Snap Interactive, Inc. Form 10-Q Summary
Business Context and Reporting Period
The filing is Snap Interactive, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company operates the “Are You Interested?” online dating application across Facebook, iOS, Android, web and mobile platforms. The source filing identifies Snap Interactive, Inc. as the registrant, not Intelligent Protection Management Corp.
As of July 31, 2014, the company reported approximately 99,500 active subscribers, a 28% increase from December 31, 2013. As of August 11, 2014, it reported approximately 100,000 active subscribers and 39,182,826 common shares outstanding.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2014 | Six Months Ended June 30, 2013 |
|---|---|---|---|---|
| Total revenue | $3.45 million | $3.15 million | $6.74 million | $6.62 million |
| Subscription revenue | $3.15 million | $3.15 million | $6.29 million | $6.58 million |
| Advertising revenue | $299,008 | $1,670 | $452,341 | $43,339 |
| Loss from operations | $(254,100) | $(1.54) million | $(1.26) million | $(2.80) million |
| Net loss | $(259,678) | $(1.47) million | $(1.19) million | $(1.63) million |
| Net loss per share | $(0.01) | $(0.04) | $(0.03) | $(0.04) |
| Adjusted EBITDA | $61,746 | $(1.13) million | $(677,760) | $(2.27) million |
| Adjusted EBITDA margin | 1.8% | (35.9)% | (10.1)% | (34.3)% |
| Bookings | $3.02 million | $3.11 million | $6.42 million | $6.09 million |
Six-month total revenue increased 1.8%, while subscription revenue declined 4.4% and advertising revenue increased 943.7%. Six-month total costs and expenses declined 15.1% to $8.00 million. Advertising and marketing expense increased 23.9% to $2.58 million, while programming, hosting and technology expense declined 40.3% to $1.61 million.
Six-month net cash used in operating activities was $765,694, compared with $2.65 million in the prior-year period. Investing activities used $5,913, and financing activities provided $400,000 from promissory notes. Cash and cash equivalents were $555,745 at June 30, 2014, compared with $927,352 at December 31, 2013. Restricted cash was $385,422, and the credit card holdback receivable was $686,016.
Balance Sheet, Debt and Liquidity
Total assets were $2.75 million at June 30, 2014, compared with $2.94 million at December 31, 2013. Total liabilities were $4.31 million, resulting in stockholders’ equity deficit of $1.56 million. Current liabilities were $4.24 million, including $1.96 million of deferred subscription revenue, $446,667 of deferred advertising revenue, $949,854 of accounts payable and $400,000 of promissory notes.
The company issued a $300,000 note to its chief executive officer, due January 24, 2015 and bearing 9% interest, and a $100,000 note to Thomas Carrella, due February 20, 2015 and bearing 15% interest. The Carrella note included a warrant to purchase 25,000 shares at $0.32 per share. Management stated that it did not expect profitability during 2014, but expected to be cash-flow positive during the remainder of 2014 without additional capital. The filing also states that additional debt or equity financing may be needed to support growth.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 9.5%, primarily from advertising revenue under the Match.com business development agreement; subscription revenue was essentially flat.
- Six-month revenue increased modestly despite a 4.4% decline in subscription revenue, because advertising revenue increased substantially.
- Operating and net losses narrowed materially because of lower technology, compensation and general and administrative costs.
- Quarterly Adjusted EBITDA improved to positive $61,746, although six-month Adjusted EBITDA remained negative $677,760.
- Active subscribers increased to 98,000 at June 30, 2014, from 79,200 at June 30, 2013.
- The company reduced its reliance on Facebook for user acquisition, with the percentage of new users acquired through non-Facebook advertising sources increasing from 49% in December 2013 to 72% in June 2014.
- The warrant liability declined from $140,550 at December 31, 2013 to $70,275 at June 30, 2014, producing a $70,275 non-cash gain in the six-month period.
Guidance, Outlook, Risks and Unusual Items
Management’s objectives for the remainder of 2014 included reducing subscriber attrition, increasing additional purchases, reducing operating expenses, expanding iOS and Android prominence and appointing independent directors. Management expected advertising and marketing expense to increase as it promoted the AYI application and anticipated continued advertising revenue contributions.
In June 2014, the company entered into a Zoosk membership acquisition agreement. It received an upfront payment of $500,000 in two installments, with a potential additional payout of up to $1.0 million per qualifying registration. The agreement ran from August 15, 2014 through November 13, 2014.
Material risks include continued operating losses and negative equity, reliance on additional financing, debt maturities in early 2015, dependence on Facebook, Apple and Google platforms, reliance on a relatively small portion of users for substantially all revenue, intense online dating competition, user acquisition costs, credit card processors, data security and privacy requirements, technology interruptions, intellectual property claims and regulatory requirements.
Management concluded that disclosure controls and procedures were not effective as of June 30, 2014. Reported material weaknesses included the absence of an independent audit committee and ineffective controls over the financial statement close process. No material legal proceedings were reported, and management disclosed no material changes to previously reported risk factors.
Subsequent to quarter-end, on July 28, 2014, Hewlett Packard released $100,000 held in a certificate of deposit related to leased equipment.
Important Facts for Investors to Verify
- Confirm the correct issuer and filing reference, because the provided metadata names Intelligent Protection Management Corp., while the filing is for Snap Interactive, Inc.
- Assess whether the company can achieve positive operating cash flow while increasing advertising and marketing spending.
- Review the ability to repay the $400,000 of promissory notes due in January and February 2015.
- Evaluate the sustainability of subscriber growth and the decline in subscription revenue despite higher active subscribers.
- Review the terms, recognized revenue and potential payouts under the Match.com and Zoosk agreements.
- Monitor the material weaknesses in internal controls and the company’s progress toward establishing an independent audit committee and improving its financial close process.
- Consider dilution from approximately 4.1 million outstanding stock options, 2.37 million warrants and substantial unrecognized stock-based compensation.
- Reconcile cash, restricted cash, credit card holdbacks and deferred revenue when evaluating liquidity.