Business Overview and History

Paltalk, Inc. (NASDAQ:PALT), a communications software innovator that has long powered multimedia social applications, is embarking on a strategic shift into the enterprise IT solutions market through its acquisition of Newtek Technology Solutions, Inc. (NTS), a subsidiary of NewtekOne, Inc. (NASDAQ:NEWT). This transformative move positions Paltalk to leverage its technical expertise and broaden its revenue streams while navigating the evolving landscape of the consumer software industry.

Paltalk was founded over 20 years ago as a communications software innovator that powers multimedia social applications. The company operates a network of consumer applications that create a unique social media enterprise where users can meet, see, chat, broadcast, play online card games and board games, and message in real time in a secure environment.

Paltalk's product portfolio includes Paltalk, Camfrog, and Tinychat, which together host a large collection of video-based communities. The company's other products include ManyCam, a live streaming software and virtual camera, and Vumber, a telecommunications services provider.

Over the years, Paltalk has faced several challenges. In 2021, the company's wholly owned subsidiary Paltalk Holdings, Inc. filed a patent infringement lawsuit against Cisco Systems, Inc., alleging that certain of Cisco's products infringed on Paltalk's patent. After a lengthy legal battle, on August 29, 2024, a jury awarded Paltalk $65.7 million in a verdict against Cisco. The final judgment was entered on October 8, 2024, and Paltalk expects to receive no more than one-third of the gross proceeds after deducting litigation expenses.

Additionally, Paltalk has had to navigate the competitive video social networking industry and adapt its business model to changes in mobile platforms and operating systems that the company does not control. The company has relied heavily on the platforms of Apple, Facebook, and Google, and has had to respond to changes in their terms and conditions or other policies that impact Paltalk's ability to monetize its user base.

Despite these challenges, Paltalk has maintained an over 20-year history of technology innovation and currently holds 8 patents. The company believes that the scale of its user base presents a competitive advantage in the video social networking industry and provides growth opportunities to advance its existing products and build future brands.

However, the consumer software industry has faced increasing headwinds in recent years, marked by intensifying competition, evolving user preferences, and economic uncertainties. Paltalk has not been immune to these challenges, as evidenced by a decline in its subscription and advertising revenues over the past several quarters. In the three months ended September 30, 2024, the company reported a 23.4% year-over-year decrease in total revenue to $2.12 million, with subscription revenue down 23.9% to $2.03 million and advertising revenue down 7.1% to $87,910. This trend has translated into a net loss of $1.51 million for the quarter, compared to a net loss of $181,580 in the prior-year period.

Newtek Technology Solutions Acquisition: A Strategic Pivot

Recognizing the need to diversify its revenue streams and capitalize on emerging opportunities, Paltalk made a bold move on August 11, 2024, by announcing the acquisition of Newtek Technology Solutions, Inc. (NTS) from NewtekOne, Inc. (NASDAQ:NEWT). NTS is a provider of a range of IT-related services, including managed IT, managed security, managed backup and disaster recovery, secure private cloud hosting, professional services consulting, and e-commerce solutions.

The acquisition of NTS represents a significant shift in Paltalk's strategic direction. By entering the enterprise IT solutions market, the company aims to leverage its technical expertise and position itself for long-term growth. NTS boasts a customer base of approximately 17,000 clients, primarily within heavily regulated industries such as financial services and healthcare, where the demand for secure and compliant IT services is paramount.

Paltalk's management believes that the acquisition of NTS will have an immediate and meaningful impact on the company's revenue, as NTS's 2023 revenue was approximately 3 times greater than Paltalk's 2023 revenue. Moreover, the company is optimistic about the enhanced growth opportunities and potential for operational synergies that the combined entity can unlock.

The acquisition will be completed through a two-step merger process. At closing, Paltalk will pay $4 million in cash to Newtek and issue 4 million shares of a new series of preferred stock. Newtek is also entitled to receive an earn-out payment of up to $5 million based on the achievement of certain Adjusted EBITDA thresholds for 2025 and 2026.

As a condition to the closing of the Mergers, Paltalk must effectuate the sale of its Paltalk, Camfrog, and Tinychat applications and all related assets and liabilities. On November 7, 2024, Paltalk entered into an Asset Purchase Agreement to sell Vumber, Paltalk, and Camfrog to Meteor Mobile Holdings, Inc. for $1.35 million.

Financial Highlights and Liquidity

As of September 30, 2024, Paltalk reported a cash balance of $12.06 million, a decrease of $1.54 million compared to $13.6 million at the end of 2023. The company's net cash used in operating activities for the nine months ended September 30, 2024 was $1.55 million, compared to $980,720 in the prior-year period. This increase in cash outflow was primarily attributed to the rise in professional expenses related to the Newtek acquisition.

Paltalk's financial performance has been impacted by the challenges facing its consumer-facing business, as evidenced by the 16.2% year-over-year decrease in total revenue to $6.9 million for the nine months ended September 30, 2024. The net loss for the same period increased to $2.9 million, compared to a net loss of $0.8 million in the prior-year period.

For the fiscal year 2023, Paltalk reported revenue of $10.98 million and a net loss of $1.07 million. The company's operating cash flow and free cash flow for 2023 were both negative $1.08 million.

In the most recent quarter (Q3 2024), Paltalk's revenue decreased 23.4% year-over-year to $2.12 million, primarily due to a 23.9% decrease in subscription revenue. The net loss for the quarter increased significantly to $1.51 million, compared to $181,580 in Q3 2023. Operating cash flow and free cash flow for Q3 2024 were both negative $779,690, a decrease from positive $16,060 in Q3 2023, mainly due to increased operating expenses, particularly professional fees related to the Merger Agreement and Divestiture Agreement.

Despite these challenges, Paltalk's liquidity position remains relatively strong. As of September 30, 2024, the company had no long-term debt on its balance sheet, with a current ratio and quick ratio both at 3.472. The debt-to-equity ratio stands at 0, reflecting the company's debt-free status.

Product Segments and Revenue Streams

Paltalk's revenue primarily comes from two main sources: subscription revenue and advertising revenue.

Subscription Revenue: Paltalk's core video chat platforms generate revenue primarily through subscription fees. The company offers different tiers of subscriptions that provide users with varying levels of features and benefits within the video chat communities. Subscription durations range from one month to 24 months, with longer-term plans generally available at discounted monthly rates. During Q3 2024, subscription revenue was $2.03 million, a decrease of 23.9% compared to the same period in 2023. This decrease was primarily driven by a $463,000 decline in virtual gift revenue as customers limited their discretionary spending amid the current economic environment.

Advertising Revenue: Paltalk also generates revenue through advertisements displayed on its video platforms. Advertising revenue is dependent on the volume of advertising impressions viewed by active users as well as the advertising inventory placed on the company's products. For Q3 2024, advertising revenue was $87,910, a decrease of 7.1% compared to the same period in 2023. This decrease was due to a reduction in the volume of advertising impressions related to changes in the optimization of third-party advertising partners for the Paltalk application.

ManyCam: ManyCam is Paltalk's live streaming software and virtual camera that allows users to deliver professional live videos on streaming platforms, video conferencing apps, and distance learning tools. ManyCam generates revenue primarily from subscription fees, with subscriptions generally offered in annual and two-year terms.

Vumber: Vumber is Paltalk's 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.

Outlook and Risks

With the completion of the Newtek acquisition, Paltalk is poised to enter a new phase of its evolution. The company's near-term business objectives include the successful integration of NTS, continued efforts to improve user experience with its ManyCam software, and the ongoing defense of its intellectual property, particularly its patent litigation against Cisco Systems, Inc. (NASDAQ:CSCO).

While the Newtek acquisition presents significant growth opportunities, Paltalk must navigate the integration process and effectively leverage the combined capabilities to drive synergies and enhance its competitive positioning in the enterprise IT solutions market. The company's success will depend on its ability to cross-sell its existing products and services, as well as its capacity to identify and capitalize on new revenue streams within the NTS customer base.

Additionally, Paltalk faces ongoing risks inherent to the consumer software industry, such as evolving user preferences, intensifying competition, and the potential impact of macroeconomic factors on its core business. The company must continue to innovate and adapt its consumer-facing applications to remain relevant and attractive to its user base.

Paltalk expects the acquisition of NTS to provide enhanced opportunities for future growth and optimization, as it will allow the company to enter the cloud infrastructure and cybersecurity sectors, which are deemed "ripe for growth, both organically and through potential accretive acquisitions in the future." The company plans to focus on growing the technology solutions business after the NTS acquisition, leveraging its ample cash balance of $12.1 million as of September 30, 2024.

Conclusion

Paltalk's acquisition of Newtek Technology Solutions marks a strategic pivot for the company, as it seeks to diversify its revenue streams and leverage its technical expertise in the enterprise IT solutions market. While the company's consumer-facing business has faced headwinds, the Newtek acquisition presents a unique opportunity for Paltalk to capitalize on the growing demand for secure and compliant IT services. As Paltalk navigates the integration process and works to unlock synergies, investors will closely monitor the company's ability to execute on this transformative shift and deliver long-term value. The recent patent infringement victory against Cisco Systems and the potential proceeds from this litigation may provide additional resources for Paltalk to invest in its growth strategies and strengthen its position in the evolving technology landscape.