Business Context and Reporting Period
This Form 10-Q covers PeerStream, Inc. for the quarter and nine months ended September 30, 2019. The request identifies Intelligent Protection Management Corp., but the filing’s registrant is PeerStream, Inc. PeerStream develops secure communications software, including PeerStream Protocol and Backchannel, and operates consumer video-chat applications including Paltalk and Camfrog.
The company sold substantially all of its online dating assets on January 31, 2019 for $1.6 million. The dating business is presented as discontinued operations.
Financial Performance and Position
| Metric | Three months ended September 30, 2019 | Three months ended September 30, 2018 | Nine months ended September 30, 2019 | Nine months ended September 30, 2018 |
|---|---|---|---|---|
| Total revenue | $2.96 million | $5.30 million | $12.70 million | $15.20 million |
| Net loss | $1.57 million | $0.57 million | $0.48 million | $3.24 million |
| Net loss per share | $0.23 | $0.08 | $0.07 | $0.47 |
| Cash used in operating activities | $0.91 million | $0.46 million | $4.29 million used | $3.30 million provided |
| Adjusted EBITDA | $0.60 million loss | $1.05 million | $0.92 million | $2.52 million |
- Third-quarter revenue declined 44.2% year over year; nine-month revenue declined 16.4%.
- Third-quarter continuing-operations loss was $1.41 million, compared with a $0.12 million loss in the prior-year quarter. Nine-month continuing-operations loss was $1.05 million, compared with $1.88 million in the prior-year period.
- Reported operating margin from continuing operations was negative 36.7% in the third quarter and negative 6.1% for the nine-month period, compared with positive 7.9% and 4.0%, respectively, in the comparable 2018 periods.
- Third-quarter gross margin was approximately 77.0%, versus approximately 83.6% in the prior-year quarter. Nine-month gross margin was approximately 80.1%, versus approximately 82.9% in 2018.
- Revenue mix for the nine months was subscription revenue of $8.90 million, advertising revenue of $0.32 million, and technology service revenue of $3.48 million.
- Cash and cash equivalents were $3.63 million at September 30, 2019, down from $6.56 million at December 31, 2018. Total assets were $19.73 million and stockholders’ equity was $15.94 million.
- Total liabilities were $3.79 million, consisting primarily of accounts payable, deferred subscription revenue, accrued liabilities, and operating lease liabilities. The filing does not report conventional outstanding debt.
- Digital tokens were carried at $0.27 million at quarter-end after a $0.50 million impairment charge. Goodwill was $13.09 million.
- Active subscribers were 105,180 at September 30, 2019, down 5.5% from 111,261 in the comparable period. Subscription bookings declined 19.2% to $2.80 million in the quarter and 18.1% to $8.87 million for the nine months.
Material Changes Versus the Prior Comparable Period
- Third-quarter subscription revenue fell 20.8%, primarily because of lower virtual-gift transaction volume and fewer active subscribers. Nine-month subscription revenue fell 18.4%.
- Advertising revenue decreased 66.2% in the quarter and 57.4% for the nine months, reflecting lower advertising impressions, reduced active users, and weaker digital advertising demand and pricing.
- Third-quarter technology service revenue fell 98.5% to $22,444. The decline followed the termination of the ProximaX Agreement and recognition of subsequent payments only when received because collectability was uncertain.
- Total third-quarter costs and expenses declined 17.2%, supported by lower sales and marketing and general and administrative expenses. Product development expense increased 1.9% in the quarter and 5.9% for the nine months.
- Operating cash flow deteriorated from $3.30 million provided in the first nine months of 2018 to $4.29 million used in 2019. Management attributed the change principally to the prior-year ProximaX prepayment, payments related to the dating-business sale, and associated legal and transaction costs.
- The dating-business sale generated $1.60 million of investing cash inflow and a $0.83 million gain in discontinued operations. Nine-month net income benefited from $0.56 million of discontinued-operation income, compared with a $1.37 million loss in 2018.
- Product development remained a significant cost, representing 57.3% of third-quarter revenue and 40.8% of nine-month revenue.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing provides no formal revenue, earnings, or cash-flow guidance. Management stated that cash on hand and expected operating cash flows should be sufficient for financial obligations for the twelve months from the report date, while acknowledging that additional capital may be needed for growth initiatives or if operating requirements increase.
- Management intends to expand secure-communications licensing and implementation, convert its sales pipeline into customers, pursue third-party platform partnerships, reduce costs, enhance video-chat applications, explore strategic transactions, and pursue a national securities exchange listing.
- After quarter-end, the company agreed to a trial collaboration with a third party reporting more than 35 million monthly active users to promote a co-branded Paltalk video-chat program. Commercial terms and financial impact were not established in the filing.
- The ProximaX Agreement was terminated effective June 24, 2019 after ProximaX reported capital constraints. Up to $2.5 million remained subject to payment terms, but collectability was uncertain and future revenue is recognized as cash is received.
- XPX tokens were delisted from the Kryptono Exchange on October 4, 2019. The company recorded a $0.50 million impairment before quarter-end and continues to face volatility and liquidity risk regarding its digital-token holdings.
- The company is developing blockchain and cybersecurity products, but commercialization, customer acceptance, regulatory treatment of cryptocurrency, and completion of new technologies remain uncertain.
- Paltalk Holdings appealed a PTAB decision rejecting the validity of patents asserted against Riot Games and Valve. No litigation reserve was recorded at September 30, 2019.
- The company maintains a full valuation allowance against U.S. deferred tax assets. Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were reported.
Investor Verification Items
- Verify the registrant identity, because the supplied metadata names Intelligent Protection Management Corp. while the filing names PeerStream, Inc.
- Assess liquidity in light of $3.63 million of cash, $4.29 million of year-to-date operating cash use, continuing losses, and management’s possible need for additional capital.
- Track active subscribers, virtual-gift activity, advertising impressions, and subscription bookings as leading indicators of consumer-business recovery.
- Verify the collectability and timing of the remaining ProximaX payments and the company’s ability to replace ProximaX-related technology-service revenue.
- Evaluate the carrying value, liquidity, and regulatory status of XPX tokens following the exchange delisting and impairment charge.
- Review the commercial progress and economics of the post-quarter-end 35-million-user partnership trial and other prospective government and enterprise contracts.
- Consider dilution from 1,055,691 outstanding stock options and ongoing stock-based compensation expense.