# Intelligent Protection Management Corp.: Form 10-Q for the period ended Mar 31, 2018

- Company: [Intelligent Protection Management Corp.](/companies/ipm.md) (CIK 1355839)
- Form: 10-Q
- Filed: 2018-05-09
- Accepted by EDGAR: May 9, 2018, 08:01 ET
- Period: 2018-03-31
- Accession: 0001213900-18-005715
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1355839/000121390018005715/f10q0318_peerstreaminc.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1355839/000121390018005715/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-31 | $5.7m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-01-01 to 2018-03-31 | $1.0m | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2018-01-01 to 2018-03-31 | $2.1m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | −$811.6k | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2018-01-01 to 2018-03-31 | −$808.7k | us-gaap:NetIncomeLoss |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | −$543.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $80.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2018-03-31 | $3.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $4.3m | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $21.6m | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $4.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-03-31 | $4.6m | us-gaap:Liabilities |
| Shareholders' equity | at 2018-03-31 | $17.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,107 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 three months ended March 31, 2018, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2017 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 22, 2018 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, 2017, 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.

### Background of Presentation and Recent Developments

#### Name Change

Effective March 12, 2018, we changed our name from “Snap Interactive, Inc.” to “PeerStream, Inc.” In connection with the name change, we also changed our trading symbol on the OTCQB Marketplace from “STVI” to “PEER.” The new brand is intended to honor the Company’s legacy of empowering consumers to meet new people and connect with peers via social video applications, while also referencing the anticipated importance of peer-to-peer networks and multimedia streaming in the Company’s future.

#### 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.

#### Business Solutions and Technology Services Agreement with ProximaX

On March 8, 2018, we launched PeerStream Business Solutions to provide technology licensing, services and support related to multimedia streaming and communications for third party developers and corporate clients (“PeerStream Business Solutions”). PeerStream Business Solutions is intended to leverage our nearly 20 years of technology innovation to tap into a potential new business-to-business revenue stream and support the efforts of a broad range of prospective corporate clients to adopt blockchain technology.

On March 21, 2018, as a first step in providing services through PeerStream Business Solutions, we entered into a technology services agreement with ProximaX Limited (“ProximaX”) whereby we agreed to provide certain development and related services to ProximaX to facilitate the implementation of PeerStream Protocol (“PSP”) into ProximaX’s proprietary blockchain protocol that is currently under development. Pursuant to the terms of the agreement, ProximaX agreed to pay us up to an aggregate of $10.0 million of cash in exchange for our services, with $5.0 million due upon the successful consummation of a future initial coin offering by ProximaX and up to an additional $5.0 million due upon our achievement of certain development milestones set forth in the agreement. In addition, ProximaX agreed to issue us a number of tokens equal to 2.4% of all outstanding tokens on the day of the planned initial coin offering and to reserve an additional 2% of such tokens to be issued as payment for future services provided by us, subject, in each case, to such initial coin offering generating aggregate gross proceeds of at least $30.0 million. If the planned initial coin offering does not raise at least $30.0 million or ProximaX fails to pay us the upfront cash payment of $5.0 million by June 1, 2018, we and ProximaX have agreed to negotiate alternative compensation for our services in good faith.

On April 30, 2018, ProximaX closed its initial coin offering, which generated aggregate gross proceeds in excess of $30.0 million for purposes of our technology services agreement with ProximaX. On May 6, 2018, as agreed under the terms of the technology services agreement, ProximaX paid us the $5.0 million fee due upon consummation of its initial coin offering.

### Overview

We are a leading developer of innovative decentralized technologies that power multimedia social applications and business communication solutions worldwide. 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. We recently announced a number of initiatives that feature enhancements of our technology platform using blockchain, and plans to offer aspects of our multimedia streaming and communications technology to third party developers and corporate clients. We are also currently developing a new video-enabled secure messaging service built on blockchain technology called Backchannel that we expect to launch in the fourth quarter of 2018.

Our leading network of products creates a unique social media enterprise where users can meet, see, chat, broadcast and message in real time in a secure environment with others in our network. Our products are generally available through Windows®, MacTM OS, iOSTM and AndroidTM platforms. The proprietary technology underlying our products allows us to operate thousands of simultaneous streams, including on mobile platforms, which support interactions on a one-on-one, one-to-many and many-to-many basis. We also have a worldwide established presence and brand identity in both live video chat and interactive dating, with users in over 180 countries as of May 1, 2018. Furthermore, most of our technology is supported by a portfolio of 26 issued patents.

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. As individuals become more reliant on communicating through applications, we believe it is becoming increasingly more important to many users that they have a secure and private environment on which to interact via live video online.

During 2018, we plan to pursue a strategy of using blockchain technology to improve our existing technology platform, to build new proprietary applications and to offer technology solutions to third parties, in each case taking advantage of the enhanced security, scalability and cost-effectiveness that blockchain technology offers. We recently announced that we are developing an open source, multimedia delivery platform based on blockchain technology called “PeerStream Protocol,” or “PSP,” that is expected to specialize in routing live, rich media content and powering applications that require real time data and video communications. At launch, we plan for this platform to host new proprietary apps we develop, as well as to allow third-party developers to build the next generation of social networking, messaging, group collaboration and live video streaming applications based on blockchain technologies. In concert with PSP, we are currently developing Backchannel, a blockchain-based secure messaging application that we believe will be the first video messaging application to eliminate a centralized intermediary responsible for hosting and storing user information, thereby reducing the risk that communications between users can be hacked, stolen or leaked.

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 provide video, voice and chat experiences with superior security, scalability and cost-efficiency.

### Our Products

#### Live Video Chat

We have five existing products in the video chat space: Paltalk, Camfrog, Tinychat, Ribbit Live, and Firetalk. In addition, we are currently developing a new blockchain based video application, Backchannel, which is expected to launch in the fourth quarter of 2018. The major revenue-generating live video chat products are Paltalk and Camfrog. Each product enables individuals to self-organize around topics and users with common affinities. Tinychat, 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 hundreds 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.

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 industry-leading traditional group video chat service, which the Company believes is complemented by the addition of live streaming entertainment. We expect to offer similar one-to-many live streaming video capabilities within our Paltalk application in 2018.

#### Blockchain Initiatives

*PSP.* PSP is an open source, decentralized, peer-to-peer multimedia and messaging protocol that, when coupled with blockchain technology, is designed to increase scalability, cost efficiency and security for real-time communication applications in such areas as video conferencing, messaging and workforce collaboration. We expect PSP to be completed in the fourth quarter of 2018. PSP is presently being licensed by and integrated with the ProximaX blockchain protocol.

*Backchannel*. Backchannel is a blockchain-based video-enabled secure messaging service we are developing that we plan to release in the fourth quarter of 2018. Backchannel is expected to enable real-time text, voice, and video messaging between individuals and among small groups and to leverage blockchain and other decentralization technologies to offer unique security and privacy benefits. We plan to market Backchannel to privacy-minded consumers around the world, as well as business, legal and government end-users.

Backchannel is expected to integrate end-to-end and forward secrecy encryption best practices for communication applications. In addition, we anticipate that Backchannel will use blockchain technology to validate and authenticate users with a crypto identity that does not require any personally identifiable information from the user. As a result, Backchannel will never request or hold the real world identity of its users, and therefore will not have any personal information that could be stolen by hackers. In addition, Backchannel is intended to decentralize the transmission of all communications within its network, meaning that communications will never pass through Backchannel servers, making the application more resistant to censorship, disruption and eavesdropping than traditional communication platforms.

#### 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 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 offers more information-rich user profiles and addresses a different target audience of adults over 50.

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 using our efforts to develop new products, as well as optimize 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 contributed to the launch of the blockchain initiative, and 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. 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.

#### Product Payment Options

Our users have a variety of methods by which to purchase product subscriptions across all of our platforms. Users can pay by credit card, PayPal, Western Union, Check, local e-wallet providers, or complete an in-app purchase through the Apple App Store or Google Play for Android users. We also expanded our payment options on certain of our applications in 2017 to include bitcoin as a method of payment. However, any payment made in bitcoin is automatically converted by our payment processor into U.S. dollars so that we receive U.S. dollars for the transaction.

### Subscriber Base

Our applications and the majority of revenues generated therefrom are supported by a large user database which includes approximately 164,000 active subscribers worldwide as of May 1, 2018. 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 three months ended March 31, 2018, we executed key components of our objectives:

- rebranded our corporate entity to PeerStream, Inc., which we believe better reflects our mission to connect peers via multimedia streaming and communications;
- began development of PSP, an open source, multimedia delivery protocol that is built on blockchain technology and designed to increase scalability, cost efficiency and security for real-time communication applications in such areas as video conferencing, messaging and workforce collaboration;
- launched PeerStream Business Solutions to provide technology licensing, services and support related to multimedia streaming and communications for third party developers and corporate clients, leveraging the Company’s blockchain technology base; and
- entered into a technology services agreement with ProximaX as an initial step in providing services through PeerStream Business Solutions.

For the near term, our business objectives include:

- advancing development of PSP, our multimedia delivery protocol that integrates with blockchain technology;
- developing our business solutions offerings and customer pipeline;
- launching a beta version of Backchannel, our new secure video messaging service leveraging blockchain technology and its benefits;
- growing our live video streaming entertainment business by increasing the content creator base and monetization for Camfrog Live, and extending this service to users of the Paltalk application;
- seeking additional partnerships with blockchain-based companies to enhance the breadth of our technology capabilities;
- exploring strategic opportunities such as business partnerships and merger and acquisition opportunities;
- continuing to take steps towards listing our common stock on a national securities exchange; and
- continuing to defend our intellectual property.

### Sources of Revenue

Currently, our sources of revenue are subscription, advertising and other fees generated from users of our video chat and dating products. In future periods, we plan to also generate revenue through the services provided by our PeerStream Business Solutions unit.

#### Subscription Revenue

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

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 gross and straight-line basis over the length of the subscription period. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets.

We also offer virtual gifts and micro-transactions 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. Micro-transactions allow users to increase the visibility of their profile and messages by paying for such services. Virtual gift and micro-transaction revenue is recognized at the point of sale, as they are incurred as purchased, and included in subscription revenue.

#### Advertising Revenue

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.

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

### 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 March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Bookings | $5,278,855 | $6,143,208 |
| Net cash (used in) provided by operating activities | $(543,031) | $943,100 |
| Net loss | $(808,655) | $(1,038,703) |
| Adjusted EBITDA | $104,676 | $(213,990) |
| Adjusted EBITDA as percentage of total revenues | 1.8% | (3.2)% |

#### 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 to Adjusted EBITDA: | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net loss | $(808,655) | $(1,038,703) |
| Interest expense (income), net | 2,938 | (36,813) |
| Depreciation and amortization expense | 521,178 | 551,824 |
| Stock-based compensation expense | 389,215 | 309,702 |
| Adjusted EBITDA | $104,676 | $(213,990) |

17

### 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 March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Total revenue | 100.0% | 100.0% |
| Costs and expenses: |  |  |
| Cost of revenue | 17.6% | 19.1% |
| Sales and marketing expense | 24.2% | 33.2% |
| Product development expense | 37.4% | 32.9% |
| General and administrative expense | 34.9% | 30.8% |
| Total costs and expenses | 114.1% | 116.0% |
| Loss from operations | (14.1)% | (16.0)% |
| Interest income, net | 0.1% | 0.5% |
| Total other income, net | 0.1% | 0.5% |
| Loss before income taxes | (14.1)% | (15.5)% |
| Provision for income taxes | - | - |
| Net loss | (14.1)% | (15.5)% |

### Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

### Revenues

Revenues decreased to $5,748,050 for the three months ended March 31, 2018 from $6,718,952 for the three months ended March 31, 2017. The decrease was mainly driven by a decline in FirstMet and Paltalk revenue as a result of declining active subscribers, as well as a decrease in advertising revenue across all products.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the three months ended March 31, 2018 and the three months ended March 31, 2017, the decrease between those periods, the percentage decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Three Months Ended March 31, 2018 | 2017 | $% Decrease | Decrease | % Revenue Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $5,426,623 | $6,223,685 | $(797,062) | (12.8)% | 94.4% | 92.6% |
| Advertising revenue | 321,427 | 495,267 | (173,840) | (35.1)% | 5.6% | 7.4% |
| Total revenues | $5,748,050 | $6,718,952 | $(970,902) | (14.5)% | 100.0% | 100.0% |

*Subscription –* Our subscription revenue for the three months ended March 31, 2018 decreased by $797,062, or 12.8%, as compared to the three months ended March 31, 2017. We believe that the decrease in subscription revenue was driven primarily by a decrease in new transaction revenue in the FirstMet and Paltalk products. We believe that the decrease in FirstMet revenue was driven by our increasing allocation of resources to new higher growth opportunities in the live video market. We believe that the decrease in Paltalk subscription revenue was driven, in part, by lower volume of usage and diminished marketing and advertising spend.

*Advertising –* Our advertising revenue for the three months ended March 31, 2018 decreased by $173,840, or 35.1%, as compared to the three months ended March 31, 2017. The decrease in advertising revenue primarily resulted from both a decline in active users as well as transitional costs as we changed to a new full service digital advertising agency. We also believe the decrease was related to challenges in the digital advertising industry due to a greater emphasis on fraud control resulting in lower demand and pricing.

### Costs and Expenses

Total costs and expenses for the three months ended March 31, 2018 reflect a decrease in costs and expenses of $1,234,825, or 15.8%, as compared to the three months ended March 31, 2017. The following table presents our costs and expenses for the three months ended March 31, 2018 and 2017, the decrease between those periods and the percentage decrease between those periods:

|  | Three Months Ended March 31, 2018 | 2017 | $% Decrease | Decrease | % Revenue Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of revenue | $1,012,027 | $1,282,505 | $(270,478) | (21.1)% | 17.6% | 19.1% |
| Sales and marketing expense | 1,389,992 | 2,230,492 | (840,500) | (37.7)% | 24.2% | 33.2% |
| Product development expense | 2,148,915 | 2,211,344 | (62,429) | (2.8)% | 37.4% | 32.9% |
| General and administrative expense | 2,008,709 | 2,070,127 | (61,418) | (3.0)% | 34.9% | 30.8% |
| Total costs and expenses | $6,559,643 | $7,794,468 | $(1,234,825) | (15.8)% | 114.1% | 116.0% |

*Cost of revenue -* Our cost of revenue for the three months ended March 31, 2018 decreased by $270,478, or 21.1%, as compared to the three months ended March 31, 2017. This decrease for the three months ended March 31, 2018 was primarily driven by decreases in customer service consulting fees, decreases in payment processing fees as a result of reduced subscription revenue and reduced 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 March 31, 2018 decreased by $840,500, or 37.7%, as compared to the three months ended March 31, 2017. The decrease in sales and marketing expense for the three months ended March 31, 2018 was primarily due to a reduction in advertising campaigns for the FirstMet and Paltalk products.

*Product development expense -* Our product development expense for the three months ended March 31, 2018 decreased by $62,429, or 2.8%, as compared to the three months ended March 31, 2017. The decrease was primarily due to the Company’s ability to utilize shared resources across products as a result of reduced headcount in the product development and engineering teams.

*General and administrative expense -* Our general and administrative expense for the three months ended March 31, 2018 decreased by $61,418, or 3.0%, as compared to the three months ended March 31, 2017. The decrease in general and administrative expense for the three months ended March 31, 2018 was primarily driven by a decrease in nonrecurring legal and other consulting fees related to our merger with A.V.M. Software, Inc. (d/b/a Paltalk) (the “AVM Merger”) as well as a decrease in insurance expense following the AVM Merger.

### Non-Operating Income

The following table presents the components of non-operating income for the three months ended March 31, 2018 and the three months ended March 31, 2017, the decrease between those periods and the percentage decrease between those periods:

|  | Three Months Ended March 31, 2018 | 2017 | $% Decrease | Decrease | % Revenue Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income (expense), net | $2,938 | $36,813 | $(33,875) | (92.0)% | 0.1% | 0.5% |
| Total non-operating income (expense), net | $2,938 | $36,813 | $(33,875) | (92.0)% | 0.1% | 0.5% |

Non-operating income for the three months ended March 31, 2018 was $ 2,938, a net decrease of $33,875, or 92.0%, as compared to a non-operating income of $36,813 for the three months ended March 31, 2017. The decrease in non-operating income was driven by a decrease in contractual interest accrued.

### Liquidity and Capital Resources

| Condensed Consolidated Statements of Cash Flows Data: | Three Months Ended March 31, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(543,031) | $943,100 |
| Net cash used in investing activities | (79,950) | (64,588) |
| Net cash used in financing activities | - | (17,144) |
| Net (decrease) increase in cash and cash equivalents | $(622,981) | $861,368 |

19

We undertook a plan to reduce costs and increase 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 making 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.

### Operating Activities

Net cash used in operating activities was $543,031 for the three months ended March 31, 2018, as compared to net cash provided by operating activities of $943,100 for the three months ended March 31, 2017. The decrease in net cash used in operating activities of $1,486,131 was mainly a result of a decrease in subscription revenue received during the period and the payment of remaining legal fees related to the cancellation of our merger agreement with LiveXLive Media, Inc.

Significant items impacting cash flow in the three months ended March 31, 2017 included collections of subscription revenue received during the period, offset by cash outlays relating to advertising and marketing.

### Investing Activities

Net cash used in investing activities for the three months ended March 31, 2018 and 2017 was $79,950 and $64,588, respectively. The increase in cash used in investing activities for the three months ended March 31, 2018 was primarily the result of increased 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 three months ended March 31, 2018 and 2017 was $0 and $17,144, respectively. The cash used in financing activities for the three months ended March 31, 2017 was related to the repayment of capital leases.

### Off-Balance Sheet Arrangements

As of March 31, 2018, we did not have any off-balance sheet arrangements.

## Controls and procedures

As filed, 1,186 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.

Based on the evaluation as of March 31, 2018, we determined that we maintain effective internal control over financial reporting.

### 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, 208 characters.

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.

Filed May 9, 2018.
Source: SEC EDGAR, the filing index for accession 0001213900-18-005715. Last ingested by Listed: Nov 11, 2026, 00:54 ET. No prices; not investment advice.