INTELLIGENT PROTECTION MANAGEMENT CORP. quarterly report, Q2 FY2020

Paltalk, Inc. 10-Q Summary — Quarter Ended June 30, 2020

Filing identity: The supplied filing identifies the registrant as Paltalk, Inc., formerly PeerStream, Inc., rather than Intelligent Protection Management Corp. The unaudited reporting periods are the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.

Business Context and Reporting Period

Paltalk operates multimedia social and communications applications, principally Paltalk and Camfrog, with additional products including Tinychat and Vumber. Revenue is generated primarily from subscriptions, virtual gifts, advertising, and technology services. Effective May 15, 2020, the Company changed its name from PeerStream, Inc. to Paltalk, Inc. and its OTCQB trading symbol from PEER to PALT.

The Company sold its dating-services business in January 2019 and presents it as discontinued operations. It also agreed to sell its secure communications assets; the sale closed on July 23, 2020, after the quarter-end.

Financial Metrics

Metric	Three Months Ended June 30, 2020	Three Months Ended June 30, 2019	Six Months Ended June 30, 2020	Six Months Ended June 30, 2019
Total revenue	$3.38 million	$4.87 million	$6.10 million	$9.75 million
Income from continuing operations	$0.53 million	$0.42 million	$0.17 million	$0.32 million
Net income	$0.53 million	$0.44 million	$0.09 million	$1.09 million
Basic and diluted EPS	$0.08	$0.06	$0.01	$0.16
Cash flow from operating activities	$0.41 million	$(0.59) million	$0.42 million	$(3.37) million
Adjusted EBITDA	$0.59 million	$1.02 million	$0.47 million	$1.52 million
Adjusted EBITDA margin	17.6%	20.9%	7.7%	15.6%

Quarterly gross margin, calculated from reported revenue less cost of revenue, was approximately 79.7% in 2020 versus 81.7% in 2019. Six-month gross margin was approximately 78.6% versus 81.1%. Continuing-operations operating margin was approximately 15.7% for the quarter and 2.7% for the six-month period.

Revenue mix: Quarterly subscription revenue increased 5.3% to $3.21 million, while advertising revenue declined 47.8% to $57,856 and technology service revenue declined 93.5% to $112,000. Six-month subscription revenue decreased 3.2% to $5.86 million, advertising revenue decreased 50.9% to $113,523, and technology service revenue decreased 96.3% to $126,952.
Operating expenses: Six-month total costs and expenses decreased 37.1% to $5.93 million, primarily due to reduced headcount, lower marketing spending, lower legal costs, and the discontinued ProximaX-related activities.
Liquidity: Cash and cash equivalents were $4.38 million at June 30, 2020, compared with $3.43 million at December 31, 2019. Management stated that cash on hand and expected operating cash flow should be sufficient for financial obligations for the twelve months following the filing.
Debt: The Company recorded $506,500 of unsecured term debt under the SBA Paycheck Protection Program. The loan bears interest at 1.0%, matures May 3, 2022, and principal and interest payments were scheduled to begin in December 2020. Forgiveness was subject to SBA and lender approval.
Balance sheet: Total assets were $12.16 million and stockholders’ equity was $8.42 million at June 30, 2020. Deferred subscription revenue was $1.97 million.
Operating metrics: Active subscribers were 108,200, up 2.0% from June 30, 2019 and 4.2% from December 31, 2019. Quarterly subscription bookings were $3.42 million and six-month bookings were $6.00 million.

Material Changes Versus the Prior Comparable Period

Revenue declined primarily because the ProximaX technology-services agreement was terminated in 2019. The 2019 comparison included substantial ProximaX revenue, including a $1.6 million termination-related recognition.
Quarterly subscription revenue grew despite lower virtual-gift activity during the six-month period, supported by higher active subscribers in the second quarter.
Advertising revenue declined because of lower impressions, reduced marketing activity, and weaker digital advertising demand and pricing.
Expense reductions more than offset the revenue decline in the second quarter, producing net income of $531,541 compared with $443,384 in the prior-year quarter. Six-month net income fell sharply because the prior-year period included $721,890 of income from discontinued operations.
The Company terminated a New York office lease and related sublease effective June 30, 2020, forfeiting a $133,968 security deposit and recognizing a $141,001 net gain on lease termination.
The Company received and recognized value for Props tokens under a YouNow integration agreement. It recorded $112,000 of second-quarter technology service revenue and had $112,000 of digital tokens receivable at June 30, 2020.
The Company repurchased 9,950 shares for approximately $8,844 under a repurchase plan that expired April 29, 2020.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

The Company did not provide formal quantitative revenue or earnings guidance. Management’s near-term priorities include enhancing live video applications, integrating Props token rewards, improving user acquisition and monetization, pursuing strategic partnerships and potential acquisitions, and defending intellectual property.

Management reported that core applications supported increased demand during the COVID-19 pandemic, but warned that the pandemic could reduce consumer spending, disrupt software development, affect staffing and third-party providers, and adversely affect results.
Key business risks include competition, dependence on Apple, Facebook, Alphabet and other distribution platforms, reliance on payment processors, cybersecurity and privacy exposure, regulation of cryptocurrencies and digital tokens, token-price volatility and limited token liquidity, and dependence on internally derived user metrics.
The Company’s digital-token assets are accounted for as indefinite-lived intangible assets and are subject to impairment risk. During the six months, it sold digital tokens for $31,356 and recognized a loss of approximately $23,800.
The Company’s U.S. deferred tax assets remain fully reserved. Reported income tax expense was $2,500 for the quarter and $5,000 for the six-month period.
A subsidiary’s patent litigation against Riot Games and Valve continued. On June 16, 2020, the PTAB affirmed its ruling deeming the asserted patents invalid; the Company was evaluating whether to appeal. No legal reserve was recorded.
Management concluded that disclosure controls were not effective because of a material weakness involving controls over changes in technology supporting financial reporting. The Company implemented remediation related to information-technology change management and planned further testing.
The July 23, 2020 sale of the secure communications assets generated $250,000, consisting of $150,000 at closing and $100,000 payable over fifteen months, plus potential royalties of 5% to 10% of specified buyer revenues capped at $500,000.

Important Facts for Investors to Verify

Confirm that the filing and financial statements relate to Paltalk, Inc. and reconcile this with the requested company name.
Assess the sustainability of subscription growth and active-subscriber gains after the temporary COVID-19 demand effects.
Separate recurring subscription economics from declining advertising revenue and largely nonrecurring or reduced technology-service revenue.
Monitor SBA loan forgiveness, repayment obligations, and the Company’s post-quarter cash position.
Evaluate the carrying value, liquidity, and impairment exposure of digital tokens and the accounting assumptions used for Props tokens.
Review remediation of the material weakness in information-technology change-management controls.
Track the financial effects of the secure communications asset sale, including installment proceeds and contingent royalty payments.
Consider the impact of discontinued operations and unusual items, including the prior-year dating-business gain and the 2020 office-lease termination gain, when comparing profitability.