Paltalk(PALT) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements This section presents Paltalk, Inc.'s unaudited condensed consolidated financial statements for Q1 2023, including balance sheets, statements of operations, equity changes, cash flows, and detailed accounting notes Condensed Consolidated Balance Sheets | Asset/Liability Category | March 31, 2023 | December 31, 2022 | | :----------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $13,929,729 | $14,739,933 | | Total current assets | $14,459,511 | $15,405,429 | | Goodwill | $6,326,250 | $6,326,250 | | Intangible assets, net | $3,321,227 | $3,526,811 | | Total assets | $24,259,739 | $25,431,608 | | Accounts payable | $802,399 | $1,013,637 | | Deferred subscription revenue | $2,162,841 | $2,257,452 | | Total current liabilities | $3,257,873 | $3,663,458 | | Total liabilities | $3,975,867 | $4,457,366 | | Total stockholders' equity | $20,283,872 | $20,974,242 | Condensed Consolidated Statements of Operations | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Subscription revenue | $2,505,670 | $2,846,339 | | Advertising revenue | $58,347 | $80,362 | | Total revenues | $2,564,017 | $2,926,701 | | Cost of revenue | $802,475 | $652,096 | | Sales and marketing expense | $254,868 | $411,482 | | Product development expense | $1,248,582 | $1,530,141 | | General and administrative expense | $1,167,111 | $1,046,148 | | Total costs and expenses | $3,473,036 | $3,639,867 | | Loss from operations | $(909,019) | $(713,166) | | Interest income (expense), net | $121,167 | $(1,862) | | Income tax benefit (expense) | $49,554 | $(16,031) | | Net loss | $(738,298) | $(738,945) | | Basic net loss per share | $(0.08) | $(0.08) | | Diluted net loss per share | $(0.08) | $(0.08) | Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | Balance at Dec 31, 2022 | Stock-based compensation expense | Repurchases of common stock | Net loss | Balance at Mar 31, 2023 | | :---------------------- | :---------------------- | :------------------------------- | :-------------------------- | :------- | :---------------------- | | Common Stock Amount | $9,864 | $- | $- | $- | $9,864 | | Treasury Stock Amount | $(1,192,124) | $- | $(7,213) | $- | $(1,199,337) | | Additional Paid-in Capital | $35,973,735 | $55,141 | $- | $- | $36,028,876 | | Accumulated Deficit | $(13,817,233) | $- | $- | $(738,298) | $(14,555,531) | | Total Stockholders' Equity | $20,974,242 | $55,141 | $(7,213) | $(738,298) | $20,283,872 | Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(802,991) | $(1,232,954) | | Net cash used in financing activities | $(7,213) | $- | | Net decrease in cash and cash equivalents | $(810,204) | $(1,232,954) | | Cash and cash equivalents at beginning of period | $14,739,933 | $21,636,860 | | Cash and cash equivalents at end of period | $13,929,729 | $20,403,906 | Notes to Condensed Consolidated Financial Statements Note 1. Organization and Description of Business Paltalk, Inc. is a communications software innovator operating multimedia social applications, facing macro-economic challenges after the ManyCam acquisition - Paltalk, Inc. is a communications software innovator with a 20-year history of technology innovation and 10 patents, offering multimedia social applications including Paltalk, Camfrog, Tinychat, ManyCam, and Vumber[28] - The Company acquired ManyCam assets for a cash purchase price of $2.7 million in June 2022, with an additional earn-out payment of $85,000 made in Q2 2023 based on sales performance[29][30][31] - Macro-economic factors, such as inflation and financial institution liquidity challenges, may negatively impact the Company's operations by affecting customer engagement and discretionary spending[33] Note 2. Summary of Significant Accounting Policies The Company adopted ASU 2016-13 without material impact, with financial statements relying on significant estimates for ManyCam asset valuation - The Company adopted ASU 2016-13, 'Financial Instruments - Credit Losses (Topic 326)', on January 1, 2023, which did not have a material impact on its financial position, results of operations, or cash flows[37] - Significant accounting estimates include discount rates and weighted average costs of capital used in determining the fair value and useful lives of ManyCam assets, based on independent third-party valuations[38] Revenue Recognition Revenue is recognized upon service transfer, with subscription revenue over time or gift redemption, and advertising based on impressions or clicks - Subscription revenue, primarily from monthly premium services and virtual gifts, is recognized on a straight-line basis over the subscription term or upon redemption of virtual gifts[41][42] - Advertising revenue is generated from displaying advertisements on products through third-party agreements, recognized on a CPC, CPM, or CPA basis[43] Deferred Revenue and Virtual Gift Metrics | Metric | March 31, 2023 | March 31, 2022 | | :-------------------------------- | :------------- | :------------- | | Deferred subscription revenue (ending balance) | $2,162,841 | $1,845,853 | | Virtual gift revenue (3 months ended) | $1,010,200 | $1,269,537 | | Deferred revenue from virtual gifts (ending balance) | $334,629 | $331,804 | Note 3. Intangible Assets, Net Net intangible assets decreased to $3.32 million as of March 31, 2023, due to significantly increased amortization Intangible Assets Net Carrying Amount | Intangible Asset Category | March 31, 2023 (Net Carrying Amount) | December 31, 2022 (Net Carrying Amount) | | :-------------------------------- | :----------------------------------- | :------------------------------------ | | Patents | $15,625 | $16,250 | | Trade names, trademarks, product names, URLs | $439,741 | $460,311 | | Internally developed software | $1,936,241 | $2,014,455 | | Subscriber/customer relationships | $929,620 | $1,035,794 | | Total intangible assets, net | $3,321,227 | $3,526,811 | - Amortization expense for the three months ended March 31, 2023, was $205,584, a significant increase from $46,166 for the same period in 2022[44] Note 4. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities decreased to $124,864 as of March 31, 2023, mainly due to reduced compensation and payroll taxes Accrued Expenses and Other Current Liabilities | Category | March 31, 2023 | December 31, 2022 | | :---------------------------------- | :------------- | :---------------- | | Compensation, benefits and payroll taxes | $- | $114,000 | | Other accrued expenses | $124,864 | $111,193 | | Total accrued expenses and other current liabilities | $124,864 | $225,193 | Note 5. Income Taxes The Company recorded a $49,554 income tax benefit in Q1 2023, with the effective tax rate differing from statutory due to a full valuation allowance Income Tax Metrics | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Income tax benefit (expense) | $49,554 | $(16,031) | | Effective tax rate | 6.64% | (2.22)% | | Statutory rate | 21% | 21% | - The Company maintains a full valuation allowance against its U.S. deferred tax assets, as their realizability is not considered more-likely-than-not[46][47][48] Note 6. Stockholders' Equity Stockholders' equity changes include stock option activity and treasury share repurchases, with 762,336 shares available under the 2016 Incentive Plan - As of March 31, 2023, there were 762,336 shares available for future issuance under the 2016 Long-Term Incentive Plan[49] Stock Option Activity | Stock Option Activity | Number of Options | Weighted Average Exercise Price | | :-------------------------- | :---------------- | :------------------------------ | | Outstanding at January 1, 2023 | 622,074 | $3.71 | | Granted during the period | 49,000 | $1.94 | | Cancelled/Forfeited | (20,100) | $1.51 | | Expired | (819) | $25.48 | | Outstanding at March 31, 2023 | 650,155 | $3.62 | | Exercisable at March 31, 2023 | 484,295 | $4.05 | - The Company repurchased 5,192 shares of common stock for an aggregate purchase price of $7,213 during the three months ended March 31, 2023, under a stock repurchase plan that expired on March 29, 2023[58] Note 7. Net Loss Share Basic and diluted net loss per share remained at $(0.08) for Q1 2023 and 2022, with antidilutive stock options excluded from diluted EPS Net Loss Per Share Data | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss from operations – basic and diluted | $(738,298) | $(738,945) | | Weighted average shares outstanding – basic | 9,222,356 | 9,832,157 | | Weighted average shares outstanding – diluted | 9,222,356 | 9,832,157 | | Per share data: Basic from operations | $(0.08) | $(0.08) | | Per share data: Diluted from operations | $(0.08) | $(0.08) | - 650,155 and 679,515 outstanding stock options for the three months ended March 31, 2023 and 2022, respectively, were excluded from diluted net loss per share calculation due to their antidilutive effect[59] Note 8. Leases The Company holds an operating lease for office space until November 2024, with monthly payments of $7,081 and lease liabilities of approximately $139,000 - The Company's office lease runs through November 30, 2024, with current monthly payments of approximately $7,081[61] Lease Metrics | Lease Metric | March 31, 2023 | | :-------------------------- | :------------- | | Operating lease liabilities | ~$139,000 | | ROU assets | ~$139,000 | | Remaining lease term | 1.7 years | | Discount rate | 2.3% | | Future minimum payments (2023) | $63,731 | | Future minimum payments (2024) | $77,894 | | Total future minimum payments | $141,625 | Note 9. Commitments and Contingencies Commitments include $490,000 in CEO/CFO salaries for 2023, alongside a patent infringement lawsuit against Cisco with a Q3 2023 trial - Aggregate base salary commitments for the CEO and CFO employment agreements total $490,000 for 2023, increasing to $510,000 per year if renewed for 2024 and beyond[66] - Paltalk Holdings, Inc. filed a patent infringement lawsuit against Cisco in July 2021, alleging infringement of U.S. Patent No. 6,683,858. The patentability of claims 1-10 was confirmed in January 2023, and a trial is scheduled for early Q3 2023[67][68] Note 10. Subsequent Events Management evaluated subsequent events through the issuance date, finding no transactions requiring disclosure ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Paltalk's Q1 2023 financial condition, operations, and liquidity, including business overview, objectives, revenue, costs, and key metrics - Paltalk is a communications software innovator operating multimedia social applications, generating revenue primarily from subscription fees and advertising[74] - The company's growth strategy focuses on investing in proprietary software development, expanding sales and marketing, increasing user base through partnerships and advertising, and pursuing strategic acquisitions[77] - Net loss remained relatively unchanged at $0.7 million for Q1 2023 compared to Q1 2022, while cash used in operations decreased by $0.4 million[82] Overview Paltalk, Inc. is a communications software innovator operating multimedia social applications, aiming for user and revenue growth through strategic development and acquisitions - Paltalk operates a network of consumer applications including Paltalk, Camfrog, Tinychat, ManyCam, and Vumber, generating revenue primarily from subscription fees and advertising[74][75] - The company's growth strategy involves investing in proprietary software, expanding sales and marketing, increasing its user base through partnerships and advertising, and pursuing synergistic acquisitions or investments[77] Recent Developments Paltalk's $1.75 million stock repurchase plan expired in March 2023, with 5,192 shares repurchased, while macro-economic factors continue to pose risks - The stock repurchase plan for up to $1,750,000 of common stock expired on March 29, 2023. During Q1 2023, 5,192 shares were repurchased at an average price of $1.39[80] - Macro-economic factors, including economic recessions, inflation, and financial institution liquidity challenges, continue to pose potential negative impacts on the Company's operations and user discretionary spending[81] Operational Highlights and Business Objectives Q1 2023 saw a stable net loss of $0.7 million and reduced operational cash use, with objectives focused on ManyCam B2B expansion, app enhancement, and M&A - Net loss for Q1 2023 remained relatively unchanged at $0.7 million, and cash used in operations decreased by $0.4 million compared to Q1 2022[82] - Business objectives include expanding ManyCam into B2B markets and integrating it with Paltalk, enhancing live video chat applications with new features for retention and monetization, exploring strategic M&A, seeking platform partnerships, and defending intellectual property[82] Sources of Revenue Paltalk's revenue primarily stems from subscription fees for video chat products and ManyCam, alongside advertising revenue based on user engagement - Main revenue sources are subscription fees from core video chat products (Paltalk, Camfrog) and ManyCam software, and advertising revenue[83] - Subscription revenue is generated from premium services and virtual gifts, recognized over the subscription period or upon gift utilization[84][85][86] - Advertising revenue is earned from displaying advertisements on video platforms, recognized on a click-through (CPC), impression (CPM), or registration (CPA) basis[87] Costs and Expenses Costs include compensation, credit card fees, hosting, and data center expenses, with sales, marketing, product development, and G&A covering personnel and professional services - Cost of revenue primarily includes compensation for data center and customer care, credit card processing fees, hosting fees, and data center rent and bandwidth costs[88] - Sales and marketing expense consists of advertising expenditures (online and offline marketing) and compensation for sales and support personnel[90] - Product development expense covers compensation for design, testing, and enhancement personnel, consultant costs, and amortization of capitalized website development costs[91] - General and administrative expense includes compensation for executive, finance, legal, HR, and facilities personnel, professional service fees, insurance costs, and depreciation/amortization[92] Key Metrics Adjusted EBITDA, a non-GAAP metric, was $(648,294) in Q1 2023, decreasing from Q1 2022 and representing (25.3)% of total revenues Key Financial Metrics | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(802,991) | $(1,232,954) | | Net loss | $(738,298) | $(738,945) | | Adjusted EBITDA | $(648,294) | $(484,431) | | Adjusted EBITDA as percentage of total revenues | (25.3)% | (16.6)% | - Adjusted EBITDA is a non-GAAP measure used by management to evaluate core operating performance, excluding interest, taxes, depreciation, amortization, and stock-based compensation[95] Results of Operations Total revenue decreased by 12.4% to $2.56 million in Q1 2023, while total costs decreased by 4.6%, and non-operating income significantly rose due to interest Revenue Performance | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Total revenue | $2,564,017 | $2,926,701 | $(362,684) | (12.4)% | | Subscription revenue | $2,505,670 | $2,846,339 | $(340,669) | (12.0)% | | Advertising revenue | $58,347 | $80,362 | $(22,015) | (27.4)% | Expense Performance | Expense Category | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change ($) | Change (%) | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Cost of revenue | $802,475 | $652,096 | $150,379 | 23.1% | | Sales and marketing expense | $254,868 | $411,482 | $(156,614) | (38.1)% | | Product development expense | $1,248,582 | $1,530,141 | $(281,559) | (18.4)% | | General and administrative expense | $1,167,111 | $1,046,148 | $120,963 | 11.6% | | Total costs and expenses | $3,473,036 | $3,639,867 | $(166,831) | (4.6)% | Non-Operating Income (Loss) | Non-Operating Item | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change ($) | Change (%) | | :------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Interest income (expense), net | $121,167 | $(1,862) | $123,029 | 6,607.4% | | Other expense | $- | $(7,886) | $7,886 | 100% | | Total non-operating income (loss) | $121,167 | $(9,748) | $130,915 | 1,343.0% | Liquidity and Capital Resources Paltalk's cash and cash equivalents were $13.93 million as of March 31, 2023, with net cash used in operations decreasing to $802,991 in Q1 2023 Cash Flow Summary | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(802,991) | $(1,232,954) | | Net cash provided by (used in) investing activities | $- | $- | | Net cash used in financing activities | $(7,213) | $- | | Net decrease in cash and cash equivalents | $(810,204) | $(1,232,954) | | Cash and cash equivalents at March 31, 2023 | $13,929,729 | $20,403,906 | - The Company believes its cash and cash equivalents balance and expected cash flows from operations are sufficient to meet financial obligations for one year[112] - The primary use of working capital is for product development and marketing activities, with potential future allocation for strategic acquisitions and investments[113] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk No quantitative or qualitative disclosures about market risk are applicable for the reported period ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of March 31, 2023, providing reasonable assurance for timely and accurate information disclosure[121] - There were no material changes in internal control over financial reporting during the quarterly period covered by this report[122] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Paltalk Holdings, Inc. is pursuing a patent infringement lawsuit against Cisco, with claims confirmed patentable and a trial scheduled for early Q3 2023 - Paltalk Holdings, Inc. filed a patent infringement lawsuit against Cisco in July 2021, alleging infringement of U.S. Patent No. 6,683,858[124] - The United States Patent Office confirmed the patentability of claims 1-10 of U.S. Patent No. 6,683,858 on January 19, 2023, and a trial is scheduled for early Q3 2023[125] ITEM 1A. Risk Factors No material changes to the previously disclosed risk factors occurred during the three months ended March 31, 2023 - No material changes to the Risk Factors disclosed in the Form 10-K occurred during the three months ended March 31, 2023[126] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity sales occurred, but 5,192 common shares were repurchased for $7,213 in Q1 2023 under an expired plan - There were no unregistered sales of equity securities during the quarter ended March 31, 2023[127] Common Stock Repurchases | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :--------------------------------- | :----------------------------- | :--------------------------- | | January 1, 2023 – January 31, 2023 | 5,192 | $1.39 | | Total | 5,192 | $1.39 | - The Stock Repurchase Plan, approved for up to $1,750,000, expired on March 29, 2023, and has not been renewed[128][129] ITEM 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period ITEM 4. Mine Safety Disclosures The Company reported no mine safety disclosures for the period ITEM 5. Other Information The Company reported no other information requiring disclosure for the period ITEM 6. Exhibits Exhibits filed with Form 10-Q include the ManyCam acquisition agreement, corporate documents, and Sarbanes-Oxley certifications - Exhibits include the Securities Purchase Agreement (ManyCam acquisition), Certificate of Incorporation, Amended and Restated Bylaws, Specimen Stock Certificate, and certifications (302 and 906) under the Sarbanes-Oxley Act[134] SIGNATURES The report was signed on May 9, 2023, by CEO Jason Katz and CFO Kara Jenny - The report was signed on May 9, 2023, by Jason Katz, Chief Executive Officer, and Kara Jenny, Chief Financial Officer[139]