UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
For the quarterly period ended
OR
For the transition period from ________ to ________
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| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at May 6, 2022 | |
| Common Stock, par value $0.001 per share |
| * | Excludes 31,963 shares of common stock that are held as treasury stock by Paltalk, Inc. |
PALTALK, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2022
Table of Contents
Unless the context otherwise indicates, references to “Paltalk,” “we,” “our,” “us” and the “Company” refer to Paltalk, Inc. and its subsidiaries on a consolidated basis.
Paltalk, our logo and other trademarks or service marks appearing in this report are the property of Paltalk, Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective owners. Solely for convenience, the trademarks, service marks and trade names included in this report are without the ®, or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.
Unless otherwise indicated, operational metrics such as those related to active users are based on internally-derived metrics for users across all platforms through which our applications are accessed.
i
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on current expectations, estimates, forecasts and assumptions and are subject to risks and uncertainties. Words such as “anticipate,” “assume,” “began,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “would” and variations of such words and similar expressions are intended to identify such forward-looking statements. All forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following:
| ● | our ability to effectively market and generate revenue from our applications; |
| ● | our ability to generate and maintain active users and to effectively monetize our user base; |
| ● | our ability to update our applications to respond to rapid technological changes; |
| ● | the intense competition in the industry in which our business operates and our ability to effectively compete with existing competitors and new market entrants; |
| ● | our ability to consummate favorable acquisitions and effectively integrate any companies or properties that we acquire; | |
| ● | the impact of the COVID-19 pandemic on our results of operations and our business; |
| ● | the dependence of our applications on mobile platforms and operating systems that we do not control, including our heavy reliance on the platforms of Apple, Facebook and Google and their ability to discontinue, limit or restrict access to their platforms by us or our applications, change their terms and conditions or other policies or features (including restricting methods of collecting payments, sending notifications or placing advertisements), establish more favorable relationships with one or more of our competitors or develop applications or features that compete with our applications; |
| ● | our ability to develop, establish and maintain strong brands; |
| ● | our reliance on our executive officers and consultants; |
| ● | our ability to adapt or modify our applications for the international market and derive revenue therefrom; |
| ● | legal and regulatory requirements related to holding and distributing cryptocurrencies and accepting cryptocurrencies as a method of payment for our services; |
| ● | the ability of foreign governments to restrict access to our applications or impose new regulations; |
| ● | the reliance of our mobile applications on having a mobile data plan and/or Wi-Fi access to gain internet connectivity; |
| ● | the effect of security breaches, computer viruses and cybersecurity incidents; |
| ● | our reliance upon credit card processors and related merchant account approvals and the impact of chargeback liabilities that we may face from credit card processors; |
| ● | the possibility that our users or third parties may be physically or emotionally harmed following interaction with other users; |
ii
| ● | our ability to obtain additional capital or financing when and if necessary, to execute our business plan, including through offerings of debt or equity or sale of any of our assets; |
| ● | the risk that we may face litigation resulting from the transmission of information through our applications; |
| ● | the effects of current and future government regulation, including laws and regulations regarding the use of the internet, privacy, cybersecurity and protection of user data and cryptocurrency technology; |
| ● | the impact of any claim that we have infringed on intellectual property rights of others; |
| ● | our ability to protect our intellectual property rights; |
| ● | our ability to maintain effective internal controls over financial reporting; |
| ● | our ability to offset fees associated with the distribution platforms that host our applications; |
| ● | our reliance on internally derived data to accurately report user metrics and other measures of our performance; |
| ● | our ability to release new applications or improve upon or add features to existing applications on schedule or at all; |
| ● | our reliance on third-party investor relations firms to help create awareness of our Company and compliance by such third parties with regulatory requirements related to promotional reports; and |
| ● | our ability to attract and retain qualified employees and consultants. |
For a more detailed discussion of these and other factors that may affect our business, see the discussion in “Item 1A. Risk Factors” in Part II of this report and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this report and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the Securities and Exchange Commission on March 23, 2022. We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this report, except to the extent required by applicable securities laws.
iii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PALTALK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | (unaudited) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowances of $ |
||||||||
| Prepaid expense and other current assets | ||||||||
| Total current assets | ||||||||
| Operating lease right-of-use asset | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Digital tokens | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Operating lease liabilities, current portion | ||||||||
| Deferred subscription revenue | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities, non-current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 10) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $ |
||||||||
| Treasury stock, |
( |
) | ( |
) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
PALTALK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Subscription revenue | $ | $ | ||||||
| Advertising revenue | ||||||||
| Technology service revenue | ||||||||
| Total revenues | ||||||||
| Costs and expenses: | ||||||||
| Cost of revenue | ||||||||
| Sales and marketing expense | ||||||||
| Product development expense | ||||||||
| General and administrative expense | ||||||||
| Total costs and expenses | ||||||||
| (Loss) income from operations | ( | ) | ||||||
| Interest (expense) income, net | ( | ) | ||||||
| Gain on extinguishment of term debt | ||||||||
| Other expense | ( | ) | ||||||
| (Loss) income from operations before provision for income taxes | ( | ) | ||||||
| Provision for income taxes | ( | ) | ( | ) | ||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Net (loss) income per share of common stock: | ||||||||
| Basic | $ | ( | ) | $ | ||||
| Diluted | $ | ( | ) | $ | ||||
| Weighted average number of shares of common stock used in calculating net (loss) income per share of common stock: | ||||||||
| Basic | ||||||||
| Diluted | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
PALTALK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
(Unaudited)
| Common | Stock | Treasury | Stock | Additional Paid- | Accumulated | Total Stockholders’ | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | in Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance at March 31, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance at March 31, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
PALTALK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net (loss) income from operations to net cash (used in) provided by operating activities: | ||||||||
| Depreciation of property and equipment | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Gain on extinguishment of term debt | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Bad debt expense | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Digital tokens | ( | ) | ||||||
| Accounts receivable | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Digital tokens payable | ||||||||
| Prepaid expense and other current assets | ( | ) | ||||||
| Accounts payable, accrued expenses and other current liabilities | ( | ) | ( | ) | ||||
| Deferred subscription revenue | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Balance of cash and cash equivalents at beginning of period | ||||||||
| Balance of cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: Non-cash investing and financing activities: | ||||||||
| Write-off of property and equipment | $ | - | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
PALTALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Description of Business
The accompanying condensed consolidated financial statements include Paltalk, Inc. and its wholly owned subsidiaries, A.V.M. Software, Inc., Paltalk Software Inc., Paltalk Holdings, Inc., Tiny Acquisition Inc., Camshare, Inc., Fire Talk LLC and Vumber LLC (collectively, the “Company”).
The Company is a communications software innovator that powers multimedia social applications. The Company’s product portfolio includes Paltalk, Camfrog and Tinychat, which together host a large collection of video-based communities. The Company’s other product is Vumber, which is a telecommunications services provider that enables users to communicate privately by having multiple phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number. The Company has an over 20-year history of technology innovation and holds 14 patents.
The condensed consolidated financial statements included in this report have been prepared on a going concern basis in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The Company has not included certain information and notes required by GAAP for complete financial statements pursuant to those rules and regulations, although it believes that the disclosure included herein is adequate to make the information presented not misleading. The condensed consolidated financial statements contained herein should be read in conjunction with the Company’s audited consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 23, 2022 (the “Form 10-K”).
In the opinion of management, the accompanying unaudited condensed consolidated financial information contains all normal and recurring adjustments necessary to fairly present the condensed consolidated balance sheets and statements of operations, cash flows and changes in stockholders’ equity of the Company for the interim periods presented. The Company’s historical results are not necessarily indicative of future operating results, and the results for the three months ended March 31, 2022 are not necessarily indicative of results for the year ending December 31, 2022, or for any other period.
Update on COVID-19
The global spread of the COVID-19 pandemic and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. COVID-19 continues to have an unpredictable and unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis with travel restrictions and potential quarantines. Although the Company’s core multimedia social applications were able to support the increased demand we experienced from the second quarter of 2020 through the year ended December 31, 2021, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. Adverse economic and market conditions as a result of COVID-19 could also affect the demand for the Company’s applications and the ability of the Company’s users to satisfy their obligations to the Company. If the pandemic continues to cause significant negative impacts to economic conditions, the Company’s results of operations, financial condition and liquidity could be materially and adversely impacted.
On April 13, 2020, to help ensure adequate liquidity
in light of the uncertainties posed by the COVID-19 pandemic, the Company applied for a loan under the Small Business Administration (“SBA”)
Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
and on May 3, 2020, the Company entered into a promissory note with an aggregate principal amount of $
5
PALTALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Summary of Significant Accounting Policies
During the three months ended March 31, 2022, there were no significant changes made to the Company’s significant accounting policies.
For a detailed discussion about the Company’s significant accounting policies, see the Form 10-K.
Significant Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
Significant estimates relied upon in preparing these financial statements include the estimates used to determine the fair value of the stock options issued in share-based payment arrangements, subscription revenues net of refunds, credits, and known and estimated credit card chargebacks and the fair value of digital tokens. Management evaluates these estimates on an ongoing basis. Changes in estimates are recorded in the period in which they become known. The Company bases estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates.
Revisions to the Company’s estimates may result in increases or decreases to revenues and income and are reflected in the condensed consolidated financial statements in the periods in which they are first identified. If the Company’s estimates indicate that a contract loss will be incurred, a loss provision is recorded in the period in which the loss first becomes probable and can be reasonably estimated. Contract losses are the amount by which the estimated costs of the contract exceed the estimated total revenue that will be generated by the contract and are included in cost of revenues in the Company’s condensed consolidated statements of operations. There were no contract losses for the periods presented.
Fair Value Measurements
The fair value framework under the guidance issued by the Financial Accounting Standards Board (“FASB’”) requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:
| ● | Level 1: Fair value measurement of the asset or liability using observable inputs such as quoted prices in active markets for identical assets or liabilities; |
| ● | Level 2: Fair value measurement of the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and |
| ● | Level 3: Fair value measurement of the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability. |
The Company reviews the appropriateness of fair value measurements including validation processes, and the reconciliation of period-over-period fluctuations based on changes in key market inputs. All fair value measurements are subject to the Company’s analysis. Review and approval by management is required as part of the validation process.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to the short-term nature of these instruments.
6
PALTALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue Recognition
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, revenue from contracts with customers is recognized when control of the promised services is transferred to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those services. Sales tax is excluded from reported revenue. The Company has elected the practical expedient allowable by the guidance to not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less.
Subscription Revenue
The Company generates subscription revenue primarily
from monthly premium subscription services. Subscription revenues are presented net of refunds, credits, and known and estimated credit
card chargebacks. During the three months ended March 31, 2022 and 2021, subscriptions were offered in durations of one-, three-, six-
and twelve- month terms. All subscription fees, however, are paid by credit card at the origination of the subscription regardless of
the term of the subscription. Revenues from multi-month subscriptions are recognized on a straight-line basis over the period where the
service is offered to the customer, indicated by length of the subscription term purchased. The unearned portion of subscription revenue
is presented as deferred revenue in the accompanying condensed consolidated balance sheets. Deferred revenue at December 31, 2021 was
$
Advertising Revenue
The Company generates advertising revenue from the display of advertisements on its products through contractual agreements with third parties that are based on the number of advertising impressions delivered. Measurements of impressions include when a customer clicks an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external website via an advertisement by clicking on or through the application (CPA basis). Advertising revenue is dependent upon traffic as well as the advertising inventory placed on the Company’s products.
7
PALTALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Technology Service Revenue
Technology service revenue is generated under service and partnership agreements that the Company negotiates with third parties which includes development, integration, engineering, licensing or other services that the Company provides.
During 2021, the Company also recorded technology service revenue in connection with its agreement to serve as a launch partner with Open Props, Inc. (formerly YouNow, Inc., and referred to herein as “YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”) into its Camfrog and Paltalk applications (as amended, the “YouNow Agreement”).
Pursuant to the terms of the YouNow Agreement, once the integration of Props tokens into the Company’s Paltalk and Camfrog applications was completed, the Company began receiving Props tokens for providing a validator service and for allowing users to participate in the loyalty platform. The loyalty platform was intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications.
Given the trading availability of Props tokens
in various active markets, the Company calculated the fair value of digital tokens based on the observable daily quoted market prices
(Level 1 inputs) on multiple international exchanges, as recorded on CoinmarketCap. The total net revenue value recognized as earned was
estimated to be $
In August 2021, the Company received notice from YouNow that it was terminating the YouNow Agreement, and that it would no longer support the Props platform past the end of calendar year 2021. As a result of the termination of the YouNow Agreement, the Company notified its users that it would no longer be issuing Props starting October 15, 2021 and would be replacing any user’s outstanding Props with a new internal rewards program. The new rewards loyalty program for Paltalk and Camfrog, allowed users to keep their existing rewards earned from the former Props program as internal rewards and also have the opportunity to earn new internal rewards points. In connection with the internal rewards points, the Company added 25 new reward tiers such as specialty coins, subscriptions, stickers, flair, and other popular buttons.
3. Property and Equipment, Net
Property and equipment, net consisted of the following at March 31, 2022 and December 31, 2021:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| Computer equipment | $ | $ | ||||||
| Website development | ||||||||
| Furniture and fixtures | ||||||||
| Total property and equipment | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation expense for the three months ended
March 31, 2022 was $
8
PALTALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Intangible Assets, Net
Intangible assets, net consisted of the following at March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||||||||||
| Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | |||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
| Patents | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Trade names, trademarks product names, URLs | ( | ) | ( | ) | ||||||||||||||||||||
| Internally developed software | ( | ) | ( | ) | ||||||||||||||||||||
| Subscriber/customer relationships | ( | ) | ( | ) | ||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
Amortization expense for the three months ended March 31, 2022 was
$
5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following for the periods presented:
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| Compensation, benefits and payroll taxes | $ | $ | ||||||
| Other accrued expenses | ||||||||
| Total accrued expenses and other current liabilities | $ | $ | ||||||
6. Income Taxes
The Company’s 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. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of March 31, 2022, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.
On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan”) was signed into law to provide additional relief in connection with the ongoing COVID-19 pandemic. The American Rescue Plan includes, among other things, provisions relating to PPP loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis. Under ASC 740, the effects of new legislation are recognized upon enactment. The enactment of the American Rescue Plan did not impact on the Company’s income tax provision.
For the three months ended March 31, 2022, the
Company recorded an income tax provision of $
For the three months ended March 31, 2021, the
Company recorded an income tax provision of $
9
PALTALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Stockholders’ Equity
The Paltalk, Inc. Amended and Restated 2011 Long-Term
Incentive Plan (the “2011 Plan”) was terminated as to future awards on May 16, 2016. A total of
Stock Repurchase Plan
On March 21, 2022, the Board of Directors of the
Company approved a stock repurchase plan for up to $
Stock Options
The following table summarizes the assumptions used in the Black-Scholes pricing model to estimate the fair value of the options granted during the three months ended March 31, 2022:
| Expected volatility | % | |||
| Expected life of option (in years) | ||||
| Risk free interest rate | % | |||
| Expected dividend yield | % |
The expected life of the options is the period of time over which employees and non-employees are expected to hold their options prior to exercise. The expected life of options has been determined using the “simplified” method as prescribed by Staff Accounting Bulletin 110, which uses the midpoint between the vesting date and the end of the contractual term. The volatility of the Company’s common stock is calculated using the Company’s historical volatilities beginning at the grant date and going back for a period of time equal to the expected life of the award. The Company estimates potential forfeitures of stock awards and adjusts recorded stock-based compensation expense accordingly. The Company estimates pre-vesting forfeitures primarily based on the Company’s historical experience and is adjusted to reflect actual forfeitures as the stock-based awards vest.
The following table summarizes stock option activity during the three months ended March 31, 2022:
| Weighted | ||||||||
| Average | ||||||||
| Number of | Exercise | |||||||
| Options | Price | |||||||
| Stock Options: | ||||||||
| Outstanding at January 1, 2022 | $ | |||||||
| Granted | ||||||||
| Expired, during the period | ( | ) | ||||||
| Outstanding at March 31, 2022 | $ | |||||||
| Exercisable at March 31, 2022 | $ | |||||||
At March 31, 2022, there was $
On March 31, 2022, the aggregate intrinsic
value of stock options that were outstanding and exercisable was $
10
PALTALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the three months ended March 31, 2022,
the Company granted stock options to members of the Board of Directors to purchase an aggregate of
Stock-based compensation expense for the Company’s stock options included in the condensed consolidated statements of operations was as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cost of revenue | $ | $ | ||||||
| Sales and marketing expense | ||||||||
| Product development expense | ||||||||
| General and administrative expense | ||||||||
| Total stock compensation expense | $ | $ | ||||||
Treasury Shares
On April 29, 2019, the Company implemented a stock
repurchase plan to repurchase up to $
8. Net (Loss) Income Per Share
Basic earnings and net (loss) income per share
are computed by dividing the net (loss) income available to common stockholders by the weighted average number of common shares outstanding
during the period as defined by ASC Topic 260, Earnings Per Share. Diluted earnings per share is computed using the weighted average
number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the
incremental common shares issuable upon the exercise of stock options (using the treasury stock method). To the extent stock options are
antidilutive, they are excluded from the calculation of diluted income per share. For the three months ended March 31, 2022 and 2021,
The following table summarizes the net (loss) income per share calculation for the periods presented:
| Three Months Ended March 31, |
||||||||
| 2022 | 2021 | |||||||
| Net (loss) income from operations – basic and diluted | $ | ( |
) | $ | ||||
| Weighted average shares outstanding – basic | ||||||||
| Weighted average shares outstanding – diluted | ||||||||
| Per share data: | ||||||||
| Basic from operations | $ | ( |
) | $ | ||||
| Diluted from operations | $ | ( |
) | $ | ||||
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PALTALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Leases
As of March 31, 2022, the Company had no long-term leases that were classified as financing leases. As of March 31, 2022, the Company did not have additional operating and financing leases that had not yet commenced.
At March 31, 2022, the Company had operating lease
liabilities of approximately $
Total rent expense for the three months ended
March 31, 2022 was $
The following table summarizes the Company’s operating leases for the periods presented:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in the measurement of operating lease liabilities: | $ | $ | ||||||
| Weighted average assumptions: | ||||||||
| Remaining lease term | ||||||||
| Discount rate | % | % | ||||||
As of March 31, 2022, future minimum payments under non-cancelable operating leases were as follows:
| For the year ending December 31, | Amount | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| Total | $ | |||
| Less: present value adjustment | ( | ) | ||
| Present value of minimum lease payments | $ | |||
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PALTALK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Commitments and Contingencies
Officer Employment Agreements
On March 23, 2022, the Company entered into Amended and Restated Employment
Agreements with the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which amends and restates their existing
employment agreements with the Company dated October 7, 2016 and December 9, 2019, respectively. The agreements are each for terms of
one year with auto renewal provisions. Except for adjustments to base salaries, all other terms and conditions of the prior employment
agreements between the Company and the CEO and CFO will remain in full force and effect. The CEO agreement is retroactive to February
2021. The CFO agreement is retroactive to January 2022. Aggregate commitments of base salaries under the agreements for 2022 total $
Patent Litigation
On July 23, 2021, a wholly owned subsidiary of the Company, Paltalk Holdings, Inc., filed a patent infringement lawsuit against WebEx Communications, Inc., Cisco WebEx LLC, and Cisco Systems, Inc. (collectively, “Cisco”), in the U.S. District Court for the Western District of Texas. The Company alleges that Cisco’s Webex products have infringed U.S. Patent No. 6,683,858, and that the Company is entitled to damages. A Markman hearing took place on February 24, 2022 and a trial is scheduled for early 2023.
Legal Proceedings
The Company may be included in legal proceedings, claims and assessments arising in the ordinary course of business. The Company evaluates the need for a reserve for specific legal matters based on the probability of an unfavorable outcome and the reasonability of an estimable loss. No reserve was deemed necessary as of March 31, 2022.
11. Subsequent Events
Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued and determined that no events or transactions are required to be disclosed herein.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2022 and 2021, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2022 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, 2021, 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 communications software innovator that powers multimedia social applications. We operate a 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.
Our product portfolio includes Paltalk, Camfrog and Tinychat, which together host a large collection of video-based communities. Our other product is Vumber, which is a telecommunications services provider that enables users to communicate privately by having multiple phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number. We have an over 20-year history of technology innovation and hold 14 patents.
We believe that the scale of our user base presents a competitive advantage in the video social networking industry and provides growth opportunities to advance our 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, online card and board games and provide robust user monetization tools.
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 also includes the acquisition of, or investment in, technologies, solutions or businesses that complement our business.
Our strategy is to approach these opportunities in a measured way, being mindful of our resources and evaluating factors such as potential revenue, time to market and amount of capital needed to invest in the opportunity.
Recent Developments
Update on COVID-19
The global spread of the COVID-19 pandemic and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. COVID-19 continues to have an unpredictable and unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis with travel restrictions and potential quarantines. Although our core multimedia social applications were able to support the increased demand we experienced from the second quarter of 2020 through the year ended December 31, 2021, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. Adverse economic and market conditions as a result of COVID-19 could also affect the demand for our applications and the ability of our users to satisfy their obligations to us. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted.
On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, we applied for a loan under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and on May 3, 2020, we entered into a promissory note with an aggregate principal amount of $506,500 (the “Note”) in favor of Citibank, N.A., as lender (the “Lender”). On January 13, 2021, the Note was fully forgiven by the SBA and the Lender in compliance with the provisions of the CARES Act. We do not expect to incur additional indebtedness under the CARES Act.
We continue 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 its group video conferencing services free of charge to select countries.
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Operational Highlights and Objectives
During the three months ended March 31, 2022, we executed key components of our objectives:
| ● | selected yellowHEAD, an AI-powered performance marketing company, to lead the Company’s increased marketing efforts for its Camfrog application; |
| ● | partnered with Hive Automated Content Moderation Solutions to roll out new content moderation software for increased user experience; |
| ● | partnered with NoGood, a growth marketing firm, to accelerate user acquisition for the Company’s Paltalk application; |
| ● | reported net loss of $0.7 million for the year ended March 31, 2022, compared to net income of $0.9 million for the year ended March 31, 2021 primarily as a result of our engagement of marketing firms as well as a non-cash gain in the first quarter of 2021 of $0.5 million related to the forgiveness of the proceeds from the PPP loan the Company received in 2020; and |
| ● | net decrease in cash flows from operations of $1.2 million for the three months ended March 31, 2022 mainly as result of an increase in sales and marketing expenses, an increase in product development expense as a result of our investment in customer acquisition, and an increase in general and administrative expenses in connection with increased professional fees and payment of year-end bonuses. |
For the near term, our business objectives include:
| ● | continuing to invest in robust marketing initiatives through marketing agencies in order to drive new user acquisition intended to result in an increase in revenue; |
| ● | continuing to implement several enhancements to our live video chat applications as well as the integration of card and board games and other features focused on retention and monetization, which collectively are intended to increase user engagement and revenue opportunities; |
| ● | continuing to explore strategic opportunities, including, but not limited to, potential mergers or acquisitions of other assets or 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. |
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 in future periods will continue to 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.
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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 service and partnership agreements that we negotiate with third parties, which includes development, integration, engineering, licensing or other services that we provide.
On May 29, 2020, we entered into an Asset Purchase Agreement, which was subsequently amended and restated (the “Amended and Restated Agreement”) with SecureCo, LLC (“SecureCo”), pursuant to which we agreed to sell substantially all of the assets related to our secure communications business (the “Secured Communications Assets”) to SecureCo. 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 SecureCo, with the aggregate amount of such royalty payments not to exceed $500,000. The royalty payments, if received, will be recorded as technology service revenue. We do not expect to continue to pursue secure communications products or technology implementation services as part of our overall business strategy.
We recorded technology service revenue in connection with our agreement to serve as a launch partner with Open Props, Inc. (formerly YouNow, Inc., and referred to herein as “YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”) into our Camfrog and Paltalk applications (as amended, the “YouNow Agreement”).
Pursuant to the terms of the YouNow Agreement, once the integration of Props tokens into our Paltalk and Camfrog applications was completed, we began receiving Props tokens for providing a validator service and for allowing users to participate in the loyalty platform. The loyalty platform was intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications. The net revenue earned was recorded under “technology service revenue” in the condensed consolidated statements of operations. The total net revenue value was recognized as earned.
We determined the fair value of the Props tokens using observable daily quoted market prices on multiple international exchanges, as recorded on CoinmarketCap.
In August 2021, we received notice from YouNow that it was terminating the YouNow Agreement, and that it would no longer support the Props platform past the end of calendar year 2021. The YouNow Agreement was terminated effective on November 23, 2021. We now expect that most of our technology service revenue generated in the future will result from opportunistic partnerships between us and third parties.
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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. Cost of revenue also includes compensation and other employee-related costs for technical personnel, consultants 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 and consultants 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 and consultant-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 non-cash 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 and cost of insurance. 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 operating activities under the ‟Results of Operations” and “Liquidity and Capital Resources” sections below. Subscription bookings and Adjusted EBITDA are discussed below.
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Subscription bookings | $ | 2,776,699 | $ | 3,104,438 | ||||
| Net cash (used in) provided by operating activities | $ | (1,232,954 | ) | $ | 96,055 | |||
| Net (loss) income | $ | (738,945 | ) | $ | 916,729 | |||
| Adjusted EBITDA | $ | (484,431 | ) | $ | 535,177 | |||
| Adjusted EBITDA as percentage of total revenues | (16.6 | )% | 15.9 | % | ||||
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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 generally accepted accounting principles in the United States (“GAAP”).
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net income (loss) adjusted to exclude interest income (expense), net, provision for income taxes, gain on the extinguishment of term debt, depreciation and amortization expense, other income, net and stock-based compensation expense.
We present Adjusted EBITDA because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to develop short- and long-term operational plans and to allocate resources to expand our business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of the cash operating income generated by our business. We believe that Adjusted EBITDA is useful to investors and others to understand and evaluate our operating results, and it allows for a more meaningful comparison between our performance and that of competitors.
Limitations of Adjusted EBITDA
Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that 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; interest income (expense), net; other income, net; the potentially dilutive impact of stock-based compensation; gain on the extinguishment of term debt; and the provision for income taxes. Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
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Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various metrics of cash flows, 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:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Reconciliation of Net (loss) income to Adjusted EBITDA: | ||||||||
| Net (loss) income | $ | (738,945 | ) | $ | 916,729 | |||
| Interest expense (income), net | 1,862 | (2,467 | ) | |||||
| Other expense, net | 7,886 | - | ||||||
| Gain on the extinguishment of term debt | - | (506,500 | ) | |||||
| Provision for income taxes | 16,031 | 1,100 | ||||||
| Depreciation and amortization expense | 76,264 | 94,947 | ||||||
| Stock-based compensation expense | 152,471 | 31,368 | ||||||
| Adjusted EBITDA | $ | (484,431 | ) | $ | 535,177 | |||
Results of Operations
The following table sets forth condensed consolidated statements of operations data for each of the periods indicated as a percentage of total revenues:
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Total revenue | 100.0 | % | 100.0 | % | ||||
| Costs and expenses: | ||||||||
| Cost of revenue | 22.3 | % | 19.2 | % | ||||
| Sales and marketing expense | 14.1 | % | 7.6 | % | ||||
| Product development expense | 52.3 | % | 38.5 | % | ||||
| General and administrative expense | 35.7 | % | 22.6 | % | ||||
| Total costs and expenses | 124.4 | % | 87.9 | % | ||||
| (Loss) income from operations | (24.4 | )% | 12.1 | % | ||||
| Interest (expense) income, net | (0.1 | )% | 0.1 | % | ||||
| Gain on extinguishment of term debt | - | % | 15.0 | % | ||||
| Other expense | (0.3 | )% | - | % | ||||
| (Loss) income from operations before provision for income taxes | (24.8 | )% | 27.2 | % | ||||
| Provision for income taxes | (0.5 | )% | (0.0 | )% | ||||
| Net (loss) income | (25.3 | )% | 27.2 | % | ||||
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Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021
Revenue
Total revenue decreased by 13% to $2,926,701 for the three months ended March 31, 2022 from $3,372,002 for the three months ended March 31, 2021. This decrease was primarily driven by a decrease in subscription revenue and a decrease in technology service revenue driven by the termination of the YouNow Agreement.
The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenue for the three months ended March 31, 2022 and the three months ended March 31, 2021, the increase or decrease between those periods, the percentage increase or decrease between those periods, and the percentage of total revenue that each represented for those periods:
| % Revenue | ||||||||||||||||||||||||
| Three Months Ended | $ | % | Three Months Ended | |||||||||||||||||||||
| March 31, | Increase | Increase | March 31, | |||||||||||||||||||||
| 2022 | 2021 | (Decrease) | (Decrease) | 2022 | 2021 | |||||||||||||||||||
| Subscription revenue | $ | 2,846,339 | $ | 3,139,365 | $ | (293,026 | ) | (9.3 | )% | 97.3 | % | 93.1 | % | |||||||||||
| Advertising revenue | 80,362 | 76,821 | 3,541 | 4.6 | % | 2.7 | % | 2.3 | % | |||||||||||||||
| Technology service revenue | - | 155,816 | (155,816 | ) | (100.0 | )% | - | % | 4.6 | % | ||||||||||||||
| Total revenues | $ | 2,926,701 | $ | 3,372,002 | $ | (445,301 | ) | (13.2 | )% | 100.0 | % | 100.0 | % | |||||||||||
Subscription Revenue
Our subscription revenue for the three months ended March 31, 2022 decreased by $293,026, or 9.3%, as compared to the three months ended March 31, 2021. The decrease in subscription revenue was primarily driven by a decrease in new subscribers as well as a decrease in virtual gifts across the Paltalk and Camfrog applications. We attribute this decrease primarily to the lifting of various COVID-19 related restrictions in certain of our target markets.
Advertising Revenue
Our advertising revenue for the three months ended March 31, 2022 increased by $3,541, or 4.6%, as compared to the three months ended March 31, 2021. The increase in advertising revenue was primarily due to an increase in the volume of advertising impressions related to changes in and the optimization of third-party advertising partners.
Technology Service Revenue
Our technology service revenue for the three months ended March 31, 2022 decreased by $155,816, or 100.0%, as compared to the three months ended March 31, 2021. The decrease in technology service revenue was driven by the termination of the YouNow Agreement, effective November 23, 2021.
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Costs and Expenses
Total costs and expenses for the three months ended March 31, 2022 increased by $676,727, or 22.8%, as compared to the three months ended March 31, 2021. The following table presents our costs and expenses for the three months ended March 31, 2022 and 2021, the increase between those periods and the percentage increase between those periods and the percentage of total revenue that each represented for those periods:
| % Revenue | ||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| March 31, | $ | % | March 31, | |||||||||||||||||||||
| 2022 | 2021 | Increase | Increase | 2022 | 2021 | |||||||||||||||||||
| Cost of revenue | $ | 652,096 | $ | 646,715 | $ | 5,381 | 0.8 | % | 22.3 | % | 19.2 | % | ||||||||||||
| Sales and marketing expense | 411,482 | 257,451 | 154,031 | 59.8 | % | 14.1 | % | 7.6 | % | |||||||||||||||
| Product development expense | 1,530,141 | 1,297,264 | 232,877 | 18.0 | % | 52.3 | % | 38.5 | % | |||||||||||||||
| General and administrative expense | 1,046,148 | 761,710 | 284,438 | 37.3 | % | 35.7 | % | 22.6 | % | |||||||||||||||
| Total costs and expenses | $ | 3,639,867 | $ | 2,963,140 | $ | 676,727 | 22.8 | % | 124.4 | % | 87.9 | % | ||||||||||||
Cost of revenue
Our cost of revenue for the three months ended March 31, 2022 increased by $5,381, or 0.8%, as compared to the three months ended March 31, 2021. Cost of revenue expenses remained stable for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Payment processing fees decreased approximately $24,800, offset by an increase of approximately $12,700 in non-cash stock compensation expense from the issuance of employee’s stock options and an increase of approximately $14,300 relating to employee’s salary and other related expenses.
Sales and marketing expense
Our sales and marketing expense for the three months ended March 31, 2022 increased by $154,031, or 59.8%, as compared to the three months ended March 31, 2021. The increase in sales and marketing expense for the three months ended March 31, 2022 was primarily due to an increase of approximately $145,600 in marketing user acquisition expenses, including agent fees, as we begin our focus on increasing consumer acquisition spend through the efforts of our third-party marketing agencies.
Product development expense
Our product development expense for the three months ended March 31, 2022 increased by $232,877, or 18.0%, as compared to the three months ended March 31, 2021. The increase was primarily due to an increase of approximately $205,400 related to consulting services in support of our processes to enhance user retention and improve monetization in the Paltalk application.
General and administrative expense
Our general and administrative expense for the three months ended March 31, 2022 increased by $284,438, or 37.3%, as compared to the three months ended March 31, 2021. The increase in general and administrative expense for the three months ended March 31, 2022 was due to an increase of approximately $107,900 in non-cash stock compensation expense from the issuance of employee’s stock options, an increase in legal fees relating to corporate matters such as executive agreements of approximately $136,100 and an increase in investor relations expense of approximately $20,300.
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Non-Operating (Loss) Income
The following table presents the components of non-operating (loss) income for the three months ended March 31, 2022 and the three months ended March 31, 2021, the decrease between those periods and the percentage decrease between those periods and the percentage of total revenue that each represented for those periods:
| % Revenue | ||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||
| March 31, | $ | % | March 31, | |||||||||||||||||||||
| 2022 | 2021 | (Decrease) | (Decrease) | 2022 | 2021 | |||||||||||||||||||
| Interest (expense) income, net | $ | (1,862 | ) | $ | 2,467 | $ | (4,329 | ) | (175.5 | )% | (0.1 | )% | 0.1 | % | ||||||||||
| Gain on extinguishment of term debt | - | 506,500 | (506,500 | ) | (100.0 | )% | - | % | 15.0 | % | ||||||||||||||
| Other expense | (7,886 | ) | - | (7,886 | ) | (100.0 | )% | (0.3 | )% | - | % | |||||||||||||
| Total non-operating (loss) income | $ | (9,748 | ) | $ | 508,967 | $ | (518,715 | ) | (101.9 | )% | (0.4 | )% | 15.1 | % | ||||||||||
Non-operating loss for the three months ended March 31, 2022 was $9,748, a decrease of $518,715, or 101.9%, as compared to non-operating income of $508,967 for the three months ended March 31, 2021. The decrease resulted from the gain on extinguishment of term debt during the three months ended March 31 2021, of the $506,500 of proceeds from the Note received in order to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic.
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, 2022 and March 31, 2021, the Company recorded an income tax provision of $16,031 and $1,100, respectively, consisting primarily of state and local taxes.
As of March 31, 2022, 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
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Condensed Consolidated Statements of Cash Flows Data: | ||||||||
| Net cash (used in) provided by operating activities | $ | (1,232,954 | ) | $ | 96,055 | |||
| Net cash provided by investing activities | - | - | ||||||
| Net cash provided by financing activities | - | - | ||||||
| Net (decrease) increase in cash and cash equivalents | $ | (1,232,954 | ) | $ | 96,055 | |||
22
Currently, our primary source of liquidity is cash on hand, and we believe that our cash and cash equivalents balance and our expected cash flows from operations will be sufficient to meet all of our financial obligations for one year from the date these financial statements are issued. As of March 31, 2022, we had $20,403,906 of cash and cash equivalents.
Our primary use of working capital is related to product development resources and an investment in marketing activities 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 seek to grow our business by expending our capital resources to fund strategic investments and partnership opportunities.
On August 5, 2021, we announced the closing of an underwritten public offering (the “August 2021 Offering”) in which we offered and sold 1,159,400 shares of our common stock. We also granted the underwriters an option to purchase up to an additional 173,910 shares of common stock at the public offering price less discounts and commissions to cover over-allotments, which was exercised in full on August 5, 2021. The net proceeds to us from the August 2021 Offering were approximately $3.2 million, after deducting underwriting discounts, commissions and other estimated offering expenses.
In addition, on October 19, 2021, we announced the pricing and closing of an underwritten public offering (the “October 2021 Offering”) in which we offered and sold 1,552,500 shares of our common stock. We also granted the underwriters an option to purchase up to an additional 202,500 shares of common stock at the public offering price less discounts and commissions to cover over-allotments, which was exercised in full on October 14, 2021. The net proceeds to us from the October 2021 Offering were approximately $10.7 million, after deducting underwriting discounts, commissions and other estimated offering expenses.
Operating Activities
Net cash used in operating activities was $1,232,954 for the three months ended March 31, 2022, as compared to net cash provided by operating activities of $96,055 for the three months ended March 31, 2021. Changes in accounts receivable and deferred revenue contributed to lower cash flows from operations for the three months ended March 31, 2022 of $19,423 and $34,713, respectively, compared to the three months ended March 31, 2021. The decrease in cash flows from operations resulted mainly from a decrease in subscription revenue and an increase in overall operating expenses as we focus on user retention and engagement.
Investing Activities
There was no net cash provided by investing activities for the three months ended March 31, 2022 and for the three months ended March 31, 2021.
Financing Activities
There was no net cash provided by financing activities for the three months ended March 31, 2022 and for the three months ended March 31, 2021.
Contractual Obligations and Commitments
As discussed above, on May 3, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, we entered into the Note in favor of the Lender in the aggregate principal amount of $506,500. The Note had a two-year term and borne interest at a stated rate of 1.0% per annum. We did not provide any collateral or guarantees for the Note, nor did we pay any facility charge to obtain the Note. The Note provided for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. On January 13, 2021, the Note was fully forgiven by the SBA and the Lender in compliance with the provisions of the CARES Act. We do not expect to incur additional indebtedness under the CARES Act.
On April 9, 2021, we entered into a lease extension agreement with Jericho Executive Center LLC for the office space at 30 Jericho Executive Plaza in Jericho, New York, which commenced on December 1, 2021 and runs through November 30, 2024. Our monthly office rent payments under the lease are currently approximately $7,081 per month.
23
On March 23, 2022, we entered into an Amended and Restated Employment Agreement with Jason Katz, our Chief Executive Officer (the “Katz Employment Agreement”), which amended and restated Mr. Katz’s existing employment agreement with the Company dated as of October 7, 2016. In addition, on March 23, 2022, we entered into an Amended and Restated Employment Agreement with Kara Jenny, our Chief Financial Officer (the “Jenny Employment Agreement”), which amended and restated Ms. Jenny’s existing employment with the Company dated as of December 9, 2019.
Pursuant to the Katz Employment Agreement, effective retroactively as of February 1, 2021, Mr. Katz shall receive an annualized base salary of two hundred twenty-five thousand dollars ($225,000). In addition, the Katz Employment Agreement provides that in the event of a “change in control,” if Mr. Katz is terminated by the Company other than for “cause,” or if Mr. Katz terminates his employment with the Company for “good reason,” then we shall pay Mr. Katz severance equal to three months of Mr. Katz’s then-current annualized base salary (each such capitalized term as defined in the Katz Employment Agreement).
Pursuant to the Jenny Employment Agreement, for fiscal year 2022, Ms. Jenny is entitled to receive an annualized base salary of two hundred sixty-five thousand dollars ($265,000), effective retroactively as of January 28, 2022. For fiscal year 2023, provided that Ms. Jenny is still employed and in good standing with the Company, she will be entitled to receive an annualized base salary of two hundred eighty-five thousand dollars ($285,000). In addition, the Jenny Employment Agreement provides that in the event of a “change in control,” if Ms. Jenny is terminated by the Company other than for “cause,” or if Ms. Jenny terminates her employment with the Company for “good reason,” then we shall pay Ms. Jenny severance equal to twelve months of Ms. Jenny’s then-current annualized base salary (each such capitalized term as defined in the Jenny Employment Agreement).
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 March 31, 2022, we did not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal 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 March 31, 2022, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were 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.
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.
24
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 23, 2021, a wholly owned subsidiary of the Company, Paltalk Holdings, Inc., filed a patent infringement lawsuit against WebEx Communications, Inc., Cisco WebEx LLC, and Cisco Systems, Inc. (collectively, “Cisco”), in the U.S. District Court for the Western District of Texas. The Company alleges that Cisco’s Webex products have infringed U.S. Patent No. 6,683,858, and that the Company is entitled to damages. A Markman hearing took place on February 24, 2022 and a trial is scheduled for early 2023.
To our knowledge, other than as described above, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.
ITEM 1A. RISK FACTORS
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sale of Equity Securities
There were no sales of unregistered securities during the quarter ended March 31, 2022 that were not previously reported on a Current Report on Form 8-K.
Issuer Repurchases of Common Stock
The following table details our repurchases of common stock during the three months ended March 31, 2022:
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) | ||||||||||||
| January 1, 2022 – January 31, 2022 | — | $ | — | — | $ | — | ||||||||||
| February 1, 2022 – February 28, 2022 | — | $ | — | — | $ | — | ||||||||||
| March 1, 2022 – March 31, 2022 | — | $ | — | — | $ | 1.75 | ||||||||||
| Total | — | $ | — | — | $ | 1.75 | ||||||||||
| (1) | On March 23, 2022, we announced that our Board of Directors approved a stock repurchase plan, effective March 29, 2022, to repurchase up to $1,750,000 of our outstanding common stock for cash. The stock repurchase plan expires on March 29, 2023. |
25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
Submission of Matters to a Vote of Security Holders
On May 5, 2022, the Company held its 2022 Annual Meeting of Stockholders (the “Annual Meeting”). The voting results on the matters submitted to the Company’s stockholders are as follows:
Proposal 1: Election of (i) Yoram (Rami) Abada, (ii) Jason Katz, (iii) Lance Laifer, (iv) Kara Jenny and (v) John Silberstein to the Company’s Board of Directors, each to serve for a one-year term until the annual meeting of stockholders to be held in 2023.
| Nominee | Votes Cast For | Votes Withheld | Broker Non-Votes | |||||||||
| Yoram (Rami) Abada | 4,981,115 | 23,417 | 1,766,064 | |||||||||
| Jason Katz | 4,993,163 | 11,369 | 1,766,064 | |||||||||
| Lance Laifer | 4,991,843 | 12,689 | 1,766,064 | |||||||||
| Kara Jenny | 4,977,035 | 27,497 | 1,766,064 | |||||||||
| John Silberstein | 4,989,066 | 15,466 | 1,766,064 | |||||||||
Proposal 2: Ratification of the appointment of Marcum LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2022.
| Votes Cast For | Votes Cast Against | Abstentions | ||
| 6,739,699 | 26,336 | 4,561 |
Proposal 3: Approval, on an advisory basis, of the executive compensation of our named executive officers as described in our Definitive Proxy Statement on Schedule 14-A filed with the SEC on April 8, 2022.
| Votes Cast For | Votes Cast Against | Abstentions | ||
| 4,944,890 | 50,126 | 1,775,580 |
Each of the proposals acted upon by the Company’s stockholders at the Annual Meeting received a sufficient number of votes to be approved.
26
ITEM 6. EXHIBITS
(a) Exhibits required to be filed by Item 601 of Regulation S-K.
The following exhibits are included herein or incorporated herein by reference:
| # | Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Paltalk, Inc. hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission. |
| † | Management contract or compensatory plan arrangement. |
| * | Filed herewith. |
| ** | The certification attached as Exhibit 32.1 is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Paltalk, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of the Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing. |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Paltalk, Inc. | ||
| Date: May 10, 2022 | By: | /s/ Jason Katz |
| Jason Katz | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Paltalk, Inc. | ||
| Date: May 10, 2022 | By: | /s/ Kara Jenny |
| Kara Jenny | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
28
Exhibit 31.1
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jason Katz, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Paltalk, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 10, 2022 | By: | /s/ Jason Katz |
|
Jason Katz Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kara Jenny, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Paltalk, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: May 10, 2022 | By: | /s/ Kara Jenny |
|
Kara Jenny Chief Financial Officer (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Paltalk, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.
| Date: May 10, 2022 | By: | /s/ Jason Katz |
Jason
Katz Chief Executive Officer (Principal Executive Officer) |
| Date: May 10, 2022 | By: | /s/ Kara Jenny |
Kara Jenny Chief Financial Officer (Principal Financial and Accounting Officer) |
The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
Condensed Consolidated Balance Sheets (Parentheticals) - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Net of allowances (in Dollars) | $ 3,648 | $ 3,648 |
| Common stock, par value (in Dollars per share) | $ 0.001 | $ 0.001 |
| Common stock, shares authorized | 25,000,000 | 25,000,000 |
| Common stock, shares issued | 9,864,120 | 9,832,157 |
| Common stock, shares outstanding | 9,832,157 | 9,832,157 |
| Treasury stock | 31,963 | 9,950 |
Condensed Consolidated Statements of Changes in Stockholders’ Equity - USD ($) |
Common Stock |
Treasury Stock |
Additional Paid- in Capital |
Accumulated Deficit |
Total |
|---|---|---|---|---|---|
| Balance at Dec. 31, 2020 | $ 6,917 | $ (10,859) | $ 21,568,041 | $ (11,729,089) | $ 9,835,010 |
| Balance (in Shares) at Dec. 31, 2020 | 6,916,404 | (9,950) | |||
| Stock-based compensation expense | 31,368 | 31,368 | |||
| Net income (loss) | 916,729 | 916,729 | |||
| Balance at Mar. 31, 2021 | $ 6,917 | $ (10,859) | 21,599,409 | (10,812,360) | 10,783,107 |
| Balance (in Shares) at Mar. 31, 2021 | 6,916,404 | (9,950) | |||
| Balance at Dec. 31, 2021 | $ 9,864 | $ (194,200) | 35,639,910 | (10,404,983) | 25,050,591 |
| Balance (in Shares) at Dec. 31, 2021 | 9,864,120 | (31,963) | |||
| Stock-based compensation expense | 152,471 | 152,471 | |||
| Net income (loss) | (738,945) | (738,945) | |||
| Balance at Mar. 31, 2022 | $ 9,864 | $ (194,200) | $ 35,792,381 | $ (11,143,928) | $ 24,464,117 |
| Balance (in Shares) at Mar. 31, 2022 | 9,864,120 | (31,963) |
Organization and Description of Business |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Organization and Description of Business [Abstract] | |
| Organization and Description of Business | 1. Organization and Description of Business
The accompanying condensed consolidated financial statements include Paltalk, Inc. and its wholly owned subsidiaries, A.V.M. Software, Inc., Paltalk Software Inc., Paltalk Holdings, Inc., Tiny Acquisition Inc., Camshare, Inc., Fire Talk LLC and Vumber LLC (collectively, the “Company”).
The Company is a communications software innovator that powers multimedia social applications. The Company’s product portfolio includes Paltalk, Camfrog and Tinychat, which together host a large collection of video-based communities. The Company’s other product is Vumber, which is a telecommunications services provider that enables users to communicate privately by having multiple phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number. The Company has an over 20-year history of technology innovation and holds 14 patents.
The condensed consolidated financial statements included in this report have been prepared on a going concern basis in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The Company has not included certain information and notes required by GAAP for complete financial statements pursuant to those rules and regulations, although it believes that the disclosure included herein is adequate to make the information presented not misleading. The condensed consolidated financial statements contained herein should be read in conjunction with the Company’s audited consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 23, 2022 (the “Form 10-K”).
In the opinion of management, the accompanying unaudited condensed consolidated financial information contains all normal and recurring adjustments necessary to fairly present the condensed consolidated balance sheets and statements of operations, cash flows and changes in stockholders’ equity of the Company for the interim periods presented. The Company’s historical results are not necessarily indicative of future operating results, and the results for the three months ended March 31, 2022 are not necessarily indicative of results for the year ending December 31, 2022, or for any other period.
Update on COVID-19
The global spread of the COVID-19 pandemic and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. COVID-19 continues to have an unpredictable and unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis with travel restrictions and potential quarantines. Although the Company’s core multimedia social applications were able to support the increased demand we experienced from the second quarter of 2020 through the year ended December 31, 2021, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. Adverse economic and market conditions as a result of COVID-19 could also affect the demand for the Company’s applications and the ability of the Company’s users to satisfy their obligations to the Company. If the pandemic continues to cause significant negative impacts to economic conditions, the Company’s results of operations, financial condition and liquidity could be materially and adversely impacted.
On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, the Company applied for a loan under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and on May 3, 2020, the Company entered into a promissory note with an aggregate principal amount of $506,500 (the “Note”) in favor of Citibank, N.A., as lender (the “Lender”). On January 13, 2021, the Note was fully forgiven by the SBA and the Lender in compliance with the provisions of the CARES Act. The Company does not expect to incur additional indebtedness under the CARES Act. |
Summary of Significant Accounting Policies |
3 Months Ended | ||||||
|---|---|---|---|---|---|---|---|
Mar. 31, 2022 | |||||||
| Organization and Description of Business [Abstract] | |||||||
| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
During the three months ended March 31, 2022, there were no significant changes made to the Company’s significant accounting policies.
For a detailed discussion about the Company’s significant accounting policies, see the Form 10-K. Significant Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
Significant estimates relied upon in preparing these financial statements include the estimates used to determine the fair value of the stock options issued in share-based payment arrangements, subscription revenues net of refunds, credits, and known and estimated credit card chargebacks and the fair value of digital tokens. Management evaluates these estimates on an ongoing basis. Changes in estimates are recorded in the period in which they become known. The Company bases estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates.
Revisions to the Company’s estimates may result in increases or decreases to revenues and income and are reflected in the condensed consolidated financial statements in the periods in which they are first identified. If the Company’s estimates indicate that a contract loss will be incurred, a loss provision is recorded in the period in which the loss first becomes probable and can be reasonably estimated. Contract losses are the amount by which the estimated costs of the contract exceed the estimated total revenue that will be generated by the contract and are included in cost of revenues in the Company’s condensed consolidated statements of operations. There were no contract losses for the periods presented.
Fair Value Measurements
The fair value framework under the guidance issued by the Financial Accounting Standards Board (“FASB’”) requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:
The Company reviews the appropriateness of fair value measurements including validation processes, and the reconciliation of period-over-period fluctuations based on changes in key market inputs. All fair value measurements are subject to the Company’s analysis. Review and approval by management is required as part of the validation process.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to the short-term nature of these instruments.
Revenue Recognition
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, revenue from contracts with customers is recognized when control of the promised services is transferred to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those services. Sales tax is excluded from reported revenue. The Company has elected the practical expedient allowable by the guidance to not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less.
Subscription Revenue
The Company generates subscription revenue primarily from monthly premium subscription services. Subscription revenues are presented net of refunds, credits, and known and estimated credit card chargebacks. During the three months ended March 31, 2022 and 2021, subscriptions were offered in durations of one-, three-, six- and twelve- month terms. All subscription fees, however, are paid by credit card at the origination of the subscription regardless of the term of the subscription. Revenues from multi-month subscriptions are recognized on a straight-line basis over the period where the service is offered to the customer, indicated by length of the subscription term purchased. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets. Deferred revenue at December 31, 2021 was $1,915,493, of which $727,130 was subsequently recognized as subscription revenue during the three months ended March 31, 2022. The ending balance of deferred revenue at March 31, 2022 and 2021 was $1,845,853 and $2,023,794, respectively.
In addition, the Company offers virtual gifts to its users. Users may purchase credits in $5, $10 or $20 increments that can be redeemed for a host of virtual gifts such as a rose, a beer or a car, among other items. These gifts are given among users to enhance communication and are typically redeemed within 30 days of purchase. Upon purchase, the virtual gifts are credited to the users’ account and are under the users’ control. Virtual gift revenue is recognized upon the users’ redemption of virtual gifts at the fixed transaction price and included in subscription revenue in the accompanying condensed consolidated statements of operations. Virtual gift revenue is presented as deferred revenue in the condensed consolidated balance sheets until virtual gifts are redeemed. Virtual gift revenue was $1,269,537 and $1,420,130 for the three months ended March 31, 2022 and 2021, respectively. The ending balance of deferred revenue from virtual gifts at March 31, 2022 and 2021 was $331,804 and $349,472, respectively.
Advertising Revenue
The Company generates advertising revenue from the display of advertisements on its products through contractual agreements with third parties that are based on the number of advertising impressions delivered. Measurements of impressions include when a customer clicks an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external website via an advertisement by clicking on or through the application (CPA basis). Advertising revenue is dependent upon traffic as well as the advertising inventory placed on the Company’s products.
Technology Service Revenue
Technology service revenue is generated under service and partnership agreements that the Company negotiates with third parties which includes development, integration, engineering, licensing or other services that the Company provides.
During 2021, the Company also recorded technology service revenue in connection with its agreement to serve as a launch partner with Open Props, Inc. (formerly YouNow, Inc., and referred to herein as “YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”) into its Camfrog and Paltalk applications (as amended, the “YouNow Agreement”).
Pursuant to the terms of the YouNow Agreement, once the integration of Props tokens into the Company’s Paltalk and Camfrog applications was completed, the Company began receiving Props tokens for providing a validator service and for allowing users to participate in the loyalty platform. The loyalty platform was intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications.
Given the trading availability of Props tokens in various active markets, the Company calculated the fair value of digital tokens based on the observable daily quoted market prices (Level 1 inputs) on multiple international exchanges, as recorded on CoinmarketCap. The total net revenue value recognized as earned was estimated to be $0 and $155,816 for the three months ended March 31, 2022 and 2021, respectively.
In August 2021, the Company received notice from YouNow that it was terminating the YouNow Agreement, and that it would no longer support the Props platform past the end of calendar year 2021. As a result of the termination of the YouNow Agreement, the Company notified its users that it would no longer be issuing Props starting October 15, 2021 and would be replacing any user’s outstanding Props with a new internal rewards program. The new rewards loyalty program for Paltalk and Camfrog, allowed users to keep their existing rewards earned from the former Props program as internal rewards and also have the opportunity to earn new internal rewards points. In connection with the internal rewards points, the Company added 25 new reward tiers such as specialty coins, subscriptions, stickers, flair, and other popular buttons. |
Property and Equipment, Net |
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| Property and Equipment, Net | 3. Property and Equipment, Net
Property and equipment, net consisted of the following at March 31, 2022 and December 31, 2021:
Depreciation expense for the three months ended March 31, 2022 was $30,098 as compared to $48,780 for the three months ended March 31, 2021. |
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Intangible Assets, Net |
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| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible Assets, Net | 4. Intangible Assets, Net
Intangible assets, net consisted of the following at March 31, 2022 and December 31, 2021:
Amortization expense for the three months ended March 31, 2022 was $46,166, as compared to $64,084 for the three months ended March 31, 2021. The aggregate amortization expense for each of the next five years and thereafter is estimated to be $103,778 for the remainder of 2022, $18,000 in 2023, $17,354 in 2024, $2,500 in 2025, $2,500 in 2026 and $6,245 thereafter. |
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Accrued Expenses and Other Current Liabilities |
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| Accrued Expenses and Other Current Liabilities | 5. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following for the periods presented:
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Income Taxes |
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Mar. 31, 2022 | |
| Income Tax Disclosure [Abstract] | |
| Income Taxes | 6. Income Taxes
The Company’s 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. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of March 31, 2022, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.
On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan”) was signed into law to provide additional relief in connection with the ongoing COVID-19 pandemic. The American Rescue Plan includes, among other things, provisions relating to PPP loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis. Under ASC 740, the effects of new legislation are recognized upon enactment. The enactment of the American Rescue Plan did not impact on the Company’s income tax provision.
For the three months ended March 31, 2022, the Company recorded an income tax provision of $16,031. The effective tax rate for the three months ended March 31, 2022 was (2.22)%. The effective tax rate differs from the statutory rate of 21% as the Company has concluded that its deferred tax assets are not realizable on a more-likely-than-not basis.
For the three months ended March 31, 2021, the Company recorded an income tax provision of $1,100. The effective tax rate for the three months ended March 31, 2021 was 0.11%. The effective tax rate differs from the statutory rate of 21% as the Company has concluded that its deferred tax assets are not realizable on a more-likely-than-not basis. |
Stockholders' Equity |
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| Stockholders' Equity | 7. Stockholders’ Equity
The Paltalk, Inc. Amended and Restated 2011 Long-Term Incentive Plan (the “2011 Plan”) was terminated as to future awards on May 16, 2016. A total of 36,402 shares of the Company’s common stock may be issued pursuant to outstanding options awarded under the 2011 Plan; however, no additional awards may be granted under such plan. The Paltalk, Inc. 2016 Long-Term Incentive Plan (“the 2016 Plan”) was adopted by the Company’s stockholders on May 16, 2016 and permits the Company to award stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other stock-based awards and cash-based incentive awards to its employees (including an employee who is also a director or officer under certain circumstances), non-employee directors and consultants. The maximum number of shares of common stock that may be issued pursuant to awards under the 2016 Plan is 1,300,000 shares, 100% of which may be issued pursuant to incentive stock options. In addition, the maximum number of shares of common stock that may be issued under the 2016 Plan may be increased by an indeterminate number of shares of common stock underlying outstanding awards issued under the 2011 Plan that are forfeited, expired, cancelled or settled in cash. As of March 31, 2022, there were 734,614 shares available for future issuance under the 2016 Plan.
Stock Repurchase Plan
On March 21, 2022, the Board of Directors of the Company approved a stock repurchase plan for up to $1,750,000 of the Company’s outstanding common stock (the “Stock Repurchase Plan”). The Stock Repurchase Plan is effective as of March 29, 2022 and expires on the one-year anniversary of such date. Shares may be repurchased from time-to-time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs, and the Stock Repurchase Plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased will be determined by a committee of the Board of Directors at its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, alternative investment opportunities and other corporate considerations. As of March 31, 2022, no shares of common stock had been repurchased by the Company pursuant to the Stock Repurchase Plan.
Stock Options
The following table summarizes the assumptions used in the Black-Scholes pricing model to estimate the fair value of the options granted during the three months ended March 31, 2022:
The expected life of the options is the period of time over which employees and non-employees are expected to hold their options prior to exercise. The expected life of options has been determined using the “simplified” method as prescribed by Staff Accounting Bulletin 110, which uses the midpoint between the vesting date and the end of the contractual term. The volatility of the Company’s common stock is calculated using the Company’s historical volatilities beginning at the grant date and going back for a period of time equal to the expected life of the award. The Company estimates potential forfeitures of stock awards and adjusts recorded stock-based compensation expense accordingly. The Company estimates pre-vesting forfeitures primarily based on the Company’s historical experience and is adjusted to reflect actual forfeitures as the stock-based awards vest.
The following table summarizes stock option activity during the three months ended March 31, 2022:
At March 31, 2022, there was $551,390 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 3.76 years.
On March 31, 2022, the aggregate intrinsic value of stock options that were outstanding and exercisable was $118,415 and $88,040, respectively. On March 31, 2021, the aggregate intrinsic value of stock options that were outstanding and exercisable was $272,363 and $167,879, respectively. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the fair value of such awards as of the period-end date.
During the three months ended March 31, 2022, the Company granted stock options to members of the Board of Directors to purchase an aggregate of 24,000 shares of common stock at an exercise price of $2.66 per share. The stock options vest in four equal quarterly installments on the last day of each calendar quarter in 2022 and have a term of ten years. During the three months ended March 31, 2022, the Company also granted options to employees to purchase an aggregate of 224,500 shares of common stock. These options have varying vesting dates ranging between the grant date and up to four years, have a term of ten years and have an exercise price of $2.66. The aggregate fair value for the options granted during the three months ended March 31, 2022 and 2021 was $636,957 and $78,522, respectively.
Stock-based compensation expense for the Company’s stock options included in the condensed consolidated statements of operations was as follows:
Treasury Shares
On April 29, 2019, the Company implemented a stock repurchase plan to repurchase up to $500,000 of its common stock for cash. The repurchase plan expired on April 29, 2020. The Company had purchased 9,950 shares of its common stock under the repurchase plan as of April 29, 2020 and has classified them as treasury shares on the Company’s condensed consolidated balance sheets. In addition, during the year ended December 31, 2021, the Company retained 22,013 in treasury shares as part of a net share exercise of stock options by former employees. As of December 31, 2021 and March 31, 2022, the Company had 31,963 shares of its common stock classified as treasury shares on the Company’s condensed consolidated balance sheets. |
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Net (Loss) Income Per Share |
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| Net (Loss) Income Per Share | 8. Net (Loss) Income Per Share
Basic earnings and net (loss) income per share are computed by dividing the net (loss) income available to common stockholders by the weighted average number of common shares outstanding during the period as defined by ASC Topic 260, Earnings Per Share. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method). To the extent stock options are antidilutive, they are excluded from the calculation of diluted income per share. For the three months ended March 31, 2022 and 2021, 679,515 and 588,407 of shares issuable upon the exercise of outstanding stock options were not included in the computation of diluted net (loss) income per share from operations because their inclusion would be antidilutive.
The following table summarizes the net (loss) income per share calculation for the periods presented:
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Leases |
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| Leases | 9. Leases
On April 9, 2021, the Company entered into a lease extension agreement with Jericho Executive Center LLC for the office space at 30 Jericho Executive Plaza in Jericho, New York, which commenced on December 1, 2021 and runs through November 30, 2024. The Company’s monthly office rent payments under the lease are currently approximately $7,081 per month. The lease extension resulted in an increase in the Company’s right-of-use (“ROU”) assets and lease liabilities of $0.2 million, using a discount rate of 2.30%.
As of March 31, 2022, the Company had no long-term leases that were classified as financing leases. As of March 31, 2022, the Company did not have additional operating and financing leases that had not yet commenced.
At March 31, 2022, the Company had operating lease liabilities of approximately $220,000 and ROU assets of approximately $220,000, which are included in the condensed consolidated balance sheets.
Total rent expense for the three months ended March 31, 2022 was $23,332, of which $1,500 was sublease income. Total rent expense for three months ended March 31, 2021 was $24,768, of which $36,095 was sublease income. Rent expense is recorded under general and administrative expense in the condensed consolidated statements of operations.
The following table summarizes the Company’s operating leases for the periods presented:
As of March 31, 2022, future minimum payments under non-cancelable operating leases were as follows:
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Commitments and Contingencies |
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| Commitments and Contingencies Disclosure [Abstract] | |
| Commitments and Contingencies | 10. Commitments and Contingencies
Officer Employment Agreements
On March 23, 2022, the Company entered into Amended and Restated Employment Agreements with the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), which amends and restates their existing employment agreements with the Company dated October 7, 2016 and December 9, 2019, respectively. The agreements are each for terms of one year with auto renewal provisions. Except for adjustments to base salaries, all other terms and conditions of the prior employment agreements between the Company and the CEO and CFO will remain in full force and effect. The CEO agreement is retroactive to February 2021. The CFO agreement is retroactive to January 2022. Aggregate commitments of base salaries under the agreements for 2022 total $490,000. Should the agreements be renewed for 2023 and beyond, the aggregate base salary commitments would total $510,000 per year.
Patent Litigation
On July 23, 2021, a wholly owned subsidiary of the Company, Paltalk Holdings, Inc., filed a patent infringement lawsuit against WebEx Communications, Inc., Cisco WebEx LLC, and Cisco Systems, Inc. (collectively, “Cisco”), in the U.S. District Court for the Western District of Texas. The Company alleges that Cisco’s Webex products have infringed U.S. Patent No. 6,683,858, and that the Company is entitled to damages. A Markman hearing took place on February 24, 2022 and a trial is scheduled for early 2023.
Legal Proceedings
The Company may be included in legal proceedings, claims and assessments arising in the ordinary course of business. The Company evaluates the need for a reserve for specific legal matters based on the probability of an unfavorable outcome and the reasonability of an estimable loss. No reserve was deemed necessary as of March 31, 2022. |
Subsequent Events |
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| Subsequent Events [Abstract] | |
| Subsequent Events | 11. Subsequent Events
Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued and determined that no events or transactions are required to be disclosed herein. |
Accounting Policies, by Policy (Policies) |
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| Organization and Description of Business [Abstract] | |||||||
| Significant Estimates and Assumptions | Significant Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
Significant estimates relied upon in preparing these financial statements include the estimates used to determine the fair value of the stock options issued in share-based payment arrangements, subscription revenues net of refunds, credits, and known and estimated credit card chargebacks and the fair value of digital tokens. Management evaluates these estimates on an ongoing basis. Changes in estimates are recorded in the period in which they become known. The Company bases estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates.
Revisions to the Company’s estimates may result in increases or decreases to revenues and income and are reflected in the condensed consolidated financial statements in the periods in which they are first identified. If the Company’s estimates indicate that a contract loss will be incurred, a loss provision is recorded in the period in which the loss first becomes probable and can be reasonably estimated. Contract losses are the amount by which the estimated costs of the contract exceed the estimated total revenue that will be generated by the contract and are included in cost of revenues in the Company’s condensed consolidated statements of operations. There were no contract losses for the periods presented.
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| Fair Value Measurements | Fair Value Measurements
The fair value framework under the guidance issued by the Financial Accounting Standards Board (“FASB’”) requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:
The Company reviews the appropriateness of fair value measurements including validation processes, and the reconciliation of period-over-period fluctuations based on changes in key market inputs. All fair value measurements are subject to the Company’s analysis. Review and approval by management is required as part of the validation process.
The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to the short-term nature of these instruments.
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| Revenue Recognition | Revenue Recognition
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, revenue from contracts with customers is recognized when control of the promised services is transferred to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those services. Sales tax is excluded from reported revenue. The Company has elected the practical expedient allowable by the guidance to not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less.
Subscription Revenue
The Company generates subscription revenue primarily from monthly premium subscription services. Subscription revenues are presented net of refunds, credits, and known and estimated credit card chargebacks. During the three months ended March 31, 2022 and 2021, subscriptions were offered in durations of one-, three-, six- and twelve- month terms. All subscription fees, however, are paid by credit card at the origination of the subscription regardless of the term of the subscription. Revenues from multi-month subscriptions are recognized on a straight-line basis over the period where the service is offered to the customer, indicated by length of the subscription term purchased. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets. Deferred revenue at December 31, 2021 was $1,915,493, of which $727,130 was subsequently recognized as subscription revenue during the three months ended March 31, 2022. The ending balance of deferred revenue at March 31, 2022 and 2021 was $1,845,853 and $2,023,794, respectively.
In addition, the Company offers virtual gifts to its users. Users may purchase credits in $5, $10 or $20 increments that can be redeemed for a host of virtual gifts such as a rose, a beer or a car, among other items. These gifts are given among users to enhance communication and are typically redeemed within 30 days of purchase. Upon purchase, the virtual gifts are credited to the users’ account and are under the users’ control. Virtual gift revenue is recognized upon the users’ redemption of virtual gifts at the fixed transaction price and included in subscription revenue in the accompanying condensed consolidated statements of operations. Virtual gift revenue is presented as deferred revenue in the condensed consolidated balance sheets until virtual gifts are redeemed. Virtual gift revenue was $1,269,537 and $1,420,130 for the three months ended March 31, 2022 and 2021, respectively. The ending balance of deferred revenue from virtual gifts at March 31, 2022 and 2021 was $331,804 and $349,472, respectively.
Advertising Revenue
The Company generates advertising revenue from the display of advertisements on its products through contractual agreements with third parties that are based on the number of advertising impressions delivered. Measurements of impressions include when a customer clicks an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external website via an advertisement by clicking on or through the application (CPA basis). Advertising revenue is dependent upon traffic as well as the advertising inventory placed on the Company’s products.
Technology Service Revenue
Technology service revenue is generated under service and partnership agreements that the Company negotiates with third parties which includes development, integration, engineering, licensing or other services that the Company provides.
During 2021, the Company also recorded technology service revenue in connection with its agreement to serve as a launch partner with Open Props, Inc. (formerly YouNow, Inc., and referred to herein as “YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”) into its Camfrog and Paltalk applications (as amended, the “YouNow Agreement”).
Pursuant to the terms of the YouNow Agreement, once the integration of Props tokens into the Company’s Paltalk and Camfrog applications was completed, the Company began receiving Props tokens for providing a validator service and for allowing users to participate in the loyalty platform. The loyalty platform was intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications.
Given the trading availability of Props tokens in various active markets, the Company calculated the fair value of digital tokens based on the observable daily quoted market prices (Level 1 inputs) on multiple international exchanges, as recorded on CoinmarketCap. The total net revenue value recognized as earned was estimated to be $0 and $155,816 for the three months ended March 31, 2022 and 2021, respectively.
In August 2021, the Company received notice from YouNow that it was terminating the YouNow Agreement, and that it would no longer support the Props platform past the end of calendar year 2021. As a result of the termination of the YouNow Agreement, the Company notified its users that it would no longer be issuing Props starting October 15, 2021 and would be replacing any user’s outstanding Props with a new internal rewards program. The new rewards loyalty program for Paltalk and Camfrog, allowed users to keep their existing rewards earned from the former Props program as internal rewards and also have the opportunity to earn new internal rewards points. In connection with the internal rewards points, the Company added 25 new reward tiers such as specialty coins, subscriptions, stickers, flair, and other popular buttons. |
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of property and equipment, net |
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Intangible Assets, Net (Tables) |
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of intangible assets, net |
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Accrued Expenses and Other Current Liabilities (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Disclosure Text Block Supplement [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of accrued expenses and other current liabilities |
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Stockholders' Equity (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stockholders' Equity Note [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of assumptions used in Black-Scholes pricing model to estimate the fair value of the options granted |
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| Schedule of stock option activity |
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| Schedule of stock-based compensation expense |
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Net (Loss) Income Per Share (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Income Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of net income per share |
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Leases (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of operating leases |
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| Schedule of future minimum payments under non-cancelable operating leases |
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Organization and Description of Business (Details) |
May 03, 2020
USD ($)
|
|---|---|
| Organization and Description of Business [Abstract] | |
| Principle amount | $ 506,500 |
Summary of Significant Accounting Policies (Details) - USD ($) |
3 Months Ended | ||
|---|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
Dec. 31, 2021 |
|
| Summary of Significant Accounting Policies (Details) [Line Items] | |||
| Deferred revenue | $ 1,845,853 | $ 2,023,794 | $ 1,915,493 |
| Subscription revenue | $ 727,130 | ||
| Subscription revenue, description | In addition, the Company offers virtual gifts to its users. Users may purchase credits in $5, $10 or $20 increments that can be redeemed for a host of virtual gifts such as a rose, a beer or a car, among other items. | ||
| Total net revenue | $ 0 | 155,816 | |
| Subscription Arrangement [Member] | |||
| Summary of Significant Accounting Policies (Details) [Line Items] | |||
| Virtual gift revenue | 1,269,537 | 1,420,130 | |
| Deferred revenue from virtual gifts | $ 331,804 | $ 349,472 | |
Property and Equipment, Net (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Property, Plant and Equipment [Abstract] | ||
| Depreciation expense | $ 30,098 | $ 48,780 |
Property and Equipment, Net (Details) - Schedule of property and equipment, net - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Total property and equipment | $ 2,514,596 | $ 3,990,245 |
| Less: Accumulated depreciation | (2,475,095) | (3,920,646) |
| Total property and equipment, net | 39,501 | 69,599 |
| Computer equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Total property and equipment | 311,335 | 866,459 |
| Website development [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Total property and equipment | 2,155,798 | 3,076,323 |
| Furniture and fixtures [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Total property and equipment | $ 47,463 | $ 47,463 |
Intangible Assets, Net (Details) - USD ($) |
Mar. 31, 2022 |
Mar. 31, 2021 |
|---|---|---|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Amortization expenses | $ 46,166 | $ 64,084 |
| Aggregate amortization expense 2022 | 103,778 | |
| Aggregate amortization expense 2023 | 18,000 | |
| Aggregate amortization expense 2024 | 17,354 | |
| Aggregate amortization expense 2025 | 2,500 | |
| Aggregate amortization expense for 2026 | 2,500 | |
| Aggregate amortization expense for thereafter | $ 6,245 |
Accrued Expenses and Other Current Liabilities (Details) - Schedule of accrued expenses and other current liabilities - USD ($) |
Mar. 31, 2022 |
Dec. 31, 2021 |
|---|---|---|
| Schedule of accrued expenses and other current liabilities [Abstract] | ||
| Compensation, benefits and payroll taxes | $ 67,038 | $ 318,150 |
| Other accrued expenses | 26,676 | 26,291 |
| Total accrued expenses and other current liabilities | $ 93,714 | $ 344,441 |
Income Taxes (Details) - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Income Tax Disclosure [Abstract] | ||
| Income tax provision (in Dollars) | $ 16,031 | $ 1,100 |
| Effective tax rate pecentage | (2.22%) | 0.11% |
| Effective tax rate from statutory rate | 21.00% | 21.00% |
Stockholders' Equity (Details) - Schedule of assumptions used in Black-Scholes pricing model to estimate the fair value of the options granted |
3 Months Ended |
|---|---|
Mar. 31, 2022 | |
| Stockholders' Equity (Details) - Schedule of assumptions used in Black-Scholes pricing model to estimate the fair value of the options granted [Line Items] | |
| Risk free interest rate | 2.53% |
| Expected dividend yield | 0.00% |
| Minimum [Member] | |
| Stockholders' Equity (Details) - Schedule of assumptions used in Black-Scholes pricing model to estimate the fair value of the options granted [Line Items] | |
| Expected volatility | 173.00% |
| Expected life of option (in years) | 5 years 2 months 12 days |
| Maximum [Member] | |
| Stockholders' Equity (Details) - Schedule of assumptions used in Black-Scholes pricing model to estimate the fair value of the options granted [Line Items] | |
| Expected volatility | 182.00% |
| Expected life of option (in years) | 6 years 2 months 12 days |
Stockholders' Equity (Details) - Schedule of stock option activity |
3 Months Ended |
|---|---|
|
Mar. 31, 2022
$ / shares
shares
| |
| Stock Options: | |
| Number of Options, Outstanding beginning balance | shares | 435,770 |
| Weighted Average Exercise Price, Outstanding beginning balance | $ / shares | $ 5.31 |
| Number of Options, Outstanding ending balance | shares | 679,515 |
| Weighted Average Exercise Price, Outstanding ending balance | $ / shares | $ 4 |
| Number of Options, Exercisable | shares | 448,264 |
| Weighted Average Exercise Price, Exercisable | $ / shares | $ 4.76 |
| Number of Options, Granted | shares | 248,500 |
| Weighted Average Exercise Price, Granted | $ / shares | $ 2.66 |
| Number of Options, Expired, during the period | shares | (4,755) |
| Weighted Average Exercise Price, Expired, during the period | $ / shares | $ 54.51 |
Stockholders' Equity (Details) - Schedule of stock-based compensation expense - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
| Total stock compensation expense | $ 152,471 | $ 31,368 |
| Cost of revenue [Member] | ||
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
| Total stock compensation expense | 12,864 | 182 |
| Sales and marketing expense [Member] | ||
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
| Total stock compensation expense | 119 | 7 |
| Product development expense [Member] | ||
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
| Total stock compensation expense | 3,469 | 3,044 |
| General and administrative expense [Member] | ||
| Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | ||
| Total stock compensation expense | $ 136,019 | $ 28,135 |
Net (Loss) Income Per Share (Details) - shares |
Mar. 31, 2022 |
Mar. 31, 2021 |
|---|---|---|
| Net Income Per Share [Abstract] | ||
| Shares issuable | 679,515 | 588,407 |
Net (Loss) Income Per Share (Details) - Schedule of net income per share - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Schedule of net income per share [Abstract] | ||
| Net (loss) income from operations – basic and diluted | $ (738,945) | $ 916,729 |
| Weighted average shares outstanding – basic | 9,832,157 | 6,906,454 |
| Weighted average shares outstanding – diluted | 9,832,157 | 6,906,454 |
| Per share data: | ||
| Basic from operations | $ (0.08) | $ 0.13 |
| Diluted from operations | $ (0.08) | $ 0.13 |
Leases (Details) - USD ($) |
3 Months Ended | ||
|---|---|---|---|
Jun. 07, 2016 |
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Leases (Textual) | |||
| Operating lease, description | On April 9, 2021, the Company entered into a lease extension agreement with Jericho Executive Center LLC for the office space at 30 Jericho Executive Plaza in Jericho, New York, which commenced on December 1, 2021 and runs through November 30, 2024. | ||
| Rent payments under the lease | $ 7,081 | ||
| Lease liabilities | $ 200,000 | ||
| Discount rate | 2.30% | ||
| Operating lease liabilities | $ 220,000 | ||
| Right-of-use assets | 220,000 | ||
| Rent expenses | 23,332 | ||
| Sublease income | $ 1,500 | $ 36,095 | |
| Rent expenses | $ 24,768 | ||
Leases (Details) - Schedule of operating leases - USD ($) |
3 Months Ended | |
|---|---|---|
Mar. 31, 2022 |
Mar. 31, 2021 |
|
| Schedule of operating leases [Abstract] | ||
| Cash paid for amounts included in the measurement of operating lease liabilities: | $ 19,905 | $ 16,133 |
| Weighted average assumptions: | ||
| Remaining lease term | 2 years 8 months 12 days | 8 months 12 days |
| Discount rate | 2.30% | 3.50% |
Leases (Details) - Schedule of future minimum payments under non-cancelable operating leases |
Mar. 31, 2022
USD ($)
|
|---|---|
| Schedule of future minimum payments under non-cancelable operating leases [Abstract] | |
| 2022 | $ 63,731 |
| 2023 | 84,975 |
| 2024 | 77,894 |
| Total | 226,600 |
| Less: present value adjustment | (7,014) |
| Present value of minimum lease payments | $ 219,586 |
Commitments and Contingencies (Details) |
1 Months Ended |
|---|---|
|
Jan. 28, 2021
USD ($)
| |
| Mr. Katz [Member] | |
| Commitments and Contingencies (Details) [Line Items] | |
| Annualized base salary | $ 490,000 |