Business Context and Reporting Period
The source is a Form 10-K for PeerStream, Inc. (formerly Snap Interactive, Inc.), not Intelligent Protection Management Corp. It covers the fiscal year ended December 31, 2017, with comparative 2016 results. PeerStream operates live video-chat, dating, telecommunications and related social applications, including Paltalk, Camfrog, FirstMet and Vumber.
The company completed the AVM merger in October 2016, accounted for as a reverse merger with AVM as the accounting acquirer. Accordingly, 2017 results are not fully comparable with 2016 because 2017 includes a full year of FirstMet and the combined operations, while 2016 includes AVM only through October 7 and the combined company thereafter.
Financial Performance and Liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $24.84 million | $20.99 million | 18.4% increase |
| Subscription revenue | $22.90 million | $18.65 million | 22.8% increase |
| Advertising revenue | $1.94 million | $2.34 million | 17.0% decrease |
| Total costs and expenses | $30.50 million | $22.73 million | 34.2% increase |
| Operating loss | $5.66 million | $1.74 million | Loss increased |
| Net loss | $5.89 million | $1.45 million | Loss increased |
| Adjusted EBITDA | $(1.93) million | $0.01 million | Declined |
| Net cash used in operating activities | $(0.73) million | $(0.41) million | Use increased |
| Cash and cash equivalents | $4.14 million | $4.16 million | Essentially flat |
| Long-term debt | None | None | Debt-free at year-end |
Revenue increased, but profitability deteriorated. Total costs and expenses were 122.8% of revenue versus 108.3% in 2016, producing an operating margin of approximately negative 22.8% versus negative 8.3%. Net loss margin was approximately negative 23.7% versus negative 6.9%.
Sales and marketing expense increased 53.9% to $7.85 million, product development expense increased 3.7% to $8.92 million, and general and administrative expense increased 121.0% to $8.87 million. Cost of revenue decreased 3.1% to $4.86 million, partly due to migration from physical servers to cloud hosting.
Cash used in investing activities was $0.22 million, while financing activities provided $0.92 million, primarily from a $1.0 million private placement of 200,000 shares at $5.00 per share. Management stated that cash on hand and expected operating cash flow should cover financial obligations for the twelve months from the filing date, although additional capital may be needed for growth initiatives.
Bookings increased to $22.62 million from $18.17 million. Bookings are a non-GAAP operating measure representing subscription fees and micro-transactions received during the period and should not be treated as GAAP revenue.
Material Changes Versus the Prior Comparable Period
- Subscription revenue benefited from a full year of FirstMet following the AVM merger, adding approximately $5.45 million, partly offset by an approximately $1.0 million decline in Paltalk subscription revenue.
- Advertising revenue declined because of disruption during a change to an exclusive advertising operations partner and broader digital advertising fraud-control challenges.
- Adjusted EBITDA declined from approximately breakeven to a $1.93 million loss, while net loss increased substantially.
- General and administrative expense rose due to higher depreciation and amortization, officer compensation, stock-based compensation, professional fees, a $225,000 lease cancellation fee and approximately $452,000 of LiveXLive-related legal and consulting costs.
- The proposed LiveXLive merger was terminated on October 31, 2017. No termination fee was payable, but the company incurred approximately $452,000 of related one-time expenses.
- The company completed a 1-for-35 reverse stock split on January 5, 2017 and changed its name and OTCQB trading symbol to PeerStream and PEER, respectively, effective March 12, 2018.
Guidance, Outlook, Risks and Unusual Items
Management’s strategy emphasizes blockchain-based multimedia streaming and communications. The company is developing the PeerStream Protocol and Backchannel, a secure video messaging application targeted for launch in the fourth quarter of 2018. It also launched PeerStream Business Solutions in March 2018.
Under a March 2018 agreement, ProximaX may pay up to $10.0 million in cash and issue tokens for development services, subject to a future initial coin offering raising at least $30.0 million and the achievement of specified conditions and milestones. If the conditions are not met, compensation is subject to good-faith renegotiation; the potential payments therefore are not assured revenue.
The company began accepting bitcoin on two applications in 2017, with the payment processor converting bitcoin to U.S. dollars. It also made a small investment in the Gladius initial coin offering. Management highlighted significant regulatory, valuation, technology, accounting and liquidity risks associated with cryptocurrencies and blockchain initiatives.
- Primary operating risks include subscriber attrition, weak engagement, intense competition, user-acquisition costs and dependence on Apple, Google, Facebook and other third-party platforms.
- Privacy, data-security, cybersecurity, content-moderation and international regulatory risks are significant. GDPR became effective in May 2018 and could impose substantial penalties for noncompliance.
- The company relies heavily on subscription revenue, which is recognized over subscription terms; changes in bookings may therefore precede changes in reported revenue.
- The company had approximately $19.1 million of federal net operating loss carryforwards, subject to potential Section 382 limitations, and maintained a substantial valuation allowance against deferred tax assets.
- Pending litigation includes patent infringement proceedings against Riot Games and Valve. The filing states that no reserve was deemed necessary at December 31, 2017; the patent office had not ruled on inter partes review petitions filed by Riot.
- Future non-cancelable operating lease payments totaled approximately $629,408 as of December 31, 2017.
Most Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for PeerStream, Inc., while the request names Intelligent Protection Management Corp.
- Review the full audited financial statements and notes for the effects of the AVM reverse merger and the limited comparability of 2016 and 2017 results.
- Assess whether revenue growth and bookings can continue while sales, product development and administrative costs remain above revenue.
- Verify cash burn, working-capital requirements and the company’s ability to fund blockchain development without additional equity or debt financing.
- Evaluate the probability, timing and accounting treatment of the ProximaX cash and token compensation.
- Monitor the launch and monetization of Backchannel, PeerStream Protocol, PeerStream Business Solutions and Camfrog Live.
- Review the status and potential economic value or cost of the Riot Games and Valve patent litigation.
- Consider dilution from outstanding options, restricted stock and any future capital raises; 980,588 options were outstanding at December 31, 2017.