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Peeks: A Summary Of My Expectations, Opportunities And Risks

|Includes: Peeks Social Ltd (PKSLF)

Having written two rather long articles on Keek (KEEKF) (KEK.V) - Keek Reborn: Peaking Into The Revenue Potential Of Peeks and The Countdown To November Should Be Fun For Peak And Peeks Shareholders I thought it would be appropriate to summarize the investment thesis along with what I view to be the risks and opportunities in the most concise way possible.

For those who haven't done so already, feel free to join the Peeks (Keek) investment group I have created on Facebook at the following link:

https://www.facebook.com/groups/190918448004346/

The group has recently surpassed 50 members and chatter has gotten very active in the past couple of days. Having gone back-and-forth with a few other investors in the group, it's actually helped shape some of my opinions I'll be discussing below. So I think it's worthwhile for all investors to join. Even if you don't wish to participate, you can still get caught up reading the good discussion.

I expect to update this blog as new risks and opportunities arise, but at this juncture I have determined six factors that investors should consider as they invest in KEK:

1. The Keek base of 75 million users

Opportunity: At any day now, we can reasonably expect user numbers on Peeks to explode as Keek users will be prompted to update to the app. The company smartly made sure that the streaming and monetization structures were fully functional before the move, so it was possible to offer Keek users an incentive to make a few bucks for doing what they already do on Keek. A reasonably conservative conversion assumption of 1-2% should result in around one million users nearly overnight. But it wouldn't be unreasonable to think that Peeks can attract 10 million users in the coming weeks just by tapping this resource.

Risk: If the app is going to grow from thousands to possibly millions of users in a short time frame, we have to be wary that the risk of downtime is high. I believe that Mark Itwaru was quite cautious during the demo phase, which is part of the reason why we are talking about the Keek conversion and mass release now and not six months ago. But I think it is naive to assume no risk of downtime during this period of very heavy growth. If the app somehow remains fully functional at all times during November, I will be very impressed. I'd consider the team at Peeks to be very talented developers and contingency planners if this ends up being the case. But I view downtime as a normal risk of operating in this business and shareholders should expect at some point in time for it to happen. Expecting this as a normal operating risk should limit any downside pressure on the stock. Investors trading with rose-coloured glasses on and who dump at the first sign of trouble are going to be the ones who cause too much volatility in the stock price. I'd rather discourage those type of people from joining us on the Keek journey.

2. Recruiting celebrities and social influencers to Peeks

Opportunity: Alongside tapping the Keek resource, Itwaru is using his Rolodex to garner celebrities and social influencers who can attract their fans to the app. So even if the Keek users don't pan out, we can expect strong growth in the user base. So far, I think the focus on B or C-list celebrities like Mario Lopez and Todd Shapiro is smart. People like this won't cost an arm and a leg to hire for events and will still bring in a substantial following. Social influencers like Sarah Stage and Emily Sears might not even cost a dime as they are in it for the exposure (note: this is just my assumption, I don't know if this is actually the case).

Risk: Having learned my lesson on Mobio, which blew its entire bankroll on signing bonuses for celebrities and having watched Gene Simmons jump the sinking ship Intertainment Media, I am wary of a focus on A-list stars who might provide a short-term pump in the stock price, but not necessarily the staying power for the app to thrive. Peeks' news release from yesterday disclosed a strategic relationship with DECOSTA marketing, which manages the online presence of Will Smith and Kevin James. A man like Will Smith obviously doesn't need the extra $2,000 for streaming for a few hours using Peeks revenue share structure that is available to the regular user. So if a lot of relationships like this start popping up, my concern would be how much cash are they burning on signing bonuses to entice these A-list stars to use or promote the app?

Opportunity: With the above risk being said, I believe there is an opportunity when the offer box for buying and selling goods becomes available. This would enable Peeks to have mutually profitable relationships with A-list celebrities who choose to use Peeks to help sell products.

Because stories like Mobio and Intertainment Media are still fresh wounds for so many shareholders interested in this space, I think name-dropping top celebrities will have minimal impact. Any small cap company can pay a celebrity $250,000 or whatever to promote their product for a few weeks or months. I'd be much more impressed if Peeks can get celebrities of all levels of fame using the app for its intended purpose and business model. Not through buying them off.

3. The financial state of Keek

The financials ended August should be out at any time, possibly hours after this article is released. I plan to expand this section after that release and we know exactly where the company's finances stand. As any startup, most of the financial considerations will obviously be "risks", but there is one substantial opportunity.

Opportunity: The monetization of the app from day one should bear fruit in strong, immediate revenue growth. Since at the end of August the app was in demo version for only a few weeks, I don't expect there to be a lot of revenue in this report coming up. The following quarterly release should be more interesting. But revenue growth is by far the best way that Peeks can prove to the market that this business is working. I expect no more than a 5-digit number in the revenue column for this quarterly result. If KEK can somehow beat that while in demo mode, I would be extremely impressed.

Risk: Cash burn rate and the need for cash going forward. This should be pretty self-explanatory, however, getting the latest snapshot of the state of the balance sheet will really help in determining how high the need for financing is.

Risk/risk mitigation factor: KEK currently has 44.6 million shares outstanding, but it also has 18.2 million warrants and options at strike prices that will certainly get exercised, especially as it continues to move up. At this point I think it is reasonable to value KEK assuming a fully diluted total of 62.8 million shares. This is a short-term risk to the stock price as warrant holders may choose to sell shares and exercise their warrants. But it is also going to result in the company getting more than $5 million in the till, a huge boost to the balance sheet that should substantially reduce the need to dilute in the near future.

Risk mitigation factor: With Mark Itwaru being the CEO and his personal holding company Riavera being a backer of KEK, should the company need cash in the future and be unable to get it at reasonable terms, I believe that Riavera will continue to back the company to keep it afloat whenever needed. Itwaru has already demonstrated a willingness to support his public entity by adjusting the revenue share between Personas and Keek upwards from 10% to 30%. I think it's safe to assume he will continue to do everything in his power to make sure KEK thrives for everyone.

Keek is obviously far from being Berkshire Hathaway in terms of financial strength. But relative to so many other Venture peers I think it is in much stronger shape.

Opportunity: Keek has $76 million in accumulated deficit. It'll be a long, long time before the company has to pay any taxes. There's an incentive out there to structure a corporate transaction like an RTO in order to take advantage of those substantial tax loss carryforwards as soon as possible.

4. Sex sells

Opportunity: Pretty much every adult entertainment outlet on the internet is privately held. Why? Because it's an absolute cash cow and the owners have no reason to go public and share profits with other investors. The livestreaming and tipping method of Peeks makes it the perfect platform for webcam-based adult entertainment. KEK is a rare opportunity to invest in a company that will be able to profit from this industry while simultaneously growing in other sectors of the livestreaming space and ecommerce as well.

Risk: As with all social media video-sharing sites, Peeks is susceptible to child porn or other activities with varying degrees of legality across the world. The good thing is that the nature of Peeks substantially reduces that risk. In order to get paid on Peeks, a user must provide accurate banking and personal information, including age. That eliminates the possibility of underage teens doing naughty things on Peeks for money. It doesn't eliminate them doing it for free, or close all the possible loopholes scammers may wish to exploit, but at least it makes it less attractive for them to use Peeks as opposed to another platform. I think Peeks has taken reasonable measures on its platform so that users are protected from content they aren't meant to see and can easily report troublesome/illegal content when they encounter it.

5. Being listed on the TSX Venture

This is all pretty much a risk, though that risk is concentrated in market perception rather than operating roadblocks so it shouldn't be to hard for Peeks to overcome being listed on this exchange. Not only do people see past failures of other social media companies like Mobio or Intertainment Media as roadblocks to investing in KEK or reasons to trash the stock, Keek itself has enough demons in its closet that Mark Itwaru has to overcome to get the investment community fully on board.

The conversion to Peeks and eventual dropping of the name Keek on the stock listing will go a long way to re-branding the company's image. A successful monetization strategy, one that is well underway, well take it one step further. If Peeks does not get bought out, I expect a move to the NASDAQ or TSX big board to be in the cards in coming years, leaving behind the TSX Venture and its band of cynical traders and manipulative investment houses looking to squeeze companies for financing at the lowest price possible. For now, the Venture is mitigated somewhat by the fact that Keek has a U.S. OTC symbol that I expect to get a lot more liquid as the story gains traction in the States.

6. Peeks makes an excellent target for Snapchat as it seeks to do an IPO

I left this section to the last intentionally because it deals with positive scenarios that are many, many multiples of KEK's current stock price. Investors should read the first five sections and carefully consider the current situation Peeks is in. If an investor has determined that they can tolerate the risks that comes with investing in KEK while understanding the opportunities, then they can start dreaming like me of a buyout scenario.

Opportunity: Snapchat is seeking to raise as much as $4 billion in an IPO to be valued between $25 billion to $35 billion some time next year. Having payment technology and a non-intrusive monetization strategy in addition to its 150 million user base would be a big boost to its value proposition during the IPO process. A $30 billion IPO implies an expensive $200 per user and 100x revenue multiple (Snapchat's 2016 revenues are estimated to be between $250 million to $350 million).

Snapchat paying, say, $500 million for Peeks' payment technology could net them billions more in IPO valuation upon successful integration so it would be worth it for the company to take a look. Peeks has the ability to tap into Keek's 75 million user base and apply the tipping mechanism towards those users. If Peeks is very successful and manages to garner more than 10 million monetized users, a price tag well in excess of $1 billion, or over 50 times the current stock price, would be in order. That would still be around a 50% discount to Snapchat's $200 per user proposed IPO price tag.

Risk: While I think that Peeks could make a great buyout target of Snapchat prior to its IPO, not all shareholders agree with me. One barrier that an investor pointed out is that the very nature of Snapchat's one-time viewing and done sharing service makes it more difficult to generate sustained tips. I'm not sure if that's necessarily the case, at least in the sense of tip enforcement. A content provider, knowing that the content they share will disappear right after the follower views it, might be more brave in sending extra "juicy" content. However, the differences in the Peeks and Snapchat business models and any other barriers to integration are certainly valid concerns when considering a potential deal between the two companies.

Opportunity: Snapchat has been trying to monetize in creative ways like promotional filters. Peeks' offer box, once live, would provide Snapchat another revenue generating tool.

Taking into consideration the risks versus the opportunities, I think KEK makes an excellent speculative investment. The company has already had some early success with its monetization concept. If it can leverage that into strong user base growth over the next couple of months while dropping the Keek legacy, I expect outstanding returns on the stock price with a distinct possibility that the market pushes it to aggressive valuations as more investors begin to see its potential as a buyout target.

Update #1 Financials released after market on 10/31:

Rather than change the above piece, I have decided to provide future updates as an addendum. KEK released its quarterly financials ended August 2016 and MD&A, which can be seen at this link on SEDAR. I couldn't possibly go through all the details so I am going to summarize what I find to be the most important points and suggest investors read through both documents to capture all details, agree with my numbers posted and decide if they agree with my interpretation of Keek's plans as stated in the MD&A. I will start with a chart containing summary line items of the income statement for the quarter and balance sheet. The column "Going Forward" is my estimate of each quarter going forward and immediate liquidity situation based on KEK's disclosure.

The financials came in as I expected. Revenues were a 5-digit figure with a net loss of around $800,000. The balance sheet would be cause for concern at first glance. Current assets of about $400,000 versus liabilities of about $3.5 million lead to a working capital deficiency of $3.2 million. On the plus side, those liabilities come in the form of trade payables. There is no debt, convertible debt or preferred shares lying on the balance sheet.

Costs of about $800,000 were down significantly from previous quarters thanks to the restructuring (employee count has dropped from 50 to 7) and moves made by the new management team to reduce costs (for instance, moving Keek data to the cloud). I find these costs to be quite reasonable for the quarter considering what the Peeks team has developed in this app. Going forward, the team expects $150,000 to $175,000 in costs per month and this represents the minimal activities needed to meet business development plans. I used that to estimate $500,000 in quarterly expenses going forward.

Revenue was substantially all legacy ad revenue of the old Keek platform. Nothing indicates to me that the 3-4 weeks of demo mode of Peeks generated anything more than maybe a few hundred dollars. Going forward this will change. How much so? The company hasn't disclosed any revenue forecast so I won't speculate either, but the stock price hasn't recently tripled because investors think revenue will be paltry. This is going to be a wild card because depending on how quickly Peeks can ramp up to $500,000 a quarter in revenue will determine if the company will need to undertake another financing in 2017.

Looking at the subsequent events section, Peeks has since extinguished $12,000 in debt through the issue of 40,000 shares and settled $599,524 in debt with a promise to pay $63,000 of it***. These two activities reduce payables to $3 million. With the stock price being in $0.60's, I think it is reasonable to expect warrant exercise. If all warrants and options with strike prices at 25 or 30 cents are exercised, the company adds $4.3 million in cash to the till. That would lead to a working capital surplus of $1.7 million. If revenue was to be zero, that would support about three quarters of cash burn.

Reading the MD&A, the company seems open to financing at the right price. That's because it can't force warrant holders to exercise. The 30 cent strike warrants expire in March 2017 so they are pretty much guaranteed to go quickly. But the 25 cent strike warrants expire in the summer of 2018, so those warrant holders have a little less urgency to exercise. Mitigating this risk is the fact that Mark Itwaru either personally or through his holding company owns 4.8 million warrants and options which I consider to be fully under his discretion to exercise whenever the corporation needs it. His exercising warrants and options brings $1.4 million into the till (a subset of the $4.3 million). Personas and Keek have also been loaning small amounts of cash back and forth to each other, which suggests to me that Itwaru will continue to do this to ensure the balance sheet remains in good standing with outside creditors.

So there is a risk of Keek needing a financing, with the two factors being the ramp up in revenue and the speed of warrant exercise determining if and when KEK will need to finance again.

***This rant is a little off-topic, but this is one of the reasons why I'm very wary of companies that book large revenues as promises to get paid (accounts receivable) rather than getting the cash. Imagine you were the vendor to KEK, and you just settled what the company owed you by getting $63,000 instead of $599,524. You just lost out on nearly 90% of the revenue you booked for this transaction! You end up taking a big loss. Or, on the flip side, collected the correct amount of revenue that the services you provided were really worth and your shareholders finally get a glimpse into your aggressive revenue recording techniques. For those of you who got burned on Virtutone Networks Inc (VFX.V), I'm sure this rings a bell for you. Try to avoid buying companies that have accounts receivable balances that are growing faster than revenue growth.

This is another reason to like Peeks. This business model is cash-based. A viewer pays tips to a content provider through their credit card. Peeks takes its share and sends the rest off to the content provider. All cash transactions. The only risk you have is chargebacks from the credit card company from unhappy viewers for whatever reason. Having worked in the finance department of a consumer-facing industry before, I know that the risk of chargebacks can be reasonably estimated. So I don't find this to be a big risk.

Non-financial business developments: results exceeding management expectations

There were two non-financial pieces of information from the MD&A that I find important. First, under the product section, the company has confirmed that it will be ready to integrate Keek users "on or about November 1, 2016". Second, in the Peeks integration section, the company disclosed that its beta roll out included testers, influencers and users from Personas and Keek. The roll out allowed Personas and Keek to analyze the product, measure performance, estimate potential conversion and usage rates, and receive a large amount of product reviews from both broadcasters and viewers. As per the MD&A, "The results exceeded management expectations."

That line sounds particularly encouraging given the risks and opportunities I have outlined. This means that the company is confident that the app can handle the expected increase in traffic and must have fairly aggressive internal projections for revenue since Keek beta testers responded to the Peeks app more favorably than expected.

One thing that I felt was missing from the MD&A was a definitive timeline for a name change. Per the lawsuit settlement with Kik, Keek will have to phase out that name. It's already doing so on the app which begins tomorrow, so I expect the corporation to follow suit very shortly. A name change should be helpful in two aspects. First, it helps rid the company of the bad Keek legacy which saw substantial losses for shareholders from 2014. Second, it makes it more investable as there is less confusion between the name of the app and the name of the corporation. Too many people still think this is a play on the Keek app. It is a play on that 75 million user base inherited from Keek, but the app aspect of it is all about Peeks now.

Disclosure: I am/we are long KEEKF.

Additional disclosure: I hold positions in securities as disclosed in this article. I have not received any compensation for this article and all opinions reflected herein are my own. The information provided herein is strictly for informational purposes only and should not be construed as a recommendation to buy or sell, or as a solicitation of an offer to buy or sell any securities. There is no guarantee that any estimate, forecast or forward looking statement presented herein will materialize and actual results may vary. Investors are encouraged to do their own research and due diligence before making any investment decision with respect to any securities discussed herein, including, but not limited to, the suitability of any transaction to their risk tolerance and investment objectives.