Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis
of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the
perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect
our future results. The following discussion and analysis should be read in conjunction with our audited consolidated financial statements
and the accompanying notes thereto included in “Item 8. Financial Statements and Supplementary Data.”
27
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 this Annual Report on
Form 10-K.
Overview
We are a leading communications software innovator
that powers multimedia social applications. Our product portfolio includes Paltalk, Camfrog and Tinychat, which together host one of
the world’s largest collections of video-based communities. Our other products are ManyCam and Vumber. ManyCam is a live streaming
software and virtual camera that allows users to deliver professional live videos on streaming platforms, video conferencing apps and
distance learning tools. Vumber is a telecommunications services provider that enables users to communicate privately by having multiple
phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number. We have an over 20-year
history of technology innovation and hold 10 patents.
We believe that the scale of our user base presents
a competitive advantage in the video social networking industry and provides growth opportunities to advance our existing products with
up-sell opportunities and build future brands with cross-sell offers. We also believe that our proprietary consumer app technology platform
can scalably support large communities of users in activities such as video, voice and text chat, online card games and board games and
provide robust user monetization tools.
Our continued growth depends on attracting new
consumer application users through the introduction of new applications, features and partnerships and further penetration of our existing
markets. Our principal growth strategy is to invest in the development of proprietary software, expand our sales and marketing efforts
with respect to such software, and increase our consumer application user base through potential platform partnerships and new and existing
advertising campaigns that we run through internet and mobile advertising networks, all while balancing the capital needs of the business.
Our strategy also includes the acquisition of, or investment in, technologies, solutions or businesses that complement our business.
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
Stock Repurchase Plan
On March 23, 2022, we announced that the Board
of Directors of the Company approved a stock repurchase plan for up to $1,750,000 of the Company’s outstanding common stock (the
“Stock Repurchase Plan”). The Stock Repurchase Plan is effective as of March 29, 2022 and expires on the one-year anniversary
of such date. Shares may be repurchased from time-to-time in open market transactions at prevailing market prices, in privately negotiated
transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs, and the Stock Repurchase Plan
may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased was determined by a committee
of the Board of Directors at its discretion and depends on a number of factors, including the market price of the Company’s common
stock, general market and economic conditions, alternative investment opportunities and other corporate considerations. During the year
ended December 31, 2022, the Company purchased a total of 604,808 at an average share price of $1.65 per share.
28
ManyCam Asset Acquisition
On June 9, 2022 (the “Effective Date”),
we entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) by and among the Company, ManyCam ULC,
an unlimited liability company incorporated under the laws of the Province of Alberta and a wholly owned subsidiary of the Company (the
“Purchaser”), Visicom Media Inc., a Canadian corporation (“Visicom”), and 2434936 Alberta ULC, an unlimited liability
company incorporated under the laws of the Province of Alberta (“Target NewCo”), pursuant to which the Purchaser purchased,
effective as of the Effective Date, all of the issued and outstanding shares of Target NewCo (the “ManyCam Acquisition”).
Prior to the ManyCam Acquisition, Target NewCo held all assets related to, or used by Visicom in connection with, the business of developing
and distributing virtual webcam driver software, including virtual backgrounds and/or “masks” or other camera effects (other
than the Excluded Contracts (as defined in the Securities Purchase Agreement)), whether tangible or intangible, including, but not limited
to, Target NewCo’s ManyCam software (“ManyCam”) and related source code, customer lists, customer relationships and
all associated customer information, contracts with contractors and suppliers, brand names, trade secrets, trademarks, trade names, designs,
copyrights, websites, all URLs, goodwill and intellectual property associated with each of the foregoing (collectively, the “Conveyed
Assets”).
The Purchaser acquired the Conveyed Assets for
a cash purchase price of $2.7 million (the “Cash Consideration”). In addition to the Cash Consideration, Visicom is entitled
to receive an additional payment of up to $600,000 (the “Earn-Out Payment”) based on the sales of the ManyCam software less
chargebacks and refunds (“Gross Sales”) in the six-month period following the closing (the “Earn-Out Period”)
as follows: (i) if the Gross Sales during the Earn-Out Period are greater than $800,000, the Earn-Out Payment shall be $600,000, (ii)
if the Gross Sales during the Earn-Out Period are greater than $700,000 but less than $800,000, the Earn-Out Payment shall be $300,000,
(iii) if the Gross Sales during the Earn-Out Period are greater than $600,000 but less than $700,000, the Earn-Out Payment shall be $150,000
and (iv) if the Gross Sales during the Earn-Out Period do not exceed $600,000, then Visicom will not be paid any portion of the Earn-Out
Payment.
On June 30, 2022, we entered into a License Agreement
with Visicom (the “License Agreement”), pursuant to which we agreed to distribute, at the discretion and direction of Visicom,
a specified number of ManyCam software updates to certain license holders to whom Visicom has previously granted a “lifetime”
license to ManyCam software. As consideration for distributing the software updates, Visicom paid us an initial upfront nonrefundable
payment of $65,000. The License Agreement provides that Visicom may purchase additional licenses at prices specified therein. Other than
providing a one-time, limited license to Visicom for the distribution of ManyCam software updates pursuant to the terms of the License
Agreement, we do not have any obligation to provide support or service to the licensee end users.
Gross Sales during the Earn-Out Period
exceeded $600,000 but were less than $700,000. Pursuant to the terms of that certain Letter Agreement, by and between Visicom, the
Purchaser and the Company, dated February 24, 2023, the Company made an Earn-Out Payment to Visicom in the amount of $85,000 (the
“Adjusted Earn-Out Payment”). We recorded a liability in the amount of the Adjusted Earn-Out Payment, with a
corresponding adjustment to the cost basis of the Conveyed Assets. The Company expects that the Adjusted Earn-Out Payment will be
paid in the first quarter of 2023.
As part of the accounting for the Conveyed Assets,
we provisionally recorded a deferred tax liability of $0.9 million with an offset to intangible assets related to the excess financial
reporting basis over the tax basis of the Conveyed Assets.
Macro-Economic Factors and COVID-19 Update
Our results of operations have been and may continue
to be negatively impacted by the uncertainty regarding COVID-19 and macro-economic factors, including the timing of economic recessions
and/or recovery and the overall inflationary environment. Prolonged periods of inflation may affect our ability to target new customers
as well as keep existing customers engaged and may ultimately have a correlating effect on our users’ discretionary spending. Our
user growth may continue to slow or decline as the impact of the COVID-19 pandemic continues to taper, particularly in light of a potential
economic downturn. Furthermore, the recent strength of the US dollar compared to foreign currencies could have a negative effect on our
non-US customer base, as our subscription prices are based in US dollars.
29
Operational Highlights and Objectives
During the year ended December 31, 2022, we executed
key components of our objectives:
●
acquired
the core assets of ManyCam, a live streaming software and virtual camera that allows users to deliver professional live videos on streaming
platforms, video conferencing apps and distance learning tools and worked on cross-selling the ManyCam software to commercial businesses
as well as retail consumers;
●
repurchased 604,808
shares of the Company’s common stock pursuant to the Stock Repurchase Plan at an average price per share of $1.65, or an aggregate
amount of approximately $1.0 million; and
●
engaged Roth Capital Partners,
LLC as our financial advisor and investment banker to explore strategic initiatives focused on buy-side acquisitions.
For the near term, our business objectives include:
●
continue to explore strategic
opportunities, including, but not limited to, potential mergers or acquisitions of other assets or entities that are synergistic
to our business;
●
optimizing our acquisition
of the ManyCam software to not only maximize subscription revenue but to integrate and cross-sell with our existing customer base
and explore business-to-business sales opportunities;
●
adjusting our spending to better align with overall
macro-economic conditions and investing in a measured way that ensures responsible cash management;
●
continuing to implement
several enhancements to our live video chat applications as well as the integration of card and board games and other features focused
on user retention and monetization, which collectively are intended to increase user engagement and revenue opportunities;
●
continuing to develop our
consumer application platform strategy by seeking potential partnerships with large third-party communities to whom we could promote
a co-branded version of our video chat products and potentially share in the incremental revenues generated by these partner communities;
and
●
continuing to defend our
intellectual property.
Sources of Revenue
Our main sources of revenue are subscription,
advertising and other fees generated from users of our core video chat products, Paltalk and Camfrog, as well as revenue downloads of
our ManyCam software products. We expect that the majority of our revenue in future periods will continue to be generated from our core
video chat products. We also generate technology service revenue under licensing and service agreements that we negotiate with third
parties which includes development, integration, engineering, licensing or other services that we provide.
Subscription Revenue
Our video chat platforms generate revenue primarily
through subscription fees. Our tiers of subscriptions provide users with unlimited video windows and levels of status within the community.
Multiple subscription tiers are offered in different durations depending on the product from one-, six- and twelve-month terms, which
continue to vary as we continue to test and optimize length and pricing. Longer-term plans (those with durations longer than one month)
are generally available at discounted monthly rates. Levels of membership benefits are offered in tiers, with the least membership benefits
in the lowest paid tier and the most membership benefits in the highest paid tier. Our membership tiers are “Plus,” “Extreme,”
“VIP” and “Prime” for Paltalk and “Pro,” “Extreme” and “Gold” for Camfrog.
We also hold occasional promotions that offer discounted subscriptions and virtual gifts. Subscriptions for ManyCam are generally offered
in annual and two-year terms, with exceptions made for enterprise sales.
30
We recognize revenue from monthly premium subscription
services beginning in the month in which the subscriptions are originated. Revenues from multi-month (or annual) subscriptions are recognized
on a gross and straight-line basis over the length of the subscription period. The unearned portion of subscription revenue is presented
as deferred revenue in the accompanying consolidated balance sheets.
We also offer virtual gifts to our users through
our Paltalk, Camfrog and TinyChat applications. Users may purchase credits that can be redeemed for a host of virtual gifts such as a
rose, a beer, or a car, among other items. Virtual gift revenue is recognized upon the users’ utilization of the virtual gift and
included in subscription revenue. The unearned portion of virtual gifts revenue is presented as deferred revenue in the accompanying
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.
During the year ended December 31, 2021, we recorded
technology service revenue in connection with our agreement to serve as a launch partner with Open Props, Inc. (formerly YouNow, Inc.,
and referred to herein as “YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”)
into our Camfrog and Paltalk applications (as amended, the “YouNow Agreement”).
In August 2021, we received notice from YouNow
that it was terminating the YouNow Agreement, and that it would no longer support the Props platform past the end of calendar year 2021.
The YouNow Agreement was terminated effective on November 23, 2021. We expect that the majority of our future technology service revenue,
if any, will result from opportunistic collaborations with third parties, however, any such collaborations are not a primary focus for
the Company.
Costs and Expenses
Cost of revenue
Cost of revenue consists primarily of compensation
(including stock-based compensation) and other employee-related costs for personnel engaged in data center and customer care functions,
credit card processing fees, hosting fees, and data center rent and bandwidth costs. Cost of revenue also includes compensation and other
employee-related costs for technical personnel, consultants and subcontracting costs relating to technology service revenue.
Sales and marketing expense
Sales and marketing expense consist primarily
of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel and
consultants engaged in sales and sales support functions. Advertising and promotional spend includes online marketing, including fees
paid to search engines, and offline marketing, which primarily consists of partner-related payments to those who direct traffic to our
brands.
Product development expense
Product development expense, which relates to
the development of technology of our applications, consists primarily of compensation (including stock-based compensation) and other
employee-related and consultants-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.
31
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 years ended
December 31, 2022 and 2021, we recorded a non-cash impairment charge in the amount of $7,262 and $765,232, respectively, which is reported
in our accompanying 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.
Historically, we used Subscription Bookings to represent the aggregate dollar value of subscription fees and virtual gifts purchases
received during the period. However, going forward, we have decided to not report Subscription Bookings as we believe that this key performance
indicator is no longer an appropriate metric to evaluate our business. We also discuss net cash provided by operating activities under
the ‟Results of Operations” and “Liquidity and Capital Resources” sections below. Adjusted EBITDA is discussed
below.
Year Ended
December 31,
2022
2021
Net cash (used in) provided by operating activities
$ (2,956,724 )
$ 1,265,464
Net (loss) income
$ (3,412,250 )
$ 1,324,106
Adjusted EBITDA
$ (2,646,860 )
$ 1,281,361
Adjusted EBITDA as percentage of total revenue
(24.1 )%
9.7 %
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure.
Adjusted EBITDA is defined as net income adjusted to exclude net loss from interest income, net, provision for income taxes, gain on
office lease termination, impairment loss on goodwill, gain from sale of Secured Communication Assets, gain on the extinguishment of
term debt, provision for income taxes, depreciation and amortization expense, loss on disposal of property and equipment, other expense,
impairment loss on digital tokens, gain on extinguishment of digital tokens payable, realized loss (gain) from the sale of digital tokens
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.
32
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; gain on extinguishment
of digital tokens payable; and the provision for income taxes. Other companies, including companies in our industry, may calculate Adjusted
EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider
Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net 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:
Year Ended
December 31,
2022
2021
Reconciliation of Net (Loss) Income to Adjusted EBITDA:
Net (loss) income
$ (3,412,250 )
$ 1,324,106
Stock-based compensation expense
333,825
(35,653 )
Depreciation and amortization expense
670,863
370,845
Impairment loss on digital tokens
7,262
765,232
Interest income, net
(74,895 )
(133 )
Gain on extinguishment of term debt
--
(506,500 )
Realized loss (gain) from sale of digital tokens
--
(307,934 )
Gain on termination of digital tokens payable
--
(338,553 )
Income tax (benefit) expense
(171,665 )
9,951
Adjusted EBITDA
$ (2,646,860 )
$ 1,281,361
Results of Operations
The following table sets forth consolidated statements
of operations data for each of the periods indicated as a percentage of total revenue:
Years Ended
December 31,
2022
2021
Total revenue
100.0 %
100.0 %
Costs and expenses:
Cost of revenue
25.7 %
20.5 %
Sales and marketing expense
14.3 %
8.8 %
Product development expense
54.0 %
40.6 %
General and administrative expense
39.2 %
20.4 %
Impairment loss on digital tokens
0.1 %
5.8
Total costs and expenses
133.3 %
96.1 %
(Loss) income from operations
(33.3 )%
3.9 %
Interest income, net
0.7 %
0.0 %
Gain on extinguishment of term debt
0.0 %
3.8 %
Realized gain (loss) from sale of digital tokens
0.0 %
2.3 %
(Loss) income from operations before income tax (benefit) expense
(32.6 )%
10.0 %
Income tax (benefit) expense
(1.6 )%
(0.1 )%
Net (loss) income
(31.0 )%
9.9 %
33
Year Ended December 31, 2022, Compared to
Year Ended December 31, 2021
Revenue
Total revenue decreased to $10,989,545 for the
year ended December 31, 2022, from $13,273,849 for the year ended December 31, 2021. The decrease was primarily driven by a decrease
in subscription revenue and virtual gift revenue from the Paltalk and Camfrog applications, as well as a decrease in technology service
revenue driven by the termination of the YouNow Agreement, effective November 23, 2021. The decrease was partially offset by revenue recognized
from sales of the ManyCam product.
The following table sets forth our subscription
revenue, advertising revenue, technology service revenue and total revenue for the year ended December 31, 2022, and the year ended December
31, 2021, the increase or decrease between those periods, the percentage increase or decrease between those periods, and the percentage
of total revenue that each represented for those periods:
Years Ended
$
%
% of Revenue Years Ended
December 31,
Increase
Increase
December 31,
2022
2021
(Decrease)
(Decrease)
2022
2021
Subscription revenue
$ 10,662,691
$ 12,368,008
$ (1,705,317 )
(13.8 )%
97.0 %
93.2 %
Advertising revenue
326,854
451,337
(124,483 )
(27.6 )%
3.0 %
3.4 %
Technology service revenue
--
454,504
(454,504 )
(100.0 )%
0.0 %
3.4 %
Total revenues
$ 10,989,545
$ 13,273,849
$ (2,284,304 )
(17.2 )%
100.0 %
100.0 %
Subscription Revenue
Our subscription revenue for the year ended December
31, 2022 decreased by $1,705,317, or 13.8%, as compared to the year ended December 31, 2021. The decrease in subscription revenue was
primarily driven by a decrease in new subscribers as well as a decrease in virtual gift revenue across the Paltalk and Camfrog applications.
We attribute this decrease to the overall macro-economic environment that may limit a customer’s access to discretionary spending,
as well as, to a lesser degree, the lifting of various COVID-19 related restrictions in certain of our target markets that had previously
prohibited individuals from leaving their homes and, as a result, caused customers to devote less time to their social applications.
As ManyCam primarily sells annual subscriptions, its revenue is consistent with similar annual subscription models in their early stages,
as the cash received traditionally will outpace the subscription revenue recognized. We anticipate that subscription revenue related
to ManyCam will increase in future quarters as the deferred revenue generated from ManyCam subscriptions is recognized.
Advertising Revenue
Our advertising revenue for the year ended December
31, 2022 decreased by $124,483, or 27.6%, as compared to the year ended December 31, 2021. The decrease in advertising revenue was primarily
due to a decrease in the volume of advertising impressions related to changes in and the optimization of third-party advertising partners
due to a slower growing user base as well as overall decline in the advertising market.
Technology Service Revenue
Our technology service revenue for the year ended
December 31, 2022, decreased by $454,504, or 100.0%, as compared to the year ended December 31, 2021. The decrease in technology service
revenue was driven by the termination of the YouNow Agreement, effective November 23, 2021.
34
Costs and Expenses
Total costs and expenses for the year ended December
31, 2022 increased by $1,893,996 or 14.8%, as compared to the year ended December 31, 2021. The following table presents our costs and
expenses for the years ended December 31, 2022 and 2021, 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:
Years Ended
$
%
% of Revenue Years Ended
December 31,
Increase
Increase
December 31,
2022
2021
(Decrease)
(Decrease)
2022
2021
Cost of revenue
$ 2,823,570
$ 2,720,189
$ 103,381
3.8 %
25.7 %
20.5 %
Sales and marketing expense
1,571,275
1,170,386
400,889
34.3 %
14.3 %
8.8 %
Product development expense
5,934,433
5,391,819
542,614
10.1 %
54.0 %
40.6 %
General and administrative expense
4,311,815
2,706,733
1,605,082
59.3 %
39.2 %
20.4 %
Impairment loss on digital tokens
7,262
765,232
(757,970 )
(99.1 )%
0.1 %
5.8 %
Total costs and expenses
$ 14,648,355
$ 12,754,359
$ 1,893,996
14.8 %
133.3 %
96.1 %
Cost of revenue
Our cost of revenue for the year ended December
31, 2022 increased by $103,381, or 3.8%, as compared to the year ended December 31, 2021. The increase for the year ended December 31,
2022, was primarily driven by an increase in costs related to the ManyCam product, which launched in June of 2022, of approximately $206,658.
These expenses were partially offset by decreases in non-cash stock compensation expense of $48,000 and credit card processing of approximately
$55,000.
Sales and marketing expense
Our sales and marketing expense for the year
ended December 31, 2022 increased by $400,889, or 34.3%, as compared to the year ended December 31, 2021. The increase in sales and marketing
expense for the year ended December 31, 2022 was primarily due to an increase of approximately $366,000 in marketing user acquisition
expenses, including agent fees, as we focused on increasing user engagement spend through the efforts of our third-party marketing agencies,
which we have subsequently scaled back on, and an increase of approximately $26,000 in other marketing and branding expenses driven by
an increased grow our focus on social media and influencers.
Product development expense
Our product development expense for the year
ended December 31, 2022 increased by $542,614, or 10.1%, as compared to the year ended December 31, 2021. The increase was primarily
due to an increase of approximately $329,000 related to software expenses in support the newly launched ManyCam product. In addition,
dues and subscriptions expense increased by approximately $132,000, and Paltalk and Camfrog consulting expenses increased by approximately
$137,000 related to initiatives to enhance user retention and improve monetization in the Paltalk application. These increases was partially
offset by a decrease of approximately $114,000 in capitalized amortization software related to Paltalk.
General and administrative expense
Our general and administrative expense for the
year ended December 31, 2022 increased by $1,605,082, or 59.3%, as compared to the year ended December 31, 2021. The increase in general
and administrative expense for the year ended December 31, 2022 was mainly due to increased non-cash stock compensation expense of approximately
$402,000, an increase in amortization of approximately $417,000 related to the acquisition of the ManyCam assets, increased professional
fees of approximately $265,000 and increased insurance costs of approximately $122,000. In addition, included in the year ended December
31, 2021, was approximately $335,000 of non-cash gain on extinguishment of digital tokens payable.
Impairment loss on digital tokens
We recorded a non-cash impairment loss on digital
tokens of $7,262 for the year ended December 31, 2022 as a result of the decline in the quoted market prices of certain digital tokens
below the market price of their acquisition. This loss represents a $757,970 decrease in the size of the loss compared to the year ended
December 31, 2021.
35
Non-Operating Income
The following table presents the components of
non-operating income for the year ended December 31, 2022 and the year ended December 31, 2021, 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:
Years Ended
December 31,
$
Increase
%
Increase
% of Revenue Years Ended
December 31,
2022
2021
(Decrease)
(Decrease)
2022
2021
Interest income, net
$ 74,895
$ 133
$ 74,762
56212.1 %
0.7 %
0.0 %
Gain on extinguishment of term debt
--
506,500
(506,500 )
(100.0 )%
0.0 %
3.8 %
Realized gain from sale of digital tokens
--
307,934
(307,934 )
(100.0 )%
0.0 %
2.3 %
Total non-operating income
$ 74,895
$ 814,567
$ (739,672 )
(90.8 )%
0.7 %
6.1 %
Non-operating income for the year ended December
31, 2022 was $74,895, a decrease of $739,672, or 90.8%, as compared to non-operating income of $814,567 for the year ended December
31, 2021. The decrease 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 as well as a gain from sale of digital
tokens of $307,934, both of which happened during the year ended December 31, 2021.
Liquidity and Capital Resources
Years Ended
December 31,
2022
2021
Consolidated Statements of Cash Flows Data:
Net cash (used in) provided by operating activities
$ (2,956,724 )
$ 1,265,464
Net cash (used in) provided by investing activities
(2,942,279 )
858,848
Net cash (used in) provided by financing activities
(997,924 )
13,927,128
Net change in cash and cash equivalents
$ (6,896,927 )
$ 16,051,440
Currently, our primary source of liquidity is
cash on hand and cash flows from continuing operations, and we believe that our cash and cash equivalents balance and our expected cash
flow from operations will be sufficient to meet all of our financial obligations for the twelve months from the date these financial
statements are issued. As of December 31, 2022, we had over $14.7 million of cash and cash equivalents.
Our use of working capital is related to product
development resources and an investment in marketing activities in order to maintain and create new services and features in applications
for our clients and users. In particular, a significant portion of our working capital has been allocated to the improvement of our products.
In addition, during the year ended December 31, 2022, we spent $997,924 in connection with our Stock Repurchase Plan as we purchased
a total of 604,808 shares at an average share price of $1.65 per share. In the future, we may continue to seek to grow our business by
expending our capital resources to fund strategic acquisitions, investments and partnership opportunities.
On August 5, 2021, we announced the closing of
the August 2021 Offering in which we offered and sold 1,159,400 shares of our common stock. We also granted the underwriters an option
to purchase up to an additional 173,910 shares of common stock at the public offering price less discounts and commissions to cover over-allotments,
which was exercised in full on August 5, 2021. The net proceeds to us from the August 2021 Offering were approximately $3.2 million,
after deducting underwriting discounts, commissions and other estimated offering expenses.
In addition, on October 19, 2021, we announced
the pricing and closing of the October 2021 Offering in which we offered and sold 1,552,500 shares of our common stock. We also granted
the underwriters an option to purchase up to an additional 202,500 shares of common stock at the public offering price less discounts
and commissions to cover over-allotments, which was exercised in full on October 14, 2021. The net proceeds to us from the October 2021
Offering were approximately $10.7 million, after deducting underwriting discounts, commissions and other estimated offering expenses.
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Operating Activities
Net cash used in operating activities was $2,956,724
for the year ended December 31, 2022, as compared to net cash provided by operating activities of $1,265,464 for the year ended December
31, 2021. A loss from operations, due to the decrease in subscription revenue as well as changes in accounts payable, accrued expenses
and other current liabilities of $453,928 which contributed to a lower cash flow for the year ended December 31, 2022, compared to the
year ended December 31, 2021.
Investing Activities
Net cash used in investing activities was $2,942,279
for the year ended December 31, 2022, as compared to net cash provided by investing activities of $858,848 for the year ended December
31, 2021. The decrease in cash flows from investing activities resulted primarily from the ManyCam Acquisition.
Financing Activities
Net cash used in financing activities was $997,924
for the year ended December 31, 2022, as compared to net cash provided by financing activities of $13,927,128 for the year ended December
31, 2021. During fiscal 2022, the use of cash of $997,924 was attributed to the Company’s repurchase of the Company’s stock
pursuant to its share buy back plan. The decrease in net cash provided by financing activities compared to the prior year is a result
of the August 2021 and October 2021 Offerings, in which the Company sold an aggregate of 2,885,810 shares of common stock at a price
to the public of $3.00 and $7.50 per share, respectively. Net proceeds received by the Company from the August 2021 and October 2021
Offerings were approximately $13.9 million, after underwriting discounts and commissions and other estimated offering expenses.
Contractual Obligations and Commitments
As discussed above, on May 3, 2020, to help ensure
adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, we entered into the Note in favor of the Lender in the
aggregate principal amount of $506,500. The Note had a two-year term and borne interest at a stated rate of 1.0% per annum. We did not
provide any collateral or guarantees for the Note, nor did we pay any facility charge to obtain the Note. The Note provided for customary
events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material
adverse effects. On January 13, 2021, the Note was fully forgiven by the SBA and the Lender in compliance with the provisions of the
CARES Act. We do not expect to incur additional indebtedness under the CARES Act.
On June 7, 2016, we entered into a lease agreement
with Jericho Executive Center LLC for office space at 30 Jericho Executive Plaza in Jericho, New York, which commenced on September 1,
2016 and runs through November 30, 2021. Our monthly office rent payments under the lease are currently approximately $7,081 per month.
On April 9, 2021, we entered into a lease extension agreement with Jericho Executive Center LLC for the office space at 30 Jericho Executive
Plaza in Jericho, New York, which commenced on December 1, 2021 and runs through November 30, 2024.
On March 23, 2022, we entered into Amended and
Restated Employment Agreements with our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),
which amends and restates their existing employment agreements with the Company dated October 7, 2016 and December 9, 2019, respectively.
The agreements are each for terms of one year with auto renewal provisions. Except for adjustments to base salaries, all other terms
and conditions of the prior employment agreements between the Company and the CEO and CFO will remain in full force and effect. The CEO
agreement is retroactive to February 2021. The CFO agreement is retroactive to January 2022. Aggregate commitments of base salaries under
the agreements for 2022 total $490,000. Should the agreements be renewed for 2023 and beyond, the aggregate base salary commitments would
total $510,000 per year.
Critical Accounting Estimates
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial
statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination
of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may
be material to the financial statements. The most significant accounting estimate inherent in the preparation of our financial statements
include the discount rates and weighted average costs of capital used in the fair value of the ManyCam Intangible Assets and in assigning
their respective useful lives. These fair values and estimates were based on a number of factors, including a valuation from an independent
third party.
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Critical Accounting Polices
The Company’s financial position, results of
operations and cash flows are impacted by the accounting policies the Company has adopted. In order to get a full understanding of the
Company’s financial statements, one must have a clear understanding of the accounting policies employed. A summary of the Company’s
critical accounting policies follows:
Subscription Revenue
The Company generates subscription revenue
primarily from monthly premium subscription services. Subscription revenues are presented net of refunds, credits, and known and
estimated credit card chargebacks. During the years ended December 31, 2022 and 2021, subscriptions were offered in durations of
one-, six- twelve-and twenty four -month terms. All subscription fees, however, are paid by credit card at the origination of the
subscription regardless of the term of the subscription. Revenues from multi-month subscriptions are recognized on a straight-line
basis over the period where the service is offered to the customer, indicated by length of the subscription term purchased. The
unearned portion of subscription revenue is presented as deferred revenue in the accompanying consolidated balance sheets.
In addition, the Company offers virtual gifts
to its users. Users may purchase credits in $5, $10 or $20 increments that can be redeemed for a host of virtual gifts such as a rose,
a beer or a car, among other items. These gifts are given among users to enhance communication and are typically redeemed within 30 days
of purchase. Upon purchase, the virtual gifts are credited to the users’ account and are under the users’ control. Virtual
gift revenue is recognized upon the users’ redemption of virtual gifts at the fixed transaction price and included in subscription
revenue in the accompanying consolidated statements of income. Virtual gift revenue is presented as deferred revenue in the consolidated
balance sheets until virtual gifts are redeemed.
Intangible Assets
The Company acquired amortizable intangible
assets as part of a purchase agreement consisting of internally developed software, intellectual property (trade names, trademarks and
URLs) and subscriber relationships/customer lists. The Company’s intangible assets represent definite lived intangible assets,
which are being amortized on a straight-line basis over their estimated useful lives as follows:
Patents
20 years
Trade names, trademarks, product names, URLs
5-10 years
Internally developed software
5-6 years
Non-compete agreements
3 years
Subscriber/customer relationships
3-12 years
The Company reviews intangible assets for impairment
whenever events or changes in business circumstances indicate that the carrying amount of the assets might not be recoverable. Factors
that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation
to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets.
If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted
cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss
would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying
amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined
based on discounted cash flows. No impairments were recorded on intangible assets as no impairment indicators were noted for the periods
presented in these consolidated financial statements.
For additional information, see Note 2 of the
Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for a summary of significant accounting policies, which
includes our critical accounting policies, and the effect on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not applicable.
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