PALTALK, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)


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



Forward-Looking Statements



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



Overview


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




Our product portfolio includes Paltalk, Camfrog and Tinychat, which together
host and serve a large collection of video-based communities. Our other products
include ManyCam and Vumber. ManyCam is a live streaming software and virtual
camera that allows users to deliver professional live videos on streaming
platforms, video conferencing apps and distance learning tools. Vumber is a
telecommunications services provider that enables users to communicate privately
by having multiple phone numbers with any area code through which calls can be
forwarded to a user's existing telephone number. We have an over 20-year history
of technology innovation and hold 14 patents.



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



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


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



                                       16







Recent Developments



ManyCam Asset Acquisition



On June 9, 2022 (the "Effective Date"), we entered into a Securities Purchase
Agreement (the "Securities Purchase Agreement") by and among the Company,
ManyCam ULC, an unlimited liability company incorporated under the laws of the
Province of Alberta and a wholly owned subsidiary of the Company (the
"Purchaser"), Visicom Media Inc., a Canadian corporation ("Visicom"), and
2434936 Alberta ULC, an unlimited liability company incorporated under the laws
of the Province of Alberta ("Target NewCo"), pursuant to which the Purchaser
purchased, effective as of the Effective Date, all of the issued and outstanding
shares of Target NewCo (the "ManyCam Acquisition"). Prior to the ManyCam
Acquisition, Target NewCo held all assets related to, or used by Visicom in
connection with, the business of developing and distributing virtual webcam
driver software, including virtual backgrounds and/or "masks" or other camera
effects (other than the Excluded Contracts (as defined in the Securities
Purchase Agreement)), whether tangible or intangible, including, but not limited
to, Target NewCo's ManyCam software ("ManyCam") and related source code,
customer lists, customer relationships and all associated customer information,
contracts with contractors and suppliers, brand names, trade secrets,
trademarks, trade names, designs, copyrights, websites, all URLs, goodwill and
intellectual property associated with each of the foregoing (collectively,
the
"Conveyed Assets").



The Purchaser acquired the Conveyed Assets for a cash purchase price of $2.7
million (the "Cash Consideration"). In addition to the Cash Consideration,
Visicom is entitled to receive an additional payment of up to $600,000 (the
"Earn-Out Payment") based on the sales of the ManyCam software less chargebacks
and refunds ("Gross Sales") in the six-month period following the Closing (the
"Earn-Out Period") as follows: (i) if the Gross Sales during the Earn-Out Period
are greater than $800,000, the Earn-Out Payment shall be $600,000, (ii) if the
Gross Sales during the Earn-Out Period are greater than $700,000 but less than
$800,000, the Earn-Out Payment shall be $300,000, (iii) if the Gross Sales
during the Earn-Out Period are greater than $600,000 but less than $700,000, the
Earn-Out Payment shall be $150,000 and (iv) if the Gross Sales during the
Earn-Out Period do not exceed $600,000, then Visicom will not be paid any
portion of the Earn-Out Payment.



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



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



On June 30, 2022, we entered into a License Agreement with Visicom (the "License
Agreement"), pursuant to which we agreed to distribute, at the discretion and
direction of Visicom, a specified number of ManyCam software updates to certain
license holders to whom Visicom has previously granted a "lifetime" license to
ManyCam software. As consideration for distributing the software updates,
Visicom paid us an initial upfront nonrefundable payment of $65,000. The License
Agreement provides that Visicom may purchase additional licenses at prices
specified therein. Other than providing a one-time, limited license to Visicom
for the distribution of ManyCam software updates pursuant to the terms of the
License Agreement, we do not have any obligation to provide support or service
to the licensee end users.



                                       17




Macro-Economic Factors and COVID-19 Update

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Our results of operations have been and may continue to be negatively impacted
by the uncertainty regarding COVID-19 and macro-economic factors, including the
timing of economic recessions and/or recovery and the overall inflationary
environment. Prolonged periods of inflation may affect our ability to target new
customers as well as keep existing customers engaged and may ultimately have a
correlating effect on our users' discretionary spending. Furthermore, the recent
strength of the US dollar compared to foreign currencies could have a negative
effect on our non-US customer base, as our subscription prices are based in
US
dollars.



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



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



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



                                       18






Operational Highlights and Objectives

During the nine months ended September 30, 2022, we executed key components of
our objectives:

? acquired the core assets of ManyCam, a live streaming software and virtual

camera that allows users to deliver professional live videos on streaming

platforms, video conferencing apps and distance learning tools and worked on

cross-selling the ManyCam software to commercial businesses as well as retail

    consumers;



? repurchased over 317,000 shares of the Company’s common stock pursuant to a

stock repurchase plan at an average price per share of $1.80, or an aggregate

    amount of $572,000; and



? engaged Roth Capital Partners, LLC (“Roth”) as our financial advisor and

    investment banker to explore strategic initiatives focused on buy-side
    acquisitions;



For the near term, our business objectives include:

? adjusting our spending to better align with overall macro-economic conditions

and investing in a measured way that ensures responsible cash management;

? working with Roth to continue to explore strategic opportunities, including,

but not limited to, potential mergers or acquisitions of other assets or

    entities that are synergistic to our business;

  ? optimizing our acquisition of the ManyCam software to not only maximize
    subscription revenue but to integrate and cross-sell with our existing
    customer base and explore business-to-business sales opportunities;

  ? continuing to implement several enhancements to our live video chat

applications as well as the integration of card and board games and other

features focused on user retention and monetization, which collectively are

    intended to increase user engagement and revenue opportunities;



? continuing to develop our consumer application platform strategy by seeking

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

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

    in the incremental revenues generated by these partner communities; and




  ? continuing to defend our intellectual property.




Sources of Revenue



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



Subscription Revenue



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



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



                                       19







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



Advertising Revenue



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



Technology Service Revenue

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




In 2021, we recorded technology service revenue in connection with our agreement
to serve as a launch partner with Open Props, Inc. (formerly YouNow, Inc., and
referred to herein as "YouNow") and to integrate YouNow's props infrastructure
(the "Props platform") into our Camfrog and Paltalk applications (as amended,
the "YouNow Agreement").



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


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

In August 2021, we received notice from YouNow that it was terminating the
YouNow Agreement, and that it would no longer support the Props platform past
the end of calendar year 2021. The YouNow Agreement was terminated effective on
November 23, 2021. We expect that the majority of our future technology service
revenue, if any, will result from opportunistic collaborations with third
parties, however, any such collaborations are not a primary focus for the
Company.



                                       20





Costs and Expenses



Cost of revenue



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



Sales and marketing expense



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



Product development expense


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


General and administrative expense




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



Impairment loss on digital tokens

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



Key Metrics



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



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




                                       21





Subscription Bookings



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



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



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



Adjusted EBITDA


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



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



Limitations of Adjusted EBITDA




Our use of Adjusted EBITDA has limitations as an analytical tool, and you should
not consider this performance measure in isolation from or as a substitute for
analysis of our results as reported under GAAP. Some of these limitations are
that Adjusted EBITDA does not reflect: cash capital expenditures for assets
underlying depreciation and amortization expense that may need to be replaced or
for new capital expenditures; interest income (expense), net; other income, net;
the potentially dilutive impact of stock-based compensation; gain on the
extinguishment of term debt; and the provision for income taxes. Other
companies, including companies in our industry, may calculate Adjusted EBITDA
differently, which reduces its usefulness as a comparative measure.



                                       22






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



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




Results of Operations



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



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




                                       23






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




Revenue



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



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



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




Subscription Revenue



Our subscription revenue for the three months ended September 30, 2022 decreased
by $610,058, or 19.4%, as compared to the three months ended September 30, 2021.
The decrease in subscription revenue was primarily driven by a decrease in new
subscribers as well as a decrease in virtual gift revenue across the Paltalk and
Camfrog applications. We attribute this decrease to the overall macro-economic
environment that may limit a customer's access to discretionary spending, as
well as, to a lesser degree, the lifting of various COVID-19 related
restrictions in certain of our target markets that had previously prohibited
individuals from leaving their homes which in turn has caused customers to
devote less time to their social applications. As ManyCam is a new product
offering that sells primarily annual subscriptions, its revenue is consistent
with similar annual subscription models in their early stages, as the cash
received traditionally will outpace the subscription revenue recognized. We
anticipate that subscription revenue related to ManyCam will increase in future
quarters as the deferred revenue generated from ManyCam subscriptions is
recognized.



Advertising Revenue



Our advertising revenue for the three months ended September 30, 2022 decreased
by $66,615, or 44.0%, as compared to the three months ended September 30, 2021.
The decrease in advertising revenue was primarily due to a decrease in the
volume of advertising impressions due to a slower growing user base as well as
overall decline in the advertising market.



Technology Service Revenue



Our technology service revenue for the three months ended September 30, 2022
decreased by $77,507, or 100.0%, as compared to the three months ended September
30, 2021. The decrease in technology service revenue was driven by the
termination of the YouNow Agreement, effective November 23, 2021. We do not
expect to generate a material amount of technology service revenue in future
periods.



                                       24







Costs and Expenses



Total costs and expenses for the three months ended September 30, 2022 decreased
by $150,319, or 3.9%, as compared to the three months ended September 30, 2021.
The following table presents our costs and expenses for the three months ended
September 30, 2022 and 2021, the increase or decrease between those periods and
the percentage increase or decrease between those periods and the percentage of
total revenue that each represented for those periods:



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




Cost of revenue


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



Sales and marketing expense



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



Product development expense



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



General and administrative expense

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



Impairment loss on digital tokens

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



                                       25







Non-Operating (Loss) Income


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



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




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



Income Taxes



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



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


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




Revenue



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



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



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




                                       26







Subscription Revenue



Our subscription revenue for the nine months ended September 30, 2022 decreased
by $1,464,287, or 15.6%, as compared to the nine months ended September 30,
2021. The decrease in subscription revenue was primarily driven by a decrease in
new subscribers as well as a decrease in virtual gifts across the Paltalk and
Camfrog applications. We attribute this decrease primarily to the overall
macro-economic environment that may limit a customer's access to discretionary
spending, as well as, to a lesser degree, the lifting of various COVID-19
related restrictions in certain of our target markets that prohibited
individuals from leaving their homes, which in turn may have caused customers to
devote less time to their social applications.



Advertising Revenue



Our advertising revenue for the nine months ended September 30, 2022 decreased
by $54,774, or 18.0%, as compared to the nine months ended September 30, 2021.
The decrease in advertising revenue was primarily due to a decrease in the
volume of advertising impressions related to changes in and the optimization of
third-party advertising partners due to a slower growing user base as well as
overall decline in the advertising market.



Technology Service Revenue


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



Costs and Expenses



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



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




Cost of revenue


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



Sales and marketing expense



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



                                       27







Product development expense



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

General and administrative expense

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


Impairment loss on digital tokens




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



Non-Operating (Loss) Income


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



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




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



Income Taxes



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


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

© Edgar Online, source Glimpses

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PALTALK, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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