INTELLIGENT PROTECTION MANAGEMENT CORP. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Number Report of Independent Registered Public Accounting Firm (PCAOB No. 688 ) F-1 Consolidated Balance Sheets as of December 31, 2021 and 2020 F-2 Consolidated Statements of Income for the Years Ended December 31, 2021 and 2020 F-3 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2021 and 2020 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 F-5 Notes to Consolidated Financial Statements F-6 36 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Paltalk, Inc. and Subsidiaries Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Paltalk, Inc. and Subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2016. Melville, NY March 23, 2022 F- 1 PALTALK, INC. CONSOLIDATED BALANCE SHEETS December 31, 2021 2020 Assets Current assets: Cash and cash equivalents $ 21,636,860 $ 5,585,420 Accounts receivable, net of allowances of $ 3,648 as of December 31, 2021 and 2020, respectively 153,448 71,410 Prepaid expense and other current assets 239,258 236,704 Total current assets 22,029,566 5,893,534 Operating lease right-of-use asset 239,491 68,967 Property and equipment, net 69,599 255,777 Goodwill 6,326,250 6,326,250 Intangible assets, net 196,543 381,210 Digital tokens 7,262 439,145 Digital tokens receivable - 210,000 Other assets 13,937 13,937 Total assets $ 28,882,648 $ 13,588,820 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 1,332,632 $ 742,141 Accrued expenses and other current liabilities 344,441 254,084 Operating lease liabilities, current portion 80,309 68,967 Digital tokens payable - 123,397 Term debt, current portion - 338,792 Deferred subscription revenue 1,915,493 2,058,721 Total current liabilities 3,672,875 3,586,102 Operating lease liabilities, non-current portion 159,182 - Term debt, non-current portion - 167,708 Total liabilities 3,832,057 3,753,810 Commitments and contingencies (Note 14) Stockholders’ equity: Common stock, $ 0.001 par value, 25,000,000 shares authorized, 9,864,120 and 6,916,404 shares issued and 9,832,157 and 6,906,454 shares outstanding as of December 31, 2021 and 2020, respectively 9,864 6,917 Treasury stock, 31,963 and 9,950 shares as of December 31, 2021 and 2020, respectively ( 194,200 ) ( 10,859 ) Additional paid-in capital 35,639,910 21,568,041 Accumulated deficit ( 10,404,983 ) ( 11,729,089 ) Total stockholders’ equity 25,050,591 9,835,010 Total liabilities and stockholders’ equity $ 28,882,648 $ 13,588,820 The accompanying notes are an integral part of these consolidated financial statements. F- 2 PALTALK, INC. CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2021 2020 Revenues Subscription revenue $ 12,368,008 $ 11,966,497 Advertising revenue 451,337 325,475 Technology service revenue 454,504 540,700 Total revenue 13,273,849 12,832,672 Costs and expenses Costs of revenue 2,720,189 2,573,083 Sales and marketing expense 1,170,386 825,069 Product development expense 5,391,819 5,025,482 General and administrative expense 2,706,733 3,166,343 Impairment loss on digital tokens 765,232 - Total costs and expenses 12,754,359 11,589,977 Income from operations 519,490 1,242,695 Interest income, net 133 7,119 Gain from sale of Secured Communications Assets - 250,000 Gain on extinguishment of term debt 506,500 - Realized gain (loss) from the sale of digital tokens 307,934 ( 72,123 ) Other expense - ( 56,042 ) Income from operations before provision for income taxes 1,334,057 1,371,649 Income tax expense ( 9,951 ) ( 387 ) Net income $ 1,324,106 1,371,262 Net income per share of common stock: Basic $ 0.17 $ 0.20 Diluted $ 0.17 $ 0.20 Weighted average number of shares of common stock used in calculating net income per share of common stock: Basic 7,766,111 6,884,690 Diluted 7,809,132 6,887,808 The accompanying notes are an integral part of these consolidated financial statements. F- 3 PALTALK, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Retained Additional Earnings Total Common Stock Treasury Stock Paid-in (Accumulated 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 - - - - 243,197 - 243,197 Issuance of common stock for consulting services 37,500 38 - - 43,462 - 43,500 Repurchases of common stock - - ( 8,050 ) ( 8,844 ) - - ( 8,844 ) Net income - - - - - 1,371,262 1,371,262 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 - - - - ( 35,653 ) - ( 35,653 ) Issuance of common stock 2,885,810 2,886 - - 13,916,240 - 13,919,126 Issuance of common stock pursuant to cashless option exercises 38,464 38 ( 38 ) - - Treasury stock received from cashless option exercises 22,013 22 ( 22,013 ) ( 183,341 ) 183,319 - - Issuance of common stock pursuant to option exercise 1,429 1 - - 8,001 - 8,002 Net income - - - - - 1,324,106 1,324,106 Balance at December 31, 2021 9,864,120 $ 9,864 ( 31,963 ) $ ( 194,200 ) $ 35,639,910 $ ( 10,404,983 ) $ 25,050,591 The accompanying notes are an integral part of these consolidated financial statements. F- 4 PALTALK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2021 2020 Cash flows from operating activities: Net income $ 1,324,106 $ 1,371,262 Adjustments to reconcile net income from operations to net cash provided by operating activities: Depreciation of property and equipment 186,178 325,044 Amortization of intangible assets 184,667 246,681 Amortization of operating lease right-of-use assets 74,416 104,083 Gain on cancellation of office lease - ( 141,001 ) Loss on disposal of property and equipment - 39,238 Gain on extinguishment of digital token liability ( 338,553 ) - Impairment loss on digital tokens 765,232 - Realized (gain) loss from the sale of digital tokens ( 307,934 ) 72,823 Write-off of note receivable - 56,042 Gain on extinguishment of term debt ( 506,500 ) - Stock-based compensation ( 35,653 ) 243,197 Bad debt expense ( 3,235 ) 4,015 Common stock issued for consulting services - 43,500 Changes in operating assets and liabilities: Digital tokens ( 884,263 ) ( 439,145 ) Accounts receivable ( 78,803 ) 55,261 Digital tokens receivable 210,000 ( 210,000 ) Operating lease liability ( 74,416 ) ( 107,674 ) Digital tokens payable 215,156 123,397 Prepaid expense and other current assets ( 2,554 ) ( 219,263 ) Other assets - 16,897 Accounts payable, accrued expenses and other current liabilities 680,848 ( 378,285 ) Deferred subscription revenue ( 143,228 ) 229,228 Net cash provided by operating activities 1,265,464 1,435,300 Cash flows from investing activities: Proceeds from Secured Communications Assets - 150,000 Proceeds from the sale of digital tokens 858,848 75,406 Net cash provided by investing activities 858,848 225,406 Cash flows from financing activities: Borrowings of term debt - 506,500 Proceeds from issuance of common stock, net of issuance costs 13,919,126 - Proceeds from issuance of common stock pursuant to option exercise 8,002 - Purchase of treasury stock - ( 8,844 ) Net cash provided by financing activities 13,927,128 497,656 Net increase in cash and cash equivalents 16,051,440 2,158,362 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 $ 21,636,860 $ 5,585,420 Supplemental disclosure of cash flow information: Non-cash investing and financing activities: Modification of operating lease right-of-use asset and liability $ 244,940 $ - Issuance of common stock pursuant to cashless option exercises $ 38 $ - Treasury stock received from cashless option exercises $ 183,341 $ - The accompanying notes are an integral part of these consolidated financial statements. F- 5 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Description of Business The accompanying 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’s product portfolio includes Paltalk, Camfrog and Tinychat, which together host one of the world’s largest collections 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 Company has an over 20-year history of technology innovation and hold 14 patents. 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. 2. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries and were prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and with the requirements of the Security and Exchange Commission (“SEC”). All intercompany balances and transactions have been eliminated upon consolidation. 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 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, subscription revenues net of refunds, credits, and known and estimated credit card chargebacks and the fair value of digital tokens. 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. F- 6 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value Measurements The fair value framework under the guidance issued by the Financial Accounting Standards Board (“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 Accounting Standards Codification (“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 years ended December 31, 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 consolidated balance sheets. Deferred revenue at December 31, 2020 was $ 2,058,721 , which was subsequently recognized as subscription revenue during the year ended December 31, 2021. The ending balance of deferred revenue at December 31, 2021 was $ 1,915,493 . 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 consolidated statements of income. Virtual gift revenue is presented as deferred revenue in the consolidated balance sheets until virtual gifts are redeemed. Virtual gift revenue was $ 5,586,710 and $ 5,188,858 for the years ended December 31, 2021 and 2020, respectively. The ending balance of deferred revenue from virtual gifts at December 31, 2021 and 2020 was $ 293,737 and $ 348,677 , 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. F- 7 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Technology Service Revenue Technology service revenue is generated under service and partnership agreements that the Company negotiates with third parties which includes development, integration, engineering, licensing or other services that the Company provides. On May 29, 2020, the Company entered into an Asset Purchase Agreement, which was subsequently amended and restated (the “Amended and Restated Agreement”), with SecureCo, LLC (“SecureCo”), pursuant to which the Company agreed to sell substantially all of the assets related to its secure communications business to SecureCo. 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 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. The Company does not expect to continue to pursue secure communications products or technology implementation services as part of its overall business strategy. The Company also recorded 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 7 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 quarters 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 consolidated statements of income and digital tokens receivable in the consolidated balance sheets. Once the integration of Props tokens into the Company’s 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 year ended December 31, 2021, the Company received 1.5 million Props tokens for the validator service and 24.3 million Props tokens under the loyalty platform. The net revenue earned was recorded under “technology service revenue” in the consolidated statements of income. 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 year ended December 31, 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 7 for additional information on the fair value of the Props tokens). The total net revenue value recognized as earned was estimated to be $ 454,504 and $ 525,748 for the years ended December 31, 2021 and 2020, respectively. In August 2021, the Company 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, 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 consolidated statements of income. As a result of the termination of the YouNow Agreement, the Company notified its users that it would no longer be issuing Props starting October 15, 2021 and would be replacing any user’s outstanding Props with a new internal rewards program. The new rewards loyalty program for Paltalk and Camfrog, allowed users to keep their existing rewards earned from the former Props program as internal rewards and also have the opportunity to earn new internal rewards points. In connection with the internal rewards points, the Company added 25 new reward tiers such as specialty coins, subscriptions, stickers, flair, and other popular buttons. As of the termination of the YouNow Agreement, the Company held 8,575,638 Props, or $ 338,553 , under “digital tokens payable” in our consolidated balance sheets. In accordance with ASC 405-20-40, the Company recorded a $ 338,553 gain on extinguishment of digital tokens payable under the Company’s operation expenses in the statement of income for the year ended December 31, 2021. F- 8 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Revisions to the Company’s estimates may result in increases or decreases to revenues and income and are reflected in the 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 consolidated statements of operations. There were no contract losses for the periods presented. Digital Tokens At December 31, 2020, digital tokens and digital tokens receivable 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, management has exercised significant judgment in determining the appropriate accounting treatment and in the event that authoritative guidance is enacted by the FASB, the Company may be required to change its policies, which could have an effect on the Company’s consolidated financial position and results from operations. The Company determined to account for digital tokens as indefinite-lived intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other . Indefinite-lived intangible assets are not amortized but assessed for impairment annually, or more frequently when events or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment exists when the carrying amount exceeds its fair value, which is measured using the quoted price of the digital token at the time its fair value is being measured. In testing for impairment, the Company has the option to first perform a qualitative assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely than not that an impairment exists, a quantitative impairment test is not necessary. Otherwise, it is required to perform a quantitative impairment test. If, at the time of an impairment test, the carrying amount of an intangible asset exceeds its fair value, an impairment loss in an amount equal to the excess is recognized. Subsequent reversal of impairment losses is not permitted. Gains (if any) are not recorded until realized upon sale, at which point they would be presented net of any impairment losses in the Company’s consolidated statements of income. In determining the gain to be recognized upon sale, the Company calculates the difference between the sales price and carrying value of the specific digital token sold immediately prior to sale. During year the ended December 31, 2021, the Company sold approximately 36.9 million Props tokens for total proceeds of $ 0.9 million. The realized gain of the sale of digital tokens was approximately $ 307,934 for the year ended December 31, 2021 and is included in the consolidated statements of income. The Company determines the fair value of its digital tokens on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement. See Note 7, Digital Tokens, to the consolidated financial statements for further information regarding the Company’s digital tokens. 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. Sales and Marketing Sales and marketing expense consists 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 the Company’s brands. Total advertising expense for the year ended December 31, 2021 was approximately $ 1.2 million and $ 0.8 million for the year ended December 31, 2020. F- 9 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Product Development Product development expense, which relates to the development of technology of the Company’s 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 General and administrative expense consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in executive management, finance, legal, tax, human resources and facilities costs and fees for other professional services. General and administrative expense also includes depreciation of property and equipment and amortization of intangible assets. Reportable Segment The Company operates in one reportable segment, and management assesses the Company’s financial performance and makes operating decisions based on a single operating segment. Income Taxes The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company recognizes deferred tax assets to the extent that the Company believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize deferred taxes in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions in accordance with ASC No. 740, Accounting for Income Taxes (“ASC 740”) on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of income. Accrued interest and penalties would be included on the related tax liability line in the accompanying consolidated balance sheets. Stock-Based Compensation In accordance with ASC No. 718, Compensation – Stock Compensation , the Company measures the compensation costs of stock-based compensation arrangements based on the grant date fair value of granted instruments and recognizes the costs in the financial statements over the period during which employees are required to provide services. Stock-based compensation arrangements include stock options and restricted stock awards. F- 10 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Equity instruments issued to non-employees are recorded on the basis of the fair value of the instruments, as required by Accounting Standards Update (“ASU”) No. 2018-07, Compensation — Stock Compensation (Topic 718) (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718, which currently only includes share-based payments to employees, to include share-based payments to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. The fair value of each option granted under the Company’s Amended and Restated 2011 Long-Term Incentive Plan (the “2011 Plan”) and 2016 Long-Term Incentive Plan (the “2016 Plan”) was estimated using the Black-Scholes option-pricing model (see Note 10 for further details). Using this model, fair value is calculated based on assumptions with respect to the (i) expected volatility of the Company’s common stock price, (ii) expected life of the award, which for options is the period of time over which employees and non- employees are expected to hold their options prior to exercise, (iii) expected dividend yield on the Company’s common stock, and (iv) a risk-free interest rate, which is based on quoted U.S. Treasury rates for securities with maturities approximating the expected term. Expected volatility is estimated based on the Company’s historical volatilities. The expected life of options has been determined using the “simplified” method, which uses the midpoint between the vesting date and the end of the contractual term. The expected dividend yield is zero as the Company has never paid dividends and does not currently anticipate paying dividends in the foreseeable future. Net Income Per Share Basic earnings and net income per share are computed by dividing the net income 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. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market funds. The Company maintains cash in bank accounts which, at times, may exceed federally insured limits. As part of its cash management process, the Company periodically reviews the relative credit standing of these banks. The Company has not experienced any losses in such accounts and periodically evaluates the credit worthiness of the financial institutions and has determined the credit exposure to be negligible. Receivables Accounts receivable are composed of amounts due from our advertising partners and from credit card processing companies following the initiation of subscription arrangements originated by the Company’s subscribers, which pay by credit card. These receivables are unsecured and are typically settled by the payment processing company within several days of transaction processing accordingly, an allowance for doubtful accounts is considered. Accounts receivable from advertising partners and payment processing companies amounted to $ 153,448 and $ 71,410 on December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021, three advertising partners accounted for 48 % of accounts receivable. As of December 31, 2021, the three advertising partners made up 22%, 15 %, and 11 % of accounts receivable, respectively. F- 11 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of those assets, as follows: Computers and equipment 5 years Website development 3 years Furniture and fixtures 7 years Leasehold improvements Shorter of estimated useful life or remaining lease term Repairs and maintenance costs are expensed as incurred Property and equipment is evaluated for recoverability whenever events or changes in circumstances indicate that the carrying amounts of the assets might not be recoverable. In evaluating an asset for recoverability, the Company estimates the future cash flow expected to result from the use and eventual disposition of the asset. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized. No impairment losses were recorded on property and equipment for the periods presented in these consolidated financial statements. Website Development Costs In accordance with ASC 350-50, Website Development Costs , the Company accounts for website development costs by capitalizing qualifying costs which are incurred during the development and infrastructure stage. Expenses incurred in the planning stage are expensed as incurred. Capitalized website development cost is included in property and equipment and are amortized straight-line over the expected period of benefit, which is three years, when the software is ready for its intended use. Amortization expense related to capitalize website development costs is included in product development expense. Goodwill Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company evaluates its goodwill for impairment in accordance with ASC 350, Intangibles – Goodwill and Other (as amended by ASU 2017-04) , by assessing qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company performs the quantitative goodwill impairment test, if, after assessing the totality of events or circumstances such as those described in paragraph ASC 350-20-35-3C(a) through (g), the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, limited to the total amount of goodwill related to the reporting unit. The Company tests the recorded amount of goodwill for impairment on an annual basis on December 31 of each fiscal year or more frequently if there are indicators that the carrying amount of the goodwill exceeds its carried value. The Company has one reporting unit. The Company performed a qualitative assessment and concluded that no impairment existed as of December 31, 2021 and 2020. Intangible Assets The Company’s intangible assets represent definite lived intangible assets, which are being amortized on a straight-line basis over their estimated useful lives as follows: Patents 20 years Trade names, trademarks, product names, URLs 5 - 10 years Internally developed software 5 - 6 years Non-compete agreements 3 years Subscriber/customer relationships 3 - 12 years F- 12 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company reviews intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. No impairments were recorded on intangible assets as no impairment indicators were noted for the periods presented in these consolidated financial statements. Leases The Company accounts for its leases under ASC 842, Leases (“ASC 842”). Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases and are recorded on the consolidated balance sheets as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. Recent Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2021. On December 1, 2021, the Company adopted ASU 2019-12 and its adoption did not have any significant impact on the Company’s consolidated financial statements and related disclosures. 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. 4. Property and Equipment, Net Property and equipment, net consisted of the following for the periods presented: 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 ( 3,920,646 ) ( 3,734,468 ) Total property and equipment, net $ 69,599 $ 255,777 Depreciation expense, which includes amortization of website development costs, for the years ended December 31, 2021 and 2020 was $ 186,178 and $ 325,044 , respectively. Loss on disposal of property and equipment for the years ended December 31, 2021 and 2020 was $ 0 and $ 39,238 , respectively, as a result from the termination of one of our office leases. 5. Goodwill The Company tests goodwill and indefinite-lived intangible assets for impairment annually and whenever events or circumstances arise that indicate an impairment may exist. The Company determined there were no indicators that would lead to a test for impairment during the years ended December 31, 2021 and 2020. Goodwill was $ 6,326,250 as of December 31, 2021 and December 31, 2020. F- 13 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. Intangible Assets, Net Intangible assets, net consisted of the following for the periods presented: December 31, 2021 2020 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Patents $ 50,000 $ ( 31,251 ) $ 18,749 $ 50,000 $ ( 28,750 ) $ 21,250 Trade names, trademarks, product names, URLs 555,000 ( 509,148 ) 45,852 555,000 ( 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 ( 2,147,058 ) 131,942 2,279,000 ( 1,980,392 ) 298,608 Total intangible assets $ 4,874,000 $ ( 4,677,457 ) $ 196,543 $ 4,874,000 $ ( 4,492,790 ) $ 381,210 Amortization expense for the years ended December 31, 2021 and 2020 was $ 184,667 and $ 246,681 , respectively. The aggregate amortization expense for each of the next three years and thereafter is estimated to be $ 149,944 in 2022, $ 18,000 in 2023, $ 17,349 in 2024 and $ 11,250 thereafter. 7. 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. 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. As the Props tokens do not currently have access to a liquid marketplace, 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. F- 14 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Digital tokens earned, receivable or payable before June 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. Given the recent trading availability of Props tokens in various active markets, during the year ended December 31, 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 December 31, 2021, the Company recorded $ 7,262 under digital tokens. During the year ended December 31, 2021, the Company recorded a non-cash impairment charge in the amount of $ 765,232 , which is reported in the accompanying consolidated statements of income 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. As a result of the termination of the YouNow Agreement, the Company notified its users that it would no longer be issuing Props starting October 15, 2021 and would be replacing any user’s outstanding Props with a new internal rewards program. During year the ended December 31, 2021, the Company sold approximately 36.9 million Props tokens for proceeds $ 0.9 million. The realized gain of the sale of digital tokens was approximately $ 307,934 for the year ended December 31, 2021 and is included in the consolidated statements of income. 8. Income Taxes On March 27, 2020, the CARES Act was enacted in response to COVID-19 pandemic. Under ASC 740, the effects of changes in tax rates and laws are recognized in the period which the new legislation is enacted. The CARES Act made various tax law changes including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest (ii) enacted a technical correction so that qualified improvement property can be immediately expensed under IRC Section 168(k), (iii) made modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years in order to generate a refund of previously paid income taxes and (iv) enhanced recoverability of AMT tax credits. Given the Company’s full valuation allowance position, the CARES Act did not have a material impact on the financial statements. The Company’s provision for income taxes is comprised of the following: December 31, 2021 2020 Current Federal $ - $ - State and local 9,951 387 Total Current 9,951 387 Deferred Federal - - State and local - - Change in Valuation Allowance - - Total Deferred - - Total Provision (Benefit) $ 9,951 $ 387 F- 15 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows: December 31, 2021 2020 Deferred Tax Assets: Net operating losses $ 3,907,758 $ 4,098,329 Share-based compensation 767,318 859,100 Amortization of Intangible Assets 716,598 769,742 Rent 56,251 15,272 Tax Credits 62,969 62,969 Other 266,986 160,762 Subtotal 5,777,880 5,966,174 Less Valuation Allowance: ( 5,713,490 ) ( 5,903,825 ) Total Deferred Tax Assets 64,390 62,349 Deferred Tax Liabilities: Property and equipment ( 64,390 ) ( 62,349 ) Total Deferred Tax Liabilities ( 64,390 ) ( 62,349 ) Net Deferred Tax Assets $ - $ - In assessing the Company’s ability to recover its deferred tax assets, the Company evaluated whether it is more likely than not that some portion or the entire deferred tax asset will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible and/or net operating losses can be utilized. The Company considered all positive and negative evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This evidence includes, but is not limited to, historical earnings, scheduled reversal of taxable temporary differences, tax planning strategies and projected future taxable income. Based on these factors including cumulative losses in recent years, the Company determined that its deferred tax assets are not realizable on a more-likely-than-not basis and has recorded a valuation allowance against its net deferred tax assets. The Company’s valuation allowance decreased by $ 190,335 during 2021. The Company will continue to evaluate its deferred tax assets to determine whether any changes in circumstances could affect the realization of their future benefit. If it is determined in future periods that portions of the Company’s deferred income tax assets satisfy the realization standards, the valuation allowance will be reduced accordingly. As of December 31, 2021, the Company has U.S. federal net operating loss carryforwards of approximately $ 17.4 million, of which $13.1 million may be subject to an annual limitation under Section 382 of the Internal Revenue Code. Of the $17.4 million, approximately, $16.2 million are available to offset 100% of future taxable income but expire in varying amounts between 2030 to 2037, if not utilized. The remaining $1.2 million is available to offset 80% of future taxable income but may be carried forward indefinitely. The Company’s effective tax rate differs from the U.S. federal statutory income tax rate of 21 % for 2021 and 2020 as follows: 2021 2020 Income tax (expense) benefit at federal statutory rate 21.0 % 21.0 % Permanent Differences 0.2 % 0.2 % State and local taxes ( 4.5 )% 1.9 % Valuation allowance ( 14.3 )% ( 37.0 )% Deferred tax adjustment 2.6 % 0.0 % Share based compensation 3.9 % 14.6 % PPP Loan Forgiveness ( 8.0 )% - Other ( 0.2 )% ( 0.6 )% Effective tax rate 0.7 % 0.1 % The Company applies the applicable authoritative guidance which prescribes a comprehensive model for the manner in which a company should recognize, measure, present and disclose in its financial statements all material uncertain tax positions that the Company has taken or expects to take on a tax return. As of December 31, 2021, the Company has no uncertain tax positions. As such, there are no uncertain tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months from December 31, 2021. The Company files a federal income tax return and income tax returns in various state tax jurisdictions. The open tax years for the federal income tax return are 2018 through 2021. The state income tax returns have varying statutes of limitations. The open tax years relating to any of the Company’s federal and state net operating losses begin in 2011. F- 16 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following for the periods presented: December 31, 2021 2020 Compensation, benefits and payroll taxes $ 318,150 $ 226,500 Other accrued expenses 26,291 27,584 Total accrued expenses and other current liabilities $ 344,441 $ 254,084 10. 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 December 31, 2021, there were 978,359 shares available for future issuance under the 2016 Plan. 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 (Registration 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 Topic 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. 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. Gross proceeds received by the Company from the October 2021 Offering were approximately $ 11.6 million, before deducting underwriting discounts and commissions and other estimated offering expenses of approximately $ 955,400 . These costs were recorded in stockholders’ equity as a reduction of additional paid-in capital in connection with Staff Accounting Bulletin Topic 5A. 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 years ended: December 31, 2021 2020 Expected volatility 178.0 – 197.0 % 188.0 % Expected life of option 5.0 – 5.5 5.3 Risk free interest rate 0.81 – 0.88 % 0.6 % Expected dividend yield 0.0 % 0.0 % F- 17 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 tables summarize stock option activity during the year ended December 31, 2021: Weighted Average Number of Exercise Options Price Outstanding at January 1, 2021 622,036 $ 5.53 Granted 37,932 3.77 Exercised during period ( 61,906 ) 3.09 Forfeited or canceled, during the period ( 128,569 ) 4.06 Expired, during the period ( 33,723 ) 16.50 Outstanding at December 31, 2021 435,770 $ 5.31 Exercisable at December 31, 2021 394,075 $ 5.65 At December 31, 2021, there was $ 71,222 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 1.96 years. On December 31, 2021, the aggregate intrinsic value of stock options that were outstanding and exercisable was $ 149,394 and $ 109,644 , respectively. On December 31, 2020, the aggregate intrinsic value of stock options that were outstanding and exercisable was $ 15,840 and $ 15,840 , 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 year ended December 31, 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 year ended December 31, 2021, the Company also granted options to employees to purchase an aggregate of 13,932 shares of common stock. These options have a vesting date ranging 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 . The aggregate fair value for the options granted during the years ended December 31, 2021 and 2020 was $ 145,522 and $ 18,664 , respectively. Stock-based compensation expense for the Company’s stock options included in the consolidated statements of income was as follows: Years Ended December 31, 2021 2020 Cost of revenue $ 67,182 $ 1,527 Sales and marketing expense 294 90 Product development expense 11,302 19,491 General and administrative expense ( 114,431 ) 222,089 Total stock-based compensation expense $ ( 35,653 ) $ 243,197 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 consolidated balance sheets. In addition, the Company retained 22,013 in treasury shares as part of a net share exercise of stock options by former employees. As of December 31, 2021, the Company had 31,963 shares of its common stock classified as treasury shares on the Company’s consolidated balance sheets. F- 18 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Net Income Per Share Basic earnings and net income per share are computed by dividing the net income 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 year ended December 31, 2021, 392,749 of shares issuable upon the exercise of outstanding stock options were not included in the computation of diluted net income per share from operations because their inclusion would be antidilutive. For the year ended December 31, 2021, 43,021 shares issuable upon the exercise of outstanding stock options were included in the computation of diluted net income per share from operations because their inclusion would be dilutive. For the year ended December 31, 2020, 618,918 of shares issuable upon the exercise of outstanding stock options were not included in the computation of diluted net income per share for operations because their inclusion would be antidilutive. For the year ended December 31, 2020, 3,118 of shares issuable upon the exercise of outstanding stock options were included in the computation of diluted net income per share for operations because their inclusion would be dilutive. The following table summarizes the net income per share calculation for the periods presented: Years Ended December 31, 2021 2020 Net income from operations – basic and diluted $ 1,324,106 $ 1,371,262 Weighted average shares outstanding – basic 7,766,111 6,884,690 Weighted average shares outstanding – diluted 7,809,132 6,887,808 Per share data: Basic from operations $ 0. 17 $ 0. 20 Diluted from operations $ 0. 17 $ 0. 20 12. Leases Operating 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 commenced 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 December 31, 2021, the Company had no long-term leases that were classified as financing leases. As of December 31, 2021, the Company did not have additional operating and financing leases that had not yet commenced. At December 31, 2021, the Company had operating lease liabilities of approximately $ 239,000 and right-of-use assets of approximately $ 239,000 , which are included in the consolidated balance sheets. Total rent expense for the year ended December 31, 2021 was $ 84,525 , of which $ 4,500 was sublease income. Total rent expense for year ended December 31, 2020 was $ 206,347 , of which $ 36,095 was sublease income. Rent expense is recorded under general and administrative expense in the consolidated statements of income. F- 19 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes the Company’s operating leases for the periods presented: Years Ended December 31, 2021 2020 Cash paid for amounts included in the measurement of operating lease liabilities: $ 74,416 $ 107,674 Weighted average assumptions: Remaining lease term 2.9 0.9 Discount rate 2.3 % 3.5 % As of December 31, 2021, future minimum payments under non-cancelable operating leases were as follows: For the years ending December 31, Amount 2022 $ 84,975 2023 84,975 2024 77,894 Total $ 247,844 Less: present value adjustment ( 8,353 ) Present value of minimum lease payments $ 239,491 13. 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. 14. Commitments and Contingencies Patent Litigations 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 took place on February 24, 2022 and a trial is scheduled for early 2023. 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 December 31, 2021. 16. Subsequent Events On January 28, 2022, the Board of Directors approved the issuance of 145,000 stock options to employees of the Company. Management has evaluated subsequent events or transactions occurring through the date the consolidated financial statements were issued and determined that no other events or transactions are required to be disclosed herein. F- 20 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.