UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 001-38717

 

PALTALK, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-3191847

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

30 Jericho Executive Plaza Suite 400E

Jericho, NY 11753

(Address of principal executive offices) (Zip Code)

 

(212) 967-5120

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.001 par value   PALT   The Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

  

Class   Outstanding at November 5, 2021
Common Stock, par value $0.001 per share   9,832,157*

 

  * Excludes 30,374 shares of common stock that are held as treasury stock by Paltalk, Inc.

 

 

 

 

 

 

PALTALK, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2021

 

Table of Contents

 

    Page
Number
     
  PART I. FINANCIAL INFORMATION  
     
ITEM 1. Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 1
     
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited) 2
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited)  3
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited) 4
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 5
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 32
     
ITEM 4. Controls and Procedures 32
     
  PART II. OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 33
     
ITEM 1A. Risk Factors 33
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
ITEM 3. Defaults Upon Senior Securities 35
     
ITEM 4. Mine Safety Disclosures 35
     
ITEM 5. Other Information 35
     
ITEM 6. Exhibits 36

 

Paltalk, our logo and other trademarks or service marks appearing in this report are the property of Paltalk, Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective owners. Solely for convenience, the trademarks, service marks and trade names included in this report are without the ®, or other applicable symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks, service marks and trade names.

 

Unless otherwise indicated, operational metrics such as those related to active users are based on internally-derived metrics for users across all platforms through which our applications are accessed.

 

i

 

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on current expectations, estimates, forecasts and assumptions and are subject to risks and uncertainties. Words such as “anticipate,” “assume,” “began,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “would” and variations of such words and similar expressions are intended to identify such forward-looking statements. All forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following:

 

  our ability to effectively market and generate revenue from our applications;

 

  our ability to generate and maintain active users and to effectively monetize our user base;

 

  our ability to update our applications to respond to rapid technological changes;

 

  the intense competition in the industry in which our business operates and our ability to effectively compete with existing competitors and new market entrants;

 

  the impact of the COVID-19 pandemic on our results of operations and our business;

 

  the dependence of our applications on mobile platforms and operating systems that we do not control, including our heavy reliance on the platforms of Apple, Facebook and Google and their ability to discontinue, limit or restrict access to their platforms by us or our applications, change their terms and conditions or other policies or features (including restricting methods of collecting payments, sending notifications or placing advertisements), establish more favorable relationships with one or more of our competitors or develop applications or features that compete with our applications;

 

  our ability to develop, establish and maintain strong brands;

 

  our reliance on our executive officers and consultants;

 

  our ability to adapt or modify our applications for the international market and derive revenue therefrom;

 

  legal and regulatory requirements related to holding and distributing cryptocurrencies and accepting cryptocurrencies as a method of payment for our services;

 

  the ability of foreign governments to restrict access to our applications or impose new regulations;

 

  the reliance of our mobile applications on having a mobile data plan and/or Wi-Fi access to gain internet connectivity;

 

  the effect of security breaches, computer viruses and cybersecurity incidents;

 

  our reliance upon credit card processors and related merchant account approvals and the impact of chargeback liabilities that we may face from credit card processors;

 

  the possibility that our users or third parties may be physically or emotionally harmed following interaction with other users;

 

  our ability to obtain additional capital or financing when and if necessary, to execute our business plan, including through offerings of debt or equity or sale of any of our assets;

 

ii

 

 

  risks related to our holdings of digital tokens, including risks related to the volatility of the trading price of the digital tokens and our ability to convert digital tokens into fiat currency;

 

  the risk that we may face litigation resulting from the transmission of information through our applications;

 

  the effects of current and future government regulation, including laws and regulations regarding the use of the internet, privacy, cybersecurity and protection of user data and cryptocurrency technology;

 

  the impact of any claim that we have infringed on intellectual property rights of others;

 

  our ability to protect our intellectual property rights;

 

  our ability to maintain effective internal controls over financial reporting;

 

  our ability to offset fees associated with the distribution platforms that host our applications;

 

  our reliance on internally derived data to accurately report user metrics and other measures of our performance;

 

  our ability to release new applications or improve upon or add features to existing applications on schedule or at all;

 

  our reliance on third-party investor relations firms to help create awareness of our Company and compliance by such third parties with regulatory requirements related to promotional reports;

 

  our ability to effectively integrate companies and properties that we acquire; and

 

  our ability to attract and retain qualified employees and consultants.

 

For a more detailed discussion of these and other factors that may affect our business, see the discussion in “Item 1A. Risk Factors” in Part II of this report and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this report and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the Securities and Exchange Commission on March 23, 2021. We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this report, except to the extent required by applicable securities laws.

 

iii

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

PALTALK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2021     2020  
    (unaudited)        
Assets            
Current assets:            
Cash and cash equivalents   $ 10,712,832     $ 5,585,420  
Accounts receivable, net of allowances of $3,648 as of September 30, 2021 and December 31, 2020, respectively     117,588       71,410  
Prepaid expense and other current assets     211,262       236,704  
Total current assets     11,041,682       5,893,534  
Operating lease right-of-use asset     259,282       68,967  
Property and equipment, net     107,830       255,777  
Goodwill     6,326,250       6,326,250  
Intangible assets, net     242,710       381,210  
Digital tokens     53,899       439,145  
Digital tokens receivable    
-
      210,000  
Other assets     13,937       13,937  
Total assets   $ 18,045,590     $ 13,588,820  
                 
Liabilities and stockholders’ equity                
Current liabilities:                
Accounts payable   $ 1,108,628     $ 742,141  
Accrued expenses and other current liabilities     157,697       254,084  
Operating lease liabilities, current portion     79,849       68,967  
Digital tokens payable     333,446       123,397  
Term debt, current portion    
-
      338,792  
Deferred subscription revenue     1,858,955       2,058,721  
Total current liabilities     3,538,575       3,586,102  
Operating lease liabilities, non-current portion     179,433      
-
 
Term debt, non-current portion    
-
      167,708  
Total liabilities     3,718,008       3,753,810  
Commitments and Contingencies (Note 12)    
 
     
 
 
Stockholders’ equity:                
Common stock, $0.001 par value, 25,000,000 shares authorized, and 8,249,714 and 6,916,404 shares issued and 8,239,764 and 6,906,454 shares outstanding as of September 30, 2021 and December 31, 2020, respectively     8,250       6,917  
Treasury stock, 9,950 shares at par as of September 30, 2021 and December 31, 2020     (10,859 )     (10,859 )
Additional paid-in capital     24,729,903       21,568,041  
Accumulated deficit     (10,399,712 )     (11,729,089 )
Total stockholders’ equity     14,327,582       9,835,010  
Total liabilities and stockholders’ equity   $ 18,045,590     $ 13,588,820  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1

 

 

PALTALK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2021     2020     2021     2020  
Revenues:                        
Subscription revenue   $ 3,148,822     $ 3,124,999     $ 9,410,096     $ 8,985,741  
Advertising revenue     151,318       86,256       303,601       199,779  
Technology service revenue     77,507       98,000       451,755       224,952  
Total revenues     3,377,647       3,309,255       10,165,452       9,410,472  
Costs and expenses:                                
Cost of revenue     744,566       632,462       2,021,863       1,940,616  
Sales and marketing expense     323,758       204,371       836,413       617,457  
Product development expense     1,334,732       1,223,818       3,930,763       3,730,398  
General and administrative expense     859,675       704,812       2,090,887       2,411,149  
Impairment loss on digital tokens     571,458      
-
      756,195      
-
 
Total costs and expenses     3,834,189       2,765,463       9,636,121       8,699,620  
Income (loss) from operations     (456,542 )     543,792       529,331       710,852  
Interest (expense) income, net     (195 )     (1,959 )     1,852       9,018  
Gain from sale of Secured Communications Assets    
-
      250,000      
-
      250,000  
Gain on extinguishment of term debt    
-
     
-
      506,500      
-
 
Realized gain (loss) from the sale of digital tokens     53,867       (48,285 )     301,160       (72,123 )
Other expense    
-
     
-
     
-
      (56,042 )
Income (loss) from operations before provision for income taxes     (402,870 )     743,548       1,338,843       841,705  
Benefit (expense) for income taxes     (6,166 )     3,300       (9,466 )     (1,700 )
Net income (loss)   $ (409,036 )   $ 746,848     $ 1,329,377     $ 840,005  
                                 
Net income (loss) per share of common stock:                                
Basic   $ (0.05 )   $ 0.11     $ 0.19     $ 0.12  
Diluted   $ (0.05 )   $ 0.11     $ 0.18     $ 0.12  
Weighted average number of shares of common stock used in calculating net income per share of common stock:                                
Basic     7,718,034       6,889,334       7,179,953       6,877,355  
Diluted     7,718,034       6,895,588       7,201,504       6,879,440  

  

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

2

 

 

PALTALK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(Unaudited)

 

    Common     Stock     Treasury     Stock     Additional
Paid-in
    Accumulated     Total
Stockholders’
 
    Shares     Amount     Shares     Amount     Capital     Deficit     Equity  
Balance at December 31, 2019     6,878,904     $ 6,879       (1,900 )   $ (2,015 )   $ 21,281,382     $ (13,100,351 )   $ 8,185,895  
Stock-based compensation expense     -      
-
      -      
-
      89,206      
-
      89,206  
Repurchases of common stock    
-
     
-
      (6,600 )     (7,240 )    
-
     
-
      (7,240 )
Net loss     -      
-
      -      
-
     
-
      (438,384 )     (438,384 )
Balance at March 31, 2020     6,878,904     $ 6,879       (8,500 )   $ (9,255 )   $ 21,370,588     $ (13,538,735 )   $ 7,829,477  
Stock-based compensation expense     -      
-
      -      
-
      57,183      
-
      57,183  
Repurchases of common stock    
-
     
-
      (1,450 )     (1,604 )    
-
     
-
      (1,604 )
Net income     -      
-
      -      
-
     
-
      531,541       531,541  
Balance at June 30, 2020     6,878,904     $ 6,879       (9,950 )   $ (10,859 )   $ 21,427,771     $ (13,007,194 )   $ 8,416,597  
Stock-based compensation expense     -       -       -       -       47,707       -       47,707  
Shares issued for consulting services     37,500       38       -       -       43,462       -       43,500  
Net income     -      
-
      -      
-
     
-
      746,848       746,848  
Balance at September 30, 2020     6,916,404     $ 6,917       (9,950 )   $ (10,859 )   $ 21,518,940     $ (12,260,346 )   $ 9,254,652  

 

    Common     Stock     Treasury     Stock     Additional
Paid-in
    Accumulated     Total
Stockholders’
 
    Shares     Amount     Shares     Amount     Capital     Deficit     Equity  
Balance at December 31, 2020     6,916,404     $ 6,917       (9,950 )   $ (10,859 )   $ 21,568,041     $ (11,729,089 )   $ 9,835,010  
Stock-based compensation expense     -      
-
      -      
-
      31,368      
-
      31,368  
Net income     -      
-
      -      
-
     
-
      916,729       916,729  
Balance at March 31, 2021     6,916,404     $ 6,917       (9,950 )   $ (10,859 )   $ 21,599,409     $ (10,812,360 )   $ 10,783,107  
Reversal of stock compensation expense of non-vested options, net     -      
-
      -      
-
      (192,342 )    
-
      (192,342 )
Net income     -      
-
      -      
-
     
-
      821,684       821,684  
Balance at June 30, 2021     6,916,404     $ 6,917       (9,950 )   $ (10,859 )   $ 21,407,067     $ (9,990,676 )   $ 11,412,449  
Stock-based compensation expense     -      
-
      -      
-
      93,430      
-
      93,430  
Public offering of common stock, net of issuance costs     1,333,310       1,333      
-
     
-
      3,229,406      
-
      3,230,739  
Net loss     -      
-
      -      
-
     
-
      (409,036 )     (409,036 )
Balance at September 30, 2021     8,249,714     $ 8,250       (9,950 )   $ (10,859 )   $ 24,729,903     $ (10,399,712 )   $ 14,327,582  

  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 

PALTALK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Nine Months Ended
September 30,
 
    2021     2020  
Cash flows from operating activities:            
Net income   $ 1,329,377     $ 840,005  
Adjustments to reconcile net income from operations to net cash provided by operating activities:                
Depreciation of property and equipment     147,947       249,614  
Amortization of intangible assets     138,500       192,250  
Amortization of operating lease right-of-use assets     54,625       89,532  
Gain on cancellation of office lease    
-
      (141,001 )
Impairment loss on digital tokens     756,195      
-
 
Realized (gain) loss from the sale of digital tokens     (301,160 )     72,123  
Write-off of note receivable    
-
      56,042  
Gain on extinguishment of term debt     (506,500 )    
-
 
Stock-based compensation     (67,544 )     194,096  
Bad debt expense     (3,235 )     (28,461 )
Common stock issued for consulting services    
-
      43,500  
Changes in operating assets and liabilities:                
    Digital tokens     (876,407 )    
-
 
Accounts receivables     (42,943 )     118,939  
Digital tokens receivable     210,000       (210,000 )
Operating lease liability     (54,625 )     (93,123 )
Digital tokens payable     210,049      
-
 
Prepaid expenses and other current assets     25,442       (214,229 )
Other assets    
-
      16,897  
Accounts payable, accrued expenses and other current liabilities     270,100       (420,478 )
Deferred subscription revenue     (199,766 )     146,855  
Net cash provided by operating activities     1,090,055       912,561  
Cash flows from investing activities:                
Proceeds from Secured Communications Assets    
-
      150,000  
Proceeds from the sale of digital tokens     806,618       75,406  
Net cash provided by investing activities     806,618       225,406  
Cash flows from financing activities:                
Borrowings of term debt    
-
      506,500  
Proceeds from issuance of common stock, net of issuance costs     3,230,739      
-
 
Purchase of treasury stock    
-
      (8,844 )
Net cash provided by financing activities     3,230,739       497,656  
Net increase in cash and cash equivalents     5,127,412       1,635,623  
Balance of cash and cash equivalents at beginning of period     5,585,420       3,427,058  
Balance of cash and cash equivalents at end of period   $ 10,712,832     $ 5,062,681  
Supplemental disclosure of cash flow information:                
Non-cash investing and financing activities:                
Modification of operating lease right-of-use asset and liability   $ 244,940      
-
 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Organization and Description of Business

 

The accompanying condensed consolidated financial statements include Paltalk, Inc. and its wholly owned subsidiaries, A.V.M. Software, Inc., Paltalk Software Inc., Paltalk Holdings, Inc., Tiny Acquisition Inc., Camshare, Inc., Fire Talk LLC and Vumber LLC (collectively, the “Company”).

 

The Company is a communications software innovator that powers multimedia social applications. The Company has an over 20-year history of technology innovations and holds 18 patents. The Company’s product portfolio includes Paltalk, Camfrog and Tinychat, which together host a large collection of video-based communities. The Company’s other product is Vumber which 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.

 

The condensed consolidated financial statements included in this report have been prepared on a going concern basis in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The Company has not included certain information and notes required by GAAP for complete financial statements pursuant to those rules and regulations, although it believes that the disclosure included herein is adequate to make the information presented not misleading. The condensed consolidated financial statements contained herein should be read in conjunction with the Company’s audited consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 23, 2021 (the “Form 10-K”).

 

In the opinion of management, the accompanying unaudited condensed consolidated financial information contains all normal and recurring adjustments necessary to fairly present the condensed consolidated balance sheets and statements of operations, cash flows and changes in stockholders’ equity of the Company for the interim periods presented. The Company’s historical results are not necessarily indicative of future operating results, and the results for the nine months ended September 30, 2021 are not necessarily indicative of results for the year ending December 31, 2021, or for any other period.

 

Update on COVID-19

 

The World Health Organization declared COVID-19 a pandemic on March 11, 2020. The global spread of the COVID-19 pandemic and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. COVID-19 continues to have an unpredictable and unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis with travel restrictions and potential quarantines. Although the Company’s core multimedia social applications have been able to support the increased demand we have experienced, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. Adverse economic and market conditions as a result of COVID-19 could also affect the demand for the Company’s applications and the ability of the Company’s users to satisfy their obligations to the Company. If the pandemic continues to cause significant negative impacts to economic conditions, the Company’s 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, the Company applied for a loan under the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and on May 3, 2020, the Company 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. The Company does not expect to incur additional indebtedness under the CARES Act.

 

5

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2. Summary of Significant Accounting Policies

 

Deferred Offering Costs

 

The Company capitalizes certain legal and professional fees that are directly related to public offerings of common stock as deferred offering costs until such financing is consummated. See Note 8 for more information regarding the Company’s recent public offerings of common stock. At the consummation of such equity financing, these costs are recorded in stockholders’ equity as a reduction of additional paid-in capital generated.

 

For a detailed discussion about the Company’s significant accounting policies, see the Form 10-K.

 

During the nine months ended September 30, 2021, there were no other significant changes made to the Company’s significant accounting policies.

 

Significant Estimates and Assumptions

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

 

Significant estimates relied upon in preparing these financial statements include the estimates used to determine the fair value of the stock options issued in share-based payment arrangements, collectability of the Company’s accounts receivable, measurements of proportional performance under certain service contracts, subscription revenues net of refunds, credits, and known and estimated credit card chargebacks, the valuation allowance on deferred tax assets, fair value of digital tokens and impairment assessment of goodwill. Management evaluates these estimates on an ongoing basis. Changes in estimates are recorded in the period in which they become known. The Company bases estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates.

 

Recent Accounting Pronouncements

 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes”, as part of its initiative to reduce complexity in the accounting standards. The ASU eliminates certain exceptions from Accounting Standards Codification (“ASC”) 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

6

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Fair Value Measurements

 

The fair value framework under the guidance issued by the FASB requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:

 

  Level 1: Fair value measurement of the asset or liability using observable inputs such as quoted prices in active markets for identical assets or liabilities;

 

  Level 2: Fair value measurement of the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and

 

  Level 3: Fair value measurement of the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability.

 

The Company reviews the appropriateness of fair value measurements including validation processes, and the reconciliation of period-over-period fluctuations based on changes in key market inputs. All fair value measurements are subject to the Company’s analysis. Review and approval by management is required as part of the validation process.

 

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable and accounts payable, approximate fair value due to the short-term nature of these instruments.

 

Revenue Recognition

 

In accordance with ASC 606, Revenue from Contracts with Customers, revenue from contracts with customers is recognized when control of the promised services is transferred to the customers in an amount that reflects the consideration the Company expects to receive in exchange for those services. Sales tax is excluded from reported revenue. The Company has elected the practical expedient allowable by the guidance to not disclose information about remaining performance obligations pertaining to contracts that have an original expected duration of one year or less.

 

Subscription Revenue

 

The Company generates subscription revenue primarily from monthly premium subscription services. Subscription revenues are presented net of refunds, credits, and known and estimated credit card chargebacks. During the nine months ended September 30, 2021 and 2020, subscriptions were offered in durations of one-, three-, six- and twelve-month terms. All subscription fees, however, are paid by credit card at the origination of the subscription regardless of the term of the subscription. Revenues from multi-month subscriptions are recognized on a straight-line basis over the period where the service is offered to the customer, indicated by length of the subscription term purchased. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets. Deferred revenue at December 31, 2020 was $2,058,721, of which $1,529,597 was subsequently recognized as subscription revenue during the nine months ended September 30, 2021. The ending balance of deferred revenue at September 30, 2021 was $1,858,955.

 

In addition, the Company offers virtual gifts to its users. Users may purchase credits in $5, $10 or $20 increments that can be redeemed for a host of virtual gifts such as a rose, a beer or a car, among other items. These gifts are given among users to enhance communication and are typically redeemed within 30 days of purchase. Upon purchase, the virtual gifts are credited to the users’ account and are under the users’ control. Virtual gift revenue is recognized upon the users’ redemption of virtual gifts at the fixed transaction price and included in subscription revenue in the accompanying condensed consolidated statements of operations. Virtual gift revenue is presented as deferred revenue in the condensed consolidated balance sheets until virtual gifts are redeemed. Virtual gift revenue was $1,450,757 and $4,259,933 for the three and nine months ended September 30, 2021, respectively. Virtual gift revenue was $1,288,717 and $3,931,151 for the three and nine months ended September 30, 2020, respectively. The ending balance of deferred revenue from virtual gifts at September 30, 2021 and 2020 was $305,767 and $276,661, respectively.

 

Advertising Revenue

 

The Company generates advertising revenue from the display of advertisements on its products through contractual agreements with third parties that are based on the number of advertising impressions delivered. Measurements of impressions include when a customer clicks an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external website via an advertisement by clicking on or through the application (CPA basis). Advertising revenue is dependent upon traffic as well as the advertising inventory placed on the Company’s products.

 

7

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Technology Service Revenue

 

The Company records technology service revenue in connection with its 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 its Camfrog and Paltalk applications (as amended, the “YouNow Agreement”).

 

Pursuant to the terms of the YouNow Agreement, YouNow agreed to pay the Company, in exchange for the Company’s services, an aggregate of 10.5 million cryptographic props tokens (“Props tokens”) upon the achievement of certain milestones as follows: (i) 3.0 million Props tokens upon execution of the YouNow Agreement, (ii) 4.0 million Props tokens upon the integration of the Props platform in the Company’s Camfrog application and (iii) 3.5 million Props tokens due upon the integration of the Props platform in the Company’s Paltalk application. In determining the value of the contract, the Company converted the Props tokens into U.S. dollars using an independent third-party valuation. The Props tokens were estimated to have a price equal to $0.02 per token (see Note 5 for additional information on the fair value of the Props tokens) at the contract inception date. The total contract value to be recognized was estimated to be $210,000, which was recognized on the completion dates of the integration services performed during the second and third quarter of 2020.

 

The upfront fee was recognized as revenue under the output method based on the direct measurements of the value of services transferred to date to the customer, relative to the remaining services under the contract. During the year ended December 31, 2020, the Company recognized $60,000 of the upfront fee and $150,000 from the completion of the first and second integration milestones under technology service revenue in the condensed consolidated statements of operations and digital tokens receivable in the condensed consolidated balance sheets.

 

Once the integration of Props tokens to the Paltalk and Camfrog applications was completed, the Company began receiving Props tokens for providing a validator service and for allowing users to participate in the loyalty platform. The loyalty platform is intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications. During the third and fourth quarters of 2020, the Company received an aggregate of 1.1 million Props tokens for the validator service and 13.5 million Props tokens under the loyalty platform. During the three and nine months ended September 30, 2021, the Company received 104 thousand and 455 thousand Props tokens, respectively, for the validator service and 3.0 million and 10.2 million Props tokens under the loyalty platform. The number of Props tokens earned and reserved by users for the nine months ended September 30, 2021 and for the year ended December 31, 2020 was 8.2 million and 4.0 million, respectively, which is recorded under “digital tokens payable” in the condensed consolidated balance sheets and the net revenue earned is recorded under “technology service revenue” in the condensed consolidated statements of operations. The total net revenue value is recognized as earned.

 

For the year ended December 31, 2020, the Company retained an independent third-party to estimate the dollar value of the revenue for the validator service and digital tokens earned through the loyalty platform. Given the recent trading availability of Props tokens in various active markets, during the three and nine months ended September 30, 2021, the Company calculated the fair value of digital tokens based on the observable daily quoted market prices (Level 1 inputs) on multiple international exchanges, as recorded on CoinmarketCap (see Note 5 for additional information on the fair value of the Props tokens). The total net revenue value recognized as earned was estimated to be $77,507 and $451,755 for the three and nine months ended September 30, 2021, respectively.

 

In August 2021, the Company received notice from YouNow that it was terminating the YouNow Agreement, and that it would not support the Props platform past the end of calendar year 2021. In connection with the notice of termination and in accordance with the YouNow Agreement, the Company received an additional 2,625,000 Props tokens. The value of these tokens was recorded as revenue under “technology service revenue” in the condensed consolidated statements of income.

 

During the three and nine months ended September 30, 2021, the Company sold approximately 29.5 million and 32.4 million Props tokens, respectively, for proceeds of $502,314 and $806,618, respectively. The realized gain of the sale of digital tokens was approximately $53,867 and $301,160 for the three and nine months ended September 30, 2021, respectively, and is included in the condensed consolidated statements of income.

 

Revisions to the Company’s estimates may result in increases or decreases to revenues and income and are reflected in the condensed consolidated financial statements in the periods in which they are first identified. If the Company’s estimates indicate that a contract loss will be incurred, a loss provision is recorded in the period in which the loss first becomes probable and can be reasonably estimated. Contract losses are the amount by which the estimated costs of the contract exceed the estimated total revenue that will be generated by the contract and are included in cost of revenues in the Company’s condensed consolidated statements of operations. There were no contract losses for the periods presented.

 

Reclassifications

 

Certain prior period amounts have been reclassified for comparative purposes to conform to the current presentation. These reclassifications have no impact on the previously reported net income.

 

8

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3. Property and Equipment, Net

 

Property and equipment, net consisted of the following at September 30, 2021 and December 31, 2020:

 

    September 30,     December 31,  
    2021     2020  
             
   Computer equipment   $ 866,459     $ 866,459  
   Website development     3,076,323       3,076,323  
   Furniture and fixtures     47,463       47,463  
Total property and equipment     3,990,245       3,990,245  
   Less: Accumulated depreciation     (3,882,415 )     (3,734,468 )
Total property and equipment, net   $ 107,830     $ 255,777  

 

Depreciation expense for the three and nine months ended September 30, 2021 was $46,090 and $147,947, respectively as compared to $77,888 and $249,614 for the three and nine months ended September 30, 2020, respectively.

 

4. Intangible Assets, Net

 

Intangible assets, net consisted of the following at September 30, 2021 and December 31, 2020:

 

    September 30, 2021     December 31, 2020  
    Gross           Net     Gross           Net  
    Carrying     Accumulated     Carrying     Carrying     Accumulated     Carrying  
    Amount     Amortization     Amount     Amount     Amortization     Amount  
Patents   $ 50,000     $ (30,625 )   $ 19,375     $ 50,000     $ (28,750 )   $ 21,250  
Trade names, trademarks product names, URLs     555,000       (505,273 )     49,727       555,000       (493,648 )     61,352  
Internally developed software     1,990,000       (1,990,000 )    
-
      1,990,000       (1,990,000 )    
-
 
Subscriber/customer relationships     2,279,000       (2,105,392 )     173,608       2,279,000       (1,980,392 )     298,608  
Total intangible assets   $ 4,874,000     $ (4,631,290 )   $ 242,710     $ 4,874,000     $ (4,492,790 )   $ 381,210  

 

Amortization expense for the three and nine months ended September 30, 2021 was $46,167 and $138,500, respectively, as compared to $64,083 and $192,250 for the three and nine months ended September 30, 2020, respectively. The aggregate amortization expense for each of the next five years and thereafter is estimated to be $46,166 in 2021, $149,944 in 2022, $18,000 in 2023, $17,354 in 2024, $2,500 in 2025 and $8,746 thereafter.

 

5. Digital Tokens

 

Digital tokens, digital tokens receivable and digital tokens payable for the periods presented consist of Props tokens received in connection with the YouNow Agreement. Given that there is limited precedent regarding the classification and measurement of cryptocurrencies and other digital tokens under current GAAP, the Company has determined to account for these tokens as indefinite-lived intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other until further guidance is issued by the FASB.

 

9

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Props Tokens

 

The Props tokens received, receivable and payable from YouNow are intangible assets that are accounted for at cost, less impairment charges. According to the FASB guidance noted above, a holder of utility tokens cannot only compare the carrying value to fair value at the reporting period, but instead must assess impairment daily. As a result, the Company uses the amount equal to the lowest price during the period in which the Props tokens are held as the carrying amount for purposes of testing for impairment.

 

During the year ended December 31, 2020, to calculate the fair value of the Props tokens received, receivable and payable pursuant to the YouNow Agreement, the Company, through a third-party valuation, used the Backsolve method, which utilizes the option pricing method to calculate the implied value of the Props tokens based on the most recent transaction price publicly available (Level 3 inputs). For purposes of the Backsolve method, the Company used a precedent transaction in which Props tokens were purchased at a price of $0.07 per Props token. The precedent transaction also included the issuance of warrants to purchase additional Props tokens at a strike price of $0.07 per Props token. Using the Backsolve method, the Company took into account the strike price of the warrants issued in the precedent transaction and then determined the allocated value of the Props tokens as though it were a basket purchase.

 

The implied fair value of the Props tokens represents a marketable basis of value. During the year ended December 31, 2020, the Props tokens did not have access to a liquid marketplace, and therefore a discount for lack of marketability was applied to the implied fair value using a protective put calculation. A summary of the key inputs used in the Backsolve model at December 31, 2020 are summarized as follows:

 

Maturity (time until an exit or liquidity)   1 year  
Volatility     197.0 %
Risk free rate of return     0.16 %

 

The basic logic of the protective put approach is supported by the notion that the holder of a non-marketable security can effectively purchase liquidity by purchasing a put option on the security. Therefore, the non-marketable value of a security is its value on a marketable basis, less the value of the hypothetical put option. The put option calculation relies on the Black-Scholes option pricing model, which utilizes volatility from comparable utility tokens, an estimated time to maturity (or liquidity), and the risk-free rate commensurate with that maturity.

 

Digital tokens earned, receivable or payable before September 30, 2020, were recorded based on an estimated fair value of $0.02. Digital tokens earned, receivable or payable from July 1, 2020 through December 31, 2020 were recorded based on an estimated fair value of $0.039. At December 31, 2020, the Company recorded $439,145 under digital tokens, $123,397 under digital tokens payable and $210,000 under digital tokens receivable pursuant to the YouNow Agreement.

 

Given the recent trading availability of Props tokens in various active markets, during the three and nine months ended September 30, 2021, the Company calculated the fair value of digital tokens based on the observable daily quoted market prices (Level 1 inputs) on multiple international exchanges, as recorded on CoinmarketCap. At September 30, 2021, the Company recorded $53,899 under digital tokens and $333,446 under digital tokens payable pursuant to the YouNow Agreement.

 

During the three and nine months ended September 30, 2021, the Company recorded a non-cash impairment charge in the amount of $571,458 and $756,195, respectively, which is reported in the accompanying condensed consolidated statements of operations as a result of recent declines in the quoted market prices of certain digital tokens below the market price of their acquisition.

 

In August 2021, the Company received notice from YouNow that it was terminating the YouNow Agreement, and that it would not support the Props platform past the end of calendar year 2021. In connection with the notice of termination and in accordance with the YouNow Agreement, the Company received an additional 2,625,000 Props tokens. The value of these tokens was recorded as revenue under “technology service revenue” in the condensed consolidated statements of income.

 

During the three and nine months ended September 30, 2021, the Company sold approximately 29.5 million and 32.4 million Props tokens, respectively, for proceeds of $502,314 and $806,618, respectively. The realized gain of the sale of digital tokens was approximately $53,867 and $301,160 for the three and nine months ended September 30, 2021, respectively, and is included in the condensed consolidated statements of income.

 

10

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6. Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following for the periods presented:

 

    September 30,     December 31,  
    2021     2020  
             
   Compensation, benefits and payroll taxes   $ 120,375     $ 226,500  
   Prepaid income tax     (27,674 )    
-
 
   Other accrued expenses     64,996       27,584  
Total accrued expenses and other current liabilities   $ 157,697     $ 254,084  

 

7. Income Taxes

 

The Company’s 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. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of September 30, 2021, our conclusion regarding the realizability of our U.S. deferred tax assets did not change and we have recorded a full valuation allowance against them.

 

On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan”) was signed into law to provide additional relief in connection with the ongoing COVID-19 pandemic. The American Rescue Plan includes, among other things, provisions relating to PPP loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis. Under ASC 740, the effects of new legislation are recognized upon enactment. The enactment of the American Rescue Plan did not impact on the Company’s income tax provision.

 

For the three and nine months ended September 30, 2021, the Company recorded an income tax provision of $6,166 and $9,466, respectively, primarily related to state and local taxes. The effective tax rate for the three and nine months ended September 30, 2021 was (1.51)% and 0.70%, respectively. The effective tax rate differs from the statutory rate of 21% as the Company has concluded that its deferred tax assets are not realizable on a more-likely-than-not basis.

 

For the three months ended September 30, 2020, the Company recorded an income tax benefit from continuing operations of $3,300 consisting primarily of state and local taxes. For the nine months ended September 30, 2020, the Company recorded an income tax provision from continuing operations of $1,700, consisting primarily of state and local taxes. The effective tax rate for the three and nine months ended September 30, 2020 was (0.44)% and 0.20%, respectively. The effective tax rate differs from the statutory rate of 21% as the Company has concluded that its deferred tax assets are not realizable on a more-likely-than-not basis.

 

8. Stockholders’ Equity

 

The Paltalk, Inc. Amended and Restated 2011 Long-Term Incentive Plan (the “2011 Plan”) was terminated as to future awards on May 16, 2016. A total of 121,930 shares of the Company’s common stock may be issued pursuant to outstanding options awarded under the 2011 Plan; however, no additional awards may be granted under such plan. The Paltalk, Inc. 2016 Long-Term Incentive Plan (“the 2016 Plan”) was adopted by the Company’s stockholders on May 16, 2016 and permits the Company to award stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other stock-based awards and cash-based incentive awards to its employees (including an employee who is also a director or officer under certain circumstances), non-employee directors and consultants. The maximum number of shares of common stock that may be issued pursuant to awards under the 2016 Plan is 1,300,000 shares, 100% of which may be issued pursuant to incentive stock options. In addition, the maximum number of shares of common stock that may be issued under the 2016 Plan may be increased by an indeterminate number of shares of common stock underlying outstanding awards issued under the 2011 Plan that are forfeited, expired, cancelled or settled in cash. As of September 30, 2021, there were 958,063 shares available for future issuance under the 2016 Plan.

 

11

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

August 2021 Underwritten Public Offering

 

On August 5, 2021, the Company announced the pricing and closing of an underwritten public offering (the “August 2021 Offering”), in which the Company sold an aggregate of 1,333,310 shares of the Company’s common stock (which includes 173,910 shares sold to the underwriter pursuant to the full exercise of the underwriter’s over-allotment option) at a public offering price of $3.00 per share. The August 2021 Offering was made pursuant to the Company’s Registration Statement on Form S-1 (File No. 333-257036), initially filed with the SEC on June 11, 2021, and was subsequently amended and declared effective on August 2, 2021.

 

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. These costs were recorded in stockholders’ equity as a reduction of additional paid-in capital in connection with Staff Accounting Bulletin 5A.

 

In connection with the August 2021 Offering, the Company’s common stock was approved for listing on The Nasdaq Capital Market under the symbol “PALT” and began trading on The Nasdaq Capital Market on August 3, 2021.

 

Treasury Shares

 

On April 29, 2019, the Company implemented a stock repurchase plan to repurchase up to $500,000 of its common stock for cash. The repurchase plan expired on April 29, 2020. The Company had purchased 9,950 shares of its common stock under the repurchase plan as of April 29, 2020 and has classified them as treasury shares on the Company’s condensed consolidated balance sheets.

 

Stock Options

 

The following table summarizes the assumptions used in the Black-Scholes pricing model to estimate the fair value of the options granted during the nine months ended September 30, 2021:

 

Expected volatility   178%-197 %
Expected life of option (in years)   5.0-5.5  
Risk free interest rate   0.81-0.88 %
Expected dividend yield   0.0 %

 

The expected life of the options is the period of time over which employees and non-employees are expected to hold their options prior to exercise. The expected life of options has been determined using the “simplified” method as prescribed by Staff Accounting Bulletin 110, which uses the midpoint between the vesting date and the end of the contractual term. The volatility of the Company’s common stock is calculated using the Company’s historical volatilities beginning at the grant date and going back for a period of time equal to the expected life of the award. The Company estimates potential forfeitures of stock awards and adjusts recorded stock-based compensation expense accordingly. The Company estimates pre-vesting forfeitures primarily based on the Company’s historical experience and is adjusted to reflect actual forfeitures as the stock-based awards vest.

 

The following table summarizes stock option activity during the nine months ended September 30, 2021:

 

          Weighted  
          Average  
    Number of     Exercise  
    Options     Price  
Stock Options:                
Outstanding at January 1, 2021     622,036     $ 5.53  
Granted     37,932       3.77  
Forfeited or canceled, during the period     (128,569 )     4.06  
Expired, during the period     (13,427 )     5.01  
Outstanding at September 30, 2021     517,972     $ 5.78  
Exercisable at September 30, 2021     446,527     $ 6.37  

 

At September 30, 2021, there was $103,205 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 1.7 years.

 

12

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On September 30, 2021, the aggregate intrinsic value of stock options that were outstanding and exercisable was $3,186,961 and $2,578,975, respectively. On September 30, 2020, the aggregate intrinsic value of stock options that were outstanding and exercisable was $7,200 and $5,400, respectively. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the fair value of such awards as of the period-end date.

 

During the nine months ended September 30, 2021, the Company granted stock options to members of the Board of Directors to purchase an aggregate of 24,000 shares of common stock at an exercise price of $3.20 per share. The stock options vest in four equal quarterly installments on the last day of each calendar quarter in 2021 and have a term of ten years. During the nine months ended September 30, 2021, the Company also granted options to employees to purchase an aggregate of 13,932 shares of common stock. These options vest between the grant date and up to four years, have a term of ten years and have an exercise price of $3.20 to $4.90.

 

During the nine months ended September 30, 2021, an unvested executive performance award was forfeited and an expense reversal of $218,679 was recorded under general and administrative expense in the condensed consolidated statements of operations.

 

The aggregate fair value for the stock options granted during the nine months ended September 30, 2021 and 2020 was $145,522 and $18,664, respectively.

 

Stock-based compensation expense for the Company’s stock options included in the condensed consolidated statements of operations is as follows:

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
Cost of revenue   $ 67,000     $ 386     $ 67,182     $ 1,137  
Sales and marketing expense     95       21       198       61  
Product development expense     2,755       4,118       8,539       15,338  
General and administrative expense     23,580       43,182       (143,463 )     177,560  
Total stock compensation expense   $ 93,430     $ 47,707     $ (67,544 )   $ 194,096  

 

9. Net Income (Loss) Per Share

 

Basic earnings and loss per share are computed by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding during the period as defined by ASC Topic 260, Earnings Per Share. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method). To the extent stock options are antidilutive, they are excluded from the calculation of diluted income per share. For the three and nine months ended September 30, 2021, 517,972 and 496,421 of shares issuable upon the exercise of outstanding stock options, respectively, were not included in the computation of diluted net income (loss) per share because their inclusion would be antidilutive. For the nine months ended September 30, 2021, 21,551 of shares issuable upon the exercise of outstanding stock options, respectively, were included in the computation of diluted net income (loss) per share from operations because their inclusion would be dilutive.

 

For the three and nine months ended September 30, 2020, 625,502 and 629,671, respectively, of shares issuable upon the exercise of outstanding stock options were not included in the computation of diluted net income (loss) per share from operations because their inclusion would be antidilutive.

 

For the three and nine months ended September 30, 2020, 6,254 and 2,085 of shares issuable upon the exercise of outstanding stock options, respectively, were included in the computation of diluted net income (loss) per share from operations because their inclusion would be dilutive.

 

13

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table summarizes the net income (loss) per share calculation for the periods presented:

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
Net income (loss) from operations – basic and diluted   $ (409,036   $ 746,848     $ 1,329,377     $ 840,005  
Weighted average shares outstanding – basic     7,718,034       6,889,334       7,179,953       6,877,335  
Weighted average shares outstanding – diluted     7,718,034       6,895,588       7,201,504       6,879,440  
Per share data:                                
Basic from operations   $ (0.05   $ 0.11     $ 0.19     $ 0.12  
Diluted from operations   $ (0.05   $ 0.11     $ 0.18     $ 0.12  

 

10. Leases

 

On June 7, 2016, the Company entered into a lease agreement with Jericho Executive Center LLC for office space at 30 Jericho Executive Plaza in Jericho, New York, which commenced on September 1, 2016 and runs through November 30, 2021. The Company’s monthly office rent payments under the lease are currently approximately $7,081 per month. On April 9, 2021, the Company 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 commences on December 1, 2021 and runs through November 30, 2024. The modification resulted in an increase its ROU assets and lease liabilities of $0.2 million, using a discount rate of 2.30%.

 

As of September 30, 2021, the Company had no long-term leases that were classified as financing leases. As of September 30, 2021, the Company did not have additional operating and financing leases that had not yet commenced.

 

At September 30, 2021, the Company had operating lease liabilities of approximately $259,000 and right-of-use assets of approximately $259,000, which are included in the condensed consolidated balance sheets.

 

Total rent expense for the nine months ended September 30, 2021 was $64,782, of which $3,000 was sublease income. Total rent expense for the nine months ended September 30, 2020 was $183,523, of which $36,095 was sublease income. Rent expense is recorded under general and administrative expense in the condensed consolidated statements of operations.

 

The following table summarizes the Company’s operating leases for the periods presented:

 

    Nine Months Ended  
    September 30,  
    2021     2020  
Cash paid for amounts included in the measurement of operating lease liabilities   $ 54,625     $ 93,123  
Weighted average assumptions:                
Remaining lease term     3.2       1.2  
Discount rate     2.3 %     3.5 %

 

As of September 30, 2021, future minimum payments under non-cancelable operating leases were as follows:

 

For the year ending December 31,   Amount  
2021     21,244  
2022     84,975  
2023     84,975  
2024     77,894  
Total   $ 269,088  
Less: present value adjustment     (9,806 )
Present value of minimum lease payments   $ 259,282  

 

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PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

11. Term debt

 

On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the coronavirus pandemic, the Company applied for a loan under the SBA PPP under the CARES Act. On May 3, 2020, the Company entered into the Note in favor of the Lender.

 

The Note had an aggregate principal amount of $506,500, a two-year term, a maturity date of May 3, 2022 and borne interest at a stated rate of 1.0% per annum. The Company did not provide any collateral or guarantees for the Note, nor did the Company pay any facility charge to obtain the Note. The Note provided for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects.

 

On January 13, 2021, the Note was fully forgiven by the SBA and the Lender in compliance with the provisions of the CARES Act.

 

12. Commitments and Contingencies

 

Patent Litigation

 

On July 23, 2021, a wholly owned subsidiary of the Company, Paltalk Holdings, Inc., filed a patent infringement lawsuit against WebEx Communications, Inc., Cisco WebEx LLC, and Cisco Systems, Inc. (collectively, “Cisco”), in the U.S. District Court for the Western District of Texas. The Company alleges that Cisco’s Webex products have infringed U.S. Patent No. 6,683,858, and that the Company is entitled to damages. A Markman hearing is scheduled for the first quarter of 2022.

 

Legal Proceedings

 

The Company may be included in legal proceedings, claims and assessments arising in the ordinary course of business. The Company evaluates the need for a reserve for specific legal matters based on the probability of an unfavorable outcome and the reasonability of an estimable loss. No reserve was deemed necessary as of September 30, 2021.

 

13. Sale of Secured Communications Assets

 

On February 24, 2020, the Company entered into an Asset Purchase Agreement, which was subsequently amended and restated on May 29, 2020 (the “Amended and Restated Agreement”) with SecureCo, LLC (the “Buyer”), pursuant to which the Company agreed to sell substantially all of the assets related to its secure communications business (the “Secured Communications Assets”) to the Buyer (the “Asset Sale”). The Secured Communications Assets included communication solutions and operations capabilities for secure messaging and data applications, and software and middleware for enterprise and government client targets.

 

On July 23, 2020, the Company completed the Asset Sale for a cash purchase price of $250,000, $150,000 of which was paid at closing and $100,000 of which is payable in four equal installments over the fifteen-month period following the closing of the Asset Sale and was recorded under other current assets in the condensed consolidated balance sheets as of December 31, 2020. The Amended and Restated Agreement also provides for a revenue sharing arrangement, pursuant to which the Company is entitled to receive quarterly royalty payments ranging from 5% to 10% of certain revenues received by the Buyer, with the aggregate amount of such royalty payments not to exceed $500,000. The gain on the Asset Sale was recorded in the condensed consolidated statements of operations for the year ended December 31, 2020. The sale of the Secured Communications Assets did not meet the requisite criteria to constitute discontinued operations or held for sale, as the historical results of Company’s secured communications business were not material to its results of operations.

 

15

 

 

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14. Subsequent Events

 

October 2021 Underwritten Public Offering

 

On October 19, 2021, the Company announced the pricing and closing of an underwritten public offering, in which the Company sold an aggregate of 1,552,500 shares of the Company’s common stock (which includes 202,500 shares sold to the underwriter pursuant to the full exercise of the underwriter’s over-allotment option) at a public offering price of $7.50 per share (the “October 2021 Offering”).

 

The October 2021 Offering was made pursuant to an effective shelf registration statement on Form S-3 (File No. 333-260063), previously filed with the SEC on October 5, 2021 and declared effective on October 14, 2021. The October 2021 Offering was offered by means of a prospectus supplement and accompanying prospectus, forming part of the registration statement.

 

Gross proceeds received by the Company from the October 2021 Offering before deducting underwriting discounts, commissions and other offering expenses were approximately $11.6 million, inclusive of the over-allotment option.

 

Management has evaluated subsequent events or transactions occurring through the date the condensed consolidated financial statements were issued and determined that no other events or transactions are required to be disclosed herein.

 

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ITEM 2. 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: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, 2021 and 2020, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2020 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, 2021 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Form 10-K. Aside from certain information as of December 31, 2020, all amounts herein are unaudited.

 

Forward-Looking Statements

 

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

 

Overview

 

We are a leading communications software innovator that powers multimedia social applications. We operate a leading network of consumer applications that we believe create a unique social media enterprise where users can meet, see, chat, broadcast and message in real time in a secure environment with others in our network. Our consumer applications generate revenue principally from subscription fees and advertising arrangements.

 

We believe that the scale of our user base presents a competitive advantage in the video social networking industry and provides growth opportunities to advance existing products with up-sell opportunities and build future brands with cross-sell offers. We also believe that our proprietary consumer app technology platform can scalably support large communities of users in activities such as video, voice and text chat and provide robust user monetization tools.

 

Our continued growth depends on attracting new consumer application users through the introduction of new applications, features and partnerships and further penetration of our existing markets. Our principal growth strategy is to invest in the development of proprietary software, expand our sales and marketing efforts with respect to such software, and increase our consumer application user base through potential platform partnerships and new and existing advertising campaigns that we run through internet and mobile advertising networks, all while balancing the capital needs of the business. Our strategy also includes the acquisition of, or investment in, technologies, solutions or businesses that complement our business.

 

Our strategy is to approach these opportunities in a measured way, being mindful of our resources and evaluating factors such as potential revenue, time to market and amount of capital needed to invest in the opportunity.

 

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Recent Developments

 

August 2021 Underwritten Public Offering

 

On August 5, 2021, we announced the pricing and closing of a firm commitment underwritten public offering of an aggregate of 1,333,310 shares of our common stock (which includes 173,910 shares sold to the underwriter pursuant to the full exercise of the underwriter’s over-allotment option) at a public offering price of $3.00 per share (the “August 2021 Offering”). The August 2021 Offering was made pursuant to the Form S-1 (File No. 333-257036), initially filed with the SEC on June 11, 2021, as subsequently amended and declared effective on August 2, 2021. The August 2021 Offering was made only by means of a prospectus forming a part of the effective registration statement. The net proceeds to us from the August 2021 Offering were approximately $3.2 million, after deducting underwriting discounts, commissions and other estimated offering expenses.

 

In connection with the August 2021 Offering, our common stock was approved for listing on The Nasdaq Capital Market under the symbol “PALT” and began trading on The Nasdaq Capital Market on August 3, 2021.

 

October 2021 Underwritten Public Offering

 

On October 19, 2021, we announced the pricing and closing of an underwritten public offering of an aggregate of 1,552,500 shares of our common stock (which includes 202,500 shares sold to the underwriter pursuant to the full exercise of the underwriter’s over-allotment option) at a public offering price of $7.50 per share (the “October 2021 Offering”). The October 2021 Offering was made pursuant to an effective shelf registration statement on Form S-3 (File No. 333-260063), previously filed with the SEC on October 5, 2021 and declared effective on October 14, 2021. The October 2021 Offering was offered by means of a prospectus supplement and accompanying prospectus, forming part of the registration statement.

 

Gross proceeds to us from the October 2021 Offering were approximately $11.6 million, before deducting underwriting discounts, commissions and other offering expenses, inclusive of the over-allotment.

 

Launch of Paltalk Rewards Points

 

As previously disclosed, we served as a launch partner with YouNow to integrate YouNow’s props infrastructure into our Camfrog and Paltalk applications, which allowed users to earn Props tokens while using the Paltalk and Camfrog applications. On October 15, 2021, we launched our new rewards loyalty program, Paltalk Rewards Points, and simultaneously ended the distribution of Props tokens, our prior rewards program. Paltalk and Camfrog users kept their existing rewards earned from the former Props program and now have the opportunity to earn new Paltalk Rewards Points. In connection with the Paltalk Rewards Points, we added 25 new reward tiers such as specialty coins, subscriptions, stickers, flair, and other popular buttons.

 

Update on COVID-19

 

The World Health Organization declared COVID-19 a pandemic on March 11, 2020. The global spread of the COVID-19 pandemic and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. COVID-19 continues to have an unpredictable and unprecedented impact on 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 have been able to support the increased demand we have experienced, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. Adverse economic and market conditions as a result of COVID-19 could also affect the demand for our applications and the ability of our users to satisfy their obligations to us. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted.

 

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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 three and nine months ended September 30, 2021, we executed key components of our objectives:

 

  completed an uplist of our shares of common stock to the Nasdaq Capital Market, which began trading on The Nasdaq Capital Market on August 3, 2021, under the Company’s current ticker symbol “PALT”;
     
  raised gross proceeds of approximately $4.0 million in connection with the August 2021 Offering of 1,333,310 shares of common stock (which includes 173,910 shares sold to the underwriter pursuant to the full exercise of the underwriter’s over-allotment option) at a price to the public of $3.00 per share;
     
  sold approximately 29.5 and 32.4 million Props tokens, respectively, for proceeds of $0.5 million and $0.8 million during the three and nine months ended September 30, 2021, respectively;
     
  reported positive adjusted EBITDA of $0.3 million and $1.5 million for the three and nine months ended September 30, 2021, respectively, compared to $0.7 million and $1.2 million for the three and nine months ended September 30, 2020; and

 

  achieved positive net cash flow of $5.1 million for the nine months ended September 30, 2021 and positive cash flow from operations of $1.1 million, an improvement of $0.2 million when compared to the nine months ended September 30, 2020.

 

For the near term, our business objectives include:

 

  continuously improving and enhancing our live video chat applications, including the posting of topical messages, photos and videos directly to other users and the community at large, integration of games, private rooms and other features focused on new user acquisition, retention and monetization, which collectively are intended to increase usage and revenue opportunities;

 

continuing to explore strategic opportunities, including, but not limited to, potential mergers or acquisitions of other entities that are synergistic to our businesses;

 

investing in advertising technology and/or partner with existing advertising solution providers to enhance advertising revenue;

 

developing new channels to find influencers on social media in order to scale current programming;

 

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. 

 

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Sources of Revenue

 

Our main sources of revenue are subscription, advertising and other fees generated from users of our core video chat products. We expect that the majority of our revenue in future periods will continue to be generated from our core video chat products. We also generate technology service revenue under licensing and service agreements that we negotiate with third parties which includes development, integration, engineering, licensing or other services that we provide.

 

Subscription Revenue

 

Our video chat platforms generate revenue primarily through subscription fees. Our tiers of subscriptions provide users with unlimited video windows and levels of status within the community. Multiple subscription tiers are offered in different durations depending on the product from one-, six- and twelve-month terms, which continue to vary as we continue to test and optimize length and pricing. Longer-term plans (those with durations longer than one month) are generally available at discounted monthly rates. Levels of membership benefits are offered in tiers, with the least membership benefits in the lowest paid tier and the most membership benefits in the highest paid tier. Our membership tiers are “Plus,” “Extreme,” “VIP” and “Prime” for Paltalk and “Pro,” “Extreme” and “Gold” for Camfrog. We also hold occasional promotions that offer discounted subscriptions and virtual gifts.

 

We recognize revenue from monthly premium subscription services beginning in the month in which the subscriptions are originated. Revenues from multi-month subscriptions are recognized on a gross and straight-line basis over the length of the subscription period. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets.

 

We also offer virtual gifts to our users. Users may purchase credits that can be redeemed for a host of virtual gifts such as a rose, a beer, or a car, among other items. Virtual gift revenue is recognized upon the users’ utilization of the virtual gift and included in subscription revenue. The unearned portion of virtual gifts revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets.

 

Advertising Revenue

 

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

 

Technology Service Revenue

 

Technology service revenue is generated under service and partnership agreements that we negotiate with third parties which includes development, integration, engineering, licensing or other services that we provide.

 

Secure Communications. During the first quarter of 2020, we received technology service revenue in connection with our technology services agreement (the “ProximaX Agreement”) with ProximaX Limited (“ProximaX”). Effective June 24, 2019, we entered into a termination agreement with ProximaX (the “Termination Agreement”), pursuant to which ProximaX was required to make certain payments to us on a monthly basis through the remainder of 2019. Since there is no assurance of collectability on the payments due under the Termination Agreement, revenue is being recognized as the payments are received. As described above, we sold our Secured Communications Assets. We do not anticipate generating any material technology service revenue in the future or continuing to pursue secure communications software solutions as part of our business strategy.

 

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Technology Partnerships. During the second and third quarter of 2020, we recorded technology service revenue in connection with our agreement to serve as a launch partner with Open Props, Inc. (formerly YouNow Inc., referred to herein as “YouNow”) and to integrate YouNow’s prop’s infrastructure (the “Props platform”) into our Camfrog and Paltalk applications (the “YouNow Agreement”). Pursuant to the terms of the YouNow Agreement, YouNow agreed to pay us, in exchange for our services, an aggregate of 10.5 million cryptographic props tokens (“Props tokens”) upon the achievement of certain milestones as follows: (i) 3.0 million Props tokens upon execution of the YouNow Agreement, (ii) 4.0 million Props tokens upon the integration of the Props platform in the Camfrog application and (iii) 3.5 million Props tokens due upon the integration of the Props platform in the Paltalk application. The upfront fee is recognized as revenue under the output method based on the direct measurements of the value of services transferred to date to the customer, relative to the remaining services under the YouNow Agreement. The milestones fees were recognized as revenue on the completion dates of integration services performed during the second and third quarters of 2020.

 

Once the integration of Props tokens into our Paltalk and Camfrog applications was completed, we began receiving Props tokens for providing a validator service and for allowing users to participate in the loyalty platform. The loyalty platform is intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications. During the third and fourth quarters of 2020, we received an aggregate of 1.1 million Props tokens for the validator service and 13.5 million Props tokens under the loyalty platform. During the nine months ended September 30, 2021, we received 351 thousand Props tokens for the validator service and 7.2 million Props tokens under the loyalty platform. The number of Props tokens earned and reserved by users for the year ended December 31, 2020 and for the nine months ended September 30, 2021 was 4.0 million and 8.2 million, respectively, which is recorded under “digital tokens payable” in the condensed consolidated balance sheets, and the net revenue earned is recorded under “technology service revenue” in the condensed consolidated statements of operations. The total net revenue value is recognized as earned.

 

For the year ended December 31, 2020, we determined the fair value of the Props tokens by converting them into U.S. dollars using an independent third-party valuation. Digital tokens earned, receivable or payable before September 30, 2020, were recorded based on a $0.02 fair value estimated at the end of the reporting period. Digital tokens earned, receivable or payable from July 1, 2020 through December 31, 2020 were recorded based on an estimated fair value of $0.039.

 

For the three and nine months ended September 30, 2021, we determined the fair value of the Props tokens using observable daily quoted market prices on multiple international exchanges, as recorded on CoinmarketCap.

 

During the three and nine months ended September 30, 2021, we sold approximately 29.5 and 32.4 million Props tokens, respectively, for proceeds of $502,314 and $806,618, respectively.

 

In August 2021, we received notice from YouNow that it was terminating the YouNow Agreement, and that it will not support the Props platform past the end of calendar year 2021. In connection with the notice of termination and in accordance with the YouNow Agreement, we received an additional 2,625,000 Props tokens. The value of these tokens was recorded as revenue under “technology service revenue” in the condensed consolidated statements of income. Following the termination of the YouNow Agreement, we expect that most of our technology service revenue generated in the future will result from opportunistic partnerships between us and third parties.  

 

We expect that our future business development partnerships are likely to contain pricing and other custom terms based on the needs of the client, which may include compensation in the form of cash or cryptocurrency tokens or a mix of cash and cryptocurrency tokens.

 

Costs and Expenses

 

Cost of revenue

 

Cost of revenue consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in data center and customer care functions, credit card processing fees, hosting fees, and data center rent and bandwidth costs. Cost of revenue also includes compensation and other employee-related costs for technical personnel and subcontracting costs relating to technology service revenue.

 

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Sales and marketing expense

 

Sales and marketing expense consist primarily of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel engaged in sales and sales support functions. Advertising and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which primarily consists of partner-related payments to 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 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, 2021, we recorded a non-cash impairment charge in the amount of $571,458 and $756,195, respectively, which is reported in our accompanying condensed consolidated statements of operations as a result of recent decline in the quoted market prices below the market price of their acquisition.

 

Key Metrics

 

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

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
Subscription bookings   $ 2,996,414     $ 3,131,784     $ 9,210,330     $ 9,132,596  
Net cash provided by operating activities   $ 478,067     $ 489,766     $ 1,090,055     $ 912,561  
Net income (loss)   $ (409,036 )   $ 746,848     $ 1,329,377     $ 840,005  
Adjusted EBITDA   $ 300,603     $ 733,470     $ 1,504,429     $ 1,205,811  
Adjusted EBITDA as percentage of total revenues     8.9 %     22.2 %     14.8 %     12.8 %

 

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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 income (loss) adjusted to exclude stock-based compensation expense, depreciation and amortization expense, gain on office lease termination, impairment loss on digital tokens, interest expense (income), net, gain from sale of Secured Communications Assets, gain on extinguishment of term debt, realized gain from sale of digital tokens, other expense, net, and provision for income taxes.

 

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; gain on sale of the Dating Services Business; income tax expense from continuing operations; gain on office lease termination; impairment loss on goodwill; gain from sale of Secured Communication Assets; loss on disposal of property and equipment; our working capital requirements; the impairment loss on digital tokens; realized gain (loss) from the sale of digital tokens; the potentially dilutive impact of stock-based compensation; gain on the extinguishment of term debt; 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.

 

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Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results. The following table presents a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated:

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
Reconciliation of Net income (loss) to Adjusted EBITDA:                        
Net income (loss)   $ (409,036 )   $ 746,848     $ 1,329,377     $ 840,005  
Stock-based compensation expense     93,430       47,707       (67,544 )     194,096  
Depreciation and amortization expense     92,257       141,971       286,447       441,864  
Gain on office lease termination     -       -       -       (141,001 )
Impairment loss on digital tokens     571,458       -       756,195       -  
Interest expense (income), net     195       1,959       (1,852 )     (9,018 )
Gain from sale of Secured Communications Assets     -       (250,000 )     -       (250,000 )
Gain on extinguishment of term debt     -       -       (506,500 )     -  
Realized gain from sale of digital tokens     (53,867 )             (301,160 )     -  
Other expense, net     -       48,285       -       128,165  
Provision for income taxes     6,166       (3,300 )     9,466       1,700  
Adjusted EBITDA   $ 300,603     $ 733,470     $ 1,504,429     $ 1,205,811  

 

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     Nine Months Ended  
    September 30,     September 30,  
    2021     2020     2021     2020  
Total revenue         100.0 %         100.0 %         100.0 %         100.0 %
Costs and expenses:                                
Cost of revenue     22.0 %     19.1 %     19.9 %     20.6 %
Sales and marketing expense     9.6 %     6.2 %     8.2 %     6.6 %
Product development expense     39.5 %     37.0 %     38.7 %     39.6 %
General and administrative expense     25.5 %     21.3 %     20.6 %     25.6 %
Impairment loss on digital tokens     16.9 %     - %     7.4 %     - %
Total costs and expenses     113.5 %     83.6 %     94.8 %     92.4 %
Income (loss) from operations     (13.5 )%     16.4 %     5.2 %     7.6 %
Interest income (expense), net     (0.0 )%     (0.1 )%     0.0 %     0.1 %
Gain from sale of Secured Communications Assets     - %     7.6 %     - %     2.7 %
Gain on extinguishment of term debt     - %     - %     5.0 %     - %
Realized gain (loss) from sale of digital tokens     1.6 %     (1.5 )%     3.0 %     (0.8 )%
Other expense, net     - %     0.0 %     - %     (0.6 )%
Income (loss) from operations before provision for income taxes     (11.9 )%     22.4 %     13.2 %     9.0 %
Provision for income taxes     (0.2 )%     0.1 %     (0.1 )%     (0.0 )%
Net income (loss)     (12.1 )%     22.5 %     13.1 %     9.0 %

 

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Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

 

Revenue

 

Total revenue increased to $3,377,647 for the three months ended September 30, 2021 from $3,309,255 for the three months ended September 30, 2020. This increase was primarily driven by technology service revenue.

 

The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenue for the three months ended September 30, 2021 and the three months ended September 30, 2020, the increase or decrease between those periods, the percentage increase or decrease between those periods, and the percentage of total revenue that each represented for those periods:

 

                            % Revenue  
    Three Months Ended     $     %     Three Months Ended  
    September 30,     Increase     Increase     September 30,  
    2021     2020     (Decrease)     (Decrease)     2021     2020  
Subscription revenue   $ 3,148,822     $ 3,124,999     $ 23,823       0.8 %     93.2 %     94.4 %
Advertising revenue     151,318       86,256       65,062       75.4 %     4.5 %     2.6 %
Technology service revenue     77,507       98,000       (20,493 )     (20.9 )%     2.3 %     3.0 %
Total revenues   $ 3,377,647     $ 3,309,255     $ 68,392       2.1 %     100.0 %     100.0 %

 

Subscription Revenue

 

Our subscription revenue for the three months ended September 30, 2021 increased by $23,823, or 0.8%, as compared to the three months ended September 30, 2020. The subscription revenue across all products was consistent for the three months ended September 30, 2021 compared to the three months ended September 30, 2020.

 

Advertising Revenue

 

Our advertising revenue for the three months ended September 30, 2021 increased by $65,062, or 75.4%, as compared to the three months ended September 30, 2020. 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.

 

Technology Service Revenue

 

Our technology service revenue for the three months ended September 30, 2021 decreased by $20,493, or 20.9%, as compared to the three months ended September 30, 2020. The decrease in technology service revenue was driven by the decrease of revenue generated by the distribution of Props tokens under the YouNow Agreement. In August 2021, we were informed by YouNow that it will not support the Props platform past the end of calendar year 2021. Accordingly, there has been a decrease in Props tokens earned.

 

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Costs and Expenses

 

Total costs and expenses for the three months ended September 30, 2021 increased by $1,068,726, or 38.6%, as compared to the three months ended September 30, 2020. The following table presents our costs and expenses for the three months ended September 30, 2021 and 2020, the increase between those periods and the percentage increase between those periods and the percentage of total revenue that each represented for those periods:

 

                            % Revenue  
    Three Months Ended                 Three Months Ended  
    September 30,     $     %     September 30,  
    2021     2020     Increase     Increase     2021     2020  
Cost of revenue   $ 744,566     $ 632,462     $ 112,104       17.7 %     22.0 %     19.1 %
Sales and marketing expense     323,758       204,371       119,387       58.4 %     9.6 %     6.2 %
Product development expense     1,334,732       1,223,818       110,914       9.1 %     39.5 %     37.0 %
General and administrative expense     859,675       704,812       154,863       22.0 %     25.5 %     21.3 %
Impairment loss on digital tokens     571,458       -       571,458       100.0 %     16.9 %     - %
Total costs and expenses   $ 3,834,189     $ 2,765,463     $ 1,068,726       38.6 %     113.5 %     83.6 %

 

Cost of revenue

 

Our cost of revenue for the three months ended September 30, 2021 increased by $112,104, or 17.7%, as compared to the three months ended September 30, 2020. The increase was primarily driven by an increase in non-cash stock compensation expense of $67,000 and approximately $40,000 in consulting services to support fraud prevention for the three months ended September 30, 2021.

 

Sales and marketing expense

 

Our sales and marketing expense for the three months ended September 30, 2021 increased by $119,387, or 58.4%, as compared to the three months ended September 30, 2020. The increase in sales and marketing expense for the three months ended September 30, 2021 was primarily due to an increase of approximately $105,400 in marketing user acquisition and social media marketing expenses.

 

Product development expense

 

Our product development expense for the three months ended September 30, 2021 increased by $110,914, or 9.1%, as compared to the three months ended September 30, 2020. The increase in product development expense was primarily driven by an increase in consulting services supporting the efforts to enhance user retention and improve monetization of approximately $97,700.

 

General and administrative expense

 

Our general and administrative expense for the three months ended September 30, 2021 increased by $154,863, or 22.0%, as compared to the three months ended September 30, 2020. The increase in general and administrative expense for the three months ended September 30, 2021 was primarily due to an increase of $113,700 in professional and legal fees in connection with the uplisting to The Nasdaq Capital Market as well as an increase in insurance expense of approximately $41,000.

 

Impairment loss on digital tokens

 

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

 

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Non-Operating Income

 

The following table presents the components of non-operating income for the three months ended September 30, 2021 and the three months ended September 30, 2020, the increase or decrease between those periods and the percentage increase or decrease between those periods and the percentage of total revenue that each represented for those periods:

 

                            % Revenue  
    Three Months Ended     $     %     Three Months Ended  
    September 30,     Increase     Increase     September 30,  
    2021     2020     (Decrease)     (Decrease)     2021     2020  
Interest expense, net   $ (195 )   $ (1,959 )   $ 1,764       90.0 %     (0.0 )%     (0.1 )%
Gain from the sale of Secured Communications Assets     -       250,000       (250,000 )     (100.0 )%     - %     7.6 %
Realized gain (loss) from sale of digital tokens     53,867       (48,285 )     102,152       211.6 %     1.6 %     (1.5 )%
Total non-operating income   $ 53,672     $ 199,756     $ (146,084 )     (73.1 )%     1.6 %     6.0 %

 

Non-operating income for the three months ended September 30, 2021 was $53,672, a net decrease of $146,084, or 73.1%, as compared to non-operating income of $199,756 for the three months ended September 30, 2020. The decrease in non-operating income was driven by the absence of gain from the sale of Secured Communication Assets of $250,000.

 

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, 2021, the Company recorded an income tax provision of $6,166, consisting primarily of state and local taxes. For the three months ended September 30, 2020, the Company recorded an income tax benefit of $3,300, consisting primarily of state and local taxes.

 

As of September 30, 2021, our conclusion regarding the realizability of our U.S. deferred tax assets did not change and we have recorded a full valuation allowance against them.  

 

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

 

Revenue

 

Revenue increased to $10,165,452 for the nine months ended September 30, 2021 from $9,410,472 for the nine months ended September 30, 2020. The increase was driven by an increase in subscription revenue of $424,355 along with an increase of $226,803 in technology service revenue as a result of revenue generated from the YouNow Agreement.

 

The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenues for the nine months ended September 30, 2021 and the nine months ended September 30, 2020, the increase between those periods, the percentage increase between those periods and the percentage of total revenues that each represented for those periods:

 

                            % Revenue  
    Nine Months Ended                 Nine Months Ended  
    September 30,     $     %     September 30,  
    2021     2020     Increase     Increase     2021     2020  
Subscription revenue   $ 9,410,096     $ 8,985,741     $ 424,355       4.7 %     92.6 %     95.5 %
Advertising revenue     303,601       199,779       103,822       52.0 %     3.0 %     2.1 %
Technology service revenue     451,755       224,952       226,803       100.8 %     4.4 %     2.4 %
Total revenues   $ 10,165,452     $ 9,410,472     $ 754,980       8.0 %     100.0 %     100.0 %

 

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Subscription Revenue – Our subscription revenue for the nine months ended September 30, 2021 increased by $424,355, or 4.7%, as compared to the nine months ended September 30, 2020. The increase in subscription revenue was primarily driven by increased activity from our existing users in the Paltalk application. The Paltalk application also experienced a change in the proportion of revenue generated between revenue from subscriptions and revenue from virtual gifts due to strategic alignment of the frequency of promotions. In addition, we had an increase in the Vumber application’s subscription revenue resulting from an increase in the work-from-home trend as a result of the COVID-19 pandemic.

 

Advertising Revenue – Our advertising revenue for the nine months ended September 30, 2021 increased by $103,822, or 52.0%, as compared to the nine months ended September 30, 2020. The increase in advertising revenue was primarily due to an increase in the volume of advertising impressions related to changes in and optimization of third-party advertising partners.

 

Technology Service Revenue – Our technology service revenue for the nine months ended September 30, 2021 increased by $226,803, or 100.8%, as compared to the nine months ended September 30, 2020. The increase in technology service revenue was mainly driven by technology service revenue generated by the YouNow Agreement. In August 2021, we were informed by YouNow that it no longer intends to support the Props platform past the end of calendar year 2021.

 

Costs and Expenses

 

Total costs and expenses for the nine months ended September 30, 2021 reflect an increase in costs and expenses of $936,501, or 10.8%, as compared to the nine months ended September 30, 2020. The following table presents our costs and expenses for the nine months ended September 30, 2021 and 2020, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenues that each represented for those periods:

 

                            % Revenue  
    Nine Months Ended     $     %     Nine Months Ended  
    September 30,     Increase     Increase     September 30,  
    2021     2020     (Decrease)     (Decrease)     2021     2020  
Cost of revenue   $ 2,021,863     $ 1,940,616     $ 81,247       4.2 %     19.9 %     20.6 %
Sales and marketing expense     836,413       617,457       218,956       35.5 %     8.2 %     6.6 %
Product development expense     3,930,763       3,730,398       200,365       5.4 %     38.7 %     39.6 %
General and administrative expense     2,090,887       2,411,149       (320,262 )     (13.3 )%     20.6 %     25.6 %
Impairment loss on digital tokens     756,195       -       756,195       100.0 %     7.4 %     - %
Total costs and expenses   $ 9,636,121     $ 8,699,620     $ 936,501       10.8 %     94.8 %     92.4 %

 

Cost of revenue - Our cost of revenue for the nine months ended September 30, 2021 increased by $81,247, or 4.2%, as compared to the nine months ended September 30, 2020. The increase for the nine months ended September 30, 2021 was primarily driven by an increase in non-cash stock compensation expense of $67,000 and an increase of consulting services to support fraud prevention.

 

Sales and marketing expense - Our sales and marketing expense for the nine months ended September 30, 2021 increased by $218,956, or 35.5%, as compared to the nine months ended September 30, 2020. The increase in advertising revenue was primarily due to an increase of approximately $198,600 from the volume of advertising impressions as we grow our focus on user acquisition and social media.

 

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Product development expense - Our product development expense for the nine months ended September 30, 2021 increased by $200,365, or 5.4%, as compared to the nine months ended September 30, 2020. The increase was primarily due to an increase in consulting services supporting the efforts to enhance user retention and improve monetization of approximately of $182,500.

 

General and administrative expense - Our general and administrative expense for the nine months ended September 30, 2021 decreased by $320,262, or 13.3%, as compared to the nine months ended September 30, 2020. The decrease in general and administrative expense for the nine months ended September 30, 2021 was mainly due to reduced rent expense of $115,100 resulting from an office lease termination, a decrease in reduced salary and related expenses of approximately $183,600 due to headcount reductions and reduction of approximately $321,000 primarily from an unvested executive performance award was forfeited and an expense reversal. These reductions were offset by an increase in professional and legal fees in connection with the uplisting to The Nasdaq Capital Market and a gain of approximately $141,000 resulting from an office lease termination during the nine months ended September 30, 2020.

 

Impairment loss on digital tokens

 

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

 

Non-Operating Income

 

The following table presents the components of non-operating income for the nine months ended September 30, 2021 and the nine months ended September 30, 2020, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenues that each represented for those periods:  

 

                            % Revenue  
    Nine Months Ended     $     %     Nine Months Ended  
    September 30,     Increase     Increase     September 30,  
    2021     2020     (Decrease)     (Decrease)     2021     2020  
Interest income, net   $ 1,852     $ 9,018     $ (7,166 )     (79.5 )%     0.0 %     0.1 %
Gain from the sale of Secured Communications Assets     -       250,000       (250,000 )     (100.0 )%     - %     2.7 %
Gain on extinguishment of term debt     506,500       -       506,500       100.0 %     5.0 %     - %
Realized gain (loss) from sale of digital tokens     301,160       (72,123 )     373,283       (517.6 )%     3.0 %     (0.8 )%
Other expense, net     -       (56,042 )     56,042       100.0 %     - %     (0.6 )%
Total non-operating income   $ 809,512     $ 130,853     $ 678,659       518.6 %     8.0 %     1.4 %

 

Non-operating income for the nine months ended September 30, 2021 increased by $678,659, or 518.6%, as compared to the nine months ended September 30, 2020. The increase resulted from the gain on extinguishment of term debt of the $506,500 of proceeds from the Note received in order to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic and a gain from sale of digital tokens of $301,160.

 

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, 2021 and 2020, the Company recorded an income tax provision of $9,466 and $1,700, respectively, consisting primarily of state and local taxes.

 

As of September 30, 2021, our conclusion regarding the realizability of our U.S. deferred tax assets did not change and we have recorded a full valuation allowance against them.

 

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Liquidity and Capital Resources

 

    Nine Months Ended
September 30,
 
    2021     2020  
Condensed Consolidated Statements of Cash Flows Data:            
Net cash provided by operating activities   $ 1,090,055     $ 912,561  
Net cash provided by investing activities     806,618       225,406  
Net cash provided by financing activities     3,320,739       497,656  
Net increase in cash and cash equivalents   $ 5,127,412     $ 1,635,623  

 

Currently, our primary source of liquidity is cash on hand and cash flows from operations, and we believe that our cash balance and our expected cash flow from operations will be sufficient to meet all of our financial obligations for the twelve months from the date of this report. As of September 30, 2021, we had $10,712,832 of cash and cash equivalents.

 

Our primary use of working capital is related to product development resources 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 also seek to grow our business by expending our capital resources to fund strategic investments and partnership opportunities.

 

On May 3, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, we entered into a promissory note under the SBA PPP under the CARES Act in favor of in favor of the Lender in the aggregate principal amount of $506,500. The Note had a two-year term and borne interest at a stated rate of 1.0% per annum. We did not provide any collateral or guarantees for the Note, nor did we pay any facility charge to obtain the Note. The Note provided for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. On January 13, 2021, the Note was fully forgiven by the SBA and the Lender in compliance with the provisions of the CARES Act. We do not expect to incur additional indebtedness under the CARES Act.

 

On May 29, 2020, we completed the sale of the Secured Communications Assets for a cash purchase price of $250,000, $150,000 of which was paid at closing and $100,000 of which is payable in four equal installments over the fifteen-month period following the closing. The Amended and Restated Agreement also provides for a revenue sharing arrangement, pursuant to which we are entitled to receive quarterly royalty payments ranging from 5% to 10% of certain revenues received by the Buyer, with the aggregate amount of such royalty payments not to exceed $500,000.

 

As discussed above, on August 5, 2021, we announced the closing of the August 2021 Offering in which we offered and sold 1,159,400 shares of our common stock. We also granted the underwriters a 45-day option to purchase up to an additional 173,910 shares of common stock at the public offering price less discounts and commissions to cover over-allotments, which was exercised in full on August 5, 2021. The net proceeds to us from the August 2021 Offering were approximately $3.2 million, after deducting underwriting discounts, commissions and other estimated offering expenses.

 

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Operating Activities

 

Net cash provided by operating activities was $1,090,055 for the nine months ended September 30, 2021, as compared to net cash provided by operating activities of $912,561 for the nine months ended September 30, 2020. The increase in net cash provided by operating activities of $177,494 was primarily due to the Company’s net income of $1,329,377 for the nine months ended September 30, 2021, an increase in non-cash expenses of $218,828 offset by changes in operating assets and liabilities of $458,150.

 

Investing Activities

 

Net cash provided by investing activities was $806,618 for the nine months ended September 30, 2021, as compared to net cash provided by investing activities of $225,406 for the nine months ended September 30, 2020. The increase in net cash provided by investing activities is due to an increase in sales of digital tokens.

 

Financing Activities

 

Net cash provided by financing activities for the nine months ended September 30, 2021 was $3,230,739 as compared to net cash provided by financing activities of $497,656 for the nine months ended September 30, 2020. The increase in net cash provided by financing activities is a result of the August 2021 Offering, in which the Company sold an aggregate of 1,333,310 shares of the Company’s common stock (which includes 173,910 shares sold to the underwriter pursuant to the full exercise of the underwriter’s over-allotment option) at a public offering price of $3.00 per share. 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.

 

Contractual Obligations and Commitments

 

As discussed above, on May 3, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, we entered into the Note in favor of the Lender in the aggregate principal amount of $506,500. The Note had a two-year term and borne interest at a stated rate of 1.0% per annum. We did not provide any collateral or guarantees for the Note, nor did we pay any facility charge to obtain the Note. The Note provided for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. On January 13, 2021, the Note was fully forgiven by the SBA and the Lender in compliance with the provisions of the CARES Act. We do not expect to incur additional indebtedness under the CARES Act.

 

On June 7, 2016, we entered into a lease agreement with Jericho Executive Center LLC for office space at 30 Jericho Executive Plaza in Jericho, New York, which commenced on September 1, 2016 and runs through November 30, 2021. The Company’s monthly office rent payments under the lease are currently approximately $7,081 per month. On April 9, 2021, the Company 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 commences on December 1, 2021 and runs through November 30, 2024.

 

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, 2021, we did not have any off-balance sheet arrangements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, including our chief executive officer and chief 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, 2021, for the reasons set forth below, our management concluded that our disclosure controls and procedures were not 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.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control our financial reporting as of September 30, 2021, the Company determined that the following item constituted a material weakness:

 

  The Company does not have adequate controls related to change management within the technology that support the Company’s financial reporting function.

 

Changes in Internal Control over Financial Reporting

 

We have implemented significant 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 nine months ended September 30, 2021, related to general information technology controls in the area of change management in order to remediate the material weakness identified above. However, the Company determined that the residual risk remaining still caused the material weakness to exist. Accordingly, the Company intends to remediate the material weakness for the year ending December 31, 2021.

 

There have been no other 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.

 

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PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On July 23, 2021, a wholly owned subsidiary of the Company, Paltalk Holdings, Inc., filed a patent infringement lawsuit against WebEx Communications, Inc., Cisco WebEx LLC, and Cisco Systems, Inc. (collectively, “Cisco”), in the U.S. District Court for the Western District of Texas. The Company alleges that Cisco’s Webex products have infringed U.S. Patent No. 6,683,858, and that the Company is entitled to damages. A Markman hearing is scheduled for the first quarter of 2022.

 

To our knowledge, other than as described above, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.

 

ITEM 1A. RISK FACTORS

 

Except as follows, 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 and in our Form S-1.

 

While the COVID-19 pandemic likely contributed to an increase in our subscription revenue for the fiscal year ended December 31, 2020 as compared to the fiscal year ended December 31, 2019, we may not be able to sustain our subscription revenue growth rate in the future.

 

The COVID-19 pandemic likely led to an increase in our subscription revenue for the 2020 fiscal year relative to our 2019 subscription revenue. You should not rely on the subscription revenue growth of any prior quarterly or annual period as an indication of our future performance. Our subscription revenue may decline in future periods if the impact of the COVID-19 pandemic dissipates. These results, as well as other metrics such as total revenues, net income, net cash provided by operating activities and other financial and operating data, may not be indicative of results for future periods.

 

Our business is subscription based, and users are not obligated to, and may choose not to, renew their subscriptions after their existing subscriptions expire. Renewals of subscriptions to our applications may decline or fluctuate because of several factors, such as dissatisfaction with our products and support, a user no longer having a need for our products, including any new users that have subscribed to our services during the COVID-19 pandemic that may subsequently reduce or discontinue their use after the impact of the pandemic has tapered, or the perception that competitive products provide better, more secure, or less expensive options. If we are not able to continue to expand our user base, our revenue may grow more slowly than expected or decline. Similar to the uncertainty of users renewing their subscriptions, the number of new users may slow or decline once the impact of the COVID-19 pandemic subsides, particularly as a vaccine becomes widely available, and users return to work or school or are otherwise no longer subject to shelter-in-place mandates.

 

Security breaches, computer viruses and cybersecurity incidents could harm our business, results of operations or financial condition.

 

We receive, process, store and transmit a significant amount of personal user and other confidential information, including credit card information, and enable our users to share their personal information with each other. In some cases, we retain third party vendors to store this information. We continuously develop and maintain systems to protect the security, integrity and confidentiality of this information, but cannot guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. If any such event were to occur, we may not be able to remedy the event, and we may have to expend significant capital and resources to mitigate the impact of such an event, and to develop and implement protections to prevent future events of this nature from occurring.

 

Security breaches, computer malware and cybersecurity incidents have become more prevalent in our industry and may occur on our systems in the future. Although it is difficult to determine what, if any, harm may directly result from an interruption or attack, any security breach caused by hacking, including efforts to gain unauthorized access to our applications, servers or websites, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business, financial condition and results of operations. If a breach of our security (or the security of our vendors and partners) occurs, the perception of the effectiveness of our security measures and our reputation may be harmed, we could lose current and potential users and the recognition of our various brands and their competitive positions could be diminished, any or all of which could adversely affect our business, financial condition and results of operations.

 

33

 

 

Spammers may attempt to use our products to send targeted and untargeted spam messages to users, which may embarrass or annoy users and make our products less user friendly. We cannot be certain that the technologies that we have developed to repel spamming attacks will be able to eliminate all spam messages from our products. Our actions to combat spam may also require diversion of significant time and focus of our engineering team from improving our products. As a result of spamming activities, our users may use our products less or stop using them altogether, and result in continuing operational cost to us.

 

Similarly, terror and other criminal groups may use our products to promote their goals and encourage users to engage in terror and other illegal activities. We expect that as more people use our products, these groups will increasingly seek to misuse our products. Although we invest resources to combat these activities, including by suspending or terminating accounts we believe are violating our Terms of Service, we expect these groups will continue to seek ways to act inappropriately and illegally on our products. Combating these groups requires our engineering team to divert significant time and focus from improving our products. In addition, we may not be able to control or stop our products from becoming the preferred application of use by these groups, which may become public knowledge and seriously harm our reputation or lead to lawsuits or attention from regulators. If these activities increase, our reputation, user growth and user engagement, and operational cost structure could be seriously harmed. Furthermore, many governments have enacted laws requiring companies to provide notice of data security incidents involving certain types of personal data. Such laws are inconsistent, and compliance in the event of a widespread data breach is costly.

 

As a result of the COVID-19 pandemic, we adopted a work-from-home policy in March 2020, and we expect this practice to continue for the foreseeable future. Remote work and remote access increases our vulnerability to cybersecurity attacks. We may see an increase in cyberattack volume, frequency and sophistication driven by the global enablement of remote workforces. We seek to detect and investigate unauthorized attempts and attacks against our network, products and services and to prevent their recurrence where practicable through changes to our internal processes and tools and changes or updates to our products and services; however, we remain potentially vulnerable to additional known or unknown threats. In some instances, we and the users of our applications can be unaware of an incident or its magnitude and effects.

 

Our existing general liability insurance coverage and the coverage we carry for cyber-related liabilities may not continue to be available on acceptable terms or be available in sufficient amounts to cover one or more large claims or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that are not covered or exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could harm our business.

 

If we are not able to comply with the applicable continued listing requirements or standards of the Nasdaq Capital Market, Nasdaq could delist our securities.

 

Our common stock was approved for listing on The Nasdaq Capital Market under the symbol “PALT” and began trading on The Nasdaq Capital Market on August 3, 2021. We cannot assure you that our securities will continue to be listed on The Nasdaq Capital Market in the future. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. We may not be able to comply with the applicable listing standards and Nasdaq could delist our securities as a result.

 

We cannot assure you that our common stock, if delisted from The Nasdaq Capital Market, will be listed on another national securities exchange. If our common stock is delisted by The Nasdaq Capital Market, our common stock would likely trade on the OTCQB where an investor may find it more difficult to sell our shares or obtain accurate quotations as to the market value of our common stock.

 

34

 

 

Our common stock is usually thinly traded, stockholders may be unable to sell at or near ask prices or at all and the price of our common stock may be volatile.

 

The shares of our common stock have usually been thinly-traded on the OTCQB, meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on stock price. In addition, we may experience unusual or infrequent trading events that cause the price of our common stock to fluctuate wildly. For example, the closing price of our common stock ranged from $0.63 per share to $10.57 per share for the period from January 1, 2020 to September 30, 2021.

 

Although our common stock is now listed for trading on The Nasdaq Capital Market, a broader or more active public trading market for our common stock may not develop or be sustained, and the current trading level of our common stock may not be sustained. Due to these conditions, you may be unable to sell your common stock at or near ask prices or at all if you desire to sell shares of common stock.

 

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock, especially in light of the COVID-19 pandemic. In the past, following periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability and reputation.

 

Because of the limited trading market for our common stock, and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss because of such illiquidity and because the price for our common stock may suffer greater declines because of its price volatility.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

There were no sales of unregistered securities during the quarter ended September 30, 2021 that were not previously reported on a Current Report on Form 8-K.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

35

 

 

ITEM 6. EXHIBITS

 

(a) Exhibits required by Item 601 of Regulation S-K.

 

Exhibit    
Number   Description
2.1#   Asset Purchase Agreement, by and between Paltalk, Inc. and The Dating Company, LLC, dated as of January 31, 2019 (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K of the Company filed on February 4, 2019 by the Company with the SEC).
2.2#   Amended and Restated Asset Purchase Agreement, dated as of May 29, 2020, by and between Paltalk, Inc. and SecureCo, LLC (incorporated by reference to Exhibit 2.2 to the Quarterly Report on Form 10-Q of the Company filed on August 6, 2020 by the Company with the SEC).
3.1*   Certificate of Incorporation of Paltalk, Inc. (as amended through May 15, 2020).
3.2*   Amended and Restated By-Laws of Paltalk, Inc. (as amended through May 15, 2020).
4.1     Specimen Stock Certificate of Paltalk, Inc. (incorporated by reference to Exhibit 4.2 to Amendment No. 7 to the Registration Statement on Form S-1 (File No. 333-226003) of the Company filed on November 27, 2018 by the Company with the SEC).
10.1   Underwriting Agreement, dated August 2, 2021, by and between the Company and Maxim Group LLC, as representative of the several underwriters thereto (incorporated by reference to Exhibit 1.1 to the Current Report on Form 8-K of the Company filed on August 5, 2021 by the Company with the SEC).
10.2   Underwriting Agreement, dated October 14, 2021, by and between the Company and Maxim Group LLC, as representative of the several underwriters thereto (incorporated by reference to Exhibit 1.1 to the Current Report on Form 8-K of the Company filed on October 19, 2021 by the Company with the SEC).
31.1*   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**   Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS   Inline XBRL Instance Document.
101.SCH   Inline XBRL Taxonomy Schema Document.
101.CAL   Inline XBRL Calculation Linkbase Document.
101.DEF   Inline XBRL Definition Linkbase Document.
101.LAB   Inline XBRL Label Linkbase Document.
101.PRE   Inline XBRL Presentation Linkbase Document.
104   Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101).

 

# Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Paltalk, Inc. hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.

 

* Filed herewith.

 

** The certification attached as Exhibit 32.1 is not deemed “filed” with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Paltalk, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of the Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

36

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Paltalk, Inc.
     
Date: November 09, 2021 By: /s/ Jason Katz
    Jason Katz
    Chief Executive Officer
    (Principal Executive Officer)

 

  Paltalk, Inc.
     
Date: November 09, 2021 By: /s/ Kara Jenny
    Kara Jenny
    Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

37

 

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Exhibit 3.1

 

CERTIFICATE OF INCORPORATION

 

FIRST: The name of the corporation shall be:

Paltalk, Inc.

 

SECOND: Its registered office in the State of Delaware is to be located at 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle and its registered agent at such address is CORPORATION SERVICE COMPANY.

 

THIRD: The purpose or purposes of the corporation shall be:

 

To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

 

FOURTH: The total number of shares of stock which the Corporation is authorized to issue is twenty-five million (25,000,000) shares of common stock, par value $0.001, and ten million (10,000,000) shares of preferred stock, par value $0.001.

 

The powers, preferences and rights and the qualifications, limitations or restrictions thereof shall be determined by the Board of Directors.

 

Shares of preferred stock may be issued from time to time in one or more series. The Board of Directors is authorized to provide by resolution or resolutions from time to time for the issuance, out of the authorized but unissued shares of preferred stock, of all or any of the shares of preferred stock in one or more series, and to establish the number of shares to be included in each such series, and to fix the voting powers (full, limited or no voting powers), designations, powers, preferences, and relative, participating, optional or other rights, if any, and any qualifications, limitations or restrictions thereof, of such series, including, without limitation, that any such series may be (i) subject to redemption at such time or times and at such price or prices, (ii) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or series of capital stock, (iii) entitled to such rights upon the liquidation, dissolution or winding up of, or upon any distribution of the assets of, the Corporation or (iv) convertible into, or exchangeable for, shares of any other class or classes of capital stock, or of any other series of the same class of capital stock, of the Corporation at such price or prices or at such rates and with such adjustments; all as may be stated in such resolution or resolutions, which resolution or resolutions shall be set forth on a certificate of designations filed with the Secretary of State of the State of Delaware in accordance with Delaware Law.

 

Effective at 4:05 p.m., Eastern Time, on January 5, 2017 (the “Split Effective Time”), every thirty-five (35) shares of common stock issued and outstanding or held by the Corporation as treasury shares as of the Split Effective Time shall automatically, and without action on the part of the stockholders, convert and combine into one (1) validly issued, fully paid and non-assessable share of common stock, without effecting a change to the par value per share of common stock (the “2017 Reverse Split”). In the case of a holder of shares not evenly divisible by thirty-five (35), in lieu of a fractional share of common stock, such holder shall receive an additional share of common stock. As of the Split Effective Time and thereafter, a certificate(s) representing shares of common stock prior to the 2017 Reverse Split is deemed to represent the number of post-2017 Reverse Split shares into which the pre-2017 Reverse Split shares were converted.

 

FIFTH: The name and address of the incorporator is as follows:

 

2711 Centerville Road
Suite 400
Wilmington, Delaware 19808

 

SIXTH: The Board of Directors shall have the power to adopt, amend or repeal the by-laws.

 

SEVENTH: No director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law, (i) for breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) pursuant to Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper personal benefit. No amendment to or repeal of this Article Seventh shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omission of such director occurring prior to such amendment.

 

 

 

 

EIGHTH: The business and affairs of the Corporation shall be under the direction of a board of directors (the “Board of Directors”), and election of directors need not be by written ballot unless and to the extent the By-laws of the Corporation so provide.

 

NINTH: In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, alter or repeal from time to time the By-Laws of the Corporation in any manner not inconsistent with the laws of the State of Delaware or the Certificate of Incorporation of the Corporation.

 

TENTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification.

 

ELEVENTH: The Corporation reserves the right at any time and from time to time to amend, alter or repeal any provision contained in this Certificate of Incorporation in the manner now or as hereafter prescribed by law, and all rights, preferences, and privileges conferred upon stockholders, directors, and officers by or pursuant to this Certificate of Incorporation in its present form or as hereafter amended are subject to the rights reserved in this Article.

 

TWELFTH: In the event that any provision (or portion thereof) of this Certificate of Incorporation shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Certificate of Incorporation shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of the Corporation and its stockholders that each such remaining provision (or portion thereof) of this Certificate of Incorporation remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders notwithstanding any such finding.

 

THIRTEENTH: The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify, and advance expenses to, any person who is or was a director or officer of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise from and against any and all of the expenses, liabilities or other matters referred to in or covered by said section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. The Corporation may provide indemnification to any such person and any other person who is or was an employee or agent of the Corporation, by agreement or otherwise, on such terms and conditions as the Board of Directors may approve. Any agreement for indemnification of any director, officer, employee or other person may provide indemnification rights that are broader or otherwise differ from those set forth herein. Any repeal or modification of this Article THIRTEENTH by the stockholders of the Corporation shall not adversely affect any rights existing under this paragraph at the time of such repeal or modification.

 

FOURTEENTH: Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee of the Corporation to the corporation or the Corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law or this Certificate of Incorporation or the By-Laws of the Corporation, or (iv) any other action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article FOURTEENTH.

 

 

 

 

 

Exhibit 3.2

 

AMENDED AND RESTATED

BY-LAWS

OF PALTALK, INC.

 

(as amended through May 15, 2020)

 

 

 

ARTICLE I

 

The Corporation

 

Section 1. Name. The legal name of this corporation (hereinafter called the “Corporation”) is Paltalk, Inc.

 

Section 2. Offices. The registered office and registered agent of the Corporation shall be set forth in the Certificate of Incorporation of the Company. The Corporation may also have offices at such other places within and without the United States as the Board of Directors may from time to time appoint or the business of the Corporation may require.

 

Section 3. Seal. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words “Corporate Seal, Delaware”. One or more duplicate dies for impressing such seal may be kept and used.

  

ARTICLE II

 

Meetings of Shareholders

 

Section 1. Place of Meetings. Meetings of the shareholders shall be held at any place within or without the State of Delaware, of which any place shall include telephonic or any other electronic means of communication, designated by the Board of Directors, as is fixed in the notice of the meeting. Absent such designation, meetings shall be held at the principal executive office in the State of Delaware. The Board of Directors may, in its discretion and subject to any guidelines and procedures it may adopt, authorize shareholders not physically present, in person or proxy, at a meeting of shareholders, whether held at a designated place or held solely by telephonic or electronic transmission by and to the Corporation, to participate in and vote at the meeting by electronic transmission by and to the Corporation or by electronic video screen communication and such shareholders shall be considered present in person or by proxy.

 

Section 2. Annual Meeting. An annual meeting of the shareholders of the Corporation shall be held on such date at such time as the Board of Directors may determine by resolution.  At any annual meeting of the shareholders, only such business shall be conducted as shall have been brought before the meeting or any adjournment thereof (i) by or at the direction of the Board of Directors or any committee thereof, (ii) pursuant to the Corporation’s notice of meeting (or any supplement thereto) or (iii) by any shareholder of the Corporation who was a shareholder of record of the Corporation at the time the notice provided for in this Section 2 is delivered to the Secretary of the Corporation, who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 2. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and any such proposed business must constitute a proper matter for shareholder action. To be timely, a shareholder’s notice must be delivered or mailed to and received at the principal executive offices of the Corporation not later than the close of business on the 90th day nor earlier than the 120th day prior to the anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which Public Announcement of the date of such meeting is first made by the Corporation. In no event shall the Public Announcement of an adjournment or postponement of an annual  meeting commence a new time period (or extend any time period) for the giving of a shareholder’s notice as described above. (“Public Announcement” means disclosure in a press release, national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).

 

 

 

 

A shareholder’s notice to the Secretary shall set forth as to each matter such shareholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend, or request the amendment of, the By-Laws or Certificate of Incorporation of the Corporation, the language of the proposed amendment), the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Corporation’s books, of the shareholder proposing such business, and beneficial owner, if any, on whose behalf the proposal is made, (iii) a description of all agreements, arrangements and understandings between such shareholder and beneficial owner, if any, and any other person or persons (including their names) in connection with the proposal of such business by such shareholder, (iv) (A) the class or series and number of shares of the Corporation’s capital stock that are, directly or indirectly, owned beneficially and of record by such shareholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith, (B) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, or any derivative or synthetic arrangement having the characteristics of a long position in any class or series of shares of the Corporation, or any contract, derivative, swap or other transaction or series of transactions designed to produce economic benefits and risks that correspond substantially to the ownership of any class or series of shares of the Corporation, including due to the fact that the value of such contract, derivative, swap or other transaction or series of transactions is determined by reference to the price, value or volatility of any class or series of shares of the Corporation, whether or not such instrument, contract or right shall be subject to settlement in the underlying class or series of shares of the Corporation, through the delivery of cash or other property, or otherwise, and without regard to whether the shareholder of record, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith, may have entered into transactions that hedge or mitigate the economic effect of such instrument, contract or right, or any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the Corporation (any of the foregoing, a “Derivative Instrument”) directly or indirectly owned beneficially by such shareholder, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith, (C) any proxy, contract, arrangement, understanding, or relationship pursuant to which such shareholder has a right to vote any class or series of shares of the Corporation, (D) any agreement, arrangement, understanding, relationship or otherwise, including any repurchase or similar so-called “stock borrowing” agreement or arrangement, involving such shareholder, directly or indirectly, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of any class or series of the shares of the Corporation by, manage the risk of share price changes for, or increase or decrease the voting power of, such shareholder with respect to any class or series of the shares of the Corporation, or which provides, directly or indirectly, the opportunity to profit or share in any profit derived from any decrease in the price or value of any class or series of the shares of the Corporation (any of the foregoing, a “Short Interest”), (E) any rights to dividends on the shares of the Corporation owned beneficially by such shareholder that are separated or separable from the underlying shares of the Corporation, (F) any proportionate interest in shares of the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which such shareholder is a general partner or, directly or indirectly, beneficially owns an interest in a general partner of such general or limited partnership, (G) any performance-related fees (other than an asset-based fee) that such shareholder is entitled to based on any increase or decrease in the value of shares of the Corporation or Derivative Instruments, if any, including without limitation any such interests held by members of such shareholder’s immediate family sharing the same household, (H) any significant equity interests or any Derivative Instruments or Short Interests in any principal competitor of the Corporation held by such shareholder, and (I) any direct or indirect interest of such shareholder in any contract with the Corporation, any affiliate of the Corporation or any principal competitor of the Corporation (including, in any such case, any employment agreement, collective bargaining agreement or consulting agreement), (v) any material interest of such shareholder and beneficial owner, if any, on whose behalf the proposal is made, in such business, and (vi) a representation whether the shareholder or the beneficial owner, if any, intends or is part of a group which intends (a) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal and/or (b) otherwise to solicit proxies or votes from shareholders in support of such proposal; provided, however, that compliance by such shareholder with the notice provisions and other requirements in this Section 2 shall not create a duty of the Corporation to include such shareholder’s business or proposal in the Corporation’s proxy statement or proxy, and notwithstanding such compliance the Corporation shall retain such discretion as it has to omit such business or proposal from such proxy statement or proxy or both.

 

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In addition, to be considered timely, a shareholder’s notice shall further be updated and supplemented, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for determining shareholders entitled to vote at the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the Secretary at the principal executive offices of the Corporation not later than five (5) business days after the record date for determining shareholders entitled to vote at the meeting in the case of the update and supplement required to be made as of the record date for determining shareholders entitled to vote at the meeting, and not later than eight (8) business days prior to the date for the meeting or any adjournment or postponement thereof in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting or any adjournment or postponement thereof.

 

No business shall be brought before or conducted at an annual meeting (i) except in accordance with the provisions of this Section 2 or (ii) if the shareholder or beneficial owner, if any, on whose behalf the proposal is made solicited (or is part of a group which solicited) proxies or votes in support of such shareholder’s proposal in contravention of such shareholder’s representation as required by clause (vi) of the second paragraph of this Section 2. The officer of the Corporation or other person presiding over the annual meeting shall have the power and duty, if the facts so warrant, to determine and declare to the meeting that business was not properly brought before the meeting or any adjournment thereof in accordance with the provisions of this Section 2 and, if he or she should so determine, he or she shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 2, unless otherwise required by law, if the shareholder (or a qualified representative of the shareholder) does not appear at the annual or special meeting of shareholders of the Corporation to present proposed business, such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 2, to be considered a qualified representative of the shareholder, a person must be a duly authorized officer, manager or partner of such shareholder or must be authorized by a writing executed by such shareholder or an electronic transmission delivered by such shareholder to act for such shareholder as proxy at the meeting of shareholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of shareholders.

 

Notwithstanding the foregoing provisions of this Section 2, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set forth in this Section 2; provided, however, that any references in these By-Laws to the Exchange Act or the rules and regulations promulgated thereunder are not intended to and shall not limit any separate and additional requirements set forth in this Section 2 applicable to proposals as to any business to be considered pursuant to this Section 2 (other than business properly brought under Rule 14a-8 under the Exchange Act). Compliance with this Section 2 shall be the exclusive means for a shareholder to submit business (other than as provided in the next sentence and included in the Corporation’s notice of meeting). This Section 2 shall not apply to (i) nominations of persons for election to the Board of Directors, which is specifically addressed in Article III, Section 3, or (ii) any rights of shareholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

 

Section 3. Special Meetings. Special meetings of shareholders may be called by the President whenever he deems it necessary or advisable. A special meeting of the shareholders shall be called by the President whenever so directed in writing by a majority of the entire Board of Directors or whenever the holders of one-third (1/3) of the number of shares of the capital stock of the Corporation entitled to vote at such meeting shall, in writing, request the same.

 

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Section 4. Notice of Meetings. Notice of the time and place of the annual and of each special meeting of the shareholders shall be given to each of the shareholders entitled to vote at such meeting by mailing the same in a postage prepaid wrapper addressed to each such shareholders at his address as it appears on the books of the Corporation, or by delivering the same personally to any such shareholder in lieu of such mailing, at least ten (10) and not more than sixty (60) days prior to each meeting. Meetings may be held without notice if all of the shareholders entitled to vote thereat are present in person or by proxy, or if notice thereof is waived by all such shareholders not present in person or by proxy, before or after the meeting. Notice by mail shall be deemed to be given when deposited, with postage thereon prepaid, in the United States mail. If a meeting is adjourned to another time, not more than thirty (30) days hence, or to another place, and if an announcement of the adjourned time or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting unless the Board of Directors, after adjournment fix a new record date for the adjourned meeting. Notice of the annual and each special meeting of the shareholders shall indicate that it is being issued by or at the direction of the person or persons calling the meeting, and shall state the name and capacity of each such person. Notice of each special meeting shall also state the purpose or purposes for which it has been called. Neither the business to be transacted at nor the purpose of the annual or any special meeting of the shareholders need be specified in any written waiver of notice.

 

Section 5. Record Date for Shareholders. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or for the purpose of determining shareholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if no notice is given, the day on which the meeting is held; the record date for determining shareholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at any meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

 

Section 6. Proxy Representation. Every shareholder may authorize another person or persons to act for him by proxy in all matters in which a shareholder is entitled to participate, whether by waiving notice of any meeting, voting or participating at a meeting, or expressing consent or dissent without a meeting. Every proxy must be signed by the shareholder or by his attorney-in-fact. No proxy shall be voted or acted upon after eleven (11) months from its date unless such proxy provides for a longer period. Every proxy shall be revocable at the pleasure of the shareholder executing it, except as otherwise provided in Section 212 of the Delaware General Corporation Law.

 

Section 7. Voting at Shareholders’ Meetings. Each share of stock shall entitle the holder thereof to one vote. In the election of directors, a plurality of the votes cast shall elect. Any other action shall be authorized by a majority of the votes cast except where the Delaware General Corporation Law prescribes a different percentage of votes or a different exercise of voting power. In the election of directors, and for any other action, voting need not be by ballot.

 

Section 8. Quorum and Adjournment. Except for a special election of directors pursuant to the Delaware General Corporation Law, the presence, in person or by proxy, of the holders of a majority of the shares of the stock of the Corporation outstanding and entitled to vote thereat shall be requisite and shall constitute a quorum at any meeting of the shareholders. When a quorum is once present to organize a meeting, it shall not be broken by the subsequent withdrawal of any shareholders. If at any meeting of the shareholders there shall be less than a quorum so present, the shareholders present in person or by proxy and entitled to vote thereat, may adjourn the meeting from time to time until a quorum shall be present, but no business shall be transacted at any such adjourned meeting except such as might have been lawfully transacted had the meeting not adjourned.

 

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Section 9. List of Shareholders. The officer who has charge of the stock ledger of the Corporation shall prepare, make and certify, at least ten (10) days before every meeting of shareholders, a complete list of the shareholders, as of the record date fixed for such meeting, arranged in alphabetical order, and showing the address of each shareholder and the number of shares registered in the name of each shareholder. Such list shall be open to the examination of any shareholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, or by other reasonable means determined by the Board of Directors. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any shareholder who is present. If the right to vote at any meeting is challenged, the inspectors of election, if any, or the person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting.

 

Section 10. Inspectors of Election. The Board of Directors, in advance of any meeting, may, but need not, appoint one or more inspectors of election to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, and at the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the person presiding thereat. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of the inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or any shareholder entitled to vote thereat, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them. Any report or certificate made by the inspector or inspectors shall be prima facie evidence of the facts stated and of the vote as certified by them.

 

Section 11. Action of the Shareholders Without Meetings. Any action which may be taken at any annual or special meeting of the shareholders may be taken on written consent without a meeting, setting forth the action so taken, signed by the holders of a majority of all outstanding shares entitled to vote thereon. 

 

ARTICLE III

 

Directors

 

Section 1. Number of Directors. The number of directors which shall constitute the entire Board of Directors shall be at least one (1). Subject to the foregoing limitation, such number may be fixed from time to time by action of a majority of the entire Board of Directors or of the shareholders at an annual or special meeting, or, if the number of directors is not so fixed, the number shall be one (1). No decrease in the number of directors shall shorten the term of any incumbent director.

 

Section 2. Election and Term. The initial Board of Directors shall be elected by the incorporator and each initial director so elected shall hold office until the first annual meeting of shareholders and until his successor has been elected and qualified. Thereafter, each director who is elected at an annual meeting of shareholders, and each director who is elected in the interim to fill a vacancy or a newly created directorship, shall hold office until the next annual meeting of shareholders and until his successor has been elected and qualified.

 

Section 3. Nomination of Directors.  Only persons who are nominated in accordance with the provisions of this Section 3 will be eligible for election as directors at a meeting of shareholders.

 

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Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders or any adjournment thereof (i) by or at the direction of the Board of Directors or any committee thereof, (ii) pursuant to the Corporation’s notice of meeting (or any supplement thereto), or (iii) by any shareholder of the Corporation who was a shareholder of record of the Corporation at the time the notice provided for in this Section 3 is delivered to the Secretary of the Corporation, who is entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this Section 3. Such shareholder nominations shall be made pursuant to timely and complete notice in writing to the Secretary of the Corporation. For elections at an annual meeting, to be timely, a shareholder’s notice must be delivered or mailed to and received at the principal executive offices of the Corporation not later than the close of business on the 90th day nor earlier than the 120th day prior to the anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which Public Announcement (as defined in Section Article II, Section 2 herein) of the date of such meeting is first made by the Corporation. In the event the Corporation calls a special meeting of the shareholders, or the Chairman of the Board or the Secretary calls a shareholder requested special meeting, for the purpose of electing one or more directors to the Board of Directors, a shareholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation’s notice of meeting, if the shareholder’s notice shall be delivered or mailed to and received at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such meeting or the 10th day following the day on which Public Announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the Public Announcement of an adjournment or postponement of an annual or special meeting commence a new time period (or extend any time period) for the giving of a shareholder’s notice as described above.

 

Such shareholder’s notice shall (a) set forth, as to each person whom such shareholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of capital stock of the Corporation which are owned directly or beneficially by such person, (iv) a statement as to such person’s citizenship, (v) such person’s written consent to serve as a director if elected, (vi) all other information relating to such person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14 of the Exchange Act (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and (vii) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such shareholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if the shareholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any affiliate or associate thereof or person acting in concert therewith, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant; (b) set forth, as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made, (i) the name and address of such shareholder, as they appear on the Corporation’s books, and of such beneficial owner, if any, (ii) the information required in subsections (iv)(A) through (iv)(I) of the second paragraph of Article II, Section 2, (iii) a representation (A) that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such nomination and (B) as to whether the shareholder or the beneficial owner, if any, intends or is part of a group which intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to elect the nominee and/or (y) otherwise to solicit proxies from shareholders in support of such nomination, and (iv) any other information relating to such shareholder and beneficial owner, if any, that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the election of directors in a contested election pursuant to Section 14 of the Exchange Act; and (c) with respect to each nominee for election or reelection to the Board of Directors, includes the completed and signed questionnaire, representation and agreement required by this Section 3 (as described below). The Corporation may require any proposed nominee to furnish such other information as the Corporation may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the Corporation. Compliance by a shareholder with the notice provisions and other requirements in this Section 3 shall not create a duty of the Corporation to include the shareholder’s nominee in the Corporation’s proxy statement or proxy if the shareholder’s nominee is not nominated by the Board of Directors, and the Corporation shall retain any discretion it has to omit the nominee from the Corporation’s proxy statement and proxy.

 

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In addition, to be considered timely, a shareholder’s notice shall further be updated and supplemented, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for determining shareholders entitled to vote at the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the Secretary at the principal executive offices of the Corporation not later than five (5) business days after the record date for determining shareholders entitled to vote at the meeting in the case of the update and supplement required to be made as of the record date for determining shareholders entitled to vote at the meeting, and not later than eight (8) business days prior to the date for the meeting or any adjournment or postponement thereof in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting or any adjournment or postponement thereof.

 

To be eligible to be a nominee for election or reelection as a director of the Corporation, a person must deliver (in accordance with the time periods prescribed for delivery of notice under this Section 3) to the Secretary at the principal executive offices of the Corporation a written questionnaire with respect to the background and qualification of such person and the background of any other person or entity on whose behalf the nomination is being made (which questionnaire shall be provided by the Secretary upon written request) and a written representation and agreement (in the form provided by the Secretary upon written request) that such person (A) will abide by the requirements pertaining to directors in these By-Laws, (B) is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Corporation or (2) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director of the Corporation, with such person’s fiduciary duties under applicable law, (C) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, and (D) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the Corporation, and will comply with the provisions of the Corporation’s code of ethics that apply to directors of the Corporation.

 

Notwithstanding anything in this Section 3 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation at the annual meeting is increased effective after the time period for which nominations would otherwise be due under the second paragraph of this Section 3 and there is no Public Announcement by the Corporation naming the nominees for the additional directorships at least one hundred (100) days prior to the first anniversary of the preceding year’s annual meeting, a shareholder’s notice required by this Section 3 shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth (10th) day following the day on which such Public Announcement is first made by the Corporation.

 

Except as otherwise expressly provided in any applicable rule or regulation promulgated under the Exchange Act, no person shall be eligible for election as a director of the Corporation at an annual or special meeting of shareholders of the Corporation unless nominated in accordance with the provisions of this Section 3. The officer of the Corporation or other person presiding at the meeting shall have the power and duty, if the facts so warrant, to determine and declare to the meeting that a nomination made at the meeting or any adjournment thereof was not made in accordance with the provisions of this Section 3, with law or rules applicable to the meeting, or whether the shareholder or beneficial owner, if any, on whose behalf the nomination is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies or votes in support of such shareholder’s nominee in compliance with such shareholder’s representation as required by clause (b)(iii) of this Section 3, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 3, unless otherwise required by law, if the shareholder (or a qualified representative of the shareholder) does not appear at the annual or special meeting of shareholders of the Corporation to present a nomination, such nomination shall be disregarded, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 3, to be considered a qualified representative of the shareholder, a person must be a duly authorized officer, manager or partner of such shareholder or must be authorized by a writing executed by such shareholder or an electronic transmission delivered by such shareholder to act for such shareholder as proxy at the meeting of shareholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of shareholders.

 

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Notwithstanding the foregoing provisions of this Section 3, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations promulgated thereunder with respect to the matters set forth in this Section 3; provided, however, that any references in these By-Laws to the Exchange Act or the rules and regulations promulgated thereunder are not intended to and shall not limit any requirements applicable to nominations to be considered pursuant to this Section 3 (and compliance with this Section 3 shall be the exclusive means for a shareholder to make nominations). Nothing in this Section 3 shall be deemed to affect any rights (a) of shareholders to request inclusion of nominations in the Corporation’s proxy statement pursuant to applicable rules and regulations promulgated under the Exchange Act or (b) of the holders of any series of preferred stock to elect directors pursuant to any applicable provisions of the Certificate of Incorporation.

 

Section 4. Filling Vacancies, Resignation and Removal. Any director may tender his resignation at any time. Any director or the entire Board of Directors may be removed, with or without cause, by vote of the shareholders. In the interim between annual meetings of shareholders or special meetings of shareholders called for the election of directors or for the removal of one or more directors and for the filling of any vacancy in that connection, newly created directorships and any vacancies in the Board of Directors, including unfilled vacancies resulting from the resignation or removal of directors for cause or without cause, may be filled by the vote of a majority of the remaining directors then in office, although less than a quorum, or by the sole remaining director.

 

Section 5. Qualifications and Powers. Each director shall be at least eighteen (18) years of age. A director need not be a shareholder, a citizen of the United States or a resident of the State of Delaware. The business of the Corporation shall be managed by the Board of Directors, subject to the provisions of the Certificate of Incorporation. In addition to the powers and authorities by these By-Laws expressly conferred upon it, the Board may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done exclusively by the shareholders.

  

Section 6. Regular and Special Meetings of the Board. The Board of Directors may hold its meetings, whether regular or special, either within or without the State of Delaware. The newly elected Board may meet at such place and time as shall be fixed by the vote of the shareholders at the annual meeting, for the purpose of organization or otherwise, and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a majority of the entire Board shall be present; or they may meet at such place and time as shall be fixed by the consent in writing of all directors. Regular meetings of the Board may be held with or without notice at such time and place as shall from time to time be determined by resolution of the Board. Whenever the time or place of regular meetings of the Board shall have been determined by resolution of the Board, no regular meetings shall be held pursuant to any resolution of the Board altering or modifying its previous resolution relating to the time or place of the holding of regular meetings, without first giving at least three (3) days written notice to each director, either personally or by telegram, or at least five (5) days written notice to each director by mail, of the substance and effect of such new resolution relating to the time and place at which regular meetings of the Board may thereafter be held without notice. Special meetings of the Board shall be held whenever called by the President, Vice-President, the Secretary or any director in writing. Notice of each special meeting of the Board shall be delivered personally to each director or sent by telegraph to his residence or usual place of business at least three (3) days before the meeting, or mailed to him to his residence or usual place of business at least five (5) days before the meeting. Meetings of the Board, whether regular or special, may be held at any time and place, and for any purpose, without notice, when all the directors are present or when all directors not present shall, in writing, waive notice of and consent to the holding of such meeting, which waiver and consent may be given after the holding of such meeting. All or any of the directors may waive notice of any meeting and the presence of a director at any meeting of the Board shall be deemed a waiver of notice thereof by him. A notice, or waiver of notice, need not specify the purpose or purposes of any regular or special meeting of the Board.

 

Section 7. Quorum and Action. A majority of the entire Board of Directors shall constitute a quorum except that when the entire Board consists of one director, then one director shall constitute a quorum, and except that when a vacancy or vacancies prevents such majority, a majority of the directors in office shall constitute a quorum, provided that such majority shall constitute at least one-third (1/3) of the entire Board. A majority of the directors present, whether or not they constitute a quorum, may adjourn a meeting to another time and place. Except as herein otherwise provided, and except as otherwise provided by the Delaware General Corporation Law, the vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board.

 

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Section 8. Telephonic Meetings. Any member or members of the Board of Directors, or of any committee designated by the Board, may participate in a meeting of the Board, or any such committee, as the case may be, by means of conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time, and participation in a meeting by such means shall constitute presence in person at such meeting.

 

Section 9. Action Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.

 

Section 10. Compensation of Directors. By resolution of the Board of Directors, the directors may be paid their expenses, if any, for attendance at each regular or special meeting of the Board or of any committee designated by the Board and may be paid a fixed sum for attendance at such meeting, or a stated salary as director, or both. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefore; provided, however, that directors who are also salaried officers shall not receive fees or salaries as directors.

  

ARTICLE IV

 

Committees

 

Section 1. In General. The Board of Directors may, by resolution or resolutions passed by the affirmative vote therefore of a majority of the entire Board, designate an Executive Committee and such other committees as the Board may from time to time determine, each to consist of one (1) or more directors, and each of which, to the extent provided in the resolution or in the Certificate of Incorporation or in the By-Laws, shall have all the powers of the Board, except that no such Committee shall have power to fill vacancies in the Board, or to change the membership of or to fill vacancies in any committee, or to make, amend, repeal or adopt By-Laws of the Corporation, or to submit to the shareholders any action that needs shareholder approval under these By-Laws or the Delaware General Corporation Law, or to fix the compensation of the directors for serving on the Board or any committee thereof, or to amend or repeal any resolution of the Board which by its terms shall not be so amendable or repealable. Each committee shall serve at the pleasure of the Board. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

 

Section 2. Executive Committee. Except as otherwise limited by the Board of Directors or by these By-Laws, the Executive Committee, if so designated by the Board of Directors, shall have and may exercise, when the Board is not in session, all the powers of the Board of Directors in the management of the business and affairs of the Corporation, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it. The Board shall have the power at any time to change the membership of the Executive Committee, to fill vacancies in it, or to dissolve it. The Executive Committee may make rules for the conduct of its business and may appoint such assistance as it shall from time to time deem necessary. A majority of the members of the Executive Committee, if more than a single member, shall constitute a quorum.

  

ARTICLE V

 

Officers

 

Section 1. Designation, Term and Vacancies. The officers of the Corporation shall be a President, one or more Vice-Presidents, a Secretary, a Treasurer, and such other officers as the Board of Directors may from time to time deem necessary. Such officers may have and perform the powers and duties usually pertaining to their respective offices, the powers and duties respectively prescribed by law and by these By-Laws, and such additional powers and duties as may from time to time be prescribed by the Board. The same person may hold any two or more offices, except that the offices of President and Secretary may not be held by the same person unless all the issued and outstanding stock of the Corporation is owned by one person, in which instance such person may hold all or any combination of offices.

 

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The initial officers of the Corporation shall be appointed by the initial Board of Directors, each to hold office until the meeting of the Board of Directors following the first annual meeting of shareholders and until his successor has been appointed and qualified. Thereafter, the officers of the Corporation shall be appointed by the Board as soon as practicable after the election of the Board at the annual meeting of shareholders, and each officer so appointed shall hold office until the first meeting of the Board of Directors following the next annual meeting of shareholders and until his successor has been appointed and qualified. Any officer may be removed at any time, with or without cause, by the affirmative note therefore of a majority of the entire Board of Directors. All other agents and employees of the Corporation shall hold office during the pleasure of the Board of Directors. Vacancies occurring among the officers of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors.

 

Section 2. President. The President shall preside at all meetings of the shareholders and at all meetings of the Board of Directors at which he may be present. Subject to the direction of the Board of Directors, he shall be the chief executive officer of the Corporation, and shall have general charge of the entire business of the Corporation. He may sign certificates of stock and sign and seal bonds, debentures, contracts or other obligations authorized by the Board, and may, without previous authority of the Board, make such contracts as the ordinary conduct of the Corporation’s business requires. He shall have the usual powers and duties vested in the President of a corporation. He shall have power to select and appoint all necessary officers and employees of the Corporation, except those selected by the Board of Directors, and to remove all such officers and employees except those selected by the Board of Directors, and make new appointments to fill vacancies. He may delegate any of his powers to a Vice-President of the Corporation.

 

Section 3. Vice-President. A Vice-President shall have such of the President’s powers and duties as the President may from time to time delegate to him, and shall have such other powers and perform such other duties as may be assigned to him by the Board of Directors. During the absence or incapacity of the President, the Vice-President, or, if there be more than one, the Vice-President having the greatest seniority in office, shall perform the duties of the President, and when so acting shall have all the powers and be subject to all the responsibilities of the office of President.

 

Section 4. Treasurer. The Treasurer shall have custody of such funds and securities of the Corporation as may come to his hands or be committed to his care by the Board of Directors. Whenever necessary or proper, he shall endorse on behalf of the Corporation, for collection, checks, notes, or other obligations, and shall deposit the same to the credit of the Corporation in such bank or banks or depositaries, approved by the Board of Directors as the Board of Directors or President may designate. He may sign receipts or vouchers for payments made to the Corporation, and the Board of Directors may require that such receipts or vouchers shall also be signed by some other officer to be designated by them. Whenever required by the Board of Directors, he shall render a statement of his cash accounts and such other statements respecting the affairs of the Corporation as may be required. He shall keep proper and accurate books of account. He shall perform all acts incident to the office of Treasurer, subject to the control of the Board.

 

Section 5. Secretary. The Secretary shall have custody of the seal of the Corporation and when required by the Board of Directors, or when any instrument shall have been signed by the President duly authorized to sign the same, or when necessary to attest any proceedings of the shareholders or directors, shall affix it to any instrument requiring the same and shall attest the same with his signature, provided that the seal may be affixed by the President or Vice-President or other officer of the Corporation to any document executed by either of them respectively on behalf of the Corporation which does not require the attestation of the Secretary. He shall attend to the giving and serving of notices of meetings. He shall have charge of such books and papers as properly belong to his office or as may be committed to his care by the Board of Directors. He shall perform such other duties as appertain to his office or as may be required by the Board of Directors.

 

Section 6. Delegation. In case of the absence of any officer of the Corporation, or for any other reason that the Board of Directors may deem sufficient, the Board may temporarily delegate the powers or duties, or any of them, of such officer to any other officer or to any director.

 

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ARTICLE VI

 

Stock

 

Section 1.  Shares of Stock. The shares of capital stock of the Corporation shall be represented by a certificate; provided that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of stock of the Corporation shall be uncertificated shares.  Notwithstanding the foregoing, every holder of uncertificated shares, shall be entitled, upon request, to a certificate representing such shares.  Shares represented by certificates shall be in such form not inconsistent with the Certificate of Incorporation, these By-Laws or the laws of the State of Delaware, including Delaware General Corporation Law.  Except as otherwise provided by law, the rights and obligations of the holders of uncertificated shares and the rights and holders of certificated shares of the same class and series shall be identical.

 

Such certificated shares shall be approved by the Board of Directors, and shall be signed by the President or a Vice-President and by the Secretary or the Treasurer and shall bear the seal of the Corporation and shall not be valid unless so signed and sealed.  Certificates countersigned by a duly appointed transfer agent and/or registered by a duly appointed registrar shall be deemed to be so signed and sealed whether the signatures be manual or facsimile signatures and whether the seal be a facsimile seal or any other form of seal. All certificates issued shall be numbered and the name of the person owning the shares represented thereby, his residence, with the number of such shares and the date of issue, shall be entered on the Corporation’s books. All certificates surrendered shall be cancelled and no new certificates issued until the former certificates for the same number of shares shall have been surrendered and cancelled, except as provided for herein.

 

In case any officer or officers who shall have signed or whose facsimile signature or signatures shall have been affixed to any such certificate or certificates, shall cease to be such officer or officers of the Corporation before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation, and may be issued and delivered as though the person or persons who signed such certificates, or whose facsimile signature or signatures shall have been affixed thereto, had not ceased to be such officer or officers of the Corporation.

 

Section 2. Fractional Share Interests. The Corporation, may, but shall not be required to, issue certificates or evidence of the equivalent uncertificated shares for fractions of a share. If the Corporation does not issue fractions of a share, it shall: (1) arrange for the disposition of fractional interests by those entitled thereto; (2) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined; or (3) issue scrip or warrants in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such scrip or warrants aggregating a full share. A certificate or evidence of the equivalent uncertificated shares for a fractional share shall, but scrip or warrants shall not unless otherwise provided therein, entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any distribution of the assets of the Corporation in the event of liquidation. The Board of Directors may cause scrip or warrants to be issued subject to the conditions that they shall become void if not exchanged for certificates or evidence of the equivalent uncertificated shares representing full shares before a specified date, or subject to the condition that the shares for which scrip or warrants are exchangeable may be sold by the Corporation and the proceeds thereof distributed to the holders of scrip or warrants, or subject to any other conditions which the Board of Directors may impose.

  

Section 3. Addresses of Shareholders. Every shareholder shall furnish the Corporation with an address to which notices of meetings and other notices may be served upon or mailed to him, and in default thereof notices may be addressed to him at his last known post office address.

 

Section 4. Stolen, Lost or Destroyed Certificates. The Board of Directors may in its sole discretion direct that a new certificate or certificates of stock be issued or may register uncertificated shares in place of any certificate or certificates of stock theretofore issued by the Corporation, alleged to have been stolen, lost or destroyed, and the Board of Directors when authorizing the issuance of such new certificate or certificates, may, in its discretion, and as a condition precedent thereto, require the owner of such stolen, lost or destroyed certificate or certificates or his legal representatives to give to the Corporation and to such registrar or registrars and/or transfer agent or transfer agents as may be authorized or required to countersign such new certificate or certificates or register such uncertificated shares, a bond in such sum as the Corporation may direct not exceeding double the value of the stock represented by the certificate alleged to have been stolen, lost or destroyed, as indemnity against any claim that may be made against them or any of them for or in respect of the shares of stock represented by the certificate alleged to have been stolen, lost or destroyed, the issuance of such new certificate or certificates or the registration of such uncertificated shares.

 

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Section 5. Transfers of Shares. Upon compliance with all provisions restricting the transferability of shares, if any, transfers of stock shall be made only upon the books of the Corporation by the holder in person or by his attorney thereunto authorized by power of attorney duly filed with the Secretary of the Corporation or with a transfer agent or registrar, if any, upon the surrender and cancellation of the certificate or certificates for such shares properly endorsed and the payment of all taxes due thereon (or in the case of uncertificated shares, upon receipt of duly executed instructions or in any other manner permitted by law and the payment of all taxes due thereon), provided, however that such surrender and endorsement, compliance or payment of taxes shall not be required in any case in which the officers of the Corporation waive such requirement.

 

With respect to certificated shares of stock, every certificate exchanged, returned or surrendered to the Corporation shall be marked “Cancelled,” with the date of cancellation, by the Secretary or Assistant Secretary of the Corporation or the transfer agent thereof.  No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by any entry showing from and to whom transferred.

 

The Board of Directors may appoint one or more suitable banks and/or trust companies as transfer agents and/or registrars of transfers, for facilitating transfers of any class or series of stock of the Corporation by the holders thereof under such regulations as the Board of Directors may from time to time prescribe. Upon such appointment being made all certificates of stock of such class or series thereafter issued shall be countersigned by one of such transfer agents and/or one of such registrars of transfers, and shall not be valid unless so countersigned.

  

ARTICLE VII

 

Indemnification

 

Section 1. General. The provisions of this Article VII shall be of no force and effect until, and shall become effective upon the time that, the shareholders approve an amendment to the Certificate of Incorporation providing for indemnification of the Corporation’s directors and officers.  The Corporation shall indemnify, and advance Expenses (as this and all other capitalized words used in this Article VII and not previously defined in these By-Laws are defined in Article VII, Section 11 hereof) to, Indemnitee to the fullest extent permitted by applicable law in effect on the date of the effectiveness of these By-Laws, and to such greater extent as applicable law may thereafter permit. The rights of Indemnitee provided under the preceding sentence shall include, but not be limited to, the right to be indemnified to the fullest extent permitted by Section 145(b) of the DGCL in Proceedings by or in the right of the Corporation and to the fullest extent permitted by Section 145(a) of the DGCL in all other Proceedings. The provisions set forth below in this Article VII are provided in furtherance, and not by way of limitation, of the obligations expressed in this Section 1.

 

Section 2. Expenses Related to Proceedings. If Indemnitee is, by reason of his or her Corporate Status, a witness in or a party to and is successful, on the merits or otherwise, in any Proceeding, he or she shall be indemnified against all Expenses actually and reasonably incurred by him or her or on his or her behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to any Matter in such Proceeding, the Corporation shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or her or on his or her behalf relating to such Matter. The termination of any Matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Matter.

 

Section 3. Advancement of Expenses. Indemnitee shall be advanced Expenses within thirty (30) days after requesting them to the fullest extent permitted by Section 145(e) of the DGCL.

 

Section 4. Request for Indemnification. To obtain indemnification, Indemnitee shall submit to the Corporation a written request with such information as is reasonably available to Indemnitee. The Secretary of the Corporation shall promptly advise the Board of Directors of such request.

 

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Section 5. Determining Entitlement to Indemnification. Indemnitee’s entitlement to indemnification shall be determined in accordance with Section 145(d) of the DGCL. The determination of entitlement to indemnification shall be made, and such indemnification shall be paid in full, within sixty (60) days after a written request for indemnification has been received by the Corporation. Upon making a request for indemnification, Indemnitee shall be presumed to be entitled to indemnification and the burden of establishing that Indemnitee is not entitled to indemnification under this Article VII otherwise shall be on the Corporation.

 

Section 6.  Judicial Proceeding.  If a claim for indemnification or advancement of expenses is not paid in full by the Corporation or on its behalf within the time frames specified in Article VII, Sections 4 or 5 hereof, as applicable, Indemnitee may at any time thereafter bring suit against the Corporation in a court of competent jurisdiction to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, Indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In any suit brought by Indemnitee to enforce a right to indemnification or advancement of expenses under this Article VII, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the such person is not entitled to be indemnified, or to such advancement of expenses, under this Article VII or otherwise shall be on the Corporation.

 

Section 7. Non-Exclusivity. The rights of indemnification and to receive advancement of Expenses as provided by this Article VII shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, these By-Laws, any agreement, a vote of shareholders, a resolution of the Board of Directors or otherwise. No amendment, alteration or repeal of this Article VII or any provision hereof shall be effective, as to any Indemnitee for acts, events and circumstances that occurred in whole or in part, before such amendment, alteration or repeal. The provisions of this Article VII shall continue as to an Indemnitee whose Corporate Status has ceased and shall inure to the benefit of his or her heirs, executors and administrators.

 

Section 8. Insurance and Subrogation. To the extent the Corporation maintains an insurance policy or policies providing liability insurance for directors or officers of the Corporation or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of coverage available for any such director or officer under such policy or policies.

 

In the event of any payment hereunder, the Corporation shall be subrogated to the extent of such payment to all the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights.

 

The Corporation shall not be liable under this Article VII to make any payment of amounts otherwise indemnifiable hereunder if, and to the extent that, Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

 

Section 9. Severability. If any provision or provisions of this Article VII shall be held to be invalid, illegal or unenforceable for any reason whatsoever, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby; and, to the fullest extent possible, the provisions of this Article VII shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.

 

Section 10. Certain Persons Not Entitled to Indemnification. Notwithstanding any other provision of Article VII, no person shall be entitled to indemnification or advancement of Expenses under this Article VII with respect to any Proceeding, or any Matter therein, brought or made by such person against the Corporation.

 

Section 11. Definitions. For purposes of this Article VII:

 

Corporate Status” describes the status of a person who is or was a director or officer of the Corporation, or who is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise.

 

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DGCL” means the Delaware General Corporation Law, as currently in effect or as amended from time to time.

 

Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating or being or preparing to be a witness in a Proceeding.

 

Indemnitee” includes any person who is, or is threatened to be made, a witness in or a party to any Proceeding as described in Article VII, Sections 1 or 2 hereof by reason of his or her Corporate Status.

 

Matter” is a claim, a material issue, or a substantial request for relief.

 

Proceeding” includes any action, suit, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative or investigative, except one initiated by an Indemnitee pursuant to Article VII, Section 6 hereof to enforce his or her rights under this Article VII.

 

Section 12. Notices. Any communication required or permitted to the Corporation under this Article VII shall be addressed to the Secretary of the Corporation and any such communication to Indemnitee shall be given in writing by depositing the same in the United States mail with postage thereon prepaid, addressed to the person to whom such notice is directed at the address of such person on the records of the Corporation, and such notice shall be deemed given at the time when the same shall be so deposited in the United States mail.

 

Section 13. Contractual Rights. The right to be indemnified or to the advancement or reimbursement of Expenses (i) is a contract right based upon good and valuable consideration, pursuant to which Indemnitee may sue as if these provisions were set forth in a separate written contract between him or her and the Corporation, (ii) is, and is intended to be, retroactive and shall be available as to events occurring prior to the adoption of these provisions and (iii) shall continue after any rescission or restrictive modification of such provisions as to events occurring prior thereto.

 

ARTICLE VIII

 

Dividends and Finance

 

Section 1. Dividends. The Board of Directors shall have power to fix and determine and to vary, from time to time, the amount of the working capital of the Corporation before declaring any dividends among its shareholders, and to direct and determine the use and disposition of any net profits or surplus, and to determine the date or dates for the declaration and payment of dividends and to determine the amount of any dividend, and the amount of any reserves necessary in their judgment before declaring any dividends among its shareholder, and to determine the amount of the net profits of the Corporation from time to time available for dividends.

 

Section 2. Fiscal Year. The fiscal year of the Corporation shall end on the last day of December in each year and shall begin on the next succeeding day, or shall be for such other period as the Board of Directors may from time to time designate with the consent of the Department of Taxation and Finance, where applicable.

 

ARTICLE IX

 

Miscellaneous Provisions

 

Section 1. Stock of Other Corporations. The Board of Directors shall have the right to authorize any director, officer or other person on behalf of the Corporation to attend, act and vote at meetings of the shareholders of any corporation in which the Corporation shall hold stock, and to exercise thereat any and all rights and powers incident to the ownership of such stock, and to execute waivers of notice of such meetings and calls therefore; and authority may be given to exercise the same either on one or more designated occasions, or generally on all occasions until revoked by the Board. In the event that the Board shall fail to give such authority, such authority may be exercised by the President in person or by proxy appointed by him on behalf of the Corporation.

 

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Any stocks or securities owned by this Corporation may, if so determined by the Board of Directors, be registered either in the name of this Corporation or in the name of any nominee or nominees appointed for that purpose by the Board of Directors.

 

Section 2. Books and Records. Subject to the Delaware General Corporation Law, the Corporation may keep its books and accounts outside the State of Delaware.

 

Section 3. Notices. Whenever any notice is required by these By-Laws to be given, personal notice is not meant unless expressly so stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in a post office box in a sealed postpaid wrapper, addressed to the person entitled thereto at his last known post office address, and such notice shall be deemed to have been given on the day of such mailing.

 

Whenever any notice whatsoever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation or these By-Laws a waiver in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

 

Section 4. Amendments. Except as otherwise provided herein, these By-Laws may be altered, amended or repealed and By-Laws may be made at any annual meeting of the shareholders or at any special meeting thereof if notice of the proposed alteration, amendment or repeal, or By-Law or By-Laws to be made be contained in the notice of such special meeting, by the holders of a majority of the shares of stock of the Corporation outstanding and entitled to vote thereat; or by a majority of the Board of Directors at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice of the proposed alteration, amendment or repeal, or By-Law or By-Laws to be made, be contained in the notice of such special meeting.

 

 

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Exhibit 31.1

 

CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Jason Katz, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Paltalk, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2021 By:  /s/ Jason Katz
   

Jason Katz

Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

 

CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Kara Jenny, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Paltalk, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 9, 2021 By:  /s/ Kara Jenny
   

Kara Jenny

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Paltalk, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:

 

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of, and for, the periods presented in the Form 10-Q.

 

Date: November 9, 2021 By:  /s/ Jason Katz
   

Jason Katz

Chief Executive Officer

(Principal Executive Officer)

 

Date: November 9, 2021 By:  /s/ Kara Jenny
   

Kara Jenny

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

The foregoing certification is being furnished as an exhibit to the Form 10-Q pursuant to Item 601(b)(32) of Regulation S-K and Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and, accordingly, is not being filed as part of the Form 10-Q for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.