8-K: NewtekOne Completes Sale of Technology Subsidiary to Paltalk for $4 Million Plus Equity and Potential Earn-Out

NewtekOne has finalized the sale of its Newtek Technology Solutions subsidiary to Paltalk for a combination of cash, preferred stock, and a potential earn-out.

Summary

• NewtekOne, Inc. completed the sale of its wholly-owned subsidiary, Newtek Technology Solutions, Inc. (NTS), to Paltalk, Inc. on January 2, 2025.
• The sale was executed as per the agreement dated August 11, 2024.
• The transaction involved a combination of $4 million in cash and 4 million shares of Paltalk's newly created non-voting preferred stock.
• The preferred stock can convert to common stock upon certain transfers, subject to anti-dilution adjustments.
• NewtekOne may also receive up to an additional $5 million earn-out based on Paltalk's adjusted EBITDA performance in 2025 and 2026.
• The earn-out can be paid in cash, preferred stock, or a combination, at Paltalk's discretion.
• As part of the agreement, NewtekOne is entitled to appoint one member to Paltalk's board of directors.

Sentiment

Score: 7

Explanation: The document indicates a positive strategic move for NewtekOne, with the completion of a previously announced sale and potential for future earnings. However, the initial cash consideration is relatively low, and the earn-out is not guaranteed, which tempers the overall positive sentiment.

Positives

• The sale of NTS allows NewtekOne to focus on its core financial holding company operations.
• The transaction provides NewtekOne with an immediate cash infusion of $4 million.
• The potential earn-out of up to $5 million offers additional upside based on Paltalk's performance.
• The board seat provides NewtekOne with influence over Paltalk's strategic direction.

Negatives

• The initial cash consideration of $4 million may be considered low for a subsidiary sale.
• The earn-out is not guaranteed and is dependent on Paltalk's future performance.
• The preferred stock is non-voting, limiting NewtekOne's immediate influence over Paltalk.

Risks

• The earn-out payment is contingent on Paltalk achieving specific EBITDA targets, which may not be met.
• The value of the preferred stock is subject to market fluctuations and Paltalk's performance.
• The conversion of preferred stock to common stock is subject to anti-dilution adjustments, which could impact the final value.

Future Outlook

The company may receive up to $5 million in earn-out payments based on Paltalk's financial performance in 2025 and 2026. NewtekOne will also have a representative on Paltalk's board of directors.

Management Comments

• The company completed the sale of its subsidiary as previously announced.
• The sale was a commitment made to the Board of Governors of the Federal Reserve System.

Industry Context

This transaction reflects a strategic move by NewtekOne to divest non-core assets following its transition to a financial holding company, aligning with industry trends of financial institutions focusing on core banking operations. The sale of technology assets to a company like Paltalk, which is not a direct competitor, is a common strategy for companies streamlining their operations.

Comparison to Industry Standards

• The sale of a technology subsidiary for a mix of cash and equity is a common practice in the industry, especially when the subsidiary is not core to the parent company's operations.
• The earn-out structure is also a standard approach to bridge valuation gaps and align incentives between the buyer and seller.
• Comparable transactions would include financial institutions divesting non-core technology assets to focus on their primary banking activities.
• The valuation of the subsidiary at $4 million plus equity and a potential $5 million earn-out is within the range of similar transactions, but the specific value will depend on Paltalk's future performance.

Stakeholder Impact

• Shareholders of NewtekOne may view the sale positively as it streamlines operations and provides cash.
• Employees of NTS will now be part of Paltalk.
• Customers of NTS will now be served by Paltalk.

Next Steps

• NewtekOne will appoint a representative to Paltalk's board of directors.
• NewtekOne will monitor Paltalk's performance to determine the earn-out payment.

Key Dates

Keywords

NewtekOne, Paltalk, subsidiary sale, technology solutions, merger, acquisition, earn-out, preferred stock, board of directors, financial holding company