# Intelligent Protection Management Corp.: Form 10-Q for the period ended Sep 30, 2015

- Company: [Intelligent Protection Management Corp.](/companies/ipm.md) (CIK 1355839)
- Form: 10-Q
- Filed: 2015-11-10
- Accepted by EDGAR: Nov 10, 2015, 17:12 ET
- Period: 2015-09-30
- Accession: 0001213900-15-008396
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1355839/000121390015008396/f10q0915_snapinteractive.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1355839/000121390015008396/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-07-01 to 2015-09-30 | $2.9m | us-gaap:Revenues |
| Revenue | 9 months, 2015-01-01 to 2015-09-30 | $9.3m | us-gaap:Revenues |
| Operating income | 3 months, 2015-07-01 to 2015-09-30 | $102.7k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-01-01 to 2015-09-30 | −$1.1m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2015-07-01 to 2015-09-30 | $539.4k | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-01-01 to 2015-09-30 | −$938.8k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-07-01 to 2015-09-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2015-01-01 to 2015-09-30 | −$0.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-07-01 to 2015-09-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2015-01-01 to 2015-09-30 | −$0.03 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-07-01 to 2015-09-30 | 39,686,087 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2015-01-01 to 2015-09-30 | 39,591,540 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2015-01-01 to 2015-09-30 | −$1.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2015-01-01 to 2015-09-30 | $44.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2015-09-30 | $2.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-09-30 | $2.7m | us-gaap:AssetsCurrent |
| Total assets | at 2015-09-30 | $3.7m | us-gaap:Assets |
| Current liabilities | at 2015-09-30 | $3.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2015-09-30 | $5.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2015-09-30 | −$1.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 54,217 characters.

*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, 2015, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2014 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, 2015 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, 2014, 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 subsidiary 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” in the Form 10-K.

### Overview

We operate a portfolio of two dating applications, AYI and The Grade, which are available through desktop and mobile platforms. We also intend to expand our portfolio through the development of new applications. Our dating applications and the revenues generated therefrom are supported by a large user database of approximately 30 million users. Our management believes that the scale of our user database presents a competitive advantage in the dating industry and can present growth opportunities to build future dating brands or to commercialize by presenting third party advertising.

### AYI

We provide a leading online dating application under the AYI brand that is native on Facebook, iOS and AndroidTM platforms and is also accessible on mobile devices and desktops at AYI.com. We intend to rebrand and relaunch AYI during the first quarter of 2016 with user interface improvements and a new brand identity. As a result, we have recently decreased our marketing investment in AYI to reserve cash for the relaunched service, as well as other growth initiatives.

Our AYI application is available to users and active subscribers. AYI is extremely scalable and requires limited incremental operational cost to add users, active subscribers or new features catering to additional discrete audiences. We believe that the number of active subscribers is directly correlated to our spending on advertising and marketing. For the three months ended September 30, 2015, our spending on advertising and marketing was 26.0% lower than the three months ended June 30, 2015 and 42.6% lower than the three months ended March 31, 2015, which we believe resulted in a decrease in the number of active subscribers, as seen in the chart below:

AYI was the #9 grossing application in the U.S. Lifestyle Category on Apple® App StoreSM in the United States as of November 6, 2015. As of November 6, 2015, AYI had approximately 86,100 active subscribers which constituted a 14% decrease in active subscribers since December 31, 2014. New subscription transactions for AYI for the three months ended September 30, 2015 decreased 32% as compared to the same period in 2014.

### The Grade

We also provide an online dating application under The Grade brand that is native on iOS and AndroidTM. The Grade is a new mobile application that we launched in November 2014 to pursue our strategy of providing a portfolio of dating and social applications. The Grade is a mobile dating application that holds users accountable to a high standard of behavior by using a proprietary algorithm that assigns letter grades to users ranging from “A+” to “F” based on profile quality, messaging quality and reviews from other users of the application. Users with a grade of “D” receive a warning and instructions on how to improve their grade, while users who fail to improve an “F” grade are at risk of expulsion. By providing user grades and expelling low-quality users who receive an “F” grade, The Grade aims to create a community of high-quality users who are desirable, articulate and responsive.

The Grade is presently building an audience focusing on New York as its core market for user adoption. During this introductory growth phase, the application is offered free to users and there are no immediate plans to monetize The Grade. Since its launch through September 30, 2015, The Grade has achieved cumulative user activity of more than 30.9 million swipes.

### Recent Developments

### Appointment of Chief Executive Officer and President of The Grade

Effective October 13, 2015, we appointed Alexander Harrington as the Company’s Chief Executive Officer and Clifford Lerner as the Company’s President of The Grade. Mr. Harrington previously served as the Company’s Chief Operating Officer and Chief Financial Officer since March 2014 and will retain the role of Chief Financial Officer in connection with the transition. Mr. Lerner previously served as the Company’s President and Chief Executive Officer since the Company’s founding in 2005. Each of Messrs. Harrington and Lerner will continue to serve as members of our Board of Directors. In connection with Mr. Harrington’s and Mr. Lerner’s appointments, the Company amended its employment agreements with each of Mr. Harrington and Mr. Lerner to update the description of such individual’s positions with, and responsibilities to, the Company.

### Strategic Review

In the third quarter of 2015, we initiated a strategic review process to identify ways to unlock shareholder value. As a result, we developed a new company strategy centered around the proactive commercialization of our 30 million user database via the development of a portfolio of products that are cross-sold to our users. In connection with this strategy, we have begun working towards a relaunched version of AYI, which we anticipate launching in the first quarter of 2016, and we are exploring opportunities to expand our portfolio through the development of new applications.

### Operational Highlights and Objectives

During the nine months ended September 30, 2015, we executed key components of our objectives:

- appointed an independent director to our Board of Directors;
- reactivated 1.2 million users from the AYI database via targeted email campaigns;
- reduced operating expenses by $1.2 million compared to the nine months ended September 30, 2014; and
- increased user activity on “The Grade,” our new mobile dating application, exceeding a milestone of 30 million swipes.

For the near term, our business objectives include:

- relaunching AYI under a new brand with user interface enhancements;
- building a recognizable brand for The Grade by expanding our user acquisition efforts;
- re-engineering AYI mobile apps to share a common technology base in order to reduce maintenance and improvement costs;
- continuing to reengage inactive users in AYI’s large user database; and
- appointing additional members to our management team and additional independent directors to our 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 advertisements and micro-transactions that allow users to access other premium features on our AYI application.

Currently, while The Grade is building its user community, it is offered for free to users. We have no immediate plans to introduce a means of generating revenue from The Grade.

*Subscription*. We provide AYI 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 AYI users choose to become paid subscribers to communicate freely with potential matches and to enhance the online dating experience.

The majority of our revenue is generated from AYI subscriptions originating through the Facebook platform, and a significant amount of our revenue is generated from subscriptions through mobile platforms.

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

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

*Micro-transactions*. We introduced micro-transactions to allow users to increase the visibility of their profile and messages on AYI by paying for such services. In addition, micro-transactions include activation fees for new subscriptions. While micro-transactions are not currently a significant driver of revenue, we believe that such micro-transactions 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.* Our advertising revenue derived from AYI primarily consists of revenue from display ads. We generally reported our advertising revenue net of amounts due to agencies, brokers and counterparties. We recognize advertising revenue as earned on a click-through, impression, registration or subscription basis. When a user clicks an advertisement (CPC basis), views an advertisement impression (CPM basis), registers for an external website via an advertisement clicks on or through our application (CPA basis), or clicks on an offer to subscribe to premium features on our application, the contract amount is recognized as revenue.

We also generate advertising revenue from AYI through advertising agreements with third parties. In June 2014, we entered into a Membership Acquisition Agreement (the “Acquisition Agreement”) with Zoosk, Inc. (“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 were entitled to a payout for each person that registered with Zoosk through the integration features during the term of the Acquisition Agreement. The term of the Acquisition Agreement commenced on August 15, 2014 and ended on November 13, 2014. In 2014, we earned $170,835 under the Acquisition Agreement and recorded the remaining amount of $329,165 as advance repayment under accrued expenses and other current liabilities on our Condensed Consolidated Balance Sheet. During the nine months ended September 30, 2015, we repaid the advance repayment.

### 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, 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 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 applications across the Internet and mobile devices, 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

*Change in fair value of derivative securities.* The conversion feature in our outstanding 12% Senior Secured Convertible Note (the “Note”), our outstanding warrants, and certain interest make-whole instruments are considered derivative instruments that require liability classification and marked-to-market accounting. Our derivative liability is marked-to-market at the end of each reporting period on our Condensed Consolidated Balance Sheets, with the changes in fair value reported in earnings on our Condensed Consolidated Statements of Operations. We have included the marked-to-market adjustment on derivative 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 derivative liability using a Monte-Carlo style simulation that uses the following assumptions at each valuation date: (i) closing common stock price, (ii) contractual exercise price, (iii) remaining contractual term, (iv) historical volatility of the common stock price, (v) an adjusted volatility that incorporates a 10% incremental discount rate premium (a reduction of the volatility estimate) to reflect the lack of marketability of the conversion feature in the Note and our outstanding warrants, (vi) risk-free interest rates that are commensurate with the term of the conversion feature in the Note and our outstanding warrants and (vii) management assessment of the probability of a change of control at various price points.

An increase or decrease in the fair value of the derivative liability will decrease or increase 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 derivative 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 the ‟Results of Operations” and ‟Liquidity and Capital Resources” sections below. Active subscribers, bookings and Adjusted EBITDA are discussed below.

|  | Three Months Ended September 30, 2015 | 2014 | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Active subscribers (at period end) | 89,000 | 100,700 | 89,000 | 100,700 |
| Bookings | $2,624,196 | $3,382,639 | $8,700,170 | $9,803,664 |
| Net cash provided by (used in) operating activities | $260,306 | $377,461 | $(1,186,337) | $(388,233) |
| Net income (loss) | $539,354 | $(217,549) | $(938,812) | $(1,410,324) |
| Adjusted EBITDA | $381,556 | $154,950 | $(157,505) | $(522,811) |
| Adjusted EBITDA as percentage of total revenues | 13.0% | 4.4% | (1.7)% | (5.1)% |

#### Active Subscribers

We believe that the number of active subscribers is a key operating metric to assess the potential of the recurring revenue stream of the AYI application. "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 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. Our management uses 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:

| Reconciliation of Subscription Revenue to Bookings | Three Months Ended September 30, 2015 | 2014 | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Subscription revenue | $2,791,722 | $3,240,317 | $8,996,899 | $9,529,346 |
| Change in deferred subscription revenue | (167,526) | 142,322 | (296,729) | 274,318 |
| Bookings | $2,624,196 | $3,382,639 | $8,700,170 | $9,803,664 |

#### 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 or a two-month period, respectively; 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 (loss) on change in fair value of derivative liabilities, loss on disposal of fixed assets 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 expenditures 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.

22

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

| Reconciliation of Net income (loss) to Adjusted EBITDA: | Three Months Ended September 30, 2015 | 2014 | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Net income (loss) | $539,354 | $(217,549) | $(938,812) | $(1,410,324) |
| Interest expense, net | 433,351 | 11,433 | 1,100,366 | 15,137 |
| Depreciation and amortization expense | 35,576 | 43,268 | 131,583 | 130,141 |
| Change in fair value of derivative liabilities | (870,000) | 23,425 | (1,280,000) | (46,850) |
| Loss on disposal of fixed assets | - | - | 79,628 | - |
| Stock-based compensation expense | 243,275 | 294,373 | 749,730 | 789,085 |
| Adjusted EBITDA | $381,556 | $154,950 | $(157,505) | $(522,811) |

### 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 September 30, 2015 | 2014 | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Revenues | 100.0% | 100.0% | 100.0% | 100.0% |
| Costs and expenses: |  |  |  |  |
| Programming, hosting and technology expense | 14.2% | 19.7% | 15.3% | 22.5% |
| Compensation expense | 22.6% | 23.6% | 23.4% | 24.0% |
| Professional fees | 3.9% | 4.4% | 5.7% | 6.5% |
| Advertising and marketing expense | 33.8% | 36.9% | 43.6% | 37.9% |
| General and administrative expense | 22.0% | 20.7% | 24.2% | 23.2% |
| Total costs and expenses | 96.5% | 105.3% | 112.2% | 114.1% |
| Income (loss) from operations | 3.5% | (5.2)% | (12.0)% | (14.1)% |
| Interest expense, net | (14.8)% | (0.3)% | (11.8)% | (0.1)% |
| Change in fair value of derivative liabilities | 29.7% | (0.7)% | 13.8% | 0.5% |
| Income (loss) before provision for income taxes | 18.4% | (6.2)% | (10.1)% | (13.8)% |
| Provision for income taxes | 0.0% | 0.0% | 0.0% | 0.0% |
| Net income (loss) | 18.4% | (6.2)% | (10.1)% | (13.8)% |

### Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

### Revenues

Revenues decreased to $2,926,693 for the three months ended September 30, 2015, from $3,484,500 for the three months ended September 30, 2014. The decrease is mainly driven by a decrease in subscription revenue as a result of a decreased number of new transactions and a decrease in active subscribers.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the three months ended September 30, 2015 and the three months ended September 30, 2014, the decrease between those periods, the percentage decrease between those periods, and the percentage of total revenue that each represented for those periods:

|  | Three Months Ended September 30,% 2015 | 2014 | Decrease | Decrease | % Revenue Three Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $2,791,722 | $3,240,317 | $(448,595) | (13.8)% | 95.4% | 93.0% |
| Advertising revenue | 134,971 | 244,183 | (109,212) | (44.7)% | 4.6% | 7.0% |
| Total revenues | $2,926,693 | $3,484,500 | $(557,807) | (16.0)% | 100.0% | 100.0% |

*Subscription -* Our subscription revenue for the three months ended September 30, 2015 decreased by $448,595, or 13.8%, as compared to the three months ended September 30, 2014. This decrease in subscription revenue for the three months ended September 30, 2015 was primarily due to a decrease in new transaction volume, particularly in new six-month and one-month subscriptions, as we reduced advertising and marketing expense in anticipation of a relaunch of the AYI application. A lesser contributor to the decrease in revenue was lower subscription pricing, driven by periodic promotions and adverse changes in foreign currency exchange rates. Subscription revenue as a percentage of total revenue was 95.4% for the three months ended September 30, 2015, as compared to 93.0% for the three months ended September 30, 2014.

*Advertising -* Our advertising revenue for the three months ended September 30, 2015 decreased by $109,212, or 44.7%, as compared to the three months ended September 30, 2014. The decrease in advertising revenue primarily resulted from the termination of the Business Development Agreement with Match.com in August 2014. We have recently entered into arrangements with multiple advertising partners which has led to an increase in advertising revenue through the present quarter. Advertising revenue as a percentage of total revenue was 4.6% for the three months ended September 30, 2015, as compared to 7.0% for the three months ended September 30, 2014.

### Costs and Expenses

Total costs and expenses for the three months ended September 30, 2015 reflect a decrease in costs and expenses of $843,203, or 23.0%, as compared to the three months ended September 30, 2014. The following table presents our costs and expenses for the three months ended September 30, 2015 and 2014, the increase or decrease between those periods and the percentage increase or decrease between those periods:

|  | Three Months Ended September 30,% 2015 | 2014 | Decrease | Decrease |
| --- | ---: | ---: | ---: | ---: |
| Programming, hosting and technology expense | $414,199 | $687,162 | $(272,963) | (39.7)% |
| Compensation expense | 661,069 | 820,872 | (159,803) | (19.5)% |
| Professional fees | 114,271 | 151,806 | (37,535) | (24.7)% |
| Advertising and marketing expense | 990,173 | 1,285,889 | (295,716) | (23.0)% |
| General and administrative expense | 644,276 | 721,462 | (77,186) | (10.7)% |
| Total costs and expenses | $2,823,988 | $3,667,191 | $(843,203) | (23.0)% |

*Programming, Hosting and Technology -* Our programming, hosting and technology expense for the three months ended September 30, 2015 decreased by $272,963, or 39.7%, as compared to the three months ended September 30, 2014. The decrease in this expense for the three months ended September 30, 2015 was primarily driven by reduced headcount. Programming, hosting and technology expense as a percentage of total revenues was 14.2% for the three months ended September 30, 2015, as compared to 19.7% for the three months ended September 30, 2014.

*Compensation -* Our compensation expense for the three months ended September 30, 2015, which excludes the cost of developers and programmers included in programming, hosting and technology expense decreased by $159,803, or 19.5%, as compared to the three months ended September 30, 2014. The decrease in compensation expense for the three months ended September 30, 2015 was primarily driven by reduced headcount in management and support areas and lower consulting expenses as compared to the comparable period in 2014. Compensation expense as a percentage of total revenues was 22.6% for the three months ended September 30, 2015, as compared to 23.6% for the three months ended September 30, 2014.

*Professional fees -* Our professional fees for the three months ended September 30, 2015 decreased by $37,535, or 24.7%, as compared to the three months ended September 30, 2014. The decrease in professional fees for the three months ended September 30, 2015 was primarily due to reduced accounting fees. Professional fees as a percentage of total revenues were 3.9% for the three months ended September 30, 2015, as compared to 4.4% for the three months ended September 30, 2014.

*Advertising and Marketing -* Our advertising and marketing expense for the three months ended September 30, 2015 decreased by $295,716, or 23.0%, as compared to the three months ended September 30, 2014. The decrease in advertising and marketing expense for the three months ended September 30, 2015, as compared to the prior year period, was primarily driven by a decrease in the number and magnitude of user acquisition campaigns. Advertising and marketing expense as a percentage of total revenues was 33.8% for the three months ended September 30, 2015, as compared to 36.9% for the three months ended September 30, 2014.

*General and Administrative -* Our general and administrative expense for the three months ended September 30, 2015 decreased by $77,186, or 10.7%, as compared to the three months ended September 30, 2014. The decrease in general and administrative expense for the three months ended September 30, 2015, as compared to the comparable period in the prior year, was primarily driven by lower fixed asset depreciation, decrease in third party server license expense and a decrease in external recruiter fees. General and administrative expense as a percentage of total revenues was 22.0% for the three months ended September 30, 2015, as compared to 20.7% for the three months ended September 30, 2014.

### Non-Operating Income (Expense)

The following table presents the components of non-operating income (expense) for the three months ended September 30, 2015 and the three months ended September 30, 2014, the increase or decrease between those periods and the percentage increase or decrease between those periods:

|  | Three Months Ended% September 30, 2015 | 2014 | Increase (Decrease) | Increase (Decrease) |
| --- | ---: | ---: | ---: | --- |
| Interest expense, net | $(433,351) | $(11,433) | $(421,918) | 3,690.4% |
| Gain (loss) on change in fair value of derivative liabilities | 870,000 | (23,425) | 893,425 | N/A |
| Total non-operating income (expense) | $436,649 | $(34,858) | $471,507 | N/A |

#### Interest expense, net

Interest expense, net for the three months ended September 30, 2015 was $433,351, a net increase of $421,918, or 3,690.4%, as compared to $11,433 for the three months ended September 30, 2014. The interest expense represents the amortization of debt discount and debt issuance cost relating to the issuance of the Note, along with the contractual interest incurred on the Note. Interest expense, net represented (14.8)% and (0.3)% of total revenues for the three months ended September 30, 2015 and 2014, respectively.

#### Change in fair value of derivative liabilities

Our derivative liability is marked-to-market in each reporting period, with changes in fair value reported in earnings. The marked-to-market gain of $870,000 for the three months ended September 30, 2015 and $(23,425) for the three months ended September 30, 2014 represented the changes in fair value of the derivative liability during those periods. The gain (loss) on change in fair value of derivative liabilities represented 29.7% and (0.7)% of total revenues for the three months ended September 30, 2015 and 2014, respectively.

### Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

### Revenues

Revenues decreased to $9,301,314 for the nine months ended September 30, 2015, from $10,226,862 for the nine months ended September 30, 2014. The decrease is mainly driven by a decrease in subscription revenue driven by the overall new transaction volume.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the nine months ended September 30, 2015 and the nine months ended September 30, 2014, the increase or decrease between those periods, the percentage increase or decrease between those periods, and the percentage of total revenue that each represented for those periods:

|  | Nine Months Ended September 30,% 2015 | 2014 | Decrease | Decrease | % Revenue Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $8,996,899 | $9,529,346 | $(532,447) | (5.6)% | 96.7% | 93.2% |
| Advertising revenue | 304,415 | 697,516 | (393,101) | (56.4)% | 3.3% | 6.8% |
| Total revenues | $9,301,314 | $10,226,862 | $(925,548) | (9.1)% | 100.0% | 100.0% |

*Subscription –* Our subscription revenue for the nine months ended September 30, 2015 decreased by $532,447, or 5.6%, as compared to the nine months ended September 30, 2014. The decrease in subscription revenue for the nine months ended September 30, 2015, was primarily driven by a decrease in new transaction volume, particularly in new six-month subscriptions, and a decrease in new and recurring one-month subscriptions, offset by an increase in recurring six-month subscriptions. In addition, there was a negative impact to the year-over-year revenues resulting from unfavorable foreign exchange rates in recent periods. Subscription revenue as a percentage of total revenue was 96.7% for the nine months ended September 30, 2015, as compared to 93.2% for the nine months ended September 30, 2014.

*Advertising –* Our advertising revenue for the nine months ended September 30, 2015 decreased by $393,101, or 56.4%, as compared to the nine months ended September 30, 2014. The decrease in advertising revenue resulted from revenue recognized in 2014 under our Business Development Agreement with Match.com, which was terminated in August 2014. We have recently entered into arrangements with multiple advertising partners which has led to an increase in advertising revenue through the present quarter. Advertising revenue as a percentage of total revenue was 3.3% for the nine months ended September 30, 2015, as compared to 6.8% for the nine months ended September 30, 2014.

### Costs and Expenses

Total costs and expenses for the nine months ended September 30, 2015 reflect a decrease in costs and expenses of $1,249,139, or 10.7%, as compared to the nine months ended September 30, 2014. The following table presents our costs and expenses for the nine months ended September 30, 2015 and the nine months ended September 30, 2014, the increase or decrease between those periods and the percentage increase or decrease between those periods:

|  | Nine Months Ended% September 30, 2015 | 2014 | Increase (Decrease) | Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Programming, hosting and technology expense | $1,418,633 | $2,299,768 | $(881,135) | (38.3)% |
| Compensation expense | 2,174,764 | 2,455,134 | (280,370) | (11.4)% |
| Professional fees | 525,632 | 664,837 | (139,205) | (20.9)% |
| Advertising and marketing expense | 4,054,340 | 3,875,148 | 179,192 | 4.6% |
| General and administrative expense | 2,246,391 | 2,374,012 | (127,621) | (5.4)% |
| Total costs and expenses | $10,419,760 | $11,668,899 | $(1,249,139) | (10.7)% |

*Programming, Hosting and Technology –* Our programming, hosting and technology expense for the nine months ended September 30, 2015 decreased by $881,135 or 38.3%, as compared to the nine months ended September 30, 2014. The decrease in this expense for the nine months ended September 30, 2015, was primarily driven by reduced consulting expense, the capitalization of equipment leased and reduced headcount. Programming, hosting and technology expense as a percentage of total revenues was 15.3% for the nine months ended September 30, 2015, as compared to 22.5% for the nine months ended September 30, 2014.

*Compensation –* Our compensation expense for the nine months ended September 30, 2015, which excludes the cost of developers and programmers included in programming, hosting and technology expense, decreased by $280,370, or 11.4%, as compared to the nine months ended September 30, 2014. The decrease in compensation expense for the nine months ended September 30, 2015 was primarily driven by reduced headcount in management and support areas and reduced consulting expense as compared to the comparable period in 2014. Compensation expense as a percentage of total revenues was 23.4% and 24.0% for the nine months ended September 30, 2015 and September 30, 2014, respectively.

*Professional fees –* Our professional fees for the nine months ended September 30, 2015 decreased by $139,205, or 20.9%, as compared to the nine months ended September 30, 2014. The decrease in professional fees for the nine months ended September 30, 2015, was primarily driven by a decrease in legal and accounting fees. Professional fees as a percentage of total revenues were 5.7% for the nine months ended September 30, 2015, as compared to 6.5% for the nine months ended September 30, 2014.

*Advertising and Marketing –* Our advertising and marketing expense for the nine months ended September 30, 2015 increased by $179,192, or 4.6%, as compared to the nine months ended September 30, 2014. The increase in advertising and marketing expense for the nine months ended September 30, 2015, as compared to the prior year period, was primarily driven by a slight increase in the number and magnitude of user acquisition campaigns. Advertising and marketing expense as a percentage of total revenues was 43.6% for the nine months ended September 30, 2015, as compared to 37.9% for the nine months ended September 30, 2014.

*General and Administrative –* Our general and administrative expense for the nine months ended September 30, 2015 decreased by $127,621, or 5.4%, as compared to the nine months ended September 30, 2014. The decrease in general and administrative expense for the nine months ended September 30, 2015, as compared to the comparable period in the prior year, was primarily driven by lower investor relations expenses, reduced headcount and a decrease in third party server license expense partially offset by the loss from disposal of fixed assets relating to the relocation of the corporate office. General and administrative expense as a percentage of total revenues was 24.2% for the nine months ended September 30, 2015, as compared to 23.2% for the nine months ended September 30, 2014.

### Non-Operating Income

The following table presents the components of non-operating income for the nine months ended September 30, 2015 and the nine months ended September 30, 2014, the decrease between those periods and the percentage decrease between those periods:

|  | Nine Months Ended% September 30, 2015 | 2014 | Increase (Decrease) | Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Interest expense, net | $(1,100,366) | $(15,137) | $(1,085,229) | 7,169.4% |
| Gain on change in fair value of derivative liabilities | 1,280,000 | 46,850 | 1,233,150 | 2,632.1% |
| Total non-operating income | $179,634 | $31,713 | $147,921 | 466.4% |

#### Interest expense, net

Interest expense, net for the nine months ended September 30, 2015 was $1,100,366, an increase of $1,085,229, or 7,169.4%, as compared to $15,137 for the nine months ended September 30, 2014. The interest expense represents the amortization of debt discount and debt issuance cost relating to the issuance of the Note, along with the contractual interest on the Note. Interest expense, net represented (11.8)% of total revenues for the nine months ended September 30, 2015 as compared to (0.1)% for the nine months ended September 30, 2014.

#### Change in fair value of derivative liabilities

Our derivative liability is marked-to-market at each reporting period, with changes in fair value reported in earnings. The marked-to-market gain of $1,280,000 for the nine months ended September 30, 2015 and $46,850 for the nine months ended September 30, 2014 represented the changes in fair value of the derivative liability during those periods. The gain on change in fair value of derivative liabilities represented 13.8% and 0.5% of total revenues for the nine months ended September 30, 2015 and 2014, respectively.

### Liquidity and Capital Resources

| Condensed Consolidated Statements of Cash Flows Data: | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(1,186,337) | $(388,233) |
| Net cash used in investing activities | (40,149) | (11,042) |
| Net cash provided by financing activities | 2,239,159 | 400,000 |
| Net increase in cash and cash equivalents | $1,012,673 | $725 |

We have historically financed our operations through cash generated from debt and equity offerings, cash provided from operations and promissory notes from investors.

A significant portion of our expenses are related to user acquisition costs. Our advertising and marketing expenses are primarily spent on channels where we can estimate the return on investment without long-term commitments. Accordingly, we can adjust our advertising and marketing expenditures quickly based on the expected return on investment, which provides flexibility and enables us to manage our advertising and marketing expense.

As of September 30, 2015, we had $2,151,058 in cash and cash equivalents, as compared to cash and cash equivalents of $1,138,385 as of December 31, 2014. Historically, our working capital has been generated through operations and equity offerings. If we grow and expand our operations, our need for working capital will increase. We intend to finance our business and growth with cash on hand, cash provided from operations, borrowings, debt or equity offerings, or some combination thereof.

We have also incurred debt as a means of generating liquidity. During the nine months ended September 30, 2015, we repaid in full two promissory notes in the aggregate principal amount of $400,000. As of September 30, 2015, the outstanding principal amount of our debt was $3,000,000, which consisted of the Note, which is discussed in more detail below.

Our ability to continue to meet our obligations and make payments on the Note is dependent upon establishing consistently profitable operations, which may be supplemented by raising additional funds through public or private financings. As of September 30, 2015, we believe that we will likely need to raise additional capital in the future to fund our operations and repay the Note. If we are unable to raise additional capital, we may need to restructure or refinance the Note, and we may not be able to complete such restructuring or refinancing on terms that are acceptable to us or at all.

#### Sigma II Note

On February 13, 2015, we issued the Note in the aggregate principal amount of $3,000,000 to Sigma Opportunity Fund II, LLC (“Sigma II”) in a private placement. The Note bears interest at a rate of 12% per annum and matures on the earlier of February 13, 2017 or a change in control. During any time while the Note is outstanding, the outstanding principal balance of the Note, together with all accrued and unpaid interest, is convertible into shares of our common stock at the option of Sigma II at a conversion price of $0.20 per share, subject to certain adjustments. The Note requires us to maintain an aggregate cash balance of $1,350,000 million in our bank accounts or we will be required to make partial prepayments on the Note. If we fail to maintain this aggregate cash balance in our bank accounts for a thirty day period, we are required to make a $125,000 prepayment on the Note. For each subsequent calendar month that the aggregate cash balance in our bank accounts does not equal or exceed $1,500,000 million, we must make an additional $125,000 prepayment on the Note. Our obligations under the Note are secured by a first priority lien on all of our assets and property. The Note is secured by up to 65% of the outstanding capital stock and other equity interests of Snap Mobile Limited, our wholly owned subsidiary. Snap Mobile Limited is also a guarantor of the Note. We intend to use the proceeds from the private placement for general corporate purposes, including working capital. Contractual interest expense under the Note incurred for the three and nine months ended September 30, 2015 was $90,000 and $226,000, respectively.

### Operating Activities

Net cash used in operating activities was $1,186,337 for the nine months ended September 30, 2015, as compared to net cash used in operating activities of $388,233 for the nine months ended September 30, 2014. This increase in net cash used in operating activities of $798,103 was a result of a decrease in our payables and accrued expenses mainly driven by the one-time repayment of the advance under the Acquisition Agreement with Zoosk, an increase of security deposit expenses in connection with the relocation of our corporate office and a decrease in deferred revenue. Other items impacting our cash flow were significant cash outlays relating to advertising and marketing expenses which were offset in part by collections in subscription revenue received during the period.

Significant items impacting cash flow in the nine months ended September 30, 2014 included significant cash outlays relating to advertising and marketing expense. These uses of cash were offset in part by collections in subscription revenue received during the period.

### Investing Activities

Cash used in investing activities for the nine months ended September 30, 2015 and 2014 was $40,149 and $11,042, respectively. Cash used in investing activities included purchases of property and equipment totaling $44,210 and $3,731 during the nine months ended September 30, 2015 and 2014, respectively. These purchases consisted primarily of computers and office furniture. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and software development.

### Financing Activities

Cash provided by financing activities for the nine months ended September 30, 2015 and 2014 was $2,239,159 and $400,000, respectively.

The increase relates to the issuance of the Note in the aggregate principal amount of $3,000,000 to Sigma II during the nine months ended September 30, 2015, which was partially offset by the repayment of two promissory notes in the aggregate principal amount of $400,000 and payments for our capital lease obligations.

### Off-Balance Sheet Arrangements

As of September 30, 2015, we did not have any off-balance sheet arrangements.

### Contractual Obligations and Commitments

On February 4, 2015, the Company entered into a lease for office space located at 320 West 37th Street, 13th Floor, New York, NY 10018 and paid a security deposit in the amount of $200,659. The term of the lease runs until March 4, 2022. The Company’s monthly office rent payments under the lease will be approximately $25,000 per month for the first year of the term of the lease, which will escalate on an annual basis each year thereafter.

### Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements that have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates relied upon in preparing these financial statements include the provision for future credit card chargebacks and refunds on subscription revenue, estimates used to determine the fair value of our common stock, stock options, non-cash capital stock issuances, stock-based compensation and common stock warrants, collectability of our accounts receivable and the valuation allowance on deferred tax assets. Management evaluates these estimates on an ongoing basis. Changes in estimates are recorded in the period in which they become known. We base estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates.

During the nine months ended September 30, 2015, there were no material changes to our significant accounting policies from those contained in the Form 10-K, except for the following:

### Significant Estimates and Judgments

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates relied upon in preparing these financial statements include the provision for future credit card chargebacks and refunds on subscription revenue, estimates used to determine the fair value of our common stock, stock options, non-cash capital stock issuances, stock-based compensation, derivative instruments, debt discounts, conversion features and common stock warrants, collectability of our accounts receivable and the valuation allowance on deferred tax assets. Management evaluates these estimates on an ongoing basis. Changes in estimates are recorded in the period in which they become known. We base estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates.

### Convertible Instruments

The Company evaluates and bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional as that term is described under applicable GAAP.

### Common Stock Purchase Warrants and Other Derivative Financial Instruments

We classify common stock purchase warrants and other free standing derivative financial instruments as equity if the contracts (i) require physical settlement or net-share settlement or (ii) give us a choice of net-cash settlement or settlement shares of our common stock (physical settlement or net-share settlement). We classify the following contracts as either an asset or a liability: contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control, (ii) give the counterparty a choice of net-cash settlement or settlement in shares of our common stock (physical settlement or net-share settlement) or (iii) contain reset provisions. We assess classification of our freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required. We determined that certain freestanding derivatives, including the embedded conversion feature and warrants issued in connection with the private placement completed in February of 2015 (See Note 10 in the Notes to the Condensed Consolidated Financial Statements) contained reset provisions and have been classified as derivative liabilities as more fully described in Note 5 to the Condensed Consolidated Financial Statements.

### Recently Adopted Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03 (“ASU 2015-03”), *Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs*. This standard amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU 2015-03 is effective on a retrospective basis for annual and interim reporting periods beginning after December 15, 2015, but early adoption is permitted. We have elected to early-adopt ASU 2015-03 in connection with the issuance of the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, and, as a result, recorded the $314,249 of offering costs incurred in connection with the issuance of the Note as a debt discount on the date the Note was issued that will be amortized over the term of the Note.

## Controls and procedures

As filed, 2,381 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on the evaluation as of September 30, 2015, for the reasons set forth below, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control our financial reporting as of September 30, 2015, the Company determined that the following item constituted a material weakness:

- the Company did not have an independent audit committee in place, which would provide oversight of the Company’s officers, operations and financial reporting function.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 286 characters.

There were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” in the Form 10-K, as updated by the Risk Factors disclosed in “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, filed with the SEC on August 13, 2015.

Filed Nov 10, 2015.
Source: SEC EDGAR, the filing index for accession 0001213900-15-008396. Last ingested by Listed: Oct 24, 2026, 15:09 ET. No prices; not investment advice.