PALTALK, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and nine months endedSeptember 30, 2021 and 2020, (ii) the consolidated financial statements and notes thereto for the year endedDecember 31, 2020 included in our Annual Report on Form 10-K (the "Form 10-K") filed with theSecurities and Exchange Commission (the "SEC") onMarch 23, 2021 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 ofDecember 31, 2020 , all amounts herein are unaudited. Forward-Looking Statements In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See "Forward-Looking Statements." Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under "Item 1A. Risk Factors" in Part II of this report and "Item 1A. Risk Factors" in the Form 10-K. Overview We are a leading communications software innovator that powers multimedia social applications. We operate a leading network of consumer applications that we believe create a unique social media enterprise where users can meet, see, chat, broadcast and message in real time in a secure environment with others in our network. Our consumer applications generate revenue principally from subscription fees and advertising arrangements. We believe that the scale of our user base presents a competitive advantage in the video social networking industry and provides growth opportunities to advance existing products with up-sell opportunities and build future brands with cross-sell offers. We also believe that our proprietary consumer app technology platform can scalably support large communities of users in activities such as video, voice and text chat and provide robust user monetization tools. 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.
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Recent Developments
OnAugust 5, 2021 , we announced the pricing and closing of a firm commitment underwritten public offering of an aggregate of 1,333,310 shares of our common stock (which includes 173,910 shares sold to the underwriter pursuant to the full exercise of the underwriter's over-allotment option) at a public offering price of$3.00 per share (the "August 2021 Offering"). TheAugust 2021 Offering was made pursuant to the Form S-1 (File No. 333-257036), initially filed with theSEC onJune 11, 2021 , as subsequently amended and declared effective onAugust 2, 2021 . TheAugust 2021 Offering was made only by means of a prospectus forming a part of the effective registration statement. The net proceeds to us from theAugust 2021 Offering were approximately$3.2 million , after deducting underwriting discounts, commissions and other estimated offering expenses. In connection with theAugust 2021 Offering, our common stock was approved for listing on The Nasdaq Capital Market under the symbol "PALT" and began trading on The Nasdaq Capital Market onAugust 3, 2021 .
OnOctober 19, 2021 , we announced the pricing and closing of an underwritten public offering of an aggregate of 1,552,500 shares of our common stock (which includes 202,500 shares sold to the underwriter pursuant to the full exercise of the underwriter's over-allotment option) at a public offering price of$7.50 per share (the "October 2021 Offering"). TheOctober 2021 Offering was made pursuant to an effective shelf registration statement on Form S-3 (File No. 333-260063), previously filed with theSEC onOctober 5, 2021 and declared effective onOctober 14, 2021 . TheOctober 2021 Offering was offered by means of a prospectus supplement and accompanying prospectus, forming part of the registration statement. Gross proceeds to us from theOctober 2021 Offering were approximately$11.6 million , before deducting underwriting discounts, commissions and other offering expenses, inclusive of the over-allotment.
Launch of Paltalk Rewards Points
As previously disclosed, we served as a launch partner with YouNow to integrate YouNow's props infrastructure into our Camfrog andPaltalk applications, which allowed users to earn Props tokens while using thePaltalk and Camfrog applications. OnOctober 15, 2021 , we launched our new rewards loyalty program, Paltalk Rewards Points, and simultaneously ended the distribution of Props tokens, our prior rewards program.Paltalk and Camfrog users kept their existing rewards earned from the former Props program and now have the opportunity to earn new Paltalk Rewards Points. In connection with the Paltalk Rewards Points, we added 25 new reward tiers such as specialty coins, subscriptions, stickers, flair, and other popular buttons. Update on COVID-19 TheWorld Health Organization declared COVID-19 a pandemic onMarch 11, 2020 . 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 theU.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 have been able to support the increased demand we have experienced, 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. 18 OnApril 13, 2020 , to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, we applied for a loan under theSmall Business Administration ("SBA") Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and onMay 3, 2020 , we entered into a promissory note with an aggregate principal amount of$506,500 (the "Note") in favor ofCitibank, N.A ., as lender (the "Lender"). OnJanuary 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.
Operational Highlights and Objectives
During the three and nine months ended
? completed an uplist of our shares of common stock to the
Market, which began trading on The Nasdaq Capital Market on
under the Company's current ticker symbol "PALT";
? raised gross proceeds of approximately
173,910 shares sold to the underwriter pursuant to the full exercise of the
underwriter's over-allotment option) at a price to the public of
share;
? sold approximately 29.5 and 32.4 million Props tokens, respectively, for
proceeds of
ended
? reported positive adjusted EBITDA of
three and nine months ended
million and
2020; and
? achieved positive net cash flow of
improvement of
30, 2020.
For the near term, our business objectives include:
? continuously improving and enhancing our live video chat applications,
including the posting of topical messages, photos and videos directly to
other users and the community at large, integration of games, private
rooms and other features focused on new user acquisition, retention and
monetization, which collectively are intended to increase usage and
revenue opportunities;
? continuing to explore strategic opportunities, including, but not limited to,
potential mergers or acquisitions of other entities that are synergistic to our
businesses;
? investing in advertising technology and/or partner with existing advertising
solution providers to enhance advertising revenue;
? developing new channels to find influencers on social media in order to scale
current programming;
? 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.
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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 servicesthat 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" forPaltalk and "Pro," "Extreme" and "Gold" for Camfrog. We also hold occasional promotions that offer discounted subscriptions and virtual gifts. We recognize revenue from monthly premium subscription services beginning in the month in which the subscriptions are originated. Revenues from multi-month subscriptions are recognized on a gross and straight-line basis over the length of the subscription period. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets. We also offer virtual gifts to our users. Users may purchase credits that can be redeemed for a host of virtual gifts such as a rose, a beer, or a car, among other items. Virtual gift revenue is recognized upon the users' utilization of the virtual gift and included in subscription revenue. The unearned portion of virtual gifts revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets. Advertising Revenue We generate a portion of our revenue through advertisements on our video platforms. Advertising revenue is dependent upon the volume of advertising impressions viewed by active users as well as the advertising inventory we place on our products. We recognize advertising revenue as earned on a click-through, impression, registration or subscription basis. Measurements of impressions include when a user clicks on an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external website via an advertisement by clicking on or through our application (CPA basis).
Technology Service Revenue
Technology service revenue is generated under service and partnership agreements that we negotiate with third parties which includes development, integration, engineering, licensing or other services that we provide.Secure Communications . During the first quarter of 2020, we received technology service revenue in connection with our technology services agreement (the "ProximaX Agreement") withProximaX Limited ("ProximaX"). EffectiveJune 24, 2019 , we entered into a termination agreement with ProximaX (the "Termination Agreement"), pursuant to which ProximaX was required to make certain payments to us on a monthly basis through the remainder of 2019. Since there is no assurance of collectability on the payments due under the Termination Agreement, revenue is being recognized as the payments are received. As described above, we sold our Secured Communications Assets. We do not anticipate generating any material technology service revenue in the future or continuing to pursue secure communications software solutions as part of our business strategy. 20 Technology Partnerships. During the second and third quarter of 2020, we recorded technology service revenue in connection with our agreement to serve as a launch partner withOpen Props, Inc. (formerlyYouNow Inc. , referred to herein as "YouNow") and to integrate YouNow's prop's infrastructure (the "Props platform") into our Camfrog andPaltalk applications (the "YouNow Agreement"). Pursuant to the terms of the YouNow Agreement, YouNow agreed to pay us, in exchange for our services, an aggregate of 10.5 million cryptographic props tokens ("Props tokens") upon the achievement of certain milestones as follows: (i) 3.0 million Props tokens upon execution of the YouNow Agreement, (ii) 4.0 million Props tokens upon the integration of the Props platform in the Camfrog application and (iii) 3.5 million Props tokens due upon the integration of the Props platform in thePaltalk application. The upfront fee is recognized as revenue under the output method based on the direct measurements of the value of services transferred to date to the customer, relative to the remaining services under the YouNow Agreement. The milestones fees were recognized as revenue on the completion dates of integration services performed during the second and third quarters of 2020. Once the integration of Props tokens into ourPaltalk 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 is intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using thePaltalk and Camfrog applications. During the third and fourth quarters of 2020, we received an aggregate of 1.1 million Props tokens for the validator service and 13.5 million Props tokens under the loyalty platform. During the nine months endedSeptember 30, 2021 , we received 351 thousand Props tokens for the validator service and 7.2 million Props tokens under the loyalty platform. The number of Props tokens earned and reserved by users for the year endedDecember 31, 2020 and for the nine months endedSeptember 30, 2021 was 4.0 million and 8.2 million, respectively, which is recorded under "digital tokens payable" in the condensed consolidated balance sheets, and the net revenue earned is recorded under "technology service revenue" in the condensed consolidated statements of operations. The total net revenue value is recognized as earned. For the year endedDecember 31, 2020 , we determined the fair value of the Props tokens by converting them intoU.S. dollars using an independent third-party valuation. Digital tokens earned, receivable or payable beforeSeptember 30, 2020 , were recorded based on a$0.02 fair value estimated at the end of the reporting period. Digital tokens earned, receivable or payable fromJuly 1, 2020 throughDecember 31, 2020 were recorded based on an estimated fair value of$0.039 .
For the three and nine months ended
During the three and nine months endedSeptember 30, 2021 , we sold approximately 29.5 and 32.4 million Props tokens, respectively, for proceeds of$502,314
and$806,618 , respectively.
InAugust 2021 , we received notice from YouNow that it was terminating the YouNow Agreement, and that it will not support the Props platform past the end of calendar year 2021. In connection with the notice of termination and in accordance with the YouNow Agreement, we received an additional 2,625,000 Props tokens. The value of these tokens was recorded as revenue under "technology service revenue" in the condensed consolidated statements of income. Following the termination of the YouNow Agreement, we expect that most of our technology service revenue generated in the future will result from opportunistic partnerships between us and third parties. We expect that our future business development partnerships are likely to contain pricing and other custom terms based on the needs of the client, which may include compensation in the form of cash or cryptocurrency tokens or a mix of cash and cryptocurrency tokens. Costs and Expenses Cost of revenue Cost of revenue consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in data center and customer care functions, credit card processing fees, hosting fees, and data center rent and bandwidth costs. Cost of revenue also includes compensation and other employee-related costs for technical personnel and subcontracting costs relating to technology service revenue. 21
Sales and marketing expense
Sales and marketing expense consist primarily of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel engaged in sales and sales support functions. Advertising and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which primarily consists of partner-related payments to thosewho direct traffic to our brands. Product development expense
Product development expense, which relates to the development of technology of our applications, consists primarily of compensation (including stock-based compensation) and other employee-related costs that are not capitalized for personnel engaged in the design, testing and enhancement of service offerings as well as amortization of capitalized website development costs.
General and administrative expense
General and administrative expense consists primarily of compensation (including 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.
Impairment loss on digital tokens
Impairment loss on digital tokens results from the daily assessment of the Props tokens' quoted market prices, as reflected on CoinmarketCap, and adjusting the recorded carrying amount to the amount equal to the lowest quoted market price during the period in which the Props tokens are held. During the three and nine months endedSeptember 30, 2021 , we recorded a non-cash impairment charge in the amount of$571,458 and$756,195 , respectively, which is reported in our accompanying condensed consolidated statements of operations as a result of recent decline in the quoted market prices below the market price of their
acquisition.
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 Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Subscription bookings $ 2,996,414 $ 3,131,784 $ 9,210,330 $ 9,132,596
Net cash provided by operating
activities $ 478,067 $ 489,766 $ 1,090,055 $ 912,561
Net income (loss) $ (409,036 ) $ 746,848 $ 1,329,377 $ 840,005
Adjusted EBITDA $ 300,603 $ 733,470 $ 1,504,429 $ 1,205,811
Adjusted EBITDA as percentage of total
revenues 8.9 % 22.2 % 14.8 % 12.8 %
22
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 stock-based compensation expense, depreciation and amortization expense, gain on office lease termination, impairment loss on digital tokens, interest expense (income), net, gain from sale of Secured Communications Assets, gain on extinguishment of term debt, realized gain from sale of digital tokens, other expense, net, and provision for income taxes. 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; net loss from discontinued operations; interest income, net; other expense, net; gain on sale of the Dating Services Business; income tax expense from continuing operations; gain on office lease termination; impairment loss on goodwill; gain from sale of Secured Communication Assets; loss on disposal of property and equipment; our working capital requirements; the impairment loss on digital tokens; realized gain (loss) from the sale of digital tokens; 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.
23
Because of these limitations, you should consider Adjusted EBITDA alongside
other financial performance measures, including various cash flow metrics, net
income and our other GAAP results. The following table presents a reconciliation
of net income, the most directly comparable financial measure calculated and
presented in accordance with GAAP, to Adjusted EBITDA for each of the periods
indicated:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Reconciliation of Net income (loss) to
Adjusted EBITDA:
Net income (loss) $ (409,036 ) $ 746,848 $ 1,329,377 $ 840,005
Stock-based compensation expense 93,430 47,707 (67,544 ) 194,096
Depreciation and amortization expense 92,257 141,971 286,447 441,864
Gain on office lease termination - - - (141,001 )
Impairment loss on digital tokens 571,458 - 756,195 -
Interest expense (income), net 195 1,959 (1,852 ) (9,018 )
Gain from sale of Secured Communications
Assets - (250,000 ) - (250,000 )
Gain on extinguishment of term debt - - (506,500 ) -
Realized gain from sale of digital
tokens (53,867 ) (301,160 ) -
Other expense, net - 48,285 - 128,165
Provision for income taxes 6,166 (3,300 ) 9,466 1,700
Adjusted EBITDA $ 300,603 $ 733,470 $ 1,504,429 $ 1,205,811
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 Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 22.0 % 19.1 % 19.9 % 20.6 %
Sales and marketing expense 9.6 % 6.2 % 8.2 % 6.6 %
Product development expense 39.5 % 37.0 % 38.7 % 39.6 %General and administrative expense 25.5 % 21.3 % 20.6 % 25.6 % Impairment loss on digital tokens 16.9 % - % 7.4 % - % Total costs and expenses 113.5 % 83.6 % 94.8 % 92.4 % Income (loss) from operations (13.5 )% 16.4 % 5.2 % 7.6 % Interest income (expense), net (0.0 )% (0.1 )% 0.0 % 0.1 % Gain from sale ofSecured Communications Assets - % 7.6 % - % 2.7 % Gain on extinguishment of term debt - % - % 5.0 % - % Realized gain (loss) from sale of digital tokens 1.6 % (1.5 )% 3.0 % (0.8 )% Other expense, net - % 0.0 % - % (0.6 )% Income (loss) from operations before provision for income taxes (11.9 )% 22.4 % 13.2 % 9.0 % Provision for income taxes (0.2 )% 0.1 % (0.1 )% (0.0 )% Net income (loss) (12.1 )% 22.5 % 13.1 % 9.0 % 24
Three Months Ended
Revenue
Total revenue increased to
The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenue for the three months endedSeptember 30, 2021 and the three months endedSeptember 30, 2020 , 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 September 30, Increase Increase September 30, 2021 2020 (Decrease) (Decrease) 2021 2020 Subscription revenue$ 3,148,822 $ 3,124,999 $ 23,823 0.8 % 93.2 % 94.4 % Advertising revenue 151,318 86,256 65,062 75.4 % 4.5 % 2.6 %
Technology service revenue 77,507 98,000 (20,493 )
(20.9 )% 2.3 % 3.0 %
Total revenues $ 3,377,647 $ 3,309,255 $ 68,392 2.1 % 100.0 % 100.0 %
Subscription Revenue
Our subscription revenue for the three months ended September 30, 2021 increased
by $23,823 , or 0.8%, as compared to the three months ended September 30, 2020 .
The subscription revenue across all products was consistent for the three months
ended September 30, 2021 compared to the three months ended September 30, 2020 .
Advertising Revenue
Our advertising revenue for the three months ended September 30, 2021 increased
by $65,062 , or 75.4%, as compared to the three months ended September 30, 2020 .
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 September 30, 2021
decreased by $20,493 , or 20.9%, as compared to the three months ended September
30, 2020 . The decrease in technology service revenue was driven by the decrease
of revenue generated by the distribution of Props tokens under the YouNow
Agreement. In August 2021 , we were informed by YouNow that it will not support
the Props platform past the end of calendar year 2021. Accordingly, there has
been a decrease in Props tokens earned.
25
Costs and Expenses
Total costs and expenses for the three months ended September 30, 2021 increased
by $1,068,726 , or 38.6%, as compared to the three months ended September 30,
2020 . The following table presents our costs and expenses for the three months
ended September 30, 2021 and 2020, 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
September 30, $ % September 30,
2021 2020 Increase Increase 2021 2020Cost of revenue$ 744,566 $ 632,462 $ 112,104 17.7 % 22.0 % 19.1 % Sales and marketing expense 323,758 204,371 119,387 58.4 % 9.6 % 6.2 % Product development expense 1,334,732 1,223,818 110,914
9.1 % 39.5 % 37.0 % General and administrative expense 859,675 704,812 154,863 22.0 % 25.5 % 21.3 % Impairment loss on digital tokens 571,458 - 571,458 100.0 % 16.9 % - % Total costs and
expenses$ 3,834,189 $ 2,765,463 $ 1,068,726 38.6 % 113.5 % 83.6 % Cost of revenue Our cost of revenue for the three months endedSeptember 30, 2021 increased by$112,104 , or 17.7%, as compared to the three months endedSeptember 30, 2020 . The increase was primarily driven by an increase in non-cash stock compensation expense of$67,000 and approximately$40,000 in consulting services to support fraud prevention for the three months endedSeptember 30, 2021 . Sales and marketing expense Our sales and marketing expense for the three months endedSeptember 30, 2021 increased by$119,387 , or 58.4%, as compared to the three months endedSeptember 30, 2020 . The increase in sales and marketing expense for the three months endedSeptember 30, 2021 was primarily due to an increase of approximately$105,400 in marketing user acquisition and social media marketing expenses. Product development expense Our product development expense for the three months endedSeptember 30, 2021 increased by$110,914 , or 9.1%, as compared to the three months endedSeptember 30, 2020 . The increase in product development expense was primarily driven by an increase in consulting services supporting the efforts to enhance user retention and improve monetization of approximately$97,700 .
General and administrative expense
Our general and administrative expense for the three months endedSeptember 30, 2021 increased by$154,863 , or 22.0%, as compared to the three months endedSeptember 30, 2020 . The increase in general and administrative expense for the three months endedSeptember 30, 2021 was primarily due to an increase of$113,700 in professional and legal fees in connection with the uplisting to The Nasdaq Capital Market as well as an increase in insurance expense of approximately$41,000 .
Impairment loss on digital tokens
The Company recorded a non-cash impairment loss on digital token of$571,458 for the three months endedSeptember 30, 2021 as a result of recent declines in the quoted market prices of certain digital tokens below the market price of their acquisition. 26 Non-Operating Income
The following table presents the components of non-operating income for the three months endedSeptember 30, 2021 and the three months endedSeptember 30, 2020 , 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 $ % Three Months Ended September 30, Increase Increase September 30, 2021 2020 (Decrease) (Decrease) 2021 2020 Interest expense, net$ (195 ) $ (1,959 ) $ 1,764 90.0 % (0.0 )% (0.1 )% Gain from the sale of Secured Communications Assets - 250,000 (250,000 ) (100.0 )% - % 7.6 % Realized gain (loss) from sale of digital tokens 53,867 (48,285 ) 102,152 211.6 % 1.6 % (1.5 )% Total non-operating income$ 53,672 $ 199,756 $ (146,084 ) (73.1 )% 1.6 % 6.0 % Non-operating income for the three months endedSeptember 30, 2021 was$53,672 , a net decrease of$146,084 , or 73.1%, as compared to non-operating income of$199,756 for the three months endedSeptember 30, 2020 . The decrease in non-operating income was driven by the absence of gain from the sale of Secured Communication Assets of$250,000 . 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 endedSeptember 30, 2021 , the Company recorded an income tax provision of$6,166 , consisting primarily of state and local taxes. For the three months endedSeptember 30, 2020 , the Company recorded an income tax benefit of$3,300 , consisting primarily of state and local taxes.
As of
Nine Months Ended
Revenue Revenue increased to$10,165,452 for the nine months endedSeptember 30, 2021 from$9,410,472 for the nine months endedSeptember 30, 2020 . The increase was driven by an increase in subscription revenue of$424,355 along with an increase of$226,803 in technology service revenue as a result of revenue generated
from the YouNow Agreement. The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenues for the nine months endedSeptember 30, 2021 and the nine months endedSeptember 30, 2020 , the increase between those periods, the percentage increase between those periods and the percentage of total revenues that each represented for those periods: % Revenue Nine Months Ended Nine Months Ended September 30, $ % September 30, 2021 2020 Increase Increase 2021 2020 Subscription revenue$ 9,410,096 $ 8,985,741 $ 424,355 4.7 % 92.6 % 95.5 % Advertising revenue 303,601 199,779 103,822 52.0 % 3.0 % 2.1 % Technology service revenue 451,755 224,952 226,803 100.8 % 4.4 % 2.4 % Total revenues$ 10,165,452 $ 9,410,472 $ 754,980 8.0 % 100.0 % 100.0 % 27 Subscription Revenue - Our subscription revenue for the nine months endedSeptember 30, 2021 increased by$424,355 , or 4.7%, as compared to the nine months endedSeptember 30, 2020 . The increase in subscription revenue was primarily driven by increased activity from our existing users in thePaltalk application. ThePaltalk application also experienced a change in the proportion of revenue generated between revenue from subscriptions and revenue from virtual gifts due to strategic alignment of the frequency of promotions. In addition, we had an increase in the Vumber application's subscription revenue resulting from an increase in the work-from-home trend as a result of the COVID-19 pandemic.
Advertising Revenue - Our advertising revenue for the nine months ended
Technology Service Revenue - Our technology service revenue for the nine months endedSeptember 30, 2021 increased by$226,803 , or 100.8%, as compared to the nine months endedSeptember 30, 2020 . The increase in technology service revenue was mainly driven by technology service revenue generated by the YouNow Agreement. InAugust 2021 , we were informed by YouNow that it no longer intends to support the Props platform past the end of calendar year 2021. Costs and Expenses Total costs and expenses for the nine months endedSeptember 30, 2021 reflect an increase in costs and expenses of$936,501 , or 10.8%, as compared to the nine months endedSeptember 30, 2020 . The following table presents our costs and expenses for the nine months endedSeptember 30, 2021 and 2020, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenues that each represented for those periods: % Revenue Nine Months Ended $ % Nine Months Ended September 30, Increase Increase September 30, 2021 2020 (Decrease) (Decrease) 2021 2020 Cost of revenue$ 2,021,863 $ 1,940,616 $ 81,247 4.2 % 19.9 % 20.6 % Sales and marketing expense 836,413 617,457 218,956 35.5 % 8.2 % 6.6 % Product development expense 3,930,763 3,730,398 200,365 5.4 % 38.7 % 39.6 % General and administrative expense 2,090,887 2,411,149 (320,262 ) (13.3 )% 20.6 % 25.6 % Impairment loss on digital tokens 756,195 - 756,195 100.0 % 7.4 % - % Total costs and expenses$ 9,636,121 $ 8,699,620 $ 936,501 10.8 % 94.8 % 92.4 % Cost of revenue - Our cost of revenue for the nine months endedSeptember 30, 2021 increased by$81,247 , or 4.2%, as compared to the nine months endedSeptember 30, 2020 . The increase for the nine months endedSeptember 30, 2021 was primarily driven by an increase in non-cash stock compensation expense of$67,000 and an increase of consulting services to support fraud prevention. Sales and marketing expense - Our sales and marketing expense for the nine months endedSeptember 30, 2021 increased by$218,956 , or 35.5%, as compared to the nine months endedSeptember 30, 2020 . The increase in advertising revenue was primarily due to an increase of approximately$198,600 from the volume of advertising impressions as we grow our focus on user acquisition and social
media.
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Product development expense - Our product development expense for the nine months endedSeptember 30, 2021 increased by$200,365 , or 5.4%, as compared to the nine months endedSeptember 30, 2020 . The increase was primarily due to an increase in consulting services supporting the efforts to enhance user retention and improve monetization of approximately of$182,500 . General and administrative expense - Our general and administrative expense for the nine months endedSeptember 30, 2021 decreased by$320,262 , or 13.3%, as compared to the nine months endedSeptember 30, 2020 . The decrease in general and administrative expense for the nine months endedSeptember 30, 2021 was mainly due to reduced rent expense of$115,100 resulting from an office lease termination, a decrease in reduced salary and related expenses of approximately$183,600 due to headcount reductions and reduction of approximately$321,000 primarily from an unvested executive performance award was forfeited and an expense reversal. These reductions were offset by an increase in professional and legal fees in connection with the uplisting to The Nasdaq Capital Market and a gain of approximately$141,000 resulting from an office lease termination during the nine months endedSeptember 30, 2020 .
Impairment loss on digital tokens
We recorded a non-cash impairment loss on digital token of$756,195 for the nine months endedSeptember 30, 2021 as a result of recent declines in the quoted market prices of certain digital tokens below the market price of their acquisition. Non-Operating Income
The following table presents the components of non-operating income for the nine months endedSeptember 30, 2021 and the nine months endedSeptember 30, 2020 , the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenues that each represented for those periods: % Revenue Nine Months Ended $ % Nine Months Ended September 30, Increase Increase September 30, 2021 2020 (Decrease) (Decrease) 2021 2020
Interest income, net$ 1,852 $ 9,018 $ (7,166 )
(79.5 )% 0.0 % 0.1 % Gain from the sale of Secured Communications Assets - 250,000 (250,000 ) (100.0 )% - % 2.7 % Gain on extinguishment of
term debt 506,500 - 506,500 100.0 % 5.0 % - % Realized gain (loss) from sale of digital tokens 301,160 (72,123 ) 373,283 (517.6 )% 3.0 % (0.8 )% Other expense, net - (56,042 ) 56,042 100.0 % - % (0.6 )% Total non-operating income$ 809,512 $ 130,853 $ 678,659 518.6 % 8.0 % 1.4 %
Non-operating income for the nine months endedSeptember 30, 2021 increased by$678,659 , or 518.6%, as compared to the nine months endedSeptember 30, 2020 . The increase resulted from the gain on extinguishment of term debt 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 and a gain from sale of digital tokens of$301,160 . 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 nine months endedSeptember 30, 2021 and 2020, the Company recorded an income tax provision of$9,466 and$1,700 , respectively, consisting primarily of state and local taxes.
As of
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