PeerStream, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The provided filing is for PeerStream, Inc., although the request metadata identifies Intelligent Protection Management Corp. The filing was signed March 24, 2020 and reports one operating segment.
Business Context
PeerStream operates multimedia social and communications applications, principally Paltalk, Camfrog, Tinychat and Vumber. Revenue is generated primarily from subscriptions and advertising, with technology-services revenue from the ProximaX blockchain agreement. The company holds 18 patents and had 24 employees as of March 20, 2020.
The online dating assets were sold effective January 31, 2019 for $1.6 million and are reported as discontinued operations. The company also agreed in February 2020 to sell substantially all secure-communications assets to SecureCo for approximately $540,000, subject to closing conditions.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $15.284 million | $20.332 million | Down 24.8% |
| Subscription revenue | $11.406 million | $14.336 million | Down 20.4% |
| Advertising revenue | $0.439 million | $1.007 million | Down 56.5% |
| Technology-services revenue | $3.439 million | $4.989 million | Down 31.1% |
| Loss from continuing operations | $8.943 million | $2.006 million | Worsened |
| Net loss | $8.380 million | $3.797 million | Worsened |
| Net loss per share | $1.22 | $0.56 | Worsened |
| Adjusted EBITDA | $0.135 million | $2.932 million | Down 95.4% |
| Adjusted EBITDA margin | 0.9% | 14.4% | Down 13.5 points |
Operating expenses were $23.899 million, including a $6.760 million goodwill impairment charge. Excluding the impairment, operating expenses declined approximately 13% or $2.7 million, reflecting lower sales and marketing and general and administrative spending. The company also recorded a $625,000 impairment loss on digital tokens and $1.385 million of stock-based compensation.
Active subscribers declined 4.9% to 103,800, subscription bookings declined 17.3% to $11.767 million, and active users declined 16.0%. Virtual-gift revenue declined to $5.080 million from $7.423 million.
Cash and cash equivalents were $3.427 million at December 31, 2019, compared with $6.555 million at year-end 2018. Current assets were $3.725 million and current liabilities were $3.451 million. The company reported no long-term debt. Total liabilities were $4.034 million and stockholders’ equity was $8.186 million.
Net cash used in operating activities was $4.465 million, compared with $2.733 million provided in 2018. Investing activities provided $1.339 million, primarily from the dating-asset sale, while financing activities used $2,000. Management stated that available cash and expected operating cash flows should meet obligations for the twelve months following the filing date, but disclosed that additional capital may be needed for growth initiatives and operations.
Material Changes Versus 2018
- Revenue declined $5.048 million, primarily because of lower subscription, advertising and ProximaX technology-services revenue.
- Subscription revenue and active subscribers declined following lower virtual-gift activity and reduced consumer-app marketing.
- Advertising revenue fell sharply because of fewer advertising impressions.
- Technology-services revenue declined following termination of the ProximaX agreement. The company recognized approximately $1.6 million of previously unrecognized upfront consideration upon termination, but future amounts remain subject to collectability.
- Operating expenses were reduced, including a 41.4% reduction in sales and marketing expense and a 19.4% reduction in general and administrative expense, but these savings were more than offset by goodwill impairment and weaker revenue.
- Goodwill decreased from $13.086 million to $6.326 million after a $6.760 million impairment tied to the decline in the company’s stock price and reporting-unit value.
- The company repurchased 1,900 shares for $2,015 under a $500,000 repurchase authorization; the authorization expired April 29, 2020.
Outlook, Risks and Unusual Items
- Management plans to focus on Paltalk and Camfrog, enhance mobile products, improve retention and monetization, reduce costs and pursue partnerships with large third-party communities.
- A fourth-quarter 2019 trial partnership involved a third-party community with more than 30 million monthly active users. The filing does not provide revenue guidance or quantify expected benefits.
- In February 2020, the company launched a YouNow Props-token partnership, initially through Camfrog and expected to expand to Paltalk. Token-related regulatory, valuation, liquidity and accounting risks remain significant.
- ProximaX had not paid the remaining $2.44 million owed under the June 2019 termination agreement as of the filing date. Payment may be made in speculative security tokens rather than cash.
- XPX tokens were delisted from the Kryptono Exchange in October 2019. The company held digital tokens of $148,229 at year-end after impairment and token sales.
- The SecureCo asset sale was subject to financing and other closing conditions. If completed, management expects to exit secure communications and technology implementation services; if not, it may pursue the business only on a measured basis.
- Material risks include declining users and bookings, intense competition, dependence on Apple and Google platforms, application-store fees, privacy and cybersecurity regulation, cryptocurrency volatility, credit-card chargebacks, international operations and the need for additional capital.
- The company is pursuing patent litigation against Riot Games and Valve and appealed a PTAB ruling concerning patent validity. No legal-loss reserve was recorded as of December 31, 2019.
- The filing identifies a material weakness in information-technology change-management controls supporting financial reporting. The filing contains internally inconsistent statements regarding whether internal controls and disclosure controls were effective; remediation efforts were initiated.
- Management disclosed that the coronavirus outbreak could disrupt operations, staffing, consumer spending and the broader economy. No quantified impact was provided.
Investor Verification Items
- Confirm that the filing belongs to PeerStream, Inc. rather than Intelligent Protection Management Corp.
- Review the audited financial statements and reconciliation of continuing versus discontinued operations, particularly the $8.380 million net loss and $6.760 million goodwill impairment.
- Assess cash burn, the $4.465 million operating cash outflow and the adequacy of the $3.427 million cash balance relative to lease and operating obligations.
- Verify collection prospects and settlement terms for the $2.44 million ProximaX receivable, including any potential payment in tokens.
- Verify whether the SecureCo transaction closed and whether the company exited secure communications and technology-services activities.
- Evaluate the sustainability of the consumer-app business given lower subscribers, bookings, advertising revenue and Adjusted EBITDA.
- Review remediation and testing of the disclosed internal-control material weakness.
- Consider dilution from 1.021 million outstanding stock options, including 764,400 exercisable options, and the company’s concentrated ownership and thinly traded OTCQB market.