10-Q 1 ea0204409-10q_paltalk.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2024

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 001-38717

 

PALTALK, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-3191847

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

30 Jericho Executive Plaza Suite 400E

Jericho, NY

  11753
(Address of principal executive offices)   (Zip Code)

 

(212) 967-5120

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.001 par value   PALT   The Nasdaq Capital Market

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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
Non-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 7, 2024

Common Stock, par value $0.001 per share   9,222,157 *

 

* Excludes 641,963 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, 2024

 

Table of Contents

 

    Page
Number
     
  PART I. FINANCIAL INFORMATION 1
     
ITEM 1. Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of March 31, 2024 (Unaudited) and December 31, 2023 1
     
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2024 and 2023 (Unaudited) 2
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2024 and 2023 (Unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (Unaudited) 4
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 5
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22
     
ITEM 4. Controls and Procedures 22
     
  PART II. OTHER INFORMATION 23
     
ITEM 1. Legal Proceedings 23
     
ITEM 1A. Risk Factors 23
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
   
ITEM 3. Defaults Upon Senior Securities 23
     
ITEM 4. Mine Safety Disclosures 23
     
ITEM 5. Other Information 23
     
ITEM 6. Exhibits 24

 

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 the context otherwise indicates, references to “Paltalk,” “we,” “our,” “us” and the “Company” refer to Paltalk, Inc. and its subsidiaries on a consolidated basis.

 

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 any economic recession and the overall inflationary environment 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;

 

  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 tax laws and laws and regulations regarding the use of the internet, privacy, cybersecurity and protection of user data;

 

  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, “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, 2023, which was filed with the Securities and Exchange Commission on March 15, 2024. 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, 
   2024   2023 
Assets  (unaudited)     
Current assets:        
Cash and cash equivalents  $13,047,255   $13,568,049 
Accounts receivable, net of allowances of $26,559 as of March 31, 2024 and $23,326 as of December 31, 2023, respectively   95,435    92,704 
Employee retention tax credit receivable, net   114,212    114,212 
Prepaid expense and other current assets   795,868    990,634 
Total current assets   14,052,770    14,765,599 
Operating lease right-of-use asset   56,164    77,005 
Goodwill   6,326,250    6,326,250 
Intangible assets, net   2,498,894    2,704,477 
Other assets   13,937    13,937 
Total assets  $22,948,015   $23,887,268 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Accounts payable  $711,598   $792,053 
Accrued expenses and other current liabilities   105,188    226,120 
Operating lease liabilities, current portion   56,164    
-
 
Contingent consideration   
-
    77,005 
Deferred subscription revenue   1,890,417    2,043,362 
Total current liabilities   2,763,367    3,138,540 
Operating lease liabilities, non-current portion   
-
    
-
 
Deferred tax liability   482,957    614,041 
Total liabilities   3,246,324    3,752,581 
Commitments and contingencies (Note 9)   
 
    
 
 
Stockholders’ equity:          
Common stock, $0.001 par value, 25,000,000 shares authorized, 9,864,120 shares issued and 9,222,157 shares outstanding as of March 31, 2024 and December 31, 2023, respectively   9,864    9,864 
Treasury stock, 641,963 shares repurchased as of March 31, 2024 and December 31, 2023, respectively   (1,199,337)   (1,199,337)
Additional paid-in capital   36,268,039    36,208,728 
Accumulated deficit   (15,376,875)   (14,884,568)
Total stockholders’ equity   19,701,691    20,134,687 
Total liabilities and stockholders’ equity  $22,948,015   $23,887,268 

 

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,
 
   2024   2023 
Revenues:        
Subscription revenue  $2,482,982   $2,505,670 
Advertising revenue   114,748    58,347 
Total revenues   2,597,730    2,564,017 
Costs and expenses:          
Cost of revenue   819,075    802,475 
Sales and marketing expense   190,594    254,868 
Product development expense   1,211,701    1,248,582 
General and administrative expense   1,138,551    1,167,111 
Total costs and expenses   3,359,921    3,473,036 
Loss from operations   (762,191)   (909,019)
Interest income, net   151,984    121,167 
Loss from operations before provision for income taxes   (610,207)   (787,852)
Income tax benefit   117,900    49,554 
Net loss  $(492,307)  $(738,298)
           
Net loss per share of common stock:          
Basic  $(0.05)  $(0.08)
Diluted  $(0.05)  $(0.08)
Weighted average number of shares of common stock used in calculating net loss per share of common stock:          
Basic   9,222,157    9,222,356 
Diluted   9,222,157    9,222,356 

 

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, 2024 AND 2023

(Unaudited)

 

   Common   Stock   Treasury   Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Shares   Amount   Capital   Deficit   Equity 
Balance at December 31, 2022   9,864,120   $9,864    (636,771)  $(1,192,124)  $35,973,735   $(13,817,233)  $20,974,242 
Stock-based compensation expense   -    
-
    -    
-
    55,141    
-
    55,141 
Repurchases of common stock   -    -    (5,192)   (7,213)   
-
    
-
    (7,213)
Net loss   -    
-
    -    
-
    
-
    (738,298)   (738,298)
Balance at March 31, 2023   9,864,120   $9,864    (641,963)  $(1,199,337)  $36,028,876   $(14,555,531)  $20,283,872 
Balance at December 31, 2023   9,864,120   $9,864    (641,963)  $(1,199,337)  $36,208,728   $(14,884,568)  $20,134,687 
Stock-based compensation expense   -    
-
    -    
-
    59,311    
-
    59,311 
Net loss   -    
-
    -    
-
    
-
    (492,307)   (492,307)
Balance at March 31, 2024   9,864,120   $9,864    (641,963)  $(1,199,337)  $36,268,039   $(15,376,875)  $19,701,691 

 

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,
 
   2024   2023 
Cash flows from operating activities:        
Net loss  $(492,307)  $(738,298)
Adjustments to reconcile net loss from operations to net cash used in operating activities:          
Amortization of intangible assets   205,583    205,584 
Amortization of operating lease right-of-use assets   20,841    20,367 
Income tax benefit   (13,184)   
-
 
Allowance for credit losses   3,233    
-
 
Deferred tax benefit   (117,900)   (49,554)
Stock-based compensation   59,311    55,141 
Changes in operating assets and liabilities:          
Accounts receivable   (5,964)   15,182 
Operating lease liability   (20,841)   (20,367)
Prepaid expense and other current assets   194,766    120,532 
Accounts payable, accrued expenses and other current liabilities   (201,387)   (316,967)
Deferred subscription revenue   (152,945)   (94,611)
Net cash used in operating activities   (520,794)   (802,991)
Cash flows from investing activities:          
Net cash used in investing activities   
-
    
-
 
Cash flows from financing activities:          
Purchase of treasury stock   
-
    (7,213)
Net cash used in financing activities   
-
    (7,213)
Net decrease in cash and cash equivalents   (520,794)   (810,204)
Balance of cash and cash equivalents at beginning of period   13,568,049    14,739,933 
Balance of cash and cash equivalents at end of period  $13,047,255   $13,929,729 
Supplemental disclosure of cash flow information:          
Cash paid during the periods:          
Taxes  $50   $
-
 

 

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

 

Overview

 

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, Vumber LLC and ManyCam ULC (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 products include ManyCam and Vumber. ManyCam is a live streaming software and virtual camera that allows users to deliver professional live videos on streaming platforms, video conferencing apps and distance learning tools. Vumber 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 8 patents.

 

Impact of Macro-Economic Factors

 

The Company’s results of operations have been and may continue to be negatively impacted by macro-economic factors, including the timing of economic recessions and/or recovery and the overall inflationary environment. Prolonged periods of inflation have affected, and may continue to affect, the Company’s ability to target new customers as well as keep existing customers engaged and may ultimately have a correlating effect on its users’ discretionary spending. Future adverse developments with respect to the economic environment and geopolitical tensions may create additional market and economic uncertainty, which could affect the Company’s industry.

 

Employee Retention Tax Credit

 

Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act, the Company was eligible for a refundable employee retention tax credit (the “ERTC”), subject to certain criteria. During the year ended December 31, 2023, the Company applied for the ERTC and recorded a receivable in the amount of $343,045, net of related costs, which was recognized in the Company’s condensed consolidated statement of operations as other income. As of March 31, 2024, the Company received an aggregate of $294,833, which was recorded as a reduction of the receivable on the Company’s condensed consolidated balance sheet.

 

 Basis of Presentation

 

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, 2023, filed with the SEC on March 15, 2024 (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, 2024 are not necessarily indicative of results for the year ending December 31, 2023, or for any other period.

 

5

 

 

2. Summary of Significant Accounting Policies

 

During the three months ended March 31, 2024, 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.

 

Inflation Reduction Act of 2022

 

On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1% excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the Treasury has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.  The IR Act was not applicable to the Company during the year ended December 31, 2023 and the three months ended March 31, 2024, given that repurchases of stock during such periods, if any, were below the threshold required to be subject to taxation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements include the discount rates and weighted average costs of capital used in the fair value of the ManyCam assets and in assigning their respective useful lives. These fair values and estimates were based on a number of factors, including a valuation by an independent third party.  

 

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.

  

6

 

 

Revenue Recognition

 

In accordance with 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, 2024 and 2023, subscriptions were offered in durations of one-, three-, six-, twelve-month and twenty four-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 subscription revenue in the accompanying condensed consolidated balance sheets. Deferred subscription revenue at December 31, 2023 was $2,043,362, of which $748,353 was subsequently recognized as subscription revenue during the three months ended March 31, 2024. The ending balance of deferred subscription revenue at March 31, 2024 and 2023 was $1,890,417 and $2,162,841, 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 $1,017,008 and $1,010,200 for the three months ended March 31, 2024 and 2023, respectively. The ending balance of deferred revenue from virtual gifts, which is included in deferred subscription revenue at March 31, 2024 and 2023 was $278,011 and $334,804, 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.

 

 

7

 

 

Goodwill

 

Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company evaluates its goodwill for impairment in accordance with ASC 350, Intangibles – Goodwill and Other (as amended by ASU 2017-04), by assessing qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company performs the quantitative goodwill impairment test, if, after assessing the totality of events or circumstances such as those described in paragraph ASC 350-20-35-3C(a) through (g), the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill related to the reporting unit.

 

The Company tests the recorded amount of goodwill for impairment on an annual basis on December 31 of each fiscal year or more frequently if there are indicators that the fair value of the goodwill exceeds its carrying amount. The Company has one reporting unit. The Company performed a qualitative assessment and concluded that no impairment existed as of December 31, 2023 and 2022.

 

Intangible Assets

 

The Company’s acquired amortizable intangible assets primarily consist of the assets acquired in June 2022 relating to ManyCam software, which assets consist of internally developed software, intellectual property (trade names, trademarks and URLs) and subscriber relationships/customer lists.

 

The Company’s intangible assets represent definite lived intangible assets, which are being amortized on a straight-line basis over their estimated useful lives as follows:

 

Patents   20 years 
Trade names, trademarks, product names, URLs   5-10 years 
Internally developed software   5-7 years 
Non-compete agreements   3 years 
Subscriber/customer relationships   3-12 years 

 

The Company reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. No impairments were recorded on intangible assets as no impairment indicators were noted for the periods presented in these consolidated financial statements. 

 

3. Intangible Assets, Net

 

Intangible assets, net consisted of the following at March 31, 2024 and December 31, 2023:

 

  

March 31, 2024

(unaudited)

   December 31, 2023 
   Gross       Net   Gross       Net 
   Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying 
   Amount   Amortization   Amount   Amount   Amortization   Amount 
Patents  $50,000   $(36,875)  $13,125   $50,000   $(36,250)  $13,750 
Trade names, trademarks product names, URLs   1,022,425    (664,959)   357,466    1,022,425    (644,390)   378,035 
Internally developed software   4,180,005    (2,556,622)   1,623,383    4,180,005    (2,478,408)   1,701,597 
Subscriber/customer relationships   3,553,102    (3,048,182)   504,920    3,553,102    (2,942,007)   611,095 
Total intangible assets  $8,805,532   $(6,306,638)  $2,498,894   $8,805,532   $(6,101,055)  $2,704,477 

 

Amortization expense for the three months ended March 31, 2024 was $205,583, as compared to $205,584 for the three months ended March 31, 2023. The aggregate amortization expense for each of the next five years is estimated to be $616,104 for the remainder of 2024, $568,529 in 2025, $382,133 in 2026, $382,133 in 2027, $382,133 in 2028 and $167,862 in 2029.

 

8

 

 

4. Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following for the periods presented:

 

   March 31,   December 31, 
   2024   2023 
   (unaudited)     
Compensation, benefits and payroll taxes  $22,950   $91,250 
Other accrued expenses   82,238    134,870 
Total accrued expenses and other current liabilities  $105,188   $226,120 

 

5. Income Taxes

 

The Company’s provision for income taxes consists of federal, foreign, 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.

 

For the three months ended March 31, 2024, the Company recorded an income tax benefit of $117,900 consisting primarily of federal, foreign, state and local taxes. The effective tax rate for the three months ended March 31, 2024 was 19.3% which differs from the statutory rate of 21% primarily due to changes in the Company’s valuation allowance, difference in foreign tax rates from the U.S. statutory rate of 21% and state and local taxes. As of March 31, 2024 the Company has continued to conclude that its U.S. deferred tax assets are not realizable on a more-likely-than-not basis and the Company maintains a full valuation allowance against such deferred tax assets.

 

For the three months ended March 31, 2023, the Company recorded an income tax benefit of $49,554. The effective tax rate for the three months ended March 31, 2023 was 6.64% which differs from the statutory rate of 21% as the Company has concluded that its U.S. deferred tax assets are not realizable on a more-likely-than-not basis.

 

9

 

 

6. 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 22,480 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, 2024, there were 632,257 shares available for future issuance under the 2016 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 nine months ended March 31, 2024:

 

Expected volatility   151.5%
Expected life of option (in years)   5.26.2 
Risk free interest rate   4.2%
Expected dividend yield   0.0%

 

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 adjusts to reflect actual forfeitures as the stock-based awards vest.

 

The following table summarizes stock option activity during the three months ended March 31, 2024:

 

       Weighted 
       Average 
   Number of   Exercise 
   Options   Price 
Stock Options:        
Outstanding at January 1, 2024   740,814   $3.32 
Granted during the period   28,000    2.78 
Cancelled/Forfeited, during the period   
-
    
-
 
Expired, during the period   (5,078)   13.49 
Outstanding at March 31, 2024   763,736   $3.23 
Exercisable at March 31, 2024   586,849   $3.56 

 

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At March 31, 2024, there was $341,530 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 2.68 years.

 

On March 31, 2024, the aggregate intrinsic value of stock options that were outstanding and exercisable was $423,850 and $259,295, respectively. On March 31, 2023, the aggregate intrinsic value of stock options that were outstanding and exercisable was $59,506 and $47,744, respectively. The intrinsic value of 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, 2024, 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 $2.78 per share. The stock options vest in four equal quarterly installments on the last day of each calendar quarter in 2024 and have a term of ten years. During the three months ended March 31, 2024, the Company also granted options to employees to purchase an aggregate of 4,000 shares of common stock. These options vest equally over four years, have a term of ten years and have an exercise price of $2.78. The aggregate fair value for the options granted during the three months ended March 31, 2024 and 2023 was $72,240 and $90,380, respectively.

 

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,
(unaudited)
 
   2024   2023 
Cost of revenue  $3,182   $2,215 
Sales and marketing expense   
-
    639 
Product development expense   7,716    6,873 
General and administrative expense   48,413    45,414 
Total stock compensation expense  $59,311   $55,141 

 

Treasury Shares

 

The Board of Directors approved a stock repurchase plan for up to $1,750,000 of the Company’s outstanding common stock (the “Stock Repurchase Plan”), effective as of March 29, 2022, which expired on March 29, 2023, the one-year anniversary of such date. Under the Stock Repurchase Plan, shares were 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. The actual timing, number and value of shares repurchased was determined by a committee of the Board of Directors at its discretion and depended 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, 2024 and December 31, 2023, the Company had 641,963 shares of its common stock, respectively, classified as treasury shares on the Company’s consolidated balance sheets.

 

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7. Net Loss Per Share

 

Basic net loss per share is computed by dividing the net loss 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 net loss 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, 2024 and 2023, 763,736 and 650,155 of shares issuable upon the exercise of outstanding stock options, respectively, were not included in the computation of diluted net loss per share because their inclusion would be antidilutive.

 

The following table summarizes the net loss per share calculation for the periods presented:

 

   Three Months Ended 
   March 31,
(unaudited)
 
   2024   2023 
Net loss – basic and diluted
  $(492,307)  $(738,298)
Weighted average shares outstanding – basic   9,222,157    9,222,356 
Weighted average shares outstanding – diluted   9,222,157    9,222,356 
Per share data:          
Basic  $(0.05)  $(0.08)
Diluted  $(0.05)  $(0.08)

 

8. 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.

 

As of March 31, 2024, the Company had no long-term leases that were classified as financing leases and did not have additional operating or financing leases that had not yet commenced.

 

As of March 31, 2024, the Company had operating lease liabilities of approximately $56,164 and ROU assets of approximately $56,164, which are included in the accompanying condensed consolidated balance sheets.

 

Total rent expense for the three months ended March 31, 2024 was $21,825, of which $1,500 was sublease income. Total rent expense for three months ended March 31, 2023 was $20,448, of which $1,500 was sublease income. Rent expense is recorded under general and administrative expense in the accompanying condensed consolidated statements of operations.

 

The following table summarizes the Company’s operating leases for the periods presented:

 

   Three Months Ended 
   March 31,
(unaudited)
 
   2024   2023 
Cash paid for amounts included in the measurement of operating lease liabilities:  $20,841   $20,367 
Weighted average assumptions:          
Remaining lease term   0.66    1.7 
Discount rate   2.3%   2.3%

 

12

 

 

As of March 31, 2024, future minimum payments under non-cancelable operating leases were as follows:

 

For the year ending December 31,  Amount 
2024   56,650 
Total  $56,650 
Less: present value adjustment   (486)
Present value of minimum lease payments  $56,164 

 

9. Commitments and Contingencies

 

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 “Court”). The Company alleges that certain of Cisco’s 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. On September 7, 2022, the United States Patent Office issued a reexamination of U.S. Patent No. 6,683,858, and on January 19, 2023, the Examiner issued an Ex Parte Reexamination Certificate, ending the reexamination and confirming the patentability of claims 1-10 of U.S. Patent No. 6,683,858. On June 29, 2023, the Court held a pretrial conference and denied Cisco’s motion for summary judgment. The trial is expected to be held in August of 2024.

 

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, 2024.

 

10. 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, 2024 and 2023, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2024 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, 2023, 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, play online card games and board games 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 products include ManyCam and Vumber. ManyCam is a live streaming software and virtual camera that allows users to deliver professional live videos on streaming platforms, video conferencing apps and distance learning tools. Vumber 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 8 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 games 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 and cross-selling them to additional synergistic businesses.

 

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.

 

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Recent Developments 

 

Impact of Macro-Economic Factors

 

Our results of operations have been and may continue to be negatively impacted by macro-economic factors, including the timing of economic recessions and/or recovery and the overall inflationary environment. Prolonged periods of inflation have affected, and may continue to affect, our ability to target new customers as well as keep existing customers engaged and may ultimately have a correlating effect on our users’ discretionary spending. Future adverse developments with respect to the economic environment and geopolitical tensions may create additional market and economic uncertainty, which could affect our industry.

 

Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act, we were eligible for a refundable employee retention tax credit (the “ERTC”) subject to certain criteria. During the year ended December 31, 2023, we applied for the ERTC and recorded a receivable in the amount of $343,045, net of related costs, which was recognized in our condensed consolidated statement of operations as other income. As of March 31, 2024, we received an aggregate of $294,833, which was recorded as a reduction of the receivable on our condensed consolidated balance sheet.

 

Operational Highlights and Business Objectives

 

During the three months ended March 31, 2024, we executed key components of our objectives:

 

total revenue increased by approximately 1.3%, to $2,597,730, for the three months ended March 31, 2024 compared to total revenue of $2,564,017 for the three months ended March 31, 2023, primarily as a result of an increase in advertising revenue;

 

net loss decreased by 33.3% to $492,307 for the three months ended March 31, 2024, compared to net loss of approximately $738,298 for the three months ended March 31, 2023, as a result of increased revenues, reduced expenses, and increased operating efficiencies; and

 

cash flows used in operations decreased by 35.1% to $282,197 for the three ended March 31, 2024, compared to $802,991 for the three ended March 31, 2023, mainly as result of a decrease in operating expenses.

  

For the near term, our business objectives include:

 

continue our efforts to leverage the integration of ManyCam software into our Paltalk product through upselling initiatives;

 

further optimizing marketing spend to effectively realize a positive return on our investment;

 

continue to our efforts to improve user experience with ManyCam software and optimize features for both consumer and enterprise applications;

 

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.

 

15

 

 

Sources of Revenue

 

Our main sources of revenue are subscription revenue, which includes virtual gift revenue, and advertising revenue generated from users of our core video chat products, Paltalk and Camfrog. We also generate revenue from subscriptions for our ManyCam software product. We expect that the majority of our revenue in future periods will continue to be generated from our core video chat products.

 

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-, three-, six-, twelve-, and twenty-four-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. Subscriptions for ManyCam are generally offered in annual and two-year terms, with exceptions made for enterprise sales.

 

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

 

We also offer virtual gifts to our users through our Paltalk, Camfrog and TinyChat applications. 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).

 

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.

 

16

 

 

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 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 “Liquidity and Capital Resources” section below. Adjusted EBITDA is discussed below.

 

   Three Months Ended 
  

March 31,
(unaudited)

 
   2024   2023 
Net cash used in operating activities  $(520,794)  $(802,991)
Net loss  $(492,307)  $(738,298)
Net loss as a percentage of total revenues   (19.0)%   (28.8)%
Adjusted EBITDA  $(497,297)  $(648,294)
Adjusted EBITDA as percentage of total revenues   (19.1)%   (25.3)%

 

Adjusted EBITDA

 

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

 

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

 

17

 

 

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, among other things: cash capital expenditures for assets underlying depreciation and amortization expense that may need to be replaced or for new capital expenditures; net loss from discontinued operations; interest income, net; other expense, net; income tax expense (benefit) from continuing operations; our working capital requirements; the potentially dilutive impact of stock-based compensation; 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.

 

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net loss and our other GAAP results. The following table presents a reconciliation of net income, 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,
(unaudited)
 
   2024   2023 
Reconciliation of net loss to Adjusted EBITDA:        
Net loss  $(492,307)  $(738,298)
Interest income, net   (151,984)   (121,167)
Income tax (benefit)   (117,900)   (49,554)
Depreciation and amortization expense   205,583    205,584 
Stock-based compensation expense   59,311    55,141 
Adjusted EBITDA  $(497,297)  $(648,294)

 

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,
(unaudited)
 
   2024   2023 
Total revenue   100.0%   100.0%
Costs and expenses:          
Cost of revenue   31.5%   31.3%
Sales and marketing expense   7.3%   9.9%
Product development expense   46.6%   48.7%
General and administrative expense   43.9%   45.5%
Total costs and expenses   129.3%   135.5%
Loss from operations   (29.3)%   (35.5)%
Interest income (expense), net   5.8%   4.7%
Other income (expense), net   0.0%   -%
Loss from operations before provision for income taxes   (23.5)%   (30.7)%
Income tax benefit (expense)   4.5%   1.9%
Net loss   (19.0)%   (28.8)%

 

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Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

 

Revenue

 

Total revenue increased by 1.3% to $2,597,730 for the three months ended March 31, 2024 from $2,564,017 for the three months ended March 31, 2023. This increase was primarily driven by an increase in advertising revenue.

 

The following table sets forth our subscription revenue, advertising revenue and total revenue for the three months ended March 31, 2024 and the three months ended March 31, 2023, the increase (decrease) between those periods, the percentage increase (decrease) between those periods, and the percentage of total revenue that each represented for those periods:

 

                   %  Revenue 
   Three Months Ended
March 31,
   $   %   Three Months Ended
March 31,
 
   (unaudited)   Increase   Increase   (unaudited) 
   2024   2023   (Decrease)   (Decrease)   2024   2023 
Subscription revenue  $2,482,982   $2,505,670   $(22,688)   (0.9)%   95.6%   97.7%
Advertising revenue   114,748    58,347    56,401    96.7%   4.4%   2.3%
Total revenues  $2,597,730   $2,564,017   $33,713    1.3%   100.0%   100.0%

 

Subscription Revenue

 

Our subscription revenue for the three months ended March 31, 2024 decreased by $22,688, or 0.9%, as compared to the three months ended March 31, 2023. The decrease in subscription revenue was primarily driven by a decrease in subscription revenue in Camfrog and Tinychat, offset slightly by increases in subscription revenue from ManyCam.

 

Advertising Revenue

 

Our advertising revenue for the three months ended March 31, 2024 increased by $56,401, or 96.7%, as compared to the three months ended March 31, 2023. The increase in advertising revenue was primarily due to an increase in the volume of advertising impressions related to changes in the optimization of third-party advertising partners.

  

Costs and Expenses

 

Total costs and expenses for the three months ended March 31, 2024 decreased by $113,115, or 3.3%, as compared to the three months ended March 31, 2023. The following table presents our costs and expenses for the three months ended March 31, 2024 and 2023, the increase or decrease between those periods and the percentage increase or decrease between those periods and the percentage of total revenue that each represented for those periods:

 

                   % Revenue 
   Three Months Ended
March 31,
   $   %   Three Months Ended
March 31,
 
   (unaudited)   Increase   Increase   (unaudited) 
   2024   2023   (Decrease)   (Decrease)   2024   2023 
Cost of revenue  $819,075   $802,475   $16,600    2.1%   31.5%   31.3%
Sales and marketing expense   190,594    254,868    (64,274)   (25.2)%   7.3%   9.9%
Product development expense   1,211,701    1,248,582    (36,881)   (3.0)%   46.6%   48.7%
General and administrative expense   1,138,551    1,167,111    (28,560)   (2.4)%   43.9%   45.5%
Total costs and expenses  $3,359,921   $3,473,036   $(113,115)   (3.3)%   129.3%   135.5%

 

19

 

 

Cost of revenue

 

Our cost of revenue for the three months ended March 31, 2024 increased by $16,600, or 2.1%, as compared to the three months ended March 31, 2023. This increase is primarily due to an increase in hosting expense due to increased usage and per unit cost from web hosting providers and slightly offset by consulting fees.

 

Sales and marketing expense

 

Our sales and marketing expense for the three months ended March 31, 2024 decreased by $64,274, or 25.2%, as compared to the three months ended March 31, 2023. The decrease in sales and marketing expense for the three months ended March 31, 2024 was primarily due to a decrease in salary-related expenses of approximately $59,361.

 

Product development expense

 

Our product development expense for the three months ended March 31, 2024 decreased by $36,881, or 3.0%, as compared to the three months ended March 31, 2023. The decrease was primarily due to a decrease in software expenses of $79,522. We accomplished this reduction by streamlining our offshore development efforts as well as reallocating in-house resources. This decrease was offset slightly by increased dues and subscriptions expenses of $28,602 and salary-related expenses of $11,774.

 

General and administrative expense

 

Our general and administrative expense for the three months ended March 31, 2024 decreased by $28,560, or 2.4%, as compared to the three months ended March 31, 2023. The decrease in general and administrative expense for the three months ended March 31, 2024 was primarily due to a decrease in professional and tax fees.

 

Non-Operating Income

 

The following table presents the components of non-operating income for the three months ended March 31, 2024 and the three months ended March 31, 2023, 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
March 31,
           Three Months Ended
March 31,
 
   (unaudited)   $  %  (unaudited) 
   2024   2023   Increase   Increase   2024   2023 
Interest income, net  $151,984   $121,167   $30,817    25.4%   5.8%   4.7%
Total non-operating income  $151,984   $121,167   $30,817    25.4%   5.8%   4.7%

 

Non-operating income for the three months ended March 30, 2024 was $151,984, an increase of $30,817, or 25.4%, as compared to non-operating income of $121,167 for the three months ended March 31, 2023. The increase was primarily a result of interest earned in a high yield bank account.

 

20

 

 

Income Taxes

 

Our provision for income taxes consists of federal, foreign, state and local taxes, as applicable, in amounts necessary to align our year-to-date tax provision with the effective rate that we expect to achieve for the full year. For the three months ended March 31, 2024 and March 31, 2023, we recorded an income tax benefit of $117,900 and income tax benefit of $49,554, respectively, consisting primarily of federal, foreign, state and local taxes.

 

Liquidity and Capital Resources

 

   Three Months Ended
March 31,
(unaudited)
 
   2024   2023 
Condensed Consolidated Statements of Cash Flows Data:        
Net cash used in operating activities  $(520,794)  $(802,991)
Net cash used in investing activities   -    - 
Net cash used in financing activities   -    (7,213)
Net decrease in cash and cash equivalents  $(520,794)  $(810,204)

 

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, 2024, we had $13,047,255 of cash and cash equivalents.

 

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

  

Operating Activities

 

Net cash used in operating activities was $520,794 for the three months ended March 31, 2024, as compared to net cash used in operating activities of $802,991 for the three months ended March 31, 2023. The improvement in the amount of cash used in operations for the three months ended March 31, 2024 was primarily attributed to a decrease in total operating expenses compared to the three months ended March 31, 2023.

 

Investing Activities

 

There was no net cash provided by investing activities for the three months ended March 31, 2024 or the three months ended March 31, 2023.

 

Financing Activities

 

Net cash used in financing activities was $0 for the three months ended March 31, 2024, as compared to $7,213 of net cash used in financing activities for the three months ended March 31, 2023. This higher use of cash used in financing activities in 2023 is attributed to a stock repurchase plan that was approved by our Board of Directors in March 2022. The stock repurchase plan expired on March 29, 2023 pursuant to its terms and has not been renewed.

 

21

 

 

Contractual Obligations and Commitments

 

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, 2024, we did not have any off-balance sheet arrangements.

  

Critical Accounting Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

 

During the three months ended March 31, 2024, there were no critical accounting estimates made by management that would involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material effect impact on the financial statements condition or results of operations of the Company.

 

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, 2024, 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.

 

22

 

 

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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 “Court”). The Company alleges that certain of Cisco’s 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. On September 7, 2022, the United States Patent Office issued a reexamination of U.S. Patent No. 6,683,858, and on January 19, 2023, the Examiner issued an Ex Parte Reexamination Certificate, ending the reexamination and confirming the patentability of claims 1-10 of U.S. Patent No. 6,683,858. On June 29, 2023, the Court held a pretrial conference with the parties and denied Cisco’s motion for summary judgment. The trial is expected to be held in August of 2024.

 

If the Company receives a jury verdict in its favor or receives settlement proceeds in connection with the foregoing litigation, the exact amount of such proceeds to be received by the Company will be determined based on a number of factors and will reflect the deduction of significant litigation-related expenses, including legal fees. Consequently, the Company will not receive the majority of any gross proceeds resulting from any potential verdict or settlement. For the foregoing reasons, we are unable to predict the outcome of this litigation and its ultimate cost.

 

ITEM 1A. RISK FACTORS

 

There were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” in the Form 10-K during the three months ended March 31, 2024. 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, 2024 that were not previously reported on a Current Report on Form 8-K.

 

Issuer Purchases of Common Stock

 

During the three months ended March 31, 2024, the Company did not repurchase any shares of common stock.

   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

On December 14, 2023, Jason Katz, our Chief Executive Officer and a member of the Board of Directors, adopted a Rule 10b5-1 trading arrangement (the “10b5-1 Plan”) that is intended to satisfy the affirmative defense of Rule 10b5-1(c) of the Exchange Act. The 10b5-1 Plan provides for the sale of up to 80,000 shares of our common stock at specified market prices, commencing on the later of (i) March 14, 2024 and (ii) the second trading day following disclosure of our financial results on Form 10-K for the fiscal year and quarter ended December 31, 2023, and ending March 15, 2025. The 10b5-1 Plan was subsequently terminated on February 7, 2024, and no sales were made pursuant to the 10b5-1 Plan.

 

Except as otherwise described above, during the three months ended March 31, 2024, none of the Company’s directors or executive officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

 

23

 

 

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:

 

Exhibit    
Number   Description
     
2.1#   Securities Purchase Agreement, dated June 9, 2022, by and among ManyCam ULC, Visicom Media Inc., 2434936 Alberta ULC and Paltalk, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of the Company filed June 10, 2022 by the Company with the SEC).
3.1   Certificate of Incorporation of Paltalk, Inc. (as amended through May 11, 2023) (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of the Company filed on August 8, 2023 by the Company with the SEC).
3.2   Amended and Restated Bylaws of Paltalk, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of the Company filed on March 17, 2023 by the Company with the SEC).
4.1     Specimen Stock Certificate of Paltalk, Inc. (incorporated by reference to Exhibit 4.1 to the Annual Report on Form 10-K of the Company filed on March 23, 2023 by the Company with the SEC).
31.1*   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   Inline XBRL Instance Document.
101.SCH   Inline XBRL Taxonomy Schema Document.
101.CAL   Inline XBRL Calculation Linkbase Document.
101.DEF   Inline XBRL Definition Linkbase Document.
101.LAB   Inline XBRL Label Linkbase Document.
101.PRE   Inline XBRL Presentation Linkbase Document.
104   Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101).

 

#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.

 

*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.

 

24

 

 

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 9, 2024

By: /s/ Jason Katz
    Jason Katz
    Chief Executive Officer
    (Principal Executive Officer and
duly authorized officer)

 

  Paltalk, Inc.
     

Date: May 9, 2024

By: /s/ Kara Jenny
    Kara Jenny
    Chief Financial Officer
    (Principal Financial and Accounting Officer
and duly authorized officer)

 

 

25

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