UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,June 30, 2020

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number      000-52176

PEERSTREAM,PALTALK, INC.

(Exact name of registrant as specified in its charter)

122 East 42nd Street

New York,30 Jericho Executive Plaza Suite 400E
Jericho, NY 1016811753

(Address of principal executive offices) (Zip Code)

(212) 967-5120

(Registrant’s telephone number, including area code)

PeerStream, Inc.

122 East 42nd Street

New York, NY 10168

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

* Excludes 8,5009,950 shares of common stock that are held as treasury stock by PeerStream,Paltalk, Inc. 

PEERSTREAM,PALTALK, INC. QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31,JUNE 30, 2020

Table of Contents

PeerStream,Effective May 15, 2020, we changed our name from “PeerStream, Inc.” to “Paltalk, Inc.” Unless the context otherwise indicates, references to “Paltalk,” “PeerStream,” “we,” “our,” “us” and the “Company” refer to Paltalk, Inc. and its subsidiaries on a consolidated basis.

Paltalk, Peerstream, our logo and other trademarks or service marks appearing in this report are the property of PeerStream,Paltalk, Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective owners. Solely for convenience, the trademarks, service marks and trade names included in this report are without the ®, or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

Unless otherwise indicated, operational metrics such as those related to active subscribers or active users are based on internally-derived metrics for users across all platforms through which our applications are accessed. 

EXPLANATORY NOTE

Name Change

Effective May 15, 2020, we changed our name from “PeerStream, Inc.” to “Paltalk, Inc.” In connection with the name change, we also changed our trading symbol on the OTCQB Marketplace from “PEER” to “PALT.” This name change takes us back to our roots and reflects our primary focus on our current operations, Paltalk and Camfrog, which together are host to one of the world’s largest collections of video-based communities.

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” in Part II of this report and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this report and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the Securities and Exchange Commission on March 24, 2020. 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

PALTALK, INC.

(F/K/APEERSTREAM, INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

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

PALTALK, INC.

(F/K/APEERSTREAM, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSINCOME

(Unaudited)

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

PALTALK, INC.

(F/K/APEERSTREAM, INC.)

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

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

PALTALK, INC.

(F/K/A PEERSTREAM, INC.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

PALTALK, INC.

(F/K/A PEERSTREAM, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying condensed consolidated financial statements include PeerStream,Paltalk, 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,“Company”).

Effective May 15, 2020, the Company changed its name from “PeerStream, Inc.” “we,to “Paltalk, Inc.” “our” or “us”).In connection with the name change, the Company changed its trading symbol on the OTCQB Marketplace from “PEER” to “PALT.” This name change takes the Company back to its roots and reflects the Company’s primary focus on its current operations, Paltalk and Camfrog, which together are host to one of the world’s largest collections of video-based communities.

The Company is a communications software innovator that powers multimedia social applications. The Company has also developed a secure business communication solution for use worldwide. OurCompany’s product portfolio includes Paltalk and Camfrog, which together host one of the world’s largest collections of video-based communities. OurThe Company’s other products include Tinychat and Vumber. The Company has an over 20-year history of technology innovation and holds 18 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, 2019, filed with the SEC on March 24, 2020 (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 threesix months ended March 31,June 30, 2020 are not necessarily indicative of results for the year ending December 31, 2020, 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 income (loss).

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

During the threesix months ended March 31,June 30, 2020, 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, subscription revenues net of refunds, credits, and known and estimated credit card chargebacks, the valuation allowance on deferred tax assets, fair value of digital tokens and impairment assessment of goodwill. 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. 

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Recent Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes(“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. The Company has not early adopted ASU 2019-12 and is currently evaluating its impact on the Company’s financial position, results of operations, and cash flows.

PALTALK, INC.

(F/K/A PEERSTREAM, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Revenue

In accordance with Accounting Standards Codification (“ASC”) 606,Revenue from Contracts with Customers, 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 threesix months ended March 31,June 30, 2020 and 2019, 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, 2019 was $1,829,493, of which $1,043,533$1,115,419 was subsequently recognized as subscription revenue during the threesix months ended March 31,June 30, 2020. The ending balance of deferred revenue at March 31,June 30, 2020 was $1,764,634.$1,969,563. 

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.income. Virtual gift revenue was $1,427,373 and $2,642,434 for the three and six months ended June 30, 2020, respectively. Virtual gift revenue was approximately $1,215,061$1,478,239 and $1,420,834$2,899,073 for the three and six months ended March 31, 2020 andJune 30, 2019, respectively. The ending balance of deferred revenue from virtual gifts at March 31,June 30, 2020 and 2019 was $204,121$240,502 and $0, 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.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Technology Service Revenue

RevenueProximaX Agreement

During 2019, revenue included as technology services revenue was revenue that was recognized under the Company’s technology services agreement (the “ProximaX Agreement”) with ProximaX Limited (“ProximaX”) and was 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.

In the second quarter ofEffective June 24, 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 remaining $2.5 million due under the ProximaX Agreement. The portion of the upfront fee that remained unrecognized as of the termination of the ProximaX Agreement was $1.6 million and was recognized as revenue upon such termination, in addition to the $1.7 million of revenue recognized in the first quarter of 2019. Since there is no assurance of collectability on the remaining payments, revenue is being recognized as the payments under the Termination Agreement are received. For the threesix months ended March 31,June 30, 2020, the Company recognized approximately $15.0 thousand in revenue in connection with payments received under the Termination Agreement.

PALTALK, INC.

(F/K/A PEERSTREAM, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

YouNow Agreement

During the second quarter of 2020, the Company recorded revenue in connection with its agreement to serve as a launch partner with YouNow, Inc. (“YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”) into its Camfrog and Paltalk applications (as amended, the “YouNow Agreement”). Revenue from the YouNow Agreement is included in technology services revenue.

Pursuant to the terms of the YouNow Agreement, YouNow agreed to pay the Company, in exchange for the Company’s services, an aggregate of 10.5 million cryptographic props tokens (“Props tokens”) upon the achievement of certain milestones as follows: (i) 3.0 million Props tokens upon execution of the YouNow Agreement, (ii) 4.0 million Props tokens upon the integration of the Props platform in the Company’s Camfrog application and (iii) 3.5 million Props tokens due upon the integration of the Props platform in the Paltalk application. In the determining the value of the contract, the Company converted the Props tokens into U.S. dollars using an independent third-party valuation. As of June 30, 2020, the Props tokens were estimated to have a price equal to $0.02 per token (see Note 7 for additional information on the fair value of the Props tokens). The total contract value to be recognized was estimated to be $210,000 which is recognized based on the completion dates of the integration services performed.

The upfront fee is recognized as revenue under the output method based on the direct measurements of the value of services transferred to date to the customer, relative to the remaining services under the contract. During the three and six months ended June 30, 2020, the Company recognized $32,000 of the upfront fee and $80,000 from the completion of the first integration milestone as technology services revenue under the condensed consolidated statements of income and digital tokens receivable under the 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 can be reasonably estimated. Contract losses are 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 statements of income. There were no contract losses for the periods presented.

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 $100.0 thousand of the purchase price held in an escrow account to secure certain of the Company’s post-closing indemnification obligations.million. 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 operationsincome 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:Business for the periods presented:

There were no major line items included in loss from discontinued operations for the Dating Services Business for the three months ended June 30, 2020 and 2019.

PALTALK, INC.

(F/K/A PEERSTREAM, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Property and equipment, net consisted of the following at March 31,June 30, 2020 and December 31, 2019:

Depreciation expense for the three and six months ended March 31,June 30, 2020 was $88,860$82,866 and $171,726, respectively, as compared to $88,614$88,820 and $177,435 for the three and six months ended March 31, 2019.June 30, 2019, respectively.

The Company tests goodwill and indefinite-lived intangible assets for impairment annually and whenever events or circumstances arise that indicate an impairment may exist.

The Company recorded $6,760,222 of goodwill impairment for the year ended December 31, 2019 due to a sustained decrease in market price per share of the Company’s common stock. At December 31, 2019, the market price per share of the Company’s common stock declined to $1.29, and as such, the Company tested for an impairment and concluded that the goodwill should be reduced as result of the decline in the market price per share and fair value of the reporting unit.

The Company determined there were no indicators that would lead to a test for impairment during the threesix months ended March 31,June 30, 2020. Goodwill was $6,326,250 at March 31,June 30, 2020 and December 31, 2019.

Intangible assets, net consisted of the following at March 31,June 30, 2020 and December 31, 2019: 

Amortization expense for the three and six months ended March 31,June 30, 2020 was $64,084,$64,083 and $128,167, respectively, as compared to $64,082$64,083 and $128,165 for the three and six months ended March 31, 2019.June 30, 2019, respectively. The estimated aggregate amortization expense for each of the next five years and thereafter will be $182,597$118,514 in 2020, $184,667 in 2021, $149,944 in 2022, $18,000 in 2023, $17,354 in 2024 and $11,245 thereafter.

PALTALK, INC.

(F/K/A PEERSTREAM, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Digital tokens consist of XPX tokens received in connection with the ProximaX Agreement and the Props tokens received in connection with the YouNow Agreement. 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 Otheruntil further guidance is issued by the FASB.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

XPX Tokens

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 had been based on the quoted market prices for the XPX tokens.

During the six months ended June 30, 2020, the Company sold 27,881,674 digital tokens for proceeds of $31,356. The recorded loss of approximately $23,800 is included under other income (expense), net in the condensed consolidated statements of income.

Props Tokens Receivable

To calculate the fair value of the Props tokens received and receivable pursuant to the YouNow Agreement, the Company used the backsolve method, which utilizes the option pricing method to calculate the implied value of the Props tokens based on the recent transaction price. The backsolve method takes into account the strike price of the token warrant agreement and then determines the allocated value of the tokens as though it were a basket purchase.

The implied fair value of the Props tokens represents a marketable basis of value. As the Props tokens do not currently have access to a liquid marketplace, a discount for lack of marketability was applied to the implied fair value using a protective put calculation. A summary of the key inputs used in the backsolve model are summarized as follows:

The basic logic of the protective put approach is supported by the notion that the holder of a nonmarketable security can effectively purchase liquidity by purchasing a put option on the security. Therefore, the non-marketable value of a security is its value on a marketable basis, less the value of the hypothetical put option. The put option calculation relies on the Black-Scholes option pricing model, which utilizes volatility from comparable utility tokens, an estimated time to maturity (or liquidity), and the risk-free rate commensurate with that maturity.

The Props tokens received and receivable from YouNow are intangible assets that are accounted for at cost, less impairment charges. According to the guidance the holder cannot only compare the carrying value to fair value at the reporting period, but instead must assess impairment daily. As a result, the Company will use the amount equal the lowest price during the period in which the Props tokens are held as the carrying amount.

Accrued expenses and other current liabilities consisted of the following at March 31,June 30, 2020 and December 31, 2019:

PALTALK, INC.

(F/K/A PEERSTREAM, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 March 31,June 30, 2020, our conclusion regarding the realizability of our U.S.US deferred tax assets did not change and we have recorded a full valuation allowance against them.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period in which the new legislation is enacted. The CARES Act made various tax law changes. including.changes including, among other things.things, (i) increasing the limitation under IRC Section 163(j) of the Internal Revenue Code of 1986, as amended (the “Code”), for 2018 through2019 and 2020 to permit additional expensing of interest (ii) enacting a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k) of the IRC,, (iii) making modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhancing the recoverability of alternative minimumAMT tax credits. Given the Company’s full valuation allowance position, the CARES Act did not have a material impact on the Company’s condensed consolidated financial statements.

For the three and six months ended March 31,June 30, 2020, the Company recorded an income tax provision from continuing operations of $2,500.$2,500 and $5,000, respectively, primarily related to state and local taxes. The effective tax rate for the three and six months ended March 31,June 30, 2020 was (0.57%).0.39% and 2.38%, respectively. The effective tax rate differs from the statutory rate of 21% as the Company has concluded that its deferred tax assets are not realizable on a more-likely-than-not basis.

For the three months ended March 31,June 30, 2019, the Company recorded an income tax benefitprovision of $163,490 from continuing operations of $158,990 on a pre-tax loss of $75,275. As a result of the gainoperations. The Company recorded in discontinued operations in connection with the sale of the Dating Services Business, the Company was able to record an income tax provision for state and local taxes and reversed the income tax benefit in continuing operations underrecorded during the three months ended March 31, 2019 as the intra-period allocation guidance. As such, ourguidance no longer applied 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 of 211.21% differed fromfor the statutory rate of 21%.three and six months ended June 30, 2019 was 36.5% and 1.21%, respectively.

The PeerStream,Paltalk, 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 121,930 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,Paltalk, 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,June 30, 2020, there were 702,660768,217 shares available for future issuance under the 2016 Plan.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Treasury Shares

On April 29, 2019, the Company implemented a stock repurchase plan to repurchase up to $500,000 of its common stock for cash. The repurchase plan expired on April 29, 2020. The Company had purchased 8,5009,950 shares of its common stock under the repurchase plan as of March 31,April 29, 2020 and has classified them as treasury shares.

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:six months ended June 30, 2020:

PALTALK, INC.
(F/K/A 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 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 adjusted to reflect actual forfeitures as the stock-based awards vest.

The following table summarizes stock option activity during the threesix months ended March 31,June 30, 2020:

At March 31,June 30, 2020, there was $303,703$233,968 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 1.71.5 years.

On March 31,June 30, 2020, the aggregate intrinsic value of stock options that were outstanding and exercisable was $1,440$7,200 and $360,$3,600, respectively. On March 31,June 30, 2019, the aggregate intrinsic value of stock options that were outstanding and exercisable was $238,293$154,514 and $124,821,$99,340, 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 threesix months ended March 31,June 30, 2020, the Company granted options to members of the Board of Directors to purchase an aggregate 24,000 shares of common stock at an exercise price of $0.80 per share. The options vest in four equal quarterly installments on the last day of each calendar quarter in 2020 and have a term of ten years.

The aggregate fair value for the options granted during the threesix months ended March 31,June 30, 2020 and 2019 was $18,664 and $187,429,$337,598, respectively.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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 income (loss) per share of common stock.

For the three and six months ended March 31,June 30, 2020, 773,375707,818 of shares issuable upon the exercise of outstanding stock options were not included in the computation of diluted net income (loss) per share for continuing operations because their inclusion would be antidilutive.

For the three and six months ended March 31,June 30, 2019, 1,062,7451,045,468 and 1,056,808 shares issuable upon the exercise of outstanding stock options, respectively, and 79,286 shares of unvested restricted stock were not included in the computation of diluted net income per share for continuing operations because their inclusion would be anti-dilutive. antidilutive.

PALTALK, INC.
(F/K/A PEERSTREAM, INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes the net income per share calculation:

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 May 1, 2019, the Company entered into a sublease agreement with Telecom Infrastructure Corp. (“Telecom”) for office space located at 122 East 42nd Street in New York, NY, pursuant to which Telecom was required to pay the Company $11,164 per month. The term of the sublease ran until April 26, 2023. On June 18, 2020, the Company entered into an agreement to terminate the sublease for this office space. Pursuant to the terms of the agreement, Telecom vacated the offices on June 30, 2020.

Lease Cancellation

On May 1, 2019, the Company entered into a lease agreement for office space located at 122 East 42nd Street in New York, NY and paid a $133,968 security deposit in the form of a letter of credit. The term of the lease runsran until April 26, 2023. The Company’s monthly office rent payments under the lease are currentlywere approximately $33,492 per month.

On May 1, 2019,June 22, 2020, the Company entered into a subleasean agreement with Telecom Infrastructure Corp.to terminate the lease for this office space located at 122 East 42nd Street in New York, NY, pursuantspace. Pursuant to which Telecom Infrastructure Corp. is required to paythe terms of the agreement, the Company $11,164 per month. The termvacated the offices on June 30, 2020 and the Company agreed to forfeit its security deposit of $133,968.

PALTALK, INC.

(F/K/A PEERSTREAM, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In accordance with ASC 842-20-40-1, the Company accounted for the cancellation of the sublease runs until April 26, 2023. We have been notified that, due tolease by removing the coronavirus outbreak, Telecom Infrastructure Corp. is currently unable to make its monthly payments underright-of-use asset and the sublease agreement, and such payments ceased being madelease liability, with a profit recognized for the difference. The Company recorded a net gain on the office lease cancellation of $141,001 reflected in March 2020. We are currently in discussions with Telecom Infrastructure Corp. concerning its nonpayment and we are exploring all remedies available to us.

the condensed consolidated statements of income. 

As of March 31,June 30, 2020, the Company had no long-term leases that were classified as a financing lease. As of March 31,June 30, 2020, the Company did not have additional operating and financing leases that have not yet commenced.

At March 31,June 30, 2020, the Company had operating lease liabilities of approximately $0.7$0.1 million and right of use assets of approximately $0.6$0.1 million, which are included in the condensed consolidated balance sheet.

Total rent expense for the threesix months ended March 31,June 30, 2020 was $61,895,$160,700, of which $36,095 was sublease income, and $81,816$178,305 for the threesix months ended March 31,June 30, 2019. Rent expense is recorded in general and administrative expense on the condensed consolidated statements of operations.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)income.

The following table summarizes the Company’s operating leases:

On March 31,June 30, 2020, future minimum payments under non-cancelable operating leases were as follows: 

On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the coronavirus pandemic, the Company applied for a $506,500 loan (the “Loan”) under the Small Business Administration (“SBA”) Paycheck Protection Program under the recently enacted CARES Act. On May 3, 2020, the Company entered into a promissory note (the “Note”) in favor of Citibank, N.A., as lender (the “Lender”).

The Note has a two-year term, matures on May 3, 2022, and bears interest at a stated rate of 1.0% per annum. Monthly principal and interest payments will commence in December 2020. The Company did not provide any collateral or guarantees for the Loan, nor did we pay any facility charge to obtain the Loan. The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the Loan at any time without incurring any prepayment charges.

The Loan may be partially or fully forgiven if the Company complies with the provisions of the CARES Act, including the use of Loan proceeds for payroll costs, rent, utilities and certain other expenses as defined in the CARES Act. Any forgiveness of the Loan will be subject to approval by the SBA and the Lender. 

On June 30, 2020, future principal payments under the Note were as follows: 

PALTALK, INC.

(F/K/A PEERSTREAM, INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 fourinter 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. On September 27, 2019, the Company filed an appeal of the PTAB’s ruling.ruling, and on June 16, 2020, the PTAB affirmed its ruling, therefore deeming the patents invalid. At this time, the Company is evaluating its options regarding filing an appeal.

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,June 30, 2020. 

OnAs previously announced, on February 21,24, 2020, wethe Company entered into an Asset Purchase Agreement, which was subsequently amended and restated on May 29, 2020 (the “SecureCo Purchase“Amended and Restated Agreement”) with SecureCo, LLC (“SecureCo”(the “Buyer”), whereby wepursuant to which the Company agreed to sell substantially all of the assets related to ourits secure communications business which includes(the “Secured Communications Assets”) to the Buyer (the “Asset Sale”). The Secured Communications Assets include communication solutions and operations capabilities with respect to the development and commercialization offor secure messaging and data applications, and software and middleware for enterprise and government client targets (the “Secure Communications Assets”), to SecureCotargets.

On July 23, 2020, the Company completed the Asset Sale for a cash purchase price of approximately $540,000,$250,000, $150,000 of which was paid at closing and $100,000 of which is comprised ofpayable in four equal installments over the next fifteen months. The Amended and Restated Agreement also provides for a base purchase price of $500,000 plus the reimbursement or waiver of certain severance expenses payable byrevenue sharing arrangement, pursuant to which the Company to certain former executive officers. In addition, we shall beis entitled to receive a transition service feequarterly royalty payments ranging from 5% to 10% of five percent (5%) of all revenuecertain revenues received by SecureCo or its Affiliates pursuantthe Buyer, with the aggregate amount of such royalty payments not to certain unassignable contracts.

PEERSTREAM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The closing of the sale of the Assets is subject to the fulfilment of certain conditions by the Company and SecureCo, including, among other things, a condition that SecureCo shall have received financing that is sufficient to fund the purchase price. If the transaction is consummated, we do not expect to continue to pursue secured communications products or technology implementation services as part of our overall business strategy. The SecureCo Purchase Agreement may be terminated by either party if the conditions to closing have not been fulfilled by April 15, 2020, provided that such date may be extended to May 31, 2020 conditioned upon a $2,000 per business day increase in the purchase price payable by SecureCo for every day past April 15, 2020. As of April 15, 2020, the conditions to closing under the SecureCo Purchase Agreement had not been fulfilled, and accordingly, the purchase price payable by SecureCo began and will continue to increase by $2,000 per business day until the conditions to closing under the SecureCo Purchase Agreement have been fulfilled. If the transaction is not consummated, we expect to take a measured approach with respect to the potential commercialization of these products in a fiscally responsible manner.exceed $500,000.

COVID-19

In December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, and has since reached multiple other countries, including the United States, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in affected countries. The various precautionary measures taken by many governmental authorities around the world in order to limit the spread of the coronavirus has had and could continue to have an adverse effect on the global markets and its economy, including on the availability and pricing of employees and resources, and other aspects of the global economy. Although we cannot predict the impact that the recent outbreak of coronavirus will have on our business or results of operations in 2020, to date, our core multimedia social applications have been able to support the increased demand we have experienced.

On April As more fully described in Note 13 2020,above, to help ensure adequate liquidity in light of the uncertainties posed by the coronavirus pandemic, we applied forthe Company did receive a $506,500 loan (the “Loan”)Note under the Small Business Administration (“SBA”)SBA Paycheck Protection Program under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On May 3, 2020, we entered into a promissory note (the “Note”) in favor of Citibank, N.A., as lender (the “Lender”).CARES ACT. There can be no assurance that the amounts will be forgiven until the Lender makes its final determination.

The Note has a two-year term, matures on May 3, 2022, and bears interest at a stated rate of 1.0% per annum. Monthly principal and interest payments will commence in December 2020. We did not provide any collateral or guarantees for the Loan, nor did we pay any facility charge to obtain the Loan. The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. We may prepay the principal of the Loan at any time without incurring any prepayment charges.

The Loan may be partially or fully forgiven if we comply with the provisions of the CARES Act, including the use of Loan proceeds for payroll costs, rent, utilities and certain other expenses, and at least 75% of the Loan proceeds must be used for payroll costs as defined in the CARES Act. Any forgiveness of the Loan will be subject to approval by the SBA and the Lender. 

PeerStreamPaltalk continues to serve as a form of safe and entertaining communication during this global pandemic and in order to help those affected in hardest hit countries will continue to offer some of ourits group video conferencing services free of charge.

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 three and six months ended March 31,June 30, 2020 and 2019, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 24, 2020 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, 2019, 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 Part II of this report and “Item 1A. Risk Factors” in the Form 10-K.

Overview

We are a leading communications software innovator that powers multimedia social applications and secure business communication solutions worldwide.applications. We 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.

We believe that the scale of our subscriber base presents a competitive advantage in the video social networking industry and provides growth opportunities to advance existing products with up-sell opportunities and build future brands with cross-sell offers. 

We also believe that our proprietary consumer app technology platform can scalably support large communities of users in activities such as video, voice and text chat and provide robust user monetization tools. In October 2019, we commenced a strategy to make our video chat platform available to potential third-party partners with large user communities to provide retention-enhancing social and communication features while potentially providing additional commercial opportunities for those partners. We expect to participate in the commercial upside with such partners via revenue sharing arrangements that we plan to negotiate on a partner-specific basis.

Our continued growth depends on attracting new consumer application users through the introduction of new applications, features and partnerships and further penetration of our existing markets. Our principal growth strategy is to invest 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 potential platform partnerships and new and existing advertising campaigns that we run through internet and mobile advertising networks, all while balancing the capital needs of the business.   

Our strategy is to approach these opportunities in a measured way, being mindful of the Company’s resources and evaluating factors such as potential revenue, time to market and amount of capital needed to invest in the opportunity. 

Recent Developments

Name Change

Effective May 15, 2020, we changed our name from “PeerStream, Inc.” to “Paltalk, Inc.” In connection with the name change, we also changed our trading symbol on the OTCQB Marketplace from “PEER” to “PALT.” This name change takes us back to our roots and reflects our primary focus on our current operations, Paltalk and Camfrog, which together are host to one of the world’s largest collections of video-based communities.

COVID-19

In December 2019, a strain of coronavirus, was reported to have surfaced in Wuhan, China, and has reached multiple other countries, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in affected countries. The various precautionary measures taken by many governmental authorities around the world in order to limit the spread of the coronavirus has had and could continue to have an adverse effect on the global markets and its economy, including on the availability and pricing of employees and resources, and other aspects of the global economy. Although we cannot predict the impact that the recent outbreak of coronavirus will have on our business or results of operations in 2020, to date, our core multimedia social applications have been able to support the increased demand we have experienced. On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the coronavirus pandemic, we applied for a $506,500 loan (the “Loan”) under the Small Business Administration (“SBA”) Paycheck Protection Program under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)., and on May 3, 2020, we entered into a promissory note (the “Note”) in favor of Citibank, N.A., as lender (the “Lender”). While management believes that at least some portion of the Note will be forgiven pursuant to its terms, there can be no assurance that any amount will be forgiven until the SBA and the Lender make their final determination.

PeerStreamPaltalk continues to serve as a form of safe and entertaining communication during this global pandemic and in order to help those affected in hardest hit countries will continue to offer some of our group video conferencing services free of charge.

Pending Sale of Secured Communications Assets

OnAs previously announced, on February 21,24, 2020, we entered into an Asset Purchase Agreement, which was subsequently amended and restated on May 29, 2020 (the “SecureCo Purchase“Amended and Restated Agreement”) with SecureCo, LLC (“SecureCo”(the “Buyer”), whereby, subjectpursuant to the terms of the SecureCo Purchase Agreement,which we agreed to sell substantially all of the assets related to ourits secure communications business which includes(the “Secured Communications Assets”) to the Buyer (the “Asset Sale”). The Secured Communications Assets include communication solutions and operations capabilities with respect to the development and commercialization offor secure messaging and data applications, and software and middleware for enterprise and government client targets (the “Secure Communications Assets”) to SecureCotargets.

On July 23, 2020, we completed the Asset Sale for a cash purchase price of approximately $540,000,$250,000, $150,000 of which was paid at closing and $100,000 of which is comprised ofpayable in four equal installments over the next fifteen months. The Amended and Restated Agreement also provides for a base purchase price of $500,000 plus the reimbursement or waiver of certain severance expenses payable by the Companyrevenue sharing arrangement, pursuant to certain former executive officers. In addition,which we are entitled to receive a transition service feequarterly royalty payments ranging from 5% to 10% of five percent (5%) of all revenuecertain revenues received by SecureCo or its affiliates pursuantthe Buyer, with the aggregate amount of such royalty payments not to certain unassignable contracts in certain circumstances.

The closing of the sale of the Secure Communications Assets is subject to the fulfilment of certain conditions by the Company and SecureCo, including, among other things, a condition that SecureCo shall have received financing that is sufficient to fund the purchase price. If the transaction is consummated, weexceed $500,000. We do not expect to continue to pursue securedsecure communications products or technology implementation services as part of our overall business strategy. The SecureCo Purchase Agreement may be terminated by either party if the conditions to closing have not been fulfilled by April 15, 2020, provided that such date may be extended to May 31, 2020 conditioned upon a $2,000 per business day increase in the purchase price payable by SecureCo for every day past April 15, 2020. As of April 15, 2020, the conditions to closing under the SecureCo Purchase Agreement had not been fulfilled, and accordingly, the purchase price payable by SecureCo began and will continue to increase by $2,000 per business day until the conditions to closing under the SecureCo Purchase Agreement have been fulfilled. If the transaction is not consummated, we expect to take a measured approach with respect to the potential commercialization of these products in a fiscally responsible manner.

Operational Highlights and Objectives 

During the three and six months ended March 31,June 30, 2020, we executed key components of our objectives:

For the near term, our business objectives include:

Sources of Revenue

Our main sources of revenue are subscription, advertising and other fees generated from users of our core video chat products. In April 2018, we started generating revenue through proprietary software licensing and technology implementation services as a result our technology services agreement (the “ProximaX Agreement”) with ProximaX Limited (“ProximaX”). In January 2019, we sold substantially all of the assets related to our dating products. As described above, we recently entered into an agreement to sell our Secured Communications Assets. If the sale is completed, weWe expect that the majority of our sole source of revenue will return to being revenuebe generated from our core video chat products. We also generate technology service revenue under licensing and service agreements that we negotiate with third parties which includes development, integration, engineering, licensing or other services that we provide.

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 condensed consolidated balance sheets.

We also 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. Virtual gift revenue is recognized upon the users’ utilization of the virtual gift and included in subscription revenue. The unearned portion of virtual gifts revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets.

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 Service Revenue

Technology service revenue is generated under licensing, service and servicepartnership agreements that we negotiate with our clients that describe the scope of thethird parties which includes development, integration, engineering, licensing or other services that we provide. More specifically,

During 2019 and the first quarter of 2020, we received technology service revenue relatesin connection with our technology services agreement (the “ProximaX Agreement”) with ProximaX Limited (“ProximaX”). Effective June 24, 2019, we entered into a termination agreement with ProximaX (the “Termination Agreement”), pursuant to which ProximaX was required to make certain payments to us on a monthly basis through the remainder of 2019. Since there is no assurance of collectability on the payments due under the Termination Agreement, revenue thatis being recognized as the payments are received. As described above, we would generate fromrecently sold our software solutions, such as PSP, through licenses to our clients that may be bundled with service and support packages. In addition,Secured Communications Assets. We do not anticipate generating any material technology service revenue includes technology-basedin the future or continuing to pursue secure communications software solutions as part of our business development partnerships. strategy.

During the second quarter of 2020, the Company also recorded technology services revenue in connection with its agreement to serve as a launch partner with YouNow Inc. (“YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”) into its Camfrog and Paltalk applications (the “YouNow Agreement”). Pursuant to the terms of the YouNow Agreement, YouNow agreed to pay the Company, in exchange for the Company’s services, an aggregate of 10.5 million cryptographic props tokens (“Props tokens”) upon the achievement of certain milestones as follows: (i) 3.0 million Props tokens upon execution of the YouNow Agreement, (ii) 4.0 million Props tokens upon the integration of the Props platform in the Company’s Camfrog application and (iii) 3.5 million Props tokens due upon the integration of the Props platform in the Paltalk application. The upfront fee is recognized as revenue under the output method based on the direct measurements of the value of services transferred to date to the customer, relative to the remaining services under the YouNow Agreement. The milestones fees are recognized as revenue on the completion dates of integration services performed.

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

As described above, we recently entered into an agreement to sell our Secured Communications Assets. If the sale is completed, we do not anticipate generating any material technology service revenue or pursuing technology services as part of our business strategy.

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.

Sales and marketing expense

Sales and marketing expense consist 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. 

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.

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 and 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 provided by (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.