UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 20212022

OR

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

For the transition period from ________ to ________

Commission File Number 001-38717

PALTALK, INC.

(Exact name of registrant as specified in its charter)

30 Jericho Executive Plaza Suite 400E

Jericho, NY 11753

(Address of principal executive offices) (Zip Code)

(212) 967-5120

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

PALTALK, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 20212022

Table of Contents

Unless the context otherwise indicates, references to “Paltalk,” “we,” “our,” “us” and the “Company” refer to Paltalk, Inc. and its subsidiaries on a consolidated basis.

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

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

FORWARD-LOOKING STATEMENTS

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

For a more detailed discussion of these and other factors that may affect our business, see the discussion in “Item 1A. Risk Factors” in Part II of this report and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I of this report and the risk factors set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, which was filed with the Securities and Exchange Commission on March 23, 2021.2022. We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this report, except to the extent required by applicable securities laws.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PALTALK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

PALTALK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

PALTALK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20212022 AND 20202021

(Unaudited)

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

PALTALK, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Description of Business

Overview

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

The Company is a communications software innovator that powers multimedia social applications. The Company has an over 20-year history of technology innovations and holds 18 patents. The Company’s product portfolio includes Paltalk, Camfrog and Tinychat, which together host and serve a large collection of video-based communities. The Company’s other productproducts include 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 which is a telecommunications services provider that enables users to communicate privately by having multiple phone numbers with any area code through which calls can be forwarded to a user’s existing telephone number. The Company has an over 20-year history of technology innovation and holds 14 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 (the “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.

The purchase price for the Conveyed Assets was $2.7 million in cash consideration, plus a potential earn-out payment of up to $600,000 upon the achievement of certain performance thresholds over the six-month period following the closing of the ManyCam Acquisition. For more information regarding the ManyCam Acquisition, see Note 3.

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The condensed consolidated financial statements included in this report have been prepared on a going concern basis in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The Company has not included certain information and notes required by GAAP for complete financial statements pursuant to those rules and regulations, although it believes that the disclosure included herein is adequate to make the information presented not misleading. The condensed consolidated financial statements contained herein should be read in conjunction with the Company’s audited consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, filed with the SEC on March 23, 20212022 (the “Form 10-K”).

In the opinion of management, the accompanying unaudited condensed consolidated financial information contains all normal and recurring adjustments necessary to fairly present the condensed consolidated balance sheets and statements of operations, cash flows and changes in stockholders’ equity of the Company for the interim periods presented. The Company’s historical results are not necessarily indicative of future operating results, and the results for the nine months ended September 30, 20212022 are not necessarily indicative of results for the year ending December 31, 2021,2022, or for any other period.

Macro-Economic Factors and COVID-19 Update on COVID-19

The World Health Organization declaredCompany’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 pandemiccorrelating effect on March 11, 2020. 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.

The global spread of the COVID-19 pandemic and the various attempts to contain it have created significant volatility, uncertainty and economic disruption. COVID-19 continues to have an unpredictable and unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis with travel restrictions and potential quarantines. Although the Company’s core multimedia social applications have beenwere able to support the increased demand we havethe Company experienced from the second quarter of 2020 through the year ended December 31, 2021, the extent of the future impact of the COVID-19 pandemic on ourthe Company’s business is highly uncertain and difficult to predict. Adverse economic and market conditions as a resultwell as the lifting of COVID-19 restrictions could also affect the demand for the Company’s applications and the ability of the Company’s users to satisfy their obligations to the Company.applications. If the pandemic continues to cause significant negative impacts to economic conditions, the Company’s results of operations, financial condition and liquidity could be materially and adversely impacted.

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

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2. Summary of Significant Accounting Policies

Deferred Offering Costs

The Company capitalizes certain legal and professional fees that are directly relatedDuring the nine months ended September 30, 2022, there were no significant changes made to public offerings of common stock as deferred offering costs until such financing is consummated. See Note 8 for more information regarding the Company’s recent public offeringssignificant accounting policies, except for the acquisition of common stock. At the consummation of such equity financing, these costs are recordedConveyed Assets which is discussed in stockholders’ equity as a reduction of additional paid-in capital generated.Note 3 below.

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

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

Significant Estimates and Assumptions

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

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

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

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

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Fair Value Measurements

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

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

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

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Revenue Recognition

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

Subscription Revenue

The Company generates subscription revenue primarily from monthly premium subscription services. Subscription revenues are presented net of refunds, credits, and known and estimated credit card chargebacks. During the three and nine months ended September 30, 20212022 and 2020,2021, subscriptions were offered in durations of one-, three-, six-, twelve- and twelve-monthtwenty-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 condensed consolidated balance sheets. Deferred revenue at December 31, 20202021 was $2,058,721,$1,915,493, $1,529,597 of which $1,529,597 was subsequently recognized as subscription revenue during the nine months ended September 30, 2021.2022. The ending balance of deferred revenue at September 30, 2022 and 2021 was $1,858,955.$2,060,867 and $1,858,955, respectively.

In addition, the Company offers virtual gifts to its users. Users may purchase credits in $5, $10 or $20 increments that can be redeemed for a host of virtual gifts such as a rose, a beer or a car, among other items. These gifts are given among users to enhance communication and are typically redeemed within 30 days of purchase. Upon purchase, the virtual gifts are credited to the users’ account and are under the users’ control. Virtual gift revenue is recognized upon the users’ redemption of virtual gifts at the fixed transaction price and included in subscription revenue in the accompanying condensed consolidated statements of operations. Virtual gift revenue is presented as deferred revenue in the condensed consolidated balance sheets until virtual gifts are redeemed. Virtual gift revenue was $966,757 and $3,327,781 for the three and nine months ended September 30, 2022, respectively. Virtual gift revenue was $1,450,757 and $4,259,933 for the three and nine months ended September 30, 2021, respectively. Virtual gift revenue was $1,288,717 and $3,931,151 for the three and nine months ended September 30, 2020, respectively. The ending balance of deferred revenue from virtual gifts at September 30, 2022 and 2021 was $372,559 and 2020 was $305,767, and $276,661, respectively.

Advertising Revenue

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

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Technology Service Revenue

TheTechnology service revenue was historically generated under service and partnership agreements that the Company recordsnegotiated 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 itsthe Company’s Camfrog and Paltalk applications (as amended, the “YouNow Agreement”).

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

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

Onceonce the integration of Props tokens tointo the Company’s Paltalk and Camfrog applications was completed, the Company began receiving Props tokens for providing a validator service and for allowing users to participate in the loyalty platform. The loyalty platform iswas intended to drive engagement and incentivize users financially by providing users with the ability to earn Props tokens while using the Paltalk and Camfrog applications. During the third and fourth quarters of 2020, the Company received an aggregate of 1.1 million Props tokens for the validator service and 13.5 million Props tokens under the loyalty platform. During the three and nine months ended September 30,

In August 2021, the Company received 104 thousandnotice from YouNow that it was terminating the YouNow Agreement, and 455 thousandthat it would no longer support the Props tokens, respectively, forplatform past the validator service and 3.0 million and 10.2 millionend of calendar year 2021. As a result of the termination of the YouNow Agreement, the Company notified its users that it would no longer be issuing Props tokens under the loyalty platform. The number of Props tokens earned and reserved by users for the nine months ended September 30,starting October 15, 2021, and would be replacing any user’s outstanding Props with a new internal rewards program. The new rewards loyalty program for Paltalk and Camfrog allowed users to keep their existing rewards earned from the year ended December 31, 2020 was 8.2 millionformer Props program as internal rewards and 4.0 million, respectively, which is recorded under “digital tokens payable” inalso have the condensed consolidated balance sheetsopportunity to earn new internal rewards points. In connection with the internal rewards points, the Company added 25 new reward tiers, including specialty coins, subscriptions, stickers, flair, and the net revenue earned is recorded under “technology service revenue” in the condensed consolidated statements of operations. The total net revenue value is recognized as earned.other popular buttons.

For the year ended December 31, 2020, the Company retained an independent third-party to estimate the dollar value of the revenue for the validator service and digital tokens earned through the loyalty platform. Given the recent trading availability of Props tokens in various active markets, during the three and nine months ended September 30, 2021, the Company calculated the fair value of digital tokens based on the observable daily quoted market prices (Level 1 inputs) on multiple international exchanges, as recorded on CoinmarketCap (see Note 5 for additional information on the fair value of the Props tokens).CoinmarketCap. The total net revenue value recognized as earned was estimated to be $77,507 and $451,755 for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, the value of all digital tokens has been reduced to zero.

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

Duringduring the three and nine months ended September 30, 2021, the Company sold approximately 29.5 million and 32.4 million Props tokens, respectively, for proceeds of $502,314 and $806,618, respectively. The realized gain of the sale of digital tokens was approximately $53,867 and $301,160 for the three and nine months ended September 30, 2021, respectively, and is included in the condensed consolidated statements of income.2022.

3. Asset Acquisition – Securities Purchase Agreement

RevisionsAs discussed above, 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 the Company’s estimates may result in increases or decreases to revenues and income and are reflected in the condensed consolidated financial statements in the periods in which they are first identified. If the Company’s estimates indicate that a contract loss will be incurred, a loss provision is recorded in the period in which the loss first becomes probable and can be reasonably estimated. Contract losses are the amount by which the estimated costsPurchaser purchased, effective as of the contract exceedEffective Date, all of the estimated total revenue that will be generated by the contractissued and are included in costoutstanding shares of revenues in the Company’s condensed consolidated statements of operations. There were no contract losses for the periods presented.Target NewCo.

Reclassifications

Certain prior period amounts have been reclassifiedThe Purchaser acquired the Conveyed Assets for comparative purposes to conforma cash purchase price of $2.7 million (the “Cash Consideration”). In addition to the current presentation. These reclassifications have no impactCash Consideration, Visicom is entitled to receive an additional payment of up to $600,000 (the “Earn-Out Payment”) based on the previously reported net income.

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Property and equipment, net consistedsales of the ManyCam software less chargebacks and refunds (“Gross Sales”) in the six-month period following atthe 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. Based on performance as of September 30, 20212022, the Company determined that it was likely that Gross Sales during the Earn Out Period would exceed $600,000 but be less than $700,000, and December 31, 2020:

Depreciation expenseas a result, the Company recorded a liability in the amount of $150,000 for payment to the three and nine months ended September 30, 2021 was $46,090 and $147,947, respectively as comparedSeller, with a corresponding adjustment to $77,888 and $249,614 for the three and nine months ended September 30, 2020, respectively.

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

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

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

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Props TokensAs 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. Final allocation was determined by 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:

The estimated aggregate amortization expense for each of the next five years and thereafter will approximate $161,315 for the remainder of 2022, $645,260 in 2023, $645,260 in 2024, $558,562 in 2025, $490,748 in 2026 and $1,196,880 thereafter.

The Props tokens received, receivableCompany incurred approximately $242,000 of expenses in connection with the ManyCam Acquisition and payable from YouNow are intangible assets that are accounted for at cost, less impairment charges. According to the FASB guidance noted above, a holder of utility tokens cannot only compare the carrying value to fair value at the reporting period, but instead must assess impairment daily. As a result, the Company uses the amount equal to the lowest price during the period in which the Props tokens are held as the carrying amount for purposes of testing for impairment.capitalized them accordingly.

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

On June 30, 2022, the Company entered into a License Agreement with Visicom (the “License Agreement”), 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 implied fair valueLicense 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 Props tokens represents a marketable basis of value. DuringLicense Agreement, the year ended December 31, 2020, the Props tokens didCompany does not have accessany obligation to a liquid marketplace, and therefore a discount for lack of marketability was appliedprovide support or service to the implied fair value using a protective put calculation. A summary oflicensee end users. The Company recognized the key inputs used$65,000 payment as revenue during the three months ended September 30, 2022, as it satisfied its performance obligation as specified in the Backsolve model at December 31, 2020 are summarized as follows:License Agreement.

The basic logic of the protective put approach is supported by the notion that the holder of a non-marketable security can effectively purchase liquidity by purchasing a put option on the security. Therefore, the non-marketable value of a security is its value on a marketable basis, less the value of the hypothetical put option. The put option calculation relies on the Black-Scholes option pricing model, which utilizes volatility from comparable utility tokens, an estimated time to maturity (or liquidity),4. Property and the risk-free rate commensurate with that maturity.Equipment, Net

Digital tokens earned, receivable or payable beforeProperty and equipment, net consisted of the following at September 30, 2020, were recorded based on an estimated fair value of $0.02. Digital tokens earned, receivable or payable from July 1, 2020 through2022 and December 31, 2020 were recorded based on an estimated fair value of $0.039. At December 31, 2020, the Company recorded $439,145 under digital tokens, $123,397 under digital tokens payable and $210,000 under digital tokens receivable pursuant to the YouNow Agreement.2021:

Given the recent trading availability of Props tokens in various active markets, during

Depreciation expense for the three and nine months ended September 30, 2021, the Company calculated the fair value of digital tokens based on the observable daily quoted market prices (Level 1 inputs) on multiple international exchanges,2022 was $13,399 and $65,317, respectively, as recorded on CoinmarketCap. At September 30, 2021, the Company recorded $53,899 under digital tokenscompared to $46,090 and $333,446 under digital tokens payable pursuant to the YouNow Agreement.

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

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

During the three and nine months ended September 30, 2021, the Company sold approximately 29.5 million and 32.4 million Props tokens, respectively, for proceeds of $502,314 and $806,618, respectively. The realized gain of the sale of digital tokens was approximately $53,867 and $301,160$147,947 for the three and nine months ended September 30, 2021, respectively, and is included in the condensed consolidated statements of income.respectively.

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Intangible Assets, Net

Intangible assets, net consisted of the following at September 30, 2022 and December 31, 2021:

Amortization expense for the three and nine months ended September 30, 2022 was $206,725 and $339,247, respectively, as compared to $46,167 and $138,500 for the three and nine months ended September 30, 2021, respectively. The aggregate amortization expense for each of the next five years and thereafter is estimated to be $217,558 for the remainder of 2022, $663,260 in 2023, $662,615 in 2024, $561,062 in 2025, $493,248 in 2026 and $1,203,130 thereafter.

6. Accrued Expenses and Other Current Liabilities

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

7. Income Taxes

The Company’s provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align the Company’s year-to-date tax provision with the effective rate that it expects to achieve for the full year. Each quarter the Company updates its estimate of the annual effective tax rate and records cumulative adjustments as necessary. As of September 30, 2021,2022, our conclusion regarding the realizability of our U.S.US deferred tax assets did not change and we have recorded a full valuation allowance against them.

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

For the three and nine months ended September 30, 2022, the Company recorded an income tax provision of $9,712 and $30,496, respectively, primarily related to state and local taxes. The effective tax rate for the three and nine months ended September 30, 2022 was (0.95)% and (1.06)%, respectively. The effective tax rate differs from the statutory rate of 21% as the Company has concluded that its deferred tax assets are not realizable on a more-likely-than-not basis.

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

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

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8. Stockholders’ Equity

The Paltalk, Inc. Amended and Restated 2011 Long-Term Incentive Plan (the “2011 Plan”) was terminated as to future awards on May 16, 2016. A total of 121,93036,402 shares of the Company’s common stock may be issued pursuant to outstanding options awarded under the 2011 Plan; however, no additional awards may be granted under such plan. The Paltalk, Inc. 2016 Long-Term Incentive Plan (“the 2016 Plan”) was adopted by the Company’s stockholders on May 16, 2016 and permits the Company to award stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other stock-based awards and cash-based incentive awards to its employees (including an employee who is also a director or officer under certain circumstances), non-employee directors and consultants. The maximum number of shares of common stock that may be issued pursuant to awards under the 2016 Plan is 1,300,000 shares, 100% of which may be issued pursuant to incentive stock options. In addition, the maximum number of shares of common stock that may be issued under the 2016 Plan may be increased by an indeterminate number of shares of common stock underlying outstanding awards issued under the 2011 Plan that are forfeited, expired, cancelled or settled in cash. As of September 30, 2021,2022, there were 958,063773,921 shares available for future issuance under the 2016 Plan.

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

August 2021 Underwritten Public Offering

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

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

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

Treasury SharesStock Repurchase Plan

On April 29, 2019,March 21, 2022, the Board of Directors of the Company implementedapproved a stock repurchase plan to repurchasefor up to $500,000$1,750,000 of itsthe Company’s outstanding common stock for cash.(the “Stock Repurchase Plan”). The repurchase plan expiredStock Repurchase Plan is effective as of March 29, 2022 and expires on April 29, 2020.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 Company had purchased 9,950actual 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 September 30, 2022, 317,089 shares of its common stock underhad been repurchased by the repurchase plan as of April 29, 2020 and has classified them as treasury shares onCompany pursuant to the Company’s condensed consolidated balance sheets.Stock Repurchase 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 nine months ended September 30, 2021:2022:

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

The following table summarizes stock option activity during the nine months ended September 30, 2021:2022:

At September 30, 2021,2022, there was $103,205$403,847 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 1.73.28 years.

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On September 30, 2022, the aggregate intrinsic value of stock options that were outstanding and exercisable was $12,980 and $12,980, respectively. On September 30, 2021, the aggregate intrinsic value of stock options that were outstanding and exercisable was $3,186,961 and $2,578,975, respectively. On September 30, 2020, the aggregate intrinsic value of stock options that were outstanding and exercisable was $7,200 and $5,400, respectively. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the fair value of such awards as of the period-end date.

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

During the nine months ended September 30, 2021,2022, 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 $3.20$2.66 per share. The stock options vest in four equal quarterly installments on the last day of each calendar quarter in 20212022 and have a term of ten years. During the nine months ended September 30, 2021,2022, the Company also granted options to employees to purchase an aggregate of 13,932224,500 shares of common stock. These options vesthave varying vesting dates ranging between the grant date and up to four years from the grant date, have a term of ten years and have an exercise price of $3.20 to $4.90.

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

$2.66. The aggregate fair value for the stock options granted during the nine months ended September 30, 2022 and 2021 was $636,957 and 2020 was $145,522, and $18,664, respectively.

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

Treasury Shares

On April 29, 2019, the Company implemented a stock repurchase plan to repurchase up to $500,000 of its common stock for cash. The repurchase plan expired on April 29, 2020. The Company had purchased 9,950 shares of its common stock under the repurchase plan as of April 29, 2020 and has classified them as treasury shares on the Company’s condensed consolidated balance sheets. In addition, during the year ended December 31, 2021, the Company retained 22,013 in treasury shares as part of a net share exercise of stock options by former employees.

As discussed above, on March 29, 2022, the Company implemented the Stock Repurchase Plan to repurchase up to $1,750,000 of its outstanding common stock for cash. The Stock Repurchase Plan expires on March 29, 2023. As of September 30, 2022, 317,089 shares of common stock had been repurchased by the Company pursuant to the Stock Repurchase Plan, which shares have been classified as treasury shares on the Company’s condensed consolidated balance sheets.

As of September 30, 2022 and December 31, 2021, the Company had 349,052 and 31,963 shares, respectively, of its common stock classified as treasury shares.

9. Net (Loss) Income Per Share

Basic earnings and lossnet (loss) income per share are computed by dividing the net (loss) income or loss available to common stockholders by the weighted average number of common shares outstanding during the period as defined by ASC Topic 260, Earnings Per Share. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options (using the treasury stock method). To the extent stock options are antidilutive, they are excluded from the calculation of diluted income per share. For the three and nine months ended September 30, 2022, 640,207 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 anti-dilutive. For the three and nine months ended September 30, 2021, 517,972 and 496,421 of shares issuable upon the exercise of outstanding stock options, respectively, were not included in the computation of diluted net income (loss) per share because their inclusion would be antidilutive. For the nine months ended September 30, 2021, 21,551 of shares issuable upon the exercise of outstanding stock options, respectively, were included in the computation of diluted net income (loss) per share from operations because their inclusion would be dilutive.

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

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

PALTALK, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the net income (loss) per share calculation for the periods presented:10. Leases