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 months endedMarch 31, 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 subscriber base presents a competitive advantage in the video social networking industry and provides growth opportunities to advance existing products with up-sell opportunities and build future brands with cross-sell offers.
We also believe that our proprietary consumer app technology platform can scalably support large communities of users in activities such as video, voice and text chat and provide robust user monetization tools.
Our continued growth depends on attracting new consumer application users through the introduction of new applications, features and partnerships and further penetration of our existing markets. Our principal growth strategy is to invest in the development of proprietary software, expand our sales and marketing efforts with respect to such software, and increase our consumer application user base through potential platform partnerships and new and existing advertising campaigns that we run through internet and mobile advertising networks, all while balancing the capital needs of the business.
Our strategy is to approach these opportunities in a measured way, being mindful of our resources and evaluating factors such as potential revenue, time to market and amount of capital needed to invest in the opportunity.
Background of Presentation and Recent Developments
COVID-19
InDecember 2019 , a novel strain of coronavirus ("COVID-19"), was reported to have surfaced inWuhan, China , and has reached multiple other countries, resulting in government-imposed quarantines, travel restrictions and other public health safety measures in affected countries. The various precautionary measures taken by many governmental authorities around the world in order to limit the spread of COVID-19 has had, and could continue to have, an adverse effect on the global markets and its economy, including on the availability and pricing of employees and resources, and other aspects of the global economy. Although we cannot predict the impact that the COVID-19 pandemic will have on our business or results of operations in future periods, to date, our core multimedia social applications have been able to support the increased demand we have experienced. 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 recently enacted 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. 15
Sale of Secured Communications Assets
As previously announced, onFebruary 24, 2020 , we entered into an Asset Purchase Agreement, which was subsequently amended and restated onMay 29, 2020 (the "Amended and Restated Agreement") withSecureCo, LLC (the "Buyer"), pursuant to which we agreed to sell substantially all of the assets related to its secure communications business (the "Secured Communications Assets") to the Buyer (the "Asset Sale"). The Secured Communications Assets included communication solutions and operations capabilities for secure messaging and data applications, and software and middleware for enterprise and government client targets.
OnJuly 23, 2020 , we completed the Asset Sale for a cash purchase price of$250,000 ,$150,000 of which was paid at closing and$100,000 of which is payable in four equal installments over the fifteen-month period following the closing of the Asset Sale. The Amended and Restated Agreement also provides for a revenue sharing arrangement, pursuant to which we are entitled to receive quarterly royalty payments ranging from 5% to 10% of certain revenues received by the Buyer, with the aggregate amount of such royalty payments not to exceed$500,000 . OnJanuary 25, 2021 , we received the first instalment of payment of$25,000 . We do not expect to continue to pursue secure communications products or technology implementation services as part of our overall business strategy.
Operational Highlights and Objectives
During the three months ended
? reported income from operations of
three months ended
revenue compared to the same period last year;
? achieved positive net cash flow of
months ended
improvement of $0.1 million when compared to the three months ended March
31, 2020 ; and
? released a private room functionality in our
For the near term, our business objectives include:
? continuously improving and enhancing our live video chat applications,
including the 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;
? 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;
? investing and developing new channels to find influencers on social media in
order to scale current programming;
? taking steps towards listing our common stock on a national securities
exchange; 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 recently sold our Secured Communications Assets. We do not anticipate generating any material technology service revenue in the future or continuing to pursue secure communications software solutions as part of our business strategy.
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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 with YouNow Inc. ("YouNow") and to integrate YouNow's prop's
infrastructure (the "Props platform") into our Camfrog and Paltalk 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 the Paltalk application. The upfront
fee is recognized as revenue under the output method based on the direct
measurements of the value of services transferred to date to the customer,
relative to the remaining services under the YouNow Agreement. The milestones
fees 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 our Paltalk and Camfrog applications
was completed, we began receiving Props tokens for providing a validator service
and for allowing users to participate in the loyalty platform. The loyalty
platform is intended to drive engagement and incentivize users financially by
providing users with the ability to earn Props tokens while using the Paltalk
and Camfrog applications. 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 three months
ended March 31, 2021 , we received 175 thousand Props tokens for the validator
service and 3.6 million Props tokens under the loyalty platform. The number of
Props tokens earned and reserved by users for the year ended December 31, 2020
and for the three months ended March 31, 2021 was 4.0 million and 1.1 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 ended December 31, 2020 , we determined the fair value of the Props
tokens by converting them into U.S. dollars using an independent third-party
valuation. Digital tokens earned, receivable or payable before June 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 from July 1, 2020 through
December 31, 2020 were recorded based on an estimated fair value of $0.039 .
For the three months ended
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.
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Costs and Expenses
Cost of revenue.
Cost of revenue consists primarily of compensation (including stock-based
compensation) and other employee-related costs for personnel engaged in data
center and customer care functions, credit card processing fees, hosting fees,
and data center rent and bandwidth costs. Cost of revenue also includes
compensation and other employee-related costs for technical personnel and
subcontracting costs relating to technology service revenue.
Sales and marketing expense.
Sales and marketing expense consist primarily of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel engaged in sales and sales support functions. Advertising and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which primarily consists of partner-related payments to those who direct traffic to our brands. Product development expense.
Product development expense, which relates to the development of technology of our applications, consists primarily of compensation (including stock-based compensation) and other employee-related costs that are not capitalized for personnel engaged in the design, testing and enhancement of service offerings as well as amortization of capitalized website development costs.
General and administrative expense.
General and administrative expense consists primarily of compensation (including
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. General
and administrative expense also includes depreciation of property and equipment
and amortization of intangible assets.
Key Metrics
Our management relies on certain non-GAAP and/or unaudited performance
indicators to manage and evaluate our business. The key performance indicators
set forth below help us evaluate growth trends, establish budgets, measure the
effectiveness of our advertising and marketing efforts and assess operational
efficiencies. We also discuss net cash provided by operating activities under
the "Results of Operations" and "Liquidity and Capital Resources" sections
below. Active subscribers, subscription bookings and Adjusted EBITDA are
discussed below.
Three Months Ended
March 31,
2021 2020
Active subscribers (as of period end) 104,400 106,400
Subscription bookings$ 3,104,438 $
2,585,264
Net cash provided by operating activities$ 96,055 $ 16,892 Net income (loss)$ 916,729 $ (438,384 ) Adjusted EBITDA$ 535,177 $
(121,452 ) Adjusted EBITDA as percentage of total revenues 15.9 % (4.5 )%
Active Subscribers
Active subscribers means users of our consumer applications that have prepaid a
fee, redeemed credits or received an upgrade from another user as a gift for
current unlocked application features such as enhanced voice and video access,
elevated status in the community or unrestricted communication on our
applications and whose subscription period has not yet expired. The metrics for
active subscribers are based on internally-derived metrics across all platforms
through which our applications are accessed. We assess the performance of our
consumer applications by measuring active subscribers because we believe that
this metric is the most reliable way to understand user engagement on our
platform and estimate the future operational performance of our applications. We
also believe that measuring active subscribers helps management estimate future
subscription revenue. Because active subscribers generate the majority of our
subscription revenue, as the number of active subscribers to our consumer
applications increases, the amount of subscription revenue generated from our
consumer applications also increases. Active subscribers is distinguished from
active users, which represents the total number of free and paid users across
all platforms during a certain period who access our various applications. We
believe that active users are important to our operations because advertising
revenue is largely dependent upon the volume of advertising impressions viewed
by active users.
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Subscription Bookings
Subscription bookings is a financial measure representing the aggregate dollar
value of subscription fees and virtual gifts purchases received during the
period. We calculate subscription bookings as subscription revenue recognized
during the period plus the change in deferred subscription revenue recognized
during the period. We record subscription revenue from subscription fees as
deferred subscription revenue and then recognize that revenue ratably over the
length of the subscription term or ratably over usage for virtual gifts. Our
management uses subscription bookings internally in analyzing our financial
results to assess operational performance and to assess the effectiveness of,
and plan future, user acquisition campaigns. We believe that this financial
measure is useful in evaluating the performance of our consumer applications
because we believe, as compared to subscription revenue, it is a better
indicator of the subscription activity in a given period. We believe that both
management and investors benefit from referring to subscription bookings in
assessing our performance and when planning, forecasting and analyzing future
periods.
While the factors that affect subscription bookings and subscription revenue are
generally the same, certain factors may affect subscription bookings more or
less than such factors affect subscription revenue in any period. While we
believe that subscription bookings is useful in evaluating our business, it
should be considered as supplemental in nature and it is not meant to be a
substitute for subscription revenue recognized in accordance with generally
accepted accounting principles in the United States ("GAAP").
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net income (loss) adjusted to exclude interest income, net, other income, net, gain on the extinguishment of term debt, provision for income taxes, depreciation and amortization expense and stock-based compensation expense. We present Adjusted EBITDA because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to develop short- and long-term operational plans and to allocate resources to expand our business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of the cash operating income generated by our business. We believe that Adjusted EBITDA is useful to investors and others to understand and evaluate our operating results, and it allows for a more meaningful comparison between our performance and that of competitors. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
? Adjusted EBITDA does not reflect cash capital expenditures for assets
underlying depreciation and amortization expense that may need to be replaced
or for new capital expenditures;
? Adjusted EBITDA does not reflect our working capital requirements;
? Adjusted EBITDA does not consider the potentially dilutive impact of
stock-based compensation;
? Adjusted EBITDA does not reflect gain on the extinguishment of term debt and
the provision for income taxes; and
? other companies, including companies in our industry, may calculate Adjusted
EBITDA differently, which reduces its usefulness as a comparative measure.
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Limitations of Adjusted EBITDA
Because of these limitations, you should consider Adjusted EBITDA alongside
other financial performance measures, including various cash flow metrics, net
income (loss) and our other GAAP results. The following table presents a
reconciliation of net income (loss), the most directly comparable financial
measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for
each of the periods indicated:
Three Months Ended
March 31,
2021 2020
Reconciliation of Net income (loss) to Adjusted EBITDA:
Net income (loss) $ 916,729 $ (438,384 )
Interest income, net (2,467 ) (12,187 )
Other income, net - 84,469Gain on the extinguishment of term debt (506,500 )
-
Provision for income taxes 1,100
2,500
Depreciation and amortization expense 94,947
152,944
Stock-based compensation expense 31,368
89,206 Adjusted EBITDA$ 535,177 $ (121,452 ) 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,
2021 2020
Total revenue 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 19.2 % 22.9 %
Sales and marketing expense 7.6 % 7.0 %
Product development expense 38.5 % 46.0 %
General and administrative expense 22.6 % 37.5 %
Total costs and expenses 87.9 % 113.4 %
Income (loss) from operations 12.1 % (13.4 )%
Interest income, net 0.1 % 0.4 %
Gain on extinguishment of term debt 15.0 % - %
Other expense - % (3.1 )%
Income (loss) from operations before provision for income taxes 27.2 % (16.0 )%
Provision for income taxes (0.0 )% - %
Net income (loss) 27.2 % (16.0 )%
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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 endedMarch 31, 2021 and the three months endedMarch 31, 2020 , the increase between those periods, the percentage increase between those periods, and the percentage of total revenue that each represented for those periods: % Revenue Three Months Ended $ % Three Months Ended March 31, Increase Increase March 31, 2021 2020 2021 2020
Subscription revenue$ 3,139,365 $ 2,650,123 $ 489,242 18.5 % 93.1 % 97.4 % Advertising revenue 76,821 55,667 21,154 38.0 % 2.3 % 2.0 % Technology service revenue 155,816 14,952 140,864
942.1 % 4.6 % 0.6 %
Total revenues $ 3,372,002 $ 2,720,742 $ 651,260 23.9 % 100.0 % 100.0 %
Subscription Revenue
Our subscription revenue for the three months ended March 31, 2021 increased by
$489,242 , or 18.5%, as compared to the three months ended March 31, 2020 . The
increase in subscription revenue was primarily driven by increased activity
across all products from our existing users resulting from an approximately
20.1% increase in subscription revenue per active subscriber. In addition, we
experienced a change in the proportion of revenue generated between revenue from
subscriptions and revenue from virtual gifts due to strategic alignment ofdiscounted price promotion. Advertising Revenue
Our advertising revenue for the three months endedMarch 31, 2021 increased by$21,154 , or 38.0%, as compared to the three months endedMarch 31, 2020 . The increase in advertising revenue was primarily due to an increase in the volume of advertising impressions related to changes in third-party advertising partners. Technology Service Revenue
Our technology service revenue increased by
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Costs and Expenses
Total costs and expenses for the three months ended March 31, 2021 decreased by
$121,204 , or 3.9%, as compared to the three months ended March 31, 2020 . The
following table presents our costs and expenses for the three months ended March
31, 2021 and 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
March 31, Increase Increase March 31,
2021 2020 (Decrease) (Decrease) 2021 2020
Cost of revenue $ 646,715 $ 622,724 $ 23,991 3.9 % 19.2 % 22.9 %
Sales and marketing
expense 257,451 191,670 65,781 34.3 % 7.6 % 7.0 %
Product development
expense 1,297,264 1,250,696 46,568 3.7 % 38.5 % 46.0 %
General and
administrative
expense 761,710 1,019,254 (257,544 ) (25.3 )% 22.6 % 37.5 %
Total costs and
expenses $ 2,963,140 $ 3,084,344 $ (121,204 ) (3.9 )% 87.9 % 113.4 %
Cost of revenue
Our cost of revenue for the three months ended
Sales and marketing expense Our sales and marketing expense for the three months endedMarch 31, 2021 increased by$65,781 , or 34.3%, as compared to the three months endedMarch 31, 2020 . The increase in sales and marketing expense for the three months endedMarch 31, 2021 was primarily due to an increase in marketing expenditures across all products as we increased our focus on social media and increased headcount. 23 Product development expense Our product development expense for the three months endedMarch 31, 2021 increased by$46,568 , or 3.7%, as compared to the three months endedMarch 31, 2020 . The increase in product development expense was primarily driven by an increase in consulting expense of approximately$80,900 , offset by a reduction of approximately$52,400 in compensation expense related to the terminated ProximaX Agreement.
General and administrative expense
Our general and administrative expense for the three months endedMarch 31, 2021 decreased by$257,544 , or 25.3%, as compared to the three months endedMarch 31, 2020 . The decrease in general and administrative expense for the three months endedMarch 31, 2021 was primarily due to headcount reductions resulting in approximately$172,000 of reduced salary, stock-based compensation and other related expenses. In addition, the decrease in general and administrative expense was in part due to reduced legal fees of approximately$78,000 . Non-Operating Income (Loss)
The following table presents the components of non-operating income for the three months endedMarch 31, 2021 and the three months endedMarch 31, 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 March 31, Increase Increase March 31, 2021 2020 (Decrease) (Decrease) 2021 2020
Interest income, net$ 2,467 $ 12,187 $ (9,720 ) (79.8 )% 0.1 % 0.4 % Gain on extinguishment of term debt 506,500 - 506,500 100.0 % 15.0 % - % Other expense, net - (84,469 ) (84,469 ) 100.0 % - % (3.1 )% Total non-operating income (loss)$ 508,967 $ (72,282 ) $ 581,249 804.1 % 15.1 % (2.7 )% Non-operating income for the three months endedMarch 31, 2021 was$508,967 , a net increase of$581,249 , or 804.1%, as compared to non-operating loss of$72,282 for the three months endedMarch 31, 2020 . The increase in non-operating income was driven by 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. 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 endedMarch 31, 2021 andMarch 31, 2020 , the Company recorded an income tax provision of$1,100 and$2,500 , respectively, consisting primarily of state and local taxes.
As of
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