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TMCNet: PEOPLESTRING CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[November 14, 2012]

PEOPLESTRING CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) We have provided below information about PeopleString Corporation's ("PeopleString" or the "Company") financial condition and results of operations for the three and nine months ended September 30, 2012 and 2011. This information should be read in conjunction with PeopleString's unaudited consolidated financial statements for the three and nine months ended September 30, 2012 and 2011, including the related notes thereto, which begin on page 1 of this report. These unaudited consolidated financial statements should be read in conjunction with the year-end consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2011 of the Company. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.


Background PeopleString was incorporated in the State of Delaware on January 2, 2009. The Company was formed to develop technology that would allow users of social networks to earn incentives through online and offline activities by the user and his or her network. In March 2009, PeopleString's incentive-based social network was introduced to the market.

RewardString Corporation ("RewardString"), incorporated in the State of Delaware, was formed in late 2010 to develop technology relating to social media marketing. At September 30, 2012, PeopleString owned 100% of RewardString's outstanding common stock and RewardString was PeopleString's only subsidiary.

Overview PeopleString Social Network PeopleString began as a technology firm, that created an incentive-based social network which allows users to aggregate and share the revenue generated from their online activities, communication and social networking through its website located at www.PeopleString.com. The Company's "InstaPortal" technology helps users design slices of Internet sites they wish to capture and have those slices appear in a convenient, home page.

The PeopleString Social Network allows individuals, entrepreneurs and small businesses to manage and aggregate their personal, business and social communications into one user-friendly online dashboard. PeopleString provides the tools necessary to manage and streamline social networking into an easy-to-use command center with useful features. Revenues are generated through the use of email, Internet searches, watching videos, shopping rewards programs and our proprietary, opt-in direct mail program. The multi-tiered affiliate program has significantly helped increase membership and revenues in our business. Rather than using traditional advertising and marketing methods, we chose to create a multi-tiered affiliate program to develop new customers. Once a user is referred and signed up, they are part of the multi-tiered affiliate program. Every time the user earns money, whether it be by viewing an ad, performing an Internet search, shopping through our Web site, receiving a piece of direct mail or using one of our premium services, the initial user that referred the new user will earn money, as well as those in the tiered affiliate program above them for five levels.

In January 2011, we introduced an InstaPortal technology that allows users to view continuously updating slices of their favorite websites on their PeopleString homepage. Increased 'stickiness' on the PeopleString website may lead to increased traffic, page views, advertising, affiliate and product/services revenue.

PeopleDeals & Marketplace Platform In April 2011, the PeopleDeals & Marketplace Platform was introduced to help local merchants utilize new social marketing tools to create direct social connections between the businesses and consumers in order to increase brand awareness, customer loyalty and/or increased sales. Merchants create unique social applications, attract and retain customers and leverage their social connections. Merchants can leverage their social connections through PeopleString, email and other social networks, such as Facebook and Twitter, to reach potential customers with special offers. Consumers and local merchants can access the website at www.PeopleDeals.com.

PeopleString has tested multiple tiers of the PeopleDeals Platform. The Company completed its trial testing on a free, basic service for local merchants who are contemplating moving their marketing from local mail, such as Valpak or Clipper Magazine, to an online, social platform. Based on customer feedback, PeopleString released its Cost Per Share (CPS) model for local merchants in October 2011; the CPS model aligns merchant payments with 'shares' of their deals.

12 -------------------------------------------------------------------------------- Index Share It Up! In November 2011, PeopleString began testing a closed Beta version of its social media platform for advertising agencies and large marketers, such as regional and global brands. PeopleString's patent pending "Share It Up!" technology allows any business to instantly create social coupons and deals that change in value the more they are shared. By leveraging their customers' social networks, business can amplify their marketing by encouraging customers to share the message into new social circles. The coupon and deal incentives, combined with trusted recommendations from friends, can motivate consumer trial and cross-purchase transactions both online and in-store.

In March 2012, after modifications from client feedback, PeopleString began offering its Share It Up! platform to brands and advertising agencies.

PeopleString recorded its first revenues for this service in April 2012. Brands and agencies can access the website at www.ShareItUp.com.

The Company has worked with clients and potential clients to structure the following offers: coupons, deals, discounts, samples, rebates, rewards, races and promotions. In addition, the Company has helped structure flash offers, cause marketing offers co-branded offers and unlocked premium content. Pricing is based on level of service and geography (Global/National, Regional, Local).

Promotion We promote our social network service and products primarily through word of mouth by our members to potential members. We augment this viral marketing with tools that our members can leverage to help recruit additional members, including hosted landing pages and collateral. We also allow 'up-line' members to volunteer to lead webinars where they can work more closely with potential members.

We initiated branding efforts on our PeopleDeals, ShareItUp and CPS services and products. Activities in the future may include further branding and/or direct response campaigns, including messaging and email tag lines, organic search, paid search, banners, blogs, social networks, video and other viral tactics, multimedia, print, and radio as well as through endorsements and alliances with marketing affiliates.

Our promotions may also include partnerships, hosting, private label, co-branded solutions and software as a service ("SaaS"). Web publishers and content sites may offer our services to their existing registered member base as well as all future members that register; web publishers and content sites are responsible for marketing. We may also promote out services and products through agencies that offer our SaaS solution to their clients. In conjunction with contracts to provide services to marketing affiliates, PeopleString may be obligated to make payments, which may represent a portion of revenue, to its marketing affiliates.

In order for us to grow our business and increase our revenue, it is critical for us to attract and retain new users and customers. For us to increase our social networking revenue, we need to establish a large customer base. A large customer base of our free services provides us with more opportunities to sell our premium services, which could result in increased revenue. In addition, a large customer base may allow us to increase our advertising rates and attract other Internet based advertising and marketing firms to advertise and form marketing affiliations with us, which could result in increased advertising and product fee revenues.

Certain criteria we review to measure our performance is set forth below: · the number of first time users of our social network; · the number of repeated users of our social network; · the number of free users; · the number of paid users; and · the number of referrals by each of our users.

BiLo Agreement A Strategic Marketing Agreement was entered into on June 27, 2012 with BiLo Media, Inc., whereby the Company will provide marketing services to BiLo and act as an independent general advisor and consultant to BiLo on all matters related to the marketing of BiLo. The term of the Agreement is for a minimum period of two (2) months and the Strategic Marketing Agreement may be terminated by either party at any time after the initial two month period by giving 7 days prior written notice.

As consideration, BiLo has agreed to pay the Company bi-monthly commission equal to fifty percent of any net revenue derived from the sale of memberships for BiLo's website, MyIngo.com, which accrue during the term of the Strategic Marketing Agreement and are directly attributable to contacts, sources or introductions made by the Company.

Critical Accounting Policies PeopleString's discussion and analysis of financial condition and results of operations are based upon PeopleString's unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these unaudited consolidated financial statements requires PeopleString to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, PeopleString evaluates its estimates, including but not limited to those related to such items as costs to complete performance contracts, income tax exposures, accruals, depreciable/useful lives, allowance for doubtful accounts and valuation allowances. PeopleString bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates 13 -------------------------------------------------------------------------------- Index PeopleString believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition. PeopleString derives revenue from online services, electronic commerce, advertising and data network services. PeopleString also derives revenue from marketing affiliations. PeopleString recognizes revenue in accordance with the guidance contained in the ASC 605, "Revenue Recognition." Consistent with the provisions of ASC 605-45-05, PeopleString generally recognizes revenue associated with its advertising and marketing affiliation programs on a gross basis due primarily to the following factors: PeopleString is the primary obligor; has general inventory risk; has latitude in establishing prices; has discretion in supplier selection; performs part of the service; and determines specifications.

Consistent with ASC 605-50-15, PeopleString accounts for cash considerations given to customers, for which it does not receive a separately identifiable benefit or cannot reasonably estimate fair value, as a reduction of revenue rather than an expense. Accordingly, any corresponding distributions to customers are recorded as a reduction of gross revenue.

PeopleString records its allowance for doubtful accounts based upon an assessment of various factors, including historical experience, age of the accounts receivable balances, the credit quality of customers, current economic conditions and other factors that may affect customers' ability to pay.

Research and Development. PeopleString accounts for research and development costs in accordance with accounting pronouncements, including ASC 730, "Research and Development" and ASC 985, "Software." PeopleString has determined that technological feasibility for its software products is reached shortly before the products are released. Research and development costs incurred between the establishment of technological feasibility and product release have not been material and have accordingly been expensed when incurred.

Stock-Based Compensation. PeopleString accounts for stock-based compensation under ASC 718, "Compensation-Stock Compensation" ("ASC 718"). The compensation cost for the portion of awards is based on the grant-date fair value of those awards as calculated for either recognition or pro forma disclosures under ASC 718.

PeopleString has one stock-based compensation plan under which incentive and nonqualified stock options or rights to purchase stock may be granted to employees, officers, directors and other eligible participants. PeopleString issues shares of its common stock, warrants to purchase common stock and non-qualified stock options to non-employees as stock-based compensation. PeopleString accounts for the services using the fair market value of the consideration issued.

Accounting for Derivatives. PeopleString evaluates its options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC 815-15-10, "Hedging and Derivatives-Embedded Derivatives" and related interpretations including ASC 815-40-05, "Hedging and Derivatives-Contracts in Entity's Own Equity." Recent Accounting Pronouncements. PeopleString's significant accounting policies are summarized in Note 1 of PeopleString's consolidated financial statements for the years ended December 31, 2011 and 2010. There were no significant changes to these accounting policies during the three and nine months ended September 30, 2012 and 2011 and PeopleString does not expect that the adoption of other recent accounting pronouncements will have a material impact on its financial statements.

Results of Operations For the Three Months Ended September 30, 2012 and 2011 Net Earnings (Loss). For the three months ended September 30, 2012, net loss was $18,917, as compared to a net loss of $396,203 for the three months ended September 30, 2011. The $377,286 decrease in net loss was primarily attributable to a $469,490 decrease in operating expenses, partially offset by a $91,440 reduction in revenue.

Revenues. For the three months ended September 30, 2012, revenues were $17,081, a $91,440 decrease from revenues of $108,521 earned in the three months ended September 30, 2011. Of the revenues generated for the three months ended September 30, 2012, $5,998 was generated from Share It Up! fees, $2,301 was generated from product and service fees and $8,782 was generated from advertisers and affiliates, as compared to $0 from Share It Up! fees, $33,705 from product and service fees and $74,816 from advertisers and affiliates for the three months ended September 30, 2011.

14 -------------------------------------------------------------------------------- Index · Share It Up! fees included a follow-up campaign by a regional brand managed by an agency, one national brand, and an international brand.

· Deferred revenue of $7,500 is related to an agreement to provide up to five global campaigns by December 31, 2012.

· The decrease in product and service fees for the three months ended September 30, 2012 over the same prior year period was primarily due to a decrease in premium subscriptions as the Company introduced new products and services, including PeopleDeals and Share It Up! · Advertising and affiliate revenues are paid based on a mix of impressions, clicks and actions. The decrease in advertising and affiliate fees for the three months ended September 30, 2012 over the same prior year period was primarily due to lower traffic due to a lower number of users.

Operating Expenses. For the three months ended September 30, 2012, operating expenses were $36,019, a $469,490 decrease from operating expenses of $505,509 incurred in the three months ended September 30, 2011.

· Cost of revenues: Cost of revenues for the three months ended September 30, 2012 were $2,438, as compared to $11,429 for the same prior year period. The $8,991decrease in cost was primarily attributable to decreased network payments to users.

· Research, development, sales, general and administrative: Research, development, sales, general and administrative expenses for the three months ended September 30, 2012 were $33,581, as compared to $494,080 for the same prior year period. The $460,499 decrease in expense was primarily attributable to decreased professional, staffing and associated overhead expenses.

Other Income. For the three months ended September 30, 2012, other income was $21, a $764 decrease over other income of $785 in the three months ended September 30, 2011. The decrease was primarily attributable to lower average cash balances.

Income Taxes. For the three months ended September 30, 2012 and 2011, PeopleString has applied valuation allowances to offset the deferred tax assets in recognition of the uncertainty that such tax benefits will be realized.

· At December 31, 2011, PeopleString had available net operating loss carry forwards of approximately $1.5 million for federal and state income tax reporting purposes which expire in various years through 2031. The principal items giving rise to deferred taxes are timing differences between book and tax assets, other expenditures and a net operating loss carryforward. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the annual utilization of a company's net operating loss and research credit carry forwards may be limited, and, as such, PeopleString may be restricted in using its net operating loss and research credit carry forwards to offset future federal income tax expense.

For the Nine months Ended September 30, 2012 and 2011 Net Earnings (Loss). For the nine months ended September 30, 2012, net loss was $538,411, as compared to net loss of $1,032,931 for the nine months ended September 30, 2011. The $494,520 decrease in net loss was primarily attributable to a $1,101,311 decrease in operating expenses, partially offset by a $605,367 decrease in revenues.

Revenues. For the nine months ended September 30, 2012, revenues were $82,677, a $605,367 decrease from revenues of $688,044 earned in the nine months ended September 30, 2011. Of the revenues generated for the nine months ended September 30, 2012, $20,495 was generated from Share It Up! fees, $30,738 was generated from product and service fees and $31,444 was generated from advertisers and affiliates, as compared to $0 from Share It Up! fees, $315,121 from product and service fees and $372,923 from advertisers and affiliates for the nine months ended September 30, 2011.

· Share It Up! included two campaigns by a regional brand managed by an agency, two national brands, an international brand and one global brand with eight campaigns managed by two agencies in the United States and Europe.

· Deferred revenue of $7,500 is related to an agreement to provide up to five global campaigns by December 31, 2012.

· The decrease in product and service fees for the nine months ended September 30, 2012 over the same prior year period was primarily due to a decrease in premium subscriptions as the Company introduced new products and services, including PeopleDeals and Share It Up! · Advertising and affiliate revenues are paid based on a mix of impressions, clicks and actions. The decrease in advertising and affiliate fees for the nine months ended September 30, 2012 over the same prior year period was primarily due to lower traffic due to a lower number of users.

15-------------------------------------------------------------------------------- Index Operating Expenses. For the nine months ended September 30, 2012, operating expenses were $621,367, a $1,101,311 decrease from operating expenses of $1,722,678 incurred in the nine months ended September 30, 2011.

· Cost of revenues: Cost of revenues for the nine months ended September 30, 2012 were $6,291, as compared to $300,863 for the same prior year period. The $294,572 decrease in cost was primarily attributable to decreased network payments to users.

· Research, development, sales, general and administrative: Research, development, sales, general and administrative expenses for the nine months ended September 30, 2012 were $615,076, as compared to $1,421,815 for the same prior year period. The $1,101,311 decrease in expense was primarily attributable to decreased professional, staffing and associated overhead expenses.

Other Income. For the nine months ended September 30, 2012, other income was $279, a $1,424 decrease from other income of $1,703 in the nine months ended September 30, 2011. The decrease was primarily attributable to lower average cash balances.

Income Taxes. For the nine months ended September 30, 2012 and 2011, PeopleString has applied valuation allowances to offset the deferred tax assets in recognition of the uncertainty that such tax benefits will be realized.

· At December 31, 2011, PeopleString had available net operating loss carry forwards of approximately $1.5 million for federal and state income tax reporting purposes which expire in various years through 2031. The principal items giving rise to deferred taxes are timing differences between book and tax assets, other expenditures and a net operating loss carryforward. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, the annual utilization of a company's net operating loss and research credit carry forwards may be limited, and, as such, PeopleString may be restricted in using its net operating loss and research credit carry forwards to offset future federal income tax expense.

Liquidity and Capital Resources PeopleString's operating and capital requirements have exceeded its cash flow from operations while PeopleString has been building its business. Since inception through September 30, 2012, PeopleString has used $1,621,792 in operating and investing activities. PeopleString has also received $1,635,515 of financing from PeopleString's stock and warrant holders.

PeopleString's cash balance as of September 30, 2012 was $13,723, which was a decrease of $387,001 from the cash balance of $400,724 as of December 31, 2011.

This decrease to the cash balance was primarily attributable to a net loss.

In May 2011, PeopleString issued 2,400,000 shares of its common stock at a per share purchase price of $0.50 and received $1,200,000 in gross proceeds. In connection with the issuance of the purchased shares, the Company also issued warrants to the investors.

Management believes PeopleString's current cash balance of $17,108 at November 12, 2012 is not sufficient to fund the minimum level of operations for the next twelve months.

PeopleString may seek additional equity financing and/or debt financing. It is also possible that PeopleString will seek to borrow money from traditional lending institutions, such as banks.

PeopleString expects to continue development of its offerings. PeopleString also expect sales, marketing and advertising expenses and cost of revenues to increase as it promotes and grows its products and services. However, if PeopleString's revenue and cash balance are insufficient to fund its operations, it will seek additional funds. There can be no assurance that such funds will be available to PeopleString or that adequate funds for its operations, whether from debt or equity financings, will be available when needed or on terms satisfactory to PeopleString. PeopleString's failure to obtain adequate additional financing may require it to delay or curtail some or all of its business efforts and could cause PeopleString to seek bankruptcy protection. Any additional equity financing may involve substantial dilution to PeopleString's then-existing stockholders.

In order to continue reducing expenses, PeopleString plans to discontinue the PeopleString Social Network and the PeopleDeals & Marketplace Platform by December 31, 2012.

PeopleString's current officers and directors have not, as of the date of this filing, loaned any funds to PeopleString. There are no formal commitments or arrangements to advance or loan funds to PeopleString or repay any such advances or loans.

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