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-2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-4 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 F-5 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2022 and 2021 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F-7 Notes to Consolidated Financial Statements F-8 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Paltalk, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Paltalk, Inc. and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, 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. F- 2 Critical Audit Matter The critical audit matter communicated below is a matter 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. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. Valuation of the ManyCam Asset Acquisition As described in Note 1 and Note 12 to the consolidated financial statements, the Company acquired certain intangible assets (the “ManyCam Asset Acquisition”) during the year ended December 31, 2022 for $2.7 million. This transaction included internally developed software, intellectual property (trade names, trademarks and URLs) and customer relationships of $1.5 million, $0.3 million and $0.9 million, respectively. We identified the valuation of the ManyCam Asset Acquisition as a critical audit matter. Auditing the Company’s accounting for these acquired intangible assets was complex due to the significant estimation required in managements determination of the fair value of intangible assets. The significant estimation was primarily due to the sensitivity of the respective fair values to the underlying assumptions, including discount rates, weighted average cost of capital and projected revenue growth rates. The primary procedures we performed to address this critical audit matter included the following: ● Evaluated the Company’s use of valuation methodologies. ● Evaluated the prospective financial information and tested the completeness and accuracy of underlying data. ● With the assistance of our valuation specialists, tested the significant assumptions used to value the acquired intangible assets by comparing the significant assumptions to current industry, market and economic trends. ● Performed sensitivity analyses of the significant assumptions to evaluate the change in fair value resulting from changes in the assumptions. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2016. Melville, NY March 23, 2023 F- 3 PALTALK, INC. CONSOLIDATED BALANCE SHEETS December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 14,739,933 $ 21,636,860 Accounts receivable, net of allowances of $ 3,648 as of December 31, 2022 and 2021, respectively 122,297 153,448 Prepaid expense and other current assets 543,199 239,258 Total current assets 15,405,429 22,029,566 Operating lease right-of-use asset 159,181 239,491 Property and equipment, net -- 69,599 Goodwill 6,326,250 6,326,250 Intangible assets, net 3,526,811 196,543 Digital tokens -- 7,262 Other assets 13,937 13,937 Total assets $ 25,431,608 $ 28,882,648 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 1,013,637 $ 1,332,632 Accrued expenses and other current liabilities 225,193 344,441 Contingent consideration 85,000 -- Operating lease liabilities, current portion 82,176 80,309 Deferred subscription revenue 2,257,452 1,915,493 Total current liabilities 3,663,458 3,672,875 Operating lease liabilities, non-current portion 77,005 159,182 Deferred tax liability 716,903 - Total liabilities 4,457,366 3,832,057 Commitments and contingencies (Note 11) Stockholders’ equity: Common stock, $ 0.001 par value, 25,000,000 shares authorized, 9,864,120 shares issued and 9,227,349 and 9,832,157 shares outstanding as of December 31, 2022 and 2021, respectively 9,864 9,864 Treasury stock, 636,771 and 31,963 shares repurchased as of December 31, 2022 and 2021, respectively ( 1,192,124 ) ( 194,200 ) Additional paid-in capital 35,973,735 35,639,910 Accumulated deficit ( 13,817,233 ) ( 10,404,983 ) Total stockholders’ equity 20,974,242 25,050,591 Total liabilities and stockholders’ equity $ 25,431,608 $ 28,882,648 The accompanying notes are an integral part of these consolidated financial statements. F- 4 PALTALK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2022 2021 Revenues Subscription revenue $ 10,662,691 $ 12,368,008 Advertising revenue 326,854 451,337 Technology service revenue -- 454,504 Total revenue 10,989,545 13,273,849 Costs and expenses Costs of revenue 2,823,570 2,720,189 Sales and marketing expense 1,571,275 1,170,386 Product development expense 5,934,433 5,391,819 General and administrative expense 4,311,815 2,706,733 Impairment loss on digital tokens 7,262 765,232 Total costs and expenses 14,648,355 12,754,359 (Loss) Income from operations ( 3,658,810 ) 519,490 Interest income, net 74,895 133 Gain on extinguishment of term debt -- 506,500 Realized gain from the sale of digital tokens -- 307,934 (Loss) Income from operations before income tax benefit (expense) ( 3,583,915 ) 1,334,057 Income tax benefit (expense) 171,665 ( 9,951 ) Net (loss) income $ ( 3,412,250 ) 1,324,106 Net (loss) income per share of common stock: Basic $ ( 0.35 ) $ 0.17 Diluted $ ( 0.35 ) $ 0.17 Weighted average number of shares of common stock used in calculating net (loss) income per share of common stock: Basic 9,638,567 7,766,111 Diluted 9,638,567 7,809,132 The accompanying notes are an integral part of these consolidated financial statements. F- 5 PALTALK, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY Common Stock Treasury Stock Additional Paid-in Accumulated Total Stockholders’ Shares Amount Shares Amount Capital Deficit Equity Balance at December 31, 2020 6,916,404 $ 6,917 ( 9,950 ) $ ( 10,859 ) $ 21,568,041 $ ( 11,729,089 ) $ 9,835,010 Stock-based compensation expense - - - - ( 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 Stock-based compensation expense - - - - 333,825 - 333,825 Repurchases of common stock - - ( 604,808 ) ( 997,924 ) - - ( 997,924 ) Net loss - - - - - ( 3,412,250 ) ( 3,412,250 ) Balance at December 31, 2022 9,864,120 $ 9,864 ( 636,771 ) $ ( 1,192,124 ) $ 35,973,735 $ ( 13,817,233 ) $ 20,974,242 The accompanying notes are an integral part of these consolidated financial statements. F- 6 PALTALK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2022 2021 Cash flows from operating activities: Net (loss) income $ ( 3,412,250 ) $ 1,324,106 Adjustments to reconcile net (loss) income from operations to net cash (used in) provided by operating activities: Depreciation of property and equipment 69,599 186,178 Amortization of intangible assets 601,264 184,667 Amortization of operating lease right-of-use assets 80,310 74,416 Gain on extinguishment of digital token liability -- ( 338,553 ) Impairment loss on digital tokens 7,262 765,232 Realized (gain) loss from the sale of digital tokens -- ( 307,934 ) Deferred tax benefit ( 171,665 ) -- Gain on extinguishment of term debt -- ( 506,500 ) Stock-based compensation 333,825 ( 35,653 ) Bad debt expense -- ( 3,235 ) Changes in operating assets and liabilities: Digital tokens -- ( 884,263 ) Accounts receivable, net 31,151 ( 78,803 ) Digital tokens receivable -- 210,000 Operating lease liability ( 80,310 ) ( 74,416 ) Digital tokens payable -- 215,156 Prepaid expense and other current assets ( 303,941 ) ( 2,554 ) Accounts payable, accrued expenses and other current liabilities ( 453,928 ) 680,848 Deferred subscription revenue 341,959 ( 143,228 ) Net cash (used in) provided by operating activities ( 2,956,724 ) 1,265,464 Cash flows from investing activities: Acquisition of ManyCam assets ( 2,700,000 ) -- Acquisition related costs of ManyCam assets ( 242,279 ) -- Proceeds from the sale of digital tokens -- 858,848 Net cash (used in) provided by investing activities ( 2,942,279 ) 858,848 Cash flows from financing activities: 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 ( 997,924 ) -- Net cash (used in) provided by financing activities ( 997,924 ) 13,927,128 Net (decrease) increase in cash and cash equivalents ( 6,896,927 ) 16,051,440 Balance of cash and cash equivalents at beginning of period 21,636,860 5,585,420 Balance of cash and cash equivalents at end of period $ 14,739,933 $ 21,636,860 Supplemental disclosure of cash flow information: Non-cash investing and financing activities: Deferred tax liability associated with the acquisition of ManyCam assets $ 904,253 -- Accrued contingent consideration $ 85,000 -- 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- 7 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, Vumber LLC and ManyCam ULC (collectively, the “Company”). The Company’s product portfolio includes Paltalk, Camfrog and Tinychat, which together host a large collection of video-based communities. The Company’s other products are ManyCam and Vumber. ManyCam is a live streaming software and virtual camera that allows users to deliver professional live videos on streaming platforms, video conferencing apps and distance learning tools. Vumber is a telecommunications services provider that enables users to communicate privately by having multiple phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number. The Company has an over 20-year history of technology innovation and hold 10 patents. ManyCam Asset Acquisition On June 9, 2022 (the “Effective Date”), the Company entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) by and among the Company, ManyCam ULC, an unlimited liability company incorporated under the laws of the Province of Alberta and a wholly owned subsidiary of the Company (the “Purchaser”), Visicom Media Inc., a Canadian corporation (“Visicom”), and 2434936 Alberta ULC, an unlimited liability company incorporated under the laws of the Province of Alberta (“Target NewCo”), pursuant to which the Purchaser purchased, effective as of the Effective Date, all of the issued and outstanding shares of Target NewCo (the “ManyCam Acquisition”). Prior to the ManyCam Acquisition, Target NewCo held all assets related to, or used by Visicom in connection with, the business of developing and distributing virtual webcam driver software, including virtual backgrounds and/or “masks” or other camera effects (other than the Excluded Contracts (as defined in the Securities Purchase Agreement)), whether tangible or intangible, including, but not limited to, Target NewCo’s ManyCam software (“ManyCam”) and related source code, customer lists, customer relationships and all associated customer information, contracts with contractors and suppliers, brand names, trade secrets, trademarks, trade names, designs, copyrights, websites, all URLs, goodwill and intellectual property associated with each of the foregoing (collectively, the “Conveyed Assets”). The Company concluded that the Conveyed Assets were not considered a business for purposes of Regulation S-X and Accounting Standards Codification (“ASC”) 805, Business Combinations. On June 30, 2022, we entered into a License Agreement with Visicom (the “License Agreement”), pursuant to which we agreed to distribute, at the discretion and direction of Visicom, a specified number of ManyCam software updates to certain license holders to whom Visicom has previously granted a “lifetime” license to ManyCam software. As consideration for distributing the software updates, Visicom paid us an initial upfront nonrefundable payment of $ 65,000 . The License Agreement provides that Visicom may purchase additional licenses at prices specified therein. Other than providing a one-time, limited license to Visicom for the distribution of ManyCam software updates pursuant to the terms of the License Agreement, we do not have any obligation to provide support or service to the licensee end users. For more information regarding the ManyCam Acquisition, see Note 12. Macro-Economic Factors and Update on COVID-19 The Company’s results of operations have been and may continue to be negatively impacted by the uncertainty regarding COVID-19 and macro-economic factors, including the timing of economic recessions and/or recovery and the overall inflationary environment. Prolonged periods of inflation may affect the Company’s ability to target new customers as well as keep existing customers engaged and may ultimately have a correlating effect on the Company’s users’ discretionary spending. Furthermore, the recent strength of the US dollar compared to foreign currencies could have a negative effect on the Company’s non-US customer base, as the Company’s subscription prices are based in US dollars. Our user growth may continue to slow or decline as the impact of the COVID-19 pandemic continues to taper, particularly in light of a potential economic downturn. Furthermore, the recent strength of the US dollar compared to foreign currencies could have a negative effect on our non-US customer base, as our subscription prices are based in US dollars. F- 8 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. The most significant accounting estimate inherent in the preparation of our financial statements include the discount rates and weighted average costs of capital used in the fair value of the ManyCam Assets and in assigning their respective useful lives. These fair values and estimates were based on a number of factors, including a valuation by an independent third party. 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, 2022 and 2021, subscriptions were offered in durations of one-, six- twelve-and twenty four -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, 2021 was $ 1,915,493 , which was subsequently recognized as subscription revenue during the year ended December 31, 2022. The ending balance of deferred revenue at December 31, 2022 was $ 2,257,452 . 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 operations. Virtual gift revenue is presented as deferred revenue in the consolidated balance sheets until virtual gifts are redeemed. Virtual gift revenue was $ 4,550,864 and $ 5,586,710 for the years ended December 31, 2022 and 2021, respectively. The ending balance of deferred revenue from virtual gifts at December 31, 2022 and 2021 was $ 393,433 and $ 293,737 , respectively. F- 9 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Technology Service Revenue Technology service revenue was historically generated under service and partnership agreements that the Company negotiated with third parties which included development, integration, engineering, licensing or other services that the Company provided. During 2021, the Company 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 the Company’s Camfrog and Paltalk applications (as amended, the “YouNow Agreement”). 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. The Company did not generate any technology service revenue during the year ended December 31, 2022. Net (Loss) Income Per Share Basic earnings and net (loss) 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. 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, 2022 and 2021. F- 10 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. The Company’s policy for global intangible low taxed income is to treat as a period cost when incurred. Intangible Assets The Company acquired amortizable intangible assets as part of a purchase agreement consisting of internally developed software, intellectual property (trade names, trademarks and URLs) and subscriber relationships/ customer lists. 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 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. F- 11 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Intangible Assets, Net Intangible assets, net consisted of the following for the periods presented: December 31, 2022 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Patents $ 50,000 $ ( 33,750 ) $ 16,250 $ 50,000 $ ( 31,251 ) $ 18,749 Trade names, trademarks, product names, URLs 1,022,425 ( 562,114 ) 460,311 555,000 ( 509,148 ) 45,852 Internally developed software 4,180,005 ( 2,165,550 ) 2,014,455 1,990,000 ( 1,990,000 ) - Subscriber/customer relationships 3,553,102 ( 2,517,307 ) 1,035,795 2,279,000 ( 2,147,058 ) 131,942 Total intangible assets $ 8,805,532 $ ( 5,278,721 ) $ 3,526,811 $ 4,874,000 $ ( 4,677,457 ) $ 196,543 Amortization expense for the years ended December 31, 2022 and 2021 was $ 601,264 and $ 184,667 , respectively. The aggregate amortization expense for each of the next five years and thereafter is estimated to be $ 822,333 in 2023, $ 821,687 in 2024, $ 568,529 in 2025, $ 382,133 in 2026, $ 382,133 in 2027, and $ 549,996 thereafter. 4. Digital Tokens Digital tokens, 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. During the years ended December 31, 2022 and 2021, the Company recorded a non-cash impairment charge in the amount of $ 7,262 and $ 765,232 , respectively, which is reported in the accompanying consolidated statements of operations as a result of recent declines in the quoted market prices of certain digital tokens below the market price of their acquisition. 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 $ 307,934 for the year ended December 31, 2021 and is included in the consolidated statements of operations. 5. Income Taxes The Inflation Reduction Act (“IRA”) and Chips and Science Act (“CHIPS Act”) were both enacted in August 2022. The IRA introduced new provisions including a 15 % corporate alternative minimum tax for certain large corporations that have at least an average of $ 1 billion adjusted financial statement income over a consecutive three-tax-year period and a 1 % excise tax surcharge on stock repurchases. The CHIPS Act provides a variety of incentives associated with investments in domestic semiconductor manufacturing and related activities. Both the IRA and CHIPS Act are applicable for tax years beginning after December 31, 2022 and had no impact to the Company’s consolidated financial statements for the year ended December 31, 2022. On March 11, 2021, the American Rescue Plan Act of 2021 (“American Rescue Plan”) was signed into law to provide additional relief in connection with the ongoing COVID-19 pandemic. The American Rescue Plan includes, among other things, provisions relating to PPP loan expansion, defined pension contributions, excessive employee remuneration, and the repeal of the election to allocate interest expense on a worldwide basis. Under ASC 740, the effects of new legislation are recognized upon enactment. The enactment of the American Rescue Plan did not impact the Company’s income tax provision. F- 12 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of income (loss) before the provision (benefit) for income taxes are as follows: December 31, 2022 2021 Domestic Operations $ ( 2,683,143 ) $ 1,334,057 Foreign Operations ( 900,772 ) - $ ( 3,583,915 ) $ 1,334,057 The Company’s provision for income taxes is comprised of the following: December 31, 2022 2021 Current Federal $ - $ - State and local 15,685 9,951 Foreign - - Total Current 15,685 9,951 Deferred Federal - - State and local - - Foreign ( 187,350 ) - Change in Valuation Allowance - - Total Deferred ( 187,350 ) - Total (Benefit) Provision $ ( 171,665 ) $ 9,951 The Company’s effective tax rate differs from the U.S. federal statutory income tax rate of 21 % for 2022 and 2021 as follows: 2022 2021 Income tax benefit (expense) at federal statutory rate 21.0 % 21.0 % Permanent Differences - 0.2 % State and local taxes ( 0.7 )% ( 4.5 )% Valuation allowance ( 7.6 )% ( 14.3 )% Deferred tax adjustment - 2.6 % Share based compensation ( 7.8 )% 3.9 % PPP Loan Forgiveness - ( 8.0 )% Foreign Income Tax Rate Differential 0.5 % - Other ( 0.6 )% ( 0.2 )% Effective tax rate 4.8 % 0.7 % 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, 2022 2021 Deferred Tax Assets: U.S. federal and state net operating losses $ 3,436,822 $ 3,907,758 Foreign net operating losses 103,375 - Share-based compensation 511,603 767,318 Amortization of intangible assets 583,727 716,598 Rent 36,413 56,251 Capitalized IRC §174 costs 1,134,472 - Tax credits 62,969 62,969 Other 257,473 266,986 Subtotal 6,126,854 5,777,880 Less Valuation Allowance: ( 5,984,591 ) ( 5,713,490 ) Total Deferred Tax Assets 142,263 64,390 Deferred Tax Liabilities: Amortization of intangible assets ( 820,279 ) - Property and equipment ( 31,262 ) ( 64,390 ) Other ( 7,625 ) - Total Deferred Tax Liabilities ( 859,166 ) ( 64,390 ) Net Deferred Tax Liability $ ( 716,903 ) $ - F- 13 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. A significant piece of objective negative evidence evaluated was cumulative loss incurred over the three-year period ended December 31, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. Based on the weight of available evidence, the Company determined that its U.S. deferred tax assets are not realizable on a more-likely-than-not basis and has recorded a valuation allowance against its net U.S. deferred tax assets. The Company’s valuation allowance increased by $ 271,101 during 2022. 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, 2022, the Company has U.S. federal net operating loss carryforwards of approximately $15.2 million, of which $12.5 million may be subject to an annual limitation under Section 382 of the Internal Revenue Code. Of the $15.2 million, approximately, $14.0 million are available to offset 100% of future taxable income but expire in varying amounts between 2031 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 also has foreign net operating loss carryforwards of approximately $0.5 million, which begin to expire in 2042. 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, 2022, 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, 2022. The Company files a federal income tax return, income tax returns in various state tax jurisdictions, and income tax returns in Canada. The open tax years for the federal income tax return are 2019 through 2022. 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 2009. 6. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following for the periods presented: December 31, 2022 2021 Compensation, benefits and payroll taxes $ 114,000 $ 318,150 Other accrued expenses 111,193 26,291 Total accrued expenses and other current liabilities $ 225,193 $ 344,441 F- 14 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. 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, 2022, there were 792,056 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. F- 15 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2022 2021 Expected volatility 173 – 182 % 178.0 – 197.0 % Expected life of option 5.2 – 6.2 5.0 – 5.5 Risk free interest rate 2.53 % 0.81 – 0.88 % Expected dividend yield 0.0 % 0.0 % The expected life of the options is the period of time over which employees and non-employees are expected to hold their options prior to exercise. The expected life of options has been determined using the “simplified” method as prescribed by Staff Accounting Bulletin 110, which uses the midpoint between the vesting date and the end of the contractual term. The volatility of the Company’s common stock is calculated using the Company’s historical volatilities beginning at the grant date and going back for a period of time equal to the expected life of the award. The Company estimates potential forfeitures of stock awards and adjusts recorded stock-based compensation expense accordingly. The Company estimates pre-vesting forfeitures primarily based on the Company’s historical experience and is adjusted to reflect actual forfeitures as the stock-based awards vest. The following tables summarize stock option activity during the year ended December 31, 2022: Weighted Average Number of Exercise Options Price Outstanding at January 1, 2022 435,770 $ 5.31 Granted 248,501 2.66 Exercised during period -- -- Forfeited or canceled, during the period ( 52,588 ) 3.64 Expired, during the period ( 9,609 ) 49.29 Outstanding at December 31, 2022 622,074 $ 3.71 Exercisable at December 31, 2022 468,023 $ 4.09 At December 31, 2022, there was $ 338,374 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 3.04 years. On December 31, 2022, the aggregate intrinsic value of stock options that were outstanding and exercisable was $ 9,360 . On December 31, 2021, the aggregate intrinsic value of stock options that were outstanding and exercisable was $ 149,394 and $ 109,644 , 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, 2022, 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 $ 2.66 per share. The stock options vest in four equal quarterly installments on the last day of each calendar quarter in 2022 and have a term of ten years. During the year ended December 31, 2022, the Company also granted options to employees to purchase an aggregate of 224 ,501shares 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 $ 2.66 . The aggregate fair value for the options granted during the years ended December 31, 2022 and 2021 was $ 636,957 and $ 145,522 , respectively. F- 16 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-based compensation expense for the Company’s stock options included in the consolidated statements of operations was as follows: Years Ended December 31, 2022 2021 Cost of revenue $ 19,500 $ 67,182 Sales and marketing expense 2,056 294 Product development expense 24,748 11,302 General and administrative expense 287,521 ( 114,431 ) Total stock-based compensation expense $ 333,825 $ ( 35,653 ) Treasury Shares The Board of Directors of the Company approved a stock repurchase plan for up to $ 1,750,000 of the Company’s outstanding common stock (the “Stock Repurchase Plan”), effective as of March 29, 2022 and expiring on the one-year anniversary of such date. Shares may be repurchased from time-to-time in open market transactions at prevailing market prices, in privately negotiated transactions or by other means in accordance with federal securities laws, including Rule 10b5-1 programs, and the Stock Repurchase Plan may be suspended or discontinued at any time. The actual timing, number and value of shares repurchased will be determined by a committee of the Board of Directors at its discretion and will depend on a number of factors, including the market price of the Company’s common stock, general market and economic conditions, alternative investment opportunities and other corporate considerations. As of December 31, 2022, the Company had 636,771 shares of its common stock classified as treasury shares on the Company’s consolidated balance sheets. 8. Net (Loss) 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 loss per share. For the year ended December 31, 2022, 622,074 of shares issuable upon the exercise of outstanding stock options were not included in the computation of diluted net loss per share from operations because their inclusion would be antidilutive. For the year ended December 31, 2022, no 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, 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 for operations because their inclusion would be antidilutive. For the year ended December 31, 2021, 43,021 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 (loss) income per share calculation for the periods presented: Years Ended December 31, 2022 2021 Net (loss) income from operations – basic and diluted $ ( 3,412,250 ) $ 1,324,106 Weighted average shares outstanding – basic 9,638,567 7,766,111 Weighted average shares outstanding – diluted 9,638,567 7,809,132 Per share data: Basic from operations $ ( 0.35 ) $ 0. 17 Diluted from operations $ ( 0.35 ) $ 0. 17 F- 17 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. 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, 2022, the Company had no long-term leases that were classified as financing leases. As of December 31, 2022, the Company did not have additional operating and financing leases that had not yet commenced. At December 31, 2022, the Company had operating lease liabilities of approximately $ 159,000 and right-of-use assets of approximately $ 159,000 , which are included in the consolidated balance sheets. Total rent expense for the year ended December 31, 2022 was $ 83,084 , of which $ 6,000 was sublease income. Total rent expense for year ended December 31, 2021 was $ 84,525 , of which $ 4,500 was sublease income. Rent expense is recorded under general and administrative expense in the consolidated statements of operations. The following table summarizes the Company’s operating leases for the periods presented: Years Ended December 31, 2022 2021 Cash paid for amounts included in the measurement of operating lease liabilities: $ 80,310 $ 74,416 Weighted average assumptions: Remaining lease term 1.9 2.9 Discount rate 2.3 % 2.3 % As of December 31, 2022, future minimum payments under non-cancelable operating leases were as follows: For the years ending December 31, Amount 2023 $ 84,975 2024 77,893 Total 162,868 Less: present value adjustment ( 3,687 ) Present value of minimum lease payments $ 159,181 10. 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, and the Company recognized a $ 506,500 gain on extinguishment of term debt. F- 18 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. 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. On September 7, 2022, the United States Patent Office issued a reexamination of U.S. Patent No. 6,683,858, and on January 19, 2023, the Examiner issued an Ex Parte Reexamination Certificate, ending the reexamination and confirming the patentability of claims 1-10 of U.S. Patent No. 6,683,858. Trial is now scheduled for early third quarter of 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, 2022. Officer Employment Agreements On March 23, 2022, the Company entered into Amended and Restated Employment Agreements with the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), which amended and restated their existing employment agreements with the Company dated October 7, 2016 and December 9, 2019, respectively. The agreements are each for a term of one year with auto renewal provisions. Except for adjustments to base salaries, all other terms and conditions of the prior employment agreements between the Company and the CEO and CFO remained in full force and effect. The CEO agreement is retroactive to February 2021. The CFO agreement is retroactive to January 2022. Aggregate commitments of base salaries under the agreements for 2022 total $ 490,000 . Should the agreements be renewed for 2023 and beyond, the aggregate base salary commitments would total $ 510,000 per year. 12. Asset Acquisition – Securities Purchase Agreement As discussed above in Note 1, on June 9, 2022, the Company entered into the Securities Purchase Agreement by and among the Company, the Purchaser, Visicom and Target NewCo, pursuant to which the Purchaser purchased, effective as of the Effective Date, all of the issued and outstanding shares of Target NewCo. The Purchaser acquired the Conveyed Assets for a cash purchase price of $ 2.7 million (the “Cash Consideration”). In addition to the Cash Consideration, Visicom is entitled to receive an additional payment of up to $ 600,000 (the “Earn-Out Payment”) based on the sales of the ManyCam software less chargebacks and refunds (“Gross Sales”) in the six-month period following the Closing (the “Earn-Out Period”) as follows: (i) if the Gross Sales during the Earn-Out Period are greater than $800,000, the Earn-Out Payment shall be $600,000, (ii) if the Gross Sales during the Earn-Out Period are greater than $700,000 but less than $800,000, the Earn-Out Payment shall be $300,000, (iii) if the Gross Sales during the Earn-Out Period are greater than $600,000 but less than $700,000, the Earn-Out Payment shall be $150,000 and (iv) if the Gross Sales during the Earn-Out Period do not exceed $600,000, then the Seller will not be paid any portion of the Earn-Out Payment. The Company concluded that the Conveyed Assets were not considered a business for purposes of Regulation S-X and ASC 805, Business Combinations. While Gross Sales during the Earn Out Period exceeded $600,000 and was less than $700,000, there were some adjustments made to calculation and it was agreed by both parties to a negotiated amount. As a result, the Company recorded a liability in the amount of $85,000 for payment to the Seller, with a corresponding adjustment to the cost basis of the Conveyed Assets. As part of a valuation analysis, the Company identified intangible assets, including internally developed software, subscriber relationships/customer list and intellectual property (trade names, trademarks, URLs). The fair value of identifiable intangible assets is determined primarily using the “income approach,” which requires a forecast of all of the expected future cash flows and includes significant inputs such as the weighted average cost of capital and the discount premium. On the date of measurement the weighted average cost of capital was 23.2 % and the discount premium was 7 %. The Company considered several factors to estimate the economic useful life of the Customer Relationships including those noted under ASC 350-30-35-3. The Customer Relationships were estimated to have an economic useful life of three years for tradenames and seven years for developed software and customer list. This assumption was deemed reasonable based on reviewing useful lives for the comparable companies. F- 19 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Final allocation was determined with the assistance of a third-party valuation specialist hired by Company management. The following table summarizes the fair value of the identifiable intangible assets and their respective useful lives: Estimated Fair Value Estimated Contingent Consideration Allocation at December 31, 2022 Total Allocation Estimated Useful Life in Years Internally developed software $ 1,504,000 $ 47,345 $ 1,551,345 7 Intellectual property (trade names, trademarks, URLs) 321,000 10,115 331,115 7 Subscriber Relationships/Customer List 875,000 27,540 902,540 3 Total acquired assets $ 2,700,000 $ 85,000 $ 2,785,000 The estimated aggregate amortization expense for each of the next five years and thereafter will approximate $ 804,333 in 2023, $ 804,333 in 2024, $ 566,029 in 2025, $ 379,633 in 2026, $ 379,633 in 2027 and $ 546,250 thereafter. The Company incurred approximately $ 242,000 of expenses in connection with the ManyCam Acquisition and capitalized them accordingly. As part of the accounting for the ManyCam assets, the Company provisionally recorded a deferred tax liability of $ 0.9 million with an offset to intangible assets related to the excess financial reporting basis over the tax basis of the Conveyed Assets. On June 30, 2022, the Company entered into the License Agreement with Visicom, pursuant to which the Company agreed to distribute, at the discretion and direction of Visicom, a specified number of ManyCam software updates to certain license holders to whom Visicom has previously granted a “lifetime” license to ManyCam software. As consideration for distributing the software updates, Visicom paid the Company an initial upfront nonrefundable payment of $ 65,000 . The License Agreement provides that Visicom may purchase additional licenses at prices specified therein. Other than providing a one-time, limited license to Visicom for the distribution of ManyCam software updates pursuant to the terms of the License Agreement, the Company does not have any obligation to provide support or service to the licensee end users. The Company recognized the $ 65,000 payment as revenue during the period ended December 31, 2022, as it satisfied its performance obligation as specified in the License Agreement. 13. Subsequent Events 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.