Business Context and Reporting Period
PeerStream, Inc. (formerly Snap Interactive, Inc.; OTCQB symbol changed from STVI to PEER on March 12, 2018) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The filing describes a global internet solutions provider operating consumer video-chat and dating applications while expanding into blockchain consulting, implementation, software licensing and support through PeerStream Business Solutions.
The company launched PeerStream Business Solutions in March 2018 and began generating technology-services revenue from its agreement with ProximaX. Its primary consumer applications include Paltalk, Camfrog, FirstMet, Tinychat, 50More, The Grade and Vumber. The filing reports approximately 150,550 active subscribers at June 30, 2018 and approximately 148,000 at July 31, 2018.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $7.39 million | $6.24 million | $13.14 million | $12.96 million |
| Subscription revenue | $4.98 million | $5.74 million | $10.41 million | $11.97 million |
| Advertising revenue | $0.31 million | $0.50 million | $0.64 million | $0.99 million |
| Technology-services revenue | $2.09 million | — | $2.09 million | — |
| Income (loss) from operations | $0.09 million | $(1.46) million | $(0.72) million | $(2.54) million |
| Net loss | $(1.87) million | $(1.48) million | $(2.67) million | $(2.52) million |
| Adjusted EBITDA | $1.02 million | $(0.52) million | $1.12 million | $(0.73) million |
| Adjusted EBITDA margin | 13.9% | (8.3%) | 8.5% | (5.6%) |
Reported operating margin was approximately 1.3% for the quarter and negative 5.5% for the six-month period. Net loss margin was approximately negative 25.2% and negative 20.3%, respectively. Net loss included a $1.96 million unrealized loss from marking XPX digital tokens to fair value.
- Cash and cash equivalents were $7.74 million at June 30, 2018, compared with $4.14 million at December 31, 2017.
- Total assets were $26.77 million; total liabilities were $11.22 million; and stockholders’ equity was $15.55 million.
- The company reported no long-term debt and no off-balance-sheet arrangements.
- Current liabilities included $6.28 million of deferred technology-service revenue and $2.39 million of deferred subscription revenue.
- Net cash provided by operating activities was $3.76 million for the six months ended June 30, 2018, versus $0.62 million in the prior-year period. The increase was substantially driven by the $5.0 million ProximaX payment.
- Net cash used in investing activities was $0.16 million, primarily for property and equipment. Financing cash flow was zero.
- Subscription bookings declined to $10.25 million from $11.74 million, and active subscribers declined 13.2% to 150,550.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 18.5%, while six-month revenue increased 1.4%, primarily because of newly recognized ProximaX technology-services revenue.
- Subscription revenue declined 13.2% for the quarter and 13.0% for the six-month period, mainly because of lower marketing expenditure, lower active subscribers, weaker international usage and management resource allocation to the blockchain-services initiative.
- Advertising revenue declined 36.7% for the quarter and 35.9% for the six-month period due to lower active users, advertising-industry fraud-control challenges, lower demand and pricing, and a transition to a new advertising agency.
- Total costs and expenses decreased 5.2% for the quarter and 10.6% for the six-month period, primarily from reduced sales and marketing and product-development spending. General and administrative expense increased because of legal, cryptocurrency-conversion, investor-relations and consulting costs.
- Quarterly operating results improved from a $1.46 million operating loss to $0.09 million of operating income, but net loss worsened because of the XPX token fair-value loss.
- The company received $5.0 million in Ethereum from ProximaX in May 2018 and converted it to cash. It also received 216.0 million XPX tokens in June 2018, initially valued at approximately $3.37 million and valued at approximately $1.41 million at June 30, 2018.
- Stock-based compensation expense increased to $0.79 million for the six-month period from $0.69 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management stated that existing cash and expected operating cash flows should be sufficient to meet financial obligations for the twelve months following the filing date. The company nevertheless may require additional capital to fund growth, development, acquisitions, strategic investments and other initiatives, potentially through equity, debt, asset sales or strategic collaborations.
- Management expected PeerStream Protocol to be completed in the first quarter of 2019 and Backchannel, a blockchain-based secure video-messaging application, to launch in beta in the fourth quarter of 2018.
- The company planned to expand its blockchain-services team and customer pipeline, increase consumer application monetization, seek additional blockchain partnerships, evaluate strategic alternatives for non-core properties and pursue a potential Nasdaq Capital Market listing.
- The ProximaX agreement provides for up to an additional $5.0 million of cash upon specified development milestones. The filing states that the remaining $5.0 million is recognized upon achievement of contractual milestones.
- XPX tokens are marked to market each quarter. Their valuation is subject to substantial volatility, limited trading history and liquidity, reliance on the relatively new Kryptono Exchange, exchange and cybersecurity risks, regulatory uncertainty and potential inability to convert the tokens into fiat currency.
- Other significant risks include uncertain market acceptance and technical performance of blockchain products, intense competition, dependence on Apple, Facebook, Google and other platforms, privacy and data-security requirements, cryptocurrency regulation, reliance on key personnel and internally derived user metrics.
- Paltalk Holdings is pursuing patent-infringement litigation against Riot Games and Valve. Riot has filed four inter partes review petitions challenging the patents; the patent office had not ruled on them as of the filing. No litigation reserve was recorded.
- The company reported effective disclosure controls as of June 30, 2018 and implemented controls addressing the existence, valuation and safeguarding of cryptocurrencies and digital tokens.
Important Facts for Investors to Verify
- Confirm the contractual status, performance milestones and collectability of the remaining ProximaX cash consideration.
- Verify the valuation, liquidity, custody and ability to monetize the 216.0 million XPX tokens, including exposure to Kryptono Exchange and regulatory developments.
- Assess whether the decline in active subscribers, subscription bookings and advertising revenue is stabilizing or continuing.
- Reconcile adjusted EBITDA with GAAP net loss and separately evaluate the impact of stock-based compensation, amortization and token fair-value changes.
- Monitor whether the company can deliver PSP and Backchannel on the stated timelines and generate recurring blockchain-services or licensing revenue beyond ProximaX.
- Review the patent litigation, inter partes reviews, employment and consulting arrangements, lease commitments and potential strategic transactions involving non-core properties.
- Note that the supplied request metadata names Intelligent Protection Management Corp., while the filing text identifies the registrant as PeerStream, Inc.; the issuer identity should be verified.