UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1-SA/A
AMENDMENT NO. 1
TO
SEMIANNUAL REPORT
PURSUANT TO REGULATION A
For the Semiannual Period Ended June 30, 2020
Open Props Inc.
(Exact name of registrant as specified in its charter)*
Commission File Number: 024-11018
| Delaware | 45-1775277 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1485 Fifth Avenue, #25D New York, New York | 10035 | |
| (Address of principal executive offices) | (Zip Code) |
(302) 658-7581
Registrant’s telephone number, including area code
Props Tokens
(Title of each class of securities issued pursuant to Regulation A)
* Formerly YouNow, Inc.
| Item 1. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis together with the consolidated financial statements and the related notes that are included elsewhere in this document. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. As a result, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
Until August 17, 2020, Open Props Inc. was known as YouNow, Inc. On August 17, 2020, the Company’s name was changed to Open Props Inc. See Note 1 in the Notes to the Consolidated Financial Statements.
The Company is the issuer of Props Tokens, a cryptographic token that exists on the Ethereum blockchain, and the operator of the Props Network, a blockchain-based infrastructure that is designed to include an open, decentralized network of consumer-facing mobile and web-based apps (collectively, “Props Apps”) that incorporate the Props Tokens into their operations. We view Props, by which we mean the Props Network, Props Apps, Props Tokens and other elements of our infrastructure, collectively, as a project that is intended to empower users in the digital economy and help app developers align with their engaged users. We expect Props Apps to operate, in some regards, as traditional apps that may be downloaded and accessed by users in a manner similar to any other mass market app, but Props Apps will share a common, special feature: the ability to provide an extra level of premium, built-in functionality to users who hold Props Apps. The Company’s first mobile application, the Props Live Video App, provides a platform on which any user can broadcast to a live audience, watch video content and engage with content creators (broadcasters) and other users. In February 2020, the Company sold the Props Live Video App, and is now focused exclusively on growing and developing the Props Token economy and the Props Network.
Recent Events
On February 26, 2020, the Company entered into an agreement with YouNow Media, LLC (the “Acquirer”) for the sale of certain assets related to and including the Company’s Props Live Video App, related intellectual property and assets and a designated amount of working capital. The consideration included cash proceeds of $250,000. The purchase price was subject to certain post-closing adjustments in connection with, among other things, true-ups of certain receivable and payable amounts that were not exactly determinable at the time of closing. The Acquirer also succeeded to a secured loan arrangement that the Company had put in place in respect of certain ongoing Props Live Video App-related receivables, the Company’s obligations (in the amount of $922,436) and pledges of assets under that secured loan arrangement were terminated. The Acquirer is not affiliated with the Company. As a result of the sale, the Company recognized a loss on the sale of the assets of $1,071,731 which was included in the results of the six months ended June 30, 2020.
In April, 2020, the Company offered Props Tokens for sale to certain investors (the “April 2020 Private Placements”) at a price of $0.07 per token in reliance of the exemption offered by Regulation D (“Regulation D”) of the Securities Act of 1933, as amended (the “Securities Act”). The Company raised $1,342,500 in cash and an additional fraction of that amount in the form of other consideration. Each investor received Props Tokens as well as a warrant to purchase an additional number of Props Tokens, equal to up to 30% of the number of Props Tokens initially purchased at an exercise price of $0.07 per Prop Token. The tokens are not transferrable for one year and the warrants are non-transferable and expire in one year. A total of 26,857,143 Props Tokens were sold in the April 2020 Private Placements, not inclusive of any Props Tokens that might be issued in connection with the exercise of any of the associated warrants.
Going Concern
Our consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, there is substantial doubt regarding our ability to do so. As a result of our sale of assets related to and including the Company’s Props Live Video App, we raised cash, and following the sale we have been able to raise additional financing based on our transition to a “pure play” token and network propagation business. However, as a consequence of the sale, we will no longer generate revenues from the sale of digital goods, and we have in the past relied on the sale of digital goods, as well as proceeds from the sale of Props Tokens and other securities, to fund our operations. There can be no assurance that we will be able to generate cash from operations and financing activities sufficient to maintain our business over the next year, and thereafter until we achieve self-sustainability and profitability.
COVID-19 Impact
The extent to which COVID-19, and the related global economic crisis, affects the Company’s business, results of operations and financial condition, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and any recovery period, future actions taken by governmental authorities, central banks and other third parties in response to the pandemic. The Company continues to monitor its liquidity and capital resources due to the current pandemic. The Company’s liquidity and capital resources were not materially impacted by COVID-19 and related economic conditions during the six months ended June 30, 2020.
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Results of Operations
Revenue and Cost of Revenue
Through February 2020, the Company derived revenue principally from the sale of in-app digital goods purchased by users to support content creators. The Company recognized revenue upon the sale of digital goods as management believes that the digital goods were materially consumed within two days following their initial purchase. Revenues were recorded gross of platform fees, applicable taxes and foreign exchange fees. Platform fees differ by platform: Apple and Google platform fees are 30% of gross revenue while PayPal and Braintree platform fees are less than 4% of gross revenue. The revenue we earned from the sale of digital goods was split between the Company and popular content creators based on arrangements between us and each content creator.
Cost of revenue consisted principally of revenue sharing with our content creators, platform fees and expenses related to matters related to hosting and bandwidth. The percent of this revenue we shared with content creators was generally 60% of net revenue spent on the “Bars” or other digital goods sent to the content creator. Net revenue in this instance can be defined as gross revenue net of platform fees, taxes and foreign exchange fees charged by the platform providers (i.e., Apple, Google, Braintree and PayPal). Certain higher value content creators (which we may have identified based on higher revenue generated, new registered users (which we may have identified based on web and app traffic metrics), concurrent viewers or other important metrics) may have received a higher percentage of this revenue pursuant to contracts we had with the content creator. The allocation to content providers is accounted for in cost of revenue on a monthly basis based on a computation of the Bars that were purchased and used in connection with the content the user created.
Revenue and costs of revenue from the sale of digital goods has ceased as of February 2020 due to the sale of certain assets related to and including the Props Live Video App.
Research and Development Expenses
Research and development expenses represent costs incurred by us for the development of the Props Network and include: employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; external research and development expenses incurred under arrangements with third parties, such as consultants; advisor token grants entered into with unaffiliated individuals and companies who provide advisory services in exchange for Props Tokens; license fees; and other expenses, which include administrative functions. For historical periods prior to the sale of the Props Live Video App (which occurred in February 2020) and for part of the period ended June 30, 2020, research and development expenses also included research and development expenses attributable to the Props Live Video App.
Research and development activities accounted for a significant portion of our operating expenses. Our current business strategy includes growing the Props Network and creating an increasingly decentralized economy of consumer apps, where the Company will play an increasingly smaller role in making key decisions affecting the Props Network.
Other Income (Expense)
Other income (expense) consists principally of gains and losses from the sale of digital currencies, mostly related to Ethereum and Bitcoin, as well as proceeds generated from the private placements of Simple Agreements for Future Tokens (“SAFT”) and sale of Debt Payable by Assets agreements (“DPA”) and token offering expenses. The gains and losses were determined based on the sale price minus the cost basis of the digital currency. The cost basis is determined at the fair market value of the digital currency at the time that the digital currency was initially received, less impairment charges. For purposes of determining realized gains and losses, the cost of digital assets sold is based on specific identification—where, each digital asset sold is traced back to the Company wallet address where it was held when first acquired, allowing the Company to determine an original cost basis for the digital asset. Because of volatility in the price of digital assets, the Company’s realized gain on the sale of digital currencies is subject to significant variability, which may also lead to significant variability in other income.
The Company has generated proceeds from private placement of SAFTs. For accounting purposes, the Company recognizes proceeds from these arrangements as other income (token development income). See the section titled “—Critical Accounting Policies and Significant Judgements and Estimates—Income Recognition” below for details.
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Six months ended June 30, 2020 Compared to June 30, 2019
The following table sets forth selected consolidated statements of operations data for each of the periods indicated:
| (Unaudited) | ||||||||||||||||
| For the Six Months Ended June 30, | ||||||||||||||||
| 2020 | 2019 | Increase (Decrease) | ||||||||||||||
| Revenue | $ | 1,435,004 | $ | 3,144,909 | $ | (1,709,905 | ) | (54.4 | )% | |||||||
| Operating expenses | ||||||||||||||||
| Cost of revenue | 944,830 | 1,846,678 | (901,848 | ) | (48.8 | )% | ||||||||||
| Research and development | 1,823,943 | 2,718,624 | (894,681 | ) | (32.9 | )% | ||||||||||
| Sales and marketing | 218,715 | 985,160 | (766,445 | ) | (77.8 | )% | ||||||||||
| General and administrative | 1,160,726 | 2,499,969 | (1,339,243 | ) | (53.6 | )% | ||||||||||
| Other income, net | 166,427 | 16,046,370 | (15,879,943 | ) | (99.0 | )% | ||||||||||
| Taxes | 12,820 | 56,141 | (43,321 | ) | (77.2 | )% | ||||||||||
| Net (loss) income | $ | (2,559,603 | ) | $ | 11,084,707 | $ | (13,644,310 | ) | (123.1 | )% | ||||||
Revenue
Revenue decreased by $1.7 million for the six months ended June 30, 2020, due to the sale of certain assets related to and including the Props Live Video App in February 2020, which resulted in no additional revenue from the sale of digital goods subsequent to February 2020.
Cost of Revenue
Cost of revenue decreased by $0.9 million for the six months ended June 30, 2020, due to the sale of certain assets related to and including the Props Live Video App in February 2020. The cost of revenue was associated with digital revenue from the Props Live Video App.
Research and Development Expenses
Research and development expenses decreased by $0.9 million for the six months ended June 30, 2020, due to lower salary and benefit costs related to a reduction in headcount subsequent to the sale of certain assets related to and including the Props Live Video App.
Sales and Marketing Expenses
Sales and marketing expenses consist of marketing, public relations, and content management. Sales and marketing expenses decreased by $0.8 million for the six months ended June 30, 2020, due to a decrease of $0.4 million in marketing expenses and partner marketing and event marketing as well as lower salary and benefit costs of $0.3 million.
General and Administrative Expenses
General and administrative expenses consist of salaries and personnel-related costs, including non-cash stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources and other administrative functions, non-litigation legal costs, as well as fees paid for accounting and tax services, consulting fees and facility costs not otherwise included in research and development expenses.
General and administrative expenses decreased by $1.3 million for the six months ended June 30, 2020, due to lower rent expense of $0.7 million and lower salary and benefit costs of $0.5 million.
Other Income, net
Other income, net decreased by $15.9 million for the six months ended June 30, 2020. Included in other income, net was the $1.1 million loss on the sale of certain assets related to and including the Props Live Video App for the six months ended June 30, 2020. Excluding the loss on the sale of the Props Live Video App assets, other income, net decreased $16.3 million, principally due to distributions of Props Tokens to SAFT purchasers, DPA purchasers and advisors of $1.2 million for the six months ended June 30, 2020 compared to $17.4 million for the six months ended June 30, 2019.
Taxes
Taxes decreased by $0.04 million mainly due to a decrease in gross receipts as discussed.
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Trend Information
Revenue Trends
Revenue from the sale of digital goods has ceased as of February 2020 due to the sale of certain assets related to and including the Props Live Video App. In the future, we may receive additional proceeds through the sales of Props Tokens by providing services to apps on the Props Network, or through other means.
Expense Trends
We expect operating expenses in the future to remain low, compared to past historical periods, principally due to the significant decrease in personnel costs associated with the sale of certain assets related to and including the Props Live Video App (including research and development and sales and marketing related personnel costs), as well as lower overhead cost and the elimination of office rent starting in July 2020. Costs of revenue was associated with revenue from the Props Live Video App, and thus should be eliminated after February 2020.
Liquidity and Capital Resources
Sources of Funds
Historically, the Company has funded operations through revenue generated through the Props Live Video App and from debt financing and sales of securities. In April 2020, the Company closed the private placements of its Props Tokens for sale to certain investors at a price of $0.07 per token. The Company raised $1.3 million in cash. In addition, in May 2020, the Company received a Paycheck Protection Program (“PPP”) loan pursuant to the Coronavirus Aid, Relief and Economic Security Act in the amount of $0.1 million. The Company’s cash and cash equivalents on hand as of June 30, 2020 were $1.3 million. Digital currencies are not treated as cash or cash equivalents. See “Digital Currencies.”
In the future, we plan to fund our operations and capital funding needs through the sales of Props Tokens. The sales of Props Tokens may result in dilution of the existing supply of Props Tokens. We may also continue to fund our operations and capital funding needs through equity financing. The sale of additional equity would result in dilution to our equity holders. If we are not able to secure adequate additional funding, we may be forced to make additional reductions in spending, extend payment terms with suppliers and/or liquidate assets where possible or suspend or curtail planned programs. To the extent that we raise additional capital through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain rights to the Props Network and related software, future revenue streams, research programs or grant licenses on terms that may not be favorable to us. Any of these actions could harm our business, results of operations and future prospects.
The following table summarizes our cash flows for the periods indicated:
| (Unaudited) | ||||||||||||||||
| For the Six Months Ended June 30, | ||||||||||||||||
| 2020 | 2019 | Increase (Decrease) | ||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||
| Operating activities | $ | (801,539 | ) | $ | (3,082,433 | ) | $ | 2,280,894 | (74.0 | )% | ||||||
| Investing activities | 273,252 | 888 | $ | (272,364 | ) | N/M | * | |||||||||
| Financing activities | (326,067 | ) | (733,638 | ) | $ | 407,571 | (55.6 | )% | ||||||||
| (Decrease) increase in cash | $ | (854,354 | ) | $ | (3,815,183 | ) | $ | 2,960,829 | (77.6 | )% | ||||||
*N/M – Not meaningful
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Net Cash Used in Operating Activities
The use of cash for the six months ended June 30, 2020 and 2019 resulted principally from our net losses adjusted for non-cash charges and changes in components of working capital and token obligations.
Net cash used in operating activities for the six months ended June 30, 2020 was $0.8 million. This consisted of a $2.6 million net loss and $0.5 million increase in working capital, from a decrease in accounts payable, which was partially offset by $1.2 million non-cash expense primarily related to the loss on sale of certain assets related to and including the Props Live Video App as well as an increase in the token obligations of $1.1 million primarily from the proceeds of $1.3 million from the April 2020 Private Placements.
Net cash used in operating activities for the six months ended June 30, 2019 was $3.1 million. This consisted of $11.1 million in net income, a $1.6 million reduction in working capital and $0.5 million of non-cash expenses related to stock compensation expense, depreciation and amortization. This was more than offset by a decrease in token development obligations of $16.3 million related to the distribution of the Props Tokens.
Net Cash Provided by Investing Activities
Our investing activities have consisted principally of property and equipment purchases for computer-related equipment, capitalization of software development costs and investments in digital currencies. Capitalized software development costs are related to new applications or improvements to our existing software that expands the functionality of our network.
Net cash provided by investing activities for the six months ended June 30, 2020 was $0.3 million which principally consisted of proceeds on the sale of the Props Live Video App.
Net cash used in investing activities for the six months ended June 30, 2019 was proceeds from the sale of property and equipment partially offset by the acquisition of computer-related equipment.
Net Cash Used In Financing Activities
Substantially all of the net cash provided by financing activities in all periods presented was the result of proceeds or repayment under the Company’s various debt arrangements.
Net cash used in financing activities for the six months ended June 30, 2020 was $0.3 million. This was from the repayment of the Company’s line of credit of $0.4 million, which was partially offset by the proceeds from the PPP loan of $0.1 million.
Net cash used in financing activities for the six months ended June 30, 2019 was $0.7 million, due to the repayment of principal of the Company’s notes payable related to the sale of DPAs.
Capital Commitments
We currently have no commitments to make capital expenditures.
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Digital Currencies
The following table provides additional information regarding our digital currency holdings.
| 1/1/2019 | 12/31/2019 | 1/1/2020 | 6/30/2020 | |||||||||||||||||||||||||||||
| Beginning | Ending | Beginning | Ending | |||||||||||||||||||||||||||||
| Intangible Assets | Balance | Additions | Reductions | Balance | Balance | Additions | Reductions | Balance | ||||||||||||||||||||||||
| Algo | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 537,500 | $ | - | $ | 537,500 | ||||||||||||||||
| Bitcoin | 384,191 | - | (374,270 | ) | 9,921 | 9,921 | - | - | 9,921 | |||||||||||||||||||||||
| Ethereum | 15,788 | - | - | 15,788 | 15,788 | - | - | 15,788 | ||||||||||||||||||||||||
| Total | $ | 399,979 | $ | - | $ | (374,270 | ) | $ | 25,709 | $ | 25,709 | $ | 537,500 | $ | - | $ | 563,209 | |||||||||||||||
The market prices of digital currencies, including Algo, Ethereum and Bitcoin, experienced significant volatility during 2020 and 2019. At June 30, 2020, the market price of Ethereum was $225.95, Bitcoin was $9,148.44 and Algo was $0.21. At December 31, 2019, the market price of Ethereum was $129.61 and Bitcoin was $7,193.60. This represents an increase of approximately 74% and approximately 27%, respectively, from their prices as of December 31, 2019. The price fluctuations of digital currencies may have a significant effect on the value of the Company’s digital currency reserves.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements during any of the periods presented.
Critical Accounting Policies and Significant Judgements and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgements and estimates.
Income Recognition
Token Development Income
The Company accounts for its token development agreements as research and development arrangements under Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 730-20, Research and Development Arrangements. The Company has concluded that, under the SAFTs, the research and development services it was obliged to provide were limited to the creation of the Props Live Video App’s platform and the creation and delivery of a functional token. The completion of these research and development services principally required the creation of the Token Code (an ERC-20 “smart contract”); building the distribution mechanism for Props Tokens, including a mechanism for effecting any vesting under SAFTs; developing the Rize app, including basic “wallet” functionality in the Rize app and merging it into the Props Live Video App; and building Props-specific exclusive features in the Props Live Video App.
Pursuant to ASC 730-20, the Company recorded a liability for amounts received from SAFT purchasers that were refundable pursuant to the terms of the SAFTs. Pursuant to the terms of the SAFTs, a SAFT expires and terminates upon the earlier to occur of certain events, including the issuance of Props Tokens upon an application launch, the payment or setting aside for payment of amounts payable to the SAFT purchaser upon the dissolution of the Company, or the reaching of a termination date, as specified by amendments to the SAFTs dated March 4, 2018, set as twelve months after the amendment’s effective date. For additional information, see the Company’s Annual Report on Form 1-K filed with the Securities and Exchange Commission on June 15, 2020. If a SAFT terminated pursuant to the expiration of this deadline, the SAFT purchaser’s purchase amount was refundable. As a result, this liability was recorded as token development obligations on the Company’s consolidated balance sheets. At all times prior to the issuance of the Props Tokens pursuant to the SAFTs, the Company has recorded a liability equal to its repayment obligations.
The Company has concluded that, upon delivery of the Props Tokens to the SAFT purchasers in accordance with the SAFTs, it has completed its services and has performed all of its research and development obligations owed to SAFT purchasers under the SAFTs. The Company released vested Props Tokens to certain SAFT purchasers on March 4, 2019. While the Company will continue to develop the functionality of the Props platform, it does not consider other activities associated with the Props Network to be part of the Company’s research and development services under the SAFTs, and upon delivery of the Props Tokens to each SAFT purchaser, it will have no remaining obligations under the SAFTs, including with respect to the further development of the network, the enhancement of the Props Tokens issued, or with respect to any refunds. Upon issuance and delivery of Props Tokens to SAFT purchasers, the Company offsets the token development obligation liability and recognizes token development income within other income (expense) in the Company’s consolidated statements of operations and comprehensive loss. Further, because the Company has fulfilled its contractual obligations under the SAFT by delivery of the Props Tokens to the purchaser’s electronic wallet, the Company has no intention of refunding the SAFT purchase amount under any circumstances. As a result, the Company has concluded there are no surrounding conditions under which they would be required to repay any of the SAFT purchase amounts.
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Total research and development expenses incurred under the token development arrangements are included in research and development in the Company’s consolidated statements of operations and comprehensive loss for the six months ended June 30, 2020 and 2019. In the future, changes in the Company’s circumstances or changes in applicable accounting standards may permit or require us to change our accounting policies, and we will fully disclose any such change in our accounting policies.
Digital Goods Income
Under FASB, ASC 606, Revenue from Contracts with Customers, the Company recognizes revenue on the sale of digital goods in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services.
Payments from digital goods purchasers are non-refundable and relate to non-cancellable contracts that specify the Company’s obligations. The satisfaction of the performance obligation occurs at the time of sale of digital goods since Management estimates the digital goods are consumed within two days after the initial purchase.
In accordance with Accounting Standards Update (“ASU”) 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), the Company evaluates its agreements with mobile platforms to determine whether the Company is acting as the principal or as an agent in the sales of digital goods to determine if revenue should be reported gross or net. The key indicators that the Company used for such determination includes:
1) the terms and conditions of the Company’s contract with the mobile platforms;
2) the party responsible for determining the type, category, and quantity of methods to generate revenue;
3) whether the Company is paid a fixed percentage of the arrangement for each transaction;
4) the party which sets the pricing with the end-user and has the credit risk; and
5) the party responsible for the fulfillment of the digital goods.
Based on the evaluation of the key indicators, the Company has determined that it is acting as the principal to the digital goods purchaser.
For revenue earned through mobile platforms, the transaction price is equal to the gross amount the Company charges to each digital goods purchaser. The related mobile platform and payment processing fees are recorded as cost of revenue in the period incurred. The Company sold certain assets related to and including the Company’s Props Live Video App on February 26, 2020 and no longer derives revenue from the sale of digital goods.
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Fair Value of Props Tokens and Digital Currencies
Fair Value
The Company uses various inputs to measure fair value on a non-recurring basis. ASC No. 820 establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below:
Level 1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date
Level 2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable
Level 3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company
Props Tokens
The Company issues and delivers Props Tokens under the terms of the SAFTs and the DPAs. The Company has accounted for all Props Tokens as internally-generated intangible assets on the balance sheet with zero carrying value. Issuance of Props Tokens to any vendor, employee, user, broadcaster, etc. will be expensed at the time that service is rendered or tokens are issued depending on the nature of the transaction. The use of Props to pay vendors, employees, users, broadcasters, etc. is a non-monetary transaction under ASC 845, Nonmonetary Transactions, and has been accounted for in accordance with ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”). In addition, the Company has distributed Props Tokens without compensation to potential network users to encourage use of the Props Network. These transactions are non-monetary transactions accounted for at fair value. In valuing Props Tokens issued in exchange for services for the six-months ended June 30, 2020 and 2019, the Company generally relied on the issue prices of the Props Tokens in its Regulation D offerings that took place in 2019 (a Level 2 measurement). The Company concluded that the estimated fair value of Props Tokens issued or distributed in the six-month period ended June 30, 2020 is a Level 2 measurement
Digital Currencies
The Company has determined that digital currencies should be classified as intangible assets with indefinite useful lives, and as such, they are recorded at their respective fair values as of the acquisition date. The Company does not amortize intangible assets with indefinite useful lives. Indefinite-lived intangible assets must be reviewed at least annually for possible impairment, or more frequently if an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of the intangible assets is below their carrying values. Impairments of digital assets are non-recurring fair value measurements. The fair value of digital currencies are determined using quoted prices on an active exchange, based on a principal market analysis in accordance with ASC 820. The Company views a decline in the quoted price to be an indicator of impairment. Each acquisition of a digital currency is considered a separate unit of account; the Company tracks the cost of each digital currency when received or purchased to use when performing impairment testing and recording dispositions either through sale or exchange.
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| Item 2. | Other Information |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Semiannual Report contains forward forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “is designed to,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.
These statements involve risks, uncertainties, assumptions and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Semiannual Report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this Semiannual Report include, but are not limited to, statements about:
| ● | the anticipated development and growth of our network; |
| ● | our expectations regarding demand for the applications that are intended to use our network; |
| ● | our expectations regarding whether a secondary trading market may develop for the Props Tokens in the form of an exchange or alternative trading system or internal bulletin board; |
| ● | our expectations regarding regulatory developments and their effect on our network; |
| ● | the ability of applications on our network to develop a user base and a successful business model; |
| ● | our future financial performance, including our expectations regarding our operating and research and development expenses; |
| ● | the impact of competition in our industry and innovation by our competitors; |
| ● | the anticipated trends, growth rates and challenges in our business and in the cryptocurrency market; |
| ● | developing and designing our network; |
| ● | maintaining and expanding our base of network users and application developers; |
| ● | maintaining our relationships with application developers; |
| ● | our liquidity and working capital requirements; |
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| ● | our anticipated growth and growth strategies and our ability to effectively manage that growth and effect these strategies; |
| ● | our ability to expand; |
| ● | the reliability of the third-party infrastructure and the blockchains on which our network depends; |
| ● | our ability to hire and retain necessary qualified employees to expand our operations; |
| ● | our ability to adequately protect our intellectual property; |
| ● | the effect on our business of litigation to which we are or may become a party; |
| ● | our ability to stay abreast of new or modified laws and regulations that currently apply or become applicable to our business both in the U.S. and internationally; |
| ● | our ability to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud; and |
| ● | the estimates and estimate methodologies used in preparing our consolidated financial statements. |
In addition, there is uncertainty about the spread of the COVID-19 virus and the impact it may have on the Company’s business and operations.
You should refer to Item No. 6 of the Company’s most recent Annual Report on Form 1-K and to the section of the Company’s most recent Offering Statement on Form 1-A, as amended, captioned “Risk Factors” for a discussion of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Semiannual Report will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
| Item 3. | Financial Statements |
10
YouNow, Inc. and Subsidiaries(1)
Consolidated Financial Statements
Table of Contents
| (1) | On August 17, 2020, the Company changed its name from YouNow, Inc. to Open Props Inc. All references to YouNow, Inc. should be understood to mean Open Props Inc. See Note 1 in the Notes to the Consolidated Financial Statements. |
i
Consolidated Balance Sheets
June 30, 2020 | December 31, 2019 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash (Note 2) | $ | 1,257,402 | $ | 2,111,756 | ||||
| Accounts receivable, net (Note 2) | 23,347 | 202,584 | ||||||
| Prepaid expenses and other assets (Note 2) | 288,866 | 299,749 | ||||||
| Total current assets | 1,569,615 | 2,614,089 | ||||||
| Restricted receivables (Note 5) | - | 430,721 | ||||||
| Property and equipment (Note 2) | 94 | 50,350 | ||||||
| Intangible assets, net (Notes 2 and 4) | 563,209 | 1,461,616 | ||||||
| Total non-current assets | 563,303 | 1,942,687 | ||||||
| Total assets | $ | 2,132,918 | $ | 4,556,776 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 154,342 | $ | 1,393,120 | ||||
| Line of credit (Note 5) | - | 430,721 | ||||||
| Token development obligations (Notes 2 and 6) | 3,533,909 | 1,870,301 | ||||||
| Notes payable, current (Note 7) | 112,669 | 112,669 | ||||||
| Total current liabilities | 3,800,920 | 3,806,811 | ||||||
| Notes payable, non-current (Note 7) | 101,197 | - | ||||||
| Total liabilities | 3,902,117 | 3,806,811 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Common stock, $0.001 par value - 139,189,499 shares authorized as of June 30, 2020 and December 31, 2019, respectively; 94,162,313 shares issued and 92,921,369 shares outstanding as of June 30, 2020; 94,095,230 shares issued and 92,854,286 outstanding as of December 31, 2019 (Note 8) | 92,921 | 92,854 | ||||||
| Treasury stock, at cost, 1,240,944 shares | (3,904,010 | ) | (3,904,010 | ) | ||||
| Additional paid-in capital | 35,668,510 | 35,628,138 | ||||||
| Accumulated deficit | (33,635,010 | ) | (31,075,407 | ) | ||||
| Accumulated other comprehensive income | 8,390 | 8,390 | ||||||
| Total stockholders’ equity (deficit) | (1,769,199 | ) | 749,965 | |||||
| Total liabilities and stockholders’ equity (deficit) | $ | 2,132,918 | $ | 4,556,776 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-1
Consolidated Statements of Operations
For the Six Months Ended June 30, 2020 and 2019
(Unaudited)
| June 30, | June 30, | |||||||
| 2020 | 2019 | |||||||
| Revenues: | ||||||||
| Digital goods (Notes 2, 3 and 13) | $ | 1,435,004 | $ | 3,144,909 | ||||
| Total revenues | 1,435,004 | 3,144,909 | ||||||
| Operating expenses | ||||||||
| Cost of revenue | 944,830 | 1,846,678 | ||||||
| Research and development | 1,823,943 | 2,718,624 | ||||||
| Sales and marketing | 218,715 | 985,160 | ||||||
| General and administrative | 1,160,726 | 2,499,969 | ||||||
| Total operating expenses | 4,148,214 | 8,050,431 | ||||||
| Loss from operations | (2,713,210 | ) | (4,905,522 | ) | ||||
| Other income | ||||||||
| Token development income (Note 6) | 1,243,142 | 16,725,015 | ||||||
| Gain from the sale of DPAs | - | 690,833 | ||||||
| Gain from the distribution of tokens (Note 11) | 134,568 | 828,327 | ||||||
| Gain from delivery of Props on YouNow | 2,266,033 | - | ||||||
| Rental income | - | 80,000 | ||||||
| Interest and other, net | - | 24,297 | ||||||
| Total other income | 3,643,743 | 18,348,472 | ||||||
| Other expense | ||||||||
| Loss on sale of fixed assets | - | (302 | ) | |||||
| Advisor token expense | (134,568 | ) | (828,327 | ) | ||||
| YouNow App token expense | (2,266,033 | ) | - | |||||
| Token offering expense | - | (1,473,473 | ) | |||||
| Interest expense | (28,331 | ) | - | |||||
| Loss on sale of the YouNow App | (1,048,384 | ) | - | |||||
| Total other expense | (3,477,316 | ) | (2,302,102 | ) | ||||
| (Loss) gain before provision for income taxes | (2,546,783 | ) | 11,140,848 | |||||
| Provision for income taxes (Note 2) | 12,820 | 56,141 | ||||||
| Net (loss) income | $ | (2,559,603 | ) | $ | 11,084,707 | |||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-2
Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
For the six months ended June 30, 2020
| Accumulated | ||||||||||||||||||||||||||||||||
| other | Total | |||||||||||||||||||||||||||||||
| Additional | comprehensive | stockholders’ | ||||||||||||||||||||||||||||||
| Common stock | Treasury stock | paid-in | Accumulated | income | equity | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | Deficit | (loss) | (deficit) | |||||||||||||||||||||||||
| Balance at January 1, 2020 | 92,854,286 | $ | 92,854 | (1,240,944 | ) | $ | (3,904,010 | ) | $ | 35,628,138 | $ | (31,075,407 | ) | $ | 8,390 | $ | 749,965 | |||||||||||||||
| Exercise of stock options | 67,083 | 67 | - | - | 3,390 | - | - | 3,457 | ||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 36,982 | - | - | 36,982 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,559,603 | ) | - | (2,559,603 | ) | ||||||||||||||||||||||
| Balance at June 30, 2020 | 92,921,369 | $ | 92,921 | (1,240,944 | ) | $ | (3,904,010 | ) | $ | 35,668,510 | $ | (33,635,010 | ) | $ | 8,390 | $ | (1,769,199 | ) | ||||||||||||||
For the six months ended June 30, 2019
| Convertible preferred stock | Common stock | Treasury stock | Additional paid-in | Accumulated | Accumulated other comprehensive income | Total stockholders’ equity | ||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | capital | Deficit | (loss) | (deficit) | |||||||||||||||||||||||||||||||
| Balance at January 1, 2019 | 22,151,167 | $ | 22,151 | 6,044,768 | $ | 6,044 | (1,240,944 | ) | $ | (3,904,010 | ) | $ | 35,189,735 | $ | (42,733,611 | ) | $ | 8,390 | $ | (11,411,301 | ) | |||||||||||||||||||
| Conversion of convertible preferred stock to common stock | (22,151,167 | ) | (22,151 | ) | 86,785,518 | 86,786 | - | - | (64,635 | ) | - | - | - | |||||||||||||||||||||||||||
| Exercise of stock options | - | - | 24,000 | 24 | - | - | 5,016 | - | - | 5,040 | ||||||||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | 319,023 | - | - | 319,023 | ||||||||||||||||||||||||||||||
| Net income | - | - | - | - | - | - | - | 11,084,707 | - | 11,084,707 | ||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | - | $ | - | 92,854,286 | $ | 92,854 | (1,240,944 | ) | $ | (3,904,010 | ) | $ | 35,449,139 | $ | (31,648,904 | ) | $ | 8,390 | $ | (2,531 | ) | |||||||||||||||||||
The accompanying notes are an integral part of this unaudited consolidated financial statement.
F-3
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2020 and 2019
(Unaudited)
| June 30, | June 30, | |||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities | ||||||||
| Net (loss) income | $ | (2,559,603 | ) | $ | 11,084,707 | |||
| Adjustments to reconcile net (loss) income to net cash used in operating activities: | ||||||||
| Loss on sale of YouNow App | 1,048,384 | - | ||||||
| Gain on token delivery | (2,266,033 | ) | - | |||||
| Token expense | 2,266,033 | - | ||||||
| Depreciation and amortization | 60,427 | 188,329 | ||||||
| Stock compensation expense | 36,982 | 319,023 | ||||||
| Loss on sale of property and equipment | - | 302 | ||||||
| Changes in operating assets and liabilities | ||||||||
| Decrease in accounts receivable | 179,237 | 21,779 | ||||||
| Decrease in prepaid expenses and other assets | 10,883 | 615,975 | ||||||
| Decrease in restricted receivable | 430,721 | - | ||||||
| (Decrease)/increase in accounts payable and accrued expenses | (1,134,678 | ) | 1,010,267 | |||||
| Increase/(decrease) in token obligations | 1,126,108 | (16,322,815 | ) | |||||
| Net cash used in operating activities | (801,539 | ) | (3,082,433 | ) | ||||
| Cash flows from investing activities | ||||||||
| Proceeds from the sale of the YouNow App | 273,347 | - | ||||||
| Proceeds from the sale of property and equipment | - | 4,246 | ||||||
| Purchase of property and equipment | (95 | ) | (3,358 | ) | ||||
| Net cash provided by investing activities | 273,252 | 888 | ||||||
| Cash flows from financing activities | ||||||||
| Repayment of line of credit | (430,721 | ) | - | |||||
| Proceeds from note payable | 101,197 | - | ||||||
| Principal payments on notes payable, net | - | (738,678 | ) | |||||
| Proceeds from exercise of stock options | 3,457 | 5,040 | ||||||
| Net cash used in financing activities | (326,067 | ) | (733,638 | ) | ||||
| Net decrease in cash | (854,354 | ) | (3,815,183 | ) | ||||
| Cash, beginning of period | 2,111,756 | 7,181,920 | ||||||
| Cash, end of period | $ | 1,257,402 | $ | 3,366,737 | ||||
| Supplemental disclosure for cash flow information | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
| Cash paid for income taxes | $ | 12,820 | $ | 56,141 | ||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
F-4
Notes to Consolidated Unaudited Financial Statements
Note 1 Organization
YouNow, Inc., a Delaware Corporation, was incorporated on April 18, 2011 under the name Bnow. Inc. On November 19, 2012, the name was changed to YouNow, Inc. On August 17, 2020, the Company changed its name from YouNow, Inc. to Open Props Inc. All references to YouNow, Inc. should be understood to mean Open Props Inc. YouNow Inc.’s wholly-owned subsidiaries include YouNow Research and Development Ltd, an Israeli company, incorporated on September 29, 2014; SwitchRTC Ltd, an Israeli company acquired on December 24, 2017; YouNow Services, LLC, a Delaware company formed on December 4, 2017, majority owned by YouNow, Inc. until December 5, 2018 when YouNow Inc. acquired its remaining membership interest; The Props Foundation Public Benefit Corporation, a Delaware company incorporated on September 20, 2018; and Algo International Holdings Corporation, a Panamanian company formed on April 15, 2020, collectively referred to as the “Company.”
The Company was incorporated to provide live video streaming service to broadcasters through the Company’s website and on mobile platforms such as Apple’s IOS and Google’s Android operating systems. The Company generated revenue through the sale of digital goods purchased by users to support the Company’s broadcasters and through advertising sales. The Company was based in New York, New York and has two international offices in Israel.
In November 2017, the Company launched a token pre-sale offering of rights to acquire Props, the Company’s Ethereum-based ERC-20 token that powers user participation in digital media in the Props Network. Props are hosted on the Ethereum blockchain and serve as the base token for applications within the ecosystem, granting users access to features and content and signal status within the community.
In March 2019, the Props Live Video App began interacting with the Ethereum blockchain and the Props Tokens when the Company enabled basic functionality of Props Tokens in the Props Live Video App. Basic functionality entails linking a user’s electronic wallet containing Props Tokens to the user’s Props Live Video App account to provide the user with functionality on the Props Network. As described in Note 4, the Company sold certain assets relating to and including the Company’s Props Live Video App on February 26, 2020 and no longer derives revenue from the sale of digital goods.
On July 11, 2019, the Securities and Exchange Commission qualified the Company’s offering statement to distribute Props Tokens in a public offering pursuant to Tier 2 of Regulation A. The Company was qualified to offer and sell up to 133,000,000 Props Tokens in a primary distribution that will reward users of its apps for in-app activities including contributing content and attention to those apps; as one-time discretionary grants to users of the Props Live Video App; or to reward administration of its own blockchain. The Props Foundation Public Benefit Corporation was qualified to offer and sell up to 45,000,000 Props Tokens in a secondary distribution that it will grant to persons developing key apps or otherwise contributing to network development efforts.
In April, 2020, the Company offered Props Tokens for sale to certain investors (the “April 2020 Private Placements”) at a price of $0.07 per token in reliance of the exemption offered by Regulation D ( “Regulation D”) of the Securities Act of 1933, as amended (the “Securities Act”). Only persons meeting the definition of “accredited investors” under the Securities Act were allowed to purchase in the April 2020 Private Placements. In addition to receiving Props Tokens, each investor in the April 2020 Private Placements received warrants to purchase an additional number of Props Tokens, equal to up to 30% of the number of Props Tokens initially purchased, at an exercise price of $0.07 per Props Token. The warrants are non-transferable and expire one year after the date on which the Props Tokens were purchased.
Note 2 Summary of Significant Accounting Policies
| (A) | Basis of Presentation and Consolidation |
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim condensed financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented. Therefore, these financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2019, which were included in the Company’s Form 1-K and filed with the SEC on June 15, 2020. The results of operations for any interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.
F-5
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
The consolidated financial statements for the six months ended June 30, 2020 and 2019 include the accounts of YouNow, Inc. and its wholly-owned subsidiaries as defined in Note 1. All significant intercompany transactions and balances have been eliminated from the consolidated financial statements.
| (B) | Use of Estimates |
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could vary from the estimates that were used.
| (C) | Revenue Recognition |
In accordance with Accounting Standards Update (“ASU”) 2016-08, Principal versus Agent Considerations (Topic 606) (Reporting Revenue Gross versus Net), the Company evaluates its agreements with mobile platforms to determine whether the Company is acting as the principal or as an agent in the sales of digital goods to determine if revenue should be reported gross or net. The key indicators that the Company used for such determination includes 1) the terms and conditions of the Company’s contract with the mobile platforms 2) the party responsible for determining the type, category, and quantity of methods to generate revenue 3) whether the Company is paid a fixed percentage of the arrangement for each transaction 4) the party which sets the pricing with the end-user and has the credit risk and 5) the party responsible for the fulfillment of the digital goods. Based on the evaluation of the key indicators, the Company has determined that it is acting as the principal to the digital goods purchaser.
For revenue earned through mobile platforms, the transaction price is equal to the gross amount the Company charges to each digital goods purchaser. The related mobile platform and payment processing fees are recorded as cost of revenue in the period incurred.
The Company derived revenue from the sale of digital goods purchased by users to support the Company’s broadcasters through the date of the sale of the YouNow App in February 2020. The revenue was split between the Company and popular broadcasters based on an agreed upon arrangement. The digital goods were available for purchase through the Company’s website, PayPal, Braintree, or through mobile platforms, such as Apple’s iTunes and Google Play. As described in Note 3, the Company sold certain assets relating to and including the Company’s Props Live Video App on February 26, 2020 and no longer derives revenue from the sale of digital goods.
Subsequent to February 26, 2020, the Company’s revenue will be derived from the sale of Props Tokens. The Company will recognize revenue when Props Tokens are sold and the purchaser has taken delivery of the Props Tokens.
| (D) | Token Development Agreements |
The Company entered into token development agreements under Simple Agreements for Future Tokens (“SAFT”) as discussed in Note 6. The Company accounts for its token development agreements as research and development arrangements under ASC 730-20, Research and Development Arrangements. The Company believes that, under the SAFTs, the research and development services it was obliged to provide were limited to the creation of the Company’s Rize platform, a live video app for the Props Network, and the creation and delivery of a functional token. The completion of these research and development services principally required the creation of the Token Code (an ERC-20 “smart contract”); building the distribution mechanism for Props Tokens, including a mechanism for effecting any vesting under SAFTs; developing the Rize app, including basic “wallet” functionality in the Rize app and merging it into the Props Live Video App; and building Props-specific exclusive features in the Props Live Video App. In October 2018, the Rize app was integrated with the Props Live Video App (also known as the YouNow Live Video App).
Pursuant to ASC 730-20, the Company recorded a liability for amounts received from SAFT purchasers that are refundable pursuant to the terms of the SAFTs. Pursuant to the terms of the SAFTs, a SAFT expires and terminates upon the earlier to occur of certain events, including the issuance of Props Tokens upon an application launch, the payment or setting aside for payment of amounts payable to the SAFT purchaser upon the dissolution of the Company, or the reaching of a termination date, as specified by amendments to the SAFTs dated March 4, 2018, set as twelve months after the amendment’s effective date as discussed in Note 6. If the SAFT terminated pursuant to the expiration of this deadline, the SAFT purchaser’s purchase amount was refundable. As a result, this liability was recorded as token development obligations on the Company’s consolidated balance sheets as of December 31, 2018. At all times prior to the issuance of the Props Tokens pursuant to the SAFTs, the Company recorded a liability equal to its repayment obligations.
F-6
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
The Company has concluded that upon delivery of the Props Tokens to the SAFT purchaser in accordance with the SAFT, it has completed its services and has performed all of its research and development obligations owed to SAFT purchasers under the SAFTs. The Company released vested Props Tokens to certain SAFT purchasers on March 4, 2019, as discussed in Note 7. While the Company will continue to develop the functionality of the Props platform, it does not consider other activities associated with the Props Network to be part of the Company’s research and development obligations under the SAFTs, and it will have no remaining obligations under the SAFTs, including with respect to the further development of the network, the enhancement of the Props Tokens issued, or with respect to any refunds. The Company satisfied the token development obligation and recognized a reduction of the token development liability and token development income of $647,001 and $4,269,505 within other income (expense) in the Company’s consolidated statements of operations as of June 30, 2020 and 2019, respectively.
The Company did not recognize token development income related to SAFT sales proceeds received from SAFT purchasers who have not yet provided the Company with an electronic wallet address as required by the SAFTs. At June 30, 2020 and December 31, 2019, the Company had a remaining Token development obligation of $130,000 and $777,001, respectively, related to undistributed SAFT Tokens.
The Company fulfilled its contractual obligations under each SAFT by delivering the tokens to the SAFT purchaser’s electronic wallets, except in cases in which the SAFT purchaser has not yet provided the Company with an electronic wallet address, as the SAFT purchaser is required to do by the terms of the SAFT. The Company has no intention of refunding the SAFT purchase amount under any circumstances and, as a result, the Company believes there are no surrounding conditions under which they would be required to repay any of the SAFT purchase amounts.
Total research and development expenses incurred under the token development arrangements are included in research and development in the Company’s consolidated statements of operations for the six months ended June 30, 2020.
| (E) | Props Tokens |
The issuance of Props Tokens to any vendor, advisor, employees, consultants, user, App etc. will be expensed at the time that service is rendered or tokens are issued depending on the nature of the transaction. The use of Props Tokens to pay any vendor, advisor, employees, consultants, user, App, etc. is a non-monetary transaction under ASC 845, Nonmonetary Transactions, and will be accounted for at the estimated fair value per Props Token. Since the tokens have no carrying value in the consolidated financial statements, use of these tokens will result in a gain equal to the value of the tokens distributed.
| (F) | Cash |
The term cash, as used in the accompanying consolidated financial statements, includes currency on hand and demand deposits with financial institutions. The Company maintains cash in several bank depository accounts, which at times may exceed Federal Deposit Insurance Corporation limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
| (G) | Prepaid Expenses and Other Assets |
The Company recognizes expenses in the period incurred. Payments made prior to the expense being incurred are recognized as prepaid expenses.
Other assets represent amounts due from certain financial intermediaries and security deposits.
| (H) | Property and Equipment |
Property and equipment is recorded at cost less accumulated depreciation. The cost of property and equipment is depreciated using the straight-line method over the estimated useful lives of the related assets. The estimated useful life of computer equipment is 3 years.
F-7
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
| (I) | Intangible Assets Other than Goodwill |
Digital assets such as Algo, Bitcoin and Ethereum are digital currencies (or cryptocurrencies) that are not fiat currencies (i.e. a currency that is backed by a central bank or a national, supra- national or quasi-national organization) and are not backed by hard assets or other credits. Digital currencies are not financial assets because they are not an ownership interest in a company, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Since they lack physical substance, digital currencies are generally considered intangible assets. The current guidance in U.S. GAAP does not directly address the accounting for digital currencies.
Previously, the Company received two types of digital currencies, Bitcoins and Ethereum related to its token offering. During 2020, the Company has received an additional digital currency, Algo (See Note 6). The Company uses the equivalency rate of Algo, Bitcoins and Ethereum to USD based on a blended weighted average global exchange rate from public exchanges such as Coinbase.
The Company records its digital currencies as indefinite-lived intangible assets under ASC 350, Intangibles–Goodwill and Other. The intangible assets are recorded at cost and tested for impairment at least annually and more frequently if events or changes in circumstances indicate that it is more likely than not that they are impaired. A decline below cost in a quoted price on an exchange may be an event indicating that it is more likely than not that the digital currencies are impaired. As of June 30, 2020, and December 31, 2019, the Company’s carrying value on its digital currencies was $563,209 and $25,709, respectively. During the six months ended June 30, 2020 and 2019 the Company did not recognize an impairment loss on the digital currencies.
| (J) | Income Taxes |
The Company accounts for income taxes using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws. If necessary, the measurement of deferred tax assets is reduced by the amount of any tax benefits that are not expected to be realized based on available evidence.
The Company records a valuation allowance to reduce deferred tax assets to the estimated net amount that will be realized in future periods. The Company considers all expectations and risks associated with estimates of future taxable income in assessing the need for a valuation allowance.
The Company recognizes tax liabilities from an uncertain tax position only if it is more likely than not that the tax position will not be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. There are no uncertain tax positions that have been recognized in the accompanying financial statements. The Company is required to file tax returns in the U.S. federal jurisdiction and various states and local municipalities. The Company’s policy is to recognize interest and penalties related to uncertain tax benefits in operating expenses. No such interest and penalties have been accrued as of June 30, 2020 or December 31, 2019.
The Company also incurs certain state minimum taxes and local income taxes.
| (K) | Stock-Based Compensation |
Under ASC 718, Compensation - Stock Compensation, the Company recognizes all stock-based compensation as an expense in the accompanying consolidated statements of operations. Estimated fair value of stock-based compensation awards are measured at the grant date using the Black-Scholes option pricing model. The Company records stock-based compensation expense on a ratable basis over the vesting term.
F-8
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
Stock-based compensation expense is recorded net of estimated forfeitures so that expense is recorded for only those stock-based awards that the Company expects to vest. The Company estimates forfeitures based on our historical forfeiture of equity awards adjusted to reflect future changes in facts and circumstances, if any. The Company revises estimated forfeiture rate if actual forfeitures differ from initial estimates.
| (L) | Research and Development |
Research and development expenses are charged to operations as incurred. For the six months ended June 30, 2020 and 2019, the Company expensed $1,823,943 and $2,718,624, respectively, in research and development costs.
| (M) | Cost of Revenue |
Costs of revenue are expensed as incurred and consist of individually agreed upon broadcaster revenue sharing fees of $728,670 and $1,526,877 for the six months ended June 30, 2020 and 2019, respectively, and variable hosting and bandwidth costs of $216,160 and $319,801 for the six months ended June 30, 2020 and 2019, respectively.
| (N) | Sales and Marketing |
Sales and marketing costs are expensed as incurred and consist of marketing, public relations and talent management costs. For the six months ended June 30, 2020 and 2019, the Company expensed $218,715 and $985,160, respectively, in total sales and marketing costs.
| (O) | General and Administrative |
General and administrative expenses consist of professional fees, operating sublease, and other office expenses. For the six months ended June 30, 2020 and 2019, the Company expensed $1,160,726 and $2,499,969, respectively, in total sales and marketing costs.
| (P) | Advertising Costs |
Advertising costs are expensed as incurred. For the six months ended June 30, 2020 and 2019, the Company expensed $57,127 and $97,584, respectively in advertising costs, which is included in Sales and Marketing on the consolidated statements of operations.
| (Q) | Foreign Currency Translation |
The functional currency of the Subsidiaries are the local currency in which the Subsidiaries operate. Since the U.S. dollar is not the functional currency of all of its Subsidiaries, foreign currency denominated monetary assets and liabilities are remeasured into U.S. dollars at current exchange rates and foreign currency denominated nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Gains or losses from foreign currency remeasurement and settlements are included in other income (expense), in the consolidated statements of operations. For its foreign subsidiaries where the functional currencies are the local currencies, the Company uses the period-end exchange rates to translate assets and liabilities, and the average exchange rates to translate revenues and expenses into U.S. dollars. The Company records translation gains and losses in accumulated other comprehensive income as a component of stockholders’ equity. For the six months ending June 30, 2020 and 2019 there was no adjustment for foreign currency translation as the Company’s foreign subsidiaries have no assets or liabilities.
| (R) | Commitments and Contingencies |
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
F-9
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations, or liquidity as disclosed in Note 13.
| (S) | Recent Accounting Pronouncements |
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires a lessee to recognize a right-of-use asset and a lease liability under most operating leases on its balance sheet. The Company adopted this standard on January 1, 2019, and adoption had no impact on the Company’s financial statements, as the Company did not have any material leases at the time of adoption. The Company has elected the ‘package of practical expedients’ which permits entities to not reassess prior conclusions about lease identification, lease classification, initial direct costs and the treatment of land easements. The Company also elected the short-term lease recognition exemption.
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.
Management does not believe that any other recently issued, but not yet effective accounting standards could have a material effect on the accompanying consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
| (T) | Reclassifications |
Certain reclassifications have been made to the 2019 consolidated financial statement presentation to correspond to the current year’s format. Total stockholders’ equity (deficit) and net loss are unchanged due to these reclassifications.
Note 3 Disposition of Props Live Video App
On February 26, 2020, the Company entered into an agreement with YouNow Media, LLC (the “Acquirer”) for the sale of certain assets relating to and including the Company’s Props Live Video App. The consideration included cash proceeds of $250,000, and the termination of the Company’s Secured Loan Agreement with a balance of $922,436. The Acquirer succeeded to the Secured Loan Agreement. The acquirer is not affiliated with the Company.
Pursuant to the February 26, 2020 asset sale agreement, commencing March 1, 2020 the Acquirer became the operator of the Company’s Props Live Video App and hired the Company’s employees whose functions primarily involved operation of the Props Live Video App. As of the same date, the Company and the Acquirer entered into a separate agreement to continue to operate the Props Live Video App as part of the Props Network and to continue to reward Props Live Video App users with the issuance of Props Tokens.
For the six months ended June 30, 2020 and 2019, the Company had revenue from the sale of digital goods of $1,435,004 and $3,144,909, respectively. As a result of the sale, the Company recognized a loss on the sale of the assets of $1,071,731 which was included in the results of the six months ended June 30, 2020.
F-10
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
The Company concluded that the sale of the Props Live Video App does not qualify for discontinued operations presentation as it does not meet the definition of a component; the Company cannot clearly distinguish the operations and cash flows of the Props Live Video App, operationally and for financial reporting purposes, from the rest of the entity.
Note 4 Intangible Assets
As of June 30, 2020 and December 31, 2019, intangible assets consisted of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Developed technology (useful life 10 years) | $ | - | $ | 1,946,599 | ||||
| Intellectual property | - | 31,468 | ||||||
| Total intangible assets before digital currencies | - | 1,978,067 | ||||||
| Accumulated Amortization | - | (542,160 | ) | |||||
| Total intangible assets before digital currencies, net | - | 1,435,907 | ||||||
| Digital currencies | ||||||||
| Algo | 537,500 | - | ||||||
| Bitcoin | 9,921 | 9,921 | ||||||
| Ethereum | 15,788 | 15,788 | ||||||
| Total digital currencies | 563,209 | 25,709 | ||||||
| Total intangible assets, net | $ | 563,209 | $ | 1,461,616 | ||||
On December 4, 2017, the Company acquired the developed technology and commenced amortization using an accelerated method based on projected future cash flows. Amortization expense charged to operations was $52,788 and $155,498 during the six months ended June 30, 2020 and 2019, respectively. As part of the sale of the YouNow App (see Note 3), the Company transferred the intellectual property to the acquirer and there was no remaining carrying value as of June 30, 2020.
During the six months ended June 30, 2020, the Company obtained digital currencies with a value of $537,500. During the six months ended June 30, 2019, the Company did not purchase or sell any digital currencies.
During the six months ended June 30, 2020, the fair market value of the Company’s digital currencies on hand was in excess of its adjusted book value and no impairment losses were recognized during this period.
Note 5 Line of Credit
On December 9, 2019, the Company entered into a loan agreement (the “Secured Loan Agreement”) with an unaffiliated Lender to provide short-term advances up to $1,500,000 secured by the Company’s receivables from certain customers, with interest ranging from 1.5% to 1.95% per month, depending on the amount advanced. In addition, the Secured Loan Agreement provided that the Company would pay the Lender a .375% fee for all receivables collected by the Lender on behalf of the Company on which there are no outstanding advances. The loan was secured by a first priority interest and all rights to all accounts, (as defined), chattel paper, commercial tort claims, deposit accounts and cash, documents, equipment, and general intangibles. As of December 31, 2019, the Company had $430,721 of uncollected accounts receivables pledged to Lender and accordingly, has classified these uncollected receivables as restricted receivables on the Company’s consolidated balance sheet. The Secured Loan Agreement was due to mature on December 10, 2020. As of December 31, 2019, the loan payable was $430,721.
On February 26, 2020, the Secured Loan Agreement was terminated in connection with the Company’s sale of certain assets relating to and including the Company’s Props Live Video App.
Additionally, the Company issued outstanding warrants to a Bank to acquire up to 15,893 shares of common stock with a strike price of $3.146. The outstanding warrants were issued on February 26, 2016 and expire on February 26, 2026. There is no vesting period.
F-11
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
Note 6 Token Delivery Obligations:
In November 2017, the Company launched a token pre-sale offering to raise cash and digital currency in exchange for the rights to acquire, if issued by the Company in the future, Props, the Company’s Ethereum-based ERC-20 token, through a SAFT with unaffiliated accredited purchasers. As described in Note 2, the Company accounts for SAFTs as research and development arrangements under ASC 730-20. In accordance with the SAFTs, the purchasers were issued rights to purchase a specific quantity of Props tokens equal to $22,975,679 during the token and network launch event. The SAFTs would terminate with the earlier of 1) the issuance of tokens to purchasers 2) the repayment to purchasers in a dissolution event (as defined) or 3) 90 days from the day the SAFTs were entered. The purchasers were not entitled to vote or receive dividends from the Company. The SAFTs are classified as current liabilities on the consolidated balance sheet. The undiscounted price per Props Token in the SAFT offering was $0.1369. A portion of the Props Tokens for certain SAFT purchasers were subject to vesting requirement due to the discounted pricing of the tokens with their early purchase of SAFT. The token vesting term ranged from 90 days to 455 days. On March 4, 2018, the SAFTs were amended to extend the termination date to twelve months after the SAFT’s effective date (as defined) and also provided purchasers the rights to additional bonus tokens as a result of the extension.
On March 4, 2019, the Company issued Props tokens to SAFT purchasers. For the six months ended June 30, 2020 and 2019, the Company recognized $1,243,142 and $16,725,015, respectively of token development income within other income in the Company’s consolidated statements of operations under ASC 730-20.
On May 10, 2019, and further amended on September 27, 2019, the Company entered into an agreement with PeerStream, Inc. (now known as Paltalk, Inc. “Paltalk”), a third-party developer, to facilitate the integration of two of their apps into the Props Network in exchange for the right to receive an initial grant of 3,000,000 Props Tokens. As a result, the Company has recognized a token development obligation of $410,700 as of December 31, 2019. During April 2020, the remaining milestones had been achieved and the Company granted 7,500,000 tokens to Paltalk and recognized a token delivery obligation of $1,026,750 for the six months ended June 30, 2020. These tokens are subject to a lock-up period and will be released from that required lock-up on May 5, 2021.
In April 2020, the Company closed the April 2020Private Placements of its Props tokens for sale to certain investors at a price of $0.07 per token in reliance of the exemption offered by Regulation D of the Securities Act of 1933, as amended. The Company raised $1,342,500 in cash and an additional fraction of that amount in the form of other consideration. Each investor received Props tokens as well as a warrant to purchase an additional number of Props tokens, equal to up to 30% of the number of Props tokens initially purchased at an exercise price of $0.07 per Prop token. The tokens are not transferrable for one year and the warrants are non-transferable and expire in one year. A total of 26,857,143 Props Tokens were sold in the April 2020 Private Placements, not inclusive of any Props Tokens that might be issued in connection with the exercise of any of the associated warrants.
As of June 30, 2020, and December 31, 2019, total outstanding token delivery obligations, net of refunds on the consolidated balance sheets were $3,533,909 and $1,870,301, respectively. The remaining token obligations as of June 30, 2020 are as follows:
| Token | Token | |||||||||||||||
| Development | Development | |||||||||||||||
| Obligations | Obligations | |||||||||||||||
| Balance, January 1, | Additional | Tokens | Balance, June 30, | |||||||||||||
| 2020 | Grants | Delivered | 2020 | |||||||||||||
| # of Tokens | 19,445,312 | 34,357,143 | 13,985,122 | 39,817,333 | ||||||||||||
| $ Value | $ | 1,870,301 | $ | 2,906,750 | $ | 1,243,142 | $ | 3,533,909 | ||||||||
F-12
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
The token obligations as of June 30, 2020 breakdown by vesting term as follows:
| Remaining | ||||||||||||||||||||
| Token | ||||||||||||||||||||
| Remaining | Development | |||||||||||||||||||
| Un-discounted | Discounted Price | Token | Obligations, | |||||||||||||||||
| Vesting Term | Discount % | Price Per Token | Per Token | Delivery, 2020 | net 2020 | |||||||||||||||
| 0 days | 0 | % | $ | 0.1369 | $ | 0.1369 | 3,060,525 | 418,233 | ||||||||||||
| 365 days | 20 | % | $ | 0.1369 | $ | 0.0996 | 792,700 | 78,926 | ||||||||||||
| 365 days | 0 | % | $ | 0.1369 | $ | 0.1369 | 7,500,000 | 1,026,750 | ||||||||||||
| 366 days | 0 | % | $ | 0.0700 | $ | 0.0700 | 26,857,143 | 1,880,000 | ||||||||||||
| 455 days | 35 | % | $ | 0.1369 | $ | 0.0809 | 1,606,965 | 130,000 | ||||||||||||
| Total | 39,817,333 | 3,533,909 | ||||||||||||||||||
The token obligations as of December 31, 2019 breakdown by vesting term as follows:
| Remaining | ||||||||||||||||||||
| Token | ||||||||||||||||||||
| Remaining | Development | |||||||||||||||||||
| Un-discounted | Discounted Price | Token | Obligations, | |||||||||||||||||
| Vesting Term | Discount % | Price Per Token | Per Token | Delivery, 2019 | net 2019 | |||||||||||||||
| 0 days | 0 | % | $ | 0.1369 | $ | 0.1369 | 60,525 | 7,533 | ||||||||||||
| 365 days | 20 | % | $ | 0.1369 | $ | 0.0996 | 6,780,064 | 675,067 | ||||||||||||
| 455 days | 35 | % | $ | 0.1369 | $ | 0.0809 | 9,604,723 | 777,001 | ||||||||||||
| 455 days | 0 | % | $ | 0.1369 | $ | 0.1369 | 3,000,000 | 410,700 | ||||||||||||
| Total | 19,445,312 | 1,870,301 | ||||||||||||||||||
During the six months ended June 30, 2020 and 2019 the Company incurred $0 and $1,473,474, respectively, of costs associated with the token offering and securities filing.
Note 7 Notes Payable
| (A) | In December 2017, the Company entered into Debt Payable by Assets agreements (the “DPA Agreements”), with various unaffiliated lenders (the “Lenders”) for a borrowing of $952,742. During 2018, the Company entered into DPA Agreements for an additional borrowing of $117,258. In accordance with the DPA Agreements, repayments were to be made in the forms of Props tokens or cash contingent upon the Company’s ownership control of the tokens. The number of Props tokens issued pursuant to the DPA Agreements is determined by the loan amount divided by $0.1369, the undiscounted price per token. Repayment in Props tokens will incur interest of 20% during the first two years of the loan. The value of the tokens with respect to any partial or full satisfaction of the DPA Agreements will be based on an undiscounted price equal to the price offered to the general public on the first public sale of the tokens. Repayment in cash prior to the second anniversary of the loan will incur no interest. Repayment in cash after the second anniversary of the loan will incur interest of 1.5% per annum. The loan matures on the third anniversary of the DPA Agreements. The Lenders are not entitled to vote or to receive dividends from the Company. |
In March 2018, the Company offered the Lenders an option of a cash payment in rescission of their DPA Agreements or alternatively, an incremental 10% bonus on the number of Props tokens each Lender was entitled to receive in aggregate pursuant to the terms of the DPA Agreements. During the six months ended June 30, 2020 and 2019, the Company repaid $0 and $39,116, respectively, to Lenders in U.S. dollars.
As of June 30, 2020, the Props Tokens related to the DPA Agreements have been issued and delivered or will be delivered pending the receipt of an electronic wallet address from Lenders. As of December 31, 2019, 998,603 Props Tokens remain undelivered to Lenders. As of June 30, 2020 and December 31, 2019, the Company has reserved 998,603 Props Tokens, respectively, to be utilized for repayment of the outstanding DPAs of $112,669, respectively.
F-13
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
| (B) | On May 5, 2020, the Company received a Paycheck Protection Program (“PPP”) loan pursuant to the Coronavirus Aid, Relief and Economic Security Act (the “CARES” Act) in the amount of $101,197. In accordance with the CARES Act, the Company will use the proceeds from the PPP loan primarily for payroll costs. The PPP loans are scheduled to mature on May 5, 2022 and bear a fixed interest rate of 1%. The promissory note evidencing the PPP loans contains customary events of default relating to, among other things, payment defaults and provisions of the promissory note. The loans may be forgiven, in part or whole, if the proceeds are used to retain and pay employees and for other qualifying expenditures. The Company expects that the full proceeds of the PPP loans will be eligible for forgiveness. |
Note 8 Stockholders’ Equity (Deficit)
On April 18, 2011, the Certificate of Incorporation authorized 5 million shares of common stock with $0.001 par value. On June 9, 2011, the Restated Certificate of Incorporation authorized 13 million shares of common stock with $0.001 par value and 3 million shares of Series A convertible preferred stock with $0.001 par value. The Certificate of Incorporation was amended and restated on March 12, 2012, July 29, 2014, July 23, 2015, August 12, 2015 and August 1, 2018, which increased the number of authorized shares of common stock and Series A convertible preferred stock. Additionally, the amendments authorized the issuance of Series A-1, Series A-2, Series B and Series B-1 convertible preferred stock. Series A, Series A-1, Series A-2, Series B and Series B-1 convertible preferred stock are collectively referred to as “Convertible Preferred Stock” in the accompanying consolidated financial statements.
Further, on August 1, 2018, in the amended and restated Certificate of Incorporation, the Company increased the total number of authorized shares of common stock and Convertible Preferred Stock to 34,118,794 and 22,151,167, respectively.
Further, on April 5, 2019, the Company amended and restated its certificate of incorporation to provide that the total number of shares of all classes of stock which the Company has authority to issue is 139,189,499 shares, all of which shall be designated as common stock, par value $0.001 per share. Previously, the Company’s certificate of incorporation had provided for certain classes of preferred stock, which were all converted to common stock pursuant to a Preferred Stock Conversion Agreement (the “Conversion Agreement”), filed contemporaneously with the Company’s amended and restated certificate of incorporation. Pursuant to the terms of the Conversion Agreement, all issued and outstanding preferred stock was converted into common stock on April 5, 2019.
As of June 30, 2020 and December 31, 2019, 94,162,313 and 94,095,230 shares of common stock were issued, and 92,921,369 and 92,854,286 shares of common stock were outstanding, respectively.
Note 9 Stock-Based Compensation
In 2011, the Company adopted the 2011 Stock Option and Grant Plan (the “Plan”) pursuant to which the Company’s board of directors may grant stock options to employees, directors, and non-employees. During 2015, the Company adopted an addendum to the Plan to grant stock options to employees, directors, and non-employees of its subsidiaries. According to the Plan as of June 30, 2020 and December 31, 2019, the maximum number of shares of common stock that were authorized to be issued under the Plan was 50,900,000.
The stock options related to employees generally vest over four years with 25% vesting after one year and the remainder vesting monthly thereafter over 36 months. The options have a contractual term of 10 years. The Company records stock-based compensation on a ratable basis over the vesting term.
Since the stock options of the Company are not publicly traded and the stock options are rarely traded privately, expected volatility is estimated based on the average historical volatility of similar entities with publicly traded shares. The risk-free rate for the expected term of the stock option is based on U.S. Treasury rates with respect to the expected term of the stock option. The stock-based compensation is recorded net of estimated forfeitures. The Company estimates the forfeiture rate based on historical forfeitures of stock-based awards and adjusts the rate to reflect changes in facts and circumstances, if any.
F-14
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
The following table presents the weighted-average grant date fair value of stock options and the related assumptions used to estimate the fair value in the consolidated financial statements for the six months ended June 30, 2020 and 2019:
| June 30, 2020 | June 30, 2019 | |||||||
| Expected terms (years) | - | 5.42 | ||||||
| Risk-free interest rates | - | 2.39 | % | |||||
| Expected volatility | - | 43.43 | % | |||||
| Dividend yield | - | 0.00 | % | |||||
| Weighted-average estimated fair value of options granted during the year | $ | - | $ | 0.02 | ||||
There were no options granted during the six months ended June 30, 2020.
As of June 30, 2020, total unrecognized stock-based compensation expense of $72,174 is expected to be recognized over a weighted-average recognition period of approximately 1.45 years.
As of June 30, 2019, total unrecognized stock-based compensation expense of $719,937 is expected to be recognized over a weighted-average recognition period of approximately 2.35 years.
The following table shows stock option activity for the six months ended June 30, 2020:
| Stock options | Weighted Average Exercise Price | Weighted Average Contractual Terms (in years) | Aggregate Intrinsic Value | |||||||||||||
| Balance at January 1, 2020 | 40,487,766 | $ | 0.43 | 8.97 | $ | 7,430 | ||||||||||
| Granted | - | - | - | - | ||||||||||||
| Exercised | (67,083 | ) | $ | 0.05 | ||||||||||||
| Forfeited / Expired | (10,753,916 | ) | $ | 0.06 | ||||||||||||
| Balance at June 30, 2020 | 29,666,767 | $ | 0.06 | 7.03 | 7,430 | |||||||||||
| Exercisable options | 25,873,813 | $ | 0.06 | 6.79 | 7,430 | |||||||||||
| Vested and expected to vest | 3,449,654 | $ | 0.05 | 8.66 | - | |||||||||||
For the six months ended June 30, 2020 and 2019, the Company recognized stock-based compensation expense of $36,982 and $319,023, respectively.
Note 10 Operating Lease
On July 1, 2019, the Company leased commercial office space under an operating sublease, which expired on June 30, 2020 and requires monthly rental payments plus escalation charges. The Company has not recorded a lease liability or right-of-use asset for this lease as it qualifies for the short-term lease exception.
Rent expense charged to operations for the six months ended June 30, 2020 and 2019 was $84,562 and $807,316, respectively.
Note 11 Commitments and Contingencies
| (A) | Litigation |
From time-to-time, the Company is involved in legal actions and claims, which arise in the ordinary course of business. In management’s opinion, the liabilities, if any, that may ultimately result from such legal actions are not expected to have a material adverse effect on the financial position, results of operations or liquidity of the Company.
On May 20, 2015, a user or the Props Livestreaming app, a former broadcaster filed a $10 million lawsuit against the Company with the Supreme Court of the State of New York. The plaintiff alleged the Company improperly terminated their broadcaster status due to an on-air altercation, which led to defamation, business disparagement, trade libel and breach of contract. The Company filed a motion to dismiss the action. On April 10, 2018, the Court granted the motion and dismissed the complaint with prejudice. The plaintiff filed a notice of appeal challenging the dismissal. The deadlines associated with the appeal expired, and this matter has been fully resolved through the dismissal.
F-15
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
| (B) | Tokens |
The Company has various agreements with unaffiliated individuals and companies who provide blockchain and marketing advisory services in exchange for Props tokens. The Props tokens are generally subject to a vesting schedule ranging between zero and two years and timed to match the provision of the service. As of June 30, 2020, and December 31, 2019, the Company reserved 1,865,709 Props Tokens to be issued for the advisory services, which will be recorded at estimated fair value. In accordance with ASC 720, Other Expenses, the Company will recognize the related expenses when incurred. During the six months ended June 30, 2020 and 2019, the Company incurred $134,568 and 828,327 of advisor related expenses, respectively.
| (C) | Paltalk Agreement |
In May 2019, the Company entered into an agreement with a third-party developer, which was amended in September 2019 and January 2020, to facilitate the integration of two of its apps into the Props Network. This agreement provides for the grant of rights to receive Props Tokens upon the achievement of certain milestones described in the agreement, including the execution of the agreement and mutual public announcement of the agreement, and the integration of the apps. According to the terms of this agreement, as amended, in aggregate, the Third Party Developer could earn the right to receive up to 10,500,000 Props Tokens upon the achievement of these milestones, and additional 1,000,000 Props Tokens if the milestones were all reached prior to April 30, 2020.
During the year ended December 31, 2019, the Company recognized a token delivery obligation of $410,700 for the issuance of the initial 3,000,000 tokens. During April 2020, the remaining milestones had been achieved and the Company granted 7,500,000 tokens to Paltalk and recognized a token delivery obligation of $1,026,750 for the six months ended June 30, 2020. These tokens are subject to a lock-up period and will be released from that required lock-up on May 5, 2021. The Company recognized research and development expenses from the distribution of tokens of $1,026,750 and $0 for the six months ended June 30, 2020 and 2019, respectively, related to the payments of tokens under this agreement.
The Company has no further obligations under this agreement.
| (D) | Migration Agreement |
In April 2020, the Company entered into an agreement with a third party to migrate a portion of its Pending Props token functions to another blockchain. This migration was completed in August 2020. As a result of the migration, the Company received token compensation valued, as of June 30th, 2020 at $23,347. The Company is also entitled to receive additional tokens with an estimated fair value of approximately $210,000 at June 30, 2020, which will be delivered in three installments at July 31, 2020 and six and twelve months following the completion of the project, should the Company continue to use the third party blockchain.
Note 12 Fair Value
In accordance with ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company uses various inputs to measure fair value on a non-recurring basis. ASC No. 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each level in the hierarchy is described below:
Level 1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement date
Level 2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable
Level 3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company
F-16
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
Impairments of digital assets are non-recurring fair value measurements. The fair value of Algo, Bitcoin and Ethereum is determined using quoted prices on an active exchange, based on a principal market analysis in accordance with ASC 820. The Company views a decline in the quoted price to be an indicator of impairment. Each acquisition of Algo, Bitcoin and Ethereum is considered a separate unit of account; the Company tracks the cost of each unit of Algo, Bitcoin and Ethereum when received or purchased to use when performing impairment testing and recording dispositions either through sale or exchange.
The Company issues Props Tokens to vendors in exchange for services. In addition, the Company has distributed Props Tokens without compensation to potential network users to encourage use of the YouNow network. These transactions are non-monetary transactions accounted for at fair value. In valuing Props Tokens issued in exchange for services for the six-months ended June 30, 2020 and 2019, the Company generally relied on the issue prices of the Props tokens in its Regulation D offerings that took place in 2019 (a Level 2 measurement). The Company concluded that the estimated fair value of Props tokens issued or distributed in the six-month period ended June 30, 2020 is a Level 2 measurement.
When Props tokens are issued or distributed under the circumstances described above, the Company recognizes an expense equal to the estimated fair value of the Props tokens (the Company has not generally issued tokens in exchange for goods), and a corresponding gain as the tokens have no carrying value in the Company’s financial statements, as they were acquired as part of the Company’s network development activities at no cost. As such, the estimated fair value of the Props tokens has not had an effect on the Company’s net income for the six months ended June 30, 2020 and 2019.
Note 13 Concentration of Risk
A significant portion of the Company’s revenue was generated from users who accessed the Company’s app through Apple iTunes and Google Play. As of December 31, 2019, 55.9% and 39.4% of the Company’s accounts receivable were amounts due from Apple iTunes and Google Play, respectively. As a result of the sale of the YouNow App, there is no concentration of revenue at June 30, 2020.
Note 14 Risks and Uncertainties
| (A) | Digital Currencies |
Digital currencies represent a material portion of the Company’s total assets and are subject to rapid increases and decreases in value and extreme price volatility, which could result in significant losses. Subsequent to the balance sheet date, the value of the digital currencies have fluctuated due to market conditions.
| (B) | Unfulfilled Token Delivery Obligations |
On March 4, 2019, the Company distributed vested Props Tokens to all SAFT purchasers who provided electronic wallet confirmations. As of June 30, 2020, the Company had $397,558 of unissued Props Tokens related to unconfirmed electronic wallets of SAFT purchasers and unvested token grants.
F-17
YouNow, Inc. and Subsidiaries
Notes to Consolidated Unaudited Financial Statements
Note 15 Going Concern Uncertainty
The Company incurred losses from operations of approximately $2.6 million and also had operating cash outflows of approximately $0.8 million for the six months ended June 30, 2020. As of June 30, 2020, the Company had approximately $1.3 million of cash available and liquid digital currency assets of $0.7 million.
The Company’s current rate of cash outflows described above raises substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of the consolidated financial statements if no additional sources of capital are secured. However, there can be no assurance that the Company will be successful in achieving its objectives.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above conditions raise substantial doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
The impact of the coronavirus (“COVID-19”) outbreak on the Company’s results of operations, financial position and cash flows will depend on future developments, including the duration and spread of the outbreak and related advisories and restrictions. These developments and the impact of COVID-19 on the financial markets and the overall economy are highly uncertain and cannot be predicted. If the financial markets and/or the overall economy are impacted for an extended period, the Company’s results of operations, financial position, cash flows and ability to secure additional sources of capital may be materially adversely affected.
Note 16 Subsequent Events
Management has evaluated subsequent events through September 28, 2020. Management is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements other than as disclosed in Note 1 and the following:
The Company liquidated 1,400,000 digital currencies in August 2020. Total proceeds from the liquidation were approximately $991,300 and the Company will record a gain on the liquidation of approximately $740,000.
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| Item 4. | Exhibits |
None. For exhibits previously filed by the Company, see the Company’s most recent Annual Report on Form 1-K and the Company’s most recent Offering Statement on Form 1-A, as amended, in each case as filed with the Securities and Exchange Commission.
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SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on September 28, 2020.
| OPEN PROPS INC. | ||
| By: | /s/ Adi Sideman | |
| Name: | Adi Sideman | |
| Title: | President and Chief Executive Officer | |
Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the date indicated.
| Signature | Title | Date | ||
| /s/ Adi Sideman | President, Chief Executive Officer and Director | September 30, 2020 | ||
| Adi Sideman | (Principal Executive Officer, Principal Accounting Officer, and Principal Financial Officer) |
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