Earnings Transcript for PALT - Q2 Fiscal Year 2024

Operator: Greetings, and welcome to the Paltalk Second Quarter 2024 Results Conference Call. At this time, all participants are on a listen-only mode. [Operator Instructions] Please note this call is being recorded. I will now turn the conference over to your host, Kara Jenny, CFO of Paltalk. Ma'am, the floor is yours.

Kara Jenny: Hello, everyone, and welcome to the Paltalk operating and financial results conference call for the second quarter ended June 30, 2024. By now, everyone should have access to the earnings press release, which was issued earlier this afternoon at approximately 4

Jason Katz: Thank you, Kara, and good afternoon, everyone. We greatly appreciate you taking the time to join us on today's call. We will discuss our operating highlights and financial results for the second quarter ended June 30, 2024. We will also provide an update on our business objectives and strategies. After my opening statement, our Chief Financial Officer, Kara Jenny, will give a summary of our financial results for the second quarter ended June 30, 2024. Following our prepared remarks, we'll move into the Q&A portion and answer any questions that were submitted prior to this call. With that, I would now like to walk you through the recent financial and operating highlights and near-term business objectives. We are very pleased to announce that we entered into an agreement to acquire Newtek Technology Solutions, Inc., a wholly owned subsidiary of NewtekOne, Inc. NTS provides dedicated server hosting, cloud hosting, managed security and other related services, including consulting and implementing technology solutions for enterprise and commercial clients across the United States. This is a transformational acquisition for Paltalk that we believe will provide excellent value for our stockholders. We expect that the acquisition, once completed, will have an immediate and meaningful impact on our revenue. Since NTS' revenue in 2023 was approximately three times greater than Paltalk's 2023 revenue. We also expect the acquisition to provide enhanced opportunities for future growth and optimization. We are extremely excited to enter the cloud infrastructure and cybersecurity sectors with the acquisition of a business we deem right for growth, both organically and through potential accretive acquisitions in the future. Given our management team's extensive technology expertise that has been demonstrated throughout the years, we are confident in our ability to integrate, operate and grow this business and enhance stockholder value. Now on to our second quarter results. We believe our second quarter results reflect the softness in discretionary spending by our subscribers due in part to the overall economic and inflationary environment. We believe these impacts are macroeconomic in nature and not long term for our business. We expect to continue to make adjustments to our promotional spending until we see a pickup in our metrics. We are excited about the recent launch of Version 9 of ManyCam, which features a revamped user interface and templates designed to assist with onboarding. During the second quarter, our cash position decreased by $200,000 from the first quarter of 2024, which resulted in a cash balance of $12.8 million at the end of the quarter. Our trial against Cisco is set to begin later this month and we look forward to continuing to defend our intellectual property. While we experienced a decline in our revenue during the second quarter as compared to the prior year period, our team is working on several initiatives to return to growth. These include continuing to explore strategic opportunities, including, but not limited to, potential mergers or acquisitions of other assets or entities that are synergistic to our businesses and divestitures of certain assets. Continuing our efforts to leverage the integration of the ManyCam product into our Paltalk product through upselling initiatives, continuing our efforts to improve user experience with ManyCam software and optimize features for both consumer and enterprise applications, further optimizing marketing spend to effectively realize a positive return on our investment. Continuing to implement several enhancements to our live video chat applications as well as the integration of card and board games and other features focused on retention and monetization, which collectively are intended to increase user engagement and revenue opportunities. Continuing to develop our consumer application platform strategy by seeking potential partnerships with large third-party communities who we could promote a co-branded version of our video chat products and potentially share in the incremental revenues generated by these partner communities. Now moving on to an update on our trial against Cisco, which is expected to begin on August 26, 2024. On July 23, 2021, a wholly owned subsidiary of the company, Paltalk Holdings, Inc. filed a patent infringement lawsuit against WebEx Communications, Cisco WebEx LLC, and Cisco Systems, collectively Cisco in the U.S. District Court for the Western District of Texas. We allege that certain of Cisco’s products have infringed U.S. Patent No. 6,683,858, and that we are 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 now set to proceed on August 26, 2024. Now I'd like to pass it to Kara for a financial summary of our second quarter ended June 30, 2024.

Kara Jenny: Thank you, Jason. Revenue for the 3 months ended June 30, 2024, decreased by 24.7% to $2.2 million compared to $2.9 million for the 3 months ended June 30, 2023. This decrease was attributed to a decrease in virtual gift revenue of 47.7%. Loss from operations for the 3 months ended June 30, 2024, increased by 322.8% or $0.9 million to a loss of $1.2 million compared to a loss of $0.3 million for the 3 months ended June 30, 2023. The increase in loss from operations was attributed to a decrease in revenue for the 3 months ended June 30, 2024, as well as an increase in professional fees. Net loss for the 3 months ended June 30, 2024, increased by 788% or $1.1 million to a net loss of $0.9 million compared to net income of $0.1 million for the 3 months ended June 30, 2023. Adjusted EBITDA loss for the 3 months ended June 30, 2024, increased by approximately 6,164% or $0.9 million to an adjusted EBITDA loss of $0.9 million compared to adjusted EBITDA loss of $14,945 for the 3 months ended June 30, 2023. Now turning to our financial results for the 6 months ended June 30, 2024. Revenue for the 6 months ended June 30, 2024, decreased by 12.6% to $4.8 million compared to $5.5 million for the 6 months ended June 30, 2023. This decrease was attributed to a decrease in virtual gift revenue of 26.6%. Loss from operations for the 6 months ended June 30, 2024, increased by 63.2% or $0.7 million to a loss of $1.9 million compared to a loss of $1.2 million for the 6 months ended June 30, 2023. The decrease in loss from operations was attributed to a decrease in revenue for the 6 months ended June 30, 2024. Net loss for the 6 months ended June 30, 2024, increased by 136.7% or $0.8 million to a net loss of $1.4 million compared to a net loss of $0.6 million for the 6 months ended June 30, 2023. Adjusted EBITDA loss for the 6 months ended June 30, 2024, increased by approximately 116.1% or $0.7 million to adjusted EBITDA loss of $1.4 million compared to an adjusted EBITDA loss of $0.7 million for the 6 months ended June 30, 2023. Cash and cash equivalents totaled $12.8 million at June 30, 2024, a decrease of $0.8 million compared to $13.6 million at December 31, 2023, and we continue to have no long-term debt on our balance sheet at June 30, 2024. We will now move on to questions.

A - Kara Jenny: Jason, can you comment on the decline in Paltalk revenue and provide some color as to your insights on this being a short-term blip and not a long-term trend?

Jason Katz: We believe our second quarter results reflect the decrease in discretionary subscriber spending as a result of an inflationary economic environment. However, we consider these impacts to be short term in nature, and do not anticipate such impacts will have a long-term effect on our business. We are optimistic about the launch of Version 9 of ManyCam and its potential to gain traction with new and existing subscribers.

Kara Jenny: Is the Cisco trial for certain starting August 26? Or could something happen like in the past to further delay it?

Jason Katz: While there is no assurance that the trial will start on August 26, we believe management believes that it will commence on that date. In addition, jury selection for the trial has already been set for August 20 as well.

Kara Jenny: Jason, back to you to close out the presentation.

Jason Katz: Thanks, everyone, for your support and for joining us today. We're very grateful for your interest in our business. We look forward to updating the market and our stockholders with our progress on our business objectives, our pending patent litigation against Cisco WebEx with the trial scheduled to start on August 26, 2024, and our potential strategic accretive acquisitions, which we continue to identify and analyze. Have a great day.

Operator: Thank you. This concludes today's conference, and you may disconnect your lines at this time. And we thank you for your participation.