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 six months endedJune 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 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
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. We granted the underwriters a 45-day option to purchase up to an additional 173,910 shares of common stock at the public offering price less discounts and commissions to cover over-allotments, which was exercised in full onAugust 5, 2021 . The net proceeds to us from theAugust 2021 Offering were approximately$3.5 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 . 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. 17 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.
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 and six 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;
? reported income from operations of
respectively, for the three and six months ended
income from operations of
three and six months ended June 30, 2020 , primarily by growing revenue
compared to the same period last year;
? achieved positive net cash flow of
30, 2021 and positive cash flow from operations of
improvement of
2020; and
? released a private room functionality in our Paltalk application.
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; 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 Open Props, Inc. (formerly YouNow Inc. , referred to herein
as "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 six months
ended June 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 ended December 31, 2020
and for the six months ended June 30, 2021 was 4.0 million and 2.1 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 income.
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 and six months ended
During the three and six 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.
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.
20
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. 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 six months endedJune 30, 2021 , we recorded a non-cash impairment charge in the amount of$184,737 , which is reported in our accompanying condensed consolidated statements of income as a result of recent decline in the quoted market prices below the market price of their acquisition. Key Metrics Our management relies on certain non-GAAP and/or unaudited performance indicators to manage and evaluate our business. The key performance indicators set forth below help us evaluate growth trends, establish budgets, measure the effectiveness of our advertising and marketing efforts and assess operational efficiencies. We also discuss net cash provided by operating activities under the "Results of Operations" and "Liquidity and Capital Resources" sections below. Subscription bookings and Adjusted EBITDA are discussed below. Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Subscription bookings$ 3,109,478 $ 3,415,548 $ 6,213,916 $ 6,000,812 Net cash provided by operating activities$ 515,933 $ 405,903 $ 611,988 $ 422,795 Net income$ 821,684 $ 531,541 $ 1,738,413 $ 93,157 Adjusted EBITDA$ 668,649 $ 593,793 $ 1,203,825 $ 472,341 Adjusted EBITDA as percentage of total revenues 19.6 % 17.6 % 17.7 % 7.7 % 21
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 inthe United States ("GAAP"). Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net income adjusted to exclude interest expense (income), net, other expense (income), net, gain on the extinguishment of term debt, provision for income taxes, gain on office lease termination, realized gain (loss) from sale of digital tokens, impairment loss on digital tokens, 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 the realized gain (loss) from sale of digital
tokens;
? Adjusted EBITDA does not reflect the impairment loss on digital tokens;
? Adjusted EBITDA does not reflect the gain on the extinguishment of term debt,
gain on office lease termination 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.
22
Limitations of Adjusted EBITDA
Because of these limitations, you should consider Adjusted EBITDA alongside
other financial performance measures, including various cash flow metrics, net
income and our other GAAP results. The following table presents a reconciliation
of net income, the most directly comparable financial measure calculated and
presented in accordance with GAAP, to Adjusted EBITDA for each of the periods
indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Reconciliation of Net income to Adjusted
EBITDA:
Net income $ 821,684 $ 531,541 $ 1,738,413 $ 93,157
Interest expense (income), net 420 1,210 (2,047 ) (10,977 )
Other expense (income), net - (4,589 ) - 56,042
Gain on extinguishment of term debt - - (506,500 ) -
Provision for income taxes 2,200 2,500 3,300 5,000
Gain on office lease termination - (141,001 ) - (141,001 )
Realized gain (loss) from sale of
digital tokens (247,293 ) (247,293 ) 23,838
Impairment loss on digital tokens 184,737 - 184,737 -
Depreciation and amortization expense 99,243 146,949 194,189 299,893
Stock-based compensation expense (192,342 ) 57,183 (160,974 ) 146,389 Adjusted EBITDA$ 668,649 $ 593,793 $ 1,203,825 $ 472,341 Results of Operations
The following table sets forth condensed consolidated statements of income data for each of the periods indicated as a percentage of total revenues:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Total revenue 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of revenue 18.5 % 20.3 % 18.8 % 21.4 %
Sales and marketing expense 7.5 % 6.5 % 7.6 % 6.8 %
Product development expense 38.0 % 37.2 % 38.2 % 41.1 %General and administrative expense 13.7 % 20.3 % 18.1 % 28.0 % Impairment loss on digital tokens 5.4 % - %
2.7 % - %
Total costs and expenses 83.1 % 84.3 % 85.4 % 97.3 %
Income from operations 16.9 % 15.7 % 14.6 % 2.7 %Interest income (expense), net (0.0 )% (0.0 )% 0.0 % 0.2 % Gain on extinguishment of term debt - % - % 7.5 % - % Realized gain (loss) from sale of digital tokens 7.2 % - % 3.6 % (0.4 )% Other income (expense), net - % 0.1 % - % (0.9 )% Income from operations before provision for income taxes 24.1 % 15.8 % 25.7 % 1.6 % Provision for income taxes (0.1 )% (0.1 )%
(0.0 )% (0.1 )%
Net income 24.0 % 15.7 % 25.7 % 1.5 %
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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 endedJune 30, 2021 and the three months endedJune 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 June 30, Increase Increase June 30, 2021 2020 (Decrease) (Decrease) 2021 2020 Subscription revenue$ 3,121,909 $ 3,210,619 $ (88,710 ) (2.8 )% 91.4 % 95.0 % Advertising revenue 75,462 57,856 17,606 30.4 % 2.2 % 1.7 %
Technology service revenue 218,432 112,000 106,432
95.0 % 6.4 % 3.3 %
Total revenues $ 3,415,803 $ 3,380,475 $ 35,328 1.0 % 100.0 % 100.0 %
Subscription Revenue
Our subscription revenue for the three months endedJune 30, 2021 decreased by$88,710 , or 2.8%, as compared to the three months endedJune 30, 2020 . The decrease in subscription revenue was primarily driven by decreased activity inthe United States from our existing users in the Camfrog application. This decrease is offset by 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 three months endedJune 30, 2021 increased by$17,606 , or 30.4%, as compared to the three months endedJune 30, 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$106,432 , or 95.0%, as compared to the three months endedJune 30, 2020 . The increase in technology service revenue was driven by technology service revenue generated by the distribution of Props tokens under the YouNow Agreement. 24 Costs and Expenses
Total costs and expenses for the three months endedJune 30, 2021 decreased by$11,021 , or 0.4%, as compared to the three months endedJune 30, 2020 . The following table presents our costs and expenses for the three months endedJune 30, 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 June 30, Increase Increase June 30, 2021 2020 (Decrease) (Decrease) 2021 2020 Cost of revenue$ 630,582 $ 685,430 $ (54,848 ) (8.0 )% 18.5 % 19.6 % Sales and marketing expense 255,204 221,416 33,788 15.3 % 7.5 % 6.3 % Product development expense 1,298,767 1,255,884 42,883 3.4 % 38.0 % 36.0 % General and administrative expense 469,502 687,083 (217,581 ) (31.7 )% 13.7 % 19.7 % Impairment loss on digital tokens 184,737 - 184,737 100.0 % 5.4 % - % Total costs and
expenses$ 2,838,792 $ 2,849,813 $ (11,021 ) (0.4 )% 83.1 % 81.6 % 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 endedJune 30, 2021 increased by$33,788 , or 15.3%, as compared to the three months endedJune 30, 2020 . The increase in sales and marketing expense for the three months endedJune 30, 2021 was primarily due to an increase of$19,874 in salary and related expenses driven by an increased headcount as we grow our focus on social media. Product development expense Our product development expense for the three months endedJune 30, 2021 increased by$42,883 , or 3.4%, as compared to the three months endedJune 30, 2020 . The increase in product development expense was primarily driven by an increase in software expense of approximately$53,300 offset by a decrease in salary and related expenses of$18,300 .
General and administrative expense
Our general and administrative expense for the three months endedJune 30, 2021 decreased by$217,581 , or 31.7%, as compared to the three months endedJune 30, 2020 . The decrease in general and administrative expense for the three months endedJune 30, 2021 was primarily due to a stock compensation expense reversal of$218,700 resulting from the forfeiture of an unvested performance stock option award and the deferral of professional fees in connection with theAugust 2021 Offering.
Impairment loss on digital tokens
The Company recorded a non-cash impairment loss on digital token of$184,737 for the three months endedJune 30, 2021 as a result of recent declines in the quoted market prices of certain digital tokens below the market price of their acquisition. 25 Non-Operating Income
The following table presents the components of non-operating income for the three months endedJune 30, 2021 and the three months endedJune 30, 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 June 30, $ % June 30, 2021 2020 Increase Increase 2021 2020 Interest expense, net$ (420 ) $ (1,210 ) $ 790 65.3 % (0.0 )% (0.0 )% Realized gain from sale of digital tokens 247,293 - 247,293 100.0 % 7.2 % - % Other income - 4,589 (4,589 ) (100.0 )% - % 0.1 % Total non-operating income$ 246,873 $ 3,379 $ 243,494 7,206.1 % 7.2 % 0.1 %
Non-operating income for the three months endedJune 30, 2021 was$246,873 , a net increase of$243,494 , or 7,206.1%, as compared to non-operating income of$3,379 for the three months endedJune 30, 2020 . The increase in non-operating income was driven by the realized gain from sale of digital tokens of$247,293 . 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 endedJune 30, 2021 and 2020, the Company recorded an income tax provision of$2,200 and$2,500 , respectively, consisting primarily of state and local taxes.
As of
Six Months Ended
Revenue
Revenue increased to$6,787,805 for the six months endedJune 30, 2021 from$6,101,217 for the six months endedJune 30, 2020 . The increase was driven by an increase in subscription revenue of$400,532 along with an increase of$247,296 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 six months endedJune 30, 2021 and the six months endedJune 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 Six Months Ended Six Months Ended June 30, $ % June 30, 2021 2020 Increase Increase 2021 2020 Subscription revenue$ 6,261,274 $ 5,860,742 $ 400,532 6.8 % 92.2 % 96.0 % Advertising revenue 152,283 113,523 38,760 34.1 % 2.2 % 1.9 % Technology service revenue 374,248 126,952 247,296 194.8 % 5.6 % 2.1 % Total revenues$ 6,787,805 $ 6,101,217 $ 686,588 11.3 % 100.0 % 100.0 % 26 Subscription Revenue - Our subscription revenue for the six months endedJune 30, 2021 increased by$400,532 , or 6.8%, as compared to the six months endedJune 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 six months endedJune 30, 2021 increased by$38,760 , or 34.1%, as compared to the six months endedJune 30, 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 for the six months endedJune 30, 2021 increased by$247,296 , or 194.8%, as compared to the six months endedJune 30, 2020 . The increase in technology service revenue was mainly driven by technology service revenue generated by the YouNow Agreement. Costs and Expenses Total costs and expenses for the six months endedJune 30, 2021 reflect a decrease in costs and expenses of$132,225 , or 2.2%, as compared to the six months endedJune 30, 2020 . The following table presents our costs and expenses for the six months endedJune 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 Six Months Ended $ % Six Months Ended June 30, Increase Increase June 30, 2021 2020 (Decrease) (Decrease) 2021 2020 Cost of revenue$ 1,277,297 $ 1,308,154 $ (30,857 ) (2.4 )% 18.8 % 21.1 % Sales and marketing expense 512,655 413,086 99,569 24.1 % 7.6 % 6.6 % Product development expense 2,596,031 2,506,580 89,451 3.6 % 38.2 % 40.3 % General and administrative expense 1,231,212 1,706,337 (475,125 ) (27.8 )% 18.1 % 27.5 % Impairment loss on digital tokens 184,737 - 184,737 100.0 % 2.7 % - % Total costs and expenses$ 5,801,932 $ 5,934,157 $ (132,225 ) (2.2 )% 85.4 % 95.5 % Cost of revenue - Our cost of revenue for the six months endedJune 30, 2021 decreased by$30,857 , or 2.4%, as compared to the six months endedJune 30, 2020 . The decrease for the six months endedJune 30, 2021 was primarily driven by a reduction of$31,730 in salary and related expenses resulting from reduced headcount, offset by an increase in payment processing costs. Sales and marketing expense - Our sales and marketing expense for the six months endedJune 30, 2021 increased by$99,569 , or 24.1%, as compared to the six months endedJune 30, 2020 . The increase in advertising revenue was primarily due to an increase of$53,867 from the volume of advertising impressions and an increase of$36,640 in salary and related expenses driven by an increased headcount as we grow our focus on social media. 27 Product development expense - Our product development expense for the six months endedJune 30, 2021 increased by$89,451 , or 3.6%, as compared to the six months endedJune 30, 2020 . The increase was primarily due to an increase in software consulting expense of$116,885 , offset by a reduction of$55,758 in compensation expenses related to the terminated ProximaX Agreement. General and administrative expense - Our general and administrative expense for the six months endedJune 30, 2021 decreased by$475,125 , or 27.8%, as compared to the six months endedJune 30, 2020 . The decrease in general and administrative expense for the six months endedJune 30, 2021 was primarily due to a stock compensation expense reversal of$218,700 resulting from the forfeiture of an unvested performance stock option award, a reduction in rent expense of$115,103 and the deferral of professional fees in connection with theAugust 2021 Offering.
Impairment loss on digital tokens
We recorded a non-cash impairment loss on digital token of
Non-Operating Income (Loss) The following table presents the components of non-operating income (loss) for the six months endedJune 30, 2021 and the six months endedJune 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 Six Months Ended $ % Six Months Ended June 30, Increase Increase June 30, 2021 2020 (Decrease) (Decrease) 2021 2020
Interest income$ 2,047 $ 10,977 $ (8,930 )
(81.4 )% 0.0 % 0.2 % Other expense, net - (56,042 ) 56,042 100.0 % 0.0 % (0.9 )% Realized gain (loss) from sale of digital
tokens 247,293 (23,838 ) 271,131 1,137.4 % 3.6 % (0.4 )% Gain on extinguishment of term debt 506,500 - 506,500 100.0 % 7.5 % - % Total non-operating income (loss)$ 755,840 $ (68,903 ) $ 824,743 1,197.0 % 11.1 % (1.1 )% Non-operating income (loss) for the six months endedJune 30, 2021 increased by$640,006 , or 928.9%, as compared to the six months endedJune 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$247,293 . Income Taxes Our provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company's year-to-date tax provision with the effective rate that it expects to achieve for the full year. For the six months endedJune 30, 2021 and 2020, the Company recorded an income tax provision of$3,300 and$5,000 , respectively, consisting primarily of state and local taxes.
As of
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