UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2021

OR

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

For the transition period from ________ to ________

Commission File Number 001-38717

PALTALK, INC.

(Exact name of registrant as specified in its charter)

Delaware |  | 20-3191847
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

30 Jericho Executive Plaza Suite 400E

Jericho, NY 11753

(Address of principal executive offices) (Zip Code)

(212) 967-5120

(Registrant’s telephone number, including area code)

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

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

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

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

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

Large accelerated filer | ☐ | Accelerated filer | ☐
Non-accelerated filer | ☒ | Smaller reporting company | ☒
|  | Emerging growth company | ☐

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

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

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

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

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

PALTALK, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2021

Table of Contents

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

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

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

i

FORWARD-LOOKING STATEMENTS

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

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

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

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

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

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

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

| ● | our ability to develop, establish and maintain strong brands;

| ● | our reliance on our executive officers and consultants;

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

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

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

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

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

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

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

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

ii

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

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

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

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

| ● | our ability to protect our intellectual property rights;

| ● | our ability to maintain effective internal controls over financial reporting;

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

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

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

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

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

| ● | our ability to attract and retain qualified employees and consultants.

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

iii

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PALTALK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

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

1

PALTALK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

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

2

PALTALK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

(Unaudited)

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

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

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

3

PALTALK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

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

4

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. | Organization and Description of Business

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

The Company is a communications software innovator that powers multimedia social applications. The Company has an over 20-year history of technology innovations and holds 18 patents. The Company’s product portfolio includes Paltalk, Camfrog and Tinychat, which together host a large collection of video-based communities. The Company’s other product is Vumber which is a telecommunications services provider that enables users to communicate privately by having multiple phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number.

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

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

Update on COVID-19

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

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

5

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. | Summary of Significant Accounting Policies

Deferred Offering Costs

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

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

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

Significant Estimates and Assumptions

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

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

Recent Accounting Pronouncements

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

6

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value Measurements

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

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

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

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

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

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

Revenue Recognition

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

Subscription Revenue

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

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

Advertising Revenue

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

7

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Technology Service Revenue

The Company records technology service revenue in connection with its agreement to serve as a launch partner with Open Props, Inc. (formerly YouNow, Inc., and referred to herein as “YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”) into its Camfrog and Paltalk applications (as amended, the “YouNow Agreement”).

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

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

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

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

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

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

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

Reclassifications

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

8

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3. | Property and Equipment, Net

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

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

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

4. | Intangible Assets, Net

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

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

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

5. | Digital Tokens

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

9

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Props Tokens

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

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

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

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

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

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

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

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

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

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

10

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. | Accrued Expenses and Other Current Liabilities

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

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

7. | Income Taxes

The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of September 30, 2021, our conclusion regarding the realizability of our U.S. deferred tax assets did not change and we have recorded a full valuation allowance against them.

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

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

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

8. | Stockholders’ Equity

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

11

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

August 2021 Underwritten Public Offering

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

Gross proceeds received by the Company from the August 2021 Offering were approximately $4.0 million, before deducting underwriting discounts and commissions and other estimated offering expenses of approximately $769,200. These costs were recorded in stockholders’ equity as a reduction of additional paid-in capital in connection with Staff Accounting Bulletin 5A.

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

Treasury Shares

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

Stock Options

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

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

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

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

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

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

12

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

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

9. | Net Income (Loss) Per Share

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

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

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

13

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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

10. | Leases

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

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

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

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

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

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

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

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

14

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. | Term debt

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

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

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

12. | Commitments and Contingencies

Patent Litigation

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

Legal Proceedings

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

13. | Sale of Secured Communications Assets

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

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

15

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

14. | Subsequent Events

October 2021 Underwritten Public Offering

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

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

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

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

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, 2021 and 2020, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2020 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 23, 2021 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Form 10-K. Aside from certain information as of December 31, 2020, all amounts herein are unaudited.

Forward-Looking Statements

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

Overview

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

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

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

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

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Recent Developments

August 2021 Underwritten Public Offering

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

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

October 2021 Underwritten Public Offering

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

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

Launch of Paltalk Rewards Points

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

Update on COVID-19

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

18

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

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

Operational Highlights and Objectives

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

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

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

For the near term, our business objectives include:

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

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

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

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

| ● | continuing to develop our consumer application platform strategy by seeking potential partnerships with large third-party communities to whom we could promote a co-branded version of our video chat products and potentially share in the incremental revenues generated by these partner communities; and

| ● | continuing to defend our intellectual property.

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Sources of Revenue

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

Subscription Revenue

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

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

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

Advertising Revenue

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

Technology Service Revenue

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

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

20

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

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

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

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

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

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

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

Costs and Expenses

Cost of revenue

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

21

Sales and marketing expense

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

Product development expense

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

General and administrative expense

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

Impairment loss on digital tokens

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

Key Metrics

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

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

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Subscription Bookings

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

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

Adjusted EBITDA

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

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

Limitations of Adjusted EBITDA

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

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

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

Results of Operations

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

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

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

Revenue

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

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

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

Subscription Revenue

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

Advertising Revenue

Our advertising revenue for the three months ended September 30, 2021 increased by $65,062, or 75.4%, as compared to the three months ended September 30, 2020. The increase in advertising revenue was primarily due to an increase in the volume of advertising impressions related to changes in and the optimization of third-party advertising partners.

Technology Service Revenue

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

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Costs and Expenses

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

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

Cost of revenue

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

Sales and marketing expense

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

Product development expense

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

General and administrative expense

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

Impairment loss on digital tokens

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

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Non-Operating Income

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

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

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

Income Taxes

Our provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. For the three months ended September 30, 2021, the Company recorded an income tax provision of $6,166, consisting primarily of state and local taxes. For the three months ended September 30, 2020, the Company recorded an income tax benefit of $3,300, consisting primarily of state and local taxes.

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

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

Revenue

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

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

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

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

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

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

Costs and Expenses

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

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

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

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

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

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

Impairment loss on digital tokens

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

Non-Operating Income

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

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

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

Income Taxes

Our provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. For the nine months ended September 30, 2021 and 2020, the Company recorded an income tax provision of $9,466 and $1,700, respectively, consisting primarily of state and local taxes.

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

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Liquidity and Capital Resources

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

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

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

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

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

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

30

Operating Activities

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

Investing Activities

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

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2021 was $3,230,739 as compared to net cash provided by financing activities of $497,656 for the nine months ended September 30, 2020. The increase in net cash provided by financing activities is a result of the August 2021 Offering, in which the Company sold an aggregate of 1,333,310 shares of the Company’s common stock (which includes 173,910 shares sold to the underwriter pursuant to the full exercise of the underwriter’s over-allotment option) at a public offering price of $3.00 per share. Gross proceeds received by the Company from the August 2021 Offering were approximately $4.0 million, before deducting underwriting discounts and commissions and other estimated offering expenses of approximately $769,200.

Contractual Obligations and Commitments

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

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

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

Off-Balance Sheet Arrangements

As of September 30, 2021, we did not have any off-balance sheet arrangements.

31

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Based on the evaluation as of September 30, 2021, for the reasons set forth below, our management concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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

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

Changes in Internal Control over Financial Reporting

We have implemented significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the nine months ended September 30, 2021, related to general information technology controls in the area of change management in order to remediate the material weakness identified above. However, the Company determined that the residual risk remaining still caused the material weakness to exist. Accordingly, the Company intends to remediate the material weakness for the year ending December 31, 2021.

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

32

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

ITEM 1A. RISK FACTORS

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

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

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

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

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

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

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

33

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

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

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

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

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

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

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

34

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

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

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

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

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

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

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

35

ITEM 6. EXHIBITS

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

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

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

* | Filed herewith.

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

36

SIGNATURES

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

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

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

37

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