiveXLive”), LXL Video Acquisition Corp., a wholly owned subsidiary of LiveXLive (“Merger Sub”), and Jason Katz, as the agent of the stockholders of the Company, pursuant to which the Company would have merged with and into Merger Sub, with Merger Sub surviving as a wholly owned subsidiary of LiveXLive (the “LiveXLive Merger Agreement”).

On October 31, 2017, the Company provided a letter to LiveXLive that terminated the LiveXLive Merger Agreement, pursuant to Section 8.2(a) of the LiveXLive Merger Agreement, due to certain conditions of the LiveXLive Merger Agreement not having been fulfilled as of October 27, 2017, which relieved the Company of its obligations under the LiveXLive Merger Agreement. No termination fee was payable by the Company in connection with the termination of the LiveXLive Merger Agreement.

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued and determined that no other events or transactions are required to be disclosed herein.

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 ninethree and six months ended SeptemberJune 30, 2017,2019 and 2018, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 20162018 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 28, 201722, 2019 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of ourthe Form 10-K. Aside from certain information as of December 31, 2016,2018, 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 and “Part II: Other Information – Item 1A. Risk Factors” herein and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed with the SEC on August 8, 2017 (the “Second Quarter 10-Q”).

AVM Merger

On October 7, 2016, we completed our previously announced merger with A.V.M. Software, Inc. (d/b/a Paltalk) (“AVM”), pursuant to which SAVM Acquisition Corporation, our wholly owned subsidiary, merged with and into AVM, with AVM surviving as a wholly owned subsidiary of Snap (the
“AVM Merger”). As a result of the AVM Merger, the former shareholders of AVM received shares of Snap’s common stock representing approximately 77.9% of the outstanding shares of common stock of the post-AVM Merger combined company, and Snap’s former shareholders retained approximately 22.1% of the outstanding shares of common stock of the post-AVM Merger combined company, in each case including unvested shares of restricted stock in the total number of shares of common stock outstanding.

Except as otherwise specifically provided, this Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the business and operations of AVM and its consolidated subsidiaries for the periods prior to the closing of the AVM Merger and on a consolidated basis with Snap and its subsidiary for periods after the closing of the AVM Merger. Unless the context otherwise indicates, references to “Snap,” “we,” “our,” “us” and the “Company” refer to the post-AVM Merger combined company and its subsidiaries on a consolidated basis.10-K.

Presentation for Reverse Stock SplitRecent Developments

CFO Resignation

On January 5, 2017, we effected a 1-for-35 reverse stock splitApril 30, 2019, Judy Krandel announced that she would be resigning from her position as our Chief Financial Officer, effective May 6, 2019. Following Ms. Krandel’s resignation, Alexander Harrington, the Company’s Chief Executive Officer, has assumed the role of our issuedprincipal financial officer while we search for a permanent replacement Chief Financial Officer. Concurrent with the announcement of Ms. Krandel’s resignation, we entered into a Consulting Agreement with Ms. Krandel, effective May 6, 2019, pursuant to which Ms. Krandel has agreed to perform certain transitional services for the Company as a Senior Business Development consultant.

Termination of ProximaX Agreement

As previously disclosed, on March 21, 2018, we entered into a technology services agreement with ProximaX Limited (“ProximaX”) whereby we agreed to provide certain development and outstanding common stockrelated services to ProximaX to facilitate the implementation of PeerStream Protocol into ProximaX’s proprietary blockchain protocol that is currently under development (the “Reverse Stock Split”“ProximaX Agreement”). As a resultPursuant to the terms of the Reverse Stock Split, each issuedProximaX Agreement, ProximaX agreed to pay the Company, among other things, up to an aggregate of $10.0 million of cash or certain highly liquid cryptocurrencies in exchange for our services, $5.0 million of which was paid in May 2018, $2.5 million of which was due upon completion the second development milestone set forth in the ProximaX Agreement and outstanding share$2.5 million of our common stock, andwhich was due upon completion of the per share exercise price of and number of shares of our common stock underlying our outstanding stock options, was automatically proportionally adjusted based onthird development milestone set forth in the 1-for-35 Reverse Stock Split ratio. Except as otherwise provided herein, all share and per-share amounts of our common stock and stock options have been adjusted to give effect to the Reverse Stock Split for all periods presented. The Reverse Stock Split did not alter the par value of our common stock, which remains at $0.001 per share, modify any voting rights or other terms of our common stock or impact the amount of preferred stock we are authorized to issue.ProximaX Agreement.

Terminated LiveXLive Merger Agreement

On September 6, 2017,In the Companysecond quarter of 2019, we completed, and ProximaX accepted delivery of, the work constituting the second development milestone under the ProximaX Agreement. During the final stages of delivery of the second milestone, ProximaX informed us that capital constraints made it unable to pay us the $2.5 million as stipulated under the ProximaX Agreement. Accordingly, following negotiations between the parties, on June 29, 2019, we entered into an Agreement and Plan of Mergeragreement with LiveXLive Media, Inc. (“LiveXLive”ProximaX, effective June 24, 2019 (the “Termination Date”), LXL Video Acquisition Corp., a wholly owned subsidiary of LiveXLive (“Merger Sub”to terminate the ProximaX Agreement (the “Termination Agreement”), and Jason Katz, asprovide for payment terms for the agent$2.5 million due under the ProximaX Agreement.

Pursuant to the Termination Agreement, the parties agreed, among other things, that (i) we have no further obligation to provide any deliverables or services under the ProximaX Agreement, including any services related to the completion of the stockholdersthird development milestone, (ii) all services performed by us under the ProximaX Agreement are accepted by ProximaX and (iii) all payments previously made by ProximaX to us prior to the Termination Date are final and non-refundable.

Under the Termination Agreement, ProximaX also acknowledged and agreed to pay us the $2.5 million owed for the completion of the Company, pursuant to which the Company would have merged with and into Merger Sub, with Merger Sub survivingsecond development milestone as a wholly owned subsidiary of LiveXLive (the “LiveXLive Merger Agreement”).follows:

On October

If ProximaX raises capital prior to December 31, 2017, the Company provided2019, ProximaX is required to apply a letter to LiveXLive that terminated the LiveXLive Merger Agreement, pursuant to Section 8.2(a)percentage of the LiveXLive Merger Agreement, due to certain conditionsnet cash proceeds from such capital raise towards the Remaining Balance as follows: 5% of the LiveXLive Merger Agreement not having been fulfillednet cash proceeds from the first $5.0 million of capital raised; 10% of the net cash proceeds from the next $2.5 million of capital raised; and 15% of the net cash proceeds from any additional capital raised. Any amount of the Remaining Balance outstanding as of October 27, 2017, which relievedDecember 31, 2019 after the Company of its obligations under the LiveXLive Merger Agreement. No termination fee was payable by the Company in connection with the terminationapplication of the LiveXLive Merger Agreement.net cash proceeds from a capital raise, if any, will be paid in security tokens issued by ProximaX.

Overview

The Company isWe are a leading providercommunications software innovator developing enhanced security and privacy solutions for multimedia 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 offer our Backchannel product suite 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 networking,communities. The Company has a long history of technology innovation and interactive dating applications. Our product portfolio includes Paltalkholds 26 patents.

In March 2018, we launched our proprietary software business centered around the development of PSP and Camfrog, which together host one ofBackchannel. In addition, we 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, by entering into the world’s largest collections of video-based communities,ProximaX Agreement. We are seeking to grow our software licensing and FirstMet,technology implementation business by securing new clients to license PSP and/or Backchannel, as well as implement these products into their existing systems.

We also operate a prominent interactive dating brand serving users 35 and older. Our other products include Tinychat, Firetalk, 50More, Ribbit Live, The Grade and Vumber. Our leading network of products createsconsumer 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 other usersothers in our network. Our properties are generally available through Windows®, Mac^TM OS, iOS^TM and Android^TM platforms.

We believe that live video is in the early stages of adoption forconsumer applications related to meeting, chatting, dating, broadcasting and other interactive purposes and over time presents an attractive growth opportunity as it becomes pervasively integrated across the social networking and interactive communications industries. The proprietary technology underlying our products allows us to operate thousands of simultaneous streams, including on mobile platforms that support interactions on a one-on-one, one-to-many and many-to-many basis. We believe our technology represents a significant competitive advantage. Furthermore, most of our technology is supported by a portfolio of 26 issued patents.

We also have a worldwide established presence and brand identity in both live video chat and interactive dating, with users in over 180 countries. We believe that we are well-positioned to take advantage of key business opportunities in our industry by leveraging our technology, user base and suite of complementary applications to incorporate live and recorded video into the dating experience, as well as to bring dating opportunities to our video chat community.

Our Products

Live Video Chat

We have five products in the video chat space: Paltalk; Camfrog; Tinychat; Ribbit Live; and Firetalk. The major revenue-generating products of the Company are Paltalk and Camfrog. Each product enables individuals to self-organize around topics and users with common affinities. Tinychat, Ribbit Live and Firetalk enable adaptations of our video technology for alternative uses and opportunities in the future.

Paltalk and Camfrog. 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 tens 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, whereas the majority of Camfrog users are international, with a particular concentration in Southeast Asia.

As described below, in the first half of 2017, we founded an innovation lab to leverage our technology and commercial platform to support growth initiatives in the live video markets. Through the support of our innovation lab, we recently updated Camfrog to support one-to-many live streaming video capabilities through the launch of Camfrog Live. Camfrog Live offers a wide variety of live video broadcasting entertainment while allowing spontaneous, real-time engagement at a more personal level. The platform offers these viewing users a unique way of connecting and sharing through live interaction with content creators, allowing them to offer feedback and appreciation, including cash donations and tips.Camfrog will continue to support its leading traditional group video chat service, which the Company believes is complemented by the addition of live streaming entertainment.

We plan to continue to rely on our innovation lab to support our live video growth initiatives, including through the addition of new features to our existing video chat applications and the build out of new products, such as our planned new live video chat consumer application and our increasing focus on blockchain technology and product development, partnerships and investments.

We expect that, as we channel our resources and focus into new, higher growth opportunities in the live video markets, we may experience a decline in users and user activity on our legacy live video chat applications. However, we believe that these declines will be offset by increases in users and user activity stemminggenerate revenue principally from the updates and applications designed in our innovation lab.

Dating

We currently have three dating applications: FirstMet, 50more and The Grade. FirstMet generates substantially all of the revenue in our dating portfolio. 50more, our product targeting users over 50, was introduced in a limited beta launch in the first quarter of 2017 and was launched commercially in July 2017. For the foreseeable future, we expect to focus our dating application resources on FirstMet and 50more.

FirstMet.We provide a leading online dating application under the FirstMet brand. FirstMet is native on Facebook, iOS and Android platforms and is also accessible on mobile devices and desktops at FirstMet.com. FirstMet is extremely scalable and requires limited incremental operational cost to add users, active subscribers or new features catering to additional discrete audiences.

FirstMet attracts a demographically and geographically diverse user base, with users in over 180 different countries. FirstMet is intuitive, and allows users and subscribers to easily find, connect and communicate with each other.

50more. We introduced 50more commercially in July 2017 as our dating application targeting adults over the age of 50. 50more is based on our FirstMet platform and utilizes the underlying FirstMet infrastructure and technology, a strategy which allowed us to streamline the process of launching 50more as a new and fresh online dating product. 50more has similar functionality to FirstMet but offer more information-rich user profiles and addresses a different target audience of adults over 50. 50more is also based on a new brand identity.

We expect that we will operate 50more in parallel with FirstMet in order to leverage the overlap with FirstMet’s user base and cross-sell our users with multiple brands. 50more is available on mobile and desktop platforms.

The Grade. The Grade is a free mobile dating application offered on iOS and Android designed to foster a high quality community of users by rewarding good behavior and exposing improper behavior through a programmatic grading algorithm. Despite the uniqueness and early success of The Grade, we decided in late 2015 to shift our promotional and product development resource-focus to FirstMet, with its established user base, and the development of 50more. We believe The Grade remains a viable product with relevant technology, and it may provide a platform in the future for other product opportunities.

Telecommunications

We own and operate a small telecommunications 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 Development and Innovation Lab

We are continually developing new products, as well as optimizing our existing platforms and feature sets in order to meet the evolving needs of our user basesubscription fees and advertising partners.

We develop mostarrangements. As of August 1, 2019, our software internally. We will, however, purchase technology and license intellectual property rights where it is strategically important, operationally compatible or economically advantageous. For instance, we partner with third parties to further our internationalization efforts as we look to bring additional languages into our existing platforms. We are not materially dependent upon licenses and other agreements with third parties relating to product development.

In the first half of 2017, we founded an innovation lab to leverage our technology and commercial platform to support growth initiatives in the live video markets. Our innovation lab is currently pursuing live video social networking and live streaming entertainment opportunities on mobile, two areas that we believe show extraordinary promise for user adoption and revenue growth. In addition, we expect that our innovation lab will be proactive in creating, reshaping and optimizing our current portfolio of video-focused assets to support user growth. As described above, our innovation lab recently launched Camfrog Live as an update to our existing Camfrog application to provide support for one-to-many live streaming videos and to include new monetization opportunities for content creators. We believe that the launch of Camfrog Live has the potential to substantially grow our user base by providing a compelling platform for live video interactions.

In the second half of 2017, our innovation lab began exploring opportunities to develop and integrate blockchain technology into new products and future iterations of our applications. As a result, we recently completed a multi-month analysis by our internal blockchain development team that resulted in updates to our Camfrog and Tinychat platforms to allow bitcoin as an accepted form of payment. We believe that blockchain represents a significant opportunity to develop the future generation of live video social mediaconsumer applications in the most private, secure and decentralized manner achievable and we are currently researching additional opportunities to integrate blockchain technology into existing and future products, and exploring opportunities for partnership and strategic transactions.

Subscriber Base

Our applications and the majority of revenues generated therefrom arewere supported by a large user database which includeswith approximately 179,200106,200 active subscribers worldwide, as of September 30, 2017. Our management believeswhich 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 can present growth opportunities to combine video with dating to advance existing products with upsellup-sell opportunities as well as toand build future brands with cross-sell offers. We believe

Our continued growth depends on the scaleexpansion 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 also offers us the opportunity to build our third partythrough advertising revenue.campaigns that we run through internet and mobile advertising networks. 

Operational Highlights and Objectives

During the ninesix months ended SeptemberJune 30, 2017,2019, we executed key components of our objectives:

For the near term, our business objectives include:

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 the ProximaX Agreement. 

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. We currently offerproduct from one-, six-, and twelve-, and fifteen-month 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.

Our dating applications generate revenue primarily through subscription fees. Multiple subscription tiers are offered in one-, three- and six-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. Pursuant to the terms of service of our dating platforms, subscriptions automatically renew for periods of the same length and at the same price as the original subscription term until terminated by the subscriber. We also hold occasional promotions that offer initial discounted subscriptions that renew at the regular price. 

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 condensed consolidated balance sheets.

Advertising

We also generate a portion of our revenue on both our video and dating platforms through advertisements. Advertising revenue is dependent upon traffic 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. When a user clicks an advertisement (CPC basis), views an advertisement impression (CPM basis), registers for an external website via an advertisement by clicking on or through our application (CPA basis) or clicks on an offer to subscribe to premium features on the application, the contract amount is recognized as revenue.

Virtual Gifts/Micro-transactions

In our video chat platforms we offer virtual gifts 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. These gifts are given among users to enhance communication and are generally redeemed within the month of purchase. Virtual gift revenue is recognized atupon the pointusers’ utilization of sale, as they are incurred as purchased,the virtual gift and included in subscription revenue.

Advertising Revenue

We also offer micro-transactions togenerate a portion of our dating users. Micro-transactions allow users to increase the visibility of their profile and messages by paying for such services. In addition, micro-transactions include activation fees for new subscriptions. While micro-transactions are not currently a significant driver of revenue we believe that micro-transactions increase user engagement withthrough advertisements on our applications and the likelihood that users will become paid subscribers. Micro-transactionvideo platforms. Advertising revenue is recognized atdependent upon the pointvolume of sale and included inadvertising 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 revenue.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 licensing and service agreements that we negotiate with our clients that describe the scope of the development, integration, engineering, licensing or other services that we will provide. More specifically, 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 with service and support packages. In addition, technology services revenue includes technology-based business development partnerships. We expect that any technology services agreements and business development partnerships are likely to contain pricing and other custom terms based on the needs of the client, which may include compensation in the form of cash or cryptocurrency tokens or a mix of cash and cryptocurrency tokens.

Costs and Expenses

Cost of revenuerevenue.. 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 expenseexpense.. 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 is primarily consists of partner-related payments to those who direct traffic to our brands.

We plan to continue to expandexpect sales and marketing expense to potentially increase in future periods if we gain positive market feedback and expand our efforts to attract new users, retain existing usersin executing our software licensing and increase sales to both new and existing users.technology implementation services strategy. 

Product development expenseexpense.. 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 expenseexpense.. 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, including fees in connection with the AVM Merger and the terminated merger with LiveXLive.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 inprovided by (used in) operating activities under the ‟Results of Operations” and ‟Liquidity and Capital Resources” sections below. BookingsActive subscribers, subscription bookings and Adjusted EBITDA are discussed below.

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 all periods presented excludes active subscribers to the dating services business, which was sold in January 2019. 

Subscription Bookings

BookingsSubscription bookings is a financial measure representing the aggregate dollar value of subscription fees and micro-transactions 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 and micro-transactions 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 businessconsumer 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 revenuebookings more or less than such factors affect bookingssubscription 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 all 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) income adjusted to exclude net loss from discontinued operations, interest expense,income, net, gain on the sale of dating applications, income tax (benefit),benefit from discontinued operations, income tax expense from continuing operations, depreciation and amortization expense, other income, netimpairment loss on digital tokens 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: