# Intelligent Protection Management Corp.: Form 10-Q for the period ended Mar 31, 2019

- Company: [Intelligent Protection Management Corp.](/companies/ipm.md) (CIK 1355839)
- Form: 10-Q
- Filed: 2019-04-30
- Accepted by EDGAR: Apr 30, 2019, 16:34 ET
- Period: 2019-03-31
- Accession: 0001213900-19-007456
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1355839/000121390019007456/f10q0319_peerstreaminc.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1355839/000121390019007456/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-01-01 to 2019-03-31 | $4.9m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2019-01-01 to 2019-03-31 | $952.2k | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2019-01-01 to 2019-03-31 | $1.8m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2019-01-01 to 2019-03-31 | −$105.2k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2019-01-01 to 2019-03-31 | −$159.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-01-01 to 2019-03-31 | $646.6k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.09 | us-gaap:EarningsPerShareDiluted |
| Diluted shares (weighted) | 3 months, 2019-01-01 to 2019-03-31 | 6,794,660 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | −$2.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-01-01 to 2019-03-31 | $99.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2019-03-31 | $5.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-03-31 | $5.8m | us-gaap:AssetsCurrent |
| Total assets | at 2019-03-31 | $21.4m | us-gaap:Assets |
| Current liabilities | at 2019-03-31 | $5.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-03-31 | $5.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2019-03-31 | $16.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,850 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, 2019 and 2018, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2018 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, 2019 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Form 10-K. Aside from certain information as of December 31, 2018, 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.

### Recent Developments

On January 31, 2019, we entered into an Asset Purchase Agreement with The Dating Company, LLC, pursuant to which we sold substantially all of the assets related to our online dating services business under the domain names FirstMet, 50more, and The Grade (the “Dating Services Business”) for a cash purchase price of $1.6 million, with $100,000 of the purchase price to be held in an escrow account to secure certain of our post-closing indemnification obligations. The closing of the asset sale was effective as of January 31, 2019.

### Overview

We are a communications software innovator developing enhanced security and privacy solutions for video, voice, and text applications and data transmission. Our offerings target consumer, government and enterprise clients. Using multi-layered encryption, blockchain technology and other recent innovations, we are developing our proprietary PeerStream Protocol (“PSP”) to offer clients maximal data security and confidentiality over distributed or decentralized networks. We also recently launched our Backchannel product suite in private beta, which includes cross platform applications, middleware and software development kits (“SDKs”) designed to offer a highly secure end user communication experience when coupled with PSP. For 20 years, we have built and continue to operate innovative consumer applications, including Paltalk and Camfrog, two of the largest live video social communities. The Company has a long history of technology innovation and holds 26 patents.

In March 2018, we launched our proprietary software business centered around the development of PSP and Backchannel. In addition, we also began providing professional services to customize and integrate our software solutions to meet client needs. In late March 2018, we secured our first software licensing and implementation client, ProximaX Limited (“ProximaX”), by entering into a technology services agreement related to the development and implementation of PSP into ProximaX’s proprietary blockchain protocol. We are seeking to grow our software licensing and technology implementation business by securing additional clients to license PSP and/or Backchannel, as well as implement these products into their existing systems, and to develop new software and services for license.

We also operate a leading network of consumer applications that we believe create a unique social media enterprise where users can meet, see, chat, broadcast and message in real time in a secure environment with others in our network. Our consumer applications generate revenue principally from subscription fees and advertising arrangements. As of April 19, 2019, our consumer applications were supported by a large user database with approximately 108,100 active subscribers worldwide, which excludes active subscribers to our Dating Services Business, which was sold in January 2019.

We believe that the scale of our subscriber base presents a competitive advantage in the video social networking industry and growth opportunities to advance existing products with up-sell opportunities and build future brands with cross-sell offers.

Our continued growth depends on the expansion of our software licensing and implementation services business, attracting new consumer application users through the introduction of new applications and features and further penetration of our existing markets. Our principal growth strategy is to continue investing in the development of proprietary software, expand our sales and marketing efforts with respect to such software, and increase our consumer application user base through advertising campaigns that we run through internet and mobile advertising networks.

### Operational Highlights and Objectives

During the three months ended March 31, 2019, we executed key components of our objectives:

- completed the sale of our dating assets to The Dating Company, LLC in order to focus on our core video applications and secure communications technology solutions;
- entered into a partnership consisting of Telefonica USA, Inc., in collaboration with its cybersecurity affiliate ElevenPaths, and Rivetz International SEZC, to offer next generation zero trust architecture for private and secure communications serving government and enterprise applications; and
- continued to post significant milestones in the development of PeerStream Protocol (“PSP”), with a live deployment of a software component of PSP made available on the ProximaX Limited Sirius platform’s public blockchain test net.

For the near term, our business objectives include:

- completing development of PSP for a full commercial deployment, along with scaling up go-to-market efforts with the goal of building adoption and revenue;
- enhancing our technology implementation services and developing our resources in anticipation of customer demand;
- deploying a commercial version of Backchannel to accompany PSP in offering what we believe will be a complete communications security solution to the market;
- implementing several enhancements to our live video chat applications focused around new user acquisition, retention and monetization designed to increase usage and revenue opportunities;
- enhancing our live video streaming content and increasing its exposure within our suite of applications;
- continuing to take steps towards listing our common stock on a national securities exchange; and
- continuing to defend our intellectual property.

### Sources of Revenue

Through the end of the first quarter of 2018, our sources of revenue were limited to subscription, advertising and other fees generated from users of our video chat and dating products. Beginning in April 2018, we started generating revenue through proprietary software licensing and technology implementation services as a result of our technology services agreement with ProximaX.

### Consumer Applications

#### 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.

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

We also offer virtual gifts 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 are recognized upon the users’ utilization of the virtual gift and included in subscription revenue.

#### Advertising Revenue

We generate a portion of our revenue through advertisements on our video platforms. Advertising revenue is dependent upon the volume of advertising impressions viewed by active users as well as the advertising inventory we place on our products. We recognize advertising revenue as earned on a click-through, impression, registration or subscription basis. Measurements of impressions include when a user clicks on an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external website via an advertisement by clicking on or through our application (CPA basis).

#### Technology Services Revenue

Technology services revenue is generated under service agreements that we negotiate with our clients that describe the scope of the development, integration, engineering, licensing or other integration services that we will provide. Similar to our technology services agreement with ProximaX, we expect that any future agreements are likely to contain pricing terms that are customized based on the needs of the client, and may provide for compensation in the form of cash or cryptocurrency tokens or a mix of cash and cryptocurrency tokens. In addition, we expect that we will generate technology services revenue from our software solutions, such as PSP, through licenses to our clients that may be bundled into service packages with our technology implementation services clients or provided separately on a standalone basis. We also intend to generate technology services revenue by offering support services to licensees of our software for additional service fees.

### Costs and Expenses

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

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

We expect sales and marketing expense to potentially increase in future periods if we gain positive market feedback and expand our efforts in executing our software licensing and technology implementation services strategy.

*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.

As a result of the launch of our software licensing and technology implementation services business, we anticipate product development expense to increase in future periods as we expect to hire additional developers dedicated to the internal development of new software and technologies we plan to offer for license.

*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. 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. Active subscribers, subscription bookings and Adjusted EBITDA are discussed below.

|  | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Active subscribers (as of period end) | 108,100 | 115,950 |
| Subscription bookings | $3,025,249 | $3,784,506 |
| Net cash used in operating activities | $(2,787,027) | $(543,031) |
| Net income (loss) | $646,615 | $(808,655) |
| Adjusted EBITDA | $499,990 | $133,886 |
| Adjusted EBITDA as percentage of total revenues | 10.3% | 3.3% |

#### Active Subscribers

Active subscribers means users of our consumer applications that have prepaid a fee, redeemed credits or received an upgrade from another user as a gift for current unlocked application features such as enhanced voice and video access, elevated status in the community or unrestricted communication on our applications and whose subscription period has not yet expired. The metrics for active subscribers are based on internally-derived metrics across all platforms through which our applications are accessed. We assess the performance of our consumer applications by measuring active subscribers because we believe that this metric is the most reliable way to understand user engagement on our platform and estimate the future operational performance of our applications. We also believe that measuring active subscribers helps management estimate future subscription revenue. Because active subscribers generate the majority of our subscription revenue, as the number of active subscribers to our consumer applications increases, the amount of subscription revenue generated from our consumer applications also increases. Active subscribers is distinguished from active users, which represents the total number of free and paid users across all platforms during a certain period who access our various applications. We believe that active users are important to our operations because advertising revenue is largely dependent upon the volume of advertising impressions viewed by active users.

Active subscribers worldwide in both periods presented excludes active subscribers to the Dating Services Business, which was sold in January 2019.

#### Subscription Bookings

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

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

Subscription bookings in both periods presented excludes subscription bookings from the Dating Services Business, which was sold in January 2019.

#### Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net income (loss) adjusted to exclude net income (loss) from discontinued operations, interest income, net, income tax expense, depreciation and amortization expense 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 income (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 income (loss) to Adjusted EBITDA: | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Net income (loss) | $646,615 | $(808,655) |
| Net (income) loss from discontinued operations | (562,900) | 318,503 |
| Interest income, net | (29,957) | (2,938) |
| Income tax benefit | (158,990) | - |
| Depreciation and amortization expense | 152,697 | 237,761 |
| Stock-based compensation expense | 452,525 | 389,215 |
| Adjusted EBITDA | $499,990 | $133,886 |

19

### Results of Operations

During the first quarter of 2019, we began to separately report the results of the Dating Services Business as a discontinued operation in our consolidated statements of operations and present the related assets and liabilities as held for sale in our consolidated balance sheets. These changes have been applied for all periods presented. Unless otherwise noted, amounts and percentages for all periods discussed below reflect the results of operations and financial condition from our continuing operations. Refer to Note 3 of our Notes to Condensed Consolidated Financial Statements for additional information on discontinued 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, 2019 | 2018 |
| --- | ---: | ---: |
| Total revenues | 100.0% | 100.0% |
| Costs and expenses: |  |  |
| Cost of revenue | 19.5% | 18.3% |
| Sales and marketing expense | 7.7% | 9.0% |
| Product development expense | 36.4% | 42.4% |
| General and administrative expense | 38.5% | 42.4% |
| Total costs and expenses | 102.2% | 112.1% |
| Loss from continuing operations | (2.2)% | (12.1)% |
| Interest income, net | 0.6% | 0.1% |
| Loss from continuing operations before provision for income taxes | (1.5)% | (12.0)% |
| Provision for income taxes | 3.3% | - |
| Net income (loss) from continuing operations | 1.7% | (12.0)% |
| Net income (loss) from discontinued operations | 11.6% | (7.8)% |
| Net income (loss) | 13.3% | (19.9)% |

### Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

### Revenue

Revenue increased to $4,873,175 for the three months ended March 31, 2019 from $4,070,404 for the three months ended March 31, 2018. The increase was driven by $1,748,330 of revenue generated under the technology services agreement with ProximaX, offset by a decline of $833,051 in subscription revenue primarily as a result of a 6.8% decline in active subscribers, as well as a decrease of $112,508 in advertising revenue across all products.

The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenues for the three months ended March 31, 2019 and the three months ended March 31, 2018, 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 March 31, 2019 | 2018 | $% Increase (Decrease) | Increase (Decrease) | % Revenue Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $3,004,355 | $3,837,406 | $(833,051) | (21.7)% | 61.7% | 94.3% |
| Advertising revenue | 120,490 | 232,998 | (112,508) | (48.3)% | 2.5% | 5.7% |
| Technology service revenue | 1,748,330 | - | 1,748,330 | 100.0% | 35.9% | -% |
| Total revenues | $4,873,175 | $4,070,404 | $802,771 | 19.7% | 100.0% | 100.0% |

20

*Subscription Revenue –* Our subscription revenue for the three months ended March 31, 2019 decreased by $833,051, or 21.7%, as compared to the three months ended March 31, 2018. The decrease in subscription revenue was mainly driven by lower virtual gift transaction volume for both Patalk and Camfrog products, corresponding to lower monthly active usage. In addition, a decrease in active subscribers of 7,850, or 6.8%, contributed to a decrease in subscription revenue. Finally, we believe that lower reseller volume led to reduced revenue in international markets.

Advertising Revenue – Our advertising revenue for the three months ended March 31, 2019 decreased by $112,508, or 48.3%, as compared to the three months ended March 31, 2018. The decrease in advertising revenue primarily resulted from a 21.2% decline in active users. 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.

*Technology Service Revenue –* For the three months ended March 31, 2019, we generated $1,748,330 of technology service revenue in exchange for providing certain development and related services to ProximaX to facilitate the integration of PSP into ProximaX’s proprietary blockchain protocol that is currently under development. Technology service revenue is generated through software licensing and technology implementation services, which we began providing in March 2018, and consequently, we did not generate any technology service revenue for the three months ended March 31, 2018.

### Costs and Expenses

Total costs and expenses for the three months ended March 31, 2019 reflect an increase in costs and expenses of $414,914, or 9.1%, as compared to the three months ended March 31, 2018. The following table presents our costs and expenses for the three months ended March 31, 2019 and 2018, the increase between those periods, the percentage increase between those periods and the percentage of total revenues that each represented for those periods:

|  | Three Months Ended March 31, 2019 | 2018 | $% Increase | Increase | % Revenue Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of revenue | $952,219 | $745,626 | $206,593 | 27.7% | 19.5% | 18.3% |
| Sales and marketing expense | 377,151 | 365,979 | 11,172 | 3.1% | 7.7% | 9.0% |
| Product development expense | 1,771,565 | 1,726,596 | 44,969 | 2.6% | 36.4% | 42.4% |
| General and administrative expense | 1,877,472 | 1,725,292 | 152,180 | 8.8% | 38.5% | 42.4% |
| Total costs and expenses | $4,978,407 | $4,563,494 | $414,914 | 9.1% | 102.2% | 112.1% |

*Cost of revenue -* Our cost of revenue for the three months ended March 31, 2019 increased by $206,593, or 27.7%, as compared to the three months ended March 31, 2018. The increase for the three months ended March 31, 2019 was primarily driven by an increase of approximately $191,300 in compensation paid to our technical personnel and consulting services related to technology service revenue. Further, there was an increase in compensation expense of approximately $46,900 due to an increased headcount in system administration support. These increases were offset by a decrease of approximately $91,900 related to Paltalk product hosting expenses.

*Sales and marketing expense* - Our sales and marketing expense for the three months ended March 31, 2019 increased by $11,172, or 3.1%, as compared to the three months ended March 31, 2018. The slight increase in sales and marketing expense for the three months ended March 31, 2019 was primarily due to an increase in marketing expenses of approximately $31,700 related to our video properties.

As a result of the launch of our software licensing and technology implementation services business, we expect sales and marketing expense to increase in future periods as we expect to incur marketing and advertising expense and hire additional sales and marketing personnel to help build brand awareness and grow this aspect of our business.

*Product development expense* - Our product development expense for the three months ended March 31, 2019 increased by $44,969, or 2.6%, as compared to the three months ended March 31, 2018. The increase was primarily due to an increase in salary and stock compensation expense of approximately $147,100 due to newly hired personnel and stock option grants for employees in the product development department, offset by a decrease in consulting expenses of approximately $110,700 related to the Paltalk product.

*General and administrative expense* - Our general and administrative expense for the three months ended March 31, 2019 increased by $152,180, or 8.8%, as compared to the three months ended March 31, 2018. The increase in general and administrative expense for the three months ended March 31, 2019 was primarily due to an increase of approximately $159,000 in legal fees mainly related to the sale of the Dating Services Business.

### Non-Operating Income

The following table presents the components of non-operating income for the three months ended March 31, 2019 and the three months ended March 31, 2018, 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% March 31, 2019 | 2018 | Increase (Decrease) | Increase (Decrease) | % Revenue Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income, net | $29,957 | $2,938 | $27,019 | 919.6% | 0.6% | 0.1% |
| Gain on sale from discontinued operations | 826,770 | - | 826,770 | 100.0% | 17.0% | -% |
| Loss from discontinued operations | (104,880) | (318,503) | 213,623 | (67.1)% | (2.2)% | (7.8)% |
| Total non-operating income (loss) | $751,847 | $(315,565) | $1,067,412 | -% | 15.4% | (7.7)% |

Non-operating income for the three months ended March 31, 2019 was $751,847, a net increase of $1,067,412, as compared to non-operating loss of $315,565 for the three months ended March 31, 2018. The increase in non-operating income was driven by the gain on the sale of the Dating Services Business, along with interest income accrued from cash held in interest-bearing accounts during the period.

### Income Taxes

Our provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. For the three months ended March 31, 2019 and 2018, the Company recorded an income tax benefit from continuing operations of $158,990 and $0, respectively.

As of March 31, 2019, our conclusion regarding the realizability of our U.S. deferred tax assets did not change and we have recorded a full valuation allowance against them.

### Liquidity and Capital Resources

| Condensed Consolidated Statements of Cash Flows Data: | Three Months Ended March 31, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(2,787,027) | $(543,031) |
| Net cash provided by (used in) investing activities | 1,500,925 | (79,950) |
| Net cash provided by (used in) financing activities | - | - |
| Net decrease in cash and cash equivalents | $(1,286,102) | $(622,981) |

Currently, our primary source of liquidity is cash on hand and cash flows from continuing operations, and we believe that our cash balance and our expected cash flow from operations will be sufficient to meet all of our financial obligations for the twelve months from the date of this report. As of March 31, 2019, we had $5,269,274 of cash and cash equivalents.

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

Our primary use of working capital is related to product development resources in order to maintain and create new products, services and applications for our clients and users. In particular, a significant portion of our working capital has been allocated to the development of PSP and Backchannel. In the future, 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 $2,787,027 for the three months ended March 31, 2019, as compared to net cash used in operating activities of $543,031 for the three months ended March 31, 2018. The increase in net cash used in operating activities of $2,243,996 was mainly a result of a one-time payment of residual liabilities in connection to the sale of the Dating Services Business as well as the payments of related legal fees.

Significant items impacting cash flow in the three months ended March 31, 2018 included significant cash outlays relating to legal fees.

### Investing Activities

Net cash provided by (used in) investing activities for the three months ended March 31, 2019 and 2018 was $1,500,925 and $(79,950), respectively. The increase in net cash provided by investing activities for the three months ended March 31, 2019 was primarily the result of proceeds from the sale of the Dating Services Business.

### Financing Activities

We did not have any net cash provided by (used in) financing activities for the three months ended March 31, 2019 and 2018.

### Off-Balance Sheet Arrangements

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

## Controls and procedures

As filed, 1,179 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, 2019, we determined that we maintain effective disclosure controls and procedures.

### 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 Apr 30, 2019.
Source: SEC EDGAR, the filing index for accession 0001213900-19-007456. Last ingested by Listed: Oct 24, 2026, 15:09 ET. No prices; not investment advice.