Business Context and Reporting Period
Snap Interactive, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2017. The provided request metadata identifies Intelligent Protection Management Corp., but the filing itself identifies Snap Interactive, Inc. as the registrant.
The company operates live video social-networking, interactive dating, and telecommunications products, including Paltalk, Camfrog, FirstMet, 50more, Tinychat, Firetalk, The Grade, and Vumber. 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, the 2017 results reflect the combined company, while the 2016 comparison primarily reflects pre-merger AVM.
The company completed a 1-for-35 reverse stock split effective January 5, 2017. It had 6,451,151 common shares outstanding as of May 4, 2017, excluding 264,286 unvested restricted shares.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $6.719 million | $4.938 million | Up 36.1% |
| Subscription revenue | $6.224 million | $4.389 million | Up 41.8% |
| Advertising revenue | $0.495 million | $0.548 million | Down 9.7% |
| Operating income (loss) | $(1.076) million | $0.041 million | Declined |
| Net income (loss) | $(1.039) million | $0.041 million | Declined |
| Adjusted EBITDA | $(0.214) million | $0.297 million | Declined |
| Adjusted EBITDA margin | (3.2%) | 6.0% | Down 9.2 percentage points |
| Operating cash flow | $0.943 million | $0.408 million | Up $0.535 million |
Revenue growth primarily reflected the inclusion of pre-merger Snap products. Subscription revenue from those products contributed approximately $2.112 million, partly offset by an approximately $0.278 million decline in pre-merger AVM subscription revenue. Advertising revenue declined following the loss of an advertising partner and elimination of a third-party toolbar arrangement.
Total costs and expenses increased 59.2% to $7.794 million. Sales and marketing expense increased 142.8% to $2.230 million, general and administrative expense increased 325.3% to $2.070 million, and product development expense increased 5.7% to $2.211 million. General and administrative costs included executive stock compensation, higher accounting and legal fees, and a lease cancellation fee.
Gross margin was approximately 80.9% in Q1 2017 versus 71.7% in Q1 2016, based on reported revenue and cost of revenue. The operating margin was approximately (16.0%), compared with 0.8% in the prior-year quarter. Net loss per basic and diluted share was $0.15, compared with net income per share of $0.01.
Cash and cash equivalents were $5.024 million at March 31, 2017, compared with $4.163 million at December 31, 2016. Total assets were $26.712 million and total liabilities were $6.598 million. The company reported no long-term debt. Current liabilities included $2.748 million of deferred subscription revenue. Stockholders’ equity was $20.114 million.
Operating cash flow was $0.943 million. Investing cash flow used $0.065 million, primarily for property and equipment and accrued interest on employee notes receivable. Financing cash flow used $0.017 million for capital lease payments. Cash increased by $0.861 million during the quarter.
Bookings increased to $6.143 million from $4.274 million. Bookings are a non-GAAP operating indicator representing subscription fees, virtual gift credits, and micro-transactions received during the period.
Material Changes Versus the Prior Comparable Period
- The comparison is not fully like-for-like because the 2017 period includes the post-merger combined company while the 2016 period primarily represents pre-merger AVM.
- Total revenue increased 36.1%, driven by acquired Snap products and higher subscription revenue, while advertising revenue decreased 9.7%.
- Despite revenue growth, the company moved from modest operating and net income to substantial operating and net losses.
- Sales and marketing and general and administrative expenses rose sharply due to the combined-company cost structure, new marketing activity, executive equity compensation, professional fees, and lease-related costs.
- Depreciation and amortization increased to $0.552 million from $0.243 million, and stock-based compensation increased to $0.310 million from $0.014 million.
- Operating cash flow improved, supported by subscription collections and working-capital changes, even though GAAP profitability deteriorated.
- The company terminated its New York office lease, agreed to vacate by May 31, 2017, and forfeited a $200,659 security deposit.
Guidance, Outlook, Risks, and Unusual Items
Management stated that cash on hand and expected operating cash flow should be sufficient to meet financial obligations for the twelve months following the filing date. Management also stated that additional capital could be required in the future to fund operations and growth initiatives, potentially through equity, debt, third-party funding, collaborations, or strategic alliances.
Near-term objectives include entering the live-streaming market, launching a new live video chat application, increasing awareness and usage of 50more, realizing merger-related cost savings, improving monetization through micro-transactions, licensing and advertising, evaluating acquisitions, and defending intellectual property.
Management expects to reduce costs through vendor, office, payment-processing, advertising-affiliate, customer-service, and product-development consolidation. No formal revenue or earnings guidance was provided.
The company reported approximately 183,300 active subscribers as of March 31, 2017. It launched 50more in limited beta, began developing a new live video chat application, launched a dating tab on Paltalk, and continued merger integration efforts.
Key risks include subscriber retention and engagement, intense competition, dependence on Apple, Facebook, Google and other third-party platforms, payment processing and chargebacks, privacy and cybersecurity, intellectual-property claims, regulation of online dating and video-chat services, reliance on key personnel, international operations, access to future capital, and successful integration of the merger.
A patent infringement claim brought by Banertek LLC was confidentially settled on April 6, 2017 and dismissed with prejudice. A separate patent infringement action brought by a company subsidiary against Riot Games and Valve remained disclosed. Management reported no reserve for litigation as of March 31, 2017.
Management concluded that disclosure controls were not effective as of March 31, 2017 because previously identified material weaknesses had not been in place long enough to be considered fully remediated. The company formed an independent audit committee on February 2, 2017 to address the weakness.
Subsequent events included executive employment and stock-option arrangements in April and May 2017. The company does not expect to pay dividends in the foreseeable future.
Important Facts for Investors to Verify
- Confirm the correct issuer: the supplied filing is for Snap Interactive, Inc., not Intelligent Protection Management Corp.
- Assess the comparability of Q1 2017 and Q1 2016 results because of the October 2016 reverse merger and accounting-acquirer treatment.
- Review whether revenue growth and bookings can offset the significant increases in sales, marketing, administrative, stock-compensation, and integration costs.
- Monitor cash generation, the company’s stated expectation of sufficient liquidity for twelve months, and the potential need for additional financing.
- Evaluate the effect of the ineffective disclosure controls and previously identified material weaknesses.
- Track subscriber growth, retention, monetization, and the performance of 50more and the planned live-video products.
- Review outstanding stock options, unvested restricted stock, subsequent executive awards, and their potential dilution and compensation expense.
- Follow intellectual-property litigation, platform dependence, privacy and cybersecurity exposure, and other risks identified in the filing.