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, 2023 and 2022 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022 F-4 Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 F-6 Notes to Consolidated Financial Statements F-7 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, 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. New York, NY March 15, 2024 F- 2 PALTALK, INC. CONSOLIDATED BALANCE SHEETS December 31, 2023 2022 Assets Current assets: Cash and cash equivalents $ 13,568,049 14,739,933 Accounts receivable, net of allowances of $ 23,326 and $ 3,648 as of December 31, 2023 and 2022, respectively 92,704 122,297 Employee retention tax credit receivable, net 114,212 -- Prepaid expense and other current assets 990,634 543,199 Total current assets 14,765,599 15,405,429 Operating lease right-of-use asset 77,005 159,181 Goodwill 6,326,250 6,326,250 Intangible assets, net 2,704,477 3,526,811 Other assets 13,937 13,937 Total assets $ 23,887,268 25,431,608 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 792,053 1,013,637 Accrued expenses and other current liabilities 226,120 225,193 Contingent consideration -- 85,000 Operating lease liabilities, current portion 77,005 82,176 Deferred subscription revenue 2,043,362 2,257,452 Total current liabilities 3,138,540 3,663,458 Operating lease liabilities, non-current portion -- 77,005 Deferred tax liability 614,041 716,903 Total liabilities 3,752,581 4,457,366 Commitments and contingencies (Note 9) Stockholders’ equity: Common stock, $ 0.001 par value, 25,000,000 shares authorized, 9,864,120 shares issued and 9,222,157 and 9,227,349 shares outstanding as of December 31, 2023 and 2022, respectively 9,864 9,864 Treasury stock, 641,963 and 636,771 shares repurchased as of December 31, 2023 and 2022, respectively ( 1,199,337 ) ( 1,192,124 ) Additional paid-in capital 36,208,728 35,973,735 Accumulated deficit ( 14,884,568 ) ( 13,817,233 ) Total stockholders’ equity 20,134,687 20,974,242 Total liabilities and stockholders’ equity $ 23,887,268 25,431,608 The accompanying notes are an integral part of these consolidated financial statements. F- 3 PALTALK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 2023 2022 Revenues Subscription revenue $ 10,646,700 $ 10,662,691 Advertising revenue 333,144 326,854 Total revenue 10,979,844 10,989,545 Costs and expenses Costs of revenue 3,238,243 2,823,570 Sales and marketing expense 878,657 1,571,275 Product development expense 4,860,607 5,934,433 General and administrative expense 4,072,580 4,311,815 Impairment loss on digital tokens -- 7,262 Total costs and expenses 13,050,087 14,648,355 Loss from operations ( 2,070,243 ) ( 3,658,810 ) Interest income, net 639,611 74,895 Other income, net 343,045 -- Loss from operations before income tax benefit ( 1,087,587 ) ( 3,583,915 ) Income tax benefit 20,252 171,665 Net loss $ ( 1,067,335 ) ( 3,412,250 ) Net loss per share of common stock: Basic $ ( 0.12 ) $ ( 0.35 ) Diluted $ ( 0.12 ) $ ( 0.35 ) Weighted average number of shares of common stock used in calculating net loss per share of common stock: Basic 9,222,206 9,638,567 Diluted 9,222,206 9,638,567 The accompanying notes are an integral part of these consolidated financial statements. F- 4 PALTALK, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022 Common Stock Treasury Stock Additional Paid-in Accumulated Total Stockholders’ Shares Amount Shares Amount Capital Deficit Equity 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 Stock-based compensation expense - - - - 234,993 - 234,993 Repurchases of common stock - - ( 5,192 ) ( 7,213 ) - - ( 7,213 ) Net loss - - - - - ( 1,067,335 ) ( 1,067,335 ) Balance at December 31, 2023 9,864,120 9,864 ( 641,963 ) ( 1,199,337 ) 36,208,728 ( 14,884,568 ) 20,134,687 The accompanying notes are an integral part of these consolidated financial statements. F- 5 PALTALK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 1,067,335 ) $ ( 3,412,250 ) Adjustments to reconcile net loss from operations to net cash used in operating activities: Depreciation of property and equipment -- 69,599 Amortization of intangible assets 822,334 601,264 Amortization of operating lease right-of-use assets 82,176 80,310 Impairment loss on digital tokens -- 7,262 Income tax benefit 20,252 -- Deferred tax liability ( 123,114 ) ( 171,665 ) Stock-based compensation 234,993 333,825 Bad debt expense 49,274 -- Changes in operating assets and liabilities: Accounts receivable, net ( 19,681 ) 31,151 Operating lease liability ( 82,176 ) ( 80,310 ) Employee retention tax credit receivable, net ( 114,212 ) -- Prepaid expense and other current assets ( 447,435 ) ( 303,941 ) Accounts payable, accrued expenses and other current liabilities ( 220,657 ) ( 453,928 ) Deferred subscription revenue ( 214,090 ) 341,959 Net cash used in operating activities ( 1,079,671 ) ( 2,956,724 ) Cash flows from investing activities: Acquisition of ManyCam assets -- ( 2,700,000 ) Acquisition related costs of ManyCam assets -- ( 242,279 ) Payment of contingent consideration ( 85,000 ) -- Net cash used in investing activities ( 85,000 ) ( 2,942,279 ) Cash flows from financing activities: Purchase of treasury stock ( 7,213 ) ( 997,924 ) Net cash used in financing activities ( 7,213 ) ( 997,924 ) Net decrease in cash and cash equivalents ( 1,171,884 ) ( 6,896,927 ) Balance of cash and cash equivalents at beginning of period 14,739,933 21,636,860 Balance of cash and cash equivalents at end of period $ 13,568,049 $ 14,739,933 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 The accompanying notes are an integral part of these consolidated financial statements. F- 6 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 is a communications software innovator that powers multimedia social applications. 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 holds 8 patents. Impact of Macro-Economic Factors The Company’s results of operations have been and may continue to be negatively impacted by macro-economic factors, including the timing of economic recessions and/or recovery and the overall inflationary environment. Prolonged periods of inflation have affected, and may continue to affect, the Company’s ability to target new customers as well as keep existing customers engaged and may ultimately have a correlating effect on its users’ discretionary spending. Additionally, the closures of certain banks in 2023 and their placement into receivership with the Federal Deposit Insurance Corporation created bank-specific and broader financial institution liquidity challenges and concerns. Future adverse developments with respect to specific financial institutions or the broader financial services industry may create additional market and economic uncertainty, which could affect the Company’s industry. Employee Retention Tax Credit Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Company was eligible for a refundable employee retention tax credit (the “ERTC”) subject to certain criteria. During the year ended December 31, 2023, the Company applied for the ERTC and recorded a receivable in the amount of $ 343,045 , net of related costs, which was recognized in the Company’s condensed consolidated statement of operations as other income. As of December 31, 2023, the Company received an aggregate of $ 294,833 , which was recorded as a reduction of the receivable on our condensed consolidated balance sheet. 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. Recent Accounting Standards In December 2023, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2023-09, “ Income Taxes (Topic 740): Improvements to Income Tax Disclosures ”. ASU 2023-09 is intended to enhance the transparency and decision usefulness of income tax disclosures for publicly traded companies. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to the rate reconciliation and income taxes paid information. ASU 2023-09 will be effective for the Company in the annual period beginning January 1, 2025, though early adoption is permitted. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2023-09 on its financial position, results of operations and cash flows. In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13 “Financial Instruments - Credit Losses (Topic 326)” and also issued subsequent amendments to the initial guidance under ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively, “Topic 326”). Topic 326 requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. This replaces the existing incurred loss model with an expected loss model and requires the use of forward-looking information to calculate credit loss estimates. The Company adopted ASU 2016-13 on January 1, 2023. The adoption of ASU 2016-13 did not have a material impact on the Company’s financial position, results of operations or cash flows. F- 7 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. During the year ended December 31, 2023, there were no critical accounting estimates made by management that would have a material effect on the financial statements. During the year ended December 31, 2022, the most significant accounting estimate inherent in the preparation of the financial statements included the discount rates and weighted average costs of capital used in the fair value of the ManyCam intangible assets and in assigning their respective useful lives. These fair values and estimates were based on a number of factors, including a valuation from an independent third party. Revenue Recognition In accordance with Accounting Standards and Codifications (“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, 2023 and 2022, 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, 2022 was $ 2,257,452 , which was subsequently recognized as subscription revenue during the year ended December 31, 2023. The ending balance of deferred revenue at December 31, 2023 was $ 2,043,362 . 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 $ 4,522,461 and $ 4,550,864 for the years ended December 31, 2023 and 2022, respectively. The ending balance of deferred revenue from virtual gifts at December 31, 2023 and 2022 was $ 374,696 and $ 393,433 , respectively. F- 8 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net (Loss) Income Per Share Basic earnings and net (loss) income per share are computed by dividing the net (loss) 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 fair value of the goodwill exceeds its carrying amount. The Company has one reporting unit. The Company performed a qualitative assessment and concluded that no impairment existed as of December 31, 2023 and 2022. 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. Inflation Reduction Act of 2022 On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law. The IR Act provides for, among other things, a new U.S. federal 1 % excise tax on certain repurchases of stock by publicly traded U.S. domestic corporations and certain U.S. domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023. The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased. The amount of the excise tax is generally 1 % of the fair market value of the shares repurchased at the time of the repurchase. However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year. In addition, certain exceptions apply to the excise tax. The U.S. Department of the Treasury has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax. The IR Act was not applicable to the Company in the current year given that repurchases of stock were below the threshold required to be subject to taxation. F- 9 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible Assets The Company’s acquired amortizable intangible assets primarily consist of the ManyCam assets acquired in June 2022, which consist 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 - 7 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. 3. Intangible Assets, Net Intangible assets, net consisted of the following for the periods presented: December 31, 2023 2022 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Patents $ 50,000 $ ( 36,250 ) $ 13,750 $ 50,000 $ ( 33,750 ) $ 16,250 Trade names, trademarks, product names, URLs 1,022,425 ( 644,390 ) 378,035 1,022,425 ( 562,114 ) 460,311 Internally developed software 4,180,005 ( 2,478,408 ) 1,701,597 4,180,005 ( 2,165,550 ) 2,014,455 Subscriber/customer relationships 3,553,102 ( 2,942,007 ) 611,095 3,553,102 ( 2,517,307 ) 1,035,795 Total intangible assets $ 8,805,532 $ ( 6,101,055 ) $ 2,704,477 $ 8,805,532 $ ( 5,278,721 ) $ 3,526,811 During the year ended December 31, 2023, in connection with the previously acquired ManyCam assets and pursuant to the securities purchase agreement related to such asset acquisition, the Company made an earn-out payment of $ 85,000 because the sales of the ManyCam software, less chargebacks and refunds, in the six-month period following the closing of the acquisition exceeded $ 600,000 but were less than $ 700,000 . Amortization expense for the years ended December 31, 2023 and 2022 was $ 822,334 and $ 601,264 , respectively. The aggregate amortization expense for each of the next five years and thereafter is estimated to be $ 821,687 in 2024, $ 568,529 in 2025, $ 382,133 in 2026, $ 382,133 in 2027, $ 382,133 in 2028, and $ 167,862 thereafter. 4. Income Taxes The Organization for Economic Co-operation and Development (OECD) Pillar Two Model Rules are intended to apply for tax years beginning in 2024. The Pillar Two Model Rules establishes a global minimum tax of 15 % for multinational companies with consolidated revenue above € 750 million. Many foreign jurisdictions have adopted the Pillar Two Model Rules and other foreign jurisdictions are in the process of enacting legislation to adopt it. The Company does not expect to be impacted by the Pillar Two Model Rules as it will not meet the consolidated revenue threshold in the near term. F- 10 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of loss before income tax benefit are as follows: December 31, 2023 2022 Domestic Operations $ ( 498,673 ) $ ( 2,683,143 ) Foreign Operations ( 588,914 ) ( 900,772 ) $ ( 1,087,587 ) $ ( 3,583,915 ) The Company’s benefit for income taxes is comprised of the following: December 31, 2023 2022 Current Federal $ - $ - State and local 6,579 15,685 Foreign 76,031 - Total Current 82,610 15,685 Deferred Federal - - State and local - - Foreign ( 102,862 ) ( 187,350 ) Change in Valuation Allowance - - Total Deferred ( 102,862 ) ( 187,350 ) Total Benefit $ ( 20,252 ) $ ( 171,665 ) The Company’s effective tax rate differs from the U.S. federal statutory income tax rate of 21 3 % for 2023 and 2022 as follows: 2023 2022 Income tax benefit at federal statutory rate 21.0 % 21.0 % Permanent Differences - % - % State and local taxes ( 1.8 )% ( 0.7 )% Valuation allowance ( 10.5 )% ( 7.6 )% Deferred tax adjustment ( 1.9 )% - % Share based compensation ( 6.4 )% ( 7.8 )% Foreign Income Tax Rate Differential 1.1 % 0.5 % Other 0.5 % ( 0.6 )% Effective tax rate 2.0 % 4.8 % F- 11 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, 2023 2022 Deferred Tax Assets: U.S. federal and state net operating losses $ 2,939,449 $ 3,436,822 Foreign net operating losses - 103,375 Share-based compensation 480,773 511,603 Amortization of intangible assets 429,651 583,727 Rent 17,291 36,413 Capitalized IRC §174 costs 1,972,960 1,134,472 Tax credits 62,969 62,969 Other 285,245 257,473 Subtotal 6,188,338 6,126,854 Less Valuation Allowance: ( 6,099,163 ) ( 5,984,591 ) Total Deferred Tax Assets 89,175 142,263 Deferred Tax Liabilities: Amortization of intangible assets ( 615,452 ) ( 820,279 ) Property and equipment ( 12,850 ) ( 31,262 ) Other ( 74,914 ) ( 7,625 ) Total Deferred Tax Liabilities ( 703,216 ) ( 859,166 ) Net Deferred Tax Liability $ ( 614,041 ) $ ( 716,903 ) 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, 2023. 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 $ 114,572 during 2023. 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, 2023, the Company has U.S. federal net operating loss carryforwards of approximately $12.8 million, of which $10.4 million continue to be subject to a severe annual limitation under Section 382. Approximately $1.3 million of the $2.4 million not subject to limitation under Section 382 may be used to offset 100% of future taxable income but expire in 2036-2037, if not utilized. The remaining $1.1 million not subject to limitation under Section 382 may be used to offset 80% of future taxable income and can be carried forward indefinitely. 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, 2023, 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, 2023. F- 12 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The open tax years for the federal income tax return are 2020 through 2023. 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 2020. 5. Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consisted of the following for the periods presented: December 31, 2023 2022 Compensation, benefits and payroll taxes $ 91,250 $ 114,000 Other accrued expenses 134,870 111,193 Total accrued expenses and other current liabilities $ 226,120 $ 225,193 6. 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, 2023, there were 665,335 shares available for future issuance under the 2016 Plan. 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, 2023 2022 Expected volatility 155 – 161 % 173 – 182 % Expected life of option 5.2 – 6.2 5.2 – 6.2 Risk free interest rate 4.26 % 2.53 % 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. F- 13 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables summarize stock option activity during the year ended December 31, 2023: Weighted Average Number of Exercise Options Price Outstanding at January 1, 2023 622,074 $ 3.71 Granted 149,000 $ 1.89 Exercised during period - - Forfeited or canceled, during the period ( 26,270 ) $ 1.77 Expired, during the period ( 3,990 ) $ 21.60 Outstanding at December 31, 2023 740,814 $ 3.32 Exercisable at December 31, 2023 550,164 $ 3.72 At December 31, 2023, there was $ 338,194 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 2.94 years. On December 31, 2023, the aggregate intrinsic value of stock options that were outstanding and exercisable was $ 136,971 and $ 79,371 , respectively. On December 31, 2022, the aggregate intrinsic value of stock options that were outstanding and exercisable was $ 9,360 . 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, 2023, the Company granted stock options to members of the Board of Directors (other than Mr. Cook) to purchase an aggregate of 24,000 shares of common stock at an exercise price of $ 1.94 per share. The stock options vest in four equal quarterly installments on the last day of each calendar quarter in 2023 and have a term of ten years. In addition to the foregoing, the Company granted a stock option to Mr. Cook to purchase an aggregate of 100,000 shares of common stock at an exercise price of $ 1.86 . The stock option vests in four equal annual installments beginning on the first anniversary of the date of the grant and has a term of ten years. During the year ended December 31, 2023, the Company also granted options to employees to purchase an aggregate of 25,000 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 $ 1.94 . The aggregate fair value for the options granted during the years ended December 31, 2023 and 2022 was $ 268,200 and $ 636,957 , respectively. Stock-based compensation expense for the Company’s stock options included in the consolidated statements of operations was as follows: Years Ended December 31, 2023 2022 Cost of revenue $ 11,750 $ 19,500 Sales and marketing expense 2,004 2,056 Product development expense 29,946 24,748 General and administrative expense 191,293 287,521 Total stock-based compensation expense $ 234,993 $ 333,825 Treasury Shares The Board of Directors 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. Under the Stock Repurchase Plan, 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. The Stock Repurchase Plan expired on March 29, 2023 pursuant to its terms and has not been renewed. F- 14 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2023, the Company had 641,963 shares of its common stock classified as treasury shares on the Company’s consolidated balance sheets. 7. Net (Loss) Income Per Share Basic earnings and net (loss) income per share are computed by dividing the net (loss) 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, 2023, 740,814 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, 2023, 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, 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. The following table summarizes the net loss per share calculation for the periods presented: Years Ended December 31, 2023 2022 Net loss from operations – basic and diluted $ ( 1,067,335 ) $ ( 3,412,250 ) Weighted average shares outstanding – basic 9,222,206 9,638,567 Weighted average shares outstanding – diluted 9,222,206 9,638,567 Per share data: Basic from operations $ ( 0.12 ) $ ( 0.35 ) Diluted from operations $ ( 0.12 ) $ ( 0.35 ) 8. 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 ran 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, 2023, the Company had no long-term leases that were classified as financing leases. As of December 31, 2023, the Company did not have additional operating and financing leases that had not yet commenced. F- 15 PALTALK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2023, the Company had operating lease liabilities of approximately $ 77,005 and right-of-use assets of approximately $ 77,005 , which are included in the consolidated balance sheets. Total rent expense for the year ended December 31, 2023 was $ 82,447 , of which $ 6,000 was sublease income. Total rent expense for the year ended December 31, 2022 was $ 83,084 , of which $ 6,000 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, 2023 2022 Cash paid for amounts included in the measurement of operating lease liabilities: $ 82,176 $ 80,310 Weighted average assumptions: Remaining lease term 0.9 1.9 Discount rate 2.3 % 2.3 % As of December 31, 2023, future minimum payments under non-cancelable operating leases were as follows: For the years ending December 31, Amount 2024 $ 77,894 Total 77,894 Less: present value adjustment ( 889 ) Present value of minimum lease payments $ 77,005 9. Commitments and Contingencies Patent Litigation On July 23, 2021, a wholly owned subsidiary of the Company, Paltalk Holdings, Inc., filed a patent infringement lawsuit against WebEx Communications, Inc., Cisco WebEx LLC, and Cisco Systems, Inc. (collectively, “Cisco”), in the U.S. District Court for the Western District of Texas (the “Court”). The Company alleges that certain of Cisco’s 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. On June 29, 2023, the Court held a pretrial conference and denied Cisco’s motion for summary judgment. The trial is expected to be held in April of 2024. 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, 2023. 10. 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- 16 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.