PALT Paltalk Inc

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 June 30, 2024

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)

(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 JUNE 30, 2024

Table of Contents

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

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 (the “Securities Act”), 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, “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, 2023, which was filed with the Securities and Exchange Commission on March 15, 2024. 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 SIX MONTHS ENDED JUNE 30, 2024 AND 2023

(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)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and six months ended June 30, 2024 and 2023, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2023 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2024 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Form 10-K. Aside from certain information as of December 31, 2023, all amounts herein are unaudited.

Forward-Looking Statements

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” in Part II of this report and “Item 1A. Risk Factors” in the Form 10-K.

Overview

We are a communications software innovator that powers multimedia social applications. We operate a network of consumer applications that we believe 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 with others in our network. Our consumer applications generate revenue principally from subscription fees and advertising arrangements.

Our product portfolio includes Paltalk, Camfrog and Tinychat, which together host a large collection of video-based communities. Our other products 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 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. We have an over 20-year history of technology innovation and hold 8 patents.

We believe that the scale of our user base presents a competitive advantage in the video social networking industry and provides growth opportunities to advance our existing products with up-sell opportunities and build future brands with cross-sell offers. We also believe that our proprietary consumer app technology platform can scalably support large communities of users in activities such as video, voice and text chat, online card games and board games and provide robust user monetization tools.

Our continued growth depends on attracting new consumer application users through the introduction of new applications, features and partnerships and further penetration of our existing markets. Our principal growth strategy is to invest in the development of proprietary software, expand our sales and marketing efforts with respect to such software, and increase our consumer application user base through potential platform partnerships and new and existing advertising campaigns that we run through internet and mobile advertising networks, all while balancing the capital needs of the business. Our strategy also includes the acquisition of, or investment in, technologies, solutions or businesses that complement our business and cross-selling them to additional synergistic businesses.

Our strategy is to approach these opportunities in a measured way, being mindful of our resources and evaluating factors such as potential revenue, time to market and amount of capital needed to invest in the opportunity.

Recent Developments 

Impact of Macro-Economic Factors

Our 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, our ability to target new customers as well as keep existing customers engaged and may ultimately have a correlating effect on our users’ discretionary spending. Future adverse developments with respect to the economic environment and geopolitical tensions may create additional market and economic uncertainty, which could affect our industry.

Under the provisions of the extension of the Coronavirus Aid, Relief, and Economic Security Act, we were eligible for a refundable employee retention tax credit (the “ERTC”) subject to certain criteria. During the year ended December 31, 2023, we applied for the ERTC and recorded a receivable in the amount of $343,045, net of related costs, which was recognized in our condensed consolidated statement of operations as other income. As of June 30, 2024, we received an aggregate of $294,833 or $228,833 net of related costs which was recorded as a reduction of the receivable on our condensed consolidated balance sheet.

NTS Acquisition Agreement

On August 11, 2024, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among us, PALT Merger Sub 1, Inc., our direct and wholly owned subsidiary (“First Merger Sub”), PALT Merger Sub 2, LLC, our direct and wholly owned (“Second Merger Sub”), Newtek Technology Solutions, Inc. (“NTS”), and NewtekOne, Inc., the sole stockholder of NTS (“Newtek”), to acquire NTS through a two-step merger process. Pursuant to the Merger Agreement, following the receipt of approval by our stockholders: (i) NTS will merge with and into First Merger Sub, with NTS continuing as the surviving entity (the “Interim Surviving Entity” and such merger, the “First Step Merger”), and (ii) immediately following the consummation of the First Step Merger, the Interim Surviving Entity will merge with and into Second Merger Sub, with Second Merger Sub continuing as the surviving entity (the “Second Step Merger” and, together with the First Step Merger, the “Mergers”).

Pursuant to the Merger Agreement, as consideration for the Mergers, we agreed to (i) pay Newtek an amount in cash equal to $4,000,000, which is subject to customary purchase price adjustments as set forth in the Merger Agreement, including a working capital adjustment (the “Closing Cash Consideration”) and (ii) issue Newtek 4,000,000 shares (the “Closing Stock Consideration” and together with the Closing Cash Consideration, the “Closing Consideration”) of a newly created series of preferred stock, the Series A Non-Voting Common Equivalent Stock of the Company, par value $0.001 per share (the “Preferred Stock”). In addition to the Closing Consideration, the Merger Agreement provides that Newtek is entitled to receive an amount up to $5,000,000 (the “Earn-Out Amount”) based on our achievement certain cumulative average Adjusted EBITDA thresholds for the 2025 and 2026 fiscal years. The Earn-Out Amount may be paid, in our sole discretion, in cash (the “Earn-Out Cash Consideration”), in shares of Preferred Stock (the “Earn-Out Stock Consideration”) or in a combination thereof. The issuance of the Closing Stock Consideration, the Earn-Out Stock Consideration (if any) and the shares of common stock issuable upon conversion of the Preferred Stock is referred to herein as the “Parent Stock Issuance”.

Pursuant to the Merger Agreement, if the issuance of the Closing Stock Consideration or the Earn-Out Stock Consideration would cause Newtek’s “total equity” (as calculated under the Bank Holding Company Act of 1956, as amended, and as implemented and interpreted by the Board of Governors of the Federal Reserve System (the “Federal Reserve”)) in the Company to exceed 33.33% (the “Total Equity Cap”), then the number of shares of Preferred Stock issuable as Closing Stock Consideration and/or Earn-Out Stock Consideration, as applicable, will be adjusted so that we will issue Newtek the maximum number of shares of Preferred Stock that would not cause Newtek’s total equity to exceed the Total Equity Cap, with a corresponding increase to the Closing Cash Consideration and the Earn-Out Cash Consideration, as applicable. Following the consummation of the Mergers and the issuance of the Closing Stock Consideration, Newtek would beneficially own approximately 30.3% of our issued and outstanding Common Stock on an as-converted and fully-diluted basis, calculated based on our outstanding shares of common stock as of August 9, 2024.

As a condition to the closing of the Mergers and the transactions contemplated by the Merger Agreement, the Merger Agreement provides that we must effectuate the sale of our Paltalk, Camfrog, and Tinychat applications and all assets and liabilities related to such applications (the “Divestiture Transaction”). Following the Divestiture Transaction, we will retain (i) all patents, patent applications, and any rights or causes of action related to such applications, and (ii) any assets (including intellectual property) that are not exclusively related to such applications.

In addition, the closing of the Mergers is subject to the satisfaction of various customary closing conditions, including, among others, approval of the Parent Stock Issuance and the Divestiture Transaction by our stockholders. The Merger Agreement contains certain termination rights for both us and Newtek, on behalf of itself and NTS, including, among other things, if the closing has not occurred prior to February 9, 2025. In the event the Merger Agreement is terminated, neither party thereto will owe a termination fee or otherwise incur a liability to any other party under or relating to the Merger Agreement.

Pursuant to the Merger Agreement, promptly following closing, the Company will cause one representative nominated by Newtek to be appointed to the Board.

Operational Highlights and Business Objectives

During the three and six months ended June 30, 2024, we executed key components of our objectives:

For the near term, our business objectives include:

Sources of Revenue

Our main sources of revenue are subscription revenue, which includes virtual gift revenue, and advertising revenue generated from users of our core video chat products, Paltalk and Camfrog. We also generate revenue from subscriptions for our ManyCam software product.

Subscription Revenue

Our video chat platforms generate revenue primarily through subscription fees. Our tiers of subscriptions provide users with unlimited video windows and levels of status within the community. Multiple subscription tiers are offered in different durations depending on the product from one-, three-, six-, twelve-, and twenty-four-month terms, which continue to vary as we continue to test and optimize length and pricing. Longer-term plans (those with durations longer than one month) are generally available at discounted monthly rates. Levels of membership benefits are offered in tiers, with the least membership benefits in the lowest paid tier and the most membership benefits in the highest paid tier. Our membership tiers are “Plus,” “Extreme,” “VIP” and “Prime” for Paltalk and “Pro,” “Extreme” and “Gold” for Camfrog. We also hold occasional promotions that offer discounted subscriptions and virtual gifts. Subscriptions for ManyCam are generally offered in annual and two-year terms, with exceptions made for enterprise sales.

We recognize revenue from monthly premium subscription services beginning in the month in which the subscriptions are originated. Revenues from multi-month (or annual) subscriptions are recognized on a gross and straight-line basis over the length of the subscription period. The unearned portion of subscription revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets.

We also offer virtual gifts to our users through our Paltalk, Camfrog and TinyChat applications. Users may purchase credits that can be redeemed for a host of virtual gifts such as a rose, a beer, or a car, among other items. Virtual gift revenue is recognized upon the users’ utilization of the virtual gift and included in subscription revenue. The unearned portion of virtual gifts revenue is presented as deferred revenue in the accompanying condensed consolidated balance sheets.

Advertising Revenue

We generate a portion of our revenue through advertisements on our video platforms. Advertising revenue is dependent upon the volume of advertising impressions viewed by active users as well as the advertising inventory we place on our products. We recognize advertising revenue as earned on a click-through, impression, registration or subscription basis. Measurements of impressions include when a user clicks on an advertisement (CPC basis), views an advertisement impression (CPM basis), or registers for an external website via an advertisement by clicking on or through our application (CPA basis).

Costs and Expenses

Cost of revenue

Cost of revenue consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in data center and customer care functions, credit card processing fees, hosting fees, and data center rent and bandwidth costs. Cost of revenue also includes compensation and other employee-related costs for technical personnel, consultants and subcontracting costs relating to technology service revenue.

Sales and marketing expense

Sales and marketing expense consist primarily of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel and consultants engaged in sales and sales support functions. Advertising and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which primarily consists of partner-related payments to those who direct traffic to our brands.

Product development expense

Product development expense, which relates to the development of technology of our applications, consists primarily of compensation (including stock-based compensation) and other employee-related and consultant-related costs that are not capitalized for personnel engaged in the design, testing and enhancement of service offerings as well as amortization of capitalized website development costs.

General and administrative expense

General and administrative expense consists primarily of compensation (including non-cash stock-based compensation) and other employee-related costs for personnel engaged in executive management, finance, legal, tax and human resources and facilities costs and fees for other professional services and cost of insurance. General and administrative expense also includes amortization of intangible assets.

Key Metrics

Our management relies on certain non-GAAP and/or unaudited performance indicators to manage and evaluate our business. The key performance indicators set forth below help us evaluate growth trends, establish budgets, measure the effectiveness of our advertising and marketing efforts and assess operational efficiencies. We also discuss net cash provided by operating activities under the “Liquidity and Capital Resources” section below. Adjusted EBITDA is discussed below.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net income (loss) adjusted to exclude interest (income) expense, net, other (income) expense, net, income tax (benefit) expense, depreciation and amortization expense, and stock-based compensation expense.

We present Adjusted EBITDA because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to develop short- and long-term operational plans and to allocate resources to expand our business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of the cash operating income generated by our business. We believe that Adjusted EBITDA is useful to investors and others to understand and evaluate our operating results, and it allows for a more meaningful comparison between our performance and that of competitors.

Limitations of Adjusted EBITDA

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Adjusted EBITDA does not reflect, among other things: cash capital expenditures for assets underlying depreciation and amortization expense that may need to be replaced or for new capital expenditures; interest income, net; other expense, net; income tax expense (benefit) from continuing operations; our working capital requirements; the potentially dilutive impact of stock-based compensation; and the provision for income taxes. Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following table presents a reconciliation of net income, the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated:

Results of Operations

The following table sets forth condensed consolidated statements of operations data for each of the periods indicated as a percentage of total revenues:

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Revenue

Total revenue decreased by 24.7% to $2,224,625 for the three months ended June 30, 2024 from $2,956,002 for the three months ended June 30, 2023. This decrease was primarily driven by a decrease in virtual gift revenue.

The following table sets forth our subscription revenue, advertising revenue and total revenue for the three months ended June 30, 2024 and the three months ended June 30, 2023, the increase or decrease between those periods, the percentage increase or decrease between those periods, and the percentage of total revenue that each represented for those periods:

Subscription Revenue

Our subscription revenue for the three months ended June 30, 2024 decreased by $752,089, or 26.1%, as compared to the three months ended June 30, 2023. The decrease in subscription revenue was primarily driven by a decrease in virtual gift revenue. We expect that virtual gift revenue may continue to decline as customers limit their discretionary spending in light of the current economic environment.

Advertising Revenue

Our advertising revenue for the three months ended June 30, 2024 increased by $20,712, or 29.2%, as compared to the three months ended June 30, 2023. The increase in advertising revenue was primarily due to an increase in the volume of advertising impressions related to changes in the optimization of third-party advertising partners.

Costs and Expenses

Total costs and expenses for the three months ended June 30, 2024 increased by $164,985, or 5.1%, as compared to the three months ended June 30, 2023. The following table presents our costs and expenses for the three months ended June 30, 2024 and 2023, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenue that each represented for those periods:

Cost of revenue

Our cost of revenue for the three months ended June 30, 2024 increased by $36,465, or 4.7%, as compared to the three months ended June 30, 2023. This increase in cost of revenue is primarily due to an increase in hosting expense due to increased usage and per unit cost from web hosting providers of $20,375, an increase in ManyCam consulting fees of $9,852 and increased credit card provider fees of $6,972.

Sales and marketing expense

Our sales and marketing expense for the three months ended June 30, 2024 decreased by $27,995, or 12.7%, as compared to the three months ended June 30, 2023. The decrease in sales and marketing expense for the three months ended June 30, 2024 was primarily due to a decrease in salary-related expenses of approximately $55,653, partially offset by increased in marketing-related expenses of $28,670.

Product development expense

Our product development expense for the three months ended June 30, 2024 increased by $48,580, or 4.2%, as compared to the three months ended June 30, 2023. The increase in product development expense was primarily due to an increase in software expenses of $18,799. There was also an increase in salary-related expenses of $17,401 and dues and subscriptions expenses of $10,408.

General and administrative expense

Our general and administrative expense for the three months ended June 30, 2024 increased by $107,935 or 10.0%, as compared to the three months ended June 30, 2023. The increase in general and administrative expense for the three months ended June 30, 2024 was primarily due to an increase of approximately $249,828 in professional and tax fees. in connection with the Mergers and the transactions related thereto, which are expected to close in fourth quarter of 2024 or the first quarter of 2025. We expect that our general and administrative expense will continue to increase in future periods in connection with the Mergers. These expenses were offset by decreases in the following: public company expenses of $71,923, franchise taxes of $28,358 and stock-based compensation expense of $24,594.

Non-Operating Income

The following table presents the components of non-operating income for the three months ended June 30, 2024 and the three months ended June 30 2023, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenue that each represented for those periods:

Non-operating income for the three months ended June 30, 2024 was $290,500, a decrease of $223,886, or 43.5%, as compared to non-operating income of $514,386 for the three months ended June 30, 2023. The decrease in non-operating income was primarily a result of the ERTC refund recognized in June 2023.

Income Taxes

Our provision for income taxes consists of federal, foreign and state taxes, as applicable, in amounts necessary to align our year-to-date tax provision with the effective rate that we expect to achieve for the full year. For the three months ended June 30, 2024 and June 30, 2023, we recorded an income tax provision of $50,591 and $101,058, respectively, consisting primarily of federal, foreign, state and local taxes.

As of June 30, 2024, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.

Six Months Ended June 30, 2024 Compared to Six Months Ended June, 2023

Revenue

Total revenue decreased by 12.6% to $4,822,355 for the six months ended June 30, 2024 from $5,520,019 for the six months ended June 30, 2023. This decrease was primarily driven by a decrease in virtual gift revenue in the three months ended June 30, 2024.

The following table sets forth our subscription revenue, advertising revenue and total revenue for the six months ended June 30, 2024 and the six months ended June 30, 2023, the increase or decrease between those periods, the percentage increase or decrease between those periods, and the percentage of total revenue that each represented for those periods:

Subscription Revenue

Our subscription revenue for the six months ended June 30, 2024 decreased by $774,777 or 14.4%, as compared to the six months ended June 30, 2023. The decrease in subscription revenue was primarily driven by a decrease in virtual gifts across the Paltalk and Camfrog applications during the three months ended June 30, 2024.

Advertising Revenue

Our advertising revenue for the six months ended June 30, 2024 increased by $77,113 or 59.6%, as compared to the six months ended June 30, 2023. The increase in advertising revenue was primarily due to an increase in the volume of advertising impressions related to changes in the optimization of third-party advertising partners.

Costs and Expenses

Total costs and expenses for the six months ended June 30, 2024 increased by $51,870, or 0.8%, as compared to the six months ended June 30, 2023. The following table presents our costs and expenses for the six months ended June 30, 2024 and 2023, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenue that each represented for those periods:

Cost of revenue

Our cost of revenue for the six months ended June 30, 2024 increased by $53,065, or 3.4%, as compared to the six months ended June 30, 2023. This increase was primarily due to an increase in hosting expenses.

Sales and marketing expense

Our sales and marketing expense for the six months ended June 30, 2024 decreased by $92,269, or 19.4%, as compared to the six months ended June 30, 2023. The decrease in sales and marketing expense for the six months ended June 30, 2024 was primarily due to a decrease in salary-related expenses ($114,375) and partially offset by an increase of marketing user acquisition expenses, including agent fees and marketing and branding expense ($20,869).

Product development expense

Our product development expense for the six months ended June 30, 2024 increased by $11,699, or 0.5%, as compared to the six months ended June 30, 2023. The increase was primarily due to an increase in dues and subscriptions of $39,010 and salary-related expenses of $29,093, slightly offset by decreased software expense cost of $60,723.

General and administrative expense

Our general and administrative expense for the six months ended June 30, 2024 increased by $79,375, or 3.5%, as compared to the six months ended June 30, 2023. The increase in general and administrative expense for the six months ended June 30, 2024 was due to an increase of approximately $278,078 in professional and tax fees in connection with the Mergers and the transactions related thereto, which are expected to close in fourth quarter of 2024 or the first quarter of 2025. We expect that our general and administrative expense will continue to increase in future periods in connection with the Mergers. These expenses were offset by decreases in public company expenses of $94,928 and franchise taxes of $117,000.

Non-Operating Income

The following table presents the components of non-operating income for the six months ended June 30, 2024 and the six months ended June 30, 2023, the increase or decrease between those periods, the percentage increase or decrease between those periods and the percentage of total revenue that each represented for those periods:

Non-operating income for the six months ended June 30, 2024 was $442,484, a decrease of $193,069, or 30.4%, as compared to non-operating income of $635,553 for the six months ended June 30, 2023. The decrease in non-operating income was primarily the result of recording the ERTC in June 2023.

Income Taxes

Our provision for income taxes consists of federal and state taxes, as applicable, in amounts necessary to align our year-to-date tax provision with the effective rate that we expect to achieve for the full year. For the six months ended June 30, 2024 and 2023, we recorded an income tax benefit of $67,309 and an income tax provision $51,504, respectively, consisting primarily of federal, foreign, state and local taxes.

As of June 30, 2024, our conclusion regarding the realizability of our US deferred tax assets did not change and we have recorded a full valuation allowance against them.

Liquidity and Capital Resources

Currently, our primary source of liquidity is cash on hand, and we believe that our cash and cash equivalents balance and our expected cash flows from operations will be sufficient to meet all of our financial obligations for one year from the date these financial statements are issued. As of June 30, 2024, we had $12,796,004 of cash and cash equivalents.

Our primary use of working capital is related to product development resources in order to maintain and create new services and features in applications for our clients and users. In particular, a significant portion of our working capital has been allocated to the improvement of our products. We are also expending our capital resources to fund strategic acquisitions, investments and partnership opportunities. For instance, on August 11, 2024, we entered into the Merger Agreement to acquire NTS through a two-step merger process. Pursuant to the Merger Agreement, as consideration for the Mergers, we agreed to (i) pay Newtek an amount in cash equal to $4,000,000, which is subject to customary purchase price adjustments as set forth in the Merger Agreement, including a working capital adjustment and (ii) issue Newtek 4,000,000 shares of Preferred Stock (subject to adjustments related to the Total Equity Cap). In addition to the consideration payable at closing, the Merger Agreement provides that Newtek is entitled to receive an amount up to $5,000,000 based on our achievement certain cumulative average Adjusted EBITDA thresholds for the 2025 and 2026 fiscal years, which may be paid, in our sole discretion, in cash, in shares of Preferred Stock or in a combination thereof (subject to adjustments related to the Total Equity Cap).

Operating Activities

Net cash used in operating activities was $772,045 for the six months ended June 30, 2024, as compared to net cash used in operating activities of $996,778 for the six months ended June 30, 2023. The decrease in the amount of cash used in operations for the six months ended June 30, 2024 was primarily attributed to cash management of payables and prepaid expenses, as compared to the six months ended June 30, 2023.

Investing Activities

There was no net cash provided by or used in investing activities for the six months ended June 30, 2024. The net cash used in investing activities during the six months ended June 30, 2023 consisted of the earn-out payment made in connection with the ManyCam acquisition.

Financing Activities

There was no net cash provided by or used in financing activities for the six months ended June 30, 2024, as compared to $7,213 of net cash used in financing activities for the six months ended June 30, 2023. This higher use of cash used in financing activities during the six months ended June 30, 2023 is attributed to a stock repurchase plan that was approved by our Board of Directors in March 2022. The stock repurchase plan expired on March 29, 2023 pursuant to its terms and has not been renewed.

Contractual Obligations and Commitments

There have been no other material changes to our contractual obligations and commitments disclosed in the contractual obligations and commitments section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K.

Off-Balance Sheet Arrangements

As of June 30, 2024, we did not have any off-balance sheet arrangements.

Critical Accounting 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 six months ended June 30, 2024, there were no critical accounting estimates made by management that would involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material effect impact on the financial statements condition or results of operations of the Company.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, our chief executive officer recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on the evaluation as of June 30, 2024, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 with the parties and denied Cisco’s motion for summary judgment. On August 1, 2024, the Court held the final pretrial conference and the trial is set to proceed on August 26, 2024.

If the Company receives a jury verdict in its favor or receives settlement proceeds in connection with the foregoing litigation, the exact amount of such proceeds to be received by the Company will be determined based on a number of factors and will reflect the deduction of significant litigation-related expenses, including legal fees. Consequently, the Company will not receive the majority of any gross proceeds resulting from any potential verdict or settlement. For the foregoing reasons, we are unable to predict the outcome of this litigation and its ultimate cost.

ITEM 1A. RISK FACTORS

Other than as set forth below, there were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” in the Form 10-K during the three months ended June 30, 2024. For more information concerning our risk factors, please see “Item 1A. Risk Factors” in the Form 10-K.

The Mergers may not be completed, and the Merger Agreement may be terminated in accordance with its terms, which could negatively impact the Company.

On August 11, 2024, we entered into the Merger Agreement with Newtek to acquire NTS through a two-step merger process. The consummation of the Mergers is subject to a number of conditions, including, among others, (i) the Paltalk Stockholder Approval, (ii) the absence of any governmental order enjoining or otherwise prohibiting the performance of the Merger Agreement or any of the transactions contemplated thereby, (iii) the absence of a Material Adverse Effect (as defined in the Merger Agreement) on the Company or NTS, (iv) receipt by Newtek from the Federal Reserve of regulatory approval or a non-objection notice relating to the Mergers and the transactions related thereto, and (v) the completion of the Divestiture Transaction. These closing conditions may not be fulfilled in a timely manner or at all, and, accordingly, the Mergers may not be consummated. Any delay in completing the Mergers could cause us not to realize, or to be delayed in realizing, some or all of the benefits that we expect to achieve if the Mergers are successfully consummated within our expected timeframe.

In addition, Newtek and the Company can mutually decide to terminate the Merger Agreement at any time, before or after Paltalk Stockholder Approval, or Newtek or the Company may elect to terminate the Merger Agreement in certain other circumstances.

If the Mergers are not completed for any reason, including as a result of our stockholders declining to approve the Parent Stock Issuance or the Divestiture Transaction, we would be subject to a number of risks, including the following:

Even if the Mergers are consummated, we may not be able to effectively integrate the businesses of NTS, or realize the anticipated benefits and synergies expected from the Mergers.

The success of the Mergers and the transactions contemplated thereby will depend, in part, on our ability to realize the anticipated benefits from acquiring NTS and its business. The anticipated benefits and estimates of future growth, synergies, and optimizations of the Mergers may not be realized fully or at all, may take longer to realize than expected, may not be realized or could have other adverse effects that we do not currently foresee. The failure to realize the anticipated benefits and synergies expected from the Mergers could adversely affect our business, financial condition and operating results.

In addition, the acquisition of the new business is complex, costly and time consuming, and we have devoted, and will continue to devote, significant management attention and resources to integrating the respective business practices and operations of NTS. Potential difficulties that we may encounter as part of the integration process include the following:

In addition, because NTS previously operated under Newtek, it is possible that the integration process could result in:

Any of these issues could adversely affect our ability to maintain relationships with customers, suppliers, employees and other constituencies or achieve the anticipated benefits of the Mergers or could negatively impact our earnings or otherwise adversely affect our business and financial results.

The announcement and pendency of the Mergers and the other transactions contemplated by the Merger Agreement, including the Divestiture Transaction, whether or not completed, may adversely affect our business.

The announcement and pendency of the Mergers, including the Divestiture Transaction, may adversely affect the trading price of our common stock, our business or our relationships with our users, consultants and employees. Third parties may be unwilling to enter into material agreements with respect to our business in light of the proposed transactions. In addition, new or existing customers, suppliers and business partners of NTS may prefer to enter into agreements with NTS’ competitors who have not expressed an intention to sell their business because customers, suppliers and business partners may perceive that such new relationships are likely to be more stable. Additionally, our employees may become concerned about the future of our business and NTS and lose focus or seek other employment.

Uncertainties associated with the Mergers may cause a loss of management personnel and other key employees, which could adversely affect our future business and operations.

We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. Our success after the Mergers will depend in part upon our ability to retain key management personnel and other key employees. Current and prospective employees may experience uncertainty about their roles within our company or other concerns regarding the operations of our company following the transactions, any of which may have an adverse effect on our ability to retain or attract key management and other key personnel.

In addition, the loss of key personnel could diminish the anticipated benefits of the Mergers and cause the integration of NTS to be more difficult. Furthermore, we may have to incur significant costs in identifying, hiring and retaining replacements for departing employees and may lose significant expertise and talent relating to the business of our company and NTS. We may not be able to retain or attract key management personnel and other key employees of NTS to the same extent that we have previously been able to retain or attract our own employees.

If we fail to complete the Divestiture Transaction, our business and financial performance may be adversely affected.

The completion of the Divestiture Transaction contemplated by the Merger Agreement is subject to various conditions, including the negotiation of a definitive agreement with a potential buyer in the timeframe required by the Merger Agreement and the approval of the Divestiture Transaction by our stockholders, either of which may not be satisfied in a timely manner or at all.

If the Divestiture Transaction is not completed, we may have difficulty recouping the costs incurred in connection with negotiating the Divestiture Transaction. Our directors, executive officers and other employees will have expended extensive time and effort and will have experienced significant distractions from their work during the pendency of the Divestiture Transaction, and we will have incurred significant third-party transaction costs, in each case, without any commensurate benefit, which may have a material and adverse effect on our stock price and results of operations.

Furthermore, if the Divestiture Transaction is not completed, the resulting announcement of the termination of the Merger Agreement may adversely affect our relationships with our users and employees, which could have a material adverse impact on our ability to effectively operate our business, which could have further adverse effects on our business, results of operations and the trading price of our common stock.

Through the Mergers, we are attempting to enter a new line of business which is highly competitive and regulated.

Entering a new line of business has many risks, including obtaining sufficient capital to cover integration expenses and to continue to fund operations until sales are sufficient to fund ongoing operations. A new business line may never generate significant revenues, bring products and services to market or have enough sales to be profitable, as the case may be. With respect to any new line of business, we may have competitors that are better established in the market, have greater experience with such line of business or have greater resources than we do. We anticipate that products and services of NTS will be developed for and distributed to the market, but there can be no guaranty that sufficient revenue to support operations will ever be generated. Furthermore, certain of our current employees may have limited experience with dedicated server hosting, cloud hosting, data storage, managed security, backup and disaster recovery, and other related services and may have limited experience with respect to any other line of business we may enter into as we seek to expand NTS’s operations.

Sales of substantial amounts of shares of our common stock following the Mergers, including shares issuable upon conversion of the Preferred Stock, could depress our stock price.

The market price of our common stock may fluctuate significantly following completion of the Mergers, and holders of our common stock could lose some or all of the value of their investment. Our historic stockholders may decide to reduce their investment in our Company as a result of the changes to our business in connection with the Mergers. These sales of our common stock (or the perception that these sales may occur) could have the effect of depressing the market price for our common stock. In addition, our financial position after completion of the Mergers may differ from our financial position before the completion of the Mergers, and our results of operations and/or cash flows after the completion of the Mergers may be affected by factors different from those currently affecting our results of operations and/or cash flows, all of which could adversely affect the market price of our common stock. Furthermore, the stock market has experienced significant price and volume fluctuations recently, which, if such fluctuations continue to occur, could have a material adverse effect on the market for, or liquidity of, our common stock, regardless of our actual operating performance.

Following the consummation of the Mergers and the issuance of the Closing Stock Consideration, Newtek would beneficially own approximately 30.3% of our issued and outstanding common stock on an as-converted and fully-diluted basis, calculated based on the outstanding shares of the Company as of August 9, 2024.The shares of our common stock issuable upon conversion of the Preferred Stock issued to Newtek (the will become freely tradable once registered pursuant to the Registration Rights Agreement between us and Newtek, which will become effective at the closing of the Mergers. Once registered, the shares of common stock underlying the Preferred Stock held by Newtek will have no restrictions, other than described below, and such shares generally will not require further registration under the Securities Act, provided, however, that any stockholders who are deemed to be affiliates of us will be subject to the resale restrictions of Rule 144 under the Securities Act.

Pursuant to the Registration Rights Agreement, Newtek will be subject to certain lockup and transfer restrictions with respect to the Preferred Stock for one year following the closing of the Mergers. Following this lockup period, Newtek may wish to dispose of some or all of its interests in the Company, and as a result may seek to sell its shares of Preferred Stock. Any such sale (or the perception that any such a sale may occur), coupled with the increase in the outstanding number of shares of our common stock following the conversion of the Preferred Stock upon transfer, may affect the market for, and the market price of, shares of common stock in an adverse manner.

We may be the target of securities class action and derivative lawsuits, which could result in substantial costs and may delay or prevent the Mergers from being completed.

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into acquisition agreements. Defending against these claims can result in substantial costs and divert management time and resources, even if the lawsuits are without merit. An adverse judgment could result in monetary damages, which could have a negative impact on our business, results of operations and financial condition. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the Mergers, the injunction may delay or prevent the Mergers from being completed, which may adversely affect our business, results of operations and financial condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sale of Equity Securities 

There were no sales of unregistered securities during the quarter ended June 30, 2024 that were not previously reported on a Current Report on Form 8-K.

Issuer Purchases of Common Stock

During the three months ended June 30, 2024, the Company did not repurchase any shares of common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

During the three months ended June 30, 2024, none of the Company’s directors or executive officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

ITEM 6. EXHIBITS

The following exhibits are included herein or incorporated herein by reference:

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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