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STVI > SEC Filings for STVI > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for SNAP INTERACTIVE, INC

Form 10-Q for SNAP INTERACTIVE, INC


14-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, 2013, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2012 included in our Annual Report on Form 10-K ("Form 10-K") filed with the Securities and Exchange Commission (the "SEC") on March 14, 2013 and (iii) the discussion under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K. Aside from certain information as of December 31, 2012, all amounts herein are unaudited. Unless the context otherwise indicates, references to "Snap," "we," "our," "us" and the "Company" refer to Snap Interactive, Inc. and its subsidiaries on a consolidated basis.

Forward-Looking Statements

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See "Forward-Looking Statements." Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under "Item 1A. Risk Factors" of our most recent Form 10-K.

Overview

We are an Internet company providing services in the expanding social dating market. We own and operate a social dating software application under our AYI brand (formerly known as AreYouInterested.com) that can be accessed on Facebook, mobile devices such as iPhone and Android, and a stand-alone website. Our application is fully integrated across these gateways and incorporates the Facebook Connect integration tool, which enables users to easily "connect" their Facebook profile to our website. Since August 2007, AYI has been one of the leading dating applications on Facebook based on the publicly reported number of DAUs and MAUs.

As of November 11, 2013, we had more than 2.5 million MAUs of AYI across all of our platforms. We primarily generate revenue from subscription fees and, as of November 11, 2013, we had approximately 77,000 active subscribers. The number of our DAUs and MAUs, which includes non-paying users and paying subscribers, varies greatly on a daily and monthly basis, and is greater than the number of our active subscribers for any same measurement period.

While we transitioned users to the redesigned AYI during 2012, we significantly reduced spending on user acquisition campaigns, and this in part led to a significant decrease in the number of active subscribers on AYI. In March 2012, we had approximately 145,000 active subscribers. This number decreased to 75,000 active subscribers in August 2013, and has risen to approximately 77,000 active subscribers as of November 11, 2013.

In addition, the number of new subscription transactions for September 2013 was the highest number of subscription transactions since October 2012. A new subscription transaction includes the purchase of a subscription for new subscribers as well as the purchase of a new subscription by a user that has previously cancelled a subscription.

We believe that the number of active subscribers and new subscription transactions are important operating metrics, and we plan to increase these metrics by increasing user acquisition campaigns, building a recognizable brand and increasing user engagement on AYI through the development of a superior feature set.

We believe that our extensive user base, which includes more than 25 million Facebook connected users and more than 2.5 billion pieces of structured interest data, allows us to create a favorable experience for users looking to meet people with mutual friends or similar interests.

Operational and Financial Highlights

During the nine months ended September 30, 2013, we executed key components of our objectives for 2013:

? We acquired and transitioned to the AYI.com domain name from the AreYouInterested.com domain name;

? We rebranded to "AYI", a shorter name that is easier for our users to remember; and

? We launched new "social" features for AYI that are designed to integrate a user's interest and social graphs into the online dating experience.

For the remainder of 2013, our business objectives include:

? Growing our base of paid subscribers;

? Continuing to build out our "social" features to improve the online dating experience for all of our users;

? Building a recognizable brand for AYI by expanding our advertising and marketing efforts beyond pure user acquisition;

? Increasing the amount of resources devoted to mobile initiatives and increasing user engagement on our mobile applications, particularly with regard to our Android application; and

? Increasing our rate of advertising and marketing expenditures to increase traffic for the AYI brand.


Sources of Revenue

We operate AYI so that users can utilize the application and search for matches for free. We generate revenue primarily when users purchase a subscription to obtain unlimited messaging and certain other premium features on our application. We also generate a small portion of our revenue through micro-transactions that allow users to access certain other premium features and advertisements on our application.

Subscription. We provide our users with the opportunity to purchase a subscription that provides for unlimited messaging and other premium features for the length of the subscription term. We believe that users choose to become paid subscribers to better communicate with potential matches and to enhance the online dating experience. We believe that users are more likely to purchase subscriptions when they have mutual friends or similar interests with other users.

Facebook is currently the primary platform for our application. The majority of our revenue is generated from subscriptions originating through the Facebook platform, and a significant amount of our revenue is being generated through subscriptions through mobile platforms.

Users can purchase subscriptions through various payment methods including credit card, electronic check, PayPal, Fortumo, or as an In-App purchase through Apple Inc.'s iPhone App Store. Pursuant to Apple Inc.'s terms of service, Apple Inc. retains 30% of the revenue that is generated from sales on our iPhone application through In-App purchases in the United States.

We recognize revenue from monthly premium subscription fees in the month in which the services are provided during the subscription term.

Micro-transactions. We introduced micro-transactions in August 2012 in conjunction with the launch of the redesigned AYI application to allow users to access certain premium features by paying for such features without purchasing a recurring subscription. While micro-transactions are not currently a significant driver of revenue, we believe that such micro-transactions may increase user engagement with the application and the likelihood that users will become a paid subscriber. Revenue from micro-transactions is recognized over a two-month period.

Advertising. Advertising revenue is a small portion of our revenue and primarily consists of revenue from our display ads. We generally report our advertising revenue net of amounts due to agencies, brokers and counterparties. We recognize advertising revenue as earned on a cost per impression (CPM) basis.

Costs and Expenses

Programming, hosting and technology. Our programming, hosting and technology expense includes salary and stock-based compensation for our engineers and developers, data center, domain name and other hosting expenses and software licensing fees and various other technology related expenses.

Compensation. Our compensation expense includes salary and stock-based compensation for management and employees (other than expense for engineers and developers recorded in programming, hosting and technology expenses above).

Professional fees. Our professional fees include fees paid to our independent accounting firm, legal expenses and various other professional fees and expenses incurred in our business.

Advertising and marketing. Our advertising and marketing expense consists of online advertising, primarily consisting of user acquisition campaigns. We execute these campaigns through affiliate or affiliate networks that advertise or promote our application and earn a fee whenever visitors click through their advertisement to our application or website and create a profile on our application. For our user acquisition campaigns, we pay to market and advertise our application across the Internet, including on Facebook and other third party platforms.

General and administrative. Our general and administrative expense includes investor relations, public relations, credit card processing fees, overhead and various other employee related expenses.


Non-Operating Expenses

Mark-to-market adjustment on warrant liability. Our outstanding warrants are considered derivative instruments that require liability classification and mark-to-market accounting. Our warrant liability is marked-to-market at the end of each reporting period on our Condensed Consolidated Balance Sheet, with the changes in fair value reported in earnings on our Condensed Consolidated Statements of Operations. We have included the mark-to-market adjustment on warranty liability as a non-operating expense as we do not believe that it is indicative of our core operating results.

We use a custom model that, at each measurement date, calculates the fair value of the warrant liability using a Monte-Carlo style simulation that uses the following assumptions at each valuation date: (i) closing stock price, (ii) contractual exercise price, (iii) remaining contractual term, (iv) historical volatility of the stock prices, (v) an adjusted volatility that incorporates a 10% incremental discount rate premium through a reduction of the volatility estimate to reflect the lack of marketability of the warrants and (vi) risk-free interest rates that are commensurate with the term of the warrant.

An increase or decrease in the fair value of the warrant liability will increase or decrease the amount of our earnings, respectively, separate from income or loss from operations. The primary cause of the change in the fair value of the warrant liability is the value of our common stock. If our common stock price goes up, the value of these derivatives will generally increase and if our common stock price goes down, the value of these derivatives will generally decrease.

Key Metrics

Our management relies on certain performance indicators to manage and evaluate
our business. The key performance indicators set forth below help us evaluate
growth trends, establish budgets, measure the effectiveness of our advertising
and marketing efforts and assess operational efficiencies. We discuss revenues
and net cash used in operating activities under "Results of Operations" and
"Liquidity and Capital Resources" below. Deferred revenue and bookings,
additional measures of our performance, are also discussed below.

                                                Three Months Ended               Nine Months Ended
                                                  September 30,                    September 30,
                                               2013            2012            2013              2012
Condensed Consolidated Statements of
Operations Data:
Total revenues                             $  2,989,978     $ 4,331,701     $  9,611,528     $ 15,289,791

Condensed Consolidated Balance Sheets
Data:
Deferred revenue at period end             $  1,942,766     $ 3,317,790     $  1,942,766     $  3,317,790

Condensed Consolidated Statements of
Cash Flows Data:
Net cash used in operating activities      $ (1,098,318 )   $  (555,460 )   $ (3,750,249 )   $ (2,253,418 )


Deferred Revenue

Revenues from multi-month subscriptions are recognized over the length of the subscription term rather than when the subscription is purchased. Because a significant amount of our subscription revenue comes from subscriptions with a term of three or more months, we apportion that revenue over the duration of the subscription term even though it is collected in full at the time of purchase. The difference between the gross cash receipts collected and the revenue recognized to date from those sales is reported as deferred revenue.

Bookings

Bookings is a financial measure representing the aggregate dollar value of subscription fees and micro-transactions received during the period but is not a financial measure that is calculated and presented in accordance with generally accepted accounting principles in the United States of America ("GAAP"). We calculate bookings as subscription revenue recognized during the period plus the change in deferred revenue recognized during the period. We record subscription revenue from subscription fees and micro-transactions as deferred revenue and then recognize that revenue ratably over the length of the subscription term. We use bookings internally in analyzing our financial results to assess operational performance and to assess the effectiveness of, and plan future, user acquisition campaigns. We believe that this non-GAAP financial measure is useful in evaluating our business because we believe, as compared to subscription revenue, it is a better indicator of the subscription activity in a given period. We believe that both management and investors benefit from referring to bookings in assessing our performance and when planning, forecasting and analyzing future periods.

While the factors that affect bookings and subscription revenue are generally the same, certain factors may affect subscription revenue more or less than such factors affect bookings in any period. While we believe that bookings is useful in evaluating our business, it should be considered as supplemental in nature and it is not meant to be a substitute for subscription revenue recognized in accordance with GAAP.

The following table presents a reconciliation of subscription revenue to bookings for each of the periods presented:

                                               Three Months Ended                Nine Months Ended
                                                  September 30,                    September 30,
                                              2013            2012            2013              2012
Reconciliation of Subscription Revenue
to Bookings
Subscription revenue                       $ 2,988,151     $ 4,304,763     $ 9,566,361      $ 15,001,709
Change in deferred revenue                     (88,936 )      (337,153 )      (581,463 )         179,384
Bookings                                   $ 2,899,215     $ 3,967,610     $ 8,984,898      $ 15,181,093

Limitations of Bookings

Some limitations of bookings as a financial measure include that:

? Bookings does not reflect that we recognize subscription revenue from subscription fees and micro-transactions over the length of the subscription term; and
? Other companies, including companies in our industry, may calculate bookings differently or choose not to calculate bookings at all, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider bookings along with other financial performance measures, including total revenues, subscription revenue, deferred revenue, net income (loss) and our financial results presented in accordance with GAAP.

Results of Operations

The following table sets forth Condensed Consolidated Statements of Operations
data for each of the periods indicated as a percentage of total revenues:

                                               Three Months Ended               Nine Months Ended
                                                 September 30,                    September 30,
                                                2013           2012            2013           2012
Revenues                                        100.0 %         100.0 %        100.0 %        100.0 %
Costs and expenses:
Programming, hosting and technology              41.0 %          28.6 %         41.6 %         20.6 %
Compensation                                     40.9 %          17.5 %         32.5 %         17.8 %
Professional fees                                 6.7 %           3.6 %          7.0 %          3.2 %
Advertising and marketing                        37.6 %          34.9 %         33.4 %         59.2 %
General and administrative                       25.9 %          21.6 %         30.9 %         19.6 %
Total costs and expenses                        152.1 %         106.1 %        145.4 %        120.4 %
Loss from operations                            (52.1 )%         (6.1 )%       (45.4 )%       (20.4 )%
Interest income, net                              0.0 %           0.1 %          0.0 %          0.2 %
Mark-to-market adjustment on warrant
liability                                        (5.5 )%         13.0 %         10.5 %         (4.0 )%
Other expense                                     0.1 %           0.0 %          0.0 %         (0.1 )%
Net income (loss) before income tax             (57.5 )%          7.0 %        (34.8 )%       (24.4 )%
Provision for income taxes                        0.0 %           0.0 %          0.0 %          0.0 %
Net income (loss)                               (57.5 )%          7.0 %        (34.8 )%       (24.4 )%


Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012

Revenues

Revenues decreased to $2,989,978 for the three months ended September 30, 2013, from $4,331,701 for the three months ended September 30, 2012. The decrease is primarily related to lower revenues from subscription sales on the AYI brand in the three months ended September 30, 2013 as compared to the three months ended September 30, 2012. We believe the decrease in revenues from subscription sales for the three months ended September 30, 2013 primarily resulted from our reduced advertising and marketing expense for the period as compared to the three months ended September 30, 2012. We intentionally reduced our user acquisition campaigns from the second half of 2012 through January 2013, which primarily affected new subscriptions, while we focused on rebuilding, testing and optimizing the redesigned AYI application. We began to increase user acquisition campaigns in January 2013 and intend to increase our user acquisition campaigns during the remainder of 2013 and into 2014. The following table sets forth our subscription revenue, advertising revenue and total revenues for the three months ended September 30, 2013 and the three months ended September 30, 2012, the decrease between those periods, the percentage decrease between those periods, and the percentage of total revenue that each represented for those periods:

                                                                                                      % Revenue
                              Three Months Ended                                                 Three Months Ended
                                 September 30,                                                      September 30,
                             2013            2012           Decrease         % Decrease          2013           2012
Subscription revenue      $ 2,988,151     $ 4,304,763     $ (1,316,612 )           (30.6 )%         99.9 %         99.4 %
Advertising revenue             1,827          26,938          (25,111 )           (93.2 )%          0.1 %          0.6 %
Total revenues            $ 2,989,978     $ 4,331,701     $ (1,341,723 )           (31.0 )%        100.0 %        100.0 %

Subscription - The results for the three months ended September 30, 2013 reflect a decrease in subscription revenue of $1,316,612, or 30.6%, as compared to the three months ended September 30, 2012. The decrease in subscription revenue for the three months ended September 30, 2013, was primarily driven by a decrease in our marketing and advertising expense versus the prior year period, which primarily affects new subscriptions. Subscription revenue as a percentage of total revenue was 99.9% for the three months ended September 30, 2013, as compared to 99.4% for the three months ended September 30, 2012.

Advertising - The results for the three months ended September 30, 2013 reflect a decrease in advertising revenue of $25,111, or 93.2%, as compared to the three months ended September 30, 2012. We believe the decrease in advertising revenue resulted from our discontinuation of online advertising campaigns in February 2013 in order to focus on improving a user's experience on AYI, which we believe will be more valuable in the long-term. Advertising revenue as a percentage of total revenue was 0.1% for the three months ended September 30, 2013, as compared to 0.6% for the three months ended September 30, 2012.


Costs and Expenses

Total costs and expenses for the three months ended September 30, 2013 reflect a
decrease in costs and expenses of $48,068, or 1.0%, as compared to the three
months ended September 30, 2012. The following table presents our costs and
expenses for the three months ended September 30, 2013 and the three months
ended September 30, 2012, the increase or decrease between those periods, and
the percentage increase or decrease between those periods:

                                               Three Months Ended                                %
                                                  September 30,             Increase         Increase
                                              2013            2012         (Decrease)       (Decrease)
Programming, hosting and technology        $ 1,225,129     $ 1,236,732     $   (11,603 )         (0.9 )%
Compensation                                 1,223,555         756,549         467,006           61.7 %
Professional fees                              200,619         156,354          44,265           28.3 %
Advertising and marketing                    1,125,181       1,511,292        (366,111 )        (25.5 )%
General and administrative                     774,632         936,257        (161,625 )        (17.3 )%
Total costs and expenses                   $ 4,549,116     $ 4,597,184     $   (48,068 )         (1.0 )%

Programming, Hosting and Technology - The results for the three months ended September 30, 2013 reflect a decrease in programming, hosting and technology expense of $11,603 or 0.9%, as compared to the three months ended September 30, 2012. The decrease in this expense for the three months ended September 30, 2013, was primarily driven by lower stock-based compensation, consulting expense and hosting expense. Programming, hosting and technology expense as a percentage of total revenues was 41.0% for the three months ended September 30, 2013, as compared to 28.6% for the three months ended September 30, 2012.

Compensation - The results for the three months ended September 30, 2013 reflect an increase in compensation expense, which excludes the cost of developers and programmers included in programming, hosting and technology expense above, of $467,006, or 61.7%, as compared to the three months ended September 30, 2012. The increase in compensation expense for the three months ended September 30, 2013 was primarily driven by increased stock-based compensation expense and consulting expense, which was offset by a reduced headcount in management and support areas as compared to the comparable period in 2012. Compensation expense as a percentage of total revenues was 40.9% for the three months ended September 30, 2013, as compared to 17.5% for the three months ended September 30, 2012.

Professional fees - The results for the three months ended September 30, 2013 reflect an increase in professional fees of $44,265, or 28.3%, as compared to the three months ended September 30, 2012. The increase in professional fees for the three months ended September 30, 2013, was primarily driven by an increase in legal fees. Professional fees as a percentage of total revenues were 6.7% for the three months ended September 30, 2013, as compared to 3.6% for the three months ended September 30, 2012.

Advertising and Marketing - The results for the three months ended September 30, 2013 reflect a decrease in advertising and marketing expense of $366,111, or 25.5%, as compared to the three months ended September 30, 2012. The decrease in advertising and marketing expense for the three months ended September 30, 2013, as compared to the prior year period, was primarily driven by reducing the number of user acquisition campaigns. We also significantly reduced our rate of advertising and marketing expense as we continued to optimize the redesigned AYI application. We anticipate that advertising and marketing expense will increase during the remainder of 2013 (as compared to our advertising and marketing expense for the three months ended September 30, 2013) as we promote the redesigned AYI application. Advertising and marketing expense as a percentage of total revenues was 37.6% for the three months ended September 30, 2013, as compared to 34.9% for the three months ended September 30, 2012.

General and Administrative - The results for the three months ended September 30, 2013 reflect a decrease in general and administrative expense of $161,625, or 17.3%, as compared to the three months ended September 30, 2012. The decrease in general and administrative expense for the three months ended September 30, 2013, as compared to the comparable period in the prior year, was primarily driven by lower recruiting and public relations expenses. General and administrative expense as a percentage of total revenues was 25.9% for the three months ended September 30, 2013, as compared to 21.6% for the three months ended September 30, 2012.


Non-Operating Income

The following table presents the components of non-operating income for the
three months ended September 30, 2013 and the three months ended September 30,
2012, the increase or decrease between those periods and the percentage increase
or decrease between those periods:

                                             Three Months Ended                                %
                                                September 30,            Increase          Increase
                                             2013           2012        (Decrease)        (Decrease)
Interest income, net                     $      1,405    $     5,589   $     (4,184 )         (74.9 )%
Mark-to-market adjustment on warrant
liability                                    (163,975 )      562,200       (726,175 )        (129.2 )%
. . .
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