Business Context and Reporting Period
This unaudited Form 10-Q covers Snap Interactive, Inc. and its wholly owned subsidiary for the three months ended March 31, 2016. The company operated the FirstMet dating application, rebranded from “Are You Interested?” in March 2016, and The Grade mobile dating application. The filing identifies the registrant as Snap Interactive, Inc., which differs from the requested company name, Intelligent Protection Management Corp.
Financial Performance and Liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $2.677 million | $3.186 million | Down 16.0% |
| Subscription revenue | $2.507 million | $3.129 million | Down 19.9% |
| Advertising revenue | $170,119 | $56,773 | Up 199.6% |
| Loss from operations | $(328,755) | $(982,775) | Improved |
| Net loss | $(1.501) million | $(1.219) million | Loss increased |
| Adjusted EBITDA | $(138,466) | $(612,465) | Improved |
| Net cash used in operating activities | $(281,188) | $(1.053) million | Improved |
- Gross margin, calculated from reported revenue and cost of revenue, was approximately 83.7%, compared with 85.9% in Q1 2015. Operating margin was negative 12.3%, compared with negative 30.8%.
- Sales and marketing expense declined 27.5% to $1.292 million; product development expense declined 29.3% to $445,548; and general and administrative expense declined 36.3% to $832,652.
- Interest expense increased 80.1% to $425,674. A $746,575 loss from the change in fair value of derivative liabilities further reduced earnings.
- Cash and cash equivalents were $1.825 million at March 31, 2016, down from $2.131 million at December 31, 2015. Total current assets were $2.285 million versus current liabilities of $4.834 million.
- Total liabilities were $6.215 million and stockholders’ deficit was $3.010 million at quarter-end. The company had $3.0 million of outstanding convertible debt principal, net debt carrying value of approximately $1.937 million, and derivative liabilities of $1.220 million.
- Bookings declined to $2.501 million from $3.158 million. FirstMet active subscribers were approximately 81,600 at March 31, 2016, down 2.9% from December 31, 2015 and below the approximately 102,700 reported for the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of fewer active subscribers, fewer new international transactions, reduced user-acquisition spending, and unfavorable foreign exchange effects.
- New FirstMet subscription transactions decreased 33.4% year over year. Management attributed lower subscriber levels partly to the 33.3% reduction in FirstMet advertising expense.
- Advertising revenue increased substantially because of new advertising partnerships and additional ad placements, but remained only 6.4% of total revenue.
- Operating loss improved because expense reductions exceeded the revenue decline. However, net loss worsened because of higher interest expense and the derivative-liability fair-value loss.
- Operating cash use improved substantially from Q1 2015, while Q1 2015 financing cash flow had benefited from the $3.0 million private placement; Q1 2016 had no comparable financing proceeds.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected to launch a new dating product using its existing platform and user database in the third quarter of 2016, continue mobile development, reactivate inactive users, pursue international growth through translations, and seek financing or strategic alternatives to refinance or retire the outstanding debt.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management said additional capital is required, but no financing commitment had been secured.
- The 12% senior secured convertible note matures on February 13, 2017. It is secured by substantially all company assets and requires minimum cash balances of $1.35 million, increasing to $1.50 million for purposes of subsequent monthly prepayments. Failure to maintain required balances may trigger $125,000 prepayments; failure to repay or comply could permit acceleration and foreclosure.
- FirstMet depends heavily on Apple, Facebook, and Google platforms, payment processors, third-party email providers, and advertising channels. Changes in platform access, fees, policies, or payment restrictions could materially affect revenue.
- Derivative liabilities are Level 3 instruments valued using significant unobservable assumptions. The related mark-to-market loss is volatile and is not considered by management indicative of core operating performance.
- Management concluded that disclosure controls and procedures were ineffective because the company lacked an independent audit committee, identified as a material weakness in internal control over financial reporting.
- The company had a New York office lease through March 2022, with current monthly rent of approximately $26,000 subject to annual escalations. No material legal proceedings or off-balance-sheet arrangements were reported.
- A 5.0 million-share restricted stock award to the chairman was canceled and replaced with a new 5.0 million-share award vesting fully on the tenth anniversary of the grant date, subject to continued service.
Important Facts for Investors to Verify
- Confirm the registrant identity because the filing is for Snap Interactive, Inc., not Intelligent Protection Management Corp.
- Assess the going-concern disclosure, available cash, cash-balance covenant, and ability to refinance or repay the $3.0 million convertible note due February 2017.
- Reconcile the decline in active subscribers, bookings, and subscription transactions with management’s planned FirstMet rebranding and future product launch.
- Separate recurring operating performance from the $746,575 derivative-liability fair-value loss and increasing interest expense.
- Review the material weakness involving the absence of an independent audit committee and any subsequent remediation.
- Evaluate potential dilution from the convertible note, warrants, stock options, and unvested restricted stock; the filing excluded approximately 49.1 million potentially issuable shares from diluted loss per share because they were antidilutive.