# Intelligent Protection Management Corp.: Form 10-Q for the period ended Mar 31, 2016

- Company: [Intelligent Protection Management Corp.](/companies/ipm.md) (CIK 1355839)
- Form: 10-Q
- Filed: 2016-05-09
- Accepted by EDGAR: May 9, 2016, 16:57 ET
- Period: 2016-03-31
- Accession: 0001213900-16-013084
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1355839/000121390016013084/f10q0316_snapinteractive.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1355839/000121390016013084/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $2.7m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-01-01 to 2016-03-31 | $435.7k | us-gaap:CostOfRevenue |
| Research and development | 3 months, 2016-01-01 to 2016-03-31 | $445.5k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | −$328.8k | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | −$1.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-01-01 to 2016-03-31 | −$0.04 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | −$281.2k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $8.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2016-03-31 | $1.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $2.3m | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $3.2m | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $4.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $6.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2016-03-31 | −$3.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 40,635 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 months ended March 31, 2016, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2015 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2016 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, 2015, 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

The Company operates a portfolio of two dating applications, FirstMet, which is available through desktop and mobile platforms, and The Grade, which is available through iOS and AndroidTM platforms. We also intend to expand our portfolio through the development of new applications, including a new application based on our existing product platform that we expect will launch in the third quarter of 2016. In March 2016, we completed a rebranding of our dating application “Are You Interested?” (“AYI”) under the name FirstMet. FirstMet offers distinctive features and superior user experience of AYI under a refreshed brand identity.

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 application brands or to commercialize by presenting third party advertising.

#### FirstMet

We provide a leading online dating application under the FirstMet brand that is native on Facebook, iOS and Android platforms and is also accessible on mobile devices and desktops at FirstMet.com. Our FirstMet application is available to users and active subscribers. FirstMet is extremely scalable and requires limited incremental operational cost to add users, active subscribers or new features catering to additional discrete audiences. FirstMet was the #15 grossing application in the U.S. Lifestyle Category on Apple® App StoreSM in the United States as of May 3, 2016.

In March 2016, we completed a rebranding of AYI under the name FirstMet. As a result of devoting our efforts to the rebranding, we decreased our marketing investment in AYI throughout the latter half of 2015 to reserve cash for the planned rebranding to FirstMet, as well as for other growth initiatives. We believe the rebranding had positive effects in reactivating inactive users from our database and we expect it to reduce user acquisition costs in the longer term.

We believe that the number of active subscribers is directly correlated to our spending on sales and marketing. For the three months ended March 31, 2016, our spending on sales and marketing was 27.5% lower than the three months ended March 31, 2015, which we believe resulted in a decrease in the number of active subscribers during 2016, as seen in the chart below:

As of March 31, 2016, FirstMet had approximately 81,600 active subscribers, which constituted a 2.9% decrease in active subscribers since December 31, 2015. New subscription transactions for FirstMet for the three months ended March 31, 2016 decreased 33.4% as compared to the same period in 2015. We expect that, for the foreseeable future, we will continue to allocate the significant majority of our resources and spending to FirstMet in an effort to increase our operating cash flow by focusing on our revenue-generating application.

#### The Grade

We also provide an online dating application under The Grade brand that is native on iOS and Android. The Grade is a 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 application is offered free to users and, apart from testing monetization approaches, there are no immediate plans to monetize The Grade.

In December 2015, we began realigning our focus from The Grade to FirstMet. We expect that, for the foreseeable future, we will continue to allocate the significant majority of our resources and spending on FirstMet in an effort to increase our operating cash flow by focusing on our revenue-generating application. As we sustain this lower level of spending on sales and marketing for The Grade, we expect that we may experience a decrease in the number of The Grade’s users.

### Operational Highlights and Objectives

During the three months ended March 31, 2016, we executed key components of our objectives:

- appointed a third independent director to our Board of Directors;
- relaunched our foundational product AYI under the new brand FirstMet; and
- rebuilt and re-introduced our iPhone and Android mobile apps, with the goal of reducing the cost of innovation on mobile platforms.

For the near term, our business objectives include:

- launching a new dating product leveraging our existing product platform and the strength of our user database;
- continuing to grow and improve our mobile platforms;
- reengaging more inactive users in our large user database;
- driving more international growth through foreign language translations of our apps; and
- seeking financing or strategic alternatives to refinance or retire our outstanding debt.

### Sources of Revenue

FirstMet 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 FirstMet application.

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

*Subscription*. We provide FirstMet 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 FirstMet 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 FirstMet subscriptions originating through the Facebook platform, and a significant amount of our revenue is generated from subscriptions through mobile platforms.

Our users have a variety of methods by which to purchase subscriptions to FirstMet. Users can pay by credit card, Google Play, 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 on our iPhone application through in-App purchases.

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

*Micro-transactions*. Micro-transactions allow users to increase the visibility of their profile and messages on FirstMet 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 FirstMet primarily consists of revenue from 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 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.

### Costs and Expenses

*Cost of revenue.* Cost of revenue consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in data center and customer care functions, credit card processing fees, hosting fees, and data center rent and bandwidth costs.

*Sales and marketing expense.* Sales and marketing expense consists primarily of advertising expenditures and compensation (including stock-based compensation) and other employee-related costs for personnel engaged in sales, and sales support functions. Advertising and promotional spend includes online marketing, including fees paid to search engines, and offline marketing, which is primarily partner-related payments to those who direct traffic to our brands. We plan to continue to expand sales and marketing efforts to attract new users, retain existing users and increase sales to both new and existing users.

*Product development expense.* Product development expense consists primarily of compensation (including stock-based compensation) and other employee- related costs that are not capitalized for personnel engaged in the design, development, testing and enhancement of product offerings and related technology.

*General and administrative.* General and administrative expense consists primarily of compensation (including stock-based compensation) and other employee-related costs for personnel engaged in executive management, finance, legal, tax, human resources, facilities costs, office expenses and fees for other professional services.

### 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 mark-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 mark-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 the warrants, (vi) risk-free interest rates that are commensurate with the term of the conversion feature in the Note and the 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 financial measures and/or unaudited performance indicators to manage and evaluate our business that are not calculated and presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”). 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 March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Active subscribers (at period end) | 81,600 | 102,700 |
| Bookings | $2,500,751 | $3,157,566 |
| Net cash used in operating activities | $(281,188) | $1,052,770 |
| Net loss | $(1,501,004) | $(1,219,179) |
| Adjusted EBITDA | $(138,466) | $(612,465) |
| Adjusted EBITDA as percentage of total revenues | (5.2)% | (19.2)% |

#### 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 FirstMet application. "Active subscribers" means current users that have prepaid a subscription fee for current access to the FirstMet application and whose subscription period has not yet expired. We plan to increase this metric by targeted user acquisition campaigns, building a recognizable brand and increasing user engagement on FirstMet 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 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 March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Subscription revenue | $2,507,148 | $3,129,310 |
| Change in deferred subscription revenue | (6,397) | 28,256 |
| Bookings | $2,500,751 | $3,157,566 |

#### 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.

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 loss to Adjusted EBITDA: | Three Months Ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Net loss | $(1,501,004) | $(1,219,179) |
| Interest expense, net | 425,674 | 236,404 |
| Loss on disposal of fixed assets | - | 79,628 |
| Depreciation and amortization expense | 36,515 | 60,819 |
| Change in fair value of derivative liabilities | 746,575 | - |
| Stock-based compensation expense | 153,774 | 229,863 |
| Adjusted EBITDA | $(138,466) | $(612,465) |

19

### 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 March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Total revenues | 100.0% | 100.0% |
| Costs and expenses: |  |  |
| Cost of revenue | 16.3% | 14.1% |
| Sales and marketing expense | 48.3% | 55.9% |
| Product development expense | 16.6% | 19.8% |
| General and administrative expense | 31.1% | 41.0% |
| Total costs and expenses | 112.3% | 130.8% |
| Loss from operations | (12.3)% | (30.8)% |
| Interest expense, net | (15.9)% | (7.4)% |
| Change in fair value of derivative liabilities | (27.9)% | - |
| Loss before provision for income taxes | (56.1)% | (38.2)% |
| Provision for income taxes | - | - |
| Net loss | (56.1)% | (38.2)% |

### Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

### Revenues

Revenues decreased to $2,677,267 for the three months ended March 31, 2016, from $3,186,083 for the three months ended March 31, 2015. The decrease is mainly driven by a decrease in subscription revenue primarily as a result of a decreased number of new international transactions and a decrease in the number of active subscribers.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the three months ended March 31, 2016 and the three months ended March 31, 2015, the decrease between those periods, the percentage decrease between those periods, and the percentage of total revenues that each represented for those periods:

|  | Three Months Ended March 31, 2016 | 2015 | Increase (Decrease) | % Increase (Decrease) | % Revenue Three Months Ended March 31, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | $2,507,148 | $3,129,310 | $(622,162) | (19.9)% | 93.6% | 98.2% |
| Advertising revenue | 170,119 | 56,773 | 113,346 | 199.6% | 6.4% | 1.8% |
| Total revenues | $2,677,267 | $3,186,083 | $(508,816) | (16.0)% | 100.0% | 100.0% |

*Subscription –* Our subscription revenue for the three months ended March 31, 2016 decreased by $622,162, or 19.9%, as compared to the three months ended March 31, 2015. This decrease in subscription revenue for the three months ended March 31, 2016 was primarily due to a decrease in the scale of user acquisition campaigns as a result of a decrease in FirstMet advertising expense of 33.3% as compared to the three months ended March 31, 2015. In addition, the year-over-year comparison of our subscription revenue was negatively impacted by unfavorable changes in foreign exchange rates. Subscription revenue as a percentage of total revenues was 93.6% for the three months ended March 31, 2016, as compared to 98.2% for the three months ended March 31, 2015.

*Advertising –* Our advertising revenue for the three months ended March 31, 2016 increased by $113,346, or 199.6%, as compared to the three months ended March 31, 2015. The increase in advertising revenue resulted from new advertising partnerships and more advertisement placements. Advertising revenue as a percentage of total revenues was 6.4% for the three months ended March 31, 2016, as compared to 1.8% for the three months ended March 31, 2015.

### Costs and Expenses

Total costs and expenses for the three months ended March 31, 2016 reflect a decrease in costs and expenses of $1,162,837, or 27.9%, as compared to the three months ended March 31, 2015. The following table presents our costs and expenses for the three months ended March 31, 2016 and 2015, the increase or decrease between those periods and the percentage increase or decrease between those periods:

|  | Three Months Ended March 31,% 2016 | 2015 | (Decrease) | (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Cost of revenue | $435,658 | $450,346 | $(14,688) | (3.3)% |
| Sales and marketing expense | 1,292,164 | 1,781,506 | (489,342) | (27.5)% |
| Product development expense | 445,548 | 629,775 | (184,227) | (29.3)% |
| General and administrative expense | 832,652 | 1,307,231 | (474,579) | (36.3)% |
| Total costs and expenses | $3,006,022 | $4,168,858 | $(1,162,836) | (27.9)% |

*Cost of revenue* - Our cost of revenue for the three months ended March 31, 2016 decreased by $14,688, or 3.3%, as compared to the three months ended March 31, 2015. This slight decrease for the three months ended March 31, 2016 was primarily driven by lower hosting expense. Cost of revenue as a percentage of total revenues was 16.3% for the three months ended March 31, 2016, as compared to 14.1% for the three months ended March 31, 2015.

*Sales and marketing expense -* Our sales and marketing expense for the three months ended March 31, 2016 decreased by $489,342, or 27.5%, as compared to the three months ended March 31, 2015. The decrease in sales and marketing expense was primarily driven by a decrease in the number and size of user acquisition campaigns, offset by an increase in headcount related expenses. Sales and marketing expense as a percentage of total revenues was 48.3% for the three months ended March 31, 2016, as compared to 55.9% for the three months ended March 31, 2015. For the three months ended March 31, 2016, advertising expense for FirstMet and The Grade was $1,136,413 and $27,725, respectively. For the three months ended March 31, 2015, advertising expense for FirstMet and The Grade was $1,704,279 and $0, respectively.

*Product development expense -* Our product development expense for the three months ended March 31, decreased by $184,227, or 29.3%, as compared to the three months ended March 31, 2015. The decrease in product development expenses was primarily due to reduced headcount in the product development and engineering teams. Product development expense as a percentage of total revenues was 16.6% for the three months ended March 31, 2016, as compared to 19.8% for the three months ended March 31, 2015.

*General and administrative expenses -* Our general and administrative expense for the three months ended March 31, 2016 decreased by $474,579, or 36.3%, as compared to the three months ended March 31, 2015. The decrease in general and administrative expense was primarily driven by a reduced stock compensation expense relating to a restricted stock award modification. In addition, the decrease in general and administrative expense was influenced by a loss on disposal of fixed assets and a one-time legal settlement in 2015, as well reduced consulting fees in 2016. General and administrative expense as a percentage of total revenues was 31.1% for the three months ended March 31, 2016, as compared to 41.0% for the three months ended March 31, 2015.

### Non-Operating Expense

The following table presents the components of non-operating expense for the three months ended March 31, 2016 and the three months ended March 31, 2015, the increase or decrease between those periods and the percentage increase or decrease between those periods:

|  | Three Months Ended March 31,% 2016 | 2015 | (Decrease) | (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Interest expense, net | $(425,674) | $(236,404) | $(189,270) | 80.1% |
| Change in fair value of derivative liabilities | (746,575) | - | (746,575) | 100.0% |
| Total non-operating expense | $(1,172,249) | $(236,404) | $(935,845) | 395.9% |

#### Interest expense, net

Interest expense, net for the three months ended March 31, 2016 was $425,674, a net increase of $189,270, or 80.1%, as compared to $236,404 for the three months ended March 31, 2015. The increase of interest expense was mainly driven by the interest incurred on and the debt discount amortization related to the Note. Interest expense, net represented 15.9% and 7.4% of total revenues for the three months ended March 31, 2016 and 2015, 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 mark-to-market loss of $746,575 for the three months ended March 31, 2016 and $0 for the three months ended March 31, 2015 represented the changes in fair value of the derivative liability during those periods.

### Liquidity and Capital Resources

| Condensed Consolidated Statements of Cash Flows Data: | Three Months Ended March 31, 2016 | 2015 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(281,188) | $(1,052,770) |
| Net cash used in investing activities | (8,072) | (20,826) |
| Net cash (used in) provided by financing activities | (17,360) | 2,263,017 |
| Net (decrease) increase in cash and cash equivalents | $(306,620) | $1,189,421 |

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 sales 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 sales and marketing expenditures quickly based on the expected return on investment, which provides flexibility and enables us to manage our sales and marketing expense.

As of March 31, 2016, we had $1,824,642 in cash and cash equivalents, as compared to cash and cash equivalents of $2,131,262 as of December 31, 2015. 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. As of March 31, 2016, the outstanding principal amount of our debt was $3,000,000, which consisted entirely of the Note, which is discussed in more detail below.

#### Sigma II Note

On February 13, 2015, we issued the Note in the aggregate principal amount of $3,000,000 to 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 have and will continue to use the proceeds from the private placement for general corporate purposes, including working capital.

Our ability to grow our business, 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. Although we currently believe that we have sufficient resources to make our required payments on the Note throughout 2016, we believe that we will need to raise additional capital in the future to fund our operations and repay the Note when it becomes due on February 13, 2017. 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. If we cannot make scheduled payments on the Note or repay the Note when it becomes due, we will be in default and Sigma II could declare all outstanding principal and interest on the Note to be immediately due and payable and could foreclose against the assets securing the Note, which could force us into bankruptcy or liquidation.

#### Going Concern

Our financial statements for the three months ended March 31, 2016 indicate there is substantial doubt about our ability to continue as a going concern as we require additional equity and/or debt financing to continue our operations. We must ultimately generate sufficient cash flow to meet our obligations on a timely basis, repay the Note which is due on February 13, 2017, attain profitability in our business operations and be able to fund our long term business development and growth plans. Our business will require significant amounts of capital to sustain operations and make the investments we need to execute our longer-term business plan. Management believes that we have access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, we have not secured any commitment for new financing at this time nor can we provide any assurance that new financing will be available on commercially acceptable terms, if at all. Our liquidity and capital resources have decreased as a result of the net operating loss of $328,755 that we incurred during the three months ended March 31, 2016. On March 31, 2016, our accumulated deficit amounted to $16,178,130.

### Operating Activities

Net cash used in operating activities was $281,188 for the three months ended March 31, 2016, as compared to net cash used in operating activities of $1,052,770 for the three months ended March 31, 2015. This decrease in net cash used in operating activities was a result of a decrease in our accrued expenses mainly driven by the one-time repayment of the advance under the Acquisition Agreement with Zoosk and security deposit made in connection with the relocation of our corporate office.

Significant items impacting cash flow in the three months ended March 31, 2016 included significant cash outlays relating to sales and marketing expense, professional fees and related benefits. These uses of cash were offset in part by collections in subscription revenue received during the period.

Significant items impacting cash flow in the three months ended March 31, 2015 included significant cash outlays relating to sales and marketing expense, increases in programming, hosting and technology expense, professional fees and related benefits. 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 three months ended March 31, 2016 and 2015 was $8,072 and $20,826, respectively. Cash used in investing activities included purchases of property and equipment totaling $8,072 and $26,192 during the three months ended March 31, 2016 and 2015, respectively. These purchases consisted primarily of computers and office furniture during the periods. 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 (used in) provided by financing activities for the three months ended March 31, 2016 and 2015 was $(17,360) and $2,263,017, respectively.

The decrease relates to the issuance of the Note in the aggregate principal amount of $3,000,000 to Sigma II during the three months ended March 31, 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 in 2015.

### Off-Balance Sheet Arrangements

As of March 31, 2016, 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 are currently approximately $26,000 per month and escalate on an annual basis for each year of the term of the lease.

### Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU 2016-02 is permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, either early adoption permitted. The Company is currently evaluating ASU 2016-09 and its impact on its consolidated financial statements or disclosures.

### Significant 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 three months ended March 31, 2016, there were no material changes to our significant accounting policies from those contained in the Form 10-K. Certain critical accounting policies are included here as follows:

### Reclassification

Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2015 presentation. These reclassifications have no impact on the previously reported net loss.

## Controls and procedures

As filed, 2,373 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 March 31, 2016, 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 March 31, 2016, 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, 208 characters.

There were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” in the Form 10-K. For more information concerning our risk factors, please see “Item 1A. Risk Factors” in the Form 10-K.

Filed May 9, 2016.
Source: SEC EDGAR, the filing index for accession 0001213900-16-013084. Last ingested by Listed: Oct 24, 2026, 15:09 ET. No prices; not investment advice.