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.”
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 communications software innovator that
powers multimedia social applications. We operate a network of consumer applications that we believe create a unique social media enterprise
where users can meet, see, chat, broadcast, play online card games and board games and message in real time in a secure environment with
others in our network. Our consumer applications generate revenue principally from subscription fees and advertising arrangements.
Our product portfolio includes Paltalk, Camfrog
and Tinychat, which together host a large collection of video-based communities. Our other products include ManyCam and Vumber. ManyCam
is a live streaming software and virtual camera that allows users to deliver professional live videos on streaming platforms, video conferencing
apps and distance learning tools. Vumber is a telecommunications services provider that enables users to communicate privately by having
multiple phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number. We have an
over 20-year history of technology innovation and hold 8 patents.
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We believe that the scale of our user base presents
a competitive advantage in the video social networking industry and provides growth opportunities to advance our existing products with
up-sell opportunities and build future brands with cross-sell offers. We also believe that our proprietary consumer app technology platform
can scalably support large communities of users in activities such as video, voice and text chat, online card games and board games and
provide robust user monetization tools.
Our continued growth depends on attracting new
consumer application users through the introduction of new applications, features and partnerships and further penetration of our existing
markets. Our principal growth strategy is to invest in the development of proprietary software, expand our sales and marketing efforts
with respect to such software, and increase our consumer application user base through potential platform partnerships and new and existing
advertising campaigns that we run through internet and mobile advertising networks, all while balancing the capital needs of the business.
Our strategy also includes the acquisition of, or investment in, technologies, solutions or businesses that complement our business and
cross-selling them to additional synergistic businesses.
Our strategy is to approach these opportunities
in a measured way, being mindful of our resources and evaluating factors such as potential revenue, time to market and amount of capital
needed to invest in the opportunity.
Recent Developments
Director Appointment
On October 9, 2023, our Board of Directors increased
the size of the Board of Directors from five (5) directors to six (6) directors and filled the newly created vacancy by appointing Geoffrey
Cook as a director of the Company, effective as of October 10, 2023. Mr. Cook was also appointed to serve as a member of the Nominating
and Corporate Governance Committee of the Board of Directors and the Strategic Transactions Committee of the Board of Directors. We believe
Mr. Cook is qualified to serve on our Board of Directors due to, among other things, his experience in the social media and consumer
internet industries as well as his insights regarding corporate strategy and brand growth.
Impact of Macro-Economic Factors
Our results of operations have been and may continue
to be negatively impacted by macro-economic factors, including the timing of economic recessions and/or recovery and the overall inflationary
environment. Prolonged periods of inflation have affected, and may continue to affect, our ability to target new customers as well as
keep existing customers engaged and may ultimately have a correlating effect on our users’ discretionary spending. Additionally,
the closures of certain banks in the first and second quarters of 2023 and their placement into receivership with the Federal Deposit
Insurance Corporation created bank-specific and broader financial institution liquidity challenges and concerns. Future adverse developments
with respect to specific financial institutions or the broader financial services industry may create additional market and economic
uncertainty, which could affect our industry.
Under the provisions
of the extension of the Coronavirus Aid, Relief, and Economic Security Act, we were eligible for a refundable employee retention tax
credit (the “ERTC”) subject to certain criteria. During the year ended December 31, 2023, we applied for the ERTC and recorded
a receivable in the amount of $343,045, net of related costs, which was recognized in our consolidated statement of operations as other
income. As of December 31, 2023, we received an aggregate of $294,833, which was recorded as a reduction of the receivable on our consolidated
balance sheet.
Operational Highlights and Business Objectives
During the year ended December 31, 2023 we executed
key components of our objectives:
●
total revenue remained relatively unchanged at approximately
$11 million for the years ended December 31, 2023 and 2022, primarily as a result of a decrease in revenue from Paltalk and Camfrog,
offset by increased revenue from ManyCam and Vumber;
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●
net loss decreased by 68.7% to $1.1 million for the year
ended December 31, 2023, compared to net loss of $3.4 million for the year ended December 31, 2022, as a result of reduced expenses
and increased operating efficiencies;
●
compared to the prior year period, cash flows used in operations
decreased by $1.9 million to $1.1 million for the year ended December 31, 2023, mainly as result of a decrease in product development
and marketing expense;
●
we were cash flow positive for the third quarter ended
September 30, 2023; and
●
engaged Cleverbridge to facilitate our global payment processing
capabilities in international geographic markets.
For the near term, our business objectives include:
●
leveraging our integration of the ManyCam product into
Paltalk product through upselling initiatives;
●
further optimizing marketing spend to effectively realize
a positive return on our investment;
●
developing a user-friendly version of ManyCam that will
be optimized for both consumer and enterprise applications;
●
continuing to implement several enhancements to our live
video chat applications as well as the integration of card and board games and other features focused on retention and monetization,
which collectively are intended to increase user engagement and revenue opportunities;
●
continuing to explore strategic opportunities, including,
but not limited to, potential mergers or acquisitions of other assets or entities that are synergistic to our businesses;
●
continuing to develop our consumer application platform
strategy by seeking potential partnerships with large third-party communities to whom we could promote a co-branded version of our
video chat products and potentially share in the incremental revenues generated by these partner communities; and
●
continuing to defend our intellectual property.
Sources of Revenue
Our main sources of revenue are subscription
revenue, which includes virtual gift revenue, and advertising revenue generated from users of our core video chat products, Paltalk and
Camfrog. We also generate revenue from subscriptions for our ManyCam software product. We expect that the majority of our revenue in
future periods will continue to be generated from our core video chat products.
Subscription Revenue
Our video chat platforms generate revenue primarily
through subscription fees. Our tiers of subscriptions provide users with unlimited video windows and levels of status within the community.
Multiple subscription tiers are offered in different durations depending on the product from one-, three-, six-, twelve-, and twenty-four-month
terms, which continue to vary as we continue to test and optimize length and pricing. Longer-term plans (those with durations longer
than one month) are generally available at discounted monthly rates. Levels of membership benefits are offered in tiers, with the least
membership benefits in the lowest paid tier and the most membership benefits in the highest paid tier. Our membership tiers are “Plus,”
“Extreme,” “VIP” and “Prime” for Paltalk and “Pro,” “Extreme” and “Gold”
for Camfrog. We also hold occasional promotions that offer discounted subscriptions and virtual gifts. Subscriptions for ManyCam are
generally offered in annual and two-year terms, with exceptions made for enterprise sales.
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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).
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 consultant-related costs that are not capitalized for personnel engaged in the design, testing and enhancement of
service offerings as well as amortization of capitalized website development costs.
General and administrative expense
General and administrative expense consists primarily
of compensation (including non-cash stock-based compensation) and other employee-related costs for personnel engaged in executive management,
finance, legal, tax and human resources and facilities costs and fees for other professional services and cost of insurance. General and
administrative expense also includes amortization of intangible assets.
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Key Metrics
Our management relies on certain non-GAAP and/or
unaudited performance indicators to manage and evaluate our business. The key performance indicators set forth below help us evaluate
growth trends, establish budgets, measure the effectiveness of our advertising and marketing efforts and assess operational efficiencies.
We also discuss net cash provided by operating activities under the “Liquidity and Capital Resources” section below. Adjusted
EBITDA is discussed below.
Year Ended
December 31,
2023
2022
Net cash used in operating activities
$ (1,079,671 )
$ (2,956,724 )
Net loss
$ (1,067,335 )
$ (3,412,250 )
Adjusted EBITDA
$ (1,012,916 )
$ (2,646,860 )
Adjusted EBITDA as percentage of total revenue
(9.2 )%
(24.1 )%
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure.
Adjusted EBITDA is defined as net (loss) income adjusted to exclude stock-based compensation expense, depreciation and amortization expenses,
impairment loss on digital token, interest income, net, other (income) expense, net, and income tax (benefit) 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.
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; income tax expense from continuing operations; our working capital requirements; the impairment
loss on digital tokens; the potentially dilutive impact of stock-based compensation; and the provision for income taxes. Other companies,
including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider
Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net 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,
2023
2022
Reconciliation of Net Loss to Adjusted EBITDA:
Net loss
$ (1,067,335 )
$ (3,412,250 )
Stock-based compensation expense
234,993
333,825
Depreciation and amortization expense
822,334
670,863
Impairment loss on digital tokens
--
7,262
Interest income, net
(639,611 )
(74,895 )
Other income, net
(343,045 )
--
Income tax benefit
(20,252 )
(171,665 )
Adjusted EBITDA
$ (1,012,916 )
$ (2,646,860 )
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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,
2023
2022
Total revenue
100.0 %
100.0 %
Costs and expenses:
Cost of revenue
29.5 %
25.7 %
Sales and marketing expense
8.0 %
14.3 %
Product development expense
44.3 %
54.0 %
General and administrative expense
37.0 %
39.2 %
Impairment loss on digital tokens
0.0 %
0.1 %
Total costs and expenses
118.8 %
133.3 %
Loss from operations
(18.8 )%
(33.3 )%
Interest income, net
5.8 %
0.7 %
Other income, net
3.1 %
0.0 %
Loss from operations before income tax benefit
(9.9 )%
(32.6 )%
Income tax benefit
0.2 %
1.6 %
Net loss
(9.7 )%
(31.0 )%
Year Ended December 31, 2023 Compared to Year
Ended December 31, 2022
Revenue
Total revenue remained relatively unchanged at
$10,979,844 for the year ended December 31, 2023, compared to $10,989,545 for the year ended December 31, 2022. The change was primarily
driven by a decrease in subscription revenue and virtual gift revenue from the Paltalk and Camfrog applications and was partially offset
by revenue recognized from sales of the ManyCam product and Vumber.
The following table sets forth our subscription
revenue, advertising revenue and total revenue for the year ended December 31, 2023, and the year ended December 31, 2022, 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,
2023
2022
(Decrease)
(Decrease)
2023
2022
Subscription revenue
$ 10,646,700
$ 10,662,691
$ (15,991 )
(0.1 )%
97.0 %
97.0 %
Advertising revenue
333,144
326,854
6,290
1.9 %
3.0 %
3.0 %
Total revenues
$ 10,979,844
$ 10,989,545
$ (9,701 )
(0.1 )%
100.0 %
100.0 %
Subscription Revenue
Our subscription revenue for the year ended December
31, 2023 decreased by $15,991, or 0.1%, as compared to the year ended December 31, 2022. 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.
These decreases were partially offset by increased revenue from ManyCam as the revenue for the year ended December 31, 2023 represented
revenue for twelve months, whereas the revenue for the year ended December 31, 2022, represented only six months of subscription revenue.
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Advertising Revenue
Our advertising revenue for the year ended December
31, 2023 increased by $6,290, or 1.9%, as compared to the year ended December 31, 2022. The increase in advertising revenue was primarily
due to an increase in the volume of advertising impressions related to changes in and the optimization of third-party advertising partners
and partnering with a new facilitator in the market.
Costs and Expenses
Total costs and expenses for the year ended December
31, 2023 decreased by $1,598,268 or 10.9%, as compared to the year ended December 31, 2022. The following table presents our costs and
expenses for the years ended December 31, 2023 and 2022, 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,
2023
2022
(Decrease)
(Decrease)
2023
2022
Cost of revenue
$ 3,238,243
$ 2,823,570
$ 414,673
14.7 %
29.5 %
25.7 %
Sales and marketing expense
878,657
1,571,275
(692,618 )
(44.1 )%
8.0 %
14.3 %
Product development expense
4,860,607
5,934,433
(1,073,826 )
(18.1 )%
44.3 %
54.0 %
General and administrative expense
4,072,580
4,311,815
(239,235 )
(5.5 )%
37.0 %
39.2 %
Impairment loss on digital tokens
--
7,262
(7,262 )
(100.0 )%
0.0 %
0.1 %
Total costs and expenses
$ 13,050,087
$ 14,648,355
$ (1,598,268 )
(10.9 )%
118.8 %
133.3 %
Cost of revenue
Our cost of revenue for the year ended December
31, 2023 increased by $414,673, or 14.7%, as compared to the year ended December 31, 2022. The increase for the year ended December 31,
2023, was primarily driven by an increase in costs related to hosting expenses of approximately $364,000, as well as costs related to
the ManyCam product, which launched in June of 2022, of approximately $61,000.
Sales and marketing expense
Our sales and marketing expense for the year
ended December 31, 2023 decreased by $692,618, or 44.1%, as compared to the year ended December 31, 2022. The decrease in sales and marketing
expense for the year ended December 31, 2023 was primarily due to a decrease of approximately $459,000 in marketing user acquisition
expenses, including agent fees compared to the prior year. During the year ended December 31, 2022, we focused on increasing user engagement
spend through the efforts of our third-party marketing agencies, which we have subsequently scaled back. This resulted in a decrease
of approximately $203,000 in other marketing and branding expenses, as well as a decrease in headcount costs of approximately $46,000
for the year ended December 31, 2023 compared to 2022.
Product development expense
Our product development expense for the year
ended December 31, 2023 decreased by $1,073,826, or 18.1%, as compared to the year ended December 31, 2022. The decrease was primarily
due to a decrease of approximately $825,000 related to software expenses. We accomplished this reduction by streamlining our offshore
development efforts as well as reallocating in-house resources. In addition, headcount costs were reduced by approximately $83,000, dues
and subscriptions decreased by approximately $74,000 and a decrease of approximately $69,000 in capitalized amortization software related
to Paltalk.
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General and administrative expense
Our general and administrative expense for the
year ended December 31, 2023 decreased by $239,235, or 5.5%, as compared to the year ended December 31, 2022. The decrease in general
and administrative expense for the year ended December 31, 2023, was mainly due to a decrease of professional fees of $299,000, as well
as a decrease in headcount costs, including non-cash stock compensation expense, of approximately $206,000. This was offset by an increase
in non-cash amortization of approximately $221,000 related to the acquisition of the ManyCam assets.
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. There was no such impairment loss for year ended December 31, 2023.
Non-Operating Income
The following table presents the components of
non-operating income for the year ended December 31, 2023 and the year ended December 31, 2022, the increase between those periods and
the percentage increase between those periods and the percentage of total revenue that each represented for those periods:
Years Ended
December 31,
$
%
% of Revenue Years Ended
December 31,
2023
2022
Increase
Increase
2023
2022
Interest income, net
$ 639,611
$ 74,895
$ 564,716
754.0 %
5.8 %
0.7 %
Other income, net
343,045
--
343,045
100.0 %
3.1 %
0.0 %
Total non-operating income
$ 982,656
$ 74,895
$ 907,761
1,212.0 %
8.9 %
0.7 %
Non-operating income for the year ended December
31, 2023 was $982,656, an increase of $907,761, or 1,212.0%, as compared to non-operating income of $74,895 for the year ended December
31, 2022. The increase in interest income was the result of interest earned in a high-yield bank account. The increase in other income
was the result of recording the ERTC.
Liquidity and Capital Resources
Years Ended
December 31,
2023
2022
Consolidated Statements of Cash Flows Data:
Net cash used in operating activities
$ (1,079,671 )
$ (2,956,724 )
Net cash used in investing activities
(85,000 )
(2,942,279 )
Net cash used in financing activities
(7,213 )
(997,924 )
Net change in cash and cash equivalents
$ (1,171,884 )
$ (6,896,927 )
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 one year from the date these financial statements
are issued. As of December 31, 2023, we had approximately $13.6 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 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, 2023, we spent $7,213 in connection with our stock repurchase plan (the “Stock Repurchase
Plan”) as we purchased a total of 5,192 shares at an average share price of $1.39 per share. The Stock Repurchase Plan expired
on March 29, 2023 pursuant to its terms and has not been renewed. 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.
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Operating Activities
Net cash used in operating activities was $1,079,671
for the year ended December 31, 2023, as compared to net cash used in operating activities of $2,956,724 for the year ended December
31, 2022. The decrease in cash used in the period was primarily the result of the improvement in the net loss, which was attributed to
a reduction in operating expenses as a result of streamlined operations.
Investing Activities
Net cash used in investing activities was $85,000
for the year ended December 31, 2023, as compared to net cash used in investing activities of $2,942,279 for the year ended December
31, 2022. The decrease in cash flows from investing activities resulted primarily from the ManyCam acquisition.
Financing Activities
Net cash used in financing activities was $7,213
for the year ended December 31, 2023, as compared to net cash used in financing activities of $997,924 for the year ended December 31,
2022. 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 Stock Repurchase Plan. The Stock Repurchase Plan expired on March 29, 2023 pursuant to its terms and has not been renewed.
Contractual Obligations and Commitments
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 ran through November 30, 2021. 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. Our monthly office rent payments under the lease are currently approximately $7,081 per month.
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. Estimates made in accordance with GAAP that involve a significant level of estimation uncertainty
and have had or are reasonably likely to have a material impact on our financial condition.
During the year ended December 31, 2023, there
were no critical accounting estimates made by management that would involve a significant level of estimation uncertainty and have had
or are reasonably likely to have a material effect impact on the financial statements condition or results of operations of the Company.
During the year ended December 31, 2022, the most significant accounting estimate inherent in the preparation of the financial statements
included 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not applicable.
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