# Intelligent Protection Management Corp.: Form 10-Q for the period ended Jun 30, 2020

- Company: [Intelligent Protection Management Corp.](/companies/ipm.md) (CIK 1355839)
- Form: 10-Q
- Filed: 2020-08-06
- Accepted by EDGAR: Aug 6, 2020, 17:20 ET
- Period: 2020-06-30
- Accession: 0001213900-20-020684
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1355839/000121390020020684/f10q0620_paltalk.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1355839/000121390020020684/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-04-01 to 2020-06-30 | $3.4m | us-gaap:Revenues |
| Revenue | 6 months, 2020-01-01 to 2020-06-30 | $6.1m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2020-04-01 to 2020-06-30 | $685.4k | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2020-01-01 to 2020-06-30 | $1.3m | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2020-04-01 to 2020-06-30 | $1.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2020-01-01 to 2020-06-30 | $2.5m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2020-04-01 to 2020-06-30 | $530.7k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-01-01 to 2020-06-30 | $167.1k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2020-04-01 to 2020-06-30 | $2.5k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-01-01 to 2020-06-30 | $5.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-04-01 to 2020-06-30 | $531.5k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-01-01 to 2020-06-30 | $93.2k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.08 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-04-01 to 2020-06-30 | $0.08 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-01-01 to 2020-06-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-04-01 to 2020-06-30 | 6,869,027 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-01-01 to 2020-06-30 | 6,871,299 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-01-01 to 2020-06-30 | $422.8k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2020-06-30 | $4.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-06-30 | $4.7m | us-gaap:AssetsCurrent |
| Total assets | at 2020-06-30 | $12.2m | us-gaap:Assets |
| Current liabilities | at 2020-06-30 | $3.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-06-30 | $3.7m | us-gaap:Liabilities |
| Long-term debt | at 2020-06-30 | $253.3k | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2020-06-30 | $253.3k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2020-06-30 | $8.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,476 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 and six months ended June 30, 2020 and 2019, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2019 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 24, 2020 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, 2019, 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 Part II of this report and “Item 1A. Risk Factors” in the Form 10-K.

### Overview

We are a leading communications software innovator that powers multimedia social applications. We 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.

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

We also believe that our proprietary consumer app technology platform can scalably support large communities of users in activities such as video, voice and text chat and provide robust user monetization tools. In October 2019, we commenced a strategy to make our video chat platform available to potential third-party partners with large user communities to provide retention-enhancing social and communication features while potentially providing additional commercial opportunities for those partners. We expect to participate in the commercial upside with such partners via revenue sharing arrangements that we plan to negotiate on a partner-specific basis.

Our continued growth depends on attracting new consumer application users through the introduction of new applications, features and partnerships and further penetration of our existing markets. Our principal growth strategy is to invest 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 potential platform partnerships and new and existing advertising campaigns that we run through internet and mobile advertising networks, all while balancing the capital needs of the business.

Our strategy is to approach these opportunities in a measured way, being mindful of the Company’s resources and evaluating factors such as potential revenue, time to market and amount of capital needed to invest in the opportunity.

### Recent Developments

### Name Change

Effective May 15, 2020, we changed our name from “PeerStream, Inc.” to “Paltalk, Inc.” In connection with the name change, we also changed our trading symbol on the OTCQB Marketplace from “PEER” to “PALT.” This name change takes us back to our roots and reflects our primary focus on our current operations, Paltalk and Camfrog, which together are host to one of the world’s largest collections of video-based communities.

### COVID-19

In December 2019, a strain of coronavirus, was reported to have surfaced in Wuhan, China, and has reached multiple other countries, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in affected countries. The various precautionary measures taken by many governmental authorities around the world in order to limit the spread of the coronavirus has had and could continue to have an adverse effect on the global markets and its economy, including on the availability and pricing of employees and resources, and other aspects of the global economy. Although we cannot predict the impact that the recent outbreak of coronavirus will have on our business or results of operations in 2020, to date, our core multimedia social applications have been able to support the increased demand we have experienced. On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the coronavirus pandemic, we applied for a $506,500 loan (the “Loan”) under the Small Business Administration (“SBA”) Paycheck Protection Program under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”)., and on May 3, 2020, we entered into a promissory note (the “Note”) in favor of Citibank, N.A., as lender (the “Lender”). While management believes that at least some portion of the Note will be forgiven pursuant to its terms, there can be no assurance that any amount will be forgiven until the SBA and the Lender make their final determination.

Paltalk continues to serve as a form of safe and entertaining communication during this global pandemic and in order to help those affected in hardest hit countries will continue to offer some of our group video conferencing services free of charge.

### Sale of Secured Communications Assets

As previously announced, on February 24, 2020, we entered into an Asset Purchase Agreement, which was subsequently amended and restated on May 29, 2020 (the “Amended and Restated Agreement”) with SecureCo, LLC (the “Buyer”), pursuant to which we agreed to sell substantially all of the assets related to its secure communications business (the “Secured Communications Assets”) to the Buyer (the “Asset Sale”). The Secured Communications Assets include communication solutions and operations capabilities for secure messaging and data applications, and software and middleware for enterprise and government client targets.

On July 23, 2020, we completed the Asset Sale for a cash purchase price of $250,000, $150,000 of which was paid at closing and $100,000 of which is payable in four equal installments over the next fifteen months. The Amended and Restated Agreement also provides for a revenue sharing arrangement, pursuant to which we are entitled to receive quarterly royalty payments ranging from 5% to 10% of certain revenues received by the Buyer, with the aggregate amount of such royalty payments not to exceed $500,000. We do not expect to continue to pursue secure communications products or technology implementation services as part of our overall business strategy.

### Operational Highlights and Objectives

During the three and six months ended June 30, 2020, we executed key components of our objectives:

- reported net income for the three and six months ended June 30, 2020 of $0.5 million and $0.1 respectively, compared to net income of $0.4 million and $1.1 million for the three and six months ended June 30, 2019 by growing subscription revenue compared to the same period last year and by executing on our streamlined operating plan, which eliminated costs associated with our secure communications business headcount;
- achieved positive net cash flow, an improvement of $2.9 million when compared to the six months ended June 30, 2019, and positive cash flow from operations, an improvement of $3.8 million when compared to the six months ended June 30, 2019;
- increased active subscribers by 4.2% as compared to December 31, 2019, along with an increase in active subscribers of 2.0% compared to June 30, 2019;
- decreased our operating expenses through a streamlined plan of operations by $3.5 million, or 37.1%, compared to the six months ended June 30, 2019;
- in connection with the commercial launch of YouNow’s Props platform on our Camfrog application, which enabled us to distribute Props tokens to our end users for anticipated loyalty and retention benefits, the Company received 7.0 million Props tokens in May 2020 (3.0 million of which were received upon signing the agreement and 4.0 million of which were received upon the launch of YouNow’s Props tokens on Camfrog); and
- completed the sale of our secure communications business for an aggregate purchase price of $250 thousand, which provides for future revenue share potential of up to an additional $0.5 million, allowing the Company to participate in the upside of that business without losing focus on its core application business.

For the near term, our business objectives include:

- implementing several enhancements to our live video chat applications, including the integration of Props token rewards and other features focused on new user acquisition, retention and monetization, which collectively are intended to increase usage and revenue opportunities;
- continuing to explore strategic opportunities, including, but not limited to, potential mergers or acquisitions of other entities that are synergistic to our businesses;
- continuing to develop our consumer application platform strategy by seeking potential partnerships with large third-party communities to whom we could promote a co-branded version of our video chat products and potentially share in the incremental revenues generated by these partner communities; and
- continuing to defend our intellectual property.

16

### Sources of Revenue

Our main sources of revenue are subscription, advertising and other fees generated from users of our core video chat products. We expect that the majority of our revenue will be generated from our core video chat products. We also generate technology service revenue under licensing and service agreements that we negotiate with third parties which includes development, integration, engineering, licensing or other services that we provide.

#### 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 condensed consolidated balance sheets.

We also 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. Virtual gift revenue is recognized upon the users’ utilization of the virtual gift and included in subscription revenue. The unearned portion of virtual gifts revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets.

#### 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 Service Revenue

Technology service revenue is generated under licensing, service and partnership agreements that we negotiate with third parties which includes development, integration, engineering, licensing or other services that we provide.

During 2019 and the first quarter of 2020, we received technology service revenue in connection with our technology services agreement (the “ProximaX Agreement”) with ProximaX Limited (“ProximaX”). Effective June 24, 2019, we entered into a termination agreement with ProximaX (the “Termination Agreement”), pursuant to which ProximaX was required to make certain payments to us on a monthly basis through the remainder of 2019. Since there is no assurance of collectability on the payments due under the Termination Agreement, revenue is being recognized as the payments are received. As described above, we recently sold our Secured Communications Assets. We do not anticipate generating any material technology service revenue in the future or continuing to pursue secure communications software solutions as part of our business strategy.

During the second quarter of 2020, the Company also recorded technology services revenue in connection with its agreement to serve as a launch partner with YouNow Inc. (“YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”) into its Camfrog and Paltalk applications (the “YouNow Agreement”). Pursuant to the terms of the YouNow Agreement, YouNow agreed to pay the Company, in exchange for the Company’s services, an aggregate of 10.5 million cryptographic props tokens (“Props tokens”) upon the achievement of certain milestones as follows: (i) 3.0 million Props tokens upon execution of the YouNow Agreement, (ii) 4.0 million Props tokens upon the integration of the Props platform in the Company’s Camfrog application and (iii) 3.5 million Props tokens due upon the integration of the Props platform in the Paltalk application. The upfront fee is recognized as revenue under the output method based on the direct measurements of the value of services transferred to date to the customer, relative to the remaining services under the YouNow Agreement. The milestones fees are recognized as revenue on the completion dates of integration services performed.

We expect that business development partnerships are likely to contain pricing and other custom terms based on the needs of the client, which may include compensation in the form of cash or cryptocurrency tokens or a mix of cash and cryptocurrency tokens.

### 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.

#### Sales and marketing expense

Sales and marketing expense consist 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.

#### 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 and 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 provided by (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 June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Active subscribers (as of period end) | 108,200 | 106,100 | 108,200 | 106,100 |
| Subscription bookings | $3,415,548 | $3,037,802 | $6,000,812 | $6,063,051 |
| Net cash provided by (used in) operating activities | $405,903 | $(586,966) | $422,795 | $(3,373,991) |
| Net income | $531,541 | $443,384 | $93,157 | $1,089,999 |
| Adjusted EBITDA | $593,793 | $1,019,611 | $472,341 | $1,519,601 |
| Adjusted EBITDA as percentage of total revenues | 17.6% | 20.9% | 7.7% | 15.6% |

#### 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.

#### Subscription Bookings

Subscription bookings is a financial measure representing the aggregate dollar value of subscription fees and virtual gifts purchases 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 or ratably over usage for virtual gifts. 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.

#### Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net income adjusted to exclude net loss from discontinued operations, interest expense (income), net, other expense (income), gain on the sale of dating applications, income tax expense from continuing operations, income tax benefit from discontinued operations, gain on office lease termination, 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.

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;
- Adjusted EBITDA does not consider the gain from the office lease cancellation;
- Adjusted EBITDA does not reflect the gain on the sale of our dating applications or our loss or income tax expense from discontinued operations; and
- other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

#### Limitations of Adjusted EBITDA

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results. The following table presents a reconciliation of net income, 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 to Adjusted EBITDA: | Three Months Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $531,541 | $443,384 | $93,157 | $1,089,999 |
| Interest expense (income), net | 1,210 | (24,837) | (10,977) | (54,794) |
| Other expense (income), net | (4,589) | - | 79,880 | - |
| Net loss from discontinued operations | - | - | - | 104,880 |
| Gain on sale of dating applications | - | - | - | (826,770) |
| Income tax benefit from discontinued operations | - | (158,990) | - | - |
| Income tax expense from continuing operations | 2,500 | 163,490 | 5,000 | 4,500 |
| Gain on office lease termination | (141,001) | - | (141,001) | - |
| Depreciation and amortization expense | 146,949 | 152,903 | 299,893 | 305,600 |
| Stock-based compensation expense | 57,183 | 443,661 | 146,389 | 896,186 |
| Adjusted EBITDA | $593,793 | $1,019,611 | $472,341 | $1,519,601 |

### Results of Operations

In January 2019, we sold substantially all of the assets related to our dating service business under the domain names FirstMet, 50more and The Grade, which we collectively refer to as the dating services business. As a result, during the first quarter of 2019, we began to separately report the results of the dating services business as a discontinued operation in our condensed consolidated statements of income and present the related assets and liabilities as held for sale in our condensed 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 the notes to our condensed consolidated financial statements for additional information on discontinued operations.

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

|  | Three Months Ended June 30, 2020 | 2019 | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: |
| Total revenue | 100.0% | 100.0% | 100.0% | 100.0% |
| Costs and expenses: |  |  |  |  |
| Cost of revenue | 20.3% | 18.3% | 21.4% | 18.9% |
| Sales and marketing expense | 6.5% | 4.7% | 6.8% | 6.2% |
| Product development expense | 37.2% | 35.1% | 41.1% | 35.7% |
| General and administrative expense | 20.3% | 33.1% | 28.0% | 35.8% |
| Total costs and expenses | 84.3% | 91.3% | 97.3% | 96.7% |
| Income from continuing operations | 15.7% | 8.7% | 2.7% | 3.3% |
| Other income (expense), net | 0.1% | -% | (1.3)% | -% |
| Interest income (expense), net | (0.0)% | 0.5% | 0.2% | 0.6% |
| Income from continuing operations before provision for income taxes | 15.8% | 9.2% | 1.6% | 3.9% |
| Income tax expense | (0.1)% | (3.4)% | (0.1)% | (0.0)% |
| Net income from continuing operations | 15.7% | 5.8% | 1.5% | 3.9% |
| Gain on sale from discontinued operations | -% | -% | -% | 8.5% |
| Loss from discontinued operations | -% | -% | -% | (1.1)% |
| Income tax benefit on discontinued operations | -% | 3.3% | -% | -% |
| Net income from discontinued operations | -% | 3.3% | -% | -% |
| Net income | 15.7% | 9.1% | 1.5% | 11.3% |

### Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

### Revenue

Total revenues decreased to $3,380,475 for the three months ended June 30, 2020 from $4,872,874 for the three months ended June 30, 2019. The decrease was mainly driven by the termination of the ProximaX Agreement, offset by technology service revenue of $112,000 generated by the YouNow Agreement, along with a decrease of $53,013 in advertising revenue across all products, offset by an increase of $160,719 in subscription revenue supported by a 2.0% increase in active subscribers.

The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenues for the three months ended June 30, 2020 and 2019, 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 June 30, 2020 | 2019 | $% Increase (Decrease) | Increase (Decrease) | % Revenue Three Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $3,210,619 | $3,049,900 | $160,719 | 5.3% | 95.0% | 62.6% |
| Advertising revenue | 57,856 | 110,869 | (53,013) | (47.8)% | 1.7% | 2.3% |
| Technology service revenue | 112,000 | 1,712,105 | (1,600,105) | (93.5)% | 3.3% | 35.1% |
| Total revenues | $3,380,475 | $4,872,874 | $(1,492,399) | (30.6)% | 100.0% | 100.0% |

*Subscription Revenue –* Our subscription revenue for the three months ended June 30, 2020 increased by $160,719, or 5.3%, as compared to the three months ended June 30, 2019. The increase in subscription revenue was mainly driven by increased subscriptions across all products, corresponding to an increase in active subscribers of approximately 2.0%.

*Advertising Revenue –* Our advertising revenue for the three months ended June 30, 2020 decreased by $53,013, or 47.8%, as compared to the three months ended June 30, 2019. The decrease in advertising revenue was primarily due to a decline in the volume of advertising impressions related to changes in third party advertising partners.

*Technology Service Revenue –* Our technology service revenue decreased by $1,600,105, or 93.5%, as compared to the three months ended June 30, 2019. The decrease in technology service revenue was mainly driven by the termination of the ProximaX Agreement, offset by technology service revenue of $112,000 generated by the YouNow Agreement.

### Costs and Expenses

Total costs and expenses for the three months ended June 30, 2020 reflect a decrease of $1,600,014, or 36.0%, as compared to the three months ended June 30, 2019. The following table presents our costs and expenses for the three months ended June 30, 2020 and 2019, 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 June 30, 2020 | 2019 | $% Decrease | Decrease | % Revenue Three Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of revenue | $685,430 | $892,470 | $(207,040) | (23.2)% | 19.6% | 18.3% |
| Sales and marketing expense | 221,416 | 230,996 | (9,580) | (4.1)% | 6.3% | 4.7% |
| Product development expense | 1,255,884 | 1,711,974 | (456,090) | (26.6)% | 36.0% | 35.1% |
| General and administrative expense | 687,083 | 1,614,387 | (927,304) | (57.4)% | 19.7% | 33.1% |
| Total costs and expenses | $2,849,813 | $4,449,827 | $(1,600,014) | (36.0)% | 81.6% | 91.3% |

*Cost of revenue –* Our cost of revenue for the three months ended June 30, 2020 decreased by $207,040, or 23.2%, as compared to the three months ended June 30, 2019. The decrease for the three months ended June 30, 2020 was primarily driven by a decrease of approximately $163,400 in expenses related to the terminated ProximaX Agreement. Additionally, there was a decrease from fraud, hosting and content delivery services reductions for the three months ended June 30, 2020.

*Sales and marketing expense –* Our sales and marketing expense for the three months ended June 30, 2020 decreased by $9,580, or 4.1%, as compared to the three months ended June 30, 2019. The decrease in sales and marketing expense for the three months ended June 30, 2020 was primarily due to a decrease in overall marketing expenditures across all products.

*Product development expense –* Our product development expense for the three months ended June 30, 2020 decreased by $456,090, or 26.6%, as compared to the three months ended June 30, 2019. The decrease was primarily due to a decrease of approximately $408,500 resulting from reduced headcount in the product and engineering teams.

*General and administrative expense –* Our general and administrative expense for the three months ended June 30, 2020 decreased by $927,304, or 57.4%, as compared to the three months ended June 30, 2019. The decrease in general and administrative expense for the three months ended June 30, 2020 was primarily due to headcount reductions resulting in approximately $529,300 of reduced salary and related expenses. In addition, the decrease was in part due to reduced legal fees of approximately $87,512 and a gain of approximately $141,000 resulting from an office lease termination.

### Non-Operating Income

The following table presents the components of non-operating income for the three months ended June 30, 2020 and the three months ended June 30, 2019, 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 June 30, 2020 | 2019 | $% Increase (Decrease) | Increase (Decrease) | % Revenue Three Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income (expense), net | $(1,210) | $24,837 | $(26,047) | (104.9)% | (0.0)% | 0.5% |
| Other income | 4,589 | - | 4,589 | 100.0% | 0.1% | -% |
| Income from discontinued operations | - | 158,990 | (158,990) | (100.0)% | -% | 3.3% |
| Total non-operating income | $3,379 | $183,827 | $(180,448) | (98.2)% | 0.1% | 3.8% |

Non-operating income for the three months ended June 30, 2020 was $3,379, a net decrease of $180,448, as compared to non-operating income of $183,827 for the three months ended June 30, 2019. The decrease in non-operating income was driven by the loss of income from the dating services business that we sold in January 2019.

### 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 June 30, 2020, the Company recorded an income tax provision from continuing operations of $2,500 consisting primarily of state and local taxes. For the three months ended June 30, 2019, the Company recorded an income tax provision from continuing operations of $163,490. The Company recorded an income tax provision for state and local taxes and reversed the income tax benefit recorded during the three months ended March 31, 2019 as the intra-period allocation guidance no longer applied as the Company reported income from both continuing and discontinued operations.

As of June 30, 2020, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.

### Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

### Revenue

Revenue decreased to $6,101,217 for the six months ended June 30, 2020 from $9,746,049 for the six months ended June 30, 2019. The decrease was driven by a decline of $3,333,483 in technology service revenue as a result of the termination of the ProximaX Agreement, offset by $112,000 of revenue generated from the YouNow Agreement, a decline in subscription revenue of $193,513 primarily as a result of lower virtual goods transaction volume, as well as a decrease of $117,836 in advertising revenue across all products.

The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenues for the six months ended June 30, 2020 and the six months ended June 30, 2019, the decrease between those periods, the percentage decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Six Months Ended June 30, 2020 | 2019 | $% Decrease | Decrease | % Revenue Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $5,860,742 | $6,054,255 | $(193,513) | (3.2)% | 96.0% | 62.1% |
| Advertising revenue | 113,523 | 231,359 | (117,836) | (50.9)% | 1.9% | 2.4% |
| Technology service revenue | 126,952 | 3,460,435 | (3,333,483) | (96.3)% | 2.1% | 35.5% |
| Total revenues | $6,101,217 | $9,746,049 | $(3,644,832) | (37.4)% | 100.0% | 100.0% |

*Subscription Revenue –* Our subscription revenue for the six months ended June 30, 2020 decreased by $193,513, or 3.2%, as compared to the six months ended June 30, 2019. The decrease in subscription revenue was mainly driven by lower virtual gift transaction volume for both Paltalk and Camfrog products, corresponding to lower monthly active usage as compared to the six months ended June 30, 2019.

*Advertising Revenue –* Our advertising revenue for the six months ended June 30, 2020 decreased by $117,836, or 50.9%, as compared to the six months ended June 30, 2019. The decrease in advertising revenue primarily resulted from a decrease in the marketing budget. We also believe a significant portion of 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 –* Our technology service revenue decreased by $3,333,483, or 96.3%, as compared to the six months ended June 30, 2019. The decrease in technology service revenue was mainly driven by the termination of the ProximaX Agreement, offset by technology service revenue of $112,000 generated by the YouNow Agreement.

### Costs and Expenses

Total costs and expenses for the six months ended June 30, 2020 reflect a decrease in costs and expenses of $3,494,077, or 37.1%, as compared to the six months ended June 30, 2019. The following table presents our costs and expenses for the six months ended June 30, 2020 and 2019, the decrease between those periods, the percentage decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Six Months Ended June 30, 2020 | 2019 | $% Decrease | Decrease | % Revenue Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of revenue | $1,308,154 | $1,844,689 | $(536,535) | (29.1)% | 21.1% | 18.9% |
| Sales and marketing expense | 413,086 | 608,147 | (195,061) | (32.1)% | 6.6% | 6.2% |
| Product development expense | 2,506,580 | 3,483,539 | (976,959) | (28.0)% | 40.3% | 35.7% |
| General and administrative expense | 1,706,337 | 3,491,859 | (1,785,522) | (51.1)% | 27.5% | 35.8% |
| Total costs and expenses | $5,934,157 | $9,428,234 | $(3,494,077) | (37.1)% | 95.5% | 96.7% |

*Cost of revenue -* Our cost of revenue for the six months ended June 30, 2020 decreased by $536,535, or 29.1%, as compared to the six months ended June 30, 2019. The decrease for the six months ended June 30, 2020 was primarily driven by a decrease of approximately $354,700 in expenses related to the terminated ProximaX Agreement. Additionally, there was a decrease in expenses resulting from the reduction of fraud, hosting and content delivery services in the six months ended June 30, 2020.

*Sales and marketing expense* - Our sales and marketing expense for the six months ended June 30, 2020 decreased by $195,061, or 32.1%, as compared to the six months ended June 30, 2019. The decrease in sales and marketing expense for the six months ended June 30, 2020 was primarily due to a decrease in marketing expenditures of approximately $172,100 related to our video applications.

*Product development expense -* Our product development expense for the six months ended June 30, 2020 decreased by $976,959, or 28.0%, as compared to the six months ended June 30, 2019. The decrease was primarily due to a decrease in compensation resulting from reduced headcount in the product and engineering teams.

*General and administrative expense* - Our general and administrative expense for the six months ended June 30, 2020 decreased by $1,785,522, or 51.1%, as compared to the six months ended June 30, 2019. The decrease in general and administrative expense was primarily due to headcount reductions resulting in approximately $1,007,900 of reduced salary and related expenses. In addition, the decrease was in part due to reduced legal fees of approximately $203,500 and a gain of approximately $141,000 resulting from an office lease termination.

### Non-Operating Income (Loss)

The following table presents the components of non-operating income (loss) for the six months ended June 30, 2020 and the six months ended June 30, 2019, the decrease between those periods, the percentage decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Six Months Ended June 30, 2020 | 2019 | $% Decrease | Decrease | % Revenue Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income, net | $10,977 | $54,794 | $(43,817) | (80.0)% | 0.2% | 0.6% |
| Other expense, net | (79,880) | - | (79,880) | (100.0)% | (1.3)% | -% |
| Income from discontinued operations | - | 721,890 | (721,890) | (100.0)% | -% | 7.4% |
| Total non-operating income (loss) | $(68,903) | $776,684 | $(845,587) | (109.6)% | (1.1)% | 8.0% |

Non-operating income for the six months ended June 30, 2020 decreased by $845,587, or 109.6%, as compared to the six months ended June 30, 2019, primarily due to the sale of the assets related to our dating services business. In addition, other expenses increased by $79,880 primarily due to a $23,838 realized loss from the sale of digital tokens and a $56,042 current asset write-off.

### 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 six months ended June 30, 2020, the Company recorded an income tax provision from continuing operations of $5,000 consisting primarily of state and local taxes. For the six-months ended June 30, 2019, the Company recorded an income tax provision of $4,500. The Company recorded an income tax provision for state and local taxes and reversed the income tax benefit recorded during the three months ended March 31, 2019 as the intra-period allocation guidance no longer applied as the Company reported income from both continuing and discontinued operations.

As of June 30, 2020, our conclusion regarding the realizability of our US 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: | Six Months Ended June 30, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash provided by (used in) operating activities | $422,795 | $(3,373,991) |
| Net cash provided by investing activities | 31,356 | 1,460,603 |
| Net cash provided by financing activities | 497,656 | - |
| Net increase (decrease) in cash and cash equivalents | $951,807 | $(1,913,388) |

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 June 30, 2020, we had $4,378,865 of cash and cash equivalents.

Our primary use of working capital is related to product development resources in order to maintain and create new services and features in applications for our clients and users. In particular, a significant portion of our working capital has been allocated to the improvement of our products. In the future, we may also seek to grow our business by expending our capital resources to fund strategic investments and partnership opportunities.

On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the coronavirus pandemic, we applied for the Loan, and on May 3, 2020, we entered into the Note in favor of the Lender in the amount of approximately $0.5 million.

The Note has a two-year term, matures on May 3, 2022, and bears interest at a stated rate of 1.0% per annum. Monthly principal and interest payments will commence in December 2020. We did not provide any collateral or guarantees for the Loan, nor did we pay any facility charge to obtain the Loan. The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. We may prepay the principal of the Loan at any time without incurring any prepayment charges.

The Loan may be partially or fully forgiven if we comply with the provisions of the CARES Act, including the use of Loan proceeds for payroll costs, rent, utilities and certain other expenses as defined in the CARES Act. Any forgiveness of the Loan will be subject to approval by the SBA and the Lender.

We also recently completed the sale of the Secured Communications Assets for a cash purchase price of $250,000, $150,000 of which was paid at closing and $100,000 of which is payable in four equal installments over the next fifteen months. The Amended and Restated Agreement also provides for a revenue sharing arrangement, pursuant to which we are entitled to receive quarterly royalty payments ranging from 5% to 10% of certain revenues received by the Buyer, with the aggregate amount of such royalty payments not to exceed $500,000.

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 sale of the dating services business in January 2019 and the sale of the Secured Communications Assets in July 2020.

### Operating Activities

Net cash provided by operating activities was $422,795 for the six months ended June 30, 2020, as compared to net cash used in operating activities of $3,373,991 for the six months ended June 30, 2019. The increase in net cash provided by operating activities of $3,796,786 was as a direct result of our streamlined plan of operations to reduce expenses. Operating expenses were reduced by $3.6 million, or 37.7%, compared to the six months ended June 30, 2019.

### Investing Activities

Net cash provided by investing activities was $31,356 for the six months ended June 30, 2020, as compared to net cash provided by investing activities of $1,460,603 for the six months ended June 30, 2019. The decrease in net cash provided by investing activities for the six months ended June 30, 2020 was primarily due to the absence of proceeds from the sale of the dating services business offset by the proceeds received from the sale of digital tokens.

### Financing Activities

There was net cash of $497,656 provided by financing activities for the six months ended June 30, 2020 as compared to no net cash used in financing activities for the six months ended June 30, 2019. The increase in net cash provided by financing activities for the six months ended June 30, 2020 was primarily from the Note proceeds received in order to help ensure adequate liquidity in light of the uncertainties posed by the coronavirus pandemic. This increase was offset by the repurchase of common stock pursuant to our repurchase plan.

### Contractual Obligations and Commitments

On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the coronavirus pandemic, we applied for the Loan, and on May 3, 2020, we entered into the Note in favor of the Lender in the amount of approximately $0.5 million.

The Note has a two-year term, matures on May 3, 2022, and bears interest at a stated rate of 1.0% per annum. Monthly principal and interest payments will commence in December 2020. We did not provide any collateral or guarantees for the Loan, nor did we pay any facility charge to obtain the Loan. The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. We may prepay the principal of the Loan at any time without incurring any prepayment charges.

The Loan may be partially or fully forgiven if we comply with the provisions of the CARES Act, including the use of Loan proceeds for payroll costs, rent, utilities and certain other expenses as defined in the CARES Act. Any forgiveness of the Loan will be subject to approval by the SBA and the Lender.

On May 1, 2019, the Company entered into a lease agreement for office space located at 122 East 42nd Street in New York, NY and paid a $133,968 security deposit in the form of a letter of credit. The term of the lease ran until April 26, 2023. The Company’s monthly office rent payments under the lease were approximately $33,492 per month. On June 22, 2020, the Company entered into an agreement to terminate the lease for this office space. Pursuant to the terms of the agreement, the Company vacated the offices on June 30, 2020 and the Company agreed to forfeit its security deposit of $133,968.

On May 1, 2019, the Company entered into a sublease agreement with Telecom Infrastructure Corp. (“Telecom”) for office space located at 122 East 42nd Street in New York, NY, pursuant to which Telecom was required to pay the Company $11,164 per month. The term of the sublease ran until April 26, 2023. On June 18, 2020, the Company entered into an agreement to terminate the sublease for this office space. Pursuant to the terms of the agreement, Telecom vacated the offices on June 30, 2020.

There have been no other material changes to our contractual obligations and commitments disclosed in the contractual obligations and commitments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.

### Off-Balance Sheet Arrangements

As of June 30, 2020, we did not have any off-balance sheet arrangements.

## Controls and procedures

As filed, 2,813 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, our chief executive officer 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 June 30, 2020, for the reasons set forth below, our management concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control our financial reporting as of June 30, 2020, the Company determined that the following item constituted a material weakness:

- The Company does not have adequate controls related to changes in management within the technology that support the Company’s financial reporting function.

### Changes in Internal Control over Financial Reporting

We have implemented 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 first quarter of 2020, related to general information technology controls in the area of change management in order to remediate the material weakness identified above. We will continue to test these controls to ensure that they appropriately address and remediate the material weakness identified above.

There have been no other 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, 2,381 characters.

Except as follows, 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.

***The recent coronavirus outbreak may adversely affect our revenues, results of operations and financial condition.***

In December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, and has reached multiple other countries, including the United States, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in the United States and other affected countries. The various precautionary measures taken by many governmental authorities around the world in order to limit the spread of the coronavirus have had and could continue to have an adverse effect on the global markets and its economy, including on the availability and pricing of employees and resources, and other aspects of the global economy. Therefore, the coronavirus could disrupt and cause delays in our software, disrupt the marketplace in which we operate, slow down the overall economy, curtail consumer spending, make it hard to adequately staff our operations or enter into agreements with independent contractors and have a material adverse effect on our operations. In addition, disruptions in the operations of the third parties with whom we do business have caused and could in the future cause such third parties to fail to perform under their respective contracts or commitments with us. For instance, we were party to a sublease agreement with Telecom for office space located at 122 East 42nd Street in New York, NY, pursuant to which Telecom was required to pay us $11,164 per month. Due to the coronavirus outbreak, Telecom was unable to make its monthly payments under the sublease agreement, and as a result, on June 18, 2020, we entered into an agreement with Telecom to terminate the sublease agreement. Under the terms of the agreement, Telecom vacated the offices on June 30, 2020.

The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

Filed Aug 6, 2020.
Source: SEC EDGAR, the filing index for accession 0001213900-20-020684. Last ingested by Listed: Oct 24, 2026, 15:09 ET. No prices; not investment advice.