PALTALK, INC. MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS (Form 10-K)

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This Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to provide a reader of our financial statements with a
narrative from the perspective of our management on our financial condition,
results of operations, liquidity, and certain other factors that may affect our
future results. The following discussion and analysis should be read in
conjunction with our audited consolidated financial statements and the
accompanying notes thereto included in "Item 8. Financial Statements and
Supplementary Data."



Forward-Looking Statements



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

Overview



We are a 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 product is Vumber, which is a telecommunications services
provider that enables users to communicate privately by having multiple phone
numbers with any area code through which calls can be forwarded to a user's
existing telephone number. We have an over 20-year history of technology
innovation and hold 14 patents.



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



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



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

Presentation background and recent developments


Update on COVID-19



The World Health Organization declared COVID-19 a pandemic on March 11, 2020.
The global spread of the COVID-19 pandemic and the various attempts to contain
it have created significant volatility, uncertainty and economic disruption.
COVID-19 continues to have an unpredictable and unprecedented impact on the U.S.
economy as federal, state and local governments react to this public health
crisis with travel restrictions and potential quarantines. Although our core
multimedia social applications have been able to support the increased demand we
have experienced, the extent of the future impact of the COVID-19 pandemic on
our business is highly uncertain and difficult to predict. Adverse economic and
market conditions as a result of COVID-19 could also affect the demand for our
applications and the ability of our users to satisfy their obligations to us. If
the pandemic continues to cause significant negative impacts to economic
conditions, our results of operations, financial condition and liquidity could
be materially and adversely impacted.



On April 13, 2020, to help ensure adequate liquidity in light of the
uncertainties posed by the COVID-19 pandemic, we applied for a loan under the
Small Business Administration ("SBA") Paycheck Protection Program under the
Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), and on May
3, 2020, we entered into a promissory note with an aggregate principal amount of
$506,500 (the "Note") in favor of Citibank, N.A., as lender (the "Lender"). On
January 13, 2021, the Note was fully forgiven by the SBA and the Lender in
compliance with the provisions of the CARES Act. We do not expect to incur
additional indebtedness under the CARES Act.



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



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August 2021 Guaranteed public offer



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



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

October 2021 Guaranteed public offer



On October 19, 2021, we announced the pricing and closing of an underwritten
public offering of an aggregate of 1,552,500 shares of our common stock (which
includes 202,500 shares sold to the underwriter pursuant to the full exercise of
the underwriter's over-allotment option) at a public offering price of $7.50 per
share (the "October 2021 Offering"). The October 2021 Offering was made pursuant
to an effective shelf Registration Statement on Form S-3 (Registration No.
333-260063), previously filed with the SEC on October 5, 2021 and declared
effective on October 14, 2021. The October 2021 Offering was offered by means of
a prospectus supplement and accompanying prospectus, forming part of the
registration statement. The net proceeds to us from the October 2021 Offering
were approximately $10.7 million, after deducting underwriting discounts,
commissions and other estimated offering expenses.



Launch of Paltalk rewards points



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



Highlights and operational objectives

During the year ended December 31, 2021we executed the key elements of our objectives:

? completed a listing of our common shares on the Nasdaq, which began

trading on the Nasdaq August 3, 2021under the current symbol of the Company

“PALT” symbol;

? collected gross proceeds of approximately $15.6 million in connection with

the August 2021 Offer and October 2021 Offer of a set of

2,885,810 common shares at a public price of $3.00 and

$7.50 per share, respectively;

? sold approximately 36.9 million Props tokens for the proceeds of $0.9 million

        during the year ended December 31, 2021;

    ?   reported net income of $1.3 million for the year ended December 31, 2021

which included a non-cash $0.8 million depreciation of digital token assets,

        compared to net income of $1.4 million for the year ended December 31,
        2020; and



? achieved a positive net cash flow of $16.1 million for the year ended December

   31, 2021, an improvement of $13.9 million when compared to the year ended
   December 31, 2020.




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In the short term, our business objectives include:

? invest in strong marketing initiatives through marketing agencies to

to drive new user acquisition intended to lead to increased revenue;



   ?  implementing several enhancements to our live video chat applications as

as well as the integration of games and other features focused on retention and

monetization, which collectively aim to increase user engagement

      and revenue opportunities;



? continue to explore strategic opportunities, including, but not limited to,

potential mergers or acquisitions of other entities that are synergistic to our

   businesses;




? focus on our core business to continue to leverage efficiencies

in 2021 and develop our core business profitably;

? further develop our consumer application platform strategy by seeking

potential partnerships with large third-party communities to whom we may

promote a co-branded version of our video chat products and potentially share

in the additional income generated by these partner communities; and

? continue to defend our intellectual property.



Sources of Revenue



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



Subscription Revenue



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



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



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



Advertising Revenue



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



Technology Services Revenue



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



On May 29, 2020, we entered into an Asset Purchase Agreement, which was
subsequently amended and restated (the "Amended and Restated Agreement") with
SecureCo, LLC ("SecureCo"), pursuant to which we agreed to sell substantially
all of the assets related to our secure communications business (the "Secured
Communications Assets") to SecureCo. The Amended and Restated Agreement also
provides for a revenue sharing arrangement, pursuant to which we are entitled to
receive quarterly royalty payments ranging from 5% to 10% of certain revenues
received by SecureCo, with the aggregate amount of such royalty payments not to
exceed $500,000. The royalty payments, if received, will be recorded as
technology service revenue. We do not expect to continue to pursue secure
communications products or technology implementation services as part of our
overall business strategy.



During the years ended December 31, 2021 and 2020, we also 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, YouNow agreed to pay us, in
exchange for our services, an aggregate of 10.5 million cryptographic props
tokens ("Props tokens") upon the achievement of certain milestones. The upfront
fee is recognized as revenue under the output method based on the direct
measurements of the value of services transferred to date to the customer,
relative to the remaining services under the YouNow Agreement. The milestones
fees were recognized as revenue on the completion dates of integration services
performed during the second and third quarters of 2020. Once the integration of
Props tokens into our Paltalk and Camfrog applications was completed, we began
receiving Props tokens for providing a validator service and for allowing users
to participate in the loyalty platform. The loyalty platform 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
consolidated statements of operations. The total net revenue value is recognized
as earned.



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



For the year ended December 31, 2021, 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. In connection with the notice of termination and
in accordance with the YouNow Agreement, we received an additional 2,625,000
Props tokens. The value of these tokens was recorded as revenue under
"technology service revenue" in the consolidated statements of income. The
YouNow Agreement was terminated effective on November 23, 2021. We now expect
that most of our technology service revenue generated in the future will result
from opportunistic partnerships between us and third parties.



During the year ended December 31, 2021we sold approximately 36.9 million Props tokens for total proceeds of $0.9 million.


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Costs and Expenses



Cost of revenue



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



Sales and marketing expense



Sales and marketing expense consist primarily of advertising expenditures and
compensation (including stock-based compensation) and other employee-related
costs for personnel and consultants engaged in sales and sales support
functions. Advertising and promotional spend includes online marketing,
including fees paid to search engines, and offline marketing, which primarily
consists of partner-related payments to those who direct traffic to our brands.



Product development expense


Product development expense, which relates to the development of technology of
our applications, consists primarily of compensation (including stock-based
compensation) and other employee-related and consultants-related costs that are
not capitalized for personnel engaged in the design, testing and enhancement of
service offerings as well as amortization of capitalized website development
costs.


General and administrative costs



General and administrative expense consists primarily of compensation (including
non-cash stock-based compensation) and other employee-related costs for
personnel engaged in executive management, finance, legal, tax and human
resources and facilities costs and fees for other professional services and cost
of insurance. General and administrative expense also includes depreciation of
property and equipment and amortization of intangible assets.



Loss of value on digital tokens

Impairment loss on digital tokens results from the daily assessment of the Props
tokens' quoted market prices, as reflected on CoinmarketCap, and adjusting the
recorded carrying amount to the amount equal to the lowest quoted market price
during the period in which the Props tokens are held. During the year ended
December 31, 2021, we recorded a non-cash impairment charge in the amount of
$765,232, which is reported in our accompanying consolidated statements of
income as a result of recent decline in the quoted market prices below the
market price of their acquisition.



Key Metrics



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



                                                          Year Ended
                                                         December 31,
                                                     2021             2020
Subscription bookings                            $ 12,224,780     $ 12,195,725
Net cash provided by operating activities        $  1,265,464     $  1,435,300
Net income                                       $  1,324,106     $  1,371,262
Adjusted EBITDA                                  $  1,281,361     $  1,955,854
Adjusted EBITDA as percentage of total revenue            9.7 %           15.2 %




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Subscription Bookings



Subscription bookings is a financial measure representing the aggregate dollar
value of subscription fees and virtual gifts purchases received during the
period. We calculate subscription bookings as subscription revenue recognized
during the period plus the change in deferred subscription revenue recognized
during the period. We record subscription revenue from subscription fees as
deferred subscription revenue and then recognize that revenue ratably over the
length of the subscription term or ratably over usage for virtual gifts. Our
management uses subscription bookings internally in analyzing our financial
results to assess operational performance and to assess the effectiveness of,
and plan future, user acquisition campaigns. We believe that this financial
measure is useful in evaluating the performance of our consumer applications
because we believe, as compared to subscription revenue, it is a better
indicator of the subscription activity in a given period. We believe that both
management and investors benefit from referring to subscription bookings in
assessing our performance and when planning, forecasting and analyzing future
periods.



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



Adjusted EBITDA


Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as
net income adjusted to exclude net loss from interest income, net, provision for
income taxes, gain on office lease termination, impairment loss on goodwill,
gain from sale of Secured Communication Assets, gain on the extinguishment of
term debt, provision for income taxes, depreciation and amortization expense,
loss on disposal of property and equipment, other expense, impairment loss on
digital tokens, gain on extinguishment of digital tokens payable, realized loss
(gain) from the sale of digital tokens and stock-based compensation expense.



We present Adjusted EBITDA because it is a key measure used by our management
and Board of Directors to understand and evaluate our core operating performance
and trends, to develop short- and long-term operational plans and to allocate
resources to expand our business. In particular, the exclusion of certain
expenses in calculating Adjusted EBITDA can provide a useful measure for
period-to-period comparisons of the cash operating income generated by our
business. We believe that Adjusted EBITDA is useful to investors and others to
understand and evaluate our operating results, and it allows for a more
meaningful comparison between our performance and that of competitors.



Adjusted EBITDA limits



Our use of Adjusted EBITDA has limitations as an analytical tool, and you should
not consider this performance measure in isolation from or as a substitute for
analysis of our results as reported under GAAP. Some of these limitations are
that Adjusted EBITDA does not reflect: cash capital expenditures for assets
underlying depreciation and amortization expense that may need to be replaced or
for new capital expenditures; net loss from discontinued operations; interest
income, net; other expense, net; gain on sale of the Dating Services Business;
income tax expense from continuing operations; gain on office lease termination;
impairment loss on goodwill; gain from sale of Secured Communication Assets;
loss on disposal of property and equipment; our working capital requirements;
the impairment loss on digital tokens; realized gain (loss) from the sale of
digital tokens; the potentially dilutive impact of stock-based compensation;
gain on the extinguishment of term debt; gain on extinguishment of digital
tokens payable; and the provision for income taxes. Other companies, including
companies in our industry, may calculate Adjusted EBITDA differently, which
reduces its usefulness as a comparative measure.



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



                                                           Year Ended
                                                          December 31,
                                                      2021            2020
Reconciliation of Net Income to Adjusted EBITDA:
Net income                                         $ 1,324,106     $ 

1,371,262

Stock-based compensation expense                       (35,653 )       

243 197

Depreciation and amortization expense                  370,845         

571,725

Gain on office lease termination                             -        (141,001 )
Impairment loss on digital tokens                      765,232             

Interest income, net                                      (133 )        (7,119 )
Gain from sale of Secured Communications Assets              -        (250,000 )
Loss on disposal of property and equipment                   -          

39,238

Gain on extinguishment of term debt                   (506,500 )           

Loss (gain) realized on sale of digital tokens (307,934 ) 72,123 Gain on termination of digital tokens payable (338,553 )

 -
Other expense                                                -          56,042
Provision for income taxes                               9,951             387
Adjusted EBITDA                                    $ 1,281,361     $ 1,955,854




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Results of Operations


The following table presents consolidated income statement data for each of the periods shown as a percentage of total revenue:


                                                               Years Ended
                                                               December 31,
                                                            2021         2020
Total revenue                                                100.0 %      100.0 %
Costs and expenses:
Cost of revenue                                               20.5 %       20.1 %
Sales and marketing expense                                    8.8 %        6.4 %
Product development expense                                   40.6 %       39.2 %
General and administrative expense                            20.4 %       24.7 %
Impairment loss on digital tokens                              5.8 %       
 -%
Total costs and expenses                                      96.1 %       90.4 %
Income from operations                                         3.9 %        9.6 %
Interest income, net                                           0.0 %        0.1 %
Gain from sale of Secured Communications Assets                 -%          1.9 %
Gain on extinguishment of term debt                            3.8 %       

-%

Realized gain (loss) from sale of digital tokens               2.3 %       (0.6 )%
Other expense                                                    - %       (0.4 )%
Income from operations before provision for income taxes      10.0 %      
10.6 %
Provision for income taxes                                    (0.1 )%      (0.0 )%
Net income                                                     9.9 %       10.6 %



Year ended December 31, 2021 Compared to the year ended December 31, 2020


Revenue


Total revenue increased to $13,273,849 for the year ended December 31, 2021 from
$12,832,672 for the year ended December 31, 2020. The increase was primarily
driven by an increase in subscription revenue from the Paltalk application, as
we experienced a change in the proportion of revenue generated from revenue from
subscriptions to revenue from virtual gifts.



The following table sets forth our subscription revenue, advertising revenue,
technology service revenue and total revenue for the year ended December 31,
2021 and the year ended December 31, 2020, the increase or decrease between
those periods, the percentage increase or decrease between those periods, and
the percentage of total revenue that each represented for those periods:



                                      Years Ended                   $                %              % of Revenue Years Ended
                                     December 31,                Increase        Increase                 December 31,
                                 2021             2020          (Decrease)      (Decrease)           2021               2020
Subscription revenue         $ 12,368,008     $ 11,966,497     $    401,511             3.4 %            93.2 %             93.3 %
Advertising revenue               451,337          325,475          125,862            38.7 %             3.4 %              2.5 %
Technology service revenue        454,504          540,700          (86,196
)         (15.9 )%            3.4 %              4.2 %
Total revenues               $ 13,273,849     $ 12,832,672     $    441,177             3.4 %           100.0 %            100.0 %




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Subscription Revenue


Our subscription revenue for the year ended December 31, 2021 increased by
$401,511, or 3.4%, as compared to the year ended December 31, 2020. The increase
in subscription revenue was primarily driven by increased activity in the
Paltalk application from our existing users, as well as a strategic alignment of
pricing promotions and a change in the blend of revenue generated from revenue
from subscriptions to revenue from virtual gifts. In addition, we had an
increase in the Vumber application's subscription revenue resulting from an
increase in the work-from-home trend as a result of the COVID-19 pandemic.

Advertising Revenue


Our advertising revenue for the year ended December 31, 2021 increased by
$125,862or 38.7%, compared to the year ended December 31, 2020. The increase in advertising revenue was primarily driven by an increase in ad impression volume related to changes and optimization of third-party ad partners.


Technology Service Revenue


Our technology service revenue decreased by $86,196, or 15.9%, as compared to
the year ended December 31, 2020. The decrease in technology service revenue was
driven by the termination of the YouNow Agreement, effective November 23, 2021.



Costs and Expenses


Total costs and expenses for the year ended December 31, 2021 increased by
$1,164,382, or 10.0%, as compared to the year ended December 31, 2020. The
following table presents our costs and expenses for the years ended December 31,
2021 and 2020, the increase or decrease between those periods and the percentage
increase or decrease between those periods and the percentage of total revenue
that each represented for those periods:



                                Years Ended                   $               %             % of Revenue Years Ended
                               December 31,               Increase        Increase                December 31,
                           2021             2020         (Decrease)      (Decrease)          2021              2020
Cost of revenue        $  2,720,189     $  2,573,083     $   147,106             5.7 %           20.5 %            20.1 %
Sales and marketing                                                        

41.9

expense                   1,170,386          825,069         345,317                 %            8.8 %             6.4 %
Product development                                                        
     7.3
expense                   5,391,819        5,025,482         366,337                 %           40.6 %            39.2 %
General and
administrative
expense                   2,706,733        3,166,343        (459,610 )         (14.5 )%          20.4 %            24.7 %
Impairment loss on
digital tokens              765,232                -         765,232           100.0 %            5.8 %               - %
Total costs and
expenses               $ 12,754,359     $ 11,589,977     $ 1,164,382            10.0 %           96.1 %            90.4 %




Cost of revenue



Our cost of revenue for the year ended December 31, 2021 increased by $147,106,
or 5.7%, as compared to the year ended December 31, 2020. The increase for the
year ended December 31, 2021 was primarily driven by an increase in non-cash
stock compensation expense of $67,000 and an increase of approximately $62,800
in consulting services to support fraud prevention.



Sales and marketing expense



Our sales and marketing expense for the year ended December 31, 2021 increased
by $345,317, or 41.9%, as compared to the year ended December 31, 2020. The
increase in sales and marketing expense for the year ended December 31, 2021 was
primarily due to an increase of approximately $259,000 in marketing user
acquisition expenses and an increase of approximately $87,000 in salary and
related expenses driven by an increased headcount as we grow our focus on social
media.



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Product development expense



Our product development expense for the year ended December 31, 2021 increased
by $366,337, or 7.3%, as compared to the year ended December 31, 2020. The
increase was primarily due to an increase of approximately $382,600 related to
consulting services and software expenses in support of enhanced user retention
and improved monetization in the Paltalk application. This increase was offset
by a decrease of approximately $55,800 in compensation expense as the sale of
the secure communications assets resulted in a decrease in headcount.



General and administrative costs

Our general and administrative expense for the year ended December 31, 2021
decreased by $459,610, or 14.5%, as compared to the year ended December 31,
2020. The decrease in general and administrative expense for the year ended
December 31, 2021 was mainly due to reduced rent expense of $115,100 resulting
from an office lease termination, a decrease in compensation and related
expenses of approximately $151,000, a reduction of approximately $336,500 in
non-cash stock compensation expense primarily from an unvested executive
performance award that was forfeited, and $338,553 non-cash gain on
extinguishment of digital tokens payable. These reductions were offset by an
increase in professional and legal fees in connection with the uplisting to The
Nasdaq Capital Market of approximately $146,000 in August of 2021 and a gain of
$141,000 resulting from an office lease termination during the year ended
December 31, 2020.



Loss of value on digital tokens



We recorded a non-cash impairment loss on digital tokens of $765,232 for the
year ended December 31, 2021 as a result of recent declines in the quoted market
prices of certain digital tokens below the market price of their acquisition.



Non-Operating Income


The following table presents the components of non-operating income for the year
ended December 31, 2021 and the year ended December 31, 2020, the increase or
decrease between those periods and the percentage increase or decrease between
those periods and the percentage of total revenue that each represented for
those periods:



                             Years Ended                 $                %                % of Revenue Years Ended
                            December 31,             Increase          Increase                  December 31,
                         2021          2020         (Decrease)        (Decrease)          2021                 2020
Interest income, net   $     133     $   7,119      $    (6,986 )           (98.1 )%           0.0 %                 0.1 %
Gain from the sale
of Secured
Communications
Assets                         -       250,000         (250,000 )          (100.0 )%             - %                 1.9 %
Gain on
extinguishment of
term debt                506,500             -          506,500             100.0 %            3.8 %                   - %
Realized gain (loss)
from sale of digital
tokens                   307,934       (72,123 )        380,057             527.0 %            2.3 %                (0.6 )%
Other expense                  -       (56,042 )         56,042             100.0 %              - %                (0.4 )%
Total non-operating
income                 $ 814,567     $ 128,954      $   685,613             531.7 %            6.1 %                 1.0 %



Non-operating income for the year ended December 31, 2021 was $814,567, an
increase of $685,613, or 531.7%, as compared to non-operating income of $128,954
for the year ended December 31, 2020. The increase resulted from the gain on
extinguishment of term debt of the $506,500 of proceeds from the Note received
in order to help ensure adequate liquidity in light of the uncertainties posed
by the COVID-19 pandemic and a gain from sale of digital tokens of $307,934.



                                       33




Cash and capital resources


                                                      Years Ended
                                                      December 31,
                                                  2021            2020

Consolidated statements of cash flows Data: Net cash flows generated by operating activities $1,265,464 $1,435,300
Net cash from investing activities 858,848 225,406 Net cash from financing activities 13,927,128 497,656 Net change in cash and cash equivalents $16,051,440 $2,158,362




Currently, our primary source of liquidity is cash on hand and cash flows from
continuing operations, and we believe that our cash and cash equivalents balance
and our expected cash flow from operations will be sufficient to meet all of our
financial obligations for the twelve months from the date these financial
statements are issued. As of December 31, 2021, we had $21,636,860 of cash
and
cash equivalents.



Our primary use of working capital is related to product development resources
and an investment in marketing activities in order to maintain and create new
services and features in applications for our clients and users. In particular,
a significant portion of our working capital has been allocated to the
improvement of our products. In the future, we may also seek to grow our
business by expending our capital resources to fund strategic investments and
partnership opportunities.



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



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



In addition, on October 19, 2021, we announced the pricing and closing of the
October 2021 Offering in which we offered and sold 1,552,500 shares of our
common stock. We also granted the underwriters an option to purchase up to an
additional 202,500 shares of common stock at the public offering price less
discounts and commissions to cover over-allotments, which was exercised in full
on October 14, 2021. The net proceeds to us from the October 2021 Offering were
approximately $10.7 million, after deducting underwriting discounts, commissions
and other estimated offering expenses.



Operating Activities


Net cash provided by operating activities was $1,265,464 for the year ended
December 31, 2021, as compared to net cash provided by operating activities of
$1,435,300 for the year ended December 31, 2020. Changes in accounts receivable
and deferred revenue contributed to a lower cash flow for the year ended
December 31, 2021 of $134,064 and $372,456, respectively, compared to the year
ended December 31, 2020. The decrease in cash flow resulted from a change in
third-party advertising partners as well as a change in the proportion of
revenue generated between revenue from subscriptions and revenue from virtual
gifts due to strategic alignment of the frequency of promotions therefore,
accumulating less deferred revenue. These decreases were offset by an increase
in accounts payables and accrued expenses of $1,059,132 for the year ended
December 31, 2021 compared to the year ended December 31, 2020, mainly as result
of higher provisions of annual performance incentives.



                                       34





Investing Activities



Net cash provided by investing activities was $858,848 for the year ended
December 31, 2021, as compared to net cash provided by investing activities of
$225,406 for the year ended December 31, 2020. The increase in net cash provided
by investing activities is due to an increase in proceeds from the sale of
digital tokens.



Financing Activities



Net cash provided by financing activities was $13,927,128 for the year ended
December 31, 2021 as compared to net cash provided by financing activities of
$497,656 for the year ended December 31, 2020. The increase in net cash provided
by financing activities is a result of the August 2021 and October 2021
Offerings, in which the Company sold an aggregate of 2,885,810 shares of common
stock at a price to the public of $3.00 and $7.50 per share, respectively. Net
proceeds received by the Company from the August 2021 and October 2021 Offerings
were approximately $13.9 million, after underwriting discounts and commissions
and other estimated offering expenses.



Contractual obligations and commitments



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



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



Off-balance sheet arrangements

From December 31, 2021we had no off-balance sheet arrangements.



Critical Accounting Estimates



We prepare our consolidated financial statements in accordance with GAAP. In
doing so, we have to make estimates and assumptions. Our critical accounting
estimates are those estimates that involve a significant level of uncertainty at
the time the estimate was made, and changes in them have had or are reasonably
likely to have a material effect on our financial condition or results of
operations. Accordingly, actual results could differ materially from our
estimates. We base our estimates on past experience and other assumptions that
we believe are reasonable under the circumstances, and we evaluate these
estimates on an ongoing basis. We have reviewed our critical accounting
estimates with the audit committee of our Board of Directors.



Critical Accounting Policies


See Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K for a summary of significant accounting policies, which includes our significant accounting policies, and the effect on our financial statements.

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