# Intelligent Protection Management Corp.: Form 10-Q for the period ended Sep 30, 2017

- Company: [Intelligent Protection Management Corp.](/companies/ipm.md) (CIK 1355839)
- Form: 10-Q
- Filed: 2017-11-08
- Accepted by EDGAR: Nov 7, 2017, 17:44 ET
- Period: 2017-09-30
- Accession: 0001213900-17-011522
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1355839/000121390017011522/f10q0917_snapinteractive.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1355839/000121390017011522/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2017-07-01 to 2017-09-30 | $5.9m | us-gaap:Revenues |
| Revenue | 9 months, 2017-01-01 to 2017-09-30 | $18.9m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2017-07-01 to 2017-09-30 | $1.2m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2017-01-01 to 2017-09-30 | $3.8m | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2017-07-01 to 2017-09-30 | $2.2m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2017-01-01 to 2017-09-30 | $6.6m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2017-07-01 to 2017-09-30 | −$2.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2017-01-01 to 2017-09-30 | −$4.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-07-01 to 2017-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-01-01 to 2017-09-30 | $0 | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-07-01 to 2017-09-30 | −$2.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-01-01 to 2017-09-30 | −$4.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-07-01 to 2017-09-30 | −$0.31 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2017-01-01 to 2017-09-30 | −$0.70 | us-gaap:EarningsPerShareBasicAndDiluted |
| Capital expenditure | 9 months, 2017-01-01 to 2017-09-30 | $214.3k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2017-09-30 | $3.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-09-30 | $4.5m | us-gaap:AssetsCurrent |
| Total assets | at 2017-09-30 | $22.6m | us-gaap:Assets |
| Current liabilities | at 2017-09-30 | $5.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-09-30 | $5.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2017-09-30 | $17.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,745 characters.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the nine months ended September 30, 2017, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2016 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2017 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K. Aside from certain information as of December 31, 2016, all amounts herein are unaudited.

### Forward-Looking Statements

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” in the Form 10-K and “Part II: Other Information – Item 1A. Risk Factors” herein and in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 filed with the SEC on August 8, 2017 (the “Second Quarter 10-Q”).

### AVM Merger

On October 7, 2016, we completed our previously announced merger with A.V.M. Software, Inc. (d/b/a Paltalk) (“AVM”), pursuant to which SAVM Acquisition Corporation, our wholly owned subsidiary, merged with and into AVM, with AVM surviving as a wholly owned subsidiary of Snap (the

“AVM Merger”). As a result of the AVM Merger, the former shareholders of AVM received shares of Snap’s common stock representing approximately 77.9% of the outstanding shares of common stock of the post-AVM Merger combined company, and Snap’s former shareholders retained approximately 22.1% of the outstanding shares of common stock of the post-AVM Merger combined company, in each case including unvested shares of restricted stock in the total number of shares of common stock outstanding.

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

### Presentation for Reverse Stock Split

On January 5, 2017, we effected a 1-for-35 reverse stock split of our issued and outstanding common stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, each issued and outstanding share of our common stock, and the per share exercise price of and number of shares of our common stock underlying our outstanding stock options, was automatically proportionally adjusted based on the 1-for-35 Reverse Stock Split ratio. Except as otherwise provided herein, all share and per-share amounts of our common stock and stock options have been adjusted to give effect to the Reverse Stock Split for all periods presented. The Reverse Stock Split did not alter the par value of our common stock, which remains at $0.001 per share, modify any voting rights or other terms of our common stock or impact the amount of preferred stock we are authorized to issue.

### Terminated LiveXLive Merger Agreement

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

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

### Overview

The Company is a leading provider of live video social networking, and interactive dating applications. Our product portfolio includes Paltalk and Camfrog, which together host one of the world’s largest collections of video-based communities, and FirstMet, a prominent interactive dating brand serving users 35 and older. Our other products include Tinychat, Firetalk, 50More, Ribbit Live, The Grade and Vumber. Our leading network of products creates a unique social media enterprise where users can meet, see, chat, broadcast and message in real time with other users in our network. Our properties are generally available through Windows®, MacTM OS, iOSTM and AndroidTM platforms.

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

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

### Our Products

#### Live Video Chat

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

*Paltalk and Camfrog.* Paltalk and Camfrog are our major video chat applications and are both leading providers of live video social networking applications available on Windows, Mac OS, iOS, Android and other tablet devices. Together, these products power one of the world’s largest global collections of video based communities, with proprietary technology to host thousands of simultaneous live group conversations on topics such as politics, financial markets, music and dating. Our proprietary client server technology helps maintain high quality video and audio even as many users simultaneously watch a particular broadcaster. Paltalk and Camfrog both have tens of millions of registered users and attract a demographically and geographically diverse user base, with users in over 180 different countries. Paltalk users are approximately one-third domestic and two-thirds international, whereas the majority of Camfrog users are international, with a particular concentration in Southeast Asia.

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

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

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

#### Dating

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

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

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

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

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

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

#### Telecommunications

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

#### Product Development and Innovation Lab

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

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

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

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

### Subscriber Base

Our applications and the majority of revenues generated therefrom are supported by a large user database which includes approximately 179,200 active subscribers worldwide as of September 30, 2017. Our management believes that the scale of our subscriber base presents a competitive advantage in the video social networking industry and can present growth opportunities to combine video with dating to advance existing products with upsell opportunities as well as to build future brands with cross-sell offers. We believe the scale of our user base also offers us the opportunity to build our third party advertising revenue.

### Operational Highlights and Objectives

During the nine months ended September 30, 2017, we executed key components of our objectives:

- founded an innovation lab to leverage our technology and commercial platform to support growth initiatives in the live video markets;
- completed the launch of Camfrog Live, a new live video streaming entertainment service;
- substantially completed work on a new live video chat consumer application;
- completed the commercial launch of 50more, our dating product targeting users over 50 years old;
- executed an exclusive advertising operations partnership with a full service digital advertising and media company, with the goal of maximizing advertising revenue;
- expanded the relationship with a leading payment processor to allow bitcoin payment processing on Camfrog and Tinychat – evolving our platform to further serve our worldwide user base;
- continued AVM Merger integration efforts, including organizational restructuring, real estate and vendor consolidation, and standardizing our technology platform and reporting systems;
- completed the Reverse Stock Split at a 1-for-35 ratio; and
- formed both an audit and compensation committee consisting of three and two independent directors, respectively.

13

For the near term, our business objectives include:

- growing our content creator base for the newly released live video streaming entertainment service integrated into Camfrog;
- launching our new live video chat consumer application;
- exploring opportunities to develop blockchain business opportunities and integrate blockchain technology into new and existing applications;
- building consumer awareness and usage of 50more and Camfrog Live;
- enhancing user monetization and revenue through micro-transactions, licensing and advertising;
- exploring merger and acquisition opportunities; and
- continuing to defend our intellectual property.

### Sources of Revenue

#### Subscription

Our video chat platforms generate revenue primarily through subscription fees. Our tiers of subscriptions provide users with unlimited video windows and levels of status within the community. Multiple subscription tiers are offered in different durations depending on the product. We currently offer one-, six-, twelve-, and fifteen-month terms, which continue to vary as we continue to test and optimize length and pricing. Longer-term plans (those with durations longer than one month) are generally available at discounted monthly rates. Levels of membership benefits are offered in tiers, with the least membership benefits in the lowest paid tier and the most membership benefits in the highest paid tier. Our membership tiers are “Plus,” “Extreme,” “VIP” and “Prime” for Paltalk and “Pro,” “Extreme” and “Gold” for Camfrog. We also hold occasional promotions that offer discounted subscriptions and virtual gifts.

Our dating applications generate revenue primarily through subscription fees. Multiple subscription tiers are offered in one-, three- and six-month terms, which continue to vary as we continue to test and optimize length and pricing. Longer-term plans (those with durations longer than one month) are generally available at discounted monthly rates. Pursuant to the terms of service of our dating platforms, subscriptions automatically renew for periods of the same length and at the same price as the original subscription term until terminated by the subscriber. We also hold occasional promotions that offer initial discounted subscriptions that renew at the regular price.

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

#### Advertising

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

#### Virtual Gifts/Micro-transactions

In our video chat platforms we offer virtual gifts to our users. Users may purchase credits that can be redeemed for a host of virtual gifts such as a rose, a beer or a car, among other items. These gifts are given among users to enhance communication and are generally redeemed within the month of purchase. Virtual gift revenue is recognized at the point of sale, as they are incurred as purchased, and included in subscription revenue.

We also offer micro-transactions to our dating users. Micro-transactions allow users to increase the visibility of their profile and messages by paying for such services. In addition, micro-transactions include activation fees for new subscriptions. While micro-transactions are not currently a significant driver of revenue, we believe that micro-transactions increase user engagement with our applications and the likelihood that users will become paid subscribers. Micro-transaction revenue is recognized at the point of sale and included in subscription revenue.

### Costs and Expenses

*Cost of revenue*. Cost of revenue consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in data center and customer care functions, credit card processing fees, hosting fees and data center rent and bandwidth costs.

*Sales and marketing expense*. Sales and marketing expense consists primarily of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel engaged in sales, and sales support functions. Advertising and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which is primarily partner-related payments to those who direct traffic to our brands. We plan to continue to expand sales and marketing efforts to attract new users, retain existing users and increase sales to both new and existing users.

*Product development expense*. Product development expense, which relates to the development of technology of our applications, consists primarily of compensation (including stock-based compensation) and other employee-related costs that are not capitalized for personnel engaged in the design, testing and enhancement of service offerings, as well as amortization of capitalized website development costs.

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

### Key Metrics

Our management relies on certain non-GAAP and/or unaudited performance indicators to manage and evaluate our business. The key performance indicators set forth below help us evaluate growth trends, establish budgets, measure the effectiveness of our advertising and marketing efforts and assess operational efficiencies. We also discuss net cash used in operating activities under the ‟Results of Operations” and ‟Liquidity and Capital Resources” sections below. Bookings and Adjusted EBITDA are discussed below.

|  | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Bookings | $5,470,749 | $2,624,196 | $17,208,702 | $12,091,315 |
| Net cash (used in) provided by operating activities | $(1,280,915) | $407,380 | $(660,277) | $301,574 |
| Net (loss) income | $(2,004,335) | $273,800 | $(4,528,002) | $(427,583) |
| Adjusted EBITDA | $(1,133,182) | $71,323 | $(1,880,607) | $52,734 |
| Adjusted EBITDA as percentage of total revenues | (19.1)% | 1.5% | (10.0)% | 0.4% |

#### Bookings

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

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

#### Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net (loss) income adjusted to exclude interest expense, net, income tax (benefit), depreciation and amortization expense, other income, net and stock-based compensation expense.

We present Adjusted EBITDA because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to develop short- and long-term operational plans and to allocate resources to expand our business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of the cash operating income generated by our business. We believe that Adjusted EBITDA is useful to investors and others to understand and evaluate our operating results, and it allows for a more meaningful comparison between our performance and that of competitors.

#### Limitations of Adjusted EBITDA

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

- Adjusted EBITDA does not reflect cash capital expenditures for assets underlying depreciation and amortization expense that may need to be replaced or for new capital expenditures;
- Adjusted EBITDA does not reflect our working capital requirements;
- Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation; and
- other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

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

| Reconciliation of Net (loss) income to Adjusted EBITDA: | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net (loss) income | $(2,004,335) | $273,800 | $(4,528,002) | $(427,583) |
| Interest (income), net | (7,765) | - | (39,643) | (802) |
| Other expense (income), net | - | (243) | 17,910 | (30,000) |
| Income tax (benefit) | - | (341,366) | - | (341,366) |
| Depreciation and amortization expense | 522,988 | 132,882 | 1,618,911 | 734,484 |
| Loss on disposal of property and equipment | 17,074 | - | 17,074 | - |
| Stock-based compensation expense | 338,856 | 6,250 | 1,033,143 | 118,001 |
| Adjusted EBITDA | $(1,133,182) | $71,323 | $(1,880,607) | $52,734 |

### Results of Operations

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

|  | Three Months Ended September 30, 2017 | 2016 | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Total revenue | 100.0% | 100.0% | 100.0% | 100.0% |
| Costs and expenses: |  |  |  |  |
| Cost of revenue | 20.7% | 24.1% | 19.9% | 26.9% |
| Sales and marketing expense | 32.8% | 18.6% | 33.4% | 19.5% |
| Product development expense | 37.4% | 40.1% | 35.1% | 45.8% |
| General and administrative expense | 43.0% | 18.7% | 35.7% | 13.5% |
| Total costs and expenses | 133.9% | 101.5% | 124.1% | 105.7% |
| Loss from operations | (33.9)% | (1.5)% | (24.1)% | (5.7)% |
| Interest income (expense), net | 0.1% | 0.0% | 0.2% | 0.0% |
| Other income, net | 0.0% | 0.0% | (0.1)% | 0.2% |
| Total other income, net | 0.1% | 0.0% | 0.1% | 0.2% |
| Loss before income taxes | (33.8)% | (1.5)% | (24.0)% | (5.5)% |
| Provision for income taxes | 0.0% | 7.3% | 0.0% | 2.4% |
| Net (loss) income | (33.8)% | 5.9% | (24.0)% | (3.1)% |

### Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

### Revenues

Revenues increased to $5,927,475 for the three months ended September 30, 2017 from $4,647,948 for the three months ended September 30, 2016. The increase was driven by the inclusion of revenue from pre-AVM Merger Snap products following the completion of the AVM Merger, offset by a decline in subscription revenue and advertising revenue in pre-AVM Merger AVM products.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the three months ended September 30, 2017 and the three months ended September 30, 2016, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Three Months Ended September 30,% 2017 | 2016 | Increase | Increase | % Revenue Three Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $5,447,119 | $4,181,950 | $1,265,169 | 30.3% | 91.9% | 90.0% |
| Advertising revenue | 480,356 | 465,998 | 14,358 | 3.1% | 8.1% | 10.0% |
| Total revenues | $5,927,475 | $4,647,948 | $1,279,527 | 27.5% | 100.0% | 100.0% |

*Subscription –* Our subscription revenue for the three months ended September 30, 2017 increased by $1,265,169, or 30.3%, as compared to the three months ended September 30, 2016. This increase in subscription revenue for the three months ended September 30, 2017 was primarily due to the inclusion of subscription revenue from pre-AVM Merger Snap of approximately $1,892,400, offset by a decline in subscription revenue of approximately $562,300 as compared to the three months ended September 30, 2016 from products attributable to pre-AVM Merger AVM products. We believe that the decrease in subscription revenue from pre-AVM Merger AVM products was driven, in part, by a decrease in new transaction revenue in the Paltalk product as we allocated increasing resources to new higher growth opportunities in the live video market. We believe the decrease was also the result of a decline in our international markets, particularly with respect to Camfrog, where there was a disruption in payment processing with a third party primary reseller that led to reduced revenue.

*Advertising –* Our advertising revenue for the three months ended September 30, 2017 increased by $14,358, or 3.1%, as compared to the three months ended September 30, 2016. The slight increase in advertising revenue was primarily driven by changes in advertising partnerships and advertisement placements.

### Costs and Expenses

Total costs and expenses for the three months ended September 30, 2017 reflect an increase in costs and expenses of $3,223,818, or 68.4%, as compared to the three months ended September 30, 2016. The following table presents our costs and expenses for the three months ended September 30, 2017 and 2016, the increase between those periods and the percentage increase between those periods:

|  | Three Months Ended September 30,% 2017 | 2016 | Increase | Increase | % Revenue Three Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of revenue | $1,228,198 | $1,120,788 | $107,410 | 9.6% | 20.7% | 24.1% |
| Sales and marketing expense | 1,944,488 | 862,639 | 1,081,849 | 125.4% | 32.8% | 18.6% |
| Product development expense | 2,217,777 | 1,864,430 | 353,347 | 19.0% | 37.4% | 40.1% |
| General and administrative expense | 2,549,112 | 867,900 | 1,681,212 | 193.7% | 43.0% | 18.7% |
| Total costs and expenses | $7,939,575 | $4,715,757 | $3,223,818 | 68.4% | 133.9% | 101.5% |

*Cost of revenue -* Our cost of revenue for the three months ended September 30, 2017 increased by $107,410, or 9.6%, as compared to the three months ended September 30, 2016. This increase for the three months ended September 30, 2017 was primarily driven by increases in fraud monitoring and webhosting expenses offset by decreases in payroll expenses as a result of a move to cloud web hosting services. The transition to cloud services also led to decreases in headcount in our information technology support areas.

*Sales and marketing expense* - Our sales and marketing expense for the three months ended September 30, 2017 increased by $1,081,849, or 125.4%, as compared to the three months ended September 30, 2016. The increase in sales and marketing expense for the three months ended September 30, 2017 was primarily due to the inclusion of pre-AVM Merger Snap sales and marketing expense following the completion of the AVM Merger.

*Product development expense -* Our product development expense for the three months ended September 30, 2017 increased by $353,347, or 19.0%, as compared to the three months ended September 30, 2016. The increase was primarily due to the inclusion of pre-AVM Merger Snap product development expense in 2017, offset by a decrease in product development due to reduced headcount in the product development and engineering teams as the AVM Merger enabled the Company to share resources across products.

*General and administrative expense -* Our general and administrative expense for the three months ended September 30, 2017 increased by $1,681,212, or 193.7%, as compared to the three months ended September 30, 2016. The increase in general and administrative expense was primarily driven by an increase in depreciation and amortization related to the inclusion of pre-AVM Merger Snap fixed and intangible assets. In addition, the increase was driven by an increase in investor relations expenses, an increase in officers’ compensation and related stock compensation expense, an increase of approximately $352,000 in legal and other consulting fees related to the proposed merger with LiveXLive, and a one-time payroll tax expense of approximately $140,000 related to the AVM Merger.

### Non-Operating Income

The following table presents the components of non-operating income for the three months ended September 30, 2017 and the three months ended September 30, 2016, the increase between those periods and the percentage increase between those periods:

|  | Three Months Ended September 30, 2017 | 2016 | Increase% (Decrease) | Increase | % Revenue Three Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income, net | $7,765 | $- | $7,765 | 100.0% | 0.1% | 0.0% |
| Other income, net | - | 243 | (243) | (100.0)% | 0.0% | 0.0% |
| Total non-operating income | $7,765 | $243 | $7,522 | 3095.7% | 0.1% | 0.0% |

Non-operating income for the three months ended September 30, 2017 was $7,765, a net increase of $7,522, or 3095.7%, as compared to a non-operating income of $243 for the three months ended September 30, 2016. The increase in non-operating income was driven by an increase contractual interest accrued.

### Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

### Revenues

Revenues increased to $18,886,016 for the nine months ended September 30, 2017 from $13,941,213 for the nine months ended September 30, 2016. The increase was mainly driven by the inclusion of revenue from pre-AVM Merger Snap products following the completion of the AVM Merger, offset by a decline in subscription revenue and advertising revenue in pre-AVM Merger AVM products.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the nine months ended September 30, 2017 and the nine months ended September 30, 2016, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Nine Months Ended% September 30, 2017 | 2016 | Increase (Decrease) | Increase (Decrease) | % Revenue Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $17,413,511 | $12,443,530 | $4,969,981 | 39.9% | 92.2% | 89.3% |
| Advertising revenue | 1,472,505 | 1,497,683 | (25,178) | (1.7)% | 7.8% | 10.7% |
| Total revenues | $18,886,016 | $13,941,213 | $4,944,803 | 35.5% | 100.0% | 100.0% |

*Subscription –* Our subscription revenue for the nine months ended September 30, 2017 increased by $4,969,981, or 39.9%, as compared to the nine months ended September 30, 2016. The increase in subscription revenue for the nine months ended September 30, 2017 was primarily due to the inclusion of subscription revenue from pre-AVM Merger Snap of approximately $5,993,600 offset by a decline in subscription revenue of approximately $963,600 as compared to September 30, 2016 from products attributable to pre-AVM Merger AVM products. We believe that the decrease in subscription revenue from pre-AVM Merger AVM products was driven, in part, by a decrease in the new transaction revenue in the Paltalk product as we allocated increasing resources to new higher growth opportunities in the live video market during 2017. We believe the decrease was also the result of a decline in our international markets, where lower reseller volume led to reduced revenue.

*Advertising –* Our advertising revenue for the nine months ended September 30, 2017 decreased by $25,178, or 1.7%, as compared to the nine months ended September 30, 2016. The decrease in advertising revenue primarily resulted from changes in advertising partnerships, offset by the inclusion of advertising revenue from pre-AVM Merger Snap of approximately $397,800 following the completion of the AVM Merger.

### Costs and Expenses

Total costs and expenses for the nine months ended September 30, 2017 reflect an increase in costs and expenses of $8,694,787, or 59.0%, as compared to the nine months ended September 30, 2016. The following table presents our costs and expenses for the nine months ended September 30, 2017 and 2016, the increase between those periods and the percentage increase between those periods:

|  | Nine Months Ended September 30,% 2017 | 2016 | Increase | Increase | % Revenue Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of revenue | $3,753,522 | $3,746,847 | $6,675 | 0.2% | 19.9% | 26.9% |
| Sales and marketing expense | 6,310,931 | 2,724,703 | 3,586,228 | 131.6% | 33.4% | 19.5% |
| Product development expense | 6,635,561 | 6,384,620 | 250,941 | 3.9% | 35.1% | 45.8% |
| General and administrative expense | 6,735,737 | 1,884,794 | 4,850,943 | 257.4% | 35.7% | 13.5% |
| Total costs and expenses | $23,435,751 | $14,740,964 | $8,694,787 | 59.0% | 124.1% | 105.7% |

*Cost of revenue -* Our cost of revenue for the nine months ended September 30, 2017 increased by $6,675, or 0.2%, as compared to the nine months ended September 30, 2016. The increase for the nine months ended September 30, 2017 was primarily driven by the inclusion of pre-AVM Merger Snap cost of revenue expense in 2017, offset by a decrease in payroll expense as a result of a move from physical servers to cloud web hosting services. The transition to cloud services also drove reduced headcount in our information technology support areas.

*Sales and marketing expense -* Our sales and marketing expense for the nine months ended September 30, 2017 increased by $3,586,228, or 131.6%, as compared to the nine months ended September 30, 2016. The increase in sales and marketing expense for the nine months ended September 30, 2017 was primarily due to the inclusion of pre-AVM Merger Snap sales and marketing expense following the completion of the AVM Merger.

*Product development expense -* Our product development expense for the nine months ended September 30, 2017 increased by $250,941, or 3.9%, as compared to the nine months ended September 30, 2016. The increase in product development expense was mainly due to the inclusion of pre-AVM Merger Snap product development expense in 2017 and an increase in consulting services supporting the efforts to enhance user retention and improve monetization, offset by a decrease primarily due to reduced headcount in the product development and engineering teams.

*General and administrative expense -* Our general and administrative expense for the nine months ended September 30, 2017 increased by $4,850,943, or 257.4%, as compared to the nine months ended September 30, 2016. The increase in general and administrative expense was primarily driven by an increase in depreciation and amortization expense and officers’ salaries related to the inclusion of pre-AVM Merger Snap’s fixed and intangible assets and officer headcount. In addition, the increase was in part driven by stock compensation expense relating to executive equity awards, a lease cancellation fee related to our office space on 320 W 37th Street in New York, NY, an accounting and legal fees increase related to the filing of the Form 10-K, approximately $352,000 in legal and consulting fees increase relating to the proposed merger with LiveXLive, and a one-time payroll tax expense of approximately $140,000 related to the AVM Merger.

### Non-Operating Income (Expense)

The following table presents the components of non-operating income (expense) for the nine months ended September 30, 2017 and the nine months ended September 30, 2016, the increase or decrease between those periods and the percentage increase or decrease between those periods:

|  | Nine Months Ended% September 30, 2017 | 2016 | Increase (Decrease) | Increase (Decrease) | % Revenue Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income, net | $39,643 | $802 | $38,841 | 4843.0% | 0.2% | 0.0% |
| Other income (expense), net | (17,910) | 30,000 | (47,910) | (159.7)% | (0.1)% | 0.2% |
| Total non-operating income (expense) | $21,733 | $30,802 | $(9,069) | (29.4)% | 0.1% | 0.2% |

Non-operating income for the nine months ended September 30, 2017 was $21,733, a net decrease of $9,069, or 29.4%, as compared to $30,802 for the nine months ended September 30, 2016. The decrease in non-operating income was driven by a legal settlement expenses and contractual interest incurred.

### Liquidity and Capital Resources

| Condensed Consolidated Statements of Cash Flows Data: | Nine Months Ended September 30, 2017 | 2016 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(660,277) | $301,574 |
| Net cash used in investing activities | (139,277) | (157,897) |
| Net cash used in financing activities | (62,775) | - |
| Net (decrease) increase in cash and cash equivalents | $(862,329) | $143,677 |

We have historically financed our operations through cash generated from operations. Currently, our primary source of liquidity is cash on hand and cash flows from continuing operations. As of September 30, 2017, we had $3,300,267 in cash and cash equivalents, as compared to cash and cash equivalents of $4,162,596 as of December 31, 2016, and no long-term debt.

We are focused on reducing costs and increasing profitability following the AVM Merger and we believe that our cash balance and our expected cash flow from operations will be sufficient to meet all of our financial obligations for the twelve months from the filing date of this Form 10-Q. It is possible that we would need additional capital in the future to fund our operations, particularly growth initiatives, which we expect we would raise through a combination of equity offerings, debt financings, other third party funding and other collaborations and strategic alliances. Our future capital requirements will depend on many factors including our growth rate, headcount, sales and marketing activities, research and development efforts and the introduction of new features, products, acquisitions and continued user engagement.

Our primary use of working capital is related to user acquisition costs, including sales and marketing expense and product development expense. Our sales and marketing expenditures are primarily spent on channels where we can estimate the return on investment without long-term commitments. Accordingly, we believe we can adjust our advertising and marketing expenditures quickly based on the expected return on investment, which should provide flexibility and should enable us to manage our advertising and marketing expense. In addition, we allocate significant resources to product development in order to maintain and create new features and products which will enable a better user experience and increase interactions. We may also seek to grow our business by expending our capital resources to fund strategic investments and partnership opportunities.

We are continuously evaluating and implementing cost reduction initiatives to manage the expense of our operations. During 2017, we plan to continue to reduce costs by consolidating vendors (including office space, payment processing, licensing agreements, etc.), consolidating advertising affiliate partners, consolidating internal departments (such as customer service) and by using incremental offshore product development resources.

### Terminated LiveXLive Merger Agreement

On September 6, 2017, the Company entered into the LiveXLive Merger Agreement. On October 31, 2017, the Company provided a letter to LiveXLive that terminated the LiveXLive Merger Agreement, pursuant to Section 8.2(a) of the LiveXLive Merger Agreement, due to certain conditions of the LiveXLive Merger Agreement not having been fulfilled as of October 27, 2017, which relieved the Company of its obligations under the LiveXLive Merger Agreement. No termination fee was payable by the Company in connection with the termination of the LiveXLive Merger Agreement.

### Operating Activities

Net cash used by operating activities was $660,277 for the nine months ended September 30, 2017, as compared to net cash provided by operating activities of $301,574 for the nine months ended September 30, 2016. The decrease in net cash used by operating activities of $961,851 was mainly a result of a decrease in subscription revenue received during the period due to the AVM Merger and one-time expenses as result of the AVM Merger and acquisition initiatives.

Significant items impacting cash flow in the nine months ended September 30, 2017 included significant cash outlays relating to advertising and marketing expense and increased headcount related expenses in the product development area. These uses of cash were offset in part by collections of subscription and advertising revenue received during the period.

### Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2017 and 2016 was $139,277 and $157,897, respectively. The decrease in cash used in investing activities for the nine months ended September 30, 2017 was primarily the result of reduced purchases of computers and office furniture. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and software development.

### Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2017 and 2016 was $62,775 and $0, respectively. The cash used in financing activities for the nine months ended September 30, 2017 was related to the repayment of capital leases.

### Off-Balance Sheet Arrangements

As of September 30, 2017, we did not have any off-balance sheet arrangements.

## Controls and procedures

As filed, 2,352 characters.

### Evaluation of Disclosure Controls and Procedures

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

### Remediation of Material Weakness in Internal Control over Financial Reporting

As described in Management’s Report On Internal Control Over Financial Reporting in Item 9A of the Form 10-K, we determined that we did not maintain effective internal control over financial reporting due to a material weakness consisting of the lack of an audit committee.

On February 2, 2017, we formed an audit committee consisting of three independent members of our Board of Directors, as independence is defined by the rules of NASDAQ. As such, management documented and implemented a remediation of its internal control processes and procedures.

Based on the evaluation as of September 30, 2017, our chief executive officer and chief financial officer believe that sufficient time has passed and concluded, these controls operate effectively. Therefore, our management, including our chief executive officer and chief financial officer, have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosures.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,917 characters.

Other than as set forth below, there were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” in the Form 10-K. For more information concerning our risk factors, please see “Item 1A. Risk Factors” in the Form 10-K and the Second Quarter 10-Q.

***The failure to complete the LiveXLive merger may have negatively affected our results of operations and may have negatively impacted our existing or prospective relationships with users or vendors.***

On September 6, 2017, the Company entered into the LiveXLive Merger Agreement. On October 31, 2017, the Company provided a letter to LiveXLive that terminated the LiveXLive Merger Agreement, pursuant to Section 8.2(a) of the LiveXLive Merger Agreement, due to certain conditions of the LiveXLive Merger Agreement not having been fulfilled as of October 27, 2017, which relieved the Company of its obligations under the LiveXLive Merger Agreement. No termination fee was payable by the Company in connection with the termination of the LiveXLive Merger Agreement.

In addition, although no termination fee was payable by us in connection with the termination of the LiveXLive Merger Agreement, the termination has had a negative impact on our results of operations. Due to the uncertainty surrounding the closing of the merger with LiveXLive, we ceased certain employee actions during the pendency of the LiveXLive Merger Agreement, such as hiring, terminating and reallocating personnel. During this time, our employees and management reallocated significant time to integration efforts, and we were also caused to defer and delay the pursuit of financing options, such as equity issuances or debt facilities, which has decreased our operational efficiency and effectiveness. This temporary allocation of resources to the LiveXLive merger may have adversely impacted our results of operations as we continue to operate as a standalone company.

Filed Nov 8, 2017.
Source: SEC EDGAR, the filing index for accession 0001213900-17-011522. Last ingested by Listed: Nov 11, 2026, 00:54 ET. No prices; not investment advice.