ITEM 1. BUSINESS.
Company Overview
We are a leading communications software innovator
that powers multimedia social applications. Our product portfolio includes Paltalk, Camfrog and Tinychat, which together host one of
the world’s largest collections of video-based communities. Our other products include ManyCam and Vumber. ManyCam is a live streaming
software and virtual camera that allows users to deliver professional live videos on streaming platforms, video conferencing apps and
distance learning tools. Vumber is a telecommunications services provider that enables users to communicate privately by having multiple
phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number. We have an over 20-year
history of technology innovation and hold 10 patents.
We were incorporated under the laws of the State
of Delaware in 2005. Our principal executive office is located at 30 Jericho Executive Plaza Suite 400E, Jericho, NY 11753.
Our Services and Products
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 our existing products with
up-sell opportunities and build future brands with cross-sell offers. We also believe that our proprietary consumer app technology platform
can scalably support large communities of users in activities such as video, voice and text chat, online card games and board games and
provide robust user monetization tools.
Our continued growth depends on attracting new
consumer application users through the introduction of new applications, features and partnerships and further penetration of our existing
markets. Our principal growth strategy is to invest in the development of proprietary software, expand our sales and marketing efforts
with respect to such software, and increase our consumer application user base through potential platform partnerships and new and existing
advertising campaigns that we run through internet and mobile advertising networks, all while balancing the capital needs of the business.
Our strategy also includes acquiring, or investing in technologies, solutions or business that complement our business and cross-selling
them to additional synergistic businesses.
Our strategy is to approach these opportunities
in a measured way, being mindful of our resources and evaluating factors such as potential revenue, time to market and amount of capital
needed to invest in the opportunity.
Consumer Applications
We operate a leading network of consumer applications
that create a unique social media enterprise where users can meet, see, chat, broadcast, play online card games and board games and message
in real time in a secure environment with others in our network. The proprietary technology underlying our products allows us to operate
thousands of simultaneous streams, including on mobile platforms, which support interactions on a one-on-one, one-to-many and many-to-many
basis. Furthermore, our technology is supported by a portfolio of 10 issued patents.
Live Video Chat. We have three existing
products in the video chat space: Paltalk, Camfrog and Tinychat. Our major revenue-generating live video chat products are Paltalk and
Camfrog. Each product enables individuals to self-organize around topics and users with common affinities. Tinychat enables adaptations
of our video technology for use in alternative markets, focused on a younger demographic user base.
Paltalk and Camfrog are both leading providers
of live video social networking applications available on Windows, Mac OS, iOS, Android and other tablet devices. Together, these products
power one of the world’s largest global collections of video-based communities, with proprietary technology to host thousands of
simultaneous live group conversations on topics such as politics, financial markets, music and dating. Our proprietary client server
technology helps maintain high quality video and audio, even as many users simultaneously watch a particular broadcaster. Paltalk and
Camfrog both attract a demographically and geographically diverse user base, with users in over 180 different countries. Paltalk users
are approximately one-third domestic and two-thirds international, and Camfrog users have an even larger international presence, with
a particular concentration in Southeast Asia.
Live Streaming Software. In 2022, we acquired
ManyCam, a live streaming software and virtual camera that allows users to deliver professional live videos on streaming platforms, video
conferencing apps and distance learning tools. The ManyCam software provides multiple camera feeds, backgrounds and effects while also
enabling users to share presentations, spreadsheets and documents.
Telecommunications. We own and operate
a small telecommunications services provider called Vumber that enables users to have multiple phone numbers in any area code through
which calls can be forwarded to a user’s existing cell phone or land line telephone number. Vumber serves both the retail and small
business community. Vumber not only allows individuals to communicate while protecting privacy, but also gives business professionals
the ability to add a new business line with any chosen area code to their cell phones. Vumber provides an in-depth data analytics platform
that can track, record and analyze calls to gain new insights into one’s business.
Product Payment Options. Our users have
a variety of methods by which to purchase product subscriptions across all of our platforms. Users can pay by credit card, PayPal, Western
Union, check, local e-wallet providers, or complete an in-app purchase through the Apple App Store or Google Play Store for Android users.
Apple retains generally up to 30% of the revenue
that is generated from sales on our iPhone applications through in-app purchases in the United States. Google also retains generally
up to 30% of the revenue that is generated from sales on Android applications via Google wallet through in-app purchases in the United
States.
All of our credit card transactions are processed
through various payment providers. Video chat users in certain international territories also have an option to purchase through local
resellers. Local resellers prepay in bulk for services and debit the prepaid balance as one-time subscriptions and virtual currency are
sold to end users. Regardless of which payment method is utilized, users may access our products through any of the gateways we offer.
Technology Services
Technology service revenue was historically generated
under service and partnership agreements that we negotiated with third parties, which included development, integration, engineering,
licensing or other services that we provided.
During the fiscal year ended December 31, 2021,
we recorded technology service revenue in connection with our agreement to serve as a launch partner with Open Props, Inc. (formerly
YouNow, Inc., and referred to herein as “YouNow”) and to integrate YouNow’s props infrastructure (the “Props
platform”) into our Camfrog and Paltalk applications (as amended, the “YouNow Agreement”).
Pursuant to the terms of the YouNow Agreement,
once the integration of Props tokens into our Paltalk and Camfrog applications was completed, we began receiving Props tokens for providing
a validator service and for allowing users to participate in the loyalty platform. The loyalty platform was intended to drive engagement
and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications.
The net revenue earned was recorded under “technology service revenue” in the condensed consolidated statements of operations.
The total net revenue value was recognized as earned.
We determined the fair value of the Props tokens
using observable daily quoted market prices on multiple international exchanges, as recorded on CoinmarketCap.
In August 2021, we received notice from YouNow
that it was terminating the YouNow Agreement, and that it would no longer support the Props platform past the end of calendar year 2021.
The YouNow Agreement was terminated effective on November 23, 2021. We expect that the majority of our future technology service revenue,
if any, will result from opportunistic collaborations with third parties, however, any such collaborations are not a primary focus for
the Company.
Company Business Strategy
User Growth Through Marketing Efforts
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 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.
During 2022, we engaged two marketing agencies
to help us drive consumer engagement through the Paltalk and Camfrog applications, but we subsequently scaled back the marketing agencies’
efforts in the fourth quarter of 2022 in response to the overall macro-economic environment.
Enhance Existing Live Video Chat Applications
We plan to enhance our existing live video chat
applications, which we anticipate will include several initiatives intended to improve usage and revenue potential. We plan to add incentives
for loyal or valuable users to enhance retention and overall user activity in the products. We also intend to improve our product and
marketing capabilities on mobile, to enhance monetization and our ability to acquire new users on mobile platforms. In addition, we expect
to increase the quality and quantity of live streaming entertainment content and broaden the distribution across our user base. Finally,
we plan to continue integrating certain technical functions of Paltalk and Camfrog, which will reduce operating costs and speed time-to-market
of future enhancements.
In 2021, we launched our new rewards loyalty
program, Paltalk Rewards Points, and added 25 new reward tiers such as specialty coins, subscriptions, stickers, flair, and other popular
buttons. Also in 2021, we launched a real-time asynchronous message board feature, the “Paltalk Feed”, which grants users
the ability to interact with the platform without a live video cam. The Paltalk Feed allows our users to comment, add photos or videos
and contribute to conversations around shared interests on a digital message board.
During the first quarter of 2022, we integrated
Hive Automated Content Moderation Solutions (“Hive”) into our Paltalk and Camfrog platforms in an effort to enhance our user
experience by reducing spam and objectionable content on our applications. Furthermore, during the second quarter of 2022, we acquired
and introduced the ManyCam software on our platforms, which provides multiple camera feeds, backgrounds and effects while also enabling
users to share presentations, spreadsheets and documents. We subsequently released updates to the ManyCam software to provide quicker
access, dark and light modes and overall rendering performance improvement for high resolution users as well as improved quality and
performance with regard to virtual backgrounds.
Private Rooms and Online Games
On January 12, 2021, we launched a private room
functionality on our Paltalk platform in beta version. In private rooms, users are able to set up their own unique URL private room that
can be used again and again. Users are able to invite up to twelve friends to video chat for unlimited use, unlike other similar offerings
which have a 40-minute time out for free users. Private rooms are currently available on our desktop application, Android platforms and
the iOS platform. We are optimistic that our users will take advantage of this new feature due to its audio and video fidelity and expect
that as the feature gains popularity, these users will utilize other paid services offered by us. Additionally, users can play online
card games and board games such as poker, blackjack, gin rummy, bridge, and chess on the Paltalk platform. In 2022, we continued to develop
our online game offerings as we launched our mobile backgammon game enabling Paltalk users to play with friends, other users or privately
with real-time voice and video.
Defend our Intellectual Property
We have a portfolio of 10 issued patents. We
have successfully defended certain of our intellectual property in the past and have generated tens of millions of dollars in licensing
fees for the use of our patents. We intend to continue defending our intellectual property rights.
Marketing Strategy
We invest in advertising and marketing primarily
for the purpose of acquiring users for our consumer applications. We adapt our marketing expenditures and channels as we gather the data
to analyze the success of our campaigns. We primarily advertise through internet and mobile advertising networks and run hundreds of
campaigns at any given time, targeting various audiences of users, and focusing on campaigns that we believe will produce a positive
return over the lifetime of new users. We also generate new sign-ups organically, as people find our sites and applications through brand
recognition and word of mouth, search engines and product review websites.
During 2022, we engaged two marketing agencies
to help us drive consumer engagement through the Paltalk and Camfrog applications, but we subsequently scaled back the marketing agencies’
efforts during the fourth quarter of 2022 in response to the overall macro-economic environment.
Competition and Our Industry
Competition in our industry remains fierce. The
market for consumer applications is extremely dynamic and is undergoing constant change. We believe this environment creates significant
opportunities for us as well as our direct and indirect competitors. Our principal competitors are BIGO Live, Cisco Webex, Facebook Live,
Google Meet, Houseparty, Instagram Live, Live.ly, Live.me, Microsoft Teams, Skype, Twitch, YouTube Live and Zoom.
Many of our competitors have substantially greater
financial, managerial, technological and other resources than we do. In addition, there are relatively few barriers to entry into the
consumer applications industry, and, as a result, any organization that has adequate financial resources and access to technical expertise
and skilled personnel may become one of our competitors.
In order to compete effectively, we seek to
offer software, services and applications that are differentiated from existing products, superior in quality and more appealing
than those of our competitors. We believe that our applications compete favorably against those offered by our competitors due to
their ability to scale, their cost-efficiency and their innovative technology. We also believe that we have the tools and expertise
that may enable us to attract new users through Facebook and other sources at a lower cost per subscriber than certain of our
traditional competitors.
Although we believe we have the capability to
compete effectively in the consumer applications industry, our competitors may offer products, services and applications that we do not
provide, and that may have more desirable features or may be offered at lower prices, and they may be able to devote greater resources
to the development, promotion, sale and support of their products. In addition, many of our competitors have more extensive customer
bases and broader customer relationships than we have, including relationships with our potential customers.
Governmental Regulations
We are subject to a number of U.S. federal
and state laws and regulations that affect companies conducting business on the internet, many of which are still evolving and being
litigated in the courts and could be interpreted in ways that could harm our business. These laws and regulations may involve user
privacy, data protection, content, intellectual property, distribution, electronic contracts, competition, wiretapping, biometrics,
online tracking, protection of minors, consumer protection, taxation and online payment services. In particular, we are subject to
federal and state laws regarding privacy and protection of user data, which are constantly evolving and can be subject to
significant change. We are also subject to diverse and evolving laws and regulations in other countries in which we operate. The
application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving
industry in which we operate. Because our applications are accessible worldwide and used by residents of some foreign countries,
foreign jurisdictions may claim that we must comply with foreign laws, even in jurisdictions in which we have no local business
entity, employees or infrastructure.
We are also subject to federal laws and regulations
regarding online content, user privacy and electronic marketing, including The Communications Decency Act of 1996, as amended.The Children’s
Online Privacy Protection Act of 1998, as amended, The Video Privacy Protection Act of 1998 (“VPPA”), The Digital Millennium
Copyright Act, The Electronic Communications Privacy Act of 1986, as amended, the USA PATRIOT Act of 2001, and the Controlling the Assault
of Non-Solicited Pornography And Marketing (“CAN-SPAM”) Act of 2003, among others. The Digital Millennium Copyright Act limits
our liability as an online service provider for linking to or hosting third-party content that infringes copyrights. The Communications
Decency Act provides statutory protections to online service providers like us who distribute third-party content. The VPPA restricts
digital video providers from disclosing to third parties personally identifiable information that is tied to the titles of consumers’
viewed videos. The Children’s Online Privacy Protection Act restricts the ability of online service providers to collect personal
information from children under 13. Congress, the Federal Trade Commission (“FTC”) and many states have promulgated laws
and regulations regarding email advertising, including the CAN-SPAM Act. Any changes in these laws or judicial interpretations narrowing
the protections of these laws may subject us to increased risk, increased costs of compliance, and limits on the operation of certain
parts of our business.
Growing public concern about privacy and the
use of personal information may subject us to increased regulatory scrutiny. Regulation related to treatment of user data by online services
is evolving as several U.S. state governments have recently adopted new, or modified existing, laws and regulations addressing data privacy
and the collection, processing, storage, transfer and use of data. These state laws include, for example: the California Consumer Protection
Act (“CCPA”), the California Privacy Rights Act (“CPRA”), which became effective on January 1, 2023, the Virginia
Consumer Data Protection Act, the Colorado Privacy Act, the Connecticut Act Concerning Personal Data Privacy and Online Monitoring, the
Utah Consumer Privacy Act, and the New York Stop Hacks and Improve Electronic Data Security (“SHIELD”) Act.
The European Union implemented a privacy regulation
called the Global Data Protection Regulation (“GDPR”) that imposes additional regulatory scrutiny on our processing of personal
data from in the European Economic Area, with possible financial consequences for noncompliance of up to 4% of our worldwide revenues.
In addition, virtually every U.S. state has passed
laws requiring notification to users when there is a security breach resulting in unauthorized disclosure of certain types of personal
information, many of which are modeled on California’s Information Practices Act. There are a number of legislative proposals pending
before the U.S. Congress and various state legislative bodies concerning data protection that could, if adopted, have an adverse effect
on our business. We are unable to determine if and when such legislation may be adopted. Many other jurisdictions, including the European
Union, have adopted breach notification and other data protection notification laws designed to inform users of unauthorized disclosure
of personally identifiable information. The introduction of new privacy and data breach laws and the interpretation of existing privacy
and data breach laws in the United States, Europe and other foreign jurisdictions is constantly evolving. There is a risk that new laws
may be introduced or that existing laws may be applied in a way that would conflict our current data protection practices or prevent
the transfer of data between countries in which we operate.
In addition, rising concern about the use of
social networking technologies for illegal conduct may in the future produce legislation or other governmental action that could require
changes to our applications or restrict or impose additional costs upon the conduct of our business. These regulatory and legislative
developments, including excessive taxation, may prevent or significantly limit our ability to expand our business.
Furthermore, some of the video card games that
we offer on our Paltalk application are based upon traditional casino games, such as poker and blackjack. We have structured and operate
these games and features with gambling laws in mind and believe that these games and features do not constitute gambling. Our games are
intended to be for entertainment purposes only and do not offer an opportunity to win earnings outside of the platform.
Employees
As of March 15, 2023, we had no part-time employee
and 19 full-time employees. We believe that our future success depends, in part, on our continued ability to hire, assimilate and retain
qualified personnel. We attract and retain employees by offering training, bonus opportunities, competitive salaries and a comprehensive
benefits package.
Company Internet Site and Availability of SEC Filings
Our corporate website is located at www.paltalk.com.
We make available on that site, as soon as reasonably practicable, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy
statements, Current Reports on Form 8-K, other reports filed with or furnished to the SEC, as well as any amendments to those filings.
Our SEC filings, as well as our Code of Conduct and other corporate governance documents, can be found in the Investor Relations section
of our site and are available free of charge. Amendments to our Code of Conduct and any grant of a waiver from a provision of the Code
of Conduct requiring disclosure under applicable SEC rules will be disclosed on our website. Information on our website is not part of
this Annual Report on Form 10-K. In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and information
statements, and other information regarding us and other issuers that file electronically with the SEC.
ITEM 1A. RISK FACTORS
Below is a summary of our risk factors with a
more detailed discussion following. The risks below are those that we believe are the material risks that we currently face but are not
the only risks facing us and our business. If any of these risks actually occur, our business, financial condition and results of operations
could be materially adversely affected.
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The success of our consumer
applications is principally dependent on our active users and our engagement with our user base. |
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We operate in an intensely
competitive industry and any failure to attract new users could diminish or suspend our development and possibly cease our operations. |
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The online live video industry
is characterized by rapid technological change and the development of enhancements and new applications, and if we fail to keep pace
with technological developments or launch new applications, our business may be adversely affected. |
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We may make or attempt
to make acquisitions in the future, which could require significant management attention, disrupt our business, dilute our stockholders
and seriously harm our business. |
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The COVID-19 pandemic may adversely affect our revenues,
results of operations and financial condition. |
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Our business may be significantly
affected by a change in the economy, including any resulting effect on consumer or business spending. |
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We may be adversely affected
by the effects of inflation. |
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Our mobile applications
are substantially dependent on interaction with mobile platforms and operating systems that we do not control. |
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Our business depends on developing, establishing and
maintaining strong brands. If we are unable to maintain and enhance our brands, we may be unable to expand or retain our active user
and paying subscriber bases. |
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Our future success is dependent, in part, on the performance
and continued service of our executive officers. Without their continued service, we may be forced to interrupt or eventually cease
our operations. |
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We plan to continue expanding our operations internationally
and may be subject to increased business and economic risks that could seriously harm our business. |
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Foreign governments restricting access to our applications
could materially adversely impact our business. |
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If our goodwill or other
intangible assets become impaired, we may be required to record a significant charge to earnings, which could seriously harm our
operating results. |
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Our mobile applications
rely on high-bandwidth data capabilities, which are subject to hardware, networks, regulations and standards that we do not control. |
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Security breaches, computer
viruses and cybersecurity incidents could harm our business, results of operations or financial condition. |
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We have faced, and we expect
that we will continue to face, chargeback liability when our credit card providers resolve chargebacks in favor of their customers.
We cannot accurately anticipate the extent of these liabilities, and if not properly addressed, these liabilities could increase
our operating expenses or preclude us from accepting certain credit cards as a method of payment, either of which would materially
adversely affect our results of operations and financial condition. |
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We face certain risks related to the physical and emotional
safety of users and third parties. |
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Our subscription metrics
and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may seriously
harm and negatively affect our reputation and our business. |
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Because we recognize revenue
from subscriptions over the term of the subscription, the full impact of downturns or upturns in subscription sales may not be immediately
reflected in our results of operations or financial condition. |
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A portion of our revenue is dependent on third-party
resellers, the efforts of which we do not control. |
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Our business depends in
large part upon the availability of cost-effective advertising space through a variety of media and keeping pace with trends in consumer
behavior. |
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Interruption, maintenance
or failure of our programming code, servers or technological infrastructure could hurt our ability to effectively provide our applications,
which could damage our reputation and harm our results of operations. |
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We may be liable as a result of information retrieved
from or transmitted over the internet. |
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Changes in laws or regulations,
including laws and regulations that impact the use of the internet, such as internet neutrality laws, or laws that relate to content
provided over the internet or monitoring such content, could adversely affect our business, results of operations or financial condition. |
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Changes in tax laws could
materially affect our financial condition, results of operations and cash flows. |
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If we are subject to intellectual
property infringement claims, it could cause us to incur significant expenses, pay substantial damages or royalties and prevent us
from offering our applications. |
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If we are unable to protect our intellectual property
rights, we may be unable to compete with competitors developing similar technologies. |
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If we fail to maintain
an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results
or prevent fraud and our business may be harmed and our stock price may be adversely impacted. |
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Our common stock is historically
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. |
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The ownership of our common
stock is significantly concentrated in a small number of investors, some of whom are affiliated with our Board of Directors and management,
which could prevent stockholders from having input on the course of our operations or otherwise lead to actual or potential conflicts
of interest. |
Risks Related to Our Business
The success of our consumer applications
is principally dependent on our active users and our engagement with our user base.
On an annual basis the Company has millions of
users, however, compared to the total number of users in any given period, only a small portion of our users are active users or purchasers
of virtual currency. We primarily generate revenue through the sale of subscriptions and virtual currency to this small portion of users
and secondarily generate revenue through paid advertisements. Accordingly, the success of our consumer applications is substantially
dependent on our ability to convert our users into active users and to sell our users virtual currency.
Users discontinue the use of our applications
in the ordinary course of business, and to sustain our revenue levels, we must attract, retain and increase the number of users or more
effectively monetize our existing users. Falling user retention, growth or engagement could also make our applications less attractive
to advertisers, which could harm our business.
There are a number of factors that could negatively
impact user retention, growth and engagement, including, among other things:
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users may adopt competing
products instead of ours; |
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we may fail to introduce
new products and services or improve upon our existing applications, or those new products and services or improvements we introduce
may be poorly received; |
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our products may fail to
operate effectively on mobile or other platforms; |
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we may be unable to combat
spam or other hostile or inappropriate usage on our products or free speech; |
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there may be adverse changes
in user sentiment about the quality or usefulness of our existing products; |
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there may be concerns about
the privacy implications, safety or security of our products; |
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technical or other problems
may frustrate the experience of our users, particularly if those problems prevent us from delivering our products in a fast and reliable
manner; |
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we may fail to provide
adequate service to our users; |
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we or other companies in
our industry may be the subject of adverse media reports or other negative publicity; |
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we may not maintain our
brand image or our reputation may be damaged; and |
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we may be subject to denial
of service or other attacks from hackers that result in service downtime. |
To retain existing users, and particularly those
users who are paying subscribers, we must devote significant resources so that our applications retain their interest. If we fail to
grow or sustain the number of our users, or if the rates at which we attract and retain existing users declines or the rate at which
users become paying subscribers declines, it could have a material adverse effect on our business, results of operations or financial
condition.
We operate in an intensely competitive
industry and any failure to attract new users could diminish or suspend our development and possibly cease our operations.
The industry in which we compete is highly competitive
and has few barriers to entry. If we are unable to efficiently and effectively attract new users as a result of intense competition or
a saturated market, we may not be able to continue the provision, development and enhancement of our consumer applications or become
profitable on a consistent basis in the future.
Important factors affecting our ability to successfully compete include:
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the usefulness, novelty,
performance, ease of use, and reliability of our consumer applications compared to our competitors; |
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the timing and market acceptance
of our consumer applications, including developments and enhancements of our competitors’ consumer applications; |
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our ability to effectively
monetize our consumer applications and the availability of free or cheaper alternatives from our competitors; |
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our ability to hire and
retain talented employees, including technical employees, executives, and marketing experts; |
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the success of our customer
service and support efforts; |
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our reputation and brand
strength compared to our competitors; |
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competition for acquiring
users that could result in increased user acquisition costs; |
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reliance upon the platforms
through which our consumer applications are accessed and the platform owner’s ability to control our activities on such platforms; |
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the effectiveness of the
marketing and advertisement of our services and consumer applications; |
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our ability to maintain
advertisers’ interest in advertising through our consumer applications; |
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our ability to innovate
in the ever-changing consumer applications industry in which we operate; |
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changes as a result of
new legislation or regulation within the consumer applications industry; and |
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acquisitions or consolidations
within the consumer applications industry. |
Many of our current and potential competitors
offer similar services, have longer operating histories, significantly greater capital, financial, technical, marketing and other resources
and larger user or subscriber bases than we do. These factors may allow our competitors to more quickly respond to new or emerging technologies
and changes in client or consumer preferences. These competitors may engage in more extensive research and development efforts, undertake
more far-reaching marketing campaigns and adopt more aggressive pricing strategies that may allow them to build larger user bases consisting
of greater numbers of clients or paying users. Our competitors may develop applications and software that are equal or superior to our
applications and software or that achieve greater market or industry acceptance. It is possible that a new application developed or offered
by one of our competitors could gain rapid scale at the expense of existing brands through harnessing a new technology or distribution
channel, creating a new approach to servicing clients or connecting people.
Certain entities that we do not directly compete
with but that have large or dominant positions in one or more markets could use those positions to gain a competitive advantage against
us by integrating competing video chat or social media platforms into products they control, such as search engines, web browsers or
mobile device operating systems.
Costs for consumers to switch between products
in the video chat industry are generally low, and consumers have a propensity to try new products to connect with new people. As a result,
new entrants and business models are likely to continue to emerge in our industry. These activities could attract users and subscribers
away from our applications and reduce our market share.
If we are unable to effectively compete, we may
fail to obtain new clients for our products or our users may discontinue the use of our products and we may lose active users, either
of which would have a material adverse effect on our business, results of operations and financial condition.
The online live video industry is characterized
by rapid technological change and the development of enhancements and new applications, and if we fail to keep pace with technological
developments or launch new applications, our business may be adversely affected.
The online live video industry is characterized
by rapid change, and our future success is dependent upon our ability to adopt and innovate. To attract new users and increase revenues
from existing users, we need to enhance, add new features to and improve our existing applications and introduce new applications in
the future. The success of any enhancements or new features and applications depends on several factors, including timely completion,
introduction and market acceptance. Building a new brand or product is generally an iterative process that occurs over a meaningful period
of time and involves considerable resources and expenditures, and we may expend significant time and resources developing and launching
an application that may not result in revenues in the anticipated timeframe or at all or may not result in revenue growth that is sufficient
to offset increased expenses. If we are unable to successfully develop enhancements, new features or new applications to meet user trends
and preferences, our business and operating results could be adversely affected.
In addition, our applications are designed to
operate on a variety of network, hardware and software platforms using internet tools and protocols and we need to continuously modify
and enhance our applications to keep pace with technological changes. If we are unable to respond in a timely and cost-effective manner,
our current and future applications may become less marketable and less competitive or even obsolete.
The COVID-19 pandemic may adversely affect
our revenues, results of operations and financial condition.
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. The various precautionary measures taken by many governmental authorities around the
world in order to limit the spread of COVID-19 have had, and could continue to have, an adverse effect on the global markets and its
economy, including on the availability and pricing of employees and resources, and other aspects of the global economy. Therefore, the
impact of the COVID-19 pandemic could disrupt and cause delays in our software, disrupt the marketplace in which we operate, slow down
the overall economy, curtail consumer spending, make it hard to adequately staff our operations or enter into agreements with independent
contractors and have a material adverse effect on our operations. In addition, disruptions in the operations of the third parties with
whom we do business have caused and could in the future cause such third parties to fail to perform under their respective contracts
or commitments with us.
Despite recent progress in the administration
of COVID-19 vaccines and the relaxation of governmental response measures, the extent to which the COVID-19 pandemic and any subsequent
outbreaks continue to impact our results will depend on future developments, which are highly uncertain and cannot be predicted.
Our business may be significantly affected
by a change in the economy, including any resulting effect on consumer or business spending.
Our business may be affected by changes in the
economy generally, including as a result of the COVID-19 pandemic, any resulting effect on spending by our customers, and inflation.
While some of our customers may consider our applications to be a cost-saving purchase, others may view a subscription to our applications
as a discretionary purchase, and our customers may reduce their discretionary spending on our platform during an economic downturn. Given
current economic conditions, including inflation, we could experience a reduction in demand and loss of customers. Moreover, while we
continue to add paid users to our customer base, our user growth may continue to slow or decline as the impact of the COVID-19 pandemic
continues to taper, particularly in light of a potential economic downturn.
Our mobile applications are substantially
dependent on interaction with mobile platforms and operating systems that we do not control.
A portion of our revenue, primarily our revenue
from mobile platforms, is derived from the Apple iOS platform and the Google Android platform. Although we believe that we have a good
relationship with Apple and Google, any deterioration in our relationship with either could materially harm our business, results of
operations or financial condition.
We are subject to each of Apple’s and Google’s
standard terms and conditions for application developers, which govern the promotion, distribution and operation of our applications
on their respective storefronts. Each of Apple and Google has broad discretion to change its standard terms and conditions. In addition,
these standard terms and conditions can be vague and subject to changing interpretations by Apple or Google. In addition, each of Apple
and Google has the right to prohibit a developer from distributing applications on the storefront if the developer violates the standard
terms and conditions. In the event that either Apple or Google ever determines that we are in violation of its standard terms and conditions
and prohibits us from distributing our applications on its storefront, it could materially harm our business, results of operations or
financial condition.
The number of people who access the internet
through devices other than personal computers, including smart phones, cell phones and handheld tablets, has increased dramatically in
the past several years and is projected to continue to increase. Accordingly, we are substantially dependent on interoperability with
popular mobile platforms that we do not control, including the Apple App Store and the Google Play Store, and a portion of our revenue
is derived from these two digital storefronts. There have been occasions in the past when these digital storefronts were unavailable
for short periods of time or where there have been issues with the in-App purchasing functionality from the storefront. In the event
that either the Apple App Store or the Google Play Store is unavailable or if in-App purchasing functionality from the storefront is
non-operational for a prolonged period of time, it could have a material adverse effect on our business, results of operations or financial
condition.
In addition, each of the Apple App Store and
Google Play Store provides consumers with products that compete with ours. If either of these platforms give preferential treatment to
competitive products, it could seriously harm the usage of our products on mobile devices.
Our business depends on developing, establishing
and maintaining strong brands. If we are unable to maintain and enhance our brands, we may be unable to expand or retain our user and
paying subscriber bases.
We believe that developing, establishing and
maintaining awareness of our application brands is critical to our efforts to achieve widespread acceptance of our applications and is
an important element to expanding our client and subscriber bases. Successful promotion of our application brands will depend largely
on the effectiveness of our advertising and marketing efforts and on our ability to provide reliable and useful applications at competitive
prices. If clients and users do not perceive our products to be of high quality, or if our products are not favorably received by clients
and users, the value of our brands could diminish, thereby decreasing the attractiveness of our software, services and applications to
clients and users. In addition, advertising and marketing activities may not yield increased revenue, and even if they do, any increased
revenue may not offset the expenses we incurred in building our brands.
If we fail to successfully promote and maintain
our application brands, or incur substantial expenses in unsuccessfully attempting to promote and maintain our brands, we may fail to
attract enough new clients or subscribers or retain our existing clients and subscribers to the extent necessary to realize a sufficient
return on our advertising and marketing activities, and it could have a material adverse effect on our business, results of operations
or financial condition.
If our goodwill or other intangible assets
become impaired, we may be required to record a significant charge to earnings, which could seriously harm our operating results.
We are required to test goodwill for impairment
at least annually or more frequently if there are indicators that the carrying amount of the goodwill exceeds its carried value. As of
December 31, 2022, we had recorded a total of $6.3 million of goodwill and $3.6 million of other intangible assets. An adverse change
in domestic or global market conditions, particularly if such change has the effect of changing one of our critical assumptions or estimates
made in connection with the impairment testing of goodwill or intangible assets, could result in a change to the estimation of fair value
that could, in turn, result in an impairment charge to our goodwill or other intangible assets. If we divest or discontinue product categories
or products that we previously acquired, or if the value of those parts of our business become impaired, we also may need to evaluate
the carrying value of our goodwill. Any such material charges may have a negative impact on our operating results.
Our future success is dependent, in part,
on the performance and continued service of our executive officers. Without their continued service, we may be forced to interrupt or
eventually cease our operations.
We are dependent to a great extent upon the experience,
abilities and continued service of Jason Katz, our Chief Executive Officer and Chairman of the Board of Directors, and Kara B. Jenny,
our Chief Financial Officer and director. The loss of the services of these individuals would substantially affect our business or operations
and could have a material adverse effect on our business, results of operations or financial condition.
Our subscription metrics and other estimates
are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may seriously harm and negatively
affect our reputation and our business.
We regularly review metrics to evaluate growth
trends, measure our performance, and make strategic decisions. These metrics are calculated using internal Company data and have not
been validated by an independent third party. While these numbers are based on what we believe to be reasonable estimates of our user
base for the applicable period of measurement, there are inherent challenges in measuring how our products are used across large populations
globally.
Some of our demographic data may be incomplete
or inaccurate. For example, because users self-report their dates of birth, our age-demographic data may differ from our users’
actual ages. If our users provide us with incorrect or incomplete information regarding their age or other attributes, our estimates
may prove inaccurate.
In addition, our business strategy is guided
by data analytics that we compute internally based on data collection, data processing, cloud-based platforms, statistical projections
and forecasting, mobile computing, social media analytics and other applications and technologies. We use these internally derived data
analytics to guide decisions concerning the development and modification of features on our applications, monetization strategies for
our applications and the development of new applications, among other things.
The inability to accurately derive our metrics
or data analytics could result in incorrect business decisions and inefficiencies. For instance, if a significant understatement or overstatement
of our active users were to occur, we may expend resources to implement unnecessary business measures or fail to take required actions
to attract a sufficient number of subscribers to satisfy our growth strategies. If advertisers or investors do not perceive our subscription,
geographic or other demographic metrics to be accurate representations of our user base, or if we discover material inaccuracies in our
subscription, geographic or other demographic metrics, our reputation may be seriously harmed. At the same time, advertisers may be less
willing to allocate their budgets or resources to our products, which could seriously harm our business, results of operation or financial
condition.
Because we recognize revenue from subscriptions
over the term of the subscription, the full impact of downturns or upturns in subscription sales may not be immediately reflected in
our results of operations or financial condition.
We recognize subscription revenue from customers
monthly over the term of the subscription, and subscriptions are generally offered in one-, six- and twelve-month terms, depending on
the particular product. As a result, much of the subscription revenue we report in each period is deferred revenue from subscription
agreements entered into during previous periods. Consequently, a decline in new or renewed subscriptions in any one quarter will negatively
affect our revenue in future quarters. In addition, we might not be able to immediately adjust our costs and expenses to reflect these
reduced revenues. Accordingly, the effect of significant downturns in user acceptance of our applications may not be fully reflected
in our results of operations until future periods. Our subscription model also makes it difficult for us to quickly increase our revenue
through additional sales in any period, as revenue from new subscribers must be recognized over the term of the subscription. As a result,
you should not rely on the amount of subscription revenue generated in prior quarters as an indication of future results.
We plan to continue expanding our operations
internationally and may be subject to increased business and economic risks that could seriously harm our business.
Presently, we derive a significant portion of
revenue from international territories, and we plan to continue expanding our business operations abroad. In addition, we rely on outsourced
development services from companies with employees and consultants based in Russia, India and elsewhere. The invasion of Ukraine by Russia
has escalated tensions among the United States, the North Atlantic Treaty Organization member states, and Russia. The United States,
other North Atlantic Treaty Organization member states, as well as non-member states, have imposed sanctions against Russia and certain
Russian banks, enterprises and individuals. These and any future additional sanctions and any resulting conflict between Russia, the
United States and other countries may, on a short term, disrupt, or in the future could disrupt, the consulting services provided by
our third-party developers residing in Russia. This conflict may increase our costs with respect to any current or future planned development
services in Russia or could result in negative publicity.
We may enter new international markets where
we have limited or no experience in marketing, selling and deploying our products. If we fail to deploy or manage our operations in international
markets successfully, our business may suffer. As our international operations increase our operating results may become more greatly
affected by fluctuations in the exchange rates of the currencies in which we do business. In addition, we are subject to a variety of
risks inherent in doing business internationally, including:
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political, social, and
economic instability; |
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risks related to the legal
and regulatory environment in foreign jurisdictions, including with respect to privacy, free speech and unexpected changes in laws,
regulatory requirements, and enforcement; |
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potential damage to our
brand and reputation due to compliance with local laws, including potential censorship and requirements to provide user information
to local authorities; |
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fluctuations in currency
exchange rates; |
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higher levels of credit
risk and payment fraud; |
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complying with multiple
tax jurisdictions; |
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reduced protection for
intellectual-property rights in some countries; |
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difficulties in staffing
and managing global operations and the increased travel, infrastructure and compliance costs associated with multiple international
locations; |
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regulations that might
add difficulties in repatriating cash earned outside the United States and otherwise preventing us from freely moving cash; |
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import and export restrictions
and changes in trade regulation; |
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complying with statutory
equity requirements; |
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complying with the U.S.
Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in other jurisdictions; |
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the impact of the United
Kingdom’s exit from the European Union; and |
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export controls and economic
sanctions administered by the Department of Commerce Bureau of Industry and Security and the Treasury Department’s Office of
Foreign Assets Control. |
If we are unable to expand internationally and manage the complexity
of our global operations successfully, our business could be seriously harmed.
A portion of our revenue is dependent on third-party resellers,
the efforts of which we do not control.
We are dependent on the efforts of third parties
who resell our subscriptions for a portion of our revenue. In particular, video chat users in certain international territories have
an option to purchase subscriptions through local resellers. These local resellers prepay in bulk for services and debit the prepaid
balance as one-time subscriptions and virtual currency are sold to end users.
We do not control the efforts of these resellers.
If they fail to market or sell our subscriptions successfully, merge or consolidate with other businesses, declare bankruptcy or depart
from their respective industries, our business could be harmed. If we are unable to maintain or replace our contractual relationships
with resellers, efficiently manage our relationships with them or establish new contractual relationships with other third parties, we
may fail to retain subscribers or acquire potential new subscribers and may experience delays and increased costs in adding or replacing
subscribers that were lost, any of which could materially affect our business, operating results and financial condition.
Foreign governments restricting access to our applications could
materially adversely impact our business.
We have continued to focus on increasing the
international presence of our applications by expanding the localized and translated versions for additional international countries
that are culturally aligned with our products. Foreign data protection, privacy, consumer protection, content regulation, and other laws
and regulations are often more restrictive than those in the United States. Foreign governments may censor our products in their countries,
restrict access to our products from their countries entirely, or impose other restrictions that may affect their citizens’ ability
to access our products for an extended period of time or even indefinitely. If foreign governments think we are violating their laws,
or for other reasons, they may seek to restrict access to our products, which would give our competitors an opportunity to penetrate
geographic markets that we cannot access. As a result, our ability to grow our international user base would be impaired, and we may
not be able to maintain or grow our revenue as anticipated and our business could be seriously harmed.
Our mobile applications rely on high-bandwidth
data capabilities, which are subject to hardware, networks, regulations and standards that we do not control.
Our mobile applications require high-bandwidth
data capabilities. If the costs of data usage increase or access to cellular networks is limited, our user growth and retention on mobile
platforms may be seriously harmed. Additionally, to deliver high-quality video and other content over mobile cellular networks, our products
must work well with a range of mobile technologies, systems, networks, regulations and standards that we do not control, and any changes
to those mobile technologies, systems, networks, regulations or standards could impact the usability of our mobile applications, which
would materially adversely affect our business, results of operations or financial condition.
Our business depends, in large part, upon
the availability of cost-effective advertising space through a variety of media and keeping pace with trends in consumer behavior.
We depend upon the availability of advertising
space through a variety of media, including third-party applications on platforms such as Facebook, to recruit new users and subscribers,
generate activity from existing users and subscribers and direct traffic to our applications. Historically, we have had to increase our
marketing expenditures in order to attract and retain users and sustain our growth. For example, during 2022, we engaged two marketing
agencies to help us drive consumer engagement through the Paltalk and Camfrog applications. The availability of advertising space varies,
and a shortage of advertising space in any particular media or on any particular platform, or the elimination of a particular medium
on which we advertise, could limit our ability to generate new subscribers, generate activity from existing subscribers or direct traffic
to our applications, any of which could have a material adverse effect on our business, results of operations and financial condition.
In addition, evolving consumer behavior can affect the availability of profitable marketing opportunities. For example, as consumers
communicate less via email and more via text messaging and other virtual means, the reach of email campaigns designed to attract new
and repeat users (and retain current users) for our applications is adversely impacted. To continue to reach potential users and grow
our business, we must devote more of our overall marketing expenditures to newer advertising channels, which may be unproven and undeveloped,
and we may not be able to continue to manage and fine-tune our marketing efforts in response to these trends. Any future marketing efforts
may be ineffective or inadequate to attract potential users or retain existing users.
Interruption, maintenance or failure of
our programming code, servers or technological infrastructure could hurt our ability to effectively provide our applications, which could
damage our reputation and harm our results of operations.
The availability of our applications depends
on the continued operation of our programming code, databases, servers and technological infrastructure. Any damage to, or failure of,
our systems could result in interruptions in service for our applications, which could damage our brands and have a material adverse
effect on our business, results of operations or financial condition. Our systems are vulnerable to damage or interruption from terrorist
attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts
to harm our systems. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities.
In addition, from time to time we experience
limited periods of server downtime due to maintenance or enhancements. If our applications are unavailable during these periods of downtime
or if our users are unable to access our applications within a reasonable amount of time, users may not return to our applications in
the future, or at all. As our user base and the volume and types of information shared on our applications continues to grow, we will
need an increasing amount of technology infrastructure, including network capacity and computing power, to continue to satisfy our users’
needs. It is possible that we may fail to effectively scale and grow our technology infrastructure to accommodate these increased demands.
Any failure to support and scale our technology infrastructure could adversely impact the reputation of our brands and harm our results
of operations.
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.
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
increase 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. Moreover, globally there has been an
increase in cybersecurity attacks since Russia invaded Ukraine. The risk of state-supported and geopolitical-related cyber-attacks may
increase in connection with the war in Ukraine and any related political or economic responses and counter-responses. We may not discover
all such incidents or activity or be able to respond or otherwise address them promptly, in sufficient respects or at all.
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.
We have faced, and we expect that we will
continue to face, chargeback liability when our credit card providers resolve chargebacks in favor of their customers. We cannot accurately
anticipate the extent of these liabilities, and if not properly addressed, these liabilities could increase our operating expenses or
preclude us from accepting certain credit cards as a method of payment, either of which would materially adversely affect our results
of operations and financial condition.
We depend on the ability to accept credit and
debit card payments from our subscribers and our ability to maintain the good standing of our merchant account with our credit card providers
to process subscription payments. In the event that one of our customers initiates a billing dispute and one of our credit card providers
resolves the dispute in the customer’s favor, the transaction is normally charged back to us and the purchase price is credited
or otherwise refunded to the customer. In addition, under current credit card practices, a merchant is liable for fraudulent credit card
transactions when, as is the case with the transactions we process, that merchant does not obtain a cardholder’s signature.
We have suffered losses and we expect that we
will continue to suffer losses as a result of subscriptions placed with fraudulent credit card data, as well as users who chargeback
their purchases. Any failure to adequately control fraudulent credit card transactions or keep our chargebacks under an acceptable threshold
would result in significantly higher credit card-related costs and, therefore, materially increase our operating expenses.
We face certain risks related to the physical and emotional
safety of users and third parties.
We cannot control the actions of our users in
their communications or physical actions. There is a possibility that users or third parties could be physically or emotionally harmed
following interaction with another user. We warn our users that we do not screen other users and, given our lack of physical presence,
we do not take any action to ensure personal safety on a meeting between users or subscribers arranged following contact initiated via
our applications or ensure personal safety of our users against self-harming following contact with other users initiated via our applications.
If an unfortunate incident of this nature occurred in a meeting of two people following contact initiated on our applications or that
of one of our competitors, any resulting negative publicity could materially and adversely affect us or the online video chat industry
in general. Any such incident involving our applications could damage our reputation and our brand, which could have a material adverse
effect on our business, results of operations or financial condition. In addition, the affected users or third parties could initiate
legal action against us, which could divert management attention from operations, cause us to incur significant expenses, whether we
are successful or not, and damage our reputation.
We may need additional capital to execute
our business plan. If we do not obtain additional financing, it could have a material adverse effect on our business, results of operations
or financial condition.
We might need to raise additional capital or
financing through debt or equity offerings to support our expansion, marketing efforts and application development programs in the future.
For instance, we might require additional capital or financing to:
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hire and retain talented
employees, including technical employees, executives, and marketing experts; |
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effectuate our long-term
growth strategy and expand our application development programs; and |
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market and advertise our
applications to attract more paying subscribers. |
We may be unable to obtain future capital or
financing on favorable terms or at all. If we cannot obtain additional capital or financing, we may need to reduce, defer or cancel application
development programs, planned initiatives, marketing or advertising expenses or costs and expenses. The failure to obtain necessary additional
capital or financing on favorable terms, if at all, could have a material adverse effect on our business, results of operations or financial
condition.
If the distribution of our products through
application stores increases, we may incur additional fees from the developers of application stores.
As the user base of our consumer applications
continues to shift to mobile solutions, we increasingly rely on the Apple iOS and Google Android platforms to distribute our products.
While our products are free to download from these stores, we offer our users the opportunity to purchase paid memberships and certain
premium features through our products. We determine the prices at which these memberships and features are sold and, in exchange for
facilitating the purchase of these memberships and features through our products to users who download our products from these stores,
we pay Apple or Google, as applicable, a share, which is currently up to 30% of the revenue we receive from these transactions. In the
future, other distribution platforms that we utilize may charge us fees for the distribution of our applications. If the distribution
of our products through application stores increases, the amount of fees that we must pay to the developers of these application stores
will also increase. Unless we find a way to offset these fees, our business, financial condition and results of operations could be adversely
affected.
We may make or attempt to make acquisitions
in the future, which could require significant management attention, disrupt our business, dilute our stockholders and seriously harm
our business.
As part of our business strategy, we have made
and intend to make acquisitions to add specialized employees and complementary companies, products and technologies. In the future, we
may not be able to find other suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if
at all. Our previous and future acquisitions may not achieve our goals, and any future acquisitions we complete could be viewed negatively
by users, advertisers or investors. In addition, if we fail to successfully close transactions or integrate new teams, or integrate the
products and technologies associated with these acquisitions into our company, our business could be seriously harmed. Any integration
process may require significant time and resources, and we may not be able to manage the process successfully. We may not successfully
evaluate or use the acquired products, technology and personnel, or accurately forecast the financial impact of an acquisition transaction,
including accounting charges. We may also incur unanticipated liabilities that we assume as a result of acquiring companies. We may have
to pay cash, incur debt or issue equity securities to pay for any acquisition, any of which could negatively impact our business and
financial condition. Issuing equity to finance any such acquisitions would also dilute our existing stockholders. Incurring debt would
increase our fixed obligations and could also include covenants or other restrictions that would impede our ability to manage our operations.
We may conduct a portion of our operations
through informal relationships, partnerships, strategic alliances or joint ventures, and our failure to continue such relationships or
resolve any material disagreements with these third parties could have a material adverse effect on the success of these operations,
our financial condition and our results of operations.
We may conduct a portion of our operations through
partnerships, strategic alliances or joint ventures and therefore we may depend on third parties for elements of these arrangements that
are important to the success of the relationship, such as the development of features or technologies to be incorporated into our applications.
The performance of these third-party obligations or the ability of third parties to meet their obligations under these arrangements would
be outside of our control. If these third parties do not meet or satisfy their obligations under these arrangements, the performance
and success of these arrangements, and their value to us, would be adversely affected. If our current or future partners are unable to
meet their obligations, we may be forced to undertake the obligations ourselves and/or incur additional expenses in order to have some
other party perform such obligations. In such cases we may also be required to seek legal enforcement of our rights, the outcome of which
would be uncertain. If any of these events occur, they may adversely impact us, our financial performance and results of operations,
and/or adversely impact our ability to enter into similar relationships in the future.
Strategic arrangements with third parties could involve risks not
otherwise present when we directly manage our operations, including, for example:
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third parties may share
certain approval rights over major decisions within the scope of the relationship; |
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the possibility that these
third parties might become insolvent or bankrupt; |
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the possibility that we
may incur liabilities as a result of an action taken by one of these third parties; |
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these third parties may
be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; and |
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disputes between us and
these third parties may result in litigation or arbitration that would increase our expenses, delay or terminate projects and prevent
our officers and directors from focusing their time and effort on our business. |
Legal and Regulatory Risks
We may be liable as a result of information retrieved from or
transmitted over the internet.
We may be sued for defamation, civil rights infringement,
negligence, copyright or trademark infringement, invasion of privacy, personal injury, product liability or under other legal theories
relating to information that is published or made available on our websites or applications. These types of claims have been brought,
sometimes successfully, against online services in the past. We also offer messaging services on our applications and we send emails
directly and through third parties to our users, which may subject us to potential risks, such as liabilities or claims resulting from
unsolicited email or spamming, lost or misdirected messages, security breaches, illegal or fraudulent use of email or personal information
or interruptions or delays in email service. Our insurance does not specifically provide for coverage of these types of claims and, therefore,
may be inadequate to protect us against them. In addition, we could incur significant costs in investigating and defending such claims,
even if we ultimately are not held liable. If any of these events occur, our revenue could be materially adversely affected or we could
incur significant additional expense, and the market price of our securities may decline.
Changes in laws or regulations, including
laws and regulations that impact the use of the internet, such as internet neutrality laws, or laws that relate to content provided over
the internet or monitoring such content, could adversely affect our business, results of operations or financial condition.
The adoption of any laws or regulations that
adversely affect the growth or use of the internet, including laws governing internet neutrality, could decrease the demand for our products
and increase our cost of doing business. In January 2018, the Federal Communications Commission (the “FCC”) released an order
that repealed the “open internet rules,” often known as “net neutrality,” which prohibit internet providers in
the United States from impeding access to most content, or otherwise unfairly discriminating against content providers like us. These
rules also prohibited mobile providers from entering into arrangements with specific content providers for faster or better access over
their data networks. The FCC order repealing the open internet rules went into effect in June 2018. In response to this decision, California
and a number of states implemented their own net neutrality rules which largely mirrored the repealed federal regulations. The U.S. Department
of Justice (“DOJ”) has filed suit to bar implementation of these state laws and their application remains uncertain. For
instance, on February 8, 2021, the DOJ voluntarily dismissed its suit against California’s net neutrality bill. We cannot predict
the outcome of similar litigation or whether the FCC order or state initiatives regulating providers will be modified, overturned, or
vacated by other legal action, federal legislation, or the FCC, or the degree to which this repeal would adversely affect our business,
if at all. The European Union similarly requires equal access to internet content. If the FCC, Congress, the European Union or courts
modify these open internet rules, mobile providers may be able to limit our users’ ability to access our applications or make our
applications a less attractive alternative to our competitors’ applications, which could materially adversely affect our business,
results of operations and financial condition.
In addition, it is possible that a number of
additional laws and regulations may be adopted or construed to apply to us, including gambling laws. Some of the video card games that
we offer on our Paltalk application are based upon traditional casino games, such as poker and blackjack. We have structured and operate
these games and features with gambling laws in mind and believe that these games and features do not constitute gambling. Our games are
offered for entertainment purposes only and do not offer an opportunity to win real money. However, our video card games could in the
future become subject to gambling-related laws and regulations and expose us to civil and criminal penalties. If were to become subject
to such laws and regulations, we might be required to seek licenses, authorizations or approvals from relevant regulators, the granting
of which may be dependent on us meeting certain capital and other requirements, and we may be subject to additional regulation and oversight,
such as reporting to regulators, all of which could significantly increase our operating costs. Changes in current laws or regulations
or the imposition of new laws and regulations in the United States, Europe or elsewhere regarding these activities may lessen the growth
of video card game services and impair our business.
Changes in tax laws could materially affect
our financial condition, results of operations and cash flows.
The tax regimes we are subject to or operate
under, including income and non-income taxes, are unsettled and may be subject to significant change. For example, the Inflation Reduction
Act (the “IRA”) was signed into law on August 16, 2022 and will become effective beginning in fiscal 2023. The IRA imposes
a 1% excise tax on certain share repurchases occurring after December 31, 2022 (including, potentially pursuant to our Stock Repurchase
Program (as defined herein)). We do not currently expect that the IRA will have a material impact on our income tax liability. We are
unable to predict what changes to the tax laws of the U.S. and other jurisdictions may be proposed or enacted in the future or what effect
such changes would have on our business. Any significant increase in our future effective tax rate could have a material adverse impact
on our business, financial condition, results of operations, or cash flows.
If there are changes in laws or regulations
regarding privacy and the protection of user data, or if we fail to comply with such laws or regulations, we may face claims brought
against us by regulators or users that could adversely affect our business, results of operations or financial condition.
State, federal and international laws and regulations
govern the collection, use, retention, sharing and security of data that we receive from and about our users. These laws can be particularly
restrictive in certain states and in countries outside of the United States. In addition, the application and interpretation of these
laws and regulations are often uncertain, particularly in the new and rapidly evolving industries in which we operate.
The European Union has implemented a privacy
regulation called the GDPR that imposes a high level of regulatory scrutiny on our business’ processing of personal data from the
European Economic Area, with possible financial consequences for noncompliance of up to 4% of our worldwide revenues.
The FTC regularly investigates and brings enforcement
actions against companies that have used personally identifiable information in a deceptive or unfair manner or in violation of a posted
privacy policy. If we are accused of violating the terms of our privacy policy, implementing unfair privacy practices or otherwise breaching
data privacy laws, we may be forced to expend significant financial and managerial resources to defend against an action by the FTC,
European Data Protection Authorities, or other state or federal enforcement agencies. Our user database holds the personal information
of our users and subscribers residing in the United States and other countries, and we could be sued by those users if any of the information
is misused or misappropriated.
Growing public concern about privacy and the
use of personal information may subject us to increased regulatory scrutiny. Regulations related to treatment of user data by online
services are evolving as several U.S. state governments have recently adopted new, or modified existing, laws and regulations addressing
data privacy and the collection, processing, storage, transfer and use of data. These state laws include, for example: CCPA, the CPRA,
which became effective on January 1, 2023, and expands upon the CCPA, the Virginia Consumer Data Protection Act, the Colorado Privacy
Act, the Connecticut Act Concerning Personal Data Privacy and Online Monitoring, the Utah Consumer Privacy Act, and the New York SHIELD
Act. In addition, every U.S. state has passed laws requiring notification to users when there is a security breach resulting in unauthorized
disclosure of certain types of personal information, many of which are modeled on California’s Information Practices Act. There
are a number of legislative proposals pending before the U.S. Congress and various state legislative bodies concerning data protection
that could, if adopted, have an adverse effect on our business. We are unable to determine if and when such legislation may be adopted.
Many other jurisdictions, including the European
Union, have adopted breach notification and other data protection notification laws designed to inform users of unauthorized disclosure
of personally identifiable information. The introduction of new privacy and data breach laws and the interpretation of existing privacy
and data breach laws in the United States, Europe and other foreign jurisdictions is constantly evolving. There is a risk that new laws
may be introduced or that existing laws may be applied in a way that would conflict our current data protection practices or prevent
the transfer of data between countries in which we operate. Future laws and regulations with respect to the collection, compilation,
use and publication of information and consumer privacy could result in limitations on our operations, increased compliance or litigation
expense, adverse publicity or loss of revenue, any of which could have a material adverse effect on our business, financial condition
and results of operations.
Any failure, or perceived failure, by us to comply
with such laws and regulations, including FTC requirements or industry self-regulatory principles, could result in proceedings or actions
against us by governmental entities or others, which could potentially have an adverse effect on our business. As a result of such a
failure, or perceived failure, we may be subject to a claim or class-action lawsuit regarding our online services. The successful assertion
of a claim against us, or a regulatory action against us, could result in significant monetary damages, diversion of management resources
and require us to make significant payments and incur substantial legal expenses. Any claims with respect to violation of privacy or
misappropriation of user data brought against us may have a material adverse effect on our business, results of operations and financial
condition.
It is also possible that we could be prohibited
from collecting or disseminating certain types of data, which could affect our ability to meet our users’ needs.
Risks Related to Our Intellectual Property
If we are unable to protect our intellectual
property rights, we may be unable to compete with competitors developing similar technologies.
Historically, our defense of our intellectual
property rights has been a significant aspect of our business and has meaningfully contributed to our results of operations. Accordingly,
our success and ability to compete are often dependent upon the development of intellectual property for our applications.
We aim to protect our confidential proprietary
information, in part, by entering into confidentiality agreements and invention assignment agreements with all our employees, consultants,
advisors and any third parties who access or contribute to our proprietary know-how, information, or technology. We also rely on trademark,
copyright, patent, trade secret, and domain-name-protection laws to protect our proprietary rights. We have filed various applications
to protect aspects of our intellectual property, and we currently hold a number of issued patents. In the future we may acquire additional
patents or patent portfolios, which could require significant cash expenditures. However, third parties may knowingly or unknowingly
infringe our proprietary rights, third parties may challenge proprietary rights held by us, and pending and future trademark and patent
applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which
we operate or intend to operate our business.
In any of these cases, we may be required to
expend significant time and expense to prevent infringement or to enforce our rights. Although we have taken measures to protect our
proprietary rights, others may offer products or concepts that are substantially similar to ours and compete with our business. If we
are unable to protect our proprietary rights or prevent unauthorized use or appropriation by third parties, the value of our brand and
other intangible assets may be diminished, and competitors may be able to more effectively mimic our service and methods of operations.
Any of these events could seriously harm our business.
If we are subject to intellectual property
infringement claims, it could cause us to incur significant expenses, pay substantial damages or royalties and prevent us from offering
our applications.
From time to time, third parties may claim that
our applications infringe or violate their intellectual property rights. Any claims of infringement could cause us to incur significant
expenses and, if successfully asserted against us, could require that we pay substantial damages and prevent us from using licensed technology
that may be fundamental to our applications. Even if we were to prevail, any litigation regarding intellectual property could be costly
and time-consuming and divert the attention of our management and key personnel from our business operations. We maintain insurance to
protect against intellectual property infringement claims and resulting litigation, but such insurance may not cover or may not be sufficient
to cover all potential claims, liability or expenses. We may also be obligated to indemnify our business partners in any such litigation,
which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we may be prevented from offering
our applications unless we enter into royalty, license or other agreements. We may not be able to obtain such agreements at all or on
terms acceptable to us, and as a result, we may be precluded from offering our applications and services.
Risks Related to Ownership of Our Common Stock
Our common stock is historically 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.
Historically, shares of our common stock were
thinly traded on the OTCQB and have usually been thinly traded following our uplist to The Nasdaq Capital Market (“Nasdaq”),
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, stockbrokers, 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.
However, during certain periods we have received,
and may continue to receive, a high degree of media coverage that is published or otherwise disseminated by third parties, including
blogs, articles, message boards and social and other media. This may include coverage that is not attributable to statements made by
the Company or our Board of Directors. Information provided by third parties may not be reliable or accurate and could materially impact
the trading price of our common stock which could cause stockholders to lose their investments.
The market prices and trading volume of our common
stock have recently experienced, and may continue to experience, extreme volatility, which could cause purchasers of our common stock
to incur substantial losses. We believe that the recent volatility and our current market prices reflect market and trading dynamics
unrelated to our underlying business, or macro or industry fundamentals, and we do not know if these dynamics will continue.
Although our common stock is listed for trading
on Nasdaq, 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, stockholders may be unable to sell their common stock at or
near ask prices or at all if they 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 macro-economic factors including rising inflation
rates, the war in Ukraine and 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, stockholders may not be able to sell their shares of common stock when you
desire to do so. The inability to sell shares in a rapidly declining market may substantially increase the risk of loss because of such
illiquidity and because the price for our common stock may suffer greater declines because of its price volatility.
The ownership of our common stock is significantly
concentrated in a small number of investors, some of whom are affiliated with our Board of Directors and management, which could prevent
stockholders from having input on the course of our operations or otherwise lead to actual or potential conflicts of interest.
As of March 15, 2023, Jason Katz, our Chairman
of the Board of Directors, Chief Executive Officer, Chief Operating Officer and President, beneficially owned approximately 38% of our
outstanding common stock, including shares of common stock held directly by Mr. Katz’s spouse, and The J. Crew Delaware Trust A,
a trust formed by Mr. Katz for the benefit of certain of his family members. Mr. Katz is not a beneficiary of the trust and does not
hold voting or dispositive power over the shares held by the trust.
Mr. Katz, The J. Crew Delaware Trust A and others
that have significant beneficial ownership of our common shares have substantial influence regarding matters submitted for stockholder
approval, including proposals regarding:
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any merger, consolidation
or sale of all or substantially all of our assets; |
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the election of members
of our Board of Directors; and |
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any amendment to our Certificate
of Incorporation, as amended (the “Certificate of Incorporation”). |
The current or increased ownership position of
any of these stockholders and/or their respective affiliates could delay, deter or prevent a change of control or adversely affect the
price that investors might be willing to pay in the future for our common shares. In addition, the interests of these stockholders and/or
their respective affiliates may significantly differ from the interests of our other stockholders and they may vote the common shares
they beneficially own in ways with which our other stockholders disagree.
If we fail to maintain an effective system
of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud and our
business may be harmed and our stock price may be adversely impacted.
Effective internal controls over financial reporting
are necessary for us to provide reliable financial reports and to effectively prevent fraud. Any inability to provide reliable financial
reports or to prevent fraud could harm our business. The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires management
to evaluate and assess the effectiveness of our internal control over financial reporting. In order to continue to comply with the requirements
of the Sarbanes-Oxley Act, we are required to continuously evaluate and, where appropriate, enhance our policies, procedures and internal
controls. We have in the past failed, and may in the future fail, to maintain the adequacy of our internal controls over financial reporting.
Such failure could subject us to litigation or regulatory scrutiny and investors could lose confidence in the accuracy and completeness
of our financial reports. We cannot provide any assurance that in the future we will be able to fully comply with the requirements of
the Sarbanes-Oxley Act or that management will conclude that our internal control over financial reporting is effective. If we fail to
fully comply with the requirements of the Sarbanes-Oxley Act, our business may be harmed, and our stock price may decline.
Our results of operations are volatile
and difficult to predict, and our stock price may decline if we fail to meet the expectations of stockholders.
Our revenue and results of operations could vary
significantly from period-to-period and year-to-year and may fail to match our past performance because of a variety of factors, many
of which are outside of our control. Any of these events could cause the market price of our common stock to fluctuate. Factors that
may contribute to the variability of our results of operations include:
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changes in expectations
as to our future financial performance; |
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announcements by us or
our competitors of significant contracts, acquisitions, strategic partnerships or capital commitments; |
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market acceptance of our
new applications and enhancements to our existing applications; |
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the amount of advertising
and marketing that is available and spent on user acquisition campaigns; |
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disruptions in the availability
of our applications on third party platforms; |
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actual or perceived violations
of privacy obligations and compromises of subscriber data; |
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the entrance of new competitors
in our market whether by established companies or the entrance of new companies; |
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additions or departures
of key personnel and the cost of attracting and retaining application developers and other software engineers; |
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general market conditions,
including market volatility and the impact of inflation; and |
| ● | developments in connection with our current patent litigation
or future patent litigation. |
Given the rapidly evolving industry in which
we operate, our historical results of operations may not be useful in predicting our future results of operations. In addition, metrics
available from third parties regarding our industry and the performance of our applications may not be indicative of our future financial
performance.
We may be adversely affected by the effects of inflation.
Increased inflation may result in decreased demand
for our products and services, increased operating costs (including our labor costs), reduced liquidity, and limitations on our ability
to access credit or otherwise raise debt and equity capital. In addition, the United States Federal Reserve has raised, and may continue
to raise, interest rates in response to concerns about inflation. Increases in interest rates, especially if coupled with reduced government
spending and volatility in financial markets, may have the effect of further increasing economic uncertainty and heightening these risks.
In an inflationary environment, we may be unable to raise the prices of our subscriptions at or above the rate at which our costs increase,
which could/would reduce our profit margins and have a material adverse effect on our financial results and net income. We also may experience
lower than expected sales and potential adverse impacts on our competitive position if there is a decrease in consumer spending or a
negative reaction to our pricing. A reduction in our revenue would be detrimental to our profitability and financial condition and could
also have an adverse impact on our future growth.
The issuance of shares upon the exercise
of stock options and unvested shares of restricted common stock may cause immediate and substantial dilution to our existing stockholders.
As of December 31, 2022, we had approximately
792,055 shares of common stock that were issuable upon the exercise of vested outstanding stock options. The issuance of shares upon
the exercise of these options may result in substantial dilution to the equity interest and voting power of holders of our common stock.
In the future, we may also issue additional shares
of common stock or other securities convertible into or exchangeable for shares of common stock. Our Certificate of Incorporation currently
authorizes us to issue up to 25,000,000 shares of common stock, of which 9,864,120 were outstanding as of December 31, 2022, which includes
10,000,000 shares of preferred stock with such designations, preferences and rights as determined by our Board of Directors, of which
none were outstanding as of December 31, 2022. The issuance of additional shares of our common stock may substantially dilute the ownership
interests of our existing stockholders. Furthermore, sales of a substantial amount of our common stock in the public market, or the perception
that these sales may occur, could reduce the market price of our common stock. This could also impair our ability to raise additional
capital through the sale of our securities.
Because we have no current plans to pay
cash dividends on our common stock for the foreseeable future, a stockholder might not receive any return on investment unless the stockholder
sold its shares of common stock for a price greater than that for which the shares were purchased.
We do not anticipate that we will declare or
pay any dividends on our common stock in the foreseeable future. Consequently, stockholders will only realize an economic gain on their
investment in our common stock if the price appreciates. Stockholders should not purchase our common stock expecting to receive cash
dividends. Because we currently do not pay dividends, and there may be limited trading in our common stock, stockholders may not have
any manner to liquidate or receive any payment on their common stock. Therefore, our failure to pay dividends may cause stockholders
to not see any return on their common stock even if we are successful in our business operations. In addition, because we do not pay
dividends, we may have trouble raising additional funds which could affect our ability to expand our business operations.
Our Certificate of Incorporation designates
the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may
be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes
with us or our directors, officers, employees, or stockholders.
Our Certificate of Incorporation provides that,
subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any (i) derivative
action or proceeding brought on behalf of our Company, (ii) action asserting a claim of breach of a fiduciary duty owed by any director,
officer, employee, agent, or stockholder of our Company to the Company or the Company’s stockholders, (iii) action asserting a
claim against the Company or any director, officer, employee, agent, or stockholder of the Company arising pursuant to any provision
of the Delaware General Corporation Law or our Certificate of Incorporation or our Amended and Restated By-Laws, as amended, or (iv)
action asserting a claim against the Company or any director, officer, employee, agent, or stockholder of the Company governed by the
internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be
deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above.
This exclusive forum provision applies to state
and federal law claims, although our stockholders will not be deemed to have waived our compliance with the federal securities laws and
the rules and regulations thereunder. In addition, this exclusive forum selection provision will not apply to claims under the Exchange
Act. Moreover, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to
enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Accordingly, there is uncertainty
as to whether a court would enforce our forum selection provision as written in connection with claims arising under the Securities Act.
This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for
disputes with us or our directors, officers, or other employees, which may discourage such lawsuits against us and our directors, officers
and employees.
Investor relations activities, nominal
“float” and supply and demand factors may affect the price of our common stock.
We have engaged an investor relations firm to
create investor awareness for our Company. These campaigns may include non-deal road shows and personal, video and telephone conferences
with investors and prospective investors in which our business and business practices are described. We provide compensation to our investor
relations firm, and may in the future provide compensation to additional investor relations firms or financial advisory firms, for these
services, and pay for newsletters, websites, mailings and email campaigns that are produced by third parties based upon publicly available
information concerning us. We do not intend to review or approve of the content of such analyst reports or other writings and communications
that are based upon analysts’ own research or methods. Investor relations firms are generally required to disclose when they are
compensated for their efforts and the source of such compensation, but whether such disclosure is made or in compliance with applicable
laws is not under our control. In addition, our investors may, from time to time, take steps to encourage investor awareness through
similar activities that may be undertaken at the expense of such investors. Investor awareness activities may also be suspended or discontinued,
which may impact the trading market of our common stock.
The SEC and the Financial Industry Regulatory
Authority enforce various statutes and regulations intended to prevent manipulative or deceptive devices in connection with the purchase
or sale of any security and carefully scrutinize trading patterns and company news and other communications for false or misleading information,
particularly in cases where the hallmarks of “pump and dump” activities may exist, such as rapid share price increases or
decreases. We and our stockholders may be subjected to enhanced regulatory scrutiny due to the fact that our affiliates hold a majority
of our outstanding common stock and we have a limited number of shares of common stock that are publicly available for resale.
The Supreme Court of the United States has stated
that manipulative action is a term of art connoting intentional or willful conduct designed to deceive or defraud investors by controlling
or artificially affecting the price of securities. Often times, manipulation is associated by regulators with forces that upset the supply
and demand factors that would normally determine trading prices. Securities regulators have often cited thinly-traded markets, small
numbers of holders and awareness campaigns as components of their claims of price manipulation and other violations of law when combined
with manipulative trading, such as wash sales, matched orders or other manipulative trading timed to coincide with false or touting press
releases. There can be no assurance that our activities or the activities of third parties, or the small number of potential sellers
or small percentage of stock in our public float, or determinations by purchasers or holders as to when or under what circumstances or
at what prices they may be willing to buy or sell stock, will not artificially impact (or would be claimed by regulators to have affected)
the normal supply and demand factors that determine the price of our common stock.
If we are not able to comply with the applicable
continued listing requirements or standards of Nasdaq, Nasdaq could delist our securities.
Our common stock was approved for listing on
Nasdaq under the symbol “PALT” and began trading on Nasdaq on August 3, 2021. We cannot assure our stockholders that our
securities will continue to be listed on Nasdaq 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 our stockholders that our common
stock, if delisted from Nasdaq, will be listed on another national securities exchange. If our common stock is delisted by Nasdaq, 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.