Business Context and Reporting Period
The supplied filing is Snap Interactive, Inc.’s Form 10-K for the fiscal year ended December 31, 2015, not Intelligent Protection Management Corp. The company operated two online dating applications: FirstMet, formerly Are You Interested? (AYI), and The Grade. FirstMet generated substantially all revenue; The Grade remained free and was not expected to be monetized in the near term.
Snap reported approximately 30 million users, 24 full-time employees as of March 7, 2016, and a single reportable operating segment. In March 2016, AYI was rebranded as FirstMet.
Financial Metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $12.02 million | $13.56 million | Down 11.3% |
| Subscription revenue | $11.57 million | $12.77 million | Down 9.4% |
| Advertising revenue | $0.45 million | $0.79 million | Down 42.7% |
| Operating loss | $1.40 million | $1.74 million | Improved $0.34 million |
| Net loss | $1.30 million | $1.66 million | Improved $0.36 million |
| Adjusted EBITDA | $(0.07) million | $(0.52) million | Improved $0.46 million |
| Net cash used in operating activities | $1.21 million | $0.17 million | Use increased $1.04 million |
| Cash and cash equivalents | $2.13 million | $1.14 million | Increased $0.99 million |
Subscription revenue represented 96.2% of total revenue, compared with 94.2% in 2014. Adjusted EBITDA margin was negative 0.6% in 2015 versus negative 3.8% in 2014. Operating expenses declined 12.3% to $13.42 million, including sales and marketing expense of $5.41 million, product development expense of $2.10 million, general and administrative expense of $4.20 million, and cost of revenue of $1.70 million.
Year-end active subscribers were 84,000, down from 100,700. Annual bookings were $11.12 million, down from $12.89 million. Fourth-quarter bookings were $2.42 million, compared with $3.09 million in the prior-year quarter.
Liquidity, Debt and Capitalization
- Outstanding principal debt at December 31, 2015 was $3.00 million, consisting of a 12% senior secured convertible note issued to Sigma Opportunity Fund II, LLC.
- The note matures February 13, 2017, is convertible at $0.20 per share subject to adjustments, and is secured by substantially all company assets and up to 65% of the equity of Snap Mobile Limited.
- The note requires minimum cash balances of $1.35 million, with required partial prepayments if specified cash thresholds are not maintained.
- The note generated $316,000 of contractual interest expense in 2015. Total reported interest expense was $1.54 million, including debt discount and issuance-cost amortization.
- Total liabilities were $5.22 million and stockholders’ deficit was $1.66 million at year-end.
- Financing activities provided $2.22 million, principally from the $3.00 million note issuance, partially offset by repayment of $400,000 of promissory notes and financing costs.
- The company had contractual obligations of approximately $2.31 million, including office, equipment and other lease commitments.
Material Changes Versus the Prior Period
- Revenue declined primarily because of fewer new subscription transactions, fewer active subscribers, lower international transactions, adverse foreign-currency effects, and reduced marketing investment.
- Advertising revenue declined following termination of the Match.com business development agreement in August 2014.
- Operating expenses fell by $1.88 million, driven by reduced headcount and lower marketing, product development, general and administrative, and cost-of-revenue spending.
- Sales and marketing spending decreased 5.7%, while product development spending decreased 28.1%.
- Cash flow from operations deteriorated substantially, principally because of lower payables and accrued expenses, repayment of a Zoosk-related advance, increased security deposits, and lower deferred revenue.
- The company shifted resources from The Grade to FirstMet late in 2015. FirstMet bookings increased 6.3% in December 2015 from November and 3.4% in January 2016 from December.
- The company appointed Alexander Harrington as chief executive officer and Clifford Lerner as President of The Grade in October 2015. Three independent directors were in place by March 2016.
Guidance, Outlook, Risks and Unusual Items
Management expected to direct the significant majority of resources toward FirstMet, pursue a win-back campaign for inactive AYI users, improve mobile applications, expand internationally through translation, and launch a new application based on the FirstMet platform in the third quarter of 2016. The company did not provide quantified revenue or earnings guidance.
- The independent auditor included a going-concern explanatory paragraph. Management stated that additional equity or debt financing would likely be required to sustain operations and repay the note at maturity.
- Management believed resources were sufficient for required note payments through 2016 but expected cash flow and existing capital resources to be insufficient to repay the note in February 2017 without refinancing, asset sales, or additional equity or debt financing.
- The company reported a $1.64 million gain from the change in fair value of derivative liabilities. This non-cash, mark-to-market item materially reduced the reported net loss and is not indicative of core operating performance.
- Interest expense included $932,219 of debt-discount amortization and $139,406 of debt-issuance-cost amortization. The effective interest rate on the note was reported as 52% for 2015.
- Management concluded that disclosure controls and internal control over financial reporting were not effective because the company lacked an independent audit committee.
- Key risks include dependence on Facebook, Apple and Google platforms; intense online-dating competition; reliance on a small percentage of users for revenue; customer chargebacks; privacy and cybersecurity exposure; regulatory risk; dependence on key executives; and potential dilution from the convertible note, warrants, options and restricted stock.
- At December 31, 2015, the company had 17.4 million outstanding warrants, 6.2 million outstanding stock options, and 10.3 million unvested restricted shares. The filing stated that approximately 48.9 million potentially issuable shares were excluded from diluted loss per share because they were antidilutive.
Most Important Facts to Verify
- Confirm the issuer identity: the supplied filing is for Snap Interactive, Inc., whereas the request identifies Intelligent Protection Management Corp.
- Verify the company’s ability to refinance or repay the $3.00 million secured convertible note due February 13, 2017.
- Review the going-concern uncertainty, accumulated deficit of $14.7 million, and negative operating cash flow.
- Assess whether the FirstMet rebranding and concentration of spending can reverse declining subscribers, bookings and revenue.
- Evaluate the effect of platform dependence, Apple’s 30% in-app revenue retention, and Facebook access on future monetization.
- Review dilution from the convertible note, warrants, options and unvested restricted stock.
- Review the material weakness in internal controls and whether an independent audit committee was subsequently established.