INTELLIGENT PROTECTION MANAGEMENT CORP. 10-K

ITEM 7. 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 our audited consolidated financial statements and the accompanying notes thereto included in “Item 8. Financial Statements and Supplementary Data.” Forward-Looking Statements In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” in this Annual Report on Form 10-K. Overview We are a leading communications software innovator that powers multimedia social applications. Our product portfolio includes Paltalk, Camfrog and Tinychat, which together host one of the world’s largest collections of video-based communities. Our other product is Vumber, which is a telecommunications services provider that enables users to communicate privately by having multiple phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number. We have an over 20-year history of technology innovation and hold 14 patents. We believe that the scale of our user base presents a competitive advantage in the video social networking industry and provides growth opportunities to advance our existing products with up-sell opportunities and build future brands with cross-sell offers. We also believe that our proprietary consumer app technology platform can scalably support large communities of users in activities such as video, voice and text chat, online card and board games and provide robust user monetization tools. Our continued growth depends on attracting new consumer application users through the introduction of new applications, features and partnerships and further penetration of our existing markets. Our principal growth strategy is to invest in the development of proprietary software, expand our sales and marketing efforts with respect to such software, and increase our consumer application user base through potential platform partnerships and new and existing advertising campaigns that we run through internet and mobile advertising networks, all while balancing the capital needs of the business. Our strategy also includes the acquisition of, or investment in, technologies, solutions or businesses that complement our business. Our strategy is to approach these opportunities in a measured way, 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. Background of Presentation and Recent Developments Update on COVID-19 The World Health Organization declared COVID-19 a pandemic on March 11, 2020. The global spread of the COVID-19 pandemic and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. COVID-19 continues to have an unpredictable and unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis with travel restrictions and potential quarantines. Although our core multimedia social applications have been able to support the increased demand we have experienced, the extent of the future impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. Adverse economic and market conditions as a result of COVID-19 could also affect the demand for our applications and the ability of our users to satisfy their obligations to us. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be materially and adversely impacted. On April 13, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, we applied for a loan under the Small Business Administration (“SBA”) Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and on May 3, 2020, we entered into a promissory note with an aggregate principal amount of $506,500 (the “Note”) in favor of Citibank, N.A., as lender (the “Lender”). On January 13, 2021, the Note was fully forgiven by the SBA and the Lender in compliance with the provisions of the CARES Act. We do not expect to incur additional indebtedness under the CARES Act. We continue to serve as a form of safe and entertaining communication during this global pandemic, and in order to help those affected in hardest hit countries, will continue to offer some of its group video conferencing services free of charge to select countries. 25 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 Registration Statement on Form S-1 (Registration No. 333-257036), initially filed with the SEC on June 11, 2021, as subsequently amended, and declared effective on August 2, 2021. The August 2021 Offering was made only by means of a prospectus forming a part of the effective registration statement. The net proceeds to us from the August 2021 Offering were approximately $3.2 million, after deducting underwriting discounts, commissions and other estimated offering expenses. In connection with the August 2021 Offering, our common stock was approved for listing on The Nasdaq Capital Market (“Nasdaq”) under the symbol “PALT” and began trading on Nasdaq 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 (Registration No. 333-260063), previously filed with the SEC on October 5, 2021 and declared effective on October 14, 2021. The October 2021 Offering was offered by means of a prospectus supplement and accompanying prospectus, forming part of the registration statement. The net proceeds to us from the October 2021 Offering were approximately $10.7 million, after deducting underwriting discounts, commissions and other estimated offering expenses. Launch of Paltalk Rewards Points As previously disclosed, we served as a launch partner with YouNow to integrate YouNow’s props infrastructure into our Camfrog and Paltalk applications, which allowed users to earn Props tokens while using the Paltalk and Camfrog applications. On October 15, 2021, we launched our new rewards loyalty program, Paltalk Rewards Points, and simultaneously ended the distribution of Props tokens, our prior rewards program. Paltalk and Camfrog users kept their existing rewards earned from the former Props program as Paltalk Rewards Points and now have the opportunity to earn new Paltalk Rewards Points. In connection with the Paltalk Rewards Points, we added 25 new reward tiers such as specialty coins, subscriptions, stickers, flair, and other popular buttons. Operational Highlights and Objectives During the year ended December 31, 2021, we executed key components of our objectives: ● completed an uplist of our shares of common stock to Nasdaq, which began trading on Nasdaq on August 3, 2021, under the Company’s current ticker symbol “PALT”; ● raised gross proceeds of approximately $15.6 million in connection with the August 2021 Offering and October 2021 Offering of an aggregate of 2,885,810 shares of common stock at a price to the public of $3.00 and $7.50 per share, respectively; ● sold approximately 36.9 million Props tokens for proceeds of $0.9 million during the year ended December 31, 2021; ● reported net income of $1.3 million for the year ended December 31, 2021 which included a non-cash $0.8 million impairment of digital token assets, compared to net income of $1.4 million for the year ended December 31, 2020; and ● achieved positive net cash flow of $16.1 million for the year ended December 31, 2021, an improvement of $13.9 million when compared to the year ended December 31, 2020. 26 For the near term, our business objectives include: ● invest in robust marketing initiatives through marketing agencies in order to drive new user acquisition intended to result in an increase in revenue; ● implementing several enhancements to our live video chat applications as well as the integration of games and other features focused on retention and monetization, which collectively are intended to increase user engagement 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; ● focusing on our core business to continue to leverage efficiencies gained during 2021 and expand our core business in a cost-efficient way; ● continuing to develop our consumer application platform strategy by seeking potential partnerships with large third-party communities to whom we could promote a co-branded version of our video chat products and potentially share in the incremental revenues generated by these partner communities; and ● continuing to defend our intellectual property. Sources of Revenue Our main sources of revenue are subscription, advertising and other fees generated from users of our core video chat products. We expect that the majority of our revenue in future periods will continue to be generated from our core video chat products. We also generate technology service revenue under licensing and service agreements that we negotiate with third parties which includes development, integration, engineering, licensing or other services that we provide. Subscription Revenue Our video chat platforms generate revenue primarily through subscription fees. Our tiers of subscriptions provide users with unlimited video windows and levels of status within the community. Multiple subscription tiers are offered in different durations depending on the product from one-, six- and twelve-month terms, which continue to vary as we continue to test and optimize length and pricing. Longer-term plans (those with durations longer than one month) are generally available at discounted monthly rates. Levels of membership benefits are offered in tiers, with the least membership benefits in the lowest paid tier and the most membership benefits in the highest paid tier. Our membership tiers are “Plus,” “Extreme,” “VIP” and “Prime” for Paltalk and “Pro,” “Extreme” and “Gold” for Camfrog. We also hold occasional promotions that offer discounted subscriptions and virtual gifts. We recognize revenue from monthly premium subscription services beginning in the month in which the subscriptions are originated. Revenues from multi-month subscriptions are recognized on a gross and straight-line basis over the length of the subscription period. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying consolidated balance sheets. 27 We also offer virtual gifts to our users. Users may purchase credits that can be redeemed for a host of virtual gifts such as a rose, a beer, or a car, among other items. Virtual gift revenue is recognized upon the users’ utilization of the virtual gift and included in subscription revenue. The unearned portion of virtual gifts revenue is presented as deferred revenue in the accompanying consolidated balance sheets. Advertising Revenue We generate a portion of our revenue through advertisements on our video platforms. Advertising revenue is dependent upon the volume of advertising impressions viewed by active users as well as the advertising inventory we place on our products. We recognize advertising revenue as earned on a click-through, impression, registration or subscription basis. Measurements of impressions include when a user clicks on an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external website via an advertisement by clicking on or through our application (CPA basis). Technology 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. On May 29, 2020, we entered into an Asset Purchase Agreement, which was subsequently amended and restated (the “Amended and Restated Agreement”) with SecureCo, LLC (“SecureCo”), pursuant to which we agreed to sell substantially all of the assets related to our secure communications business (the “Secured Communications Assets”) to SecureCo. The Amended and Restated Agreement also provides for a revenue sharing arrangement, pursuant to which we are entitled to receive quarterly royalty payments ranging from 5% to 10% of certain revenues received by SecureCo, with the aggregate amount of such royalty payments not to exceed $500,000. The royalty payments, if received, will be recorded as technology service revenue. We do not expect to continue to pursue secure communications products or technology implementation services as part of our overall business strategy. During the years ended December 31, 2021 and 2020, we also recorded technology service revenue in connection with our agreement to serve as a launch partner with Open Props, Inc. (formerly YouNow, Inc., and referred to herein as “YouNow”) and to integrate YouNow’s props infrastructure (the “Props platform”) into our Camfrog and Paltalk applications (as amended, the “YouNow Agreement”). Pursuant to the terms of the YouNow Agreement, YouNow agreed to pay us, in exchange for our services, an aggregate of 10.5 million cryptographic props tokens (“Props tokens”) upon the achievement of certain milestones. The upfront fee is recognized as revenue under the output method based on the direct measurements of the value of services transferred to date to the customer, relative to the remaining services under the YouNow Agreement. The milestones fees were recognized as revenue on the completion dates of integration services performed during the second and third quarters of 2020. Once the integration of Props tokens into our Paltalk and Camfrog applications was completed, we began receiving Props tokens for providing a validator service and for allowing users to participate in the loyalty platform. The loyalty platform was intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications. The net revenue earned was recorded under “technology service revenue” in the consolidated statements of operations. The total net revenue value is recognized as earned. For the year ended December 31, 2020, we determined the fair value of the Props tokens by converting them into U.S. dollars using an independent third-party valuation. Digital tokens earned, receivable or payable before September 30, 2020, were recorded based on a $0.02 fair value estimated at the end of the reporting period. Digital tokens earned, receivable or payable from July 1, 2020 through December 31, 2020 were recorded based on an estimated fair value of $0.039. For the year ended December 31, 2021, we determined the fair value of the Props tokens using observable daily quoted market prices on multiple international exchanges, as recorded on CoinmarketCap. In August 2021, we received notice from YouNow that it was terminating the YouNow Agreement, and that it would no longer support the Props platform past the end of calendar year 2021. In connection with the notice of termination and in accordance with the YouNow Agreement, we received an additional 2,625,000 Props tokens. The value of these tokens was recorded as revenue under “technology service revenue” in the consolidated statements of income. The YouNow Agreement was terminated effective on November 23, 2021. We now expect that most of our technology service revenue generated in the future will result from opportunistic partnerships between us and third parties. During year the ended December 31, 2021, we sold approximately 36.9 million Props tokens for total proceeds of $0.9 million. 28 Costs and Expenses Cost of revenue Cost of revenue consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in data center and customer care functions, credit card processing fees, hosting fees, and data center rent and bandwidth costs. Cost of revenue also includes compensation and other employee-related costs for technical personnel, consultants and subcontracting costs relating to technology service revenue. Sales and marketing expense Sales and marketing expense consist primarily of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel and consultants engaged in sales and sales support functions. Advertising and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which primarily consists of partner-related payments to those who direct traffic to our brands. Product development expense Product development expense, which relates to the development of technology of our applications, consists primarily of compensation (including stock-based compensation) and other employee-related and consultants-related costs that are not capitalized for personnel engaged in the design, testing and enhancement of service offerings as well as amortization of capitalized website development costs. General and administrative 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 year ended December 31, 2021, we recorded a non-cash impairment charge in the amount of $765,232, which is reported in our accompanying consolidated statements of income as a result of recent decline in the quoted market prices below the market price of their acquisition. Key Metrics Our management relies on certain non-GAAP and/or unaudited performance indicators to manage and evaluate our business. The key performance indicators set forth below help us evaluate growth trends, establish budgets, measure the effectiveness of our advertising and marketing efforts and assess operational efficiencies. We also discuss net cash provided by operating activities under the ‟Results of Operations” and “Liquidity and Capital Resources” sections below. Subscription bookings and Adjusted EBITDA are discussed below. Year Ended December 31, 2021 2020 Subscription bookings $ 12,224,780 $ 12,195,725 Net cash provided by operating activities $ 1,265,464 $ 1,435,300 Net income $ 1,324,106 $ 1,371,262 Adjusted EBITDA $ 1,281,361 $ 1,955,854 Adjusted EBITDA as percentage of total revenue 9.7 % 15.2 % 29 Subscription Bookings Subscription bookings is a financial measure representing the aggregate dollar value of subscription fees and virtual gifts purchases received during the period. We calculate subscription bookings as subscription revenue recognized during the period plus the change in deferred subscription revenue recognized during the period. We record subscription revenue from subscription fees as deferred subscription revenue and then recognize that revenue ratably over the length of the subscription term or ratably over usage for virtual gifts. Our management uses subscription bookings internally in analyzing our financial results to assess operational performance and to assess the effectiveness of, and plan future, user acquisition campaigns. We believe that this financial measure is useful in evaluating the performance of our consumer applications because we believe, as compared to subscription revenue, it is a better indicator of the subscription activity in a given period. We believe that both management and investors benefit from referring to subscription bookings in assessing our performance and when planning, forecasting and analyzing future periods. While the factors that affect subscription bookings and subscription revenue are generally the same, certain factors may affect subscription bookings more or less than such factors affect subscription revenue in any period. While we believe that subscription bookings is useful in evaluating our business, it should be considered as supplemental in nature and it is not meant to be a substitute for subscription revenue recognized in accordance with generally accepted accounting principles in the United States (“GAAP”). Adjusted EBITDA Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net income adjusted to exclude net loss from interest income, net, provision for income taxes, gain on office lease termination, impairment loss on goodwill, gain from sale of Secured Communication Assets, gain on the extinguishment of term debt, provision for income taxes, depreciation and amortization expense, loss on disposal of property and equipment, other expense, impairment loss on digital tokens, gain on extinguishment of digital tokens payable, realized loss (gain) from the sale of digital tokens and stock-based compensation expense. We present Adjusted EBITDA because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to develop short- and long-term operational plans and to allocate resources to expand our business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of the cash operating income generated by our business. We believe that Adjusted EBITDA is useful to investors and others to understand and evaluate our operating results, and it allows for a more meaningful comparison between our performance and that of competitors. 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; gain on extinguishment of digital tokens payable; and the provision for income taxes. Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results. The following table presents a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated: Year Ended December 31, 2021 2020 Reconciliation of Net Income to Adjusted EBITDA: Net income $ 1,324,106 $ 1,371,262 Stock-based compensation expense (35,653 ) 243,197 Depreciation and amortization expense 370,845 571,725 Gain on office lease termination - (141,001 ) Impairment loss on digital tokens 765,232 - Interest income, net (133 ) (7,119 ) Gain from sale of Secured Communications Assets - (250,000 ) Loss on disposal of property and equipment - 39,238 Gain on extinguishment of term debt (506,500 ) - Realized loss (gain) from sale of digital tokens (307,934 ) 72,123 Gain on termination of digital tokens payable (338,553 ) - Other expense - 56,042 Provision for income taxes 9,951 387 Adjusted EBITDA $ 1,281,361 $ 1,955,854 30 Results of Operations The following table sets forth consolidated statements of income data for each of the periods indicated as a percentage of total revenue: Years Ended December 31, 2021 2020 Total revenue 100.0 % 100.0 % Costs and expenses: Cost of revenue 20.5 % 20.1 % Sales and marketing expense 8.8 % 6.4 % Product development expense 40.6 % 39.2 % General and administrative expense 20.4 % 24.7 % Impairment loss on digital tokens 5.8 % -% Total costs and expenses 96.1 % 90.4 % Income from operations 3.9 % 9.6 % Interest income, net 0.0 % 0.1 % Gain from sale of Secured Communications Assets -% 1.9 % Gain on extinguishment of term debt 3.8 % -% Realized gain (loss) from sale of digital tokens 2.3 % (0.6 )% Other expense - % (0.4 )% Income from operations before provision for income taxes 10.0 % 10.6 % Provision for income taxes (0.1 )% (0.0 )% Net income 9.9 % 10.6 % Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Revenue Total revenue increased to $13,273,849 for the year ended December 31, 2021 from $12,832,672 for the year ended December 31, 2020. The increase was primarily driven by an increase in subscription revenue from the Paltalk application, as we experienced a change in the proportion of revenue generated from revenue from subscriptions to revenue from virtual gifts. The following table sets forth our subscription revenue, advertising revenue, technology service revenue and total revenue for the year ended December 31, 2021 and the year ended December 31, 2020, the increase or decrease between those periods, the percentage increase or decrease between those periods, and the percentage of total revenue that each represented for those periods: Years Ended $ % % of Revenue Years Ended December 31, Increase Increase December 31, 2021 2020 (Decrease) (Decrease) 2021 2020 Subscription revenue $ 12,368,008 $ 11,966,497 $ 401,511 3.4 % 93.2 % 93.3 % Advertising revenue 451,337 325,475 125,862 38.7 % 3.4 % 2.5 % Technology service revenue 454,504 540,700 (86,196 ) (15.9 )% 3.4 % 4.2 % Total revenues $ 13,273,849 $ 12,832,672 $ 441,177 3.4 % 100.0 % 100.0 % 31 Subscription Revenue Our subscription revenue for the year ended December 31, 2021 increased by $401,511, or 3.4%, as compared to the year ended December 31, 2020. The increase in subscription revenue was primarily driven by increased activity in the Paltalk application from our existing users, as well as a strategic alignment of pricing promotions and a change in the blend of revenue generated from revenue from subscriptions to revenue from virtual gifts. In addition, we had an increase in the Vumber application’s subscription revenue resulting from an increase in the work-from-home trend as a result of the COVID-19 pandemic. Advertising Revenue Our advertising revenue for the year ended December 31, 2021 increased by $125,862, or 38.7%, as compared to the year ended December 31, 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 decreased by $86,196, or 15.9%, as compared to the year ended December 31, 2020. The decrease in technology service revenue was driven by the termination of the YouNow Agreement, effective November 23, 2021. Costs and Expenses Total costs and expenses for the year ended December 31, 2021 increased by $1,164,382, or 10.0%, as compared to the year ended December 31, 2020. The following table presents our costs and expenses for the years ended December 31, 2021 and 2020, the increase or decrease between those periods and the percentage increase or decrease between those periods and the percentage of total revenue that each represented for those periods: Years Ended December 31, $ % % of Revenue Years Ended December 31, Increase Increase 2021 2020 (Decrease) (Decrease) 2021 2020 Cost of revenue $ 2,720,189 $ 2,573,083 $ 147,106 5.7 % 20.5 % 20.1 % Sales and marketing expense 1,170,386 825,069 345,317 41.9 % 8.8 % 6.4 % Product development expense 5,391,819 5,025,482 366,337 7.3 % 40.6 % 39.2 % General and administrative expense 2,706,733 3,166,343 (459,610 ) (14.5 )% 20.4 % 24.7 % Impairment loss on digital tokens 765,232 - 765,232 100.0 % 5.8 % - % Total costs and expenses $ 12,754,359 $ 11,589,977 $ 1,164,382 10.0 % 96.1 % 90.4 % Cost of revenue Our cost of revenue for the year ended December 31, 2021 increased by $147,106, or 5.7%, as compared to the year ended December 31, 2020. The increase for the year ended December 31, 2021 was primarily driven by an increase in non-cash stock compensation expense of $67,000 and an increase of approximately $62,800 in consulting services to support fraud prevention. Sales and marketing expense Our sales and marketing expense for the year ended December 31, 2021 increased by $345,317, or 41.9%, as compared to the year ended December 31, 2020. The increase in sales and marketing expense for the year ended December 31, 2021 was primarily due to an increase of approximately $259,000 in marketing user acquisition expenses and an increase of approximately $87,000 in salary and related expenses driven by an increased headcount as we grow our focus on social media. 32 Product development expense Our product development expense for the year ended December 31, 2021 increased by $366,337, or 7.3%, as compared to the year ended December 31, 2020. The increase was primarily due to an increase of approximately $382,600 related to consulting services and software expenses in support of enhanced user retention and improved monetization in the Paltalk application. This increase was offset by a decrease of approximately $55,800 in compensation expense as the sale of the secure communications assets resulted in a decrease in headcount. General and administrative expense Our general and administrative expense for the year ended December 31, 2021 decreased by $459,610, or 14.5%, as compared to the year ended December 31, 2020. The decrease in general and administrative expense for the year ended December 31, 2021 was mainly due to reduced rent expense of $115,100 resulting from an office lease termination, a decrease in compensation and related expenses of approximately $151,000, a reduction of approximately $336,500 in non-cash stock compensation expense primarily from an unvested executive performance award that was forfeited, and $338,553 non-cash gain on extinguishment of digital tokens payable. These reductions were offset by an increase in professional and legal fees in connection with the uplisting to The Nasdaq Capital Market of approximately $146,000 in August of 2021 and a gain of $141,000 resulting from an office lease termination during the year ended December 31, 2020. Impairment loss on digital tokens We recorded a non-cash impairment loss on digital tokens of $765,232 for the year ended December 31, 2021 as a result of recent declines in the quoted market prices of certain digital tokens below the market price of their acquisition. Non-Operating Income The following table presents the components of non-operating income for the year ended December 31, 2021 and the year ended December 31, 2020, the increase or decrease between those periods and the percentage increase or decrease between those periods and the percentage of total revenue that each represented for those periods: Years Ended December 31, $ Increase % Increase % of Revenue Years Ended December 31, 2021 2020 (Decrease) (Decrease) 2021 2020 Interest income, net $ 133 $ 7,119 $ (6,986 ) (98.1 )% 0.0 % 0.1 % Gain from the sale of Secured Communications Assets - 250,000 (250,000 ) (100.0 )% - % 1.9 % Gain on extinguishment of term debt 506,500 - 506,500 100.0 % 3.8 % - % Realized gain (loss) from sale of digital tokens 307,934 (72,123 ) 380,057 527.0 % 2.3 % (0.6 )% Other expense - (56,042 ) 56,042 100.0 % - % (0.4 )% Total non-operating income $ 814,567 $ 128,954 $ 685,613 531.7 % 6.1 % 1.0 % Non-operating income for the year ended December 31, 2021 was $814,567, an increase of $685,613, or 531.7%, as compared to non-operating income of $128,954 for the year ended December 31, 2020. The increase resulted from the gain on extinguishment of term debt of the $506,500 of proceeds from the Note received in order to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic and a gain from sale of digital tokens of $307,934. 33 Liquidity and Capital Resources Years Ended December 31, 2021 2020 Consolidated Statements of Cash Flows Data: Net cash provided by operating activities $ 1,265,464 $ 1,435,300 Net cash provided by investing activities 858,848 225,406 Net cash provided by financing activities 13,927,128 497,656 Net change in cash and cash equivalents $ 16,051,440 $ 2,158,362 Currently, our primary source of liquidity is cash on hand and cash flows from continuing operations, and we believe that our cash and cash equivalents balance and our expected cash flow from operations will be sufficient to meet all of our financial obligations for the twelve months from the date these financial statements are issued. As of December 31, 2021, we had $21,636,860 of cash and cash equivalents. Our primary use of working capital is related to product development resources and an investment in marketing activities in order to maintain and create new services and features in applications for our clients and users. In particular, a significant portion of our working capital has been allocated to the improvement of our products. In the future, we may also seek to grow our business by expending our capital resources to fund strategic investments and partnership opportunities. As discussed above, on May 29, 2020, we completed the sale of the Secured Communications Assets for a cash purchase price of $250,000, $150,000 of which was paid at closing and $100,000 of which was paid in four equal installments over the fifteen-month period following the closing. The Amended and Restated Agreement also provides for a revenue sharing arrangement, pursuant to which we are entitled to receive quarterly royalty payments ranging from 5% to 10% of certain revenues received by SecureCo, with the aggregate amount of such royalty payments not to exceed $500,000. The royalty payments, if received, will be recorded as technology service revenue. On August 5, 2021, we announced the closing of the August 2021 Offering in which we offered and sold 1,159,400 shares of our common stock. We also granted the underwriters an option to purchase up to an additional 173,910 shares of common stock at the public offering price less discounts and commissions to cover over-allotments, which was exercised in full on August 5, 2021. The net proceeds to us from the August 2021 Offering were approximately $3.2 million, after deducting underwriting discounts, commissions and other estimated offering expenses. In addition, on October 19, 2021, we announced the pricing and closing of the October 2021 Offering in which we offered and sold 1,552,500 shares of our common stock. We also granted the underwriters an option to purchase up to an additional 202,500 shares of common stock at the public offering price less discounts and commissions to cover over-allotments, which was exercised in full on October 14, 2021. The net proceeds to us from the October 2021 Offering were approximately $10.7 million, after deducting underwriting discounts, commissions and other estimated offering expenses. Operating Activities Net cash provided by operating activities was $1,265,464 for the year ended December 31, 2021, as compared to net cash provided by operating activities of $1,435,300 for the year ended December 31, 2020. Changes in accounts receivable and deferred revenue contributed to a lower cash flow for the year ended December 31, 2021 of $134,064 and $372,456, respectively, compared to the year ended December 31, 2020. The decrease in cash flow resulted from a change in third-party advertising partners as well as a change in the proportion of revenue generated between revenue from subscriptions and revenue from virtual gifts due to strategic alignment of the frequency of promotions therefore, accumulating less deferred revenue. These decreases were offset by an increase in accounts payables and accrued expenses of $1,059,132 for the year ended December 31, 2021 compared to the year ended December 31, 2020, mainly as result of higher provisions of annual performance incentives . 34 Investing Activities Net cash provided by investing activities was $858,848 for the year ended December 31, 2021, as compared to net cash provided by investing activities of $225,406 for the year ended December 31, 2020. The increase in net cash provided by investing activities is due to an increase in proceeds from the sale of digital tokens. Financing Activities Net cash provided by financing activities was $13,927,128 for the year ended December 31, 2021 as compared to net cash provided by financing activities of $497,656 for the year ended December 31, 2020. The increase in net cash provided by financing activities is a result of the August 2021 and October 2021 Offerings, in which the Company sold an aggregate of 2,885,810 shares of common stock at a price to the public of $3.00 and $7.50 per share, respectively. Net proceeds received by the Company from the August 2021 and October 2021 Offerings were approximately $13.9 million, after underwriting discounts and commissions and other estimated offering expenses. Contractual Obligations and Commitments As discussed above, on May 3, 2020, to help ensure adequate liquidity in light of the uncertainties posed by the COVID-19 pandemic, we entered into the Note in favor of the Lender in the aggregate principal amount of $506,500. The Note had a two-year term and borne interest at a stated rate of 1.0% per annum. We did not provide any collateral or guarantees for the Note, nor did we pay any facility charge to obtain the Note. The Note provided for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. On January 13, 2021, the Note was fully forgiven by the SBA and the Lender in compliance with the provisions of the CARES Act. We do not expect to incur additional indebtedness under the CARES Act. On June 7, 2016, we entered into a lease agreement with Jericho Executive Center LLC for office space at 30 Jericho Executive Plaza in Jericho, New York, which commenced on September 1, 2016 and runs through November 30, 2021. Our monthly office rent payments under the lease are currently approximately $7,081 per month. On April 9, 2021, we entered into a lease extension agreement with Jericho Executive Center LLC for the office space at 30 Jericho Executive Plaza in Jericho, New York, which commenced on December 1, 2021 and runs through November 30, 2024. Off-Balance Sheet Arrangements As of December 31, 2021, we did not have any off-balance sheet arrangements. Critical Accounting Estimates We prepare our consolidated financial statements in accordance with GAAP. In doing so, we have to make estimates and assumptions. Our critical accounting estimates are those estimates that involve a significant level of uncertainty at the time the estimate was made, and changes in them have had or are reasonably likely to have a material effect on our financial condition or results of operations. Accordingly, actual results could differ materially from our estimates. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We have reviewed our critical accounting estimates with the audit committee of our Board of Directors. Critical Accounting Policies See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for a summary of significant accounting policies, which includes our critical accounting policies, and the effect on our financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 35