# Intelligent Protection Management Corp.: Form 10-Q for the period ended Sep 30, 2022

- Company: [Intelligent Protection Management Corp.](/companies/ipm.md) (CIK 1355839)
- Form: 10-Q
- Filed: 2022-11-07
- Accepted by EDGAR: Nov 7, 2022, 16:45 ET
- Period: 2022-09-30
- Accession: 0001213900-22-069779
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1355839/000121390022069779/f10q0922_paltalkinc.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1355839/000121390022069779/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $2.6m | us-gaap:Revenues |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $8.2m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $775.3k | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $2.1m | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2022-07-01 to 2022-09-30 | $1.5m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2022-01-01 to 2022-09-30 | $4.5m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | −$2.9m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | −$1.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | −$2.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | −$0.11 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | −$0.30 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | −$0.11 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | −$0.30 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 9,722,157 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 9,774,904 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | −$2.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2022-09-30 | $15.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $15.9m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $26.3m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $3.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $4.4m | us-gaap:Liabilities |
| Long-term debt | at 2022-09-30 | $97.7k | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2022-09-30 | $21.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 49,921 characters.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, 2022 and 2021, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2021 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2022 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Form 10-K. Aside from certain information as of December 31, 2021, all amounts herein are unaudited.

### Forward-Looking Statements

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” in Part II of this report and “Item 1A. Risk Factors” in the Form 10-K.

### Overview

We are a 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 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 and serve 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 14 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 acquiring, or investing 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

#### 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.

Based on performance as of September 30, 2022, we determined that it was likely that Gross Sales during the Earn-Out Period would exceed $600,000 but be less than $700,000 and as a result, we recorded a liability in the amount of $150,000 for payment to the seller, with a corresponding adjustment to the cost basis of the Conveyed Assets, as it is likely that the applicable Gross Sales threshold of $600,000 will be met and the contingency will be resolved.

As part of the accounting for the ManyCam assets, we provisionally recorded a deferred tax liability of $0.9 with an offset to intangible assets related to the excess financial reporting basis over the tax basis of the Conveyed Assets.

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.

#### 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. 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.

The global spread of the COVID-19 pandemic and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. COVID-19 continues to have an unpredictable and unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis with travel restrictions and potential quarantines. Although our core multimedia social applications were able to support the increased demand we experienced from the second quarter of 2020 through the year ended December 31, 2021, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. Adverse economic and market conditions as well as the lifting of COVID-19 restrictions could also affect the demand for our applications. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted.

On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, we applied for a loan under the Small Business Administration (“SBA”) Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and on May 3, 2020, we entered into a promissory note with an aggregate principal amount of $506,500 (the “Note”) in favor of Citibank, N.A., as lender (the “Lender”). 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.

We continue to serve as a form of safe and entertaining communication during this global pandemic, and in order to help those affected in hardest hit countries, will continue to offer some of its group video conferencing services free of charge to select countries.

### Operational Highlights and Objectives

During the nine months ended September 30, 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 over 317,000 shares of the Company’s common stock pursuant to a stock repurchase plan at an average price per share of $1.80, or an aggregate amount of $572,000; and
- engaged Roth Capital Partners, LLC (“Roth”) as our financial advisor and investment banker to explore strategic initiatives focused on buy-side acquisitions;

For the near term, our business objectives include:

- adjusting our spending to better align with overall macro-economic conditions and investing in a measured way that ensures responsible cash management;
- working with Roth to 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;
- 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 from 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 have historically generated 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-, 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.

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 condensed 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 condensed consolidated balance sheets.

#### Advertising Revenue

We generate a portion of our revenue through advertisements on our video platforms. Advertising revenue is dependent upon the volume of advertising impressions viewed by active users as well as the advertising inventory we place on our products. We recognize advertising revenue as earned on a click-through, impression, registration or subscription basis. Measurements of impressions include when a user clicks on an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external website via an advertisement by clicking on or through our application (CPA basis).

#### Technology Service Revenue

Technology service revenue was historically generated under service and partnership agreements that we negotiated with third parties, which included development, integration, engineering, licensing or other services that we provided.

In 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”).

Pursuant to the terms of the YouNow Agreement, once the integration of Props tokens into our Paltalk and Camfrog applications was completed, we began receiving Props tokens for providing a validator service and for allowing users to participate in the loyalty platform. The loyalty platform was intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications. The net revenue earned was recorded under “technology service revenue” in the condensed consolidated statements of operations. The total net revenue value was recognized as earned.

We determined the fair value of the Props tokens using observable daily quoted market prices on multiple international exchanges, as recorded on CoinmarketCap.

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 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 depreciation of property and equipment and amortization of intangible assets.

#### Impairment loss on digital tokens

Impairment loss on digital tokens results from the daily assessment of the Props tokens’ quoted market prices, as reflected on CoinmarketCap, and adjusting the recorded carrying amount to the amount equal to the lowest quoted market price during the period in which the Props tokens are held. During the three and nine months ended September 30, 2022 and September 30, 2021, we recorded a non-cash impairment charge in the amount of $0 and $7,262,and $571,458 and $756,195 respectively, which is reported in our accompanying condensed consolidated statements of operations, as a result of the decline in the quoted market prices below the market price of their acquisition.

### Key Metrics

Our management relies on certain non-GAAP and/or unaudited performance indicators to manage and evaluate our business. The key performance indicators set forth below help us evaluate growth trends, establish budgets, measure the effectiveness of our advertising and marketing efforts and assess operational efficiencies. We also discuss net cash (used in) provided by operating activities under the ‟Results of Operations” and “Liquidity and Capital Resources” sections below. Subscription bookings and Adjusted EBITDA are discussed below.

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Subscription bookings | $2,759,762 | $2,996,414 | $8,091,183 | $9,210,330 |
| Net cash (used in) provided by operating activities | $(979,748) | $478,067 | $(2,623,682) | $1,090,055 |
| Net (loss) income | $(1,050,365) | $(409,036) | $(2,918,016) | $1,329,377 |
| Adjusted EBITDA | $(780,550) | $300,603 | $(2,173,979) | $1,504,429 |
| Adjusted EBITDA as percentage of total revenues | (29.8)% | 8.9% | (26.5)% | 14.8% |

21

#### Subscription Bookings

Subscription bookings is a financial measure representing the aggregate dollar value of subscription fees and virtual gifts purchases received during the period. We calculate subscription bookings as subscription revenue recognized during the period plus the change in deferred subscription revenue recognized during the period. We record subscription revenue from subscription fees as deferred subscription revenue and then recognize that revenue ratably over the length of the subscription term or ratably over usage for virtual gifts.

Our management uses subscription bookings internally in analyzing our financial results to assess operational performance and to assess the effectiveness of, and plan future, user acquisition campaigns. We believe that this financial measure is useful in evaluating the performance of our consumer applications because we believe, as compared to subscription revenue, it is a better indicator of the subscription activity in a given period. We believe that both management and investors benefit from referring to subscription bookings in assessing our performance and when planning, forecasting and analyzing future periods.

While the factors that affect subscription bookings and subscription revenue are generally the same, certain factors may affect subscription bookings more or less than such factors affect subscription revenue in any period. While we believe that subscription bookings is useful in evaluating our business, it should be considered as supplemental in nature and it is not meant to be a substitute for subscription revenue recognized in accordance with generally accepted accounting principles in the United States (“GAAP”).

#### Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net (loss) income adjusted to exclude interest expense (income), net, provision for income taxes, gain on extinguishment of term debt, depreciation and amortization expense, other expense, net, stock-based compensation expense, realized gain from sale of digital tokens and impairment loss on digital tokens.

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; interest income (expense), net; other income, net; the potentially dilutive impact of stock-based compensation; gain on the extinguishment of term debt; 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 metrics of cash flows, net (loss) income and our other GAAP results. The following table presents a reconciliation of net (loss) income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated:

| Reconciliation of net (loss) income to Adjusted EBITDA: | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Net (loss) income | $(1,050,365) | $(409,036) | $(2,918,016) | $1,329,377 |
| Interest (income) expense, net | (19,750) | 195 | 3,004 | (1,852) |
| Other (income) expense, net | - |  | 27,361 | - |
| Gain on extinguishment of term debt | - | - | - | (506,500) |
| Provision for income taxes | 9,712 | 6,166 | 30,496 | 9,466 |
| Realized gain from sale of digital tokens | - | (53,867) | - | (301,160) |
| Impairment loss on digital tokens | - | 571,458 | 7.262 | 756,195 |
| Depreciation and amortization expense | 220,124 | 92,257 | 404,565 | 286,447 |
| Stock-based compensation expense | 59,729 | 93,430 | 271,349 | (67,544) |
| Adjusted EBITDA | $(780,550) | $300,603 | $(2,173,979) | $1,504,429 |

### Results of Operations

The following table sets forth condensed consolidated statements of operations data for each of the periods indicated as a percentage of total revenues:

|  | Three Months Ended September 30, 2022 | 2021 | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Total revenue | 100.0% | 100.0% | 100.0% | 100.0% |
| Costs and expenses: |  |  |  |  |
| Cost of revenue | 29.6% | 22.0% | 25.5% | 19.9% |
| Sales and marketing expense | 14.1% | 9.6% | 15.5% | 8.2% |
| Product development expense | 56.6% | 39.5% | 55.4% | 38.7% |
| General and administrative expense | 40.1% | 25.5% | 38.5% | 20.6% |
| Impairment loss on digital tokens | 0.0% | 16.9% | 0.1% | 7.4% |
| Total costs and expenses | 140.4% | 113.5% | 134.9% | 94.8% |
| (Loss) income from operations | (40.4)% | (13.5)% | (34.9)% | 5.2% |
| Interest (expense) income, net | (0.7)% | (0.0)% | (0.0)% | 0.0% |
| Gain on extinguishment of term debt | -% | -% | -% | 5.0% |
| Realized gain from sale of digital tokens | -% | 1.6% | -% | 3.0% |
| Other income (expense), net | 0.7% | -% | (0.3)% | -% |
| (Loss) income from operations before provision for income taxes | (39.7)% | (11.9)% | (35.2)% | 13.2% |
| Provision for income taxes | (0.4)% | (0.2)% | (0.4)% | (0.1)% |
| Net (loss) income | (40.0)% | (12.1)% | (35.6)% | 13.1% |

23

### Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021

### Revenue

Total revenue decreased by 22.3% to $2,623,467 for the three months ended September 30, 2022 from $3,377,647 for the three months ended September 30, 2021. This decrease was primarily driven by a decrease in subscription revenue and a decrease in technology service revenue driven by the termination of the YouNow Agreement.

The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenue for the three months ended September 30, 2022 and September 30, 2021, the decrease between those periods, the percentage decrease between those periods, and the percentage of total revenue that each represented for those periods:

|  | Three Months Ended September 30, 2022 | 2021 | $% (Decrease) | (Decrease) | % Revenue Three Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $2,538,764 | 3,148,822 | (610,058) | (19.4)% | 96.8% | 93.2% |
| Advertising revenue | 84,703 | 151,318 | (66,615) | (44.0)% | 3.2% | 4.5% |
| Technology service revenue | - | 77,507 | (77,507) | (100.0)% | 0.0% | 2.3% |
| Total revenues | $2,623,467 | 3,377,647 | (754,180) | (22.3)% | 100.0% | 100.0% |

#### Subscription Revenue

Our subscription revenue for the three months ended September 30, 2022 decreased by $610,058, or 19.4%, as compared to the three months ended September 30, 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 which in turn has caused customers to devote less time to their social applications. As ManyCam is a new product offering that sells primarily 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 three months ended September 30, 2022 decreased by $66,615, or 44.0%, as compared to the three months ended September 30, 2021. The decrease in advertising revenue was primarily due to a decrease in the volume of advertising impressions 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 three months ended September 30, 2022 decreased by $77,507, or 100.0%, as compared to the three months ended September 30, 2021. The decrease in technology service revenue was driven by the termination of the YouNow Agreement, effective November 23, 2021. We do not expect to generate a material amount of technology service revenue in future periods.

### Costs and Expenses

Total costs and expenses for the three months ended September 30, 2022 decreased by $150,319, or 3.9%, as compared to the three months ended September 30, 2021. The following table presents our costs and expenses for the three months ended September 30, 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:

|  | Three Months Ended September 30, 2022 | 2021 | $% Increase (Decrease) | Increase (Decrease) | % Revenue Three Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of revenue | $775,330 | $744,566 | 30,764 | 4.1% | 29.6% | 22.0% |
| Sales and marketing expense | 370,772 | 323,758 | 47,014 | 14.5% | 14.1% | 9.6% |
| Product development expense | 1,485,479 | 1,334,732 | 150,747 | 11.3% | 56.6% | 39.5% |
| General and administrative expense | 1,052,289 | 859,675 | 192,614 | 22.4% | 40.1% | 25.5% |
| Impairment loss on digital tokens | - | 571,458 | (571,458) | (100.0)% | 0.0% | 16.9% |
| Total costs and expenses | $3,683,870 | $3,834,189 | (150,319) | (3.9)% | 140.4% | 113.5% |

#### Cost of revenue

Our cost of revenue for the three months ended September 30, 2022 increased by $30,764, or 4.1%, as compared to the three months ended September 30, 2021. The increase in cost of revenue expenses was primarily attributed to an increase of approximately $104,000 of expenses related to ManyCam sales and was partially offset by a decrease of approximately $65,000 in stock-based compensation expense.

#### Sales and marketing expense

Our sales and marketing expense for the three months ended September 30, 2022 increased by $47,014, or 14.5%, as compared to the three months ended September 30, 2021. The increase in sales and marketing expense for the three months ended September 30, 2022 was primarily due to an increase of approximately $45,000 in marketing user acquisition expenses, including agent fees, as we continue to focus on increasing user engagement spend through the efforts of our third-party marketing agencies.

#### Product development expense

Our product development expense for the three months ended September 30, 2022 increased by $150,747, or 11.3%, as compared to the three months ended September 30, 2021. The increase was primarily due to an increase of approximately $156,000 related to expenses related to ManyCam expenses.

#### General and administrative expense

Our general and administrative expense for the three months ended September 30, 2022 increased by $192,614, or 22.4%, as compared to the three months ended September 30, 2021. The increase in general and administrative expense for the three months ended September 30, 2022 was due to an increase in amortization expense of approximately $160,000, and an increase in insurance expense of approximately $37,000.

#### Impairment loss on digital tokens

We recorded a non-cash impairment loss on digital tokens of $0 and $571,458 for the three months ended September 30, 2022 and September 30, 2021, respectively, as a result of declines in the quoted market prices of certain digital tokens below the market price of their acquisition.

### Non-Operating (Loss) Income

The following table presents the components of non-operating (loss) income for the three months ended September 30, 2022 and the three months ended September 30, 2021, the increase and decrease between those periods and the percentage increase and decrease between those periods and the percentage of total revenue that each represented for those periods:

|  | Three Months Ended September 30, 2022 | 2021 | $% Increase (Decrease) | Increase (Decrease) | % Revenue Three Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income (expense), net | $453 | (195) | 648 | 332.3% | 0.0% | (0.0)% |
| Realized gain from sale of digital tokens | - | 53,867 | (53,867) | (100.0)% | - | -% |
| Other income, net | 19,297 | - | 19,297 | 100.0% | (0.7)% | 1.6% |
| Total non-operating income (loss) | $19,750 | 53,672 | (33,922) | (63.2)% | (0.7)% | 1.6% |

Non-operating income for the three months ended September 30, 2022, was $19,750, a decrease of $33,922, or 63.2%, as compared to non-operating income of $53,672 for the three months ended September 30, 2021. The decrease in non-operating income primarily resulted from the gain from sale of digital tokens during the three months ended September 30, 2021 that was not similarly recognized during the three months ended September 30, 2022.

### Income Taxes

Our provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. For the three months ended September 30, 2022, and September 30, 2021, we recorded an income tax provision of $9,712 and $6,166, respectively, consisting primarily of state and local taxes.

As of September 30, 2022, our conclusion regarding the realizability of our US deferred tax assets did not change and we recorded a full valuation allowance against them.

### Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

### Revenue

Revenue decreased to $8,194,636 for the nine months ended September 30, 2022, from $10,165,452 for the nine months ended September 30, 2021. The decrease was primarily driven by a decrease in subscription revenue of $1,464,287 along with a decrease of $451,755 in technology service revenue driven by the termination of the YouNow Agreement.

The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenues for the nine months ended September 30, 2022 and the nine months ended September 30, 2021, the decrease between those periods, the percentage decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Nine Months Ended September 30, 2022 | 2021 | $% (Decrease) | (Decrease) | % Revenue Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $7,945,809 | $9,410,096 | $(1,464,287) | (15.6)% | 97.0% | 92.6% |
| Advertising revenue | 248,827 | 303,601 | (54,774) | (18.0)% | 3.0% | 3.0% |
| Technology service revenue | - | 451,755 | (451,755) | (100.0)% | -% | 4.4% |
| Total revenues | $8,194,636 | $10,165,452 | $(1,970,816) | (19.4)% | 100.0% | 100.0% |

26

#### Subscription Revenue

Our subscription revenue for the nine months ended September 30, 2022 decreased by $1,464,287, or 15.6%, as compared to the nine months ended September 30, 2021. The decrease in subscription revenue was primarily driven by a decrease in new subscribers as well as a decrease in virtual gifts across the Paltalk and Camfrog applications. We attribute this decrease primarily 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 prohibited individuals from leaving their homes, which in turn may have caused customers to devote less time to their social applications.

#### Advertising Revenue

Our advertising revenue for the nine months ended September 30, 2022 decreased by $54,774, or 18.0%, as compared to the nine months ended September 30, 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 nine months ended September 30, 2022 decreased by $451,755, or 100.0%, as compared to the nine months ended September 30, 2021. The decrease in technology service revenue was driven by the termination of the YouNow Agreement, effective November 23, 2021. We do not expect to generate a material amount of technology service revenue in future periods.

### Costs and Expenses

Total costs and expenses for the nine months ended September 30, 2022 reflect an increase in costs and expenses of $1,415,670, or 14.7%, as compared to the nine months ended September 30, 2021. The following table presents our costs and expenses for the nine months ended September 30, 2022 and 2021, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Nine Months Ended September 30, 2022 | 2021 | $% Increase (Decrease) | Increase (Decrease) | % Revenue Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Cost of revenue | $2,088,974 | $2,021,863 | 67,111 | 3.3% | 25.5% | 19.9% |
| Sales and marketing expense | 1,266,387 | 836,413 | 429,974 | 51.4% | 15.5% | 8.2% |
| Product development expense | 4,537,384 | 3,930,763 | 606,621 | 15.4% | 55.4% | 38.7% |
| General and administrative expense | 3,151,784 | 2,090,887 | 1,060,897 | 50.7% | 38.5% | 20.6% |
| Impairment loss on digital tokens | 7,262 | 756,195 | (748,933) | (99.0)% | 0.1% | 7.4% |
| Total costs and expenses | $11,051,791 | $9,636,121 | 1,415,670 | 14.7% | 134.9% | 94.8% |

#### Cost of revenue

Our cost of revenue for the nine months ended September 30, 2022 increased by $67,111, or 3.3%, as compared to the nine months ended September 30, 2021. The increase for the nine months ended September 30, 2022 was primarily driven by an increase in approximately $130,000 of ManyCam expenses and was offset by a decrease in stock-based compensation expense of approximately $50,000.

#### Sales and marketing expense

Our sales and marketing expense for the nine months ended September 30, 2022 increased by $429,974, or 51.4%, as compared to the nine months ended September 30, 2021. The increase in sales and marketing expense for the nine months ended September 30, 2022 was primarily due to an increase of approximately $418,000 in marketing expenses, including agent fees, as we continue to focus on increasing user engagement spend through the efforts of our third-party marketing agencies.

#### Product development expense

Our product development expense for the nine months ended September 30, 2022 increased by $606,621, or 15.4%, as compared to the nine months ended September 30, 2021. The increase was primarily due to an increase of approximately $203,000 of expenses related to ManyCam, and $185,000 of expenses related to consulting services in support of our processes to enhance user retention and improve monetization in the Paltalk application. In addition, there was an increase in subscription costs of approximately $146,000 related to user engagement monitoring, as well as an $84,000 increase in software expenses.

#### General and administrative expense

Our general and administrative expenses for the nine months ended September 30, 2022 increased by $1,060,897, or 50.7%, as compared to the nine months ended September 30, 2021. The increase in general and administrative expense for the nine months ended September 30, 2022 was due to an increase of approximately $339,000 in non-cash stock-based compensation expense from the issuance of employee stock options, an increase in professional fees relating to corporate matters such as executive agreements of approximately $212,000, an increase in insurance expense of approximately $147,000 and increased amortization expense of approximately $200,000.

#### Impairment loss on digital tokens

We recorded a non-cash impairment loss on digital tokens of $7,262 and $756,195 for the nine months ended September 30, 2022 and September 30, 2021, respectively, as a result of declines in the quoted market prices of certain digital tokens below the market price of their acquisition.

### Non-Operating (Loss) Income

The following table presents the components of non-operating (loss) income for the nine months ended September 30, 2022 and the nine months ended September 30, 2021, the decrease between those periods, the percentage decrease between those periods and the percentage of total revenues that each represented for those periods:

|  | Nine Months Ended September 30, 2022 | 2021 | $% (Decrease) | (Decrease) | % Revenue Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest (expense) income | $(3,004) | $1,852 | $(4,856) | (262.2)% | (0.0)% | 0.0% |
| Other expense, net | (27,361) | - | (27,361) | 100.0% | (0.3)% | -% |
| Realized gain from sale of digital tokens | - | 301,160 | (301,160) | (100.0)% | 0.0% | 3.0% |
| Gain on extinguishment of term debt | - | 506,500 | (506,500) | (100.0)% | 0.0% | 5.0% |
| Total non-operating (loss) income | $(30,365) | $809,512 | $(839,887) | (103.8)% | (0.3)% | 8.0% |

Non-operating loss for the nine months ended September 30, 2022 increased by $839,887, or 103.8%, as compared to non-operating income of $809,512 for the nine months ended September 30, 2021. The increase in non-operating loss was primarily attributed to the gain on extinguishment of term debt of the $506,500 of proceeds from the Note and the gain from sale of digital tokens of $301,160 during the nine months ended September 30, 2021 that were not similarly recognized during the nine months ended September 30, 2022. The Note was entered into to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic.

### Income Taxes

Our provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. For the nine months ended September 30, 2022 and 2021, the Company recorded an income tax provision of $30,496 and $9,466, respectively, consisting primarily of state and local taxes.

As of September 30, 2022, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.

### Liquidity and Capital Resources

| Condensed Consolidated Statements of Cash Flows Data: | Nine Months Ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net cash (used in) provided by operating activities | $(2,623,682) | $1,090,055 |
| Net cash (used in) provided by investing activities | (2,942,279) | 806,618 |
| Net cash (used in) provided by financing activities | (572,336) | 3,320,739 |
| Net (decrease) increase in cash and cash equivalents | $(6,138,297) | $5,127,412 |

28

Currently, our primary source of liquidity is cash on hand, and based on our plans, we believe the Company has adequate cash on hand as of September 30, 2022 to fund its obligations for at least one year from the date of issuance of these financial statements. As of September 30, 2022, we had $15,498,563 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 the future, we may continue to seek to grow our business by expending our capital resources to fund strategic acquisitions, investments and partnership opportunities.

### Operating Activities

Net cash used in operating activities was $2,623,682 for the nine months ended September 30, 2022, as compared to net cash provided by operating activities of $1,090,055 for the nine months ended September 30, 2021. The decrease in cash flows from operations resulted mainly from a decrease in subscription revenue and an increase in overall operating expenses as we focused on and invested in user retention and engagement.

### Investing Activities

Net cash used in investing activities was $2,942,279 for the nine months ended September 30, 2022, as compared to net cash provided by investing activities of $806,618 for the nine months ended September 30, 2021. The decrease in cash flows from investing activities resulted primarily from the ManyCam Acquisition.

### Financing Activities

Net cash used in financing activities was $572,336 for the nine months ended September 30, 2022, as compared to $3,230,739 of net cash provided by financing activities for the nine months ended September 30, 2021. This decrease in cash from financing activity is attributed to the offering in August of 2021 Offering, in which we sold an aggregate of 1,333,310 shares of our common stock at a public offering price of $3.00 per share (the “August 2021 Offering”). Gross proceeds received by the Company from the August 2021 Offering were approximately $4.0 million, before deducting underwriting discounts and commissions and other estimated offering expenses of approximately $769,200, which were not similarly recognized during the nine months ended September 30. 2021. In addition, for the nine months ended September 30, 2022, pursuant to our stock repurchase plan, we repurchased 317,089 shares of common stock for an aggregate purchase price of $0.6 million.

### Contractual Obligations and Commitments

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.

There have been no other material changes to our contractual obligations and commitments disclosed in the contractual obligations and commitments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.

### Off-Balance Sheet Arrangements

As of September 30, 2022, we did not have any off-balance sheet arrangements.

## Controls and procedures

As filed, 1,754 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, our chief executive officer recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on the evaluation as of September 30, 2022, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 208 characters.

There were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” in the Form 10-K. For more information concerning our risk factors, please see “Item 1A. Risk Factors” in the Form 10-K.

Filed Nov 7, 2022.
Source: SEC EDGAR, the filing index for accession 0001213900-22-069779. Last ingested by Listed: Oct 24, 2026, 15:09 ET. No prices; not investment advice.