Snap Interactive, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2016. The supplied filing is for Snap Interactive, Inc., not Intelligent Protection Management Corp. The company operated the FirstMet and The Grade online dating applications.
Financial performance and liquidity
| Metric | Three months ended June 30, 2016 | Six months ended June 30, 2016 | Comparable change |
|---|---|---|---|
| Total revenue | $2.614 million | $5.291 million | Down 18.0% and 17.0%, respectively |
| Subscription revenue | $2.460 million | $4.967 million | Down 20.0% in both periods |
| Advertising revenue | $154,329 | $324,448 | Up 37.0% and 91.5%, respectively |
| Loss from operations | $303,827 | $632,584 | Prior-year losses were $238,375 and $1.221 million |
| Net loss | $841,133 | $2.342 million | Prior-year losses were $258,986 and $1.478 million |
| Adjusted EBITDA | $(131,300) | $(269,768) | Prior-year amounts were $73,405 and $(539,060) |
| Net cash used in operating activities | $(239,247) | $(520,435) | Improved from $(393,872) and $(1.447) million |
Six-month operating margins remained negative: loss from operations was 12.0% of revenue and net loss was 44.3% of revenue. Adjusted EBITDA margin was negative 5.1%.
- Cash and cash equivalents were $1.562 million at June 30, 2016, compared with $2.131 million at December 31, 2015.
- Total assets were $2.866 million and total liabilities were $6.581 million, resulting in stockholders’ deficit of $3.714 million.
- The $3.0 million Senior Note bears 12% interest, is secured by substantially all company assets, and matures February 13, 2017. The balance sheet reported $2.240 million net of discount as current debt.
- Derivative liabilities increased to $1.330 million from $473,425 at December 31, 2015; the six-month fair-value loss was $856,575.
- Accounts payable were $1.287 million and deferred subscription revenue was $1.408 million at June 30, 2016.
Material changes versus the prior comparable periods
- Revenue declined primarily because of fewer new subscription transactions, fewer active subscribers, reduced user-acquisition spending, lower new subscription prices, and unfavorable foreign exchange effects in the six-month comparison.
- Active subscribers decreased to approximately 78,700 from 98,000 at June 30, 2015 and declined 6.4% from December 31, 2015. New subscription transactions fell 31.4% year over year for the six months.
- Total costs and expenses declined 14.9% in the quarter and 22.0% for the six months, reflecting lower sales and marketing, product development, general and administrative, and hosting costs.
- Sales and marketing expense decreased 21.3% for the six months, but management stated that the lower spending contributed to the decline in active subscribers and revenue.
- Interest expense increased 27.9% for the six months because the Senior Note and related debt-discount amortization were outstanding for the full period.
- The company rebranded “Are You Interested?” as FirstMet, reengaged approximately 647,000 inactive users, rebuilt its mobile applications, translated portions of FirstMet into nine additional languages, and began developing a product targeting users over age 50.
Outlook, risks, contingencies, and unusual items
- Management expects to launch a new dating product targeting users over 50 in the fourth quarter of 2016 and to focus resources primarily on FirstMet. The Grade remained free, with no immediate monetization plan.
- The financial statements state that there is substantial doubt about the company’s ability to continue as a going concern. Management said additional debt or equity financing, strategic combinations, or other capital sources are required to sustain operations and repay the Senior Note.
- The Senior Note requires minimum cash balances of $1.350 million and, in specified circumstances, $1.500 million. Failure to maintain the required balances can trigger $125,000 monthly prepayments and could impair operations.
- On June 17, 2016, the company entered into a non-binding letter of intent to merge with A.V.M. Software, Inc. (Paltalk). Paltalk’s stockholders would receive shares representing a majority of the combined company on a fully diluted basis. Completion was subject to due diligence, definitive agreements, approvals, and other conditions.
- After quarter-end, Paltalk provided a subordinated term note of up to $250,000; $200,000 had been borrowed as of August 8, 2016. The note bears 8% interest and matures July 18, 2017.
- After quarter-end, warrants to purchase up to 15.0 million shares were exchanged for 2.0 million common shares and cancelled.
- On August 2, 2016, the company became aware of patent litigation in the Eastern District of Texas. Management disputed the allegations and did not believe the matter would materially affect results, but no outcome was assured.
- Disclosure controls and procedures were deemed ineffective because the company lacked an independent audit committee, which management identified as a material weakness in internal control over financial reporting.
- The company had no material changes to the risk factors reported in its 2015 Form 10-K and had no off-balance-sheet arrangements at June 30, 2016.
Investor verification points
- Confirm that the filing identity is Snap Interactive, Inc. and reconcile it with the requested company name.
- Assess the company’s ability to raise capital, maintain the Senior Note’s minimum cash covenant, and repay or refinance the $3.0 million note by February 13, 2017.
- Review the effect of reduced marketing spending on active subscribers, bookings, subscription revenue, and future operating cash flow.
- Verify the status and terms of the proposed Paltalk merger and the related $200,000 term-note borrowing.
- Evaluate dilution from the 2.0 million shares issued in exchange for warrants, outstanding options, unvested restricted stock, and potential Senior Note conversion.
- Monitor the patent litigation, derivative-liability remeasurement, and the remediation of the independent-audit-committee material weakness.