Business Context and Reporting Period
The provided filing is a Form 10-K for PeerStream, Inc. (not Intelligent Protection Management Corp.), covering the fiscal year ended December 31, 2018. The filing was dated March 22, 2019. PeerStream develops secure communications software using encryption and blockchain technologies, including PeerStream Protocol (PSP) and Backchannel, and operates consumer video-chat applications including Paltalk, Camfrog and Tinychat, as well as Vumber telecommunications services.
In March 2018, the company launched its software licensing and technology implementation business. Its first major client was ProximaX Limited, under a technology services agreement to integrate PSP into ProximaX’s blockchain protocol.
Financial Performance and Position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $26.36 million | $24.84 million | Up 6.1% |
| Subscription revenue | $20.05 million | $22.90 million | Down 12.4% |
| Advertising revenue | $1.32 million | $1.94 million | Down 32.1% |
| Technology services revenue | $4.99 million | — | New in 2018 |
| Operating loss | $1.34 million | $5.66 million | Improved $4.32 million |
| Net loss | $3.80 million | $5.89 million | Improved $2.10 million |
| Net loss per share | $0.56 | $0.91 | Improved |
| Adjusted EBITDA | $2.24 million | $(1.93) million | Improved $4.17 million |
| Adjusted EBITDA margin | 8.5% | (7.8)% | Improved |
| Net cash provided by operating activities | $2.73 million | $(0.73) million | Improved $3.46 million |
Revenue growth was driven by $4.99 million of ProximaX technology services revenue, which more than offset declines in subscription and advertising revenue. The reported operating margin was approximately negative 5.1%, and the net loss margin was approximately negative 14.4%.
Cash and cash equivalents were $6.56 million at December 31, 2018, compared with $4.14 million at December 31, 2017. The company reported no long-term debt. Total liabilities were $9.28 million, including $3.38 million of deferred technology services revenue and $2.09 million of deferred subscription revenue. Total assets were $24.43 million and stockholders’ equity was $15.15 million.
Investing activities used $342,651, primarily for property and equipment. Financing activities provided $28,210 from stock option exercises. Management stated that cash on hand and expected operating cash flow should be sufficient to meet financial obligations for the twelve months following the filing date, although additional capital may be needed for growth initiatives.
Material Changes Versus 2017
- The company shifted strategic focus toward secure communications software, blockchain-related development and technology implementation services.
- Technology services revenue contributed $4.99 million in 2018, primarily from ProximaX, but the company’s new services revenue was substantially dependent on a single customer.
- Active subscribers declined 15.0%, from 171,800 to 146,100 at year-end. Subscription bookings declined from $22.62 million to $19.58 million.
- Subscription revenue declined $2.85 million and advertising revenue declined $624,000, reflecting lower subscriber and user activity, reduced marketing expenditure and weaker international performance.
- Total costs and expenses declined 9.2% to $27.70 million. Sales and marketing expense fell 26.2%, and product development expense fell 9.8%.
- The company recorded a $2.54 million impairment loss on digital tokens, primarily related to XPX tokens received from ProximaX.
- The company adopted ASC 842 for operating leases on December 31, 2018, recognizing a $232,423 right-of-use asset and related lease liabilities without a material impact on the income statement or cash flows.
Outlook, Risks and Unusual Items
Management expected to complete the remaining PSP development stages in the first and third quarters of 2019, begin expanded marketing and customer discovery in the first half of 2019, and pursue full commercialization during the second half of 2019. Planned initiatives also included enhancements to Paltalk and Camfrog, improved mobile monetization, increased live-streaming content and integration of technical functions to reduce operating costs.
Under the ProximaX agreement, the company may receive up to two additional milestone payments of $2.5 million each. ProximaX may pay in cash or qualifying cryptocurrencies. Management warned that declining cryptocurrency prices and ProximaX’s limited resources may prevent timely payment, and that any restructuring of the payment terms may not be economically favorable or possible.
The company held 216.0 million XPX tokens with a December 31, 2018 fair value of approximately $1.0 million and book value of $832,892. The tokens were accounted for as indefinite-lived intangible assets and remain subject to future impairment. Cryptocurrency liquidity, exchange failure, regulatory restrictions, cybersecurity incidents and loss of private keys could impair the value or accessibility of these assets.
On January 31, 2019, the company sold substantially all assets related to its online dating business for $1.6 million in cash, with $100,000 placed in escrow. The sale is expected to reduce future active subscribers, subscription revenue and advertising revenue, while allowing the company to focus on video applications and secure communications.
Material risks include dependence on ProximaX, uncertain market acceptance of PSP and blockchain technologies, intense competition, declining user engagement, reliance on Apple and Google distribution platforms, data privacy and GDPR compliance, cybersecurity and payment-processing risks, potential intellectual-property litigation, the need for additional capital, and substantial goodwill and intangible assets subject to impairment. A patent infringement action involving Riot Games and Valve remained pending; the PTAB was expected to issue a determination by May 15, 2019. No legal reserve was recorded.
Marcum LLP issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to provide an opinion on internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the registrant identity: the supplied filing is for PeerStream, Inc., despite the request metadata naming Intelligent Protection Management Corp.
- Assess the sustainability of revenue and cash flow generated by the ProximaX agreement, including the collectability of the remaining $5.0 million in milestone payments.
- Review the valuation, liquidity, impairment exposure and regulatory status of the company’s XPX token holdings.
- Evaluate the effect of the January 2019 dating-asset sale on continuing revenue, subscribers, expenses and operating cash flow.
- Track whether PSP and Backchannel achieved the stated 2019 development and commercialization milestones.
- Reconcile the decline in active subscribers and subscription bookings with future customer-acquisition and monetization plans.
- Consider dilution from 1.04 million outstanding stock options, including 611,810 exercisable options, and any future equity financing.
- Review the pending patent litigation and the potential impact of the PTAB’s validity determination.