SEC Form 10-Q Summary
Filing and reporting period: The supplied filing is a Form 10-Q for the quarter and six months ended June 30, 2019, filed August 8, 2019. The filing identifies the registrant as PeerStream, Inc., which differs from the requested company name, Intelligent Protection Management Corp.
Business Context
PeerStream develops secure communications software using encryption and blockchain technology, including PeerStream Protocol and the Backchannel product suite. It also operates consumer video and communications applications, including Paltalk and Camfrog. The company reported approximately 106,100 active subscribers at June 30, 2019 and approximately 106,200 as of August 1, 2019.
The company sold substantially all assets of its dating-services business on January 31, 2019 for $1.6 million. The dating business is presented as discontinued operations.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $4.873 million, down 16.3% | $9.746 million, down 1.5% |
| Subscription revenue | $3.050 million, down 12.3% | $6.054 million, down 17.2% |
| Advertising revenue | $0.111 million, down 56.8% | $0.231 million, down 52.8% |
| Technology service revenue | $1.712 million, down 18.2% | $3.460 million, up 65.4% |
| Income from continuing operations | $0.423 million | $0.318 million |
| Net income | $0.443 million | $1.090 million |
| Basic earnings per share | $0.06 | $0.16 |
| Adjusted EBITDA | $1.020 million, or 20.9% of revenue | $1.520 million, or 15.6% of revenue |
| Cash flow from operating activities | $(0.587) million | $(3.374) million |
Margins: Gross margin was approximately 81.7% for the quarter and 81.1% for the six-month period. Income from continuing operations represented 8.7% and 3.3% of revenue, respectively. Net margin, including discontinued operations, was 9.1% for the quarter and 11.2% for the six months.
Balance sheet and liquidity: Cash and cash equivalents were $4.642 million at June 30, 2019, compared with $6.555 million at December 31, 2018. Total assets were $21.368 million and total liabilities were $4.193 million. Stockholders’ equity was $17.175 million. The filing does not report traditional borrowings or interest-bearing debt; liabilities principally comprised accounts payable, deferred subscription revenue and operating lease liabilities. Management stated that cash on hand and expected operating cash flows should cover financial obligations for the twelve months following the filing, but additional capital may be needed to fund growth.
Digital tokens were recorded as indefinite-lived intangible assets at $0.777 million at June 30, 2019. The company sold 16.6 million tokens for $56,100 during the quarter.
Material Changes Versus Prior Comparable Period
- Quarterly revenue declined $0.952 million, primarily due to lower subscription, advertising and technology service revenue.
- Six-month revenue was broadly stable because a $1.368 million increase in technology service revenue substantially offset declines in subscriptions and advertising.
- Active subscribers declined approximately 5.4%, or 6,000 users, to 106,100. Management also cited a 21.2% decline in active users as a factor in lower advertising revenue.
- Quarterly costs and expenses declined 13.8%, reflecting lower sales and marketing and general and administrative spending, partially offset by higher product development expense.
- The company reported net income in both periods in 2019, compared with net losses in the 2018 comparable periods. The improvement was aided by the absence of the $1.959 million digital-token impairment recorded in 2018 and by discontinued-operations effects.
- Operating cash flow deteriorated from $3.762 million provided in the first six months of 2018 to $3.374 million used in the first six months of 2019, primarily reflecting the absence of a significant ProximaX prepayment received in 2018 and payments related to the dating-business sale.
- On April 29, 2019, the company authorized a share repurchase program of up to $500,000; no shares had been repurchased through June 30, 2019.
Guidance, Outlook, Risks and Unusual Items
Management did not provide numerical revenue or earnings guidance. Near-term objectives include commercializing PeerStream Protocol and Backchannel, expanding secure-communications sales, enhancing video applications, integrating Props token rewards, increasing user acquisition and retention, pursuing a national securities exchange listing, and continuing intellectual-property enforcement.
ProximaX termination: The technology-services agreement was terminated effective June 24, 2019 after ProximaX reported that it could not pay the $2.5 million due for the second development milestone. The remaining balance is scheduled to be paid largely on December 31, 2019 in cash or ProximaX security tokens. Because collectability is uncertain, the company will recognize payments as received. This creates significant counterparty, liquidity and token-valuation risk.
Other risks: Key risks include declining subscribers and engagement, dependence on Apple, Facebook and Google platforms, competition, cybersecurity and privacy regulation, cryptocurrency and digital-token volatility, dependence on key personnel, the need for additional capital, credit-card processor and chargeback exposure, intellectual-property claims, and reliance on internally derived user metrics.
The company’s CFO resigned effective May 6, 2019, and the CEO assumed the principal financial officer role while a permanent replacement was sought. A patent dispute involving Riot Games and Valve remains active; the PTAB rejected the validity of the company’s patents in May 2019, and the company is pursuing an appeal. No legal reserve was recorded.
Management stated that disclosure controls and procedures were effective as of June 30, 2019 and that there were no material changes in internal control over financial reporting.
Facts Investors Should Verify
- Confirm that the filing belongs to PeerStream, Inc., not Intelligent Protection Management Corp.
- Monitor collection of the $2.5 million ProximaX obligation, including whether payment is made in cash or speculative security tokens.
- Assess whether subscriber, user engagement, virtual-gift activity and advertising trends stabilize or continue to decline.
- Reconcile reported net income with negative operating cash flow and evaluate the sustainability of cash resources.
- Evaluate the company’s ability to commercialize PeerStream Protocol and generate customers beyond ProximaX.
- Review exposure to digital-token valuation changes and the company’s ability to convert tokens into cash.
- Track the CFO replacement, patent litigation appeal and any future capital-raising or share-repurchase activity.