10-K 1 f10k2019_peerstreaminc.htm ANNUAL REPORT

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For The Fiscal Year Ended December 31, 2019

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

Commission File No. 000-52176

PEERSTREAM, INC.

(Exact name of registrant as specified in its charter)

Delaware |  | 20-3191847
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

122 East 42nd Street |  |
New York, NY |  | 10168
(Address of principal executive offices) |  | (Zip Code)

Registrant’s telephone number, including area code: (212) 594-5050

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

Title of each class |  | Trading Symbol(s) |  | Name of each exchange on which registered
— |  | — |  | —

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common stock, par value $0.001 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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, a 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.

Large accelerated filer | ☐ |  | Accelerated filer | ☐
Non-accelerated filer | ☒ |  | Smaller reporting company | ☒
|  |  | Emerging growth company | ☐

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 ☒

The aggregate market value of the registrant’s common stock, par value $0.001 per share, held by non-affiliates of the registrant, based on the closing price of the common stock as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $6,515,821.

As of March 20, 2020, the registrant had 6,877,004* shares of common stock outstanding.

*Excludes 1,900 shares of common stock that are held as treasury stock by PeerStream, Inc.

DOCUMENTS INCORPORATED BY REFERENCE:

The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference to the registrant’s Definitive Proxy Statement on Schedule 14A relating to the 2020 Annual Meeting of Stockholders which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.

PEERSTREAM, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

|  | Page
PART I |  |
ITEM 1. | Business | 1
ITEM 1A. | Risk Factors | 6
ITEM 1B. | Unresolved Staff Comments | 25
ITEM 2. | Properties | 25
ITEM 3. | Legal Proceedings | 25
ITEM 4. | Mine Safety Disclosures | 25
PART II |  |
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 26
ITEM 6. | Selected Financial Data | 27
ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 27
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk | 37
ITEM 8. | Financial Statements and Supplementary Data | 38
ITEM 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 39
ITEM 9A. | Controls and Procedures | 39
ITEM 9B. | Other Information | 39
PART III |  |
ITEM 10. | Directors, Executive Officers and Corporate Governance | 40
ITEM 11. | Executive Compensation | 40
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 40
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence | 40
ITEM 14. | Principal Accounting Fees and Services | 40
PART IV |  |
ITEM 15. | Exhibits and Financial Statement Schedules | 41
ITEM 16. | Form 10-K Summary | 44
| Signatures | 45

PeerStream, Paltalk, our logo and other trademarks or service marks appearing in this report are the property of PeerStream, 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. All references to active subscribers in this report exclude active subscribers to our former dating services business, which was sold in January 2019.

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FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K constitute “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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:

| ● | our ability to effectively market and generate revenue from our applications;
| ● | our ability to generate and maintain active subscribers and to effectively monetize our user base;
| ● | the intense competition in the industries in which our business operates and our ability to effectively compete with existing competitors and new market entrants;
| ● | legal and regulatory requirements related holding and distributing cryptocurrencies and accepting cryptocurrencies as a method of payment for our services;
| ● | risks related to our holdings of digital tokens, including risks related to the volatility of the trading price of the digital tokens and our ability to convert digital tokens into fiat currency;
| ● | our increasing focus on the use of new and novel technologies, such as blockchain, to enhance our applications, and our ability to timely complete development of applications using new technologies;
| ● | the dependence of our applications on mobile platforms and operating systems that we do not control, including our heavy reliance on the platforms of Apple Inc., Facebook, Inc. and Alphabet Inc. and their ability to discontinue, limit or restrict access to their platforms by us or our applications, change their terms and conditions or other policies or features (including restricting methods of collecting payments, sending notifications or placing advertisements), establish more favorable relationships with one or more of our competitors or develop applications or features that compete with our applications;
| ● | our ability to obtain additional capital or financing when and if necessary, to execute our business plan, including through offerings of debt or equity;

| ● | our ability to develop, establish and maintain strong brands;

| ● | the effects of current and future government regulation, including laws and regulations regarding the use of the internet, privacy, cybersecurity and protection of user data and blockchain and cryptocurrency technologies;
| ● | our ability to offset fees associated with the distribution platforms that host our applications;

| ● | our reliance on our executive officers and consultants;

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| ● | our reliance on internally derived data to accurately report user metrics and other measures of our performance;

| ● | our ability to release new applications on schedule or at all, as well as our ability to improve upon existing applications;

| ● | our ability to update our applications to respond to rapid technological changes;
| ● | our ability to protect our intellectual property rights;

| ● | our ability to adapt or modify our applications for the international market and derive revenue therefrom;

| ● | the ability of foreign governments to restrict access to our applications or impose new regulations;

| ● | risks associated with our termination agreement (the “Termination Agreement”) with ProximaX Limited (“ProximaX”), including that ProximaX may make certain future payments to us in digital tokens that have speculative value;
| ● | the reliance of our mobile applications on having a mobile data plan and/or Wi-Fi access to gain internet connectivity;

| ● | our reliance on third-party investor relations firms to help create awareness of our Company and compliance by such third parties with regulatory requirements related to promotional reports;

| ● | the effect of security breaches, computer viruses and computer hacking attacks;

| ● | our reliance upon credit card processors and related merchant account approvals and the impact of chargeback liabilities that we may face from credit card processors;

| ● | the impact of any claim that we have infringed on intellectual property rights of others;

| ● | our ability to effectively integrate companies and properties that we acquire;

| ● | the possibility that our users or third parties may be physically or emotionally harmed following interaction with other users;

| ● | the risk that we may face litigation resulting from the transmission of information through our applications;

| ● | our ability to attract and retain qualified employees and consultants; and

| ● | our ability to maintain effective internal controls over financial reporting.

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 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. 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.

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PART I

ITEM 1. | BUSINESS

Company Overview

We are a leading communications software innovator that powers multimedia social applications. We have also have developed a suite of secure communications software for use worldwide. Our product portfolio includes Paltalk and Camfrog, which together host one of the world’s largest collections of video-based communities. Our other products include Tinychat and Vumber. The Company has an over 20 year history of technology innovation and holds 18 patents.

We were incorporated under the laws of the State of Delaware in 2005. Our principal executive office is located at 122 East 42nd Street, Suite 3400, New York, New York 10168.

Our Services and Products

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. During the fourth quarter of 2019, we agreed to collaborate with a third party with a community of over 30 million monthly active users, which has agreed to promote a co-branded version of our Paltalk video chat program to its user base on a trial 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.

Consumer Applications

We operate a leading network of consumer applications that create a unique social media enterprise where users can meet, see, chat, broadcast and message in real time in a secure environment with others in our network. The proprietary technology underlying our products allows us to operate thousands of simultaneous streams, including on mobile platforms, which support interactions on a one-on-one, one-to-many and many-to-many basis. Furthermore, our technology is supported by a portfolio of 18 issued patents.

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

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Paltalk and Camfrog 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 attract a demographically and geographically diverse user base, with users in over 180 different countries. Paltalk users are approximately one-third domestic and two-thirds international, and Camfrog users have an even larger international presence, with a particular concentration in Southeast Asia.

Telecommunications. We own and operate a small telecommunications services provider called Vumber that enables users to have multiple phone numbers in any area code through which calls can be forwarded to a user’s existing cell phone or land line telephone number. Vumber serves both the retail and small business community. Vumber not only allows individuals to communicate while protecting privacy, but also gives business professionals the ability to add a new business line with any chosen area code to their cell phones. Vumber provides an in-depth data analytics platform that can track, record and analyze calls to gain new insights into one’s business.

Product Payment Options. Our users have a variety of methods by which to purchase product subscriptions across all of our platforms. Users can pay by credit card, PayPal, Western Union, check, local e-wallet providers, or complete an in-app purchase through the Apple App Store or Google Play Store for Android users.

Apple retains 30% of the revenue that is generated from sales on our iPhone application through in-app purchases in the United States. Google also retains 30% of the revenue that is generated from sales on Android applications via Google wallet through in-app purchases in the United States.

All of our credit card transactions are processed through various payment providers. Video chat users in certain international territories also have an option to purchase through local resellers. Local resellers prepay in bulk for services and debit the prepaid balance as one-time subscriptions and virtual currency are sold to end users. Regardless of which payment method is utilized, users may access our products through any of the gateways we offer.

Technology Implementation Services and Secured Communications

In the first quarter of 2018 we began developing and licensing our suite of secure communications software. In addition, we began providing professional services to customize and integrate our software solutions to meet client needs. On March 21, 2018, we entered into a technology services agreement with ProximaX whereby we agreed to provide certain development and related services to ProximaX to facilitate the implementation of our PeerStream Protocol (“PSP”) into their proprietary blockchain protocol.

In the second quarter of 2019, the Company completed, and ProximaX accepted delivery of, the work prescribed under the agreement. During the final stages of delivery of the second project milestone set forth in the agreement, ProximaX informed the Company that capital constraints made it unable to pay the Company. Accordingly, the Company and ProximaX entered into an agreement, effective June 24, 2019, to terminate the technology services agreement and provide for payment terms for the remaining amounts due under the technology services agreement.

On February 21, 2020, we entered into an Asset Purchase Agreement (the “SecureCo Purchase Agreement”) with SecureCo, LLC (“SecureCo”), whereby, subject to the terms of the Agreement, we agreed to sell substantially all of the assets related to our secure communications business, which includes communication solutions and operations capabilities with respect to the development and commercialization of secure messaging and data applications, software and middleware for enterprise and government client targets (the “Secure Communications Assets”), to SecureCo for a cash purchase price of approximately $540,000, which is comprised of a base purchase price of $500,000 plus the reimbursement or waiver of certain severance expenses payable by the Company to certain former executive officers. In addition, we would be entitled to receive a transition service fee of five percent (5%) of all revenue received by SecureCo or its Affiliates pursuant to certain unassignable contracts.

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. 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.

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Company Business Strategy

Enhance Existing Live Video Chat Applications

We plan to enhance our existing live video chat applications, which we anticipate will include several initiatives intended to improve usage and revenue potential. We plan to add incentives for loyal or valuable users to enhance retention and overall user activity in the products. We also intend to improve our product and marketing capabilities on mobile, to enhance monetization and our ability to acquire new users on mobile platforms. In addition, we expect to increase the quality and quantity of live streaming entertainment content and broaden the distribution across our user base. Finally, we will continue to integrate certain technical functions of Paltalk and Camfrog, which will reduce operating costs and speed time-to-market of future enhancements.

Launch Consumer Application Platform Strategy

At the end of 2019, we launched our consumer application platform strategy, under which we plan to co-brand our video chat applications and promote them in partnership with third-party communities, with the expectation of entering into revenue sharing arrangements with potential partners. During the fourth quarter of 2019, we reached an agreement with a launch partner with 30 million monthly active users who has agreed to a trial of our consumer application platform. We plan to seek to open more of these types of partnerships in the future.

Refocus Plans for Business-to-Business Solutions in Secure Communications

The cybersecurity market is large and growing rapidly, and the segment that addresses secure communications has attracted interest as high profile communication hacks and data breaches gain media publicity. We believe PSP and Backchannel, our branded framework designed to be a secure video-enabled mobile messaging solution for enterprise and government end users, present a differentiated solution to this market with additional layers of security that are not commonly offered. In February 2020, we contracted to sell substantially all of the Secure Communications Assets to SecureCo. If the transaction does not close for any reason, we expect that we may take a measured approach to the marketing activities we began in 2019 and move toward commercialization of these products in a fiscally responsible manner. However, we may also seek an alternative purchaser for the Secure Communications Assets or we may determine to no longer pursue the secure communications line of business if we determine it would no longer be economically viable to do so.

Defend our Intellectual Property

We have a portfolio of 18 issued patents. We have successfully defended our intellectual property in the past and have generated tens of millions of dollars in licensing fees for the use of our patents. In 2016, we commenced an enforcement action related to two of our patents against Riot Games, Inc. and Valve Corporation for infringement of U.S. Patent Nos. 5,822,523 and 6,226,686 with respect to their online games League of Legends and Defense of the Ancients 2. These two patents were previously asserted against, and then licensed to, Microsoft, Sony, and Activision. 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 parts 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.

For additional information concerning the status of these proceedings, see “Item 3. Legal Proceedings” herein.

Sale of Non-Core Assets

On January 31, 2019, we entered into an Asset Purchase Agreement with The Dating Company, LLC, pursuant to which we sold substantially all of the assets related to our online dating services business under the domain names FirstMet, 50more, and The Grade for a cash purchase price of $1.6 million, with $100.0 thousand of the purchase price that was held in an escrow account to secure certain of our post-closing indemnification obligations. The closing of the asset sale was effective as of January 31, 2019.

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On February 21, 2020, we entered into the SecureCo Purchase Agreement with SecureCo, whereby we agreed, subject to the terms of the Agreement, to sell substantially all of the Secure Communications Assets to SecureCo for a cash purchase price of approximately $540,000, which is comprised of a base purchase price of $500,000 plus the reimbursement or waiver of certain severance expenses payable by the Company to certain former executive officers. In addition, we would be entitled to receive a transition service fee of five percent (5%) of all revenue received by SecureCo or its Affiliates pursuant to certain unassignable contracts. 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.

Marketing Strategy

We invest in advertising and marketing primarily for the purpose of acquiring users for our consumer applications. We adapt our marketing expenditures and channels as we gather the data to analyze the success of our campaigns. We primarily advertise through internet and mobile advertising networks and run hundreds of campaigns at any given time, targeting various audiences of users, and focusing on campaigns that we believe will produce a positive return over the lifetime of new users. We also generate new sign-ups organically, as people find our sites and applications through brand recognition and word of mouth, search engines and product review websites.

Competition and Our Industry

Competition in the industries in which we compete remains fierce. The markets for consumer applications, secure communications software and technology implementation services are extremely dynamic and are undergoing constant change. We believe this environment creates significant opportunities for us as well as our direct and indirect competitors. Our principal competitors consist of:

| ● | Consumer Applications: YouNow, Inc. (“YouNow”), Live.me, BIGO Live, Live.ly, Houseparty, Facebook Live, YouTube Live, Instagram Live, and Twitch;

| ● | Secure Communications Software Licensing: Adeya SA, Commdex, Ercom, IVCi LLC, KoolSpan, Ribbon Communications Inc. and Wickr; and

| ● | Technology Implementation Services: IBM, Accenture, Cognizant, Deloitte Touche Tohmatsu Limited, Wipro Limited, as well as Virtusa, Saksoft, Mindtree, Larsen & Toubro Infotech Limited, ConsenSys, Vanbex Group and CanYa.

As described above, if the sale of the Secure Communications Assets is completed, we no longer expect to compete in the secure communications software licensing or technology implementation services lines of business.

Many of our competitors have substantially greater financial, managerial, technological and other resources than we do. In addition, there are relatively few barriers to entry into the industries in which we operate, and, as a result, any organization that has adequate financial resources and access to technical expertise and skilled personnel may become one of our competitors.

In order to compete effectively, we seek to offer software, services and applications that are differentiated from existing products, superior in quality and more appealing than those of our competitors. We believe that our applications compete favorably against those offered by our competitors due to their ability to scale easily, their cost-efficiency and their innovative technology. We also believe that we have the tools and expertise to attract new users through Facebook and other sources at a lower cost per subscriber than certain of our traditional competitors.

Although we believe we have the capability to compete effectively in our industries, our competitors may offer products, services and applications that we do not provide with more desirable features or at lower prices, and they may be able to devote greater resources to the development, promotion, sale and support of their products. In addition, many of our competitors have more extensive customer bases and broader customer relationships than we have, including relationships with our potential customers.

Governmental Regulations

We are subject to a number of U.S. federal and state laws and regulations that affect companies conducting business on the internet, many of which are still evolving and being litigated in the courts and could be interpreted in ways that could harm our business. These laws and regulations may involve user privacy, data protection, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation and online payment services. In particular, we are subject to federal and state laws regarding privacy and protection of user data, which are constantly evolving and can be subject to significant change. We are also subject to diverse and evolving laws and regulations in other countries in which we operate. The application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly-evolving industry in which we operate. Because our applications are accessible worldwide and used by residents of some foreign countries, foreign jurisdictions may claim that we must comply with foreign laws, even in jurisdictions in which we have no local business entity, employees or infrastructure.

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We are also subject to federal laws and regulations regarding content, privacy and the protection of user data, including The Communications Decency Act of 1996, as amended (“The Communications Decency Act”), The Children’s Online Privacy Protection Act of 1998, as amended, The Digital Millennium Copyright Act, The Electronic Communications Privacy Act of 1986, as amended, the USA PATRIOT Act of 2001, and the Controlling the Assault of Non-Solicited Pornography And Marketing (“CAN-SPAM”) Act of 2003, among others. The Digital Millennium Copyright Act limits our liability as an online service provider for linking to or hosting third-party content that infringes copyrights. The Communications Decency Act provides statutory protections to online service providers like us who distribute third-party content. The Children’s Online Privacy Protection Act restricts the ability of online service providers to collect personal information from children under 13. Congress, the Federal Trade Commission (“FTC”) and many states have promulgated laws and regulations regarding email advertising, including the CAN-SPAM Act. Any changes in these laws or judicial interpretations narrowing the protections of these laws may subject us to increased risk, increased costs of compliance, and limits on the operation of certain parts of our business.

Growing public concern about privacy and the use of personal information may subject us to increased regulatory scrutiny. Regulation related to the provision of online services is evolving as federal, state and foreign governments continue to adopt new, or modify existing, laws and regulations addressing data privacy and the collection, processing, storage, transfer and use of data. This includes, for example, the new California Consumer Protection Act, which became effective on January 1, 2020. The FTC has, over the last few years, begun investigating companies that have used personally identifiable information in a deceptive or unfair manner or in violation of a posted privacy policy. On May 25, 2018, the European Union implemented a privacy directive called the Global Data Protection Regulation (“GDPR”) that imposes additional new regulatory scrutiny on our business in that geographic region with possible financial consequences for noncompliance. If we are accused of violating the terms of our privacy policy, implementing unfair privacy practices or otherwise breaching data privacy laws, we may be forced to expend significant financial and managerial resources to defend against an FTC, GDPR or other state or federal enforcement action. Our user database holds the personal information of our users and subscribers residing in the United States and other countries, and we could be sued by those users if any of the information is misappropriated. Any failure by us to adequately protect our users’ privacy and data could also result in loss of user confidence in our consumer applications and services and ultimately in a loss of active subscribers, which could adversely affect our business.

In addition, virtually every U.S. state has passed laws requiring notification to users when there is a security breach for personal data resulting in unauthorized disclosure, many of which are modeled on California’s Information Practices Act. There are a number of legislative proposals pending before the U.S. Congress and various state legislative bodies concerning data protection that could, if adopted, have an adverse effect on our business. We are unable to determine if and when such legislation may be adopted. Many jurisdictions, including the European Union, have adopted breach notification and other data protection notification laws designed to prevent unauthorized disclosure of personally identifiable information. The introduction of new privacy and data breach laws and the interpretation of existing privacy and data breach laws in the United States, Europe and other foreign jurisdictions is constantly evolving. There is a risk that new laws may be introduced or existing laws may be applied in a way that would conflict our current data protection practices or prevent the transfer of data between countries in which we operate.

In addition, rising concern about the use of social networking technologies for illegal conduct may in the future produce legislation or other governmental action that could require changes to our applications or restrict or impose additional costs upon the conduct of our business. These regulatory and legislative developments, including excessive taxation, may prevent or significantly limit our ability to expand our business.

We may also become subject to laws or regulations in the future that limit our ability to accept bitcoin or other cryptocurrencies as a form of payment or to otherwise hold bitcoin or other cryptocurrencies. As cryptocurrencies have grown in both popularity and market size, governments around the world have reacted differently to cryptocurrencies, with certain governments deeming cryptocurrency offerings and cryptocurrency exchanges illegal, while others have allowed their use and trade. Governments may in the future curtail or outlaw the acquisition or use of cryptocurrencies or the exchange of cryptocurrencies for fiat currencies. Ownership of, holding, trading in or participating in offerings of cryptocurrencies may then be considered illegal and subject to sanction. Governments may also take regulatory action that may increase the cost and/or subject companies that transact in or hold cryptocurrencies to additional regulation. Finally, we are party to an arrangement under which we may distribute cryptocurrency tokens to users of our applications. It is possible that the SEC or another regulator could conclude that our distribution of these tokens constitutes broker-dealer activity and could force us to register as a broker-dealer and comply with laws and regulations applicable to broker-dealers.

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Employees

As of March 20, 2020, we had 24 employees. We believe that our future success depends in part on our continued ability to hire, assimilate and retain qualified personnel. We attract and retain employees by offering training, bonus opportunities, competitive salaries and a comprehensive benefits package.

Company Internet Site and Availability of SEC Filings

Our corporate website is located at www.peerstream.com. We make available on that site, as soon as reasonably practicable, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy statements, Current Reports on Form 8-K, other reports filed with or furnished to the SEC, as well as any amendments to those filings. Our SEC filings, as well as our Code of Conduct and other corporate governance documents, can be found in the Investor Relations section of our site and are available free of charge. Amendments to our Code of Conduct and any grant of a waiver from a provision of the Code of Conduct requiring disclosure under applicable SEC rules will be disclosed on our website. Information on our website is not part of this Annual Report on Form 10-K. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC.

ITEM 1A. | RISK FACTORS

The risks below are those that we believe are the material risks that we currently face, but are not the only risks facing us and our business. If any of these risks actually occur, our business, financial condition and results of operations could be materially adversely affected.

Risks Related to Our Business

The success of our consumer applications is principally dependent on our active subscribers and our engagement with our user base.

As of March 13, 2020, our applications supported an active subscriber base of approximately 103,800 active subscribers worldwide.

However, compared to the total number of users in any given period, only a small portion of our users are active subscribers or purchasers of virtual currency. We primarily generate revenue through the sale of subscriptions and virtual currency to this small portion of users and secondarily generate revenue through paid advertisements. Accordingly, the success of our consumer applications is substantially dependent on our ability to convert our users into active subscribers and to sell our users virtual currency.

Users discontinue the use of our applications in the ordinary course of business, and to sustain our revenue levels, we must attract, retain and increase the number of users or more effectively monetize our existing users. Falling user retention, growth or engagement could also make our applications less attractive to advertisers, which could harm our business.

There are a number of factors that could negatively impact user retention, growth and engagement, including, among other things:

| ● | users may adopt competing products instead of ours;

| ● | we may fail to introduce new products and services or those we introduce may be poorly received;

| ● | our products may fail to operate effectively on mobile or other platforms;

| ● | we may be unable to combat spam or other hostile or inappropriate usage on our products;

| ● | there may be adverse changes in user sentiment about the quality or usefulness of our existing products;

| ● | there may be concerns about the privacy implications, safety or security of our products;

| ● | technical or other problems may frustrate the experience of our users, particularly if those problems prevent us from delivering our products in a fast and reliable manner;

| ● | we may fail to provide adequate service to our users;

| ● | we or other companies in our industry may be the subject of adverse media reports or other negative publicity;

| ● | we may not maintain our brand image or our reputation may be damaged; and

| ● | we may be subject to denial of service or other attacks from hackers that result in service downtime.

To retain existing users, and particularly those users who are paying subscribers, we must devote significant resources so that our applications retain their interest. If we fail to grow or sustain the number of our users, or if the rates at which we attract and retain existing users declines or the rate at which users become paying subscribers declines, it could have a material adverse effect on our business, results of operations or financial condition.

6

We operate in intensely competitive industries and any failure to attract new clients and users could diminish or suspend our development and possibly cease our operations.

The industries in which we compete are highly competitive and have few barriers to entry. If we are unable to efficiently and effectively attract new users or clients as a result of intense competition or a saturated market, we may not be able to continue the provision, development and enhancement of our software, services and applications or become profitable on a consistent basis in the future.

Important factors affecting our ability to successfully compete include:

| ● | the usefulness, novelty, performance and reliability of our products compared to our competitors;

| ● | the timing and market acceptance of our products, including developments and enhancements of our competitors’ products;

| ● | our ability to effectively monetize our services and products and the availability of free or cheaper alternatives from our competitors;

| ● | our ability to hire and retain talented employees, including technical employees, executives, and marketing experts;

| ● | the success of our customer service and support efforts;

| ● | our reputation and brand strength compared to our competitors;

| ● | with respect to consumer applications, competition for acquiring users that could result in increased user acquisition costs;

| ● | reliance upon the platforms through which our consumer applications are accessed and the platform owner’s ability to control our activities on such platforms;

| ● | the effectiveness of the marketing and advertisement of our services and products;

| ● | our ability to maintain advertisers’ interest in advertising through our products;

| ● | our ability to innovate in the ever-changing industries in which we operate;

| ● | changes as a result of new legislation or regulation within our industries; and

| ● | acquisitions or consolidations within our industries.

Many of our current and potential competitors offer similar services, have longer operating histories, significantly greater capital, financial, technical, marketing and other resources and, with respect to our consumer applications, larger user or subscriber bases than we do. These factors may allow our competitors to more quickly respond to new or emerging technologies and changes in client or consumer preferences. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing strategies that may allow them to build larger user bases consisting of greater numbers of clients or paying users. Our competitors may provide services or develop applications and software that are equal or superior to our services or applications and software or that achieve greater market or industry acceptance. It is possible that a new product or service developed or offered by one of our competitors could gain rapid scale at the expense of existing brands through harnessing a new technology or distribution channel, creating a new approach to servicing clients or connecting people.

Certain entities that we do not directly compete with but that have large or dominant positions in one or more markets could use those positions to gain a competitive advantage against us in areas where we operate by beginning to provide secured communications software and implementation services or by integrating competing video chat or social media platforms into products they control, such as search engines, web browsers or mobile device operating systems.

With respect to consumer applications, costs for consumers to switch between products in the video chat industry are generally low, and consumers have a propensity to try new products to connect with new people. As a result, new entrants and business models are likely to continue to emerge in our industry. These activities could attract users and subscribers away from our applications and reduce our market share.

If we are unable to effectively compete, we may fail to obtain new clients for our products or our users may discontinue the use of our products and we may lose active subscribers, either of which would have a material adverse effect on our business, results of operations and financial condition.

7

We are subject to risks related to holding and distributing cryptocurrencies.

In the past, we have accepted cryptocurrencies as compensation for our services. Cryptocurrencies are not considered legal tender or backed by any government and have experienced price volatility, technological glitches and various law enforcement and regulatory interventions. The use of cryptocurrency such as bitcoin has been prohibited or effectively prohibited in some countries. If we fail to comply with prohibitions applicable to us, we could face regulatory or other enforcement actions and potential fines and other consequences.

As part of our strategy of forming strategic alliances with blockchain companies, we may make limited investments in initial coin or token offerings or negotiate that we receive cryptocurrency tokens as compensation for services. For instance, as part of our technology services agreement with ProximaX, a portion of our compensation was paid in XPX tokens. The prices of cryptocurrency tokens, including our XPX tokens, are typically highly volatile and subject to exchange rate risks, as well as the risk that regulatory or other developments may adversely affect their value. Fluctuations in the market value of XPX tokens could cause us to record an impairment charge on the value of our XPX tokens, which would directly impact our balance sheet and statements of operations.

In particular, tokens may experience periods of extreme volatility due to (i) having a very limited trading history, (ii) limited public supply, (iii) a lack of adoption by cryptocurrency holders, including a lack of adoption of cryptocurrencies generally due to the expense of mining cryptocurrencies and (iv) tokens trading on a limited number of cryptocurrency exchanges, all of which have limited operating histories. Speculators and investors who seek to profit from trading and holding tokens currently account for a significant portion of token demand. Such speculation regarding the potential future appreciation in the value of tokens may artificially inflate their price. Fluctuations in the value of our tokens or any other cryptocurrencies that we hold may also lead to fluctuations in the value of our common stock. In addition, because of the limited trading volumes in tokens on cryptocurrency exchanges, converting our holdings to fiat currency would likely take an extended period of time. If exchanges where tokens trade were to cease operations or no longer quote our tokens, it would likely be impossible to convert XPX tokens into fiat currency.

In addition, we recently launched our partnership with YouNow in the Props Developer Network, which, now that regulatory approval has been obtained, enables us to distribute YouNow’s Props tokens to our application end users for anticipated loyalty and retention benefits. Because we will be receiving Props tokens from YouNow so that they may be distributed to users, we will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act. A statutory underwriter is subject to the prospectus delivery and liability provisions of the Securities Act, Regulation M, and may be deemed to be conducting broker-dealer like activities that could in certain circumstances subject us to regulatory obligations.

It is possible that the SEC or another regulator could conclude that our distribution of Props tokens could constitute broker-dealer activities. If so, we could be forced to register as a broker-dealer and comply with laws and regulations applicable to broker-dealers, which would disrupt our business substantially and make it prohibitive to operate and participate on the Props Developer Network. In such circumstance, we may also become the target of regulatory enforcement for conducting unlicensed broker-dealer activities, which could lead to costly litigation and otherwise materially adversely impact our business.

There is substantial uncertainty regarding the future legal and regulatory requirements relating to cryptocurrency or transactions utilizing cryptocurrency. For instance, governments may in the near future curtail or outlaw the acquisition, use or redemption of cryptocurrencies. Ownership of, holding or trading in cryptocurrencies may then be considered illegal and subject to sanction. These uncertainties, as well as future accounting and tax developments, or other requirements relating to cryptocurrency, could have a material adverse effect on our business.

8

Currently, there are no regulated trading markets for cryptocurrency tokens, and therefore our ability to sell such tokens may be limited.

As of the date of this report, the online trading platforms on which cryptocurrency tokens trade do not qualify as registered exchanges within the meaning of federal securities laws or regulated alternative trading systems. To the extent the tokens trading on these platforms meet the definition of a security under federal securities laws, the platform is generally required to register with the SEC as a national securities exchange or be exempt from such registration requirements. The failure of these platforms to register as national securities exchanges or properly comply with registration exemptions could result in the SEC bringing an enforcement action seeking to prohibit, suspend or limit their operations. In such event, the tokens we hold may be tradable on a very limited range of venues, or not at all, and there may be periods where trading activity in tokens that we hold is minimal or non-existent. These potential consequences could have a material adverse impact on the trading price of the tokens that we hold and could render the exchange of our tokens for other digital assets or fiat currency difficult or impossible.

Our tokens and other cryptocurrencies that we hold may be subject to loss, theft or restriction on access.

There is a risk that some or all of our cryptocurrencies could be lost or stolen. Access to our coins could also be restricted by cybercrime. We currently hold all of our cryptocurrencies in cold storage. Cold storage refers to any cryptocurrency wallet that is not connected to the internet. Cold storage is generally more secure but is not ideal for quick or regular transactions. We expect to continue to hold the majority of our cryptocurrencies in cold storage to reduce the risk of malfeasance, but this risk cannot be eliminated.

Hackers or malicious actors may launch attacks to steal, compromise or secure cryptocurrencies, such as by attacking the cryptocurrency network source code, exchange servers, third party platforms, cold and hot storage locations or software, or by other means. As we increase in size, we may become a more appealing target of hackers, malware, cyber-attacks or other security threats. Any of these events may adversely affect our operations and, consequently, our investments and profitability. The loss or destruction of a private key required to access our digital wallets may be irreversible and we may be denied access for all time to our cryptocurrency holdings or the holdings of others. Our loss of access to our private keys or our experience of a data loss relating to our digital wallets could adversely affect our investments and assets.

Cryptocurrencies are controllable only by the possessor of both the unique public and private keys relating to the local or online digital wallet in which they are held, which wallet’s public key or address is reflected in the network’s public blockchain. We will publish the public key relating to digital wallets in use when we verify the receipt of transfers and disseminate such information into the network, but we will need to safeguard the private keys relating to such digital wallets. To the extent such private keys are lost, destroyed or otherwise compromised, we will be unable to access our cryptocurrency coins and such private keys may not be capable of being restored by any network. Any loss of private keys relating to digital wallets used to store our cryptocurrencies could have a material adverse effect on our business, prospects or operations and the value of any cryptocurrencies we hold for our own account.

9

Because there has been limited precedent set for financial accounting of cryptocurrencies and other digital assets, the determination that we have made for how to account for our tokens and any other digital assets we may acquire may be subject to change.

Because there has been limited precedent set for the accounting classification and measurement of cryptocurrency and other digital tokens and related revenue recognition, it is unclear how companies may in the future be required to account for digital asset transactions and assets and related revenue recognition. We are currently accounting for our tokens as indefinite-lived intangible assets in accordance with Accounting Standard Codification No. 350: Intangibles—Goodwill and Other. Indefinite-lived intangible assets are recorded at cost and are not subject to amortization, but shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. However, a change in regulatory or financial accounting standards could result in the necessity to change our accounting methods and restate our financial statements. Such a restatement could adversely affect the accounting for our tokens or other cryptocurrencies that we may acquire and may more generally negatively impact our business, prospects, financial condition and results of operation.

The further development and acceptance of blockchain technologies, which are part of a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain technologies or assets would have a material adverse effect on our business.

The growth of the blockchain industry in general is subject to a high degree of uncertainty. The factors affecting the further development of the blockchain industry and networks, include, without limitation:

| ● | worldwide growth in the adoption and use of blockchain and distributed ledger technologies, including cryptocurrencies and digital tokens, cryptosecurities and digital tokens;

| ● | government and quasi-government regulation of blockchain assets, including cryptocurrencies, and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems;

| ● | the maintenance and development of the open-source software protocol of blockchain networks;

| ● | changes in consumer demographics and public tastes and preferences;

| ● | general economic conditions and the regulatory environment relating to cryptocurrencies; and

| ● | a decline in the popularity or acceptance of blockchain-based technologies, including cryptocurrencies and tokens.

The blockchain industry as a whole is in its infancy and has been characterized by rapid changes and innovations. Although it has experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks and blockchain assets may materially adversely affect our business plans, financial results and prospects.

ProximaX may not have sufficient cash resources to pay us amounts owed under our termination agreement and may be required to make payments to us in security tokens.

On June 29, 2019, we entered into the Termination Agreement with ProximaX to, among other things, terminate the remaining obligations under our technology services agreement with ProximaX. Under the Termination Agreement, ProximaX paid us eight monthly cash installments of $7,500 each from May through December 2019. In addition, ProximaX agreed to pay us, by December 31, 2019, a remaining balance of $2.44 million owed to us in either cash or security tokens issued by ProximaX. As of the date of this report, we have not received the $2.44 million payment from ProximaX.

10

As a recently formed entity with limited capital, ProximaX may not have sufficient cash or liquid assets, and may not be able to raise sufficient capital, to make the remainder of the payments owed to us under the Termination Agreement in cash. As a result, ProximaX may be required to pay us in an equivalent amount of newly issued security tokens. The value of any security tokens that would be issued in the future by ProximaX is speculative, and the price of such security tokens may experience periods of extreme volatility due to (i) such tokens having a very limited trading history, (ii) the limited public supply of such tokens, (iii) a potential lack of adoption of such tokens by token holders, and (iv) such tokens trading on a limited number of token exchanges or any at all. As a result, any future acquisition of newly issued security tokens from ProximaX could subject our business to additional risks and could have a material adverse impact on our operations.

Our mobile applications are substantially dependent on interaction with mobile platforms and operating systems that we do not control.

A portion of our revenue, primarily our revenue from mobile platforms, is derived from the Apple iOS platform and the Google Android platform. Although we believe that we have a good relationship with Apple and Google, any deterioration in our relationship with either could materially harm our business, results of operations or financial condition.

We are subject to each of Apple’s and Google’s standard terms and conditions for application developers, which govern the promotion, distribution and operation of our applications on their respective storefronts. Each of Apple and Google has broad discretion to change its standard terms and conditions. In addition, these standard terms and conditions can be vague and subject to changing interpretations by Apple or Google. In addition, each of Apple and Google has the right to prohibit a developer from distributing applications on the storefront if the developer violates the standard terms and conditions. In the event that either Apple or Google ever determines that we are in violation of its standard terms and conditions and prohibits us from distributing our applications on its storefront, it could materially harm our business, results of operations or financial condition.

The number of people who access the internet through devices other than personal computers, including smart phones, cell phones and handheld tablets, has increased dramatically in the past few years and is projected to continue to increase. Accordingly, we are substantially dependent on interoperability with popular mobile platforms that we do not control, including the Apple App Store and the Google Play Store, and a portion of our revenue is derived from these two digital storefronts. There have been occasions in the past when these digital storefronts were unavailable for short periods of time or where there have been issues with the in-App purchasing functionality from the storefront. In the event that either the Apple App Store or the Google Play Store is unavailable or if in-App purchasing functionality from the storefront is non-operational for a prolonged period of time, it could have a material adverse effect on our business, results of operations or financial condition.

In addition, each of the Apple App Store and Google Play Store provides consumers with products that compete with ours. If either of these platforms give preferential treatment to competitive products, it could seriously harm the usage of our products on mobile devices.

Our business depends on developing, establishing and maintaining strong brands. If we are unable to maintain and enhance our brands, we may be unable to expand or retain our user and paying subscriber bases.

We believe that developing, establishing and maintaining awareness of our application brands is critical to our efforts to achieve widespread acceptance of our applications and is an important element to expanding our client and subscriber bases. Successful promotion of our application brands will depend largely on the effectiveness of our advertising and marketing efforts and on our ability to provide reliable and useful applications at competitive prices. If clients and users do not perceive our products to be of high quality, or if our products are not favorably received by clients and users, the value of our brands could diminish, thereby decreasing the attractiveness of our software, services and applications to clients and users. In addition, advertising and marketing activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brands.

If we fail to successfully promote and maintain our application brands, or incur substantial expenses in unsuccessfully attempting to promote and maintain our brands, we may fail to attract enough new clients or subscribers or retain our existing clients and subscribers to the extent necessary to realize a sufficient return on our advertising and marketing activities, and it could have a material adverse effect on our business, results of operations or financial condition.

11

We may conduct a portion of our operations through informal relationships, partnerships, strategic alliances or joint ventures, and our failure to continue such relationships or resolve any material disagreements with these third parties could have a material adverse effect on the success of these operations, our financial condition and our results of operations.

We may conduct a portion of our operations through partnerships, strategic alliances or joint ventures. For instance, at the end of 2019, we launched our consumer application platform strategy, under which we plan to co-brand our video chat applications and promote them in partnership with third-party communities, with the expectation of entering into revenue sharing arrangements with potential partners.

We may depend on third parties for elements of these arrangements that are important to the success of the relationship, such as the development of features or technologies to be incorporated into our applications. The performance of these third party obligations or the ability of third parties to meet their obligations under these arrangements would be outside of our control. If these third parties do not meet or satisfy their obligations under these arrangements, the performance and success of these arrangements, and their value to us, would be adversely affected. If our current or future partners are unable to meet their obligations, we may be forced to undertake the obligations ourselves and/or incur additional expenses in order to have some other party perform such obligations. In such cases we may also be required to seek legal enforcement of our rights, the outcome of which would be uncertain. If any of these events occur, they may adversely impact us, our financial performance and results of operations, and/or adversely impact our ability to enter into similar relationships in the future.

Strategic arrangements with third parties could involve risks not otherwise present when we directly manage our operations, including, for example:

| ● | third parties may share certain approval rights over major decisions within the scope of the relationship;

| ● | the possibility that these third parties might become insolvent or bankrupt;

| ● | the possibility that we may incur liabilities as a result of an action taken by one of these third parties;
| ● | these third parties may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; and

| ● | disputes between us and these third parties may result in litigation or arbitration that would increase our expenses, delay or terminate projects and prevent our officers and directors from focusing their time and effort on our business.

If our goodwill or other intangible assets become impaired, we may be required to record a significant charge to earnings, which could seriously harm our operating results.

We are required to test goodwill for impairment at least annually or more frequently if there are indicators that the carrying amount of the goodwill exceeds its carried value. As of December 31, 2019, we had recorded a total of $6.3 million of goodwill, $0.6 million of other intangible assets and $0.1 million of digital tokens. An adverse change in domestic or global market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates made in connection with the impairment testing of goodwill or intangible assets, could result in a change to the estimation of fair value that could result in an impairment charge to our goodwill or other intangible assets. If we divest or discontinue product categories or products that we previously acquired, or if the value of those parts of our business become impaired, we also may need to evaluate the carrying value of our goodwill. Any such material charges may have a negative impact on our operating results.

12

As the distribution of our products through application stores increases, we may incur additional fees from the developers of application stores.

As the user base of our consumer applications continues to shift to mobile solutions, we increasingly rely on the Apple iOS and Google Android platforms to distribute our products. While our products are free to download from these stores, we offer our users the opportunity to purchase paid memberships and certain premium features through our products. We determine the prices at which these memberships and features are sold and, in exchange for facilitating the purchase of these memberships and features through our products to users who download our products from these stores, we pay Apple or Google, as applicable, a share, which is currently 30% of the revenue we receive from these transactions. In the future, other distribution platforms that we utilize may charge us fees for the distribution of our applications. As the distribution of our products through application stores increases, the amount of fees that we must pay to the developers of these application stores will also increase. Unless we find a way to offset these fees, our business, financial condition and results of operations could be adversely affected.

Our future success is dependent, in part, on the performance and continued service of our executive officers. Without their continued service, we may be forced to interrupt or eventually cease our operations.

We are dependent to a great extent upon the experience, abilities and continued service of Jason Katz, our Chief Executive Officer and Chairman of the Board of Directors, and Kara B. Jenny, our Chief Financial Officer. The loss of the services of these individuals would substantially affect our business or operations and could have a material adverse effect on our business, results of operations or financial condition.

Our subscription metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may seriously harm and negatively affect our reputation and our business.

We regularly review metrics, including our active subscribers, to evaluate growth trends, measure our performance, and make strategic decisions. These metrics are calculated using internal Company data and have not been validated by an independent third party. While these numbers are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our products are used across large populations globally.

Some of our demographic data may be incomplete or inaccurate. For example, because users self-report their dates of birth, our age-demographic data may differ from our users’ actual ages. If our users provide us with incorrect or incomplete information regarding their age or other attributes, then our estimates may prove inaccurate.

In addition, our business strategy is guided by data analytics that we compute internally based on data collection, data processing, cloud-based platforms, statistical projections and forecasting, mobile computing, social media analytics and other applications and technologies. We use these internally derived data analytics to guide decisions concerning the development and modification of features on our applications, monetization strategies for our applications and the development of new applications, among other things.

The inability to accurately derive our metrics or data analytics could result in incorrect business decisions and inefficiencies. For instance, if a significant understatement or overstatement of our active subscribers were to occur, we may expend resources to implement unnecessary business measures or fail to take required actions to attract a sufficient number of subscribers to satisfy our growth strategies. If advertisers or investors do not perceive our subscription, geographic or other demographic metrics to be accurate representations of our user base, or if we discover material inaccuracies in our subscription, geographic or other demographic metrics, our reputation may be seriously harmed. At the same time, advertisers may be less willing to allocate their budgets or resources to our products, which could seriously harm our business, results of operation or financial condition.

Because we recognize revenue from subscriptions over the subscription term, the full impact of downturns or upturns in subscription sales may not be immediately reflected in our results of operations or financial condition.

We recognize subscription revenue from customers monthly over the subscription term, and subscriptions are generally offered in one-, three-, six-, twelve-, and fifteen-month terms, depending on the particular product. As a result, much of the subscription revenue we report in each period is deferred revenue from subscription agreements entered into during previous periods. Consequently, a decline in new or renewed subscriptions in any one quarter will negatively affect our revenue in future quarters. In addition, we might not be able to immediately adjust our costs and expenses to reflect these reduced revenues. Accordingly, the effect of significant downturns in user acceptance of our applications may not be fully reflected in our results of operations until future periods. Our subscription model also makes it difficult for us to quickly increase our revenue through additional sales in any period, as revenue from new subscribers must be recognized over the subscription term. As a result, you should not rely on the amount of subscription revenue generated in prior quarters as an indication of future results.

13

The online live video industry is characterized by rapid technological change and the development of enhancements and new applications, and if we fail to keep pace with technological developments or launch new applications, our business may be adversely affected.

The online live video industry is characterized by rapid change, and our future success is dependent upon our ability to adopt and innovate. To attract new users and increase revenues from existing users, we need to enhance, add new features to and improve our existing applications and introduce new applications in the future. The success of any enhancements or new features and applications depends on several factors, including timely completion, introduction and market acceptance. Building a new brand or product is generally an iterative process that occurs over a meaningful period of time and involves considerable resources and expenditures, and we may expend significant time and resources developing and launching an application that may not result in revenues in the anticipated timeframe or at all, or may not result in revenue growth that is sufficient to offset increased expenses. If we are unable to successfully develop enhancements, new features or new applications to meet user trends and preferences, our business and operating results could be adversely affected.

In addition, our applications are designed to operate on a variety of network, hardware and software platforms using internet tools and protocols and we need to continuously modify and enhance our applications to keep pace with technological changes. If we are unable to respond in a timely and cost-effective manner, our current and future applications may become less marketable and less competitive or even obsolete.

If we are unable to protect our intellectual property rights, we may be unable to compete with competitors developing similar technologies.

Historically, our defense of our intellectual property rights has been a significant aspect of our business and has meaningfully contributed to our results of operations. Accordingly, our success and ability to compete are often dependent upon the development of intellectual property for our applications.

We aim to protect our confidential proprietary information, in part, by entering into confidentiality agreements and invention assignment agreements with all our employees, consultants, advisors and any third parties who access or contribute to our proprietary know-how, information, or technology. We also rely on trademark, copyright, patent, trade secret, and domain-name-protection laws to protect our proprietary rights. In the United States and internationally, we have filed various applications to protect aspects of our intellectual property, and we currently hold a number of issued patents in multiple jurisdictions. In the future we may acquire additional patents or patent portfolios, which could require significant cash expenditures. However, third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held by us, and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate or intend to operate our business.

In any of these cases, we may be required to expend significant time and expense to prevent infringement or to enforce our rights. Although we have taken measures to protect our proprietary rights, others may offer products or concepts that are substantially similar to ours and compete with our business. If we are unable to protect our proprietary rights or prevent unauthorized use or appropriation by third parties, the value of our brand and other intangible assets may be diminished, and competitors may be able to more effectively mimic our service and methods of operations. Any of these events could seriously harm our business.

14

We plan to continue expanding our operations internationally and may be subject to increased business and economic risks that could seriously harm our business.

Presently, we derive a significant portion of revenue from international territories and we plan to continue expanding our business operations abroad. In addition, we rely on outsourced services based in Russia, India and elsewhere. We may enter new international markets where we have limited or no experience in marketing, selling and deploying our products. If we fail to deploy or manage our operations in international markets successfully, our business may suffer. As our international operations increase our operating results may become more greatly affected by fluctuations in the exchange rates of the currencies in which we do business. In addition, we are subject to a variety of risks inherent in doing business internationally, including:

| ● | political, social, and economic instability;

| ● | risks related to the legal and regulatory environment in foreign jurisdictions, including with respect to privacy, and unexpected changes in laws, regulatory requirements, and enforcement;

| ● | potential damage to our brand and reputation due to compliance with local laws, including potential censorship and requirements to provide user information to local authorities;

| ● | fluctuations in currency exchange rates;

| ● | higher levels of credit risk and payment fraud;

| ● | complying with multiple tax jurisdictions;

| ● | reduced protection for intellectual-property rights in some countries;

| ● | difficulties in staffing and managing global operations and the increased travel, infrastructure and compliance costs associated with multiple international locations;

| ● | regulations that might add difficulties in repatriating cash earned outside the United States and otherwise preventing us from freely moving cash;

| ● | import and export restrictions and changes in trade regulation;

| ● | complying with statutory equity requirements;

| ● | complying with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in other jurisdictions;

| ● | the impact of the United Kingdom’s pending exit from the European Union; and

| ● | export controls and economic sanctions administered by the Department of Commerce Bureau of Industry and Security and the Treasury Department’s Office of Foreign Assets Control.

If we are unable to expand internationally and manage the complexity of our global operations successfully, our business could be seriously harmed.

A portion of our revenue is dependent on third-party resellers, the efforts of which we do not control.

We are dependent on the efforts of third parties who resell our subscriptions for a portion of our revenue. In particular, video chat users in certain international territories have an option to purchase subscriptions through local resellers. These local resellers prepay in bulk for services and debit the prepaid balance as one-time subscriptions and virtual currency are sold to end users.

We do not control the efforts of these resellers. If they fail to market or sell our subscriptions successfully, merge or consolidate with other businesses, declare bankruptcy or depart from their respective industries, our business could be harmed. If we are unable to maintain or replace our contractual relationships with resellers, efficiently manage our relationships with them or establish new contractual relationships with other third parties, we may fail to retain subscribers or acquire potential new subscribers and may experience delays and increased costs in adding or replacing subscribers that were lost, any of which could materially affect our business, operating results and financial condition.

15

Foreign governments restricting access to our applications could materially adversely impact our business.

We have continued to focus on increasing the international presence of our applications by expanding the localized and translated versions for additional international countries that are culturally aligned with our products. Foreign data protection, privacy, consumer protection, content regulation, and other laws and regulations are often more restrictive than those in the United States. Foreign governments may censor our products in their countries, restrict access to our products from their countries entirely, or impose other restrictions that may affect their citizens’ ability to access our products for an extended period of time or even indefinitely. If foreign governments think we are violating their laws, or for other reasons, they may seek to restrict access to our products, which would give our competitors an opportunity to penetrate geographic markets that we cannot access. As a result, our ability to grow our international user base would be impaired, and we may not be able to maintain or grow our revenue as anticipated and our business could be seriously harmed.

Our mobile applications rely on high-bandwidth data capabilities, which are subject to hardware, networks, regulations and standards that we do not control.

Our mobile applications require high-bandwidth data capabilities. If the costs of data usage increase or access to cellular networks is limited, our user growth and retention on mobile platforms may be seriously harmed. Additionally, to deliver high-quality video and other content over mobile cellular networks, our products must work well with a range of mobile technologies, systems, networks, regulations and standards that we do not control, and any changes to those mobile technologies, systems, networks, regulations or standards could impact the usability of our mobile applications, which would materially adversely affect our business, results of operations or financial condition.

Our business depends in large part upon the availability of cost-effective advertising space through a variety of media and keeping pace with trends in consumer behavior.

We depend upon the availability of advertising space through a variety of media, including third-party applications on platforms such as Facebook, to recruit new users and subscribers, generate activity from existing users and subscribers and direct traffic to our application. Historically, we have had to increase our marketing expenditures in order to attract and retain users and sustain our growth. The availability of advertising space varies, and a shortage of advertising space in any particular media or on any particular platform, or the elimination of a particular medium on which we advertise, could limit our ability to generate new subscribers, generate activity from existing subscribers or direct traffic to our applications, any of which could have a material adverse effect on our business, results of operations and financial condition. In addition, evolving consumer behavior can affect the availability of profitable marketing opportunities. For example, as consumers communicate less via email and more via text messaging and other virtual means, the reach of email campaigns designed to attract new and repeat users (and retain current users) for our applications is adversely impacted. To continue to reach potential users and grow our business, we must devote more of our overall marketing expenditures to newer advertising channels, which may be unproven and undeveloped, and we may not be able to continue to manage and fine-tune our marketing efforts in response to these trends.

Interruption, maintenance or failure of our programming code, servers or technological infrastructure could hurt our ability to effectively provide our applications, which could damage our reputation and harm our results of operations.

The availability of our applications depends on the continued operation of our programming code, databases, servers and technological infrastructure. Any damage to, or failure of, our systems could result in interruptions in service for our applications, which could damage our brands and have a material adverse effect on our business, results of operations or financial condition. Our systems are vulnerable to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities.

In addition, from time to time we experience limited periods of server downtime due to maintenance or enhancements. If our applications are unavailable during these periods of downtime or if our users are unable to access our applications within a reasonable amount of time, users may not return to our applications in the future, or at all. As our user base and the volume and types of information shared on our applications continues to grow, we will need an increasing amount of technology infrastructure, including network capacity and computing power, to continue to satisfy our users’ needs. It is possible that we may fail to effectively scale and grow our technology infrastructure to accommodate these increased demands. Any failure to support and scale our technology infrastructure could adversely impact the reputation of our brands and harm our results of operations.

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Security breaches, computer viruses and computer hacking attacks could harm our business, results of operations or financial condition.

We receive, process, store and transmit a significant amount of personal user and other confidential information, including credit card information, and enable our users to share their personal information with each other. In some cases, we retain third party vendors to store this information. We continuously develop and maintain systems to protect the security, integrity and confidentiality of this information, but cannot guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. If any such event were to occur, we may not be able to remedy the event, and we may have to expend significant capital and resources to mitigate the impact of such an event, and to develop and implement protections to prevent future events of this nature from occurring.

Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry, have occurred on our systems in the past, and may occur on our systems in the future. Although it is difficult to determine what, if any, harm may directly result from an interruption or attack, any security breach caused by hacking, including efforts to gain unauthorized access to our applications, servers or websites, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business, financial condition and results of operations. If a breach of our security (or the security of our vendors and partners) occurs, the perception of the effectiveness of our security measures and our reputation may be harmed, we could lose current and potential users and the recognition of our various brands and their competitive positions could be diminished, any or all of which could adversely affect our business, financial condition and results of operations.

Spammers may attempt to use our products to send targeted and untargeted spam messages to users, which may embarrass or annoy users and make our products less user friendly. We cannot be certain that the technologies that we have developed to repel spamming attacks will be able to eliminate all spam messages from our products. Our actions to combat spam may also require diversion of significant time and focus of our engineering team from improving our products. As a result of spamming activities, our users may use our products less or stop using them altogether, and result in continuing operational cost to us.

Similarly, terror and other criminal groups may use our products to promote their goals and encourage users to engage in terror and other illegal activities. We expect that as more people use our products, these groups will increasingly seek to misuse our products. Although we invest resources to combat these activities, including by suspending or terminating accounts we believe are violating our Terms of Service, we expect these groups will continue to seek ways to act inappropriately and illegally on our products. Combating these groups requires our engineering team to divert significant time and focus from improving our products. In addition, we may not be able to control or stop our products from becoming the preferred application of use by these groups, which may become public knowledge and seriously harm our reputation or lead to lawsuits or attention from regulators. If these activities increase, our reputation, user growth and user engagement, and operational cost structure could be seriously harmed.

If there are changes in laws or regulations regarding privacy and the protection of user data, or if we fail to comply with such laws or regulations, we may face claims brought against us by regulators or users that could adversely affect our business, results of operations or financial condition.

State, federal and international laws and regulations govern the collection, use, retention, sharing and security of data that we receive from and about our users. These laws can be particularly restrictive in countries outside of the United States. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industries in which we operate.

Any failure, or perceived failure, by us to comply with such laws and regulations, including Federal Trade Commission requirements or industry self-regulatory principles, could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business. As a result of such a failure, or perceived failure, we may be subject to a claim or class-action lawsuit regarding our online services. The successful assertion of a claim against us, or a regulatory action against us, could result in significant monetary damages, diversion of management resources and require us to make significant payments and incur substantial legal expenses. Any claims with respect to violation of privacy or misappropriation of user data brought against us may have a material adverse effect on our business, results of operations and financial condition.

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Several proposals are pending before federal, state, and foreign legislative and regulatory bodies or have recently been enacted that could significantly affect our business. For example, the GDPR in the European Union, which went into effect on May 25, 2018, required us to change our policies and procedures regarding the handling of personal and sensitive data in the European Union. The failure to comply with the GDPR could, in certain instances, result in penalties of up to 4% of our worldwide revenues. As a result, a failure to comply with the GDPR could seriously harm our business.

Continued privacy concerns may result in new or amended laws and regulations. Future laws and regulations with respect to the collection, compilation, use and publication of information and consumer privacy could result in limitations on our operations, increased compliance or litigation expense, adverse publicity or loss of revenue, which any of which could have a material adverse effect on our business, financial condition and results of operations. It is also possible that we could be prohibited from collecting or disseminating certain types of data, which could affect our ability to meet our users’ needs.

Changes in laws or regulations that impact the use of the internet, including internet neutrality laws, could adversely affect our business, results of operations or financial condition.

The adoption of any laws or regulations that adversely affect the growth or use of the internet, including laws governing internet neutrality, could decrease the demand for our products and increase our cost of doing business. Current Federal Communications Commission “open internet rules” prohibit internet providers in the United States from impeding access to most content, or otherwise unfairly discriminating against content providers like us. These rules also prohibit mobile providers from entering into arrangements with specific content providers for faster or better access over their data networks. The European Union similarly requires equal access to internet content. If the Federal Communications Commission, Congress, the European Union or courts modify these open internet rules, mobile providers may be able to limit our users’ ability to access our applications or make our applications a less attractive alternative to our competitors’ applications, which could materially adversely affect our business, results of operations and financial condition.

We have faced, and we expect that we will continue to face, chargeback liability when our credit card providers resolve chargebacks in favor of their customers. We cannot accurately anticipate the extent of these liabilities, and if not properly addressed, these liabilities could increase our operating expenses or preclude us from accepting certain credit cards as a method of payment, either of which would materially adversely affect our results of operations and financial condition.

We depend on the ability to accept credit and debit card payments from our subscribers and our ability to maintain the good standing of our merchant account with our credit card providers to process subscription payments. In the event that one of our customers initiates a billing dispute and one of our credit card providers resolves the dispute in the customer’s favor, the transaction is normally “charged back” to us and the purchase price is credited or otherwise refunded to the customer. In addition, under current credit card practices, a merchant is liable for fraudulent credit card transactions when, as is the case with the transactions we process, that merchant does not obtain a cardholder’s signature.

We have suffered losses and we expect that we will continue to suffer losses as a result of subscriptions placed with fraudulent credit card data, as well as users who chargeback their purchases. Any failure to adequately control fraudulent credit card transactions or keep our chargebacks under an acceptable threshold would result in significantly higher credit card-related costs and, therefore, materially increase our operating expenses.

If we are subject to intellectual property infringement claims, it could cause us to incur significant expenses, pay substantial damages or royalties and prevent us from offering our applications.

From time to time, third parties may claim that our applications infringe or violate their intellectual property rights. Any claims of infringement could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages and prevent us from using licensed technology that may be fundamental to our applications. Even if we were to prevail, any litigation regarding intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. We maintain insurance to protect against intellectual property infringement claims and resulting litigation, but such insurance may not cover or may not be sufficient to cover all potential claims, liability or expenses. We may also be obligated to indemnify our business partners in any such litigation, which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we may be prevented from offering our applications unless we enter into royalty, license or other agreements. We may not be able to obtain such agreements at all or on terms acceptable to us, and as a result, we may be precluded from offering our applications and services.

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We may make or attempt to make acquisitions in the future, which could require significant management attention, disrupt our business, dilute our stockholders and seriously harm our business.

As part of our business strategy, we have made and intend to make acquisitions to add specialized employees and complementary companies, products and technologies. In the future, we may not be able to find other suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. Our previous and future acquisitions may not achieve our goals, and any future acquisitions we complete could be viewed negatively by users, advertisers or investors. In addition, if we fail to successfully close transactions or integrate new teams, or integrate the products and technologies associated with these acquisitions into our company, our business could be seriously harmed. Any integration process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully evaluate or use the acquired products, technology and personnel, or accurately forecast the financial impact of an acquisition transaction, including accounting charges. We may also incur unanticipated liabilities that we assume as a result of acquiring companies. We may have to pay cash, incur debt or issue equity securities to pay for any acquisition, any of which could negatively impact our business and financial condition. Issuing equity to finance any such acquisitions would also dilute our existing stockholders. Incurring debt would increase our fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.

We face certain risks related to the physical and emotional safety of users and third parties.

We cannot control the actions of our users in their communications or physical actions. There is a possibility that users or third parties could be physically or emotionally harmed following interaction with another user. We warn our users that we do not screen other users and, given our lack of physical presence, we do not take any action to ensure personal safety on a meeting between users or subscribers arranged following contact initiated via our applications or ensure personal safety of our users against self-harming following contact with other users initiated via our applications. If an unfortunate incident of this nature occurred in a meeting of two people following contact initiated on our applications or that of one of our competitors, any resulting negative publicity could materially and adversely affect us or the online video chat industry in general. Any such incident involving our applications could damage our reputation and our brand, which could have a material adverse effect on our business, results of operations or financial condition. In addition, the affected users or third parties could initiate legal action against us, which could divert management attention from operations, cause us to incur significant expenses, whether we are successful or not, and damage our reputation.

We may be liable as a result of information retrieved from or transmitted over the internet.

We may be sued for defamation, civil rights infringement, negligence, copyright or trademark infringement, invasion of privacy, personal injury, product liability or under other legal theories relating to information that is published or made available on our websites or applications. These types of claims have been brought, sometimes successfully, against online services in the past. We also offer messaging services on our applications and we send emails directly and through third parties to our users, which may subject us to potential risks, such as liabilities or claims resulting from unsolicited email or spamming, lost or misdirected messages, security breaches, illegal or fraudulent use of email or personal information or interruptions or delays in email service. Our insurance does not specifically provide for coverage of these types of claims and, therefore, may be inadequate to protect us against them. In addition, we could incur significant costs in investigating and defending such claims, even if we ultimately are not held liable. If any of these events occur, our revenue could be materially adversely affected or we could incur significant additional expense, and the market price of our securities may decline.

We may need additional capital to execute our business plan. If we do not obtain additional financing, it could have a material adverse effect on our business, results of operations or financial condition.

We might need to raise additional capital or financing through debt or equity offerings to support our expansion, marketing efforts and application development programs in the future. We might require additional capital or financing to:

| ● | expand our software licensing and technology implementation services business;

| ● | hire and retain talented employees, including technical employees, executives, and marketing experts;

| ● | effectuate our long-term growth strategy and expand our application development programs; and

| ● | market and advertise our applications to attract more paying subscribers.

We may be unable to obtain future capital or financing on favorable terms or at all. If we cannot obtain additional capital or financing, we may need to reduce, defer or cancel application development programs, planned initiatives, marketing or advertising expenses or costs and expenses. The failure to obtain necessary additional capital or financing on favorable terms, if at all, could have a material adverse effect on our business, results of operations or financial condition.

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We may not be effective in protecting our internet domain names.

We currently hold various internet domain names related to our brands and in the future may acquire new internet domain names. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. We may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our existing trademarks and other proprietary rights or those we may seek to acquire. Any such inability to protect ourselves could cause us to lose a significant portion of our members and paying subscribers to our competitors.

Risks Related to Ownership of Our Common Stock

Our results of operations are volatile and difficult to predict, and our stock price may decline if we fail to meet the expectations of stockholders.

Our revenue and results of operations could vary significantly from period-to-period and year-to-year and may fail to match our past performance because of a variety of factors, many of which are outside of our control. Any of these events could cause the market price of our common stock to fluctuate. Factors that may contribute to the variability of our results of operations include:

| ● | changes in expectations as to our future financial performance;

| ● | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships or capital commitments;

| ● | market acceptance of our new applications and enhancements to our existing applications;

| ● | the amount of advertising and marketing that is available and spent on user acquisition campaigns;

| ● | disruptions in the availability of our applications on third party platforms;

| ● | actual or perceived violations of privacy obligations and compromises of subscriber data;

| ● | the entrance of new competitors in our market whether by established companies or the entrance of new companies;

| ● | additions or departures of key personnel and the cost of attracting and retaining application developers and other software engineers; and

| ● | general market conditions, including market volatility.

Given the rapidly evolving industries in which we operate, our historical results of operations may not be useful in predicting our future results of operations. In addition, metrics available from third parties regarding our industry and the performance of our applications may not be indicative of our future financial performance.

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Our common stock is usually thinly traded, you may be unable to sell at or near ask prices or at all and the price of our common stock may be volatile.

The shares of our common stock have usually been thinly-traded on the OTCQB Marketplace (the “OTCQB”), meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on stock price. In addition, we may experience unusual or infrequent trading events that cause the price of our common stock to fluctuate wildly. For example, the price of our common stock ranged from $1.00 per share to $4.48 per share for the period from January 1, 2019 to December 31, 2019.

A broader or more active public trading market for our common stock may not develop or be sustained, and the current trading level of our common stock may not be sustained. Due to these conditions, you may be unable to sell your common stock at or near ask prices or at all if you desire to sell shares of common stock.

Because of the limited trading market for our common stock, and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss because of such illiquidity and because the price for our common stock may suffer greater declines because of its price volatility.

The ownership of our common stock is significantly concentrated in a small number of investors, some of whom are affiliated with our Board of Directors and management, which could prevent stockholders from having input on the course of our operations or otherwise lead to actual or potential conflicts of interest.

As of March 20, 2020, Jason Katz, our Chairman of the Board of Directors and Chief Operating Officer, beneficially owned approximately 10.8% of our outstanding common stock, including shares of common stock held directly by Mr. Katz’s spouse, and The J. Crew Delaware Trust A, a trust formed by Mr. Katz for the benefit of certain of his family members, also beneficially owned approximately 34.3% of our outstanding common stock as of March 20, 2020. Mr. Katz is not a beneficiary of the trust and does not hold voting or dispositive power over the shares held by the trust.

Mr. Katz, The J. Crew Delaware Trust A and others that have significant beneficial ownership of our common shares have substantial influence regarding matters submitted for stockholder approval, including proposals regarding:

| ● | any merger, consolidation or sale of all or substantially all of our assets;

| ● | the election of members of our Board of Directors; and

| ● | any amendment to our Certificate of Incorporation, as amended (the “Certificate of Incorporation”).

The current or increased ownership position of any of these stockholders and/or their respective affiliates could delay, deter or prevent a change of control or adversely affect the price that investors might be willing to pay in the future for our common shares. In addition, the interests of these stockholders and/or their respective affiliates may significantly differ from the interests of our other stockholders and they may vote the common shares they beneficially own in ways with which our other stockholders disagree.

The issuance of shares upon the exercise of stock options and unvested shares of restricted common stock may cause immediate and substantial dilution to our existing stockholders.

As of December 31, 2019, we had approximately 764,400 shares of common stock that were issuable upon the exercise of vested outstanding stock options. The issuance of shares upon the exercise of these options may result in substantial dilution to the equity interest and voting power of holders of our common stock.

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In the future, we may also issue additional shares of common stock or other securities convertible into or exchangeable for shares of common stock. Our Certificate of Incorporation currently authorizes us to issue up to 25,000,000 shares of common stock, of which 6,877,004 were outstanding as of December 31, 2019, which includes 10,000,000 shares of preferred stock with such designations, preferences and rights as determined by our Board of Directors, of which none were outstanding as of December 31, 2019. The issuance of additional shares of our common stock may substantially dilute the ownership interests of our existing stockholders. Furthermore, sales of a substantial amount of our common stock in the public market, or the perception that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional capital through the sale of our securities.

We cannot assure you we will repurchase any shares of our common stock pursuant to our stock repurchase plan.

On April 29, 2019, we implemented a stock repurchase plan pursuant to which we may repurchase up to $500 thousand of our common stock for cash. Pursuant to the plan, share repurchases may be made through a variety of methods, including open market or privately negotiated transactions. The timing and number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. Our repurchase program does not obligate us to repurchase any specific number of shares and may be suspended or discontinued at any time. As a result, we may not repurchase a material number of shares, or any shares at all, under our stock repurchase plan. In addition, any repurchases of our stock pursuant to the stock repurchase plan may materially reduce the amount of cash we have available and may not materially enhance the long-term value of our business or our stock.

Our Certificate of Incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees, or stockholders.

Our Certificate of Incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of our Company, (ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee, agent, or stockholder of our Company to the Company or the Company’s stockholders, (iii) action asserting a claim against the Company or any director, officer, employee, agent, or stockholder of the Company arising pursuant to any provision of the Delaware General Corporation Law (the “DGCL”) or our Certificate of Incorporation or our Amended and Restated By-Laws, as amended (the “By-Laws”), or (iv) action asserting a claim against the Company or any director, officer, employee, agent, or stockholder of the Company governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above.

This exclusive forum provision applies to state and federal law claims, although our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. In addition, this exclusive forum selection provision will not apply to claims under the Securities Exchange Act of 1934. Moreover, Section 22 of the Securities Act of 1933 creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act of 1933 or the rules and regulations thereunder. Accordingly, there is uncertainty as to whether a court would enforce our forum selection provision as written in connection with claims arising under the Securities Act of 1933. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers and employees.

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If we fail to remain current on our reporting requirements, we could be removed from the OTCQB, which would limit the ability of broker-dealers to sell our common stock and the ability of stockholders to sell their common stock in the secondary market.

Companies trading on the OTCQB must be reporting issuers under Section 12 of the Exchange Act, and must be current in their filings under the Exchange Act to maintain price quotation privileges on the OTCQB. If we fail to remain current on our reporting requirements, we could be removed from the OTCQB. As a result, the liquidity for our common stock could be adversely affected by limiting the ability of broker-dealers to sell our common stock and the ability of stockholders to sell their common stock in the secondary market.

Because we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We do not anticipate that we will declare or pay any dividends on our common stock in the foreseeable future. Consequently, stockholders will only realize an economic gain on their investment in our common stock if the price appreciates. Stockholders should not purchase our common stock expecting to receive cash dividends. Because we currently do not pay dividends, and there may be limited trading in our common stock, stockholders may not have any manner to liquidate or receive any payment on their common stock. Therefore, our failure to pay dividends may cause stockholders to not see any return on their common stock even if we are successful in our business operations. In addition, because we do not pay dividends we may have trouble raising additional funds which could affect our ability to expand our business operations.

Investor relations activities, nominal “float” and supply and demand factors may affect the price of our common stock.

We have engaged an investor relations firm to create investor awareness for our Company. These campaigns may include non-deal road shows and personal, video and telephone conferences with investors and prospective investors in which our business and business practices are described. We provide compensation to our investor relations firm, and may in the future provide compensation to additional investor relations firms or financial advisory firms, for these services, and pay for newsletters, websites, mailings and email campaigns that are produced by third parties based upon publicly available information concerning us. We do not intend to review or approve of the content of such analyst reports or other writings and communications that are based upon analysts’ own research or methods. Investor relations firms are generally required to disclose when they are compensated for their efforts and the source of such compensation, but whether such disclosure is made or in compliance with applicable laws is not under our control. In addition, investors in the Company may, from time to time, take steps to encourage investor awareness through similar activities that may be undertaken at the expense of such investors. Investor awareness activities may also be suspended or discontinued which may impact the trading market of our common stock.

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The SEC and the Financial Industry Regulatory Authority enforce various statutes and regulations intended to prevent manipulative or deceptive devices in connection with the purchase or sale of any security and carefully scrutinize trading patterns and company news and other communications for false or misleading information, particularly in cases where the hallmarks of “pump and dump” activities may exist, such as rapid share price increases or decreases. We and our stockholders may be subjected to enhanced regulatory scrutiny due to the fact that our affiliates hold a majority of our outstanding common stock and we have a limited number of shares of common stock that are publicly available for resale. The limited trading markets in which our shares of common stock may be offered or sold have often been associated with improper activities concerning penny-stocks, such as the OTCQB or the pink sheets.

The Supreme Court of the United States has stated that manipulative action is a term of art connoting intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities. Often times, manipulation is associated by regulators with forces that upset the supply and demand factors that would normally determine trading prices. Securities regulators have often cited thinly-traded markets, small numbers of holders and awareness campaigns as components of their claims of price manipulation and other violations of law when combined with manipulative trading, such as wash sales, matched orders or other manipulative trading timed to coincide with false or touting press releases. There can be no assurance that our activities or the activities of third parties, or the small number of potential sellers or small percentage of stock in our public float, or determinations by purchasers or holders as to when or under what circumstances or at what prices they may be willing to buy or sell stock, will not artificially impact (or would be claimed by regulators to have affected) the normal supply and demand factors that determine the price of our common stock.

If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our business may be harmed and our stock price may be adversely impacted.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires management to evaluate and assess the effectiveness of our internal control over financial reporting. In order to continue to comply with the requirements of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal controls. If we fail to maintain the adequacy of our internal controls over financial reporting, we could be subject to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness of our financial reports. We cannot provide any assurance that in the future we will be able to fully comply with the requirements of the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If we fail to fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed and our stock price may decline.

Our assessment, testing and evaluation of the design and operating effectiveness of our internal control over financial reporting resulted in our conclusion that as of December 31, 2019 our internal control over financial reporting was not effective, due to the Company not having adequate controls related to changes in management within the technology that support the Company’s financial reporting function.

With respect to the year ended December 31, 2019, under the supervision and with the participation of our management, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures. Based upon this evaluation, our management concluded that our disclosure controls and procedures were not effective as of December 31, 2019.

The recent coronavirus outbreak may adversely affect our revenues, results of operations and financial condition.

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 could 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. Therefore, the coronavirus could disrupt and cause delays in our software and disrupt the marketplace in which we operate and may have a material adverse effect on our operations. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. The development of the coronavirus outbreak could materially disrupt our business and operations, slow down the overall economy, curtail consumer spending and make it hard to adequately staff our operations or enter into agreements with independent contractors.

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ITEM 1B. | UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. | PROPERTIES

Our principal executive office is located at 122 East 42nd Street in New York, NY 10168. The 122 East 42nd Street office space lease expires on April 26, 2023. We currently do not own any real property. We also lease office space at 30 Jericho Executive Plaza in Jericho, New York 10168. The 30 Jericho Executive Plaza office space lease expires on November 30, 2021.

ITEM 3. | 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.

On November 2, 2017, Riot Games, Inc. filed a total of four petitions for inter partes review with the United States Patent and Trademark Office, two per patent held by Paltalk Holdings, Inc., seeking to have the Paltalk Holdings, Inc. patents declared invalid. On May 15, 2018, inter partes review was instituted, and on February 13, 2019, the Patent Trial and Appeal Board (the “PTAB”) held a hearing on the matter. 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.

To our knowledge, other than as described above, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.

ITEM 4. | MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is quoted on the OTCQB under the symbol “PEER.”

The following table sets forth the range of the quarterly high and low bid price information for the fiscal quarters indicated below as reported by the OTCQB. Except for trading on the OTCQB, there is no established public trading market for our common stock.

|  | High Bid* ($) |  |  | Low Bid* ($) |
2019 |  |  |  |  |  |
Fourth Quarter |  | $ | 1.19 |  |  | $ | 1.00 |
Third Quarter |  | $ | 2.70 |  |  | $ | 2.15 |
Second Quarter |  | $ | 3.25 |  |  | $ | 3.25 |
First Quarter |  | $ | 3.54 |  |  | $ | 3.54 |
2018 |  |  |  |  |  |  |  |
Fourth Quarter |  | $ | 5.90 |  |  | $ | 3.00 |
Third Quarter |  | $ | 7.00 |  |  | $ | 3.40 |
Second Quarter |  | $ | 7.50 |  |  | $ | 4.00 |
First Quarter |  | $ | 7.60 |  |  | $ | 3.10 |

* | The over-the-counter market quotations of the bid prices reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.

The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market, and other factors, over many of which we have little or no control. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.

Holders

As of March 20, 2020, there were approximately 79 holders of record of our common stock. This does not reflect the number of persons or entities who held stock in nominee or street name through various brokerage firms.

Recent Sales of Unregistered Securities

On January 15, 2019 and October 1, 2019, we issued 6,000 and 4,225 shares of our common stock, respectively, to PCG Advisory, Inc. as consideration for investor relations services. The issuance of the shares was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) thereof as a transaction not involving a public offering.

Other than the above, there were no sales of unregistered securities during the year ended December 31, 2019 that were not previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

Issuer Purchases of Equity Securities

The following table details our repurchases of common stock during the fourth quarter of the fiscal year ended December 31, 2019:

Period |  | Total Number of Shares Purchased (1) |  |  | Average Price Paid Per Share |  |  | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |  |  | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
October 1, 2019 – October 31, 2019 |  |  | — |  |  | $ | — |  |  |  | — |  |  | $ | — |
November 1, 2019 – November 30, 2019 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
December 1, 2019 – December 31, 2019 |  |  | 1,900 |  |  |  | 1.06 |  |  |  | 1,900 |  |  |  | 498,000 |
Total |  |  | 1,900 |  |  | $ | 1.06 |  |  |  | 1,900 |  |  | $ | 498,000 |

(1) | On April 29, 2019, we implemented a repurchase plan to repurchase up to $500 thousand of our common stock for cash. The repurchase plan expires on April 29, 2020.

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ITEM 6. | SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. | 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 our audited consolidated financial statements and the accompanying notes thereto included in “Item 8. Financial Statements and Supplementary Data.”

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 this Annual Report on Form 10-K.

Overview

We are a leading communications software innovator that powers multimedia social applications and secure business communication solutions worldwide. 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. During the fourth quarter of 2019, we agreed to collaborate with a third party with a community of over 30 million monthly active users, which has agreed to promote a co-branded version of our Paltalk video chat program to its user base on a trial 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.

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Recent Developments

Pending Sale of Secured Communications Assets

On February 21, 2020, we entered into the SecureCo Purchase Agreement with SecureCo, whereby, subject to the terms of the Agreement, we agreed to sell substantially all of the Secure Communications Assets to SecureCo for a cash purchase price of approximately $540,000, which is comprised of a base purchase price of $500,000 plus the reimbursement or waiver of certain severance expenses payable by the Company to certain former executive officers. In addition, we would be entitled to receive a transition service fee of five percent (5%) of all revenue received by SecureCo or its Affiliates pursuant to certain unassignable contracts.

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. 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.

Props Token Launch

In February 2020, we launched our partnership with YouNow in the Props Developer Network, which, now that regulatory approval has been obtained, enables us to distribute YouNow’s Props tokens to our application end users for anticipated loyalty and retention benefits. We began distributing Props tokens through Camfrog in February 2020 and we expect to launch Props distributions through Paltalk by early second quarter 2020.

Completed Sale of Dating Assets

On January 31, 2019, we entered into an Asset Purchase Agreement with The Dating Company, LLC, pursuant to which we sold substantially all of the assets related to our online dating services business under the domain names FirstMet, 50more, and The Grade for a cash purchase price of $1.6 million, with $100.0 thousand of the purchase price that was held in an escrow account to secure certain of our post-closing indemnification obligations. The closing of the asset sale was effective as of January 31, 2019.

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Operational Highlights and Objectives

During the year ended December 31, 2019, we executed key components of our objectives:

| ● | launched our consumer application platform strategy, under which we plan to co-brand our video chat applications and promote them in partnership with third-party communities, with the expectation of entering into revenue sharing arrangements with potential partners. During the fourth quarter, we reached agreement with a launch partner with 30 million monthly active users who has agreed to a trial of our consumer application platform;

| ● | decreased our operating expenses through a streamlined plan of operations by over 13%, or $2.7 million, for the year, which includes reductions in sales and marketing expenses of over 41%, or approximately $747,350, and reductions in general and administrative expenses of over 19%, or $1.5 million. These reductions were offset by one-time severance costs of $0.3 million recorded in the fourth quarter;

| ● | launched our partnership with YouNow in the Props Developer Network, which, enables us to distribute YouNow’s Props tokens to our application end users for anticipated loyalty and retention benefits;

| ● | completed and delivered work constituting the second development milestone under a technology and services agreement with ProximaX, whereby we agreed to provide certain development and related services to ProximaX to facilitate the implementation of PSP into ProximaX’s proprietary blockchain protocol (the “ProximaX Agreement”); and

| ● | completed the sale of our dating assets to The Dating Company, LLC in order to enable us to focus on our core video applications and to try to monetize secure communications technology solutions.

For the near term, our business objectives include:

| ● | continuing to develop our consumer application platform strategy by seeking potential partnerships with large third-party communities to whom we could promote a co-branded version of our video chat products and potentially share in the incremental revenues generated by these partner communities;

| ● | continuing to explore strategic opportunities, including, but not limited to, potential mergers or acquisitions of other entities that are synergistic to our businesses;

| ● | making further cost reductions to right-size operations and reduce or eliminate cash consumption;

| ● | focusing on our core business to continue to leverage efficiencies gained during 2019 and expand our core business in a cost-efficient way;

| ● | implementing several enhancements to our live video chat applications, including the integration of Props token rewards and other features focused on new user acquisition, retention and monetization, which collectively are intended to increase usage and revenue opportunities; and

| ● | continuing to defend our intellectual property.

Sources of Revenue

Through the end of the first quarter of 2018, our sources of revenue were limited to subscription, advertising and other fees generated from users of our video chat and dating products. In April 2018, we started generating revenue through proprietary software licensing and technology implementation services as a result the ProximaX Agreement. 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, we expect that our sole source of revenue will return to being revenue generated from our video chat products.

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.

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Historically, our dating applications generated revenue primarily through subscription fees. Multiple subscription tiers were offered in one-, three- and six-month terms. Longer-term plans (those with durations longer than one platforms, subscriptions automatically renewed for periods of the same length and at the same price as the original subscription term until terminated by the subscriber. We also held occasional promotions that offered initial discounted subscriptions that renewed at the regular price. As described above, in January 2019 we sold substantially all of our dating assets for a cash purchase price of $1.6 million.

We recognize revenue from monthly premium subscription services beginning in the month in which the subscriptions are originated. Revenues from multi-month subscriptions are recognized on a gross and straight-line basis over the length of the subscription period. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying consolidated balance sheets.

We also offer virtual gifts 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 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 Services Revenue

Technology service 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 service 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 service 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.

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 consists primarily of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel engaged in sales and sales support functions. Advertising and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which primarily consists of partner-related payments to those who direct traffic to our brands.

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.

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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.

|  | Year Ended December 31, |
|  | 2019 |  |  | 2018 |
Active subscribers (as of period end) |  |  | 103,800 |  |  |  | 109,200 |
Subscription bookings |  | $ | 11,766,709 |  |  | $ | 14,218,801 |
Net cash (used in) provided by operating activities |  | $ | (4,465,363 | ) |  | $ | 2,732,767 |
Net loss |  | $ | (8,380,060 | ) |  | $ | (3,797,217 | )
Adjusted EBITDA |  | $ | 135,422 |  |  | $ | 2,932,002 |
Adjusted EBITDA as percentage of total revenues |  |  | 0.9 | % |  |  | 14.4 | %

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

Subscription bookings is a financial measure representing the aggregate dollar value of subscription fees and virtual gifts purchases received during the period. We calculate subscription bookings as subscription revenue recognized during the period plus the change in deferred subscription revenue recognized during the period. We record subscription revenue from subscription fees as deferred subscription revenue and then recognize that revenue ratably over the length of the subscription term or ratably over usage for virtual gifts. Our management uses subscription bookings internally in analyzing our financial results to assess operational performance and to assess the effectiveness of, and plan future, user acquisition campaigns. We believe that this financial measure is useful in evaluating the performance of our consumer applications because we believe, as compared to subscription revenue, it is a better indicator of the subscription activity in a given period. We believe that both management and investors benefit from referring to subscription bookings in assessing our performance and when planning, forecasting and analyzing future periods.

While the factors that affect subscription bookings and subscription revenue are generally the same, certain factors may affect subscription bookings more or less than such factors affect subscription revenue in any period. While we believe that subscription bookings is useful in evaluating our business, it should be considered as supplemental in nature and it is not meant to be a substitute for subscription revenue recognized in accordance with GAAP.

Subscription bookings in all periods presented excludes subscription bookings from the dating services business, which was sold in January 2019.

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Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net loss adjusted to exclude net loss from discontinued operations, interest income, gain on the sale of dating applications, income tax expense from continuing operations, depreciation and amortization expense, goodwill impairment, impairment 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.

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

| ● | Adjusted EBITDA does not reflect cash capital expenditures for assets underlying depreciation and amortization expense that may need to be replaced or for new capital expenditures;

| ● | Adjusted EBITDA does not reflect our working capital requirements;
| ● | Adjusted EBITDA does not reflect the goodwill impairment or the impairment loss on digital tokens;

| ● | Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation;

| ● | Adjusted EBITDA does not reflect the gain on the sale of our dating applications or our loss or income tax expense from discontinued operations; and

| ● | other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Limitations of Adjusted EBITDA

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. The following table presents a reconciliation of net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated:

|  | Year Ended December 31, |
|  | 2019 |  |  | 2018 |
Reconciliation of Net Loss to Adjusted EBITDA: |  |  |  |  |  |
Net loss |  | $ | (8,380,060 | ) |  | $ | (3,797,217 | )
Interest income |  |  | (156,423 | ) |  |  | (81,180 | )
Net loss from discontinued operations |  |  | 104,880 |  |  |  | 1,791,286 |
Gain on sale of dating applications |  |  | (826,770 | ) |  |  | - |
Income tax expense (benefit) from continuing operations |  |  | 17,672 |  |  |  | 3,001 |
Depreciation and amortization expense |  |  | 605,415 |  |  |  | 888,756 |
Impairment loss on goodwill |  |  | 6,760,222 |  |  |  | - |
Impairment loss on digital tokens |  |  | 625,368 |  |  |  | 2,535,235 |
Stock-based compensation expense |  |  | 1,385,118 |  |  |  | 1,592,121 |
Adjusted EBITDA |  | $ | 135,422 |  |  | $ | 2,932,002 |

Results of Operations

In January 2019, we sold substantially all of the assets related to our dating service business under the domain names FirstMet, 50more and The Grade, which we collectively refer to as the dating services business. As a result, during the first quarter of 2019, we began to separately report the results of the dating services business as a discontinued operation in our consolidated statements of operations and present the related assets and liabilities as held for sale in our consolidated balance sheets. These changes have been applied for all periods presented. Unless otherwise noted, amounts and percentages for all periods discussed below reflect the results of operations and financial condition from our continuing operations. Refer to Note 3 of our Notes to Consolidated Financial Statements for additional information on discontinued operations.

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The following table sets forth consolidated statements of operations data for each of the periods indicated as a percentage of total revenues:

|  | Years Ended December 31, |
|  | 2019 |  |  | 2018 |
Total revenue |  |  | 100.0 | % |  |  | 100.0 | %
Costs and expenses: |  |  |  |  |  |  |  |
Cost of revenue |  |  | 20.8 | % |  |  | 17.8 | %
Sales and marketing expense |  |  | 6.9 | % |  |  | 8.9 | %
Product development expense |  |  | 42.9 | % |  |  | 32.4 | %
General and administrative expense |  |  | 41.5 | % |  |  | 38.7 | %
Impairment loss on goodwill |  |  | 44.2 | % |  |  | - | %
Total costs and expenses |  |  | 156.4 | % |  |  | 97.8 | %
Income (loss) from operations from continuing operations |  |  | (56.4 | )% |  |  | 2.2 | %
Interest income |  |  | 1.0 | % |  |  | 0.4 | %
Impairment loss on digital tokens |  |  | (4.1 | )% |  |  | (12.5 | )%
Loss from continuing operations before provision for income taxes |  |  | (59.5 | )% |  |  | (9.9 | )%
Provision for income taxes |  |  | 0.9 | % |  |  | (0.0 | )%
Net loss from continuing operations |  |  | (58.6 | )% |  |  | (9.9 | )%
Provision for income taxes resulting from discontinued operations |  |  | (1.0 | )% |  |  | - | %
Gain on sale of discontinued operations |  |  | 5.4 | % |  |  | - | %
Loss from discontinued operations |  |  | (0.7 | )% |  |  | (8.8 | )%
Net loss |  |  | (54.9 | )% |  |  | (18.7 | )%

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

In January 2019 we completed the sale of substantially all of our dating properties. Consequently, we expect that in future periods our total number of active subscribers, as well as our subscription revenue and advertising revenue, will be significantly lower than prior periods as the active subscribers, subscription revenue and advertising revenue derived from our dating properties will no longer be included in our results of operations.

Total revenues decreased to $15,283,617 for the year ended December 31, 2019 from $20,331,800 for the year ended December 31, 2018. The decrease was driven by a decline of $2,930,359 in subscription revenue primarily as a result of lower virtual gifts transaction volume and a 4.9% decline in active subscribers, as well as a decrease of $1,549,365 in technology service revenue generated under the ProximaX Agreement.

The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenues for the year ended December 31, 2019 and the year ended December 31, 2018, the decrease between those periods, the percentage decrease between those periods, and the percentage of total revenue that each represented for those periods:

|  | Years Ended December 31, |  |  | $ |  |  | % |  |  | % of Revenue Years Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | (Decrease) |  |  | (Decrease) |  |  | 2019 |  |  | 2018 |
Subscription revenue |  | $ | 11,405,787 |  |  | $ | 14,336,146 |  |  | $ | (2,930,359 | ) |  |  | (20.4 | )% |  |  | 74.6 | % |  |  | 70.5 | %
Advertising revenue |  |  | 438,503 |  |  |  | 1,006,962 |  |  |  | (568,459 | ) |  |  | (56.5 | )% |  |  | 2.9 | % |  |  | 5.0 | %
Technology service revenue |  |  | 3,439,327 |  |  |  | 4,988,692 |  |  |  | (1,549,365 | ) |  |  | (31.1 | )% |  |  | 22.5 | % |  |  | 24.5 | %
Total revenues |  | $ | 15,283,617 |  |  | $ | 20,331,800 |  |  | $ | (5,048,183 | ) |  |  | (24.8 | )% |  |  | 100.0 | % |  |  | 100.0 | %

Subscription Revenue

Our subscription revenue for the year ended December 31, 2019 decreased by $2,930,359, or 20.4%, as compared to the year ended December 31, 2018. This decrease in subscription revenue for the year ended December 31, 2019 was driven primarily by lower virtual gift transaction volume for both Paltalk and Camfrog products, which corresponded to lower monthly active usage. In addition, we experienced a decrease in active subscribers of approximately 4.9%, partially as a result of diminished marketing and advertising spend of approximately $600,000 related to our consumer applications as compared to the year ended December 31, 2018.

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Advertising Revenue

Our advertising revenue for the year ended December 31, 2019 decreased by $568,459, or 56.5%, as compared to the year ended December 31, 2018. The decrease in advertising revenue was primarily due to a decline in the volume of advertising impressions, which resulted from a 16.0% decline in active users.

Technology Service Revenue

For the year ended December 31, 2019, we generated $3,439,327 of technology services revenue in exchange for providing certain development and related services to ProximaX to facilitate the integration of PSP into ProximaX’s proprietary blockchain protocol. Technology service revenue decreased by $1,549,365, or 31.1%, as compared to the year ended December 31, 2018 due to the termination of the ProximaX contract. The portion of the upfront fee associated with the ProximaX Agreement that remained unrecognized as of the termination of the ProximaX Agreement was $1,631,105 and was recognized as revenue upon such termination.

Costs and Expenses

Total costs and expenses for the year ended December 31, 2019 reflect an increase in costs and expenses of $4,018,275 or 20.2%, as compared to the year ended December 31, 2018. The following table presents our costs and expenses for the year ended December 31, 2019 and 2018, the increase or decrease between those periods and the percentage increase or decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Years Ended December 31, |  |  | $ |  |  | % |  |  | % of Revenue Years Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | Increase (Decrease) |  |  | Increase (Decrease) |  |  | 2019 |  |  | 2018 |
Cost of revenue |  | $ | 3,174,453 |  |  | $ | 3,611,479 |  |  | $ | (437,026 | ) |  |  | (12.1 | )% |  |  | 20.8 | % |  |  | 17.8 | %
Sales and marketing expense |  |  | 1,056,967 |  |  |  | 1,804,317 |  |  |  | (747,350 | ) |  |  | (41.4 | )% |  |  | 6.9 | % |  |  | 8.9 | %
Product development expense |  |  | 6,563,449 |  |  |  | 6,590,943 |  |  |  | (27,494 | ) |  |  | (0.4 | )% |  |  | 42.9 | % |  |  | 32.4 | %
General and administrative expense |  |  | 6,343,859 |  |  |  | 7,873,936 |  |  |  | (1,530,077 | ) |  |  | (19.4 | )% |  |  | 41.5 | % |  |  | 38.7 | %
Impairment loss on goodwill |  |  | 6,760,222 |  |  |  | - |  |  |  | 6,760,222 |  |  |  | 100.0 | % |  |  | 44.2 | % |  |  | - | %
Total costs and expenses |  | $ | 23,898,950 |  |  | $ | 19,880,675 |  |  | $ | 4,018,275 |  |  |  | 20.2 | % |  |  | 156.4 | % |  |  | 97.8 | %

Cost of revenue

Our cost of revenue for the year ended December 31, 2019 decreased by $437,026, or 12.1%, as compared to the year ended December 31, 2018. The decrease in cost of revenue for the year ended December 31, 2019 was primarily driven by a decrease in compensation expense due to decreased headcount in system administration support.

34

Sales and marketing expense

Our sales and marketing expense for the year ended December 31, 2019 decreased by $747,350, or 41.4%, as compared to the year ended December 31, 2018. The decrease in sales and marketing expense for the year ended December 31, 2019 was primarily due to a decrease in marketing expenditures of approximately $592,700 related to our video properties along with a decrease of approximately $171,600 in compensation to marketing personnel.

Product development expense

Our product development expense for the year ended December 31, 2019 decreased by $27,494, or 0.4% as compared to the year ended December 31, 2018. The decrease in product development expenses for the year ended December 31, 2019 was primarily due to decreases in consulting expense of approximately $75,300, offset by an increase in software expenses and compensation expenses.

General and administrative expense

Our general and administrative expense for the year ended December 31, 2019 decreased by $1,530,077, or 19.4%, as compared to the year ended December 31, 2018. The decrease in general and administrative expense for the year ended December 31, 2019 was primarily driven by the absence of non-recurring charges from 2018, such as approximately $113,000 of transaction fees relating to cryptocurrency conversion into U.S. dollars and $95,100 paid in recruiting fees. Additionally, there was a decrease in professional fees of approximately $811,200 and a decrease in compensation related expenses of approximately $422,900 due to headcount reduction.

Impairment loss on goodwill

The Company recorded a $6,760,222 goodwill impairment for the year ended December 31, 2019 due to the instability and declining market price of the Company’s common stock. At December 31, 2019, the market price per share of 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 of the Company’s common stock. At December 31, 2019, goodwill was $6,326,250 compared to $13,086,472 for the year ended December 31, 2018.

Non-Operating Income (Loss)

The following table presents the components of non-operating income (loss) for the year ended December 31, 2019 and the year ended December 31, 2018, the increase between those periods and the percentage increase between those periods and the percentage of total revenues that each represented for those periods:

|  | Years Ended December 31, |  |  | $ |  |  | % |  |  | % of Revenue Years Ended December 31, |
|  | 2019 |  |  | 2018 |  |  | Increase |  |  | Increase |  |  | 2019 |  |  | 2018 |
Interest income |  | $ | 156,423 |  |  | $ | 81,180 |  |  | $ | 75,243 |  |  |  | 92.7 | % |  |  | 1.0 | % |  |  | 0.4 | %
Impairment loss on digital tokens |  |  | (625,368 | ) |  |  | (2,535,235 | ) |  |  | 1,909,867 |  |  |  | 75.3 | % |  |  | (4.1 | )% |  |  | (12.5 | )%
Income (loss) from discontinued operations |  |  | 562,625 |  |  |  | (1,791,286 | ) |  |  | 2,353,911 |  |  |  | 131.4 | % |  |  | 3.7 | % |  |  | (9.1 | )%
Total non-operating income (loss) |  | $ | 93,680 |  |  | $ | (4,245,341 | ) |  | $ | 4,339,022 |  |  |  | 102.2 | % |  |  | 0.6 | % |  |  | (21.2 | )%

Non-operating income (loss) for the year ended December 31, 2019 increased by $4,339,022, or 102.2%, as compared to the year ended December 31, 2018. For the year ended December 31, 2018, the Company recorded an impairment loss on digital tokens of approximately $2.5 million. During December 31, 2019, further decreases to the carrying value of these tokens compared to the quoted prices caused the Company to take a further impairment charge of $625,368.

35

Liquidity and Capital Resources

|  | Years Ended December 31, |
|  | 2019 |  |  | 2018 |
Consolidated Statements of Cash Flows Data: |  |  |  |  |  |
Net cash provided by (used in) operating activities |  | $ | (4,465,363 | ) |  | $ | 2,732,767 |
Net cash provided by (used in) investing activities |  |  | 1,339,060 |  |  |  | (342,651 | )
Net cash provided by (used in) financing activities |  |  | (2,015 | ) |  |  | 28,210 |
Net change in cash and cash equivalents |  | $ | (3,128,318 | ) |  | $ | 2,418,326 |

Currently, our primary source of liquidity is cash on hand and cash flows from continuing operations, and we believe that our cash balance and our expected cash flow from operations will be sufficient to meet all of our financial obligations for the twelve months from the date of this report. As of December 31, 2019 and 2018, we had $3,427,058 and $6,555,376 of cash and cash equivalents, respectively, and no long-term debt.

In the future, it is possible that we will need additional capital to fund our operations, particularly growth initiatives, which we expect we would raise through a combination of equity offerings, debt financings, other third-party funding and other collaborations and strategic alliances. We may also attempt to raise capital through dispositions of our assets, such as our sale of the dating services business in January 2019 and our pending sale of the Secured Communications Assets. To raise additional funds through dispositions, we may in the future seek to sell all or a portion of our XPX tokens or Vumber, a small telecommunications services provider that we operate, or certain of our patents, which we refer to collectively as our non-core properties. Our need to generate additional capital will largely depend on future capital requirements, which in turn will depend on many factors including our growth rate, headcount, sales and marketing activities, research and development efforts and the introduction of new features, products, acquisitions and continued user engagement.

Operating Activities

Net cash used in operating activities was $4,465,363 for the year ended December 31, 2019, as compared to net cash provided by operating activities of $2,732,767 for the year ended December 31, 2018. This decrease in net cash provided by operating activities of $7,198,130 was mainly due to a one-time prepayment of the ProximaX Agreement during the year ended December 31, 2018. In addition, the decrease was in part a result of the non-recurring payment of residual liabilities in connection to the sale of the dating services business as well as the payments of related legal and transaction fees.

Investing Activities

Net cash provided by investing activities for the year ended December 31, 2019 was $1,339,060 and net cash used by investing activities for the year ended December 31, 2018 was $342,651. The increase in cash used in investing activities for the year ended December 31, 2019 was primarily the result of proceeds from the sale of the dating services business.

Financing Activities

Net cash used by financing activities for the year ended December 31, 2019 was $2,015 as compared to net cash provided by financing activities of $28,210 for the year ended December 31, 2018. Net cash provided by financing activities during fiscal 2018 was the result of the exercise of employee stock options. There were no employee stock options exercised during fiscal 2019.

36

Contractual Obligations and Commitments

On June 7, 2016, we 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. Our office rent payments under the lease are currently approximately $6,100 per month.

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 runs until April 26, 2023. The Company’s monthly office rent payments under the lease are currently approximately $33,492 per month.

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

Off-Balance Sheet Arrangements

As of December 31, 2019, we did not have any off-balance sheet arrangements.

ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

37

ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

| Page Number
Report of Independent Registered Public Accounting Firm | F-1
Consolidated Balance Sheets as of December 31, 2019 and 2018 | F-2
Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018 | F-3
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2019 and 2018 | F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018 | F-5
Notes to Consolidated Financial Statements | F-6

38

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

of PeerStream, Inc. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Peerstream, Inc. and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Marcum LLP |  |

Marcum LLP

We have served as the Company’s auditor since 2016.

Melville, New York

March 24, 2020

| F-1 |

PEERSTREAM, INC.

CONSOLIDATED BALANCE SHEETS

|  | December 31, |
|  | 2019 |  |  | 2018 |
Assets |  |  |  |  |  |
Current assets: |  |  |  |  |  |
Cash and cash equivalents |  | $ | 3,427,058 |  |  | $ | 6,555,376 |
Credit card holdback receivable |  |  | 11,323 |  |  |  | 94,498 |
Accounts receivable, net of allowances and reserves of $23,832 and $34,546, as of December 31, 2019 and 2018, respectively |  |  | 130,686 |  |  |  | 326,786 |
Prepaid expense and other current assets |  |  | 156,118 |  |  |  | 269,668 |
Current assets held for sale |  |  | - |  |  |  | 19,053 |
Total current assets |  |  | 3,725,185 |  |  |  | 7,265,381 |
Operating lease right-of-use asset |  |  | 685,042 |  |  |  | 232,423 |
Property and equipment, net |  |  | 620,059 |  |  |  | 577,911 |
Goodwill |  |  | 6,326,250 |  |  |  | 13,086,472 |
Intangible assets, net |  |  | 627,891 |  |  |  | 884,223 |
Digital tokens |  |  | 148,229 |  |  |  | 832,892 |
Other assets |  |  | 86,876 |  |  |  | 116,767 |
Noncurrent assets held for sale |  |  | - |  |  |  | 1,436,499 |
Total assets |  | $ | 12,219,532 |  |  | $ | 24,432,568 |
Liabilities and stockholders’ equity |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Accounts payable |  | $ | 1,007,851 |  |  | $ | 2,842,947 |
Accrued expenses and other current liabilities |  |  | 434,739 |  |  |  | 737,945 |
Current portion of operating lease liabilities |  |  | 178,479 |  |  |  | 114,789 |
Deferred subscription revenue |  |  | 1,829,493 |  |  |  | 1,468,571 |
Deferred technology service revenue |  |  | - |  |  |  | 3,379,435 |
Current liabilities held for sale |  |  | - |  |  |  | 617,410 |
Total current liabilities |  |  | 3,450,562 |  |  |  | 9,161,097 |
Operating lease liabilities, non-current portion |  |  | 583,075 |  |  |  | 117,634 |
Total liabilities |  |  | 4,033,637 |  |  |  | 9,278,731 |
Commitments and contingencies |  |  |  |  |  |  |  |
Stockholders’ equity: |  |  |  |  |  |  |  |
Common stock, $0.001 par value, 25,000,000 shares authorized, 6,878,904 and 6,868,679 shares issued and outstanding as of December 31, 2019 and 2018, respectively |  |  | 6,879 |  |  |  | 6,869 |
Treasury stock, 1,900 and no shares, at par as of December 31, 2019 and 2018, respectively |  |  | (2,015 | ) |  |  | - |
Additional paid-in capital |  |  | 21,281,382 |  |  |  | 19,867,259 |
Accumulated deficit |  |  | (13,100,351 | ) |  |  | (4,720,291 | )
Total stockholders’ equity |  |  | 8,185,895 |  |  |  | 15,153,837 |
Total liabilities and stockholders’ equity |  | $ | 12,219,532 |  |  | $ | 24,432,568 |

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

| F-2 |

PEERSTREAM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

|  | Years Ended December 31, |
|  | 2019 |  |  | 2018 |
Revenues |  |  |  |  |  |
Subscription revenue |  | $ | 11,405,787 |  |  | $ | 14,336,146 |
Advertising revenue |  |  | 438,503 |  |  |  | 1,006,962 |
Technology service revenue |  |  | 3,439,327 |  |  |  | 4,988,692 |
Total revenue |  |  | 15,283,617 |  |  |  | 20,331,800 |
Costs and expenses |  |  |  |  |  |  |  |
Costs of revenue |  |  | 3,174,453 |  |  |  | 3,611,479 |
Sales and marketing expense |  |  | 1,056,967 |  |  |  | 1,804,317 |
Product development expense |  |  | 6,563,449 |  |  |  | 6,590,943 |
General and administrative expense |  |  | 6,343,859 |  |  |  | 7,873,936 |
Impairment loss on goodwill |  |  | 6,760,222 |  |  |  | - |
Total costs and expenses |  |  | 23,898,950 |  |  |  | 19,880,675 |
Income (loss) from continuing operations |  |  | (8,615,333 | ) |  |  | 451,125 |
Interest income |  |  | 156,423 |  |  |  | 81,180 |
Impairment loss on digital tokens |  |  | (625,368 | ) |  |  | (2,535,235 | )
Loss from continuing operations before provision for income taxes |  |  | (9,084,278 | ) |  |  | (2,002,930 | )
Benefit (expense) for income taxes |  |  | 141,593 |  |  |  | (3,001 | )
Net loss from continuing operations |  |  | (8,942,685 | ) |  |  | (2,005,931 | )
Discontinued Operations: |  |  |  |  |  |  |  |
Gain on sale from discontinued operations |  |  | 826,770 |  |  |  | - |
Loss from discontinued operations |  |  | (104,880 | ) |  |  | (1,791,286 | )
Income tax expense from discontinued operations |  |  | (159,265 | ) |  |  | - |
Net income (loss) from discontinued operations |  |  | 562,625 |  |  |  | (1,791,286 | )
Net loss |  |  | (8,380,060 | ) |  |  | (3,797,217 | )
Basic net income (loss) per share of common stock: |  |  |  |  |  |  |  |
Continuing operations |  | $ | (1.30 | ) |  | $ | (0.30 | )
Discontinued operations |  |  | 0.08 |  |  |  | (0.26 | )
Net loss per share of common stock |  | $ | (1.22 | ) |  | $ | (0.56 | )
Diluted net income (loss) per share of common stock: |  |  |  |  |  |  |  |
Continuing operations |  | $ | (1.30 | ) |  | $ | (0.30 | )
Discontinued operations |  |  | 0.08 |  |  |  | (0.26 | )
Net loss per share of common stock |  | $ | (1.22 | ) |  | $ | (0.56 | )
Weighted average number of shares of common stock used in calculating net loss per share of common stock: |  |  |  |  |  |  |  |
Basic and diluted continuing operations |  |  | 6,873,652 |  |  |  | 6,721,633 |
Basic and diluted discontinued operations |  |  | 6,873,652 |  |  |  | 6,721,63 3 |

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

| F-3 |

PEERSTREAM, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Retained |  |  |  |
|  |  |  |  |  |  |  |  |  |  |  |  |  | Additional |  |  | Earnings |  |  | Total |
|  | Common |  |  | Stock |  |  | Treasury |  |  | Stock |  |  | Paid- |  |  | (Accumulated |  |  | Stockholders’ |
|  | Shares |  |  | Amount |  |  | Shares |  |  | Amount |  |  | in Capital |  |  | Deficit) |  |  | Equity |
Balance on January 1, 2018 |  |  | 6,881,794 |  |  | $ | 6,882 |  |  |  | - |  |  | $ | - |  |  | $ | 18,346,914 |  |  | $ | (923,074 | ) |  | $ | 17,430,722 |
Stock-based compensation expense for restricted stock awards and stock options |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,592,121 |  |  |  | - |  |  |  | 1,592,121 |
Reconciliation of shares issued in stock-based compensation arrangement |  |  | 522 |  |  |  | 1 |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1 |
Issuance of common stock for stock option exercises |  |  | 6,363 |  |  |  | 6 |  |  |  | - |  |  |  | - |  |  |  | 28,204 |  |  |  | - |  |  |  | 28,210 |
Surrender of common stock for tax withholding |  |  | (20,000 | ) |  |  | (20 | ) |  |  | - |  |  |  | - |  |  |  | (99,980 | ) |  |  | - |  |  |  | (100,000 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (3,797,217 | ) |  |  | (3,797,217 | )
Balance on December 31, 2018 |  |  | 6,868,679 |  |  | $ | 6,869 |  |  |  | - |  |  |  | - |  |  | $ | 19,867,259 |  |  | $ | (4,720,291 | ) |  | $ | 15,153,837 |
Stock-based compensation expense for restricted stock awards and stock options |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 1,385,118 |  |  |  | - |  |  |  | 1,385,118 |
Issuance of common stock for consulting services |  |  | 10,225 |  |  |  | 10 |  |  |  | - |  |  |  | - |  |  |  | 29,005 |  |  |  | - |  |  |  | 29,015 |
Repurchased of common stock |  |  |  |  |  |  |  |  |  |  | (1,900 | ) |  |  | (2,015 | ) |  |  | - |  |  |  | - |  |  |  | (2,015 | )
Net loss |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | (8,380,060 | ) |  |  | (8,380,060 | )
Balance on December 31, 2019 |  |  | 6,878,904 |  |  | $ | 6,879 |  |  |  | (1,900 | ) |  | $ | (2,015 | ) |  | $ | 21,281,382 |  |  | $ | (13,100,351 | ) |  | $ | 8,185,895 |

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

| F-4 |

PEERSTREAM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

|  | Years Ended December 31, |
|  | 2019 |  |  | 2018 |
Cash flows from operating activities: |  |  |  |  |  |
Net loss |  | $ | (8,380,060 | ) |  | $ | (3,797,217 | )
Less: Income (loss) from discontinued operations |  |  | 562,625 |  |  |  | (1,791,286 | )
Loss from continuing operations |  |  | (8,942,685 | ) |  |  | (2,005,931 | )
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities of continuing operations: |  |  |  |  |  |  |  |
Depreciation of property and equipment |  |  | 349,082 |  |  |  | 387,452 |
Amortization of intangible assets |  |  | 256,332 |  |  |  | 1,599,721 |
Amortization of operating lease right-of-use assets |  |  | 178,158 |  |  |  | - |
Reconciliation of shares issued in stock-based compensation arrangement |  |  | - |  |  |  | 1 |
Surrender of common stock for tax withholding |  |  | - |  |  |  | (100,000 | )
Stock-based compensation |  |  | 1,385,118 |  |  |  | 1,592,121 |
Common stock issued for consulting services |  |  | 29,015 |  |  |  | - |
Bad debt expense |  |  | - |  |  |  | 8,552 |
Digital tokens received as payment for services |  |  | - |  |  |  | (3,368,127 | )
Impairment loss on goodwill |  |  | 6,760,222 |  |  |  | - |
Impairment loss on digital tokens |  |  | 625,368 |  |  |  | 2,535,235 |
Realized gain from the sale of digital tokens |  |  | (70,995 | ) |  |  | - |
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Credit card holdback receivable |  |  | 83,175 |  |  |  | 46,291 |
Accounts receivable |  |  | 196,100 |  |  |  | 143,810 |
Operating lease liability |  |  | (101,647 | ) |  |  | - |
Prepaid expense and other current assets |  |  | 113,550 |  |  |  | (60,425 | )
Other assets |  |  | 29,891 |  |  |  | 32,770 |
Accounts payable, accrued expenses and other current liabilities |  |  | (2,138,302 | ) |  |  | 800,993 |
Deferred subscription revenue |  |  | 360,922 |  |  |  | (467,845 | )
Deferred technology service revenue |  |  | (3,379,435 | ) |  |  | 3,379,435 |
Net cash (used in) provided by continuing operating activities |  |  | (4,266,131 | ) |  |  | 4,524,053 |
Net cash used in discontinued operating activities |  |  | (199,232 | ) |  |  | (1,791,286 | )
Net cash (used in) provided by operating activities |  |  | (4,465,363 | ) |  |  | 2,732,767 |
Cash flows from investing activities: |  |  |  |  |  |  |  |
Purchases of property and equipment |  |  | (391,230 | ) |  |  | (342,651 | )
Proceeds from the sale of digital tokens |  |  | 130,290 |  |  |  | - |
Net cash used in continuing investing activities |  |  | (260,940 | ) |  |  | (342,651 | )
Net cash provided by discontinued investing activities |  |  | 1,600,000 |  |  |  | - |
Net cash provided by (used in) investing activities |  |  | 1,339,060 |  |  |  | (342,651 | )
Cash flows from financing activities: |  |  |  |  |  |  |  |
Proceeds from issuance of common stock for stock option exercises |  |  | - |  |  |  | 28,210 |
Purchase of treasury stock |  |  | (2,015 | ) |  |  |  |
Net cash provided by (used in) continuing financing activities |  |  | (2,015 | ) |  |  | 28,210 |
Net cash provided by discontinued financing activities |  |  | - |  |  |  | - |
Net cash provided by (used in) financing activities |  |  | (2,015 | ) |  |  | 28,210 |
Net increase (decrease) in cash and cash equivalents |  |  | (3,128,318 | ) |  |  | 2,418,326 |
Balance of cash and cash equivalents at beginning of period |  |  | 6,555,376 |  |  |  | 4,137,050 |
Balance of cash and cash equivalents at end of period |  | $ | 3,427,058 |  |  | $ | 6,555,376 |
Supplemental disclosure of cash flow information: |  |  |  |  |  |  |  |
Non-cash investing and financing activities: |  |  |  |  |  |  |  |
Operating lease right-of-use asset and liability |  | $ | 630,776 |  |  | $ | 232,423 |

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

| F-5 |

PEERSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. | Organization and Description of Business

The accompanying consolidated financial statements include PeerStream, Inc. and its wholly owned subsidiaries, A.V.M. Software, Inc., Paltalk Software Inc., Paltalk Holdings, Inc., Tiny Acquisition Inc., Camshare, Inc., Fire Talk LLC and Vumber LLC (collectively, the “Company,” “we,” “our” or “us”).

The Company is a communications software innovator that power multimedia social applications. The Company has also developed a secure business communication solution for use worldwide. Our product portfolio includes Paltalk and Camfrog, which together host one of the world’s largest collections of video-based communities. Our other products include Tinychat and Vumber. The Company has over 20 year history of technology innovation and holds 18 patents.

2. | Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the requirements of the Security and Exchange Commission (“SEC”). All intercompany balances and transactions have been eliminated upon consolidation.

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 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.

Revenue Recognition

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 year ended December 31, 2019 and 2018, subscriptions were offered in durations of one-, three-, six- and twelve- month terms. All subscription fees, however, are paid by credit card at the origination of the subscription regardless of the term of the subscription. Revenues from multi-month subscriptions are recognized on a straight-line basis over the period where the service is offered to the customer, indicated by length of the subscription term purchased. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying consolidated balance sheets. The deferred revenue at December 31, 2018 was $1,468,571, of which $1,468,571 was subsequently recognized as subscription revenue during the year ended December 31, 2019. The ending balance of deferred revenue at December 31, 2019 was $1,829,493.

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 consolidated statements of operations. Virtual gift revenue for the year ended December 31, 2019 and 2018 was $5,079,837 and $7,422,884, respectively. The ending balance of deferred revenue at December 31, 2019 was $411,326.

| F-6 |

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”) 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 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 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 year ended December 31, 2019, the Company recognized $22.4 thousand in revenue in connection with payments received.

Digital Tokens

Digital tokens consist of XPX tokens received in connection with the ProximaX 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 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 had been based on the quoted market prices for the XPX tokens on the Kryptono Exchange. In September 2019, the Kryptono Exchange announced that as part of its periodic review of its listed digital assets it was determined that ProximaX no longer met its standards for continued listing. Accordingly, it delisted and ceased trading for XPX tokens on October 4, 2019. Because the value of XPX as listed on other exchanges had declined significantly, the Company recorded an impairment charge in the amount of $625,368 which is reported as a component of other income and expenses in the accompanying consolidated statements of operations for the year ended December 31, 2019.

For the year ended December 31, 2019, the Company sold 61,716,857 digital tokens for $130,290. The gain of approximately $71,000 was recorded in the consolidated financial statements.

Cost of revenue

Cost of revenue consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in data center and customer care functions, credit card processing fees, hosting fees, and data center rent and bandwidth costs. Beginning in April 2018, cost of revenue also includes compensation and other employee-related costs for technical personnel and subcontracting costs relating to technology service revenue. We expect to experience corresponding growth in our cost of revenue as our software licensing and technology implementation services business grows.

Sales and marketing

Sales and marketing expense consists primarily of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel engaged in sales and sales support functions. Advertising and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which primarily consists of partner-related payments to those who direct traffic to our brands. Total advertising expense for the year ended December 31, 2019 was approximately $1.1 million and $5.3 million for the year ended December 31, 2018.

| F-7 |

Product development

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

General and administrative expense consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in executive management, finance, legal, tax, human resources and facilities costs and fees for other professional services. General and administrative expense also includes depreciation of property and equipment and amortization of intangible assets.

Reportable Segment

The Company operates in one reportable segment, and management assesses the Company’s financial performance and makes operating decisions based on a single operating segment.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company recognizes deferred tax assets to the extent that the Company believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize deferred taxes in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. Accrued interest and penalties would be included on the related tax liability line in the accompanying Consolidated Balance Sheets.

Stock-Based Compensation

In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), the Company measures the compensation costs of stock-based compensation arrangements based on the grant date fair value of granted instruments and recognizes the costs in the financial statements over the period during which employees are required to provide services. Stock-based compensation arrangements include stock options and restricted stock awards.

Equity instruments (“instruments”) issued to non-employees are recorded on the basis of the fair value of the instruments, as required by ASU No. 2018-07, Compensation — Stock Compensation (Topic 718) (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718, which currently only includes share-based payments to employees, to include share-based payments to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned.

The fair value of each option granted under the Company’s Amended and Restated 2011 Long-Term Incentive Plan (the “2011 Plan”) and 2016 Long-Term Incentive Plan (the “2016 Plan”) was estimated using the Black-Scholes option-pricing model (see Note 7 for further details). Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non- employees are expected to hold their options prior to exercise, (iii) expected dividend yield on the Company’s common stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. Expected volatility is estimated based on the Company’s historical volatilities. The expected life of options has been determined using the “simplified” method, which uses the midpoint between the vesting date and the end of the contractual term. The expected dividend yield is zero as the Company has never paid dividends and does not currently anticipate paying dividends in the foreseeable future.

| F-8 |

Net Loss Per Share

Basic net loss per common share is determined using the two-class method and is computed by dividing net loss by the weighted-average number of common shares outstanding during the period as defined by ASC No. 260, Earnings Per Share. The two-class method is an earnings allocation formula that determines loss per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The two-class method treats a participating security as having rights to earnings that otherwise would have been available to common shareholders. According to the contractual terms of participating securities, such securities do not participate in losses.

Diluted net loss per common share reflects the more dilutive earnings per share amount calculated using the treasury stock method or the two-class method, taking into account any potentially dilutive shares outstanding during the period. Potentially dilutive shares consist of shares issuable upon the exercise of stock options and unvested shares of restricted common stock (using the treasury stock method). To the extent stock options and unvested shares of restricted common stock are antidilutive, they are excluded from the calculation of diluted loss per share.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market funds. The Company maintains cash in bank accounts which, at times, may exceed federally insured limits. As part of its cash management process, the Company periodically reviews the relative credit standing of these banks. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible.

Receivables

Accounts receivable are composed of amounts due from our advertising partners and from credit card processing companies following the initiation of subscription arrangements originated by our subscribers, which subscribers pay by credit cards. These receivables are unsecured and are typically settled by the payment processing company within several days of transaction processing accordingly, an allowance for doubtful accounts is considered. Accounts receivable from advertising partners and payment processing companies amounted to $130,686 and $326,786 on December 31, 2019 and December 31, 2018, respectively.

As of December 31, 2019, three advertising partners accounted for 47% of accounts receivable. As of December 31, 2018, two advertising partners accounted for 23% of accounts receivable.

Property and equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of those assets, as follows:

Computers and equipment | 5 years
Website development | 3 years
Furniture and fixtures | 7 years
Leasehold improvements | Shorter of estimated useful life or remaining lease term

Repairs and maintenance costs are expensed as incurred.

Property and equipment is evaluated for recoverability whenever events or changes in circumstances indicate that the carrying amounts of the assets might not be recoverable. In evaluating an asset for recoverability, the Company estimates the future cash flow expected to result from the use and eventual disposition of the asset. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. No impairment losses were recorded on property and equipment for the periods presented in these consolidated financial statements.

Website Development Costs

In accordance with ASC 350-50, Website Development Costs, the Company accounts for website development costs by capitalizing qualifying costs which are incurred during the development and infrastructure stage. Expenses incurred in the planning stage are expensed as incurred. Capitalized website development cost is included in property and equipment and are amortized straight-line over the expected period of benefit, which is three years, when the software is ready for its intended use. Amortization expense related to capitalize website development costs is included in product development expense.

| F-9 |

Goodwill

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company evaluates its goodwill for impairment in accordance with ASC 350, Intangibles – Goodwill and Other (as amended by ASU 2017-04), by assessing qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company performs the quantitative goodwill impairment test, if, after assessing the totality of events or circumstances such as those described in paragraph ASC 350-20-35-3C(a) through (g), the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill related to the reporting unit.

The Company tests the recorded amount of goodwill for impairment on an annual basis on December 31 of each fiscal year or more frequently if there are indicators that the carrying amount of the goodwill exceeds its carried value. The Company has one reporting unit. The Company performed a qualitative assessment and concluded that impairment of $6.8 million existed as of December 31, 2019, compared to no impairment for the year ended December 31, 2018 (See Note 12 for further details on impairment recorded).

Intangible Assets

The Company’s intangible assets represent definite lived intangible assets, which are being amortized on a straight-line basis over their estimated useful lives as follows:

Patents |  | 20 years
Trade names, trademarks, product names, URLs |  | 5-10 years
Internally developed software |  | 5-6 years
Non-compete agreements |  | 3 years
Subscriber/customer relationships |  | 3-12 years
Lead pool |  | 2 years

The Company reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. No impairments were recorded on intangible assets as no impairment indicators were noted for the periods presented in these consolidated financial statements.

Asset and Liability Held for Sale

An asset is considered to be held for sale when all of the following criteria are met: (i) management commits to a plan to sell the asset; (ii) it is unlikely that the disposal plan will be significantly modified or discontinued; (iii) the asset is available for immediate sale in its present condition; (iv) actions required to complete the sale of the asset have been initiated; (v) sale of the asset is probable and the completed sale is expected to occur within one year; and (vi) the asset is actively being marketed for sale at a price that is reasonable given its current market value.

An asset classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell. If the long-lived asset is newly acquired, the carrying amount of the long-lived asset is established based on its fair value less cost to sell at the acquisition date. A long-lived asset is not depreciated or amortized while it is classified as held for sale.

As of December 31, 2018, the Company had an asset and liability held for sale as a result of the Asset Purchase Agreement with The Dating Company, LLC on January 31, 2019 pursuant to which we sold substantially all of the assets related to our online dating services business under the domain names FirstMet and 50more (see Note 3 for further details).

| F-10 |

Leases

Effective December 31, 2018, the Company accounts for its leases under ASC 842, Leases (“ASC 842”). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term.

Fair Value of Financial Instruments

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, credit card holdback receivable, accounts payable, approximate fair value due to the short-term nature of these instruments.

Recent Accounting Pronouncements

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 will be effective for the Company beginning in the first quarter of fiscal year 2020, is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company adopted this guidance during the fourth quarter of fiscal year 2019, and its adoption had a significant impact on the Company’s consolidated financial statements (refer to Note 12 for further details).

In June 2018, the FASB issued an ASU to simplify several aspects of the accounting for nonemployee share-based payment transactions by expanding the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under ASC 606. The amendments in this ASU are effective for the Company on January 1, 2019. The Company adopted this guidance, and its adoption did not have any significant impact on the Company’s consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, 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 financial position, results of operations, and cash flows.

| 3. | Discontinued Operations

On January 31, 2019, the Company entered into an Asset Purchase Agreement with The Dating Company, LLC, pursuant to which the Company sold substantially all of the assets related to its online dating services business under the domain names FirstMet, 50more, and The Grade (collectively, the “Dating Services Business”) for a cash purchase price of $1.6 million, with $100.0 thousand of the purchase price that was 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 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 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.

| F-11 |

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

|  | Year Ended December 31, |
|  | 2019 |  |  | 2018 |
Revenues |  | $ | 440,225 |  |  | $ | 6,024,146 |
Costs of revenue |  |  | (115,338 | ) |  |  | (1,272,733 | )
Sales and marketing expense |  |  | (270,200 | ) |  |  | (3,990,233 | )
Product development expense |  |  | (76,845 | ) |  |  | (1,454,049 | )
General and administrative expense |  |  | (82,722 | ) |  |  | (1,098,417 | )
Loss from discontinued operations |  | $ | (104,880 | ) |  | $ | (1,791,286 | )

4. | Property and Equipment, Net

Property and equipment, net consists of the following:

|  | December 31, |
|  | 2019 |  |  | 2018 |
Computer equipment |  | $ | 3,706,017 |  |  | $ | 3,706,017 |
Website development |  |  | 3,076,323 |  |  |  | 2,685,093 |
Furniture and fixtures |  |  | 89,027 |  |  |  | 89,027 |
Leasehold improvements |  |  | 32,726 |  |  |  | 32,726 |
Total property and equipment |  |  | 6,904,093 |  |  |  | 6,512,863 |
Less: Accumulated depreciation |  |  | (6,284,034 | ) |  |  | (5,934,952 | )
Total property and equipment, net |  | $ | 620,059 |  |  | $ | 577,911 |

Depreciation expense, which includes amortization of website development costs, for the years ended December 31, 2019 and 2018 was $349,082 and $387,452, respectively.

5. | Intangible Assets, Net

Intangible assets, net consist of the following:

|  | December 31, |
|  | 2019 |  |  | 2018 |
|  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Net Carrying Amount |  |  | Gross Carrying Amount |  |  | Accumulated Amortization |  |  | Net Carrying Amount |
Patents |  | $ | 50,000 |  |  | $ | (26,250 | ) |  | $ | 23,750 |  |  | $ | 50,000 |  |  | $ | (23,750 | ) |  | $ | 26,250 |
Trade names, trademarks, product names, URLs |  |  | 555,000 |  |  |  | (446,479 | ) |  |  | 108,521 |  |  |  | 555,000 |  |  |  | (390,979 | ) |  |  | 164,021 |
Internally developed software |  |  | 1,990,000 |  |  |  | (1,959,655 | ) |  |  | 30,345 |  |  |  | 1,990,000 |  |  |  | (1,927,988 | ) |  |  | 62,012 |
Subscriber/customer relationships |  |  | 2,279,000 |  |  |  | (1,813,725 | ) |  |  | 465,275 |  |  |  | 2,279,000 |  |  |  | (1,647,060 | ) |  |  | 631,940 |
Total intangible assets |  | $ | 4,874,000 |  |  | $ | (4,246,109 | ) |  | $ | 627,891 |  |  | $ | 4,874,000 |  |  | $ | (3,989,777 | ) |  | $ | 884,223 |

Amortization expense for the years ended December 31, 2019 and 2018 was $256,332 and $1,599,721, respectively. The estimated aggregate amortization expense for each of the next five years and thereafter will be $246,681 in 2020, $184,667 in 2021, $149,944 in 2022 and $46,599 thereafter.

| F-12 |

6. | Income Taxes

The Company’s provision for income taxes is comprised of the following:

|  | December 31, |
|  | 2019 |  |  | 2018 |
Current |  |  |  |  |  |
Federal |  | $ | (151,597 | ) |  | $ | - |
State and local |  |  | 10,004 |  |  |  | 3,001 |
Total current |  |  | (141,593 | ) |  |  | 3,001 |
Deferred |  |  |  |  |  |  |  |
Federal |  |  | - |  |  |  | - |
State and local |  |  | - |  |  |  | - |
Change in valuation allowance |  |  | - |  |  |  | - |
Total deferred |  |  | - |  |  |  | - |
Total provision (benefit) |  | $ | (141,593 | ) |  | $ | 3,001 |

In 2019, as a result of the gain recorded in discontinued operations related to the sale of the Dating Services Business, the Company recorded an income tax benefit of $159,265 from continuing operations pursuant to the intra-period allocation guidance in ASC 740-20-45-7 which was partially offset by an income tax provision of $17,672 for state and local taxes. The Company also recorded an income tax expense of $159,265 allocated to discontinued operations. In 2018, the Company recorded an income tax provision of $3,001 for state and local taxes.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

|  | December 31, |
|  | 2019 |  |  | 2018 |
Deferred tax assets: |  |  |  |  |  |
Net operating losses |  | $ | 4,265,150 |  |  | $ | 4,529,410 |
Share-based compensation |  |  | 989,763 |  |  |  | 1,061,421 |
Amortization of intangible assets |  |  | 1,056,162 |  |  |  | 767,591 |
Rent |  |  | 168,036 |  |  |  | - |
Tax credits |  |  | 62,969 |  |  |  | 62,969 |
Other |  |  | 72,032 |  |  |  | 10,528 |
Subtotal |  |  | 6,614,116 |  |  |  | 6,431,919 |
Less: valuation allowance: |  |  | (6,349,900 | ) |  |  | (6,339,578 | )
Total deferred tax assets |  |  | 264,216 |  |  |  | 92,341 |
Deferred tax liabilities: |  |  |  |  |  |  |  |
Intangibles |  |  | - |  |  |  | - |
Property and equipment |  |  | (264,216 | ) |  |  | (92,341 | )
Other |  |  | - |  |  |  | - |
Total deferred tax liabilities |  |  | (264,216 | ) |  |  | (92,341 | )
Net deferred tax assets |  | $ | - |  |  | $ | - |

In assessing the Company’s ability to recover its deferred tax assets, the Company evaluated whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. The Company considered all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, historical earnings, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Based on these factors including cumulative losses in recent years, the Company determined that its deferred tax assets are not realizable on a more-likely-than-not basis and has recorded a valuation allowance against its net deferred tax assets. The Company’s valuation allowance increased by $10,322 during 2019. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s deferred income tax assets satisfy the realization standards, the valuation allowance will be reduced accordingly.

| F-13 |

The Company’s effective tax rate differs from the U.S. federal statutory income tax rate of 21% for 2019 and 2018 as follows:

|  | 2019 |  |  | 2018 |
Income tax (expense) benefit at federal statutory rate |  |  | 21.0 | % |  |  | 21.0 | %
Permanent differences |  |  | (6.7 | )% |  |  | (0.7 | )%
State and local taxes |  |  | (0.2 | )% |  |  | (2.4 | )%
Valuation allowance |  |  | (0.1 | )% |  |  | (18.2 | )%
Deferred tax adjustment |  |  | (12.6 | )% |  |  | 0.0 | %
Other |  |  | 0.1 | % |  |  | 0.2 | %
Effective tax rate |  |  | 1.6 | % |  |  | (0.1 | )%

The Company applies the applicable authoritative guidance which prescribes a comprehensive model for the manner in which a company should recognize, measure, present and disclose in its financial statements all material uncertain tax positions that the Company has taken or expects to take on a tax return. As of December 31, 2019, the Company has no uncertain tax positions. As such, there are no uncertain tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months from December 31, 2019.

The Company files a federal income tax return and income tax returns in various state tax jurisdictions. The open tax years for the federal income tax return is 2016 through 2019. The state income tax returns have varying statutes of limitations. The open tax years relating to any of the Company’s federal and state net operating losses begin in 2009.

7. | Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

|  | December 31, |
|  | 2019 |  |  | 2018 |
Compensation, benefits and payroll taxes |  | $ | 138,001 |  |  | $ | 355,300 |
Income tax payable |  |  | 17,672 |  |  |  | - |
Other accrued expenses |  |  | 279,066 |  |  |  | 382,645 |
Total accrued expenses and other current liabilities |  | $ | 434,739 |  |  | $ | 737,945 |

8. | Stockholders’ Equity

The PeerStream, Inc. Amended and Restated 2011 Long-Term Incentive Plan (the “2011 Plan”) was terminated as to future awards on May 16, 2016. A total of 181,604 shares of the Company’s common stock may be issued pursuant to outstanding options awarded under the 2011 Plan; however, no additional awards may be granted under such plan. The PeerStream, Inc. 2016 Long-Term Incentive Plan (the “2016 Plan”) was adopted by the Company’s stockholders on May 16, 2016 and permits the Company to award stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other stock-based awards and cash-based incentive awards to its employees (including an employee who is also a director or officer under certain circumstances), non-employee directors and consultants. The maximum number of shares of common stock that may be issued pursuant to awards under the 2016 Plan is 1,300,000 shares, 100% of which may be issued pursuant to incentive stock options. In addition, the maximum number of shares of common stock that may be issued under the 2016 Plan may be increased by an indeterminate number of shares of common stock underlying outstanding awards issued under the 2011 Plan that are forfeited, expired, cancelled or settled in cash. As of December 31, 2019, there were 454,792 shares available for future issuance under the 2016 Plan.

| F-14 |

Treasury Shares

On April 29, 2019, the Company implemented a stock repurchase plan to repurchase up to $500 thousand of its common stock for cash. The repurchase plan expires on April 29, 2020. The Company has purchased 1,900 shares of its common stock under the repurchase plan as of December 31, 2019 and has classified them as treasury shares.

Shares issued for consulting services

On January 15, 2019 and October 1, 2019, we issued 6,000 and 4,225 shares of our common stock, respectively, to PCG Advisory, Inc. as consideration for investor relations services. The total expense for these grants was $29,005 and is included in general and administrative expense in the consolidated financial statements.

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 years ended:

|  | December 31, |
|  | 2019 |  |  | 2018 |
Expected volatility |  |  | 171.0-177.0 | % |  |  | 159.0-167.0 | %
Expected life of option |  |  | 5.0-6.3 |  |  |  | 5.2-6.2 |
Risk free interest rate |  |  | 1.7-2.5 | % |  |  | 2.3-2.9 | %
Expected dividend yield |  |  | 0.0 | % |  |  | 0.0 | %

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 tables summarize stock option activity during the year ended December 31, 2019:

|  | Number of Options |  |  | Weighted Average Exercise Price |
Outstanding at January 1, 2019 |  |  | 1,037,797 |  |  | $ | 4.17 |
Granted |  |  | 268,294 |  |  |  | 3.17 |
Exercised during period |  |  | - |  |  |  | 4.55 |
Forfeited or canceled, during the period |  |  | (263,661 | ) |  |  | 4.34 |
Expired, during the period |  |  | (21,187 | ) |  |  | 4.55 |
Outstanding at December 31, 2019 |  |  | 1,021,243 |  |  | $ | 4.82 |
Exercisable at December 31, 2019 |  |  | 764,400 |  |  | $ | 5.34 |

| F-15 |

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 agreement, pursuant to which the Company canceled Ms. Krandel’s option award agreement, dated November 15, 2016, related to the award of a stock option representing the right to purchase 142,857 shares of common stock and (ii) 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 $3.55 per share (the “Revised Option Agreement”). The stock option subject to the Revised Option Agreement vests: (i) 50% on 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 last tranche vesting on May 15, 2020. The Company accounted for these agreements as an option modification and recognized approximately $115,000 of stock compensation expense in connection with the agreements.

At December 31, 2019, there was $635,013 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 1.78 years.

On December 31, 2019, there was no aggregate intrinsic value of stock options that were outstanding and exercisable. On December 31, 2018, the aggregate intrinsic value of stock options that were outstanding and exercisable was $725,604 and $365,861, 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 year ended December 31, 2019, the Company granted options to employees to purchase an aggregate of 268,294 shares of common stock. These options vest between one and four years and have a term of ten years and have a weighted average exercise price of $3.17.

The aggregate fair value for the options granted during the years ended December 31, 2019 and 2018 was $469,179 and $708,501, respectively.

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

|  | Year Ended December 31, |
|  | 2019 |  |  | 2018 |
Cost of revenue |  | $ | 1,478 |  |  | $ | 2,398 |
Sales and marketing expense |  |  | 130 |  |  |  | 985 |
Product development expense |  |  | 117,375 |  |  |  | 27,919 |
General and administrative expense |  |  | 710,013 |  |  |  | 819,325 |
Total stock-based compensation expense |  | $ | 828,996 |  |  | $ | 850,627 |

Restricted Stock Awards

The following table summarizes restricted stock award activity for the year ended December 31, 2019:

|  | Number of Restricted Stock Awards |  |  | Weighted Average Grant Date Fair Value |
Unvested at January 1, 2019 |  |  | 158,571 |  |  | $ | 20.29 |
Granted |  |  | - |  |  |  | - |
Expired or canceled, during the period |  |  | (20,000 | ) |  |  | 20.29 |
Forfeited, during the period |  |  | (138,571 | ) |  |  | 20.29 |
Unvested at December 31, 2019 |  |  | - |  |  | $ | - |

At December 31, 2019, there was no unrecognized compensation expense related to unvested restricted stock awards.

Stock-based compensation expense relating to restricted stock awards for the years ended December 31, 2019 and 2018 was $556,122 and $741,494, respectively, which is included in general and administrative expense in the consolidated financial statements.

| F-16 |

| 9. | Net Income (Loss) Per Share

Basic net income (loss) per share of common stock is computed based upon the number of weighted average shares of common stock outstanding as defined by ASC Topic 260, Earnings Per Share. Diluted net income (loss) per share of common stock includes the dilutive effects of stock options and stock equivalents. To the extent stock options are antidilutive, they are excluded from the calculation of diluted net income (loss) per share of common stock. For the year ended December 31, 2019, 1,021,243 of shares 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.

The following table summarizes the net income (loss) per share calculation:

|  | Years Ended December 31, |
|  | 2019 |  |  | 2018 |
Net income (loss) from discontinued operations - basic and diluted |  | $ | 562,625 |  |  | $ | (1,791,286 | )
Weighted average shares outstanding – basic and diluted |  |  | 6,873,652 |  |  |  | 6,721,633 |
Per share data: |  |  |  |  |  |  |  |
Basic and diluted from discontinued operations |  | $ | 0.08 |  |  | $ | (0.26 | )

|  | Years Ended December 31, |
|  | 2019 |  |  | 2018 |
Net income (loss) from continuing operations - basic and diluted |  | $ | (8,942,685 | ) |  | $ | (2,005,931 | )
Weighted average shares outstanding – basic and diluted |  |  | 6,873,652 |  |  |  | 6,721,633 |
Per share data: |  |  |  |  |  |  |  |
Basic and diluted from continuing operations |  | $ | (1.30 | ) |  | $ | (0.30 | )

|  | Years Ended December 31, |
|  | 2019 |  |  | 2018 |
Net income (loss) - basic and diluted |  | $ | (8,380,060 | ) |  | $ | (3,797,217 | )
Weighted average shares outstanding – basic and diluted |  |  | 6,873,652 |  |  |  | 6,721,633 |
Per share data: |  |  |  |  |  |  |  |
Basic and diluted |  | $ | (1.22 | ) |  | $ | (0.56 | )

10. | Leases

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 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 runs until April 26, 2023. The Company’s monthly office rent payments under the lease are currently approximately $33,492 per month.

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

| F-17 |

As of December 31, 2019, the Company had no long-term leases that were classified as a financing lease. As of December 31, 2019, the Company did not have additional operating and financing leases that have not yet commenced.

At December 31, 2019, the Company had operating lease liabilities of approximately $0.6 million and right of use assets of approximately $0.7 million, which are included in the consolidated balance sheet.

Total rent expense for the year ended December 31, 2019 was $394,636, of which $52,136 was sublease income, and is recorded in general and administrative expense on the consolidated statements of operations.

The following summarizes quantitative information about the Company’s operating leases:

|  | Years Ended |
|  | December 31, |
|  | 2019 |  |  | 2018 |
Lease cost |  |  |  |  |  |
Operating lease cost |  | $ | 392,424 |  |  | $ | 273,073 |
Short-term lease rent expense |  |  | 2,212 |  |  |  | 20,355 |
Total rent expense |  | $ | 394,636 |  |  | $ | 293,428 |

The following table summarizes the Company’s operating and financing leases:

|  | Years Ended |
|  | December 31, |
|  | 2019 |  |  | 2018 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |
Operating cash flows from operating leases |  | $ | 178,158 |  |  | $ | - |
Weighted average remaining lease term |  |  |  |  |  |  |  |
Operating leases |  |  | 3.1 |  |  |  | 3.0 |
Weighted average discount rate |  |  |  |  |  |  |  |
Operating leases |  |  | 2.5 | % |  |  | 3.7 | %

On December 31, 2019, future minimum payments under non-cancelable operating leases were as follows:

For the years ending December 31, |  | Amount |
2020 |  | $ | 381,291 |
2021 |  |  | 382,238 |
2022 |  |  | 304,101 |
2023 |  |  | 102,418 |
Total |  | $ | 1,170,048 |
Less: present value adjustment |  |  | (484,340 | )
Present value of minimum lease payments |  | $ | 685,708 |

11. | Commitments and contingencies

Legal Proceedings

On December 16, 2016, a wholly owned subsidiary of the Company, Paltalk Holdings, Inc., filed a patent infringement lawsuit in Delaware against Riot Games, Inc. and Valve Corporation for infringement of U.S. Patent Nos. 5,822,523 and 6,226,686 with respect to their online games League of Legends and Defense of the Ancients 2. These two patents were previously asserted against, and then licensed to, Microsoft, Sony, and Activision. In 2018, Valve Corporation moved to transfer the litigation from Delaware to the Western District of Washington. Such motion was granted by the court.

| F-18 |

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. On September 27, 2019, the Company filed an appeal of the PTAB’s ruling.

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 December 31, 2019.

12. | Goodwill

The Company test 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. At December 31, 2019, the market price per share 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. At December 31, 2019, the goodwill was $6,326,250 and $13,086,472 for the year ended December 31, 2018.

The following table reflects changes in the carrying amount of goodwill for our reporting unit for the years ended December 31, 2019 and 2018:

Balance at January 1, 2018 |  | $ | 13,086,472 |
Impairment |  |  | - |
Balance at December 31, 2018 |  |  | 13,086,472 |
Impairment |  |  | (6,760,222 | )
Balance at December 31, 2019 |  | $ | 6,326,250 |

13. | Subsequent Events

On February 21, 2020, we entered into an Asset Purchase Agreement (the “SecureCo Purchase Agreement”) with SecureCo, LLC (“SecureCo”), whereby we agreed to sell substantially all of the assets related to our secure communications business, which includes communication solutions and operations capabilities with respect to the development and commercialization of secure messaging and data applications, software and middleware for enterprise and government client targets (the “Secure Communications Assets”), to SecureCo for a cash purchase price of approximately $540,000, which is comprised of a base purchase price of $500,000 plus the reimbursement or waiver of certain severance expenses payable by the Company to certain former executive officers. In addition, we shall be entitled to receive a transition service fee of five percent (5%) of all revenue received by SecureCo or its Affiliates pursuant to certain unassignable contracts.

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. 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.

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

| F-19 |

ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our consolidated financial statements in conformity with GAAP.

Our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on the evaluation as of December 31, 2019, for the reasons set forth below, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act). Our internal control system was designed to, in general, provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Our chief executive officer and chief financial officer evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019, and based on that evaluation they concluded that our internal control over financial reporting was not effective.

The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our chief executive officer and chief financial officer evaluated the effectiveness of our internal control over financial reporting as of December 31, 2019, and based on that evaluation, management concluded that our internal control over financial reporting was effective. Therefore, our management, including our chief executive officer and chief financial officer, have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosures.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control our financial reporting as of December 31, 2019, the Company determined that the following item constituted a material weakness:

| ● | The Company does not have adequate controls related to changes in management within the technology that support the Company’s financial reporting function.

Changes in Internal Control over Financial Reporting

We have implemented changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2019 and in the first quarter of 2020, related to general information technology controls in the area of change management in order to remediate the material weakness identified above. We will continue to test these controls to ensure that they appropriately address and remediate the material weakness identified above.

There were no other changes in our internal control over financial reporting during the quarter ended December 31, 2019 (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. | OTHER INFORMATION

None.

39

PART III

ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required in response to this Item 10 is incorporated herein by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

ITEM 11. | EXECUTIVE COMPENSATION

The information required in response to this Item 11 is incorporated herein by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required in response to this Item 12 is incorporated herein by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required in response to this Item 13 is incorporated herein by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required in response to this Item 14 is incorporated herein by reference to our Definitive Proxy Statement on Schedule 14A to be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

40

PART IV

ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following are filed as part of this Annual Report:

1. | Financial Statements

The financial statements filed as part of this Annual Report are included in “Item 8. Financial Statements and Supplementary Data.”

2. | Financial Statement Schedules

All schedules have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or the Notes thereto.

3. | Exhibits

The following exhibits are required by Item 601 of Regulation S-K.

(a) Documents filed as part of this Annual Report.

1. | Report of Independent Registered Public Accounting Firm | F-1
| Consolidated Balance Sheets as of December 31, 2019 and 2018 | F-2
| Consolidated Statements of Operations for the Years Ended December 31, 2019 and 2018 | F-3
| Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2019 and 2018 | F-4
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2019 and 2018 | F-5
| Notes to Consolidated Financial Statements | F-6

2. | Financial Statement Schedules

41

3. | Exhibits required to be filed by Item 601 of Regulation S-K
| The following exhibits are filed herewith:

2.1# |  | Agreement and Plan of Merger, dated September 13, 2016, by and among PeerStream, Inc., SAVM Acquisition Corporation, A.V.M. Software, Inc. and Jason Katz (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of the Company filed on September 14, 2016 by the Company with the SEC).
2.2# |  | Asset Purchase Agreement, by and between PeerStream, Inc. and The Dating Company, LLC, dated as of January 31, 2019 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of the Company filed on February 4, 2018 by the Company with the SEC).
3.1 |  | Certificate of Incorporation, dated July 19, 2005 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-172202) of the Company filed February 11, 2011 by the Company with the SEC).
3.2 |  | Certificate of Amendment to Certificate of Incorporation, dated November 20, 2007 (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-172202) of the Company filed February 11, 2011 by the Company with the SEC).
3.3 |  | Certificate of Amendment to Certificate of Incorporation, dated March 8, 2016 (incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K of the Company filed on March 14, 2016 by the Company with the SEC).
3.4 |  | Certificate of Amendment to Certificate of Incorporation, dated May 19, 2016 (incorporated by reference to Exhibit 3.4 to the Quarterly Report on Form 10-Q of the Company filed on August 11, 2016 by the Company with the SEC).
3.5 |  | Certificate of Amendment to Certificate of Incorporation, dated January 5, 2017 (incorporated by reference to Exhibit 3.5 to the Annual Report on Form 10-K filed on March 28, 2017 by the Company with the SEC).
3.6 |  | Certificate of Amendment to Certificate of Incorporation, dated May 25, 2017 (incorporated by reference to Exhibit 3.6 to the Quarterly Report on Form 10-Q of the Company filed on August 8, 2017 by the Company with the SEC).
3.7 |  | Certificate of Amendment to Certificate of Incorporation, effective March 12, 2018 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of the Company filed on March 13, 2018 by the Company with the SEC).
3.8 |  | Amended and Restated By-Laws of PeerStream, Inc., as amended April 19, 2012 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K (File No. 000-52176) of the Company filed April 25, 2012 by the Company with the SEC).
3.9 |  | Amendment No. 1 to the Amended and Restated By-Laws of PeerStream, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of the Company filed September 8, 2017 by the Company with the SEC).
3.10 |  | Amendment No. 2 to the Amended and Restated By-Laws of PeerStream, Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K of the Company filed on March 13, 2018 by the Company with the SEC).
4.1 |  | Specimen Stock Certificate of PeerStream, Inc. (incorporated by reference to Exhibit 4.2 to Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-226003) of the Company filed on November 27, 2018 by the Company with the SEC).
4.2* |  | Description of Securities.
10.1 |  | Statement of Rights and Responsibilities, by and between PeerStream, Inc. and Facebook Inc. (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K (File No. 000-52176) filed March 31, 2011 by the Company with the SEC).

42

10.2 |  | Registered Apple Developer Agreement, by and between PeerStream, Inc. and Apple Inc. (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K (File No. 000-52176) filed March 31, 2011 by the Company with the SEC).
10.3 |  | iOS Developer Program License Agreement, by and between PeerStream, Inc. and Apple Inc. (incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-K (File No. 000-52176) filed March 31, 2011 by the Company with the SEC).
10.4† |  | Amended and Restated PeerStream, Inc. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q (File No. 000-52176) of the Company filed on November 14, 2011 by the Company with the SEC).
10.5† |  | Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 99.2 to the Registration Statement on Form S-8 (File No. 333-174456) of the Company filed on May 24, 2011 by the Company with the SEC).
10.6† |  | Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 99.3 to the Registration Statement on Form S-8 (File No. 333-174456) of the Company filed on May 24, 2011 by the Company with the SEC).
10.7† |  | Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 99.4 to the Registration Statement on Form S-8 (File No. 333-174456) of the Company filed on May 24, 2011 by the Company with the SEC).
10.8† |  | Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q (File No. 000-52176) of the Company filed on November 14, 2011 by the Company with the SEC).
10.9† |  | PeerStream, Inc. 2016 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company filed on May 16, 2016 by the Company with the SEC).
10.10† |  | First Amendment to PeerStream, Inc. 2016 Long Term Incentive Plan, dated as of April 10, 2017 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company filed on May 30, 2017 by the Company with the SEC).
10.11† |  | Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of the Company filed on August 11, 2016 by the Company with the SEC).
10.12† |  | Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of the Company filed on August 11, 2016 by the Company with the SEC).
10.13† |  | Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of the Company filed on August 11, 2016 by the Company with the SEC).

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10.14† |  | Executive Employment Agreement, dated October 7, 2016, by and between PeerStream, Inc. and Jason Katz (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K of the Company filed on October 11, 2016 by the Company with the SEC).
10.15 |  | Registration Rights Agreement, dated October 7, 2016, by and between PeerStream, Inc. and Clifford Lerner (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Company filed on October 11, 2016 by the Company with the SEC).
10.16† |  | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company filed on February 15, 2017 by the Company with the SEC).
10.17 |  | Termination Agreement, dated as of June 29, 2019, by and between PeerStream, Inc. and ProximaX Limited. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company filed July 5, 2019 by the Company with the SEC).
10.18† |  | Employment Agreement, dated May 5, 2017, by and between PeerStream, Inc. and Arash Vakil (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of the Company filed on May 9, 2018).
10.19 |  | First Amendment to Registration Rights Agreement, dated June 15, 2018, by and between the Company and Clifford Lerner (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of the Company filed on June 19, 2018 by the Company with the SEC).
10.20†* |  | Employment Agreement, dated December 9, 2019, by and between PeerStream, Inc. and Kara Jenny.
21.1* |  | Subsidiaries of the Company.
23.1* |  | Consent of Marcum LLP.
31.1* |  | Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* |  | Certification of the Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1** |  | Certification of the Chief Executive Officer and Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 |  | The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in XBRL (eXtensible Business Reporting Language), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Stockholders’ (Deficit) Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Financial Statements.

| # | Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. PeerStream, Inc. hereby undertakes to furnish supplementally copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.

| † | Management contract or compensatory plan arrangement.

| * | Filed herewith.

| ** | The certification attached as Exhibit 32.1 is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of PeerStream, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of the Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.

ITEM 16. | FORM 10-K SUMMARY

Not applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 24, 2020 | PEERSTREAM, INC.
| By: | /s/ Jason Katz
|  | Jason Katz
|  | Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature |  | Title |  | Date
/s/ Jason Katz |  | Chief Executive Officer and Chairman of the Board |  | March 24, 2020
Jason Katz |  | (Principal Executive Officer) |  |
/s/ Kara Jenny |  | Chief Financial Officer (Principal Financial and Accounting Officer), |  | March 24, 2020
Kara Jenny |  |  |  |
/s/ Yoram “Rami” Abada |  | Director |  | March 24, 2020
Yoram “Rami” Abada |  |  |  |
/s/ Michael Jones |  | Director |  | March 24, 2020
Michael Jones |  |  |  |
/s/ Lance Laifer |  | Director |  | March 24, 2020
Lance Laifer |  |  |  |
/s/ Michael Levit |  | Director |  | March 24, 2020
Michael Levit |  |  |  |
/s/ John Silberstein |  | Director |  | March 24, 2020
John Silberstein |  |  |  |

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