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STVI > SEC Filings for STVI > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for SNAP INTERACTIVE, INC

Form 10-Q for SNAP INTERACTIVE, INC


11-Aug-2014

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 six months ended June 30, 2014, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2013 included in our Annual Report on Form 10-K (the "Form 10-K") filed with the Securities and Exchange Commission (the "SEC") on March 5, 2014 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, 2013, 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 the Form 10-K, as updated by "Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 5, 2014 (the "Form 10-Q").

Overview

We provide a leading online dating application under the "Are You Interested?" ("AYI") brand that is native on Facebook, iOS and Android platforms, and is also accessible on the web, mobile devices and AYI.com. The vast majority of subscribers to our application are between the ages of 30 and 60, with an average age of 46 years old. We target our application to users in this age demographic because of their rapidly growing use of online dating and greater disposable income. We were the #1 grossing application in the Lifestyle Category on the iPhone in the United States as of August 11, 2014. As of August 11, 2014, we had approximately 100,000 active subscribers across all of our platforms.

We believe the success of our online dating application is the direct result of the superior user experience it provides. While many online dating applications and websites provide similar functionality, most competitive services require meaningful effort and initiative on the part of the user to make contact with other users. AYI is designed to eliminate effort and friction in user-to-user interaction by automating certain aspects of the introductory dialog between users. As a consequence, we believe AYI users find our experience more social and enjoyable than many competitive interactive dating services.

Our data-driven business practices are another differentiator of Snap in the competitive field. The user engagement of our application and the propensity of users to subscribe is continually enhanced through constant experimentation. Our sophisticated A/B testing framework can support millions of different versions of the application in parallel in order to test new features and functionality, design changes, and changes to our algorithms. We have also developed business processes and human capital dedicated to business intelligence to analyze and interpret A/B test data, with the result that every change we make to our application produces a verifiable benefit, and the user experience and economics of the application continually improve. We believe this capability to be a competitive advantage.

Our application is also available to confirmed users (those who have created a user name and password) and active subscribers (those confirmed users who have prepaid a subscription fee for current unrestricted communication on AYI and whose subscription period has not yet expired). As of July 31, 2014, we had approximately 99,500 active subscribers, which constituted a 28% increase in active subscribers since December 31, 2013. In addition, new subscription transactions increased approximately 34% from January 1, 2014 through July 31, 2014 as compared to the same period in 2013. Our online dating application is extremely scalable and requires limited incremental cost to add additional users or to create new tools catering to additional discrete audiences. We have experienced recent growth in the number of our active subscribers, as seen by the table below:

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We generate revenues from subscriptions as well as advertising agreements with third parties. While we transitioned users to the redesigned AYI application during 2012, we significantly reduced advertising and marketing expenses for user acquisition campaigns which in part led to a significant decreased in the number of active subscribers and our revenues. For the years ended December 31, 2012 and 2013, our revenues were $19.2 million and $12.6 million, respectively. We had net losses of $4.0 million and $4.0 million for the years ended December 31, 2012 and 2013, respectively, and $1.6 million and $1.2 million in the six months ended June 30, 2013 and 2014, respectively. As of August 11, 2014, we had 33 employees, all of which were located in our New York City headquarters.

Our Application

AYI attracts a demographically and geographically diverse user base, with users in approximately 200 different countries. Our application is intuitive, and allows users and subscribers to easily find, connect and communicate with each other. Key features and tools of our online dating application include:


Profile Creation

Users can join AYI by creating a personal profile that is connected to their email address or that is connected to a Facebook profile. An AYI user with a Facebook profile can nearly effortlessly import information from such profile, including the user's photos, friends and interest data, their AYI profiles are updated in real time as they add interests on Facebook. Once a profile has been created, AYI users are able to search for potential matches, including other singles with mutual friends or similar interests. Using this information, AYI has designed features around mutual friends and interests that improve the online dating experience and, compared to traditional online dating websites, more closely mirrors the way singles traditionally meet offline. We continually update AYI's feature set with new features to increase user engagement, make users more social and to increase the number of users that are converted to active subscribers.

Browse Function

AYI's game-like "browse" function presents profiles of other users that match user criteria and prompts them to indicate if they are "interested" by either clicking on a "yes" or "skip" button above the profile picture or by sending a message when viewing that user's profile. Users are notified when another user has clicked "yes" on their profile or if they have received a message from another user. In instances where users select "yes" on each other's profile, the application automatically introduces the two users, who are likely to have mutual interest. In addition, AYI's "friends of friends" function allows users view other users that have mutual friends. Users are also able to search for profiles of other users with similar interests.

Subscription Benefits

AYI operates on a "freemium" model, whereby certain application features are free to all users and other features are only available to paid subscribers. All users are allowed to create a profile, browse, search and view other user's profiles, send instant messages and send an initial message to any user. Unlimited messaging and other premium features require a paid subscription.

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Accessibility

Our easy-to-use mobile interface allows our users to engage with our online dating application from virtually anywhere at any time. The availability of our online dating application across mobile devices, tablets and personal computers enables our users to move seamlessly between devices, increasing the opportunities for user engagement and real-time interactions.

Operational Highlights and Objectives

During the six months ended June 30, 2014, we executed key components of our objectives for 2014:

? increased our messaging activity, user engagement and user conversion rates;

? increased the number of new subscriptions primarily due to advertising and marketing efficiency;

? reduced total costs and expenses, including programming, hosting and technology expense by approximately 40%, general and administrative expense by approximately 27% and compensation expense by approximately 14% for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013;

? diversified our user acquisition sources, increasing the percentage of new users acquired through advertisements placed on sources other than Facebook media from 49% in December 2013 to 72% in June 2014; and

? increased advertising revenues due to the renewal of the advertising agreement with Match.com L.L.C. ("Match.com") and secured future advertising revenues by entering into a new advertising agreement with Zoosk, Inc. ("Zoosk").

For the remainder of 2014, our business objectives include:

? increasing revenue generated from subscribers by reducing subscriber attrition and presenting additional purchases opportunities;

? continuing to seek reductions in general and administrative expense, programming, hosting and technology expense, and in other expense areas in order to generate positive cash flow from operations;

? increasing the prominence of our mobile applications on iOS and Android platforms; and

? appointing independent directors to the Company's Board of Directors.


Sources of Revenue

AYI operates on a "freemium" model, whereby certain application features are free to all users and other features are only available to paid subscribers. We generate revenue primarily when users purchase a subscription to obtain unlimited messaging and certain other premium features. We also generate a small portion of our revenue through micro-transactions that allow users to access 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 communicate freely 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.

The majority of our revenue is generated from subscriptions originating through the Facebook platform, and a significant amount of our revenue is being generated from 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. We generate advertising revenue from advertising agreements with third parties. We recognize advertising revenue from these agreements ratably over the term of the agreement.

In December 2013, we entered into a Business Development Agreement (the "Business Development Agreement") with Match.com, which was amended in April 2014, whereby the Company received upfront payments in exchange for developing various integrations of Match.com's dating properties into the core AYI.com experience. The initial upfront payments were recognized on the Company's Consolidated Balance Sheet as deferred advertising revenue. The deferred advertising revenue is recognized on the Company's Consolidated Statement of Operations ratably over the 90-day term of each agreement.

In June 2014, we entered into a Membership Acquisition Agreement (the "Acquisition Agreement") with Zoosk, whereby we received an upfront payment of $500,000 in two installments in exchange for implementing certain integration features on our AYI.com website and application that advertise Zoosk during the term of the Acquisition Agreement. We are entitled to a payout (amount up to a maximum of $1,000,000) for each person that registers with Zoosk through the integration features during the term of the Acquisition Agreement. The term of the Acquisition Agreement commences on August 15, 2014 and ends ninety days thereafter, on November 13, 2014.

Prior to these agreements, our advertising revenue was historically a small portion of our revenue and primarily consisted of revenue from display ads. We generally reported our advertising revenue net of amounts due to agencies, brokers and counterparties. We recognized advertising revenue as earned on a click-through, impression, registration or subscription basis. When a user clicked an advertisement (CPC basis), viewed an advertisement impression (CPM basis), registered for an external website via an advertisement clicked on through our application (CPA basis), or clicked on an offer to subscribe to premium features on our application, the contract amount was recognized as revenue.

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 included 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 direct media buys, affiliates 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

Gain (loss) on change in fair value of warrants. 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 price, (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 also discuss net
cash used in operating activities under "Results of Operations" and "Liquidity
and Capital Resources" sections. Active subscribers, bookings and Adjusted
EBITDA are discussed below.

                                                 Three Months Ended                   Six Months Ended
                                                      June 30,                            June 30,
                                               2014              2013              2014              2013
Active subscribers (at period end)               98,000            79,200            98,000            79,200
Bookings                                   $  3,021,860      $  3,114,169      $  6,422,018      $  6,085,683
Net cash used in operating activities      $   (301,174 )    $ (1,480,086 )    $   (765,694 )    $ (2,651,931 )
Net loss                                   $   (259,678 )    $ (1,472,413 )    $ (1,192,775 )    $ (1,627,483 )
Adjusted EBITDA                            $     61,746      $ (1,130,476 )    $   (677,760 )    $ (2,271,207 )
Adjusted EBITDA as percentage of total
revenues                                            1.8 %           (35.9 )%          (10.1 )%          (34.3 )%

Active Subscribers

We believe that the number of active subscribers is a key operating metric to evaluate the effectiveness of our operating strategies and monitor the financial performance of our business. "Active subscribers" means current users that have prepaid a subscription fee for current access to the AYI application and whose subscription period has not yet expired. We plan to increase this metric by increasing user acquisition campaigns, building a recognizable brand and increasing user engagement on AYI through the development of a superior feature set.


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 subscription revenue recognized during the period. We record subscription revenue from subscription fees and micro-transactions as deferred subscription 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               Six Months Ended
                                                    June 30,                        June 30,
                                              2014            2013            2014            2013
Reconciliation of Subscription Revenue
to Bookings
Subscription revenue                       $ 3,151,002     $ 3,150,319     $ 6,290,022     $ 6,578,210
Change in deferred subscription revenue       (129,142 )       (36,150 )       131,996        (492,527 )
Bookings                                   $ 3,021,860     $ 3,114,169     $ 6,422,018     $ 6,085,683

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 subscription revenue, net loss and our financial results presented in accordance with GAAP.

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net loss adjusted to exclude interest income (expense), net, depreciation and amortization expense, gain on change in fair value of warrants and stock-based compensation expense.

We present Adjusted EBITDA because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to develop short- and long-term operational plans, and to allocate resources to expand our business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of the cash operating income generated by our business. We believe that Adjusted EBITDA is useful to investors and others to understand and evaluate our operating results and it allows for a more meaningful comparison between our performance and that of competitors.


Limitations of Adjusted EBITDA

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

? Adjusted EBITDA does not reflect cash capital expenditure requirements for assets underlying depreciation and amortization expense that may need to be replaced or for new capital expenditures;

? Adjusted EBITDA does not reflect our working capital requirements;

? Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation;

? Adjusted EBITDA does not reflect interest expense or interest payments on our outstanding indebtedness;

? Adjusted EBITDA does not reflect the change in fair value of warrants; and

? Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following unaudited table presents a reconciliation from net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated:

                                               Three Months Ended                Six Months Ended
                                                    June 30,                         June 30,
                                              2014            2013             2014             2013
Reconciliation of Net loss to Adjusted
EBITDA:
Net loss                                   $ (259,678 )   $ (1,472,413 )   $ (1,192,775 )   $ (1,627,483 )
Interest expense (income), net                  5,578           (1,440 )          3,705           (3,106 )
Depreciation and amortization expense          43,610           43,530           86,873           85,563
Gain on change in fair value of warrants            -          (70,275 )        (70,275 )     (1,171,250 )
Stock-based compensation expense              272,236          370,122          494,712          445,069
Adjusted EBITDA                            $   61,746     $ (1,130,476 )   $   (677,760 )   $ (2,271,207 )

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               Six Months Ended
                                                      June 30,                        June 30,
                                                  2014           2013            2014           2013
Revenues                                           100.0 %        100.0 %        100.0 %        100.0 %
Costs and expenses:
Programming, hosting and technology expense         19.4 %         42.5 %         23.9 %         40.8 %
Compensation expense                                25.1 %         34.2 %         24.2 %         28.7 %
Professional fees                                    7.6 %          6.6 %          7.6 %          7.2 %
Advertising and marketing expense                   32.2 %         30.2 %         38.3 %         31.5 %
. . .
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