Business Context and Reporting Period
This summary covers Snap Interactive, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2017, filed August 8, 2017. The request metadata identifies Intelligent Protection Management Corp., but the filing’s registrant is Snap Interactive, Inc.
The company operates live video social-networking, interactive dating, telecommunications, and related internet software products, including Paltalk, Camfrog, FirstMet, Tinychat, 50more, The Grade, Vumber, and Firetalk. The October 2016 merger with A.V.M. Software, Inc. was accounted for as a reverse merger, with AVM treated as the accounting acquirer. Accordingly, historical comparisons primarily reflect pre-merger AVM results, while 2017 includes the combined company.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $6.24 million | $4.36 million | $12.96 million | $9.29 million |
| Subscription revenue | $5.74 million | $3.87 million | $11.97 million | $8.26 million |
| Advertising revenue | $0.50 million | $0.48 million | $0.99 million | $1.03 million |
| Loss from operations | $(1.46) million | $(0.77) million | $(2.54) million | $(0.73) million |
| Net loss | $(1.48) million | $(0.74) million | $(2.52) million | $(0.70) million |
| Net loss per share | $(0.22) | $(0.14) | $(0.38) | $(0.13) |
| Adjusted EBITDA | $(0.52) million | $(0.32) million | $(0.73) million | $(0.02) million |
- Revenue increased 43.3% year over year in the second quarter and 39.4% for the first six months, primarily because 2017 included pre-merger Snap products.
- Subscription revenue represented approximately 92% of second-quarter revenue and increased 48.3%; advertising revenue increased 2.8% in the quarter but declined 3.8% for the six-month period.
- Second-quarter operating margin was approximately negative 23.4%, compared with negative 17.7% in the prior-year quarter. Six-month operating margin was negative 19.6%, compared with negative 7.9%.
- Total costs and expenses increased 50.2% in the quarter and 54.6% for the six-month period. Sales and marketing and general and administrative costs rose substantially, while product development expense declined modestly.
- Cash provided by operating activities was $620,638 for the six months, compared with cash used of $105,806 in the prior-year period. Second-quarter operating cash flow was negative $322,462.
- Cash and cash equivalents were $4.61 million at June 30, 2017, compared with $4.16 million at December 31, 2016. Total assets were $25.79 million and total liabilities were $6.75 million.
- The company reported no long-term debt. Financing cash outflows of $34,289 related to capital lease payments; approximately $7,600 of monthly payments remained under five capital leases.
- Deferred subscription revenue was $2.60 million at June 30, 2017. Goodwill was $14.30 million and net intangible assets were $4.76 million.
Material Changes Versus the Prior Comparable Period
- The revenue comparison is significantly affected by the reverse merger and is not fully comparable to pre-merger AVM results.
- Pre-merger Snap products contributed approximately $1.995 million of second-quarter subscription revenue and approximately $4.106 million of six-month subscription revenue.
- Subscription revenue from pre-merger AVM products declined, partly because management shifted resources away from certain Paltalk activity toward newer live-video opportunities. The company also cited weaker international activity, particularly in the Middle East, and changes in a regional payment-processing arrangement.
- Second-quarter sales and marketing expense increased 126.4%, and general and administrative expense increased 299.2%. For the six-month period, those expenses increased 134.5% and 311.7%, respectively, largely due to the combined-company cost structure, executive compensation, stock compensation, investor relations, and higher depreciation and amortization.
- Cost of revenue declined as the company migrated from physical servers to cloud hosting and reduced related information-technology support headcount.
- Stock-based compensation expense was $694,287 for the six months, compared with $111,751 in the prior-year period. The company had $1.32 million of unrecognized stock-option compensation and $1.67 million of unrecognized restricted-stock compensation at June 30, 2017.
- The company terminated its New York office lease, vacated the premises by May 31, 2017, and forfeited a $200,659 security deposit. A related lease cancellation fee contributed to higher general and administrative expense.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected to launch a live-video streaming entertainment service initially integrated into Camfrog, roll out a new live-video chat application, expand 50more, improve monetization through micro-transactions, licensing and advertising, and continue merger-related cost reductions.
- The company founded an innovation lab and expected to shift resources toward new live-video products. Management warned that users and activity on existing video-chat applications could decline before new products and features offset those declines.
- 50more launched commercially in July 2017 following beta activity with more than 10,000 registered users, 7,500 matches, and 500,000 matching questions answered.
- Management stated that cash on hand and expected operating cash flow should be sufficient for financial obligations for the twelve months from the filing date, but acknowledged that additional capital may be required to fund growth initiatives and other activities.
- Principal risks include subscriber retention and engagement, intense competition, reliance on Apple, Facebook, Google, mobile platforms and payment processors, cybersecurity and privacy obligations, intellectual-property claims, regulatory treatment of dating services and cryptocurrency, dependence on key personnel, and the need to integrate the merger successfully.
- The company settled a patent-infringement claim by Banertek LLC confidentially in April 2017. A Paltalk subsidiary continued patent litigation against Riot Games and Valve Corporation.
- In August 2017, the company began accepting Bitcoin through a third-party vendor on Camfrog and Tinychat. The filing highlights related regulatory, tax, accounting, exchange-rate, and country-specific risks.
- Management reported that a prior material weakness related to the lack of an audit committee had been remediated after formation of a three-member independent audit committee. Disclosure controls were deemed effective as of June 30, 2017.
- The company had a $1.0 million share-repurchase authorization announced in May 2017 but reported no repurchases during the quarter. No dividends were anticipated in the foreseeable future.
Important Facts for Investors to Verify
- Verify the correct issuer: the supplied filing is for Snap Interactive, Inc., not Intelligent Protection Management Corp.
- Assess the comparability of 2017 versus 2016 results given the reverse-merger accounting and inclusion of pre-merger Snap operations.
- Monitor whether new live-video products and 50more offset declining activity in legacy applications and international markets.
- Review the company’s ability to convert revenue growth and bookings into positive Adjusted EBITDA and sustainable operating cash flow.
- Evaluate liquidity relative to continuing net losses, planned product investment, marketing expenditures, and the possibility of future equity or debt financing.
- Review dilution exposure from 857,402 outstanding stock options, 264,286 unvested restricted shares, and substantial unrecognized stock-based compensation.
- Track the outcome of ongoing patent litigation and any further legal, regulatory, privacy, cybersecurity, or cryptocurrency developments.