PeerStream, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; filed November 8, 2018. The supplied filing identifies the registrant as PeerStream, Inc., formerly Snap Interactive, Inc., rather than Intelligent Protection Management Corp. PeerStream changed its name and OTCQB symbol to PEER in March 2018.
Business context
PeerStream operates consumer video-chat, dating and messaging applications, including Paltalk, Camfrog and FirstMet. In March 2018 it launched PeerStream Business Solutions to provide blockchain consulting, implementation, licensing and support services. The company is developing PeerStream Protocol and the Backchannel secure messaging application.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $6.69 million, versus $5.93 million in 2017 | $19.83 million, versus $18.89 million in 2017 |
| Operating loss | $0.04 million, versus $2.01 million in 2017 | $0.75 million, versus $4.55 million in 2017 |
| Net loss | $0.57 million, or $0.08 per share | $3.24 million, or $0.47 per share |
| Adjusted EBITDA | $0.88 million, or 13.2% of revenue | $2.01 million, or 10.1% of revenue |
| Operating cash flow | $(0.46) million | $3.30 million, versus $(0.66) million in 2017 |
Quarterly revenue growth was driven by $1.45 million of technology service revenue from ProximaX, partly offset by a 9.9% decline in subscription revenue and a 31.1% decline in advertising revenue. Nine-month technology service revenue was $3.54 million, while subscription revenue declined 12.0% and advertising revenue declined 34.3%.
The quarterly gross margin was approximately 82.2%; the nine-month gross margin was approximately 81.9%. Operating margins were approximately negative 0.5% and negative 3.8%, respectively. Net margins were approximately negative 8.5% and negative 16.4%.
At September 30, 2018, cash and cash equivalents were $7.22 million, compared with $4.14 million at December 31, 2017. Total assets were $25.42 million and total liabilities were $10.00 million. The company reported no long-term debt and no off-balance-sheet arrangements. Current liabilities included $4.83 million of deferred technology service revenue and $2.17 million of deferred subscription revenue.
Material changes versus prior comparable periods
- Total revenue increased 12.8% in the quarter and 5.0% for the nine-month period, primarily because of the new ProximaX technology services agreement.
- Subscription revenue declined because active subscribers fell 10.6% to 150,400 and marketing spending was reduced, particularly for dating products.
- Advertising revenue declined because of lower active users, agency-transition delays and weaker advertising demand and pricing.
- Total costs and expenses decreased 15.3% in the quarter and 12.2% for the nine-month period, reflecting lower marketing, product development and general and administrative spending.
- The company recorded a $575,831 digital-token impairment charge in the quarter and a $2.54 million charge for the nine-month period.
- Accumulated deficit increased to $4.17 million from $0.92 million at year-end 2017, and stockholders’ equity decreased to $15.42 million from $17.43 million.
- Stock-based compensation expense increased to $1.21 million for the nine-month period from $1.03 million in 2017.
Outlook, unusual items, risks and contingencies
Under the ProximaX agreement, the company received approximately $5.0 million in Ethereum in May 2018 and 216.0 million XPX tokens in June 2018. The Ethereum was converted to cash. The XPX tokens were initially valued at approximately $3.4 million but had a reported fair value of approximately $0.8 million at September 30, 2018, resulting in the impairment charge. The agreement provides for up to an additional $5.0 million upon achievement of development milestones, subject to the contract terms.
Management stated that existing cash and expected operating cash flow should be sufficient to meet financial obligations for the twelve months following the report date, although additional capital may be needed for growth initiatives. Potential funding sources include equity, debt, strategic alliances or asset dispositions.
Near-term objectives include advancing PeerStream Protocol, expanding the blockchain services team and customer pipeline, launching a private beta of Backchannel, increasing Camfrog Live monetization, pursuing additional blockchain partnerships, evaluating strategic alternatives for dating properties, Vumber and certain patents, and seeking a national exchange listing. The filing does not provide formal revenue or earnings guidance.
Key risks include declining subscribers and advertising demand; intense competition; reliance on Apple, Facebook, Google and other distribution platforms; uncertain acceptance and regulation of blockchain and cryptocurrencies; XPX price volatility and limited liquidity; cybersecurity and loss-of-private-key risks; potential impairment of goodwill and other intangible assets; execution risk for PeerStream Protocol and Backchannel; dependence on ProximaX and other partners; and the need for additional financing. Paltalk Holdings is pursuing patent litigation against Riot Games and Valve; Riot has filed inter partes review challenges, and no loss reserve was recorded.
Management concluded that disclosure controls and procedures were effective as of September 30, 2018. No material changes to internal control over financial reporting were reported.
Facts investors should verify
- Confirm the correct issuer, because the filing supplied is for PeerStream, Inc., not Intelligent Protection Management Corp.
- Assess whether declining subscription and advertising revenue can be offset by recurring or milestone-based blockchain services revenue.
- Verify the remaining ProximaX obligations, milestone conditions and collectability of the potential additional $5.0 million.
- Monitor XPX token price, liquidity, exchange access, custody controls and future impairment exposure.
- Reconcile reported operating cash flow with the one-time approximately $5.0 million ProximaX cash receipt.
- Evaluate dilution from 1,067,527 outstanding stock options and 158,571 unvested restricted shares.
- Review the status and potential financial impact of the Riot Games and Valve patent litigation and related inter partes reviews.
- Determine whether cash generation remains adequate if blockchain initiatives require increased hiring, marketing and product-development spending.