UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to ________

Commission File Number 000-52176

SNAP INTERACTIVE, INC.

(Exact name of registrant as specified in its charter)

320 W 37th Street, 13th Floor

New York, NY 10018

(Address of principal executive offices)

(Zip Code)

(212) 594-5050

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

*Excludes 9,250,000 shares of unvested restricted stock.

SNAP INTERACTIVE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2016

Table of Contents

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.

FirstMet, Snap, Paltalk, the Snap logo and other trademarks or service marks appearing in this report are the property of Snap Interactive, Inc. Trade names, trademarks and service marks of other companies appearing in this report are the property of their respective owners.

Unless otherwise indicated, metrics for users are based on information that is reported by Facebook and internally-derived metrics for users across all platforms through which our applications are accessed. References in this report to users means those persons who have created a user name and password, and active subscribers means users that have prepaid a subscription fee for current unrestricted communication on the FirstMet application and whose subscription period has not yet expired. The metrics for active subscribers are based on internally-derived metrics across all platforms through which FirstMet is accessed.

EXPLANATORY NOTE

On October 7, 2016, we completed our previously announced merger with A.V.M. Software, Inc. (d/b/a Paltalk) (“Paltalk”), pursuant to which SAVM Acquisition Corporation, our wholly owned subsidiary, merged with and into Paltalk, with Paltalk surviving as a wholly owned subsidiary of the Company (the “Merger”). As a result of the Merger, the former shareholders of Paltalk received shares of our common stock representing approximately 77.9% of the outstanding shares of common stock of the post-Merger combined company, and the Company’s former shareholders retained approximately 22.1% of the outstanding shares of common stock of the post-Merger combined company, in each case including 9,250,000 shares of unvested restricted stock in the total number of shares of common stock outstanding. In connection with the consummation of the Merger, the Company fully repaid its outstanding 12% Senior Secured Convertible Note due February 13, 2017 in the original aggregate principal amount of $3,000,000.

Except as otherwise specifically noted herein, the financial statements, other financial information and the business information set forth herein generally speak only as to Snap Interactive, Inc. on a pre-Merger basis and its pre-Merger subsidiary.

Beginning with the Annual Report on Form 10-K for the fiscal year ending December 31, 2016, the Company will report on a consolidated basis representing the combined operations of Snap and Paltalk and their respective subsidiaries.  The quarter ending December 31, 2016 will be the first quarterly reporting period following the combination of Snap and Paltalk, which was consummated on October 7, 2016.  Because Paltalk was deemed the accounting acquirer under accounting principles generally accepted in the United States, the historical financial statements of Paltalk will be treated as the historical financial statements of the combined company and will be reflected in post-Merger Snap’s future quarterly and annual reports.

In addition, supplemental information concerning the business and properties of post-combination Snap (representing the combined operations of Snap and Paltalk and their respective subsidiaries) will be included in its Form 8-K/A to be filed on or before December 23, 2016.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q constitute “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on current expectations, estimates, forecasts and assumptions and are subject to risks and uncertainties. Words such as “anticipate,” “assume,” “began,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “would” and variations of such words and similar expressions are intended to identify such forward-looking statements. All forward-looking statements speak only as of the date on which they are made. Such forward-looking statements are subject to certain risks, uncertainties and assumptions relating to factors that could cause actual results to differ materially from those anticipated in such statements, including, without limitation, the following:

For a more detailed discussion of these and other factors that may affect our business, see the discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. We caution that the foregoing list of factors is not exclusive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this report, except to the extent required by applicable securities laws.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements are those of Snap Interactive, Inc. and its wholly owned subsidiary, Snap Mobile Limited (collectively, the “Company”). 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 Android platforms. The condensed consolidated financial statements included in this report have been prepared on a going concern basis in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial information. The Company has not included certain information normally included in annual financial statements pursuant to those rules and regulations, although it believes that the disclosure included herein is adequate to make the information presented not misleading.

The financial statements contained herein should be read in conjunction with the Company’s audited consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “Form 10-K”), filed with the SEC on March 14, 2016.

In the opinion of management, the accompanying unaudited condensed consolidated financial information contains all normal and recurring adjustments necessary to fairly present the condensed consolidated balance sheet, results of operations, cash flows and changes in the stockholders’ deficit of the Company for the interim periods presented. The Company’s historical results are not necessarily indicative of future operating results and the results for the three and nine months ended September 30, 2016 are not necessarily indicative of results for the year ending December 31, 2016, or for any other period.

Merger

On October 7, 2016, the Company completed its previously announced merger with A.V.M. Software, Inc. (d/b/a Paltalk) (“Paltalk”), pursuant to which SAVM Acquisition Corporation, the Company’s wholly owned subsidiary, merged with and into Paltalk, with Paltalk surviving as a wholly owned subsidiary of the Company (the “Merger”). As a result of the Merger, the former shareholders of Paltalk received shares of the Company’s common stock representing approximately 77.9% of the outstanding shares of common stock of the post-Merger combined company, and the Company’s former shareholders retained approximately 22.1% of the outstanding shares of common stock of the post-Merger combined company, in each case including 9,250,000 shares of unvested restricted stock in the total number of shares of common stock outstanding. The accompanying unaudited condensed consolidated financial statements represent only the financial condition and results of operations of the Company on a pre-Merger basis and do not include the financial results of Paltalk. In connection with the consummation of the Merger, the Company fully repaid its outstanding 12% Senior Secured Convertible Note due February 13, 2017 in the original aggregate principal amount of $3,000,000 (the “Senior Note”).

Supplemental information concerning the business and properties of the post-combination Company (representing the combined operations of the Company and Paltalk and their respective subsidiaries) will be included in the Company’s Form 8-K/A to be filed on or before December 23, 2016.

2. Summary of Significant Accounting Policies

During the three and nine months ended September 30, 2016, there were no material changes to the Company’s significant accounting policies from those disclosed in the Form 10-K. Certain significant accountant policies relied on in the preparation of the accompanying unaudited condensed consolidated financial statements are as follows:

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 condensed consolidated 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 subscription revenue refunds, estimates used to determine the fair value of the Company’s common stock, stock options, non-cash capital stock issuances, stock-based compensation, derivative instruments, debt discounts, conversion features and common stock warrants, collectability of 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. The Company bases estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from the Company’s estimates.

Reclassification

Certain prior period amounts have been reclassified for comparative purposes to conform to the fiscal 2016 presentation. These reclassifications have no impact on the previously reported net loss.

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

On August 26, 2016, the FASB issued ASU 2016-15, which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating ASU 2016-09 and its impact on its consolidated financial statements or disclosures.

4. Accounts Receivable, Net

Accounts receivable, net consisted of the following as of September 30, 2016 and December 31, 2015:

Credit card payments for subscriptions and micro-transactions typically settle several days after the date of purchase. The amount of unsettled transactions due from credit card payment processors was $77,076 as of September 30, 2016, as compared to $147,582 at December 31, 2015. The amount of accounts receivable due from Apple Inc. was $86,795, or 44.1% of the Company’s accounts receivable, as of September 30, 2016, compared to $76,074, or 36.8% of the Company’s accounts receivable, at December 31, 2015.

5. Security Deposits

In October 2014, the Company issued a $135,000 security deposit which replaced the previous letter of credit as part of the new capital lease obligations for equipment with Hewlett Packard Financial Services Company (“HP”). In November 2015, HP returned $60,000 of the security deposit. The Company recorded $75,000 under long-term security deposits on its Condensed Consolidated Balance Sheet as of September 30, 2016 and December 31, 2015, respectively.

In February 2015, the Company issued $200,659 as a security deposit as part of a new office rent lease (see Note 15). The Company recorded the $200,659 under long-term security deposits on its Condensed Consolidated Balance Sheet as of September 30, 2016 and December 31, 2015.

In November 2015, the Company issued $3,751 as a security deposit as part of the Company’s new data center. The Company recorded the $3,751 under long- term security deposits on its Condensed Consolidated Balance Sheet as of September 30, 2016 and December 31, 2015.

6. Fair Value Measurements

The fair value framework under the Financial Accounting Standards Board’s guidance requires the categorization of assets and liabilities into three levels based upon the assumptions used to measure the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3, if applicable, would generally require significant management judgment. The three levels for categorizing assets and liabilities under the fair value measurement requirements are as follows:

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the liabilities measured at fair value on a recurring basis as of September 30, 2016:

The following table summarizes the liabilities measured at fair value on a recurring basis as of December 31, 2015:

Level 3 liabilities are valued using unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the liabilities. For fair value measurements categorized within Level 3 of the fair value hierarchy, the Company’s accounting and finance department, who report to the Chief Financial Officer, determine its valuation policies and procedures. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s accounting and finance department and are approved by the Chief Financial Officer.

Level 3 Valuation Techniques:

Level 3 financial liabilities consist of the derivative liabilities for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

The Company deems financial instruments which do not have fixed settlement provisions to be derivative instruments. The common stock purchase warrants issued in connection with the Senior Note and the Senior Note’s embedded conversion feature did not have fixed settlement provisions because their exercise prices may have been lowered if the Company issued securities at a lower price in the future. In accordance with Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity, the fair value of these warrants was classified as a liability on the Company’s Condensed Consolidated Balance Sheets because, according to the terms of the warrants, a fundamental transaction could have given rise to an obligation of the Company to pay cash to its warrant holders. In addition, the Company entered into an Advisory Services Agreement (the “Advisory Agreement”), dated as of February 13, 2015, by and between the Company and Sigma Capital Advisors, LLC (“Sigma”) that contained certain provisions whereby the Company would have been required to make certain make-whole cash payments to the holder of the Senior Note upon the occurrence of certain future events, as more fully described in Note 11. Such instruments did not have fixed settlement provisions and have also been recorded as derivative liabilities. Corresponding changes in the fair value of the derivative liabilities are recognized in earnings on the Company’s Condensed Consolidated Statement of Operations in each subsequent period.

The Company’s derivative liabilities are carried at fair value and were classified as Level 3 in the fair value hierarchy due to the use of significant unobservable inputs. In order to calculate fair value, the Company uses a custom model developed with the assistance of an independent third-party valuation expert. This model calculates the fair value of the warrant derivative liabilities at each measurement date using a Monte-Carlo style simulation, as the value of certain features of the warrant derivative liabilities would not be captured by the standard Black-Scholes model.

The following table summarizes the values of certain assumptions used by the Company’s custom model to estimate the fair value of the warrant liabilities as of December 31, 2015:

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As described in Note 13, the Company entered into an Exchange Agreement, dated July 13, 2016 (the “Exchange Agreement”), with the holders of the warrants issued in connection with the Senior Note, pursuant to which the warrants were exchanged for an aggregate of 2,000,000 shares of the Company’s common stock. As a result, such warrants were automatically terminated and cancelled in full. In addition, as described in Note 11, in connection with the consummation of the Merger, the Company fully repaid the Senior Note and satisfied all of its outstanding obligations under the Advisory Agreement.

The following table summarizes the values of certain assumptions used by the Company’s custom model to estimate the fair value of the conversion feature liability as of September 30, 2016 and December 31, 2015:

The following table sets forth a summary of the changes in the fair value of our Level 3 financial liabilities that are measured at fair value on a recurring basis:

7. Fixed Assets and Intangible Assets, Net

Fixed assets and intangible assets, net consisted of the following at September 30, 2016 and December 31, 2015:

Depreciation and amortization expense for the three and nine months ended September 30, 2016 was $34,860 and $106,646, respectively, as compared to $35,576 and $131,583, respectively for the three and nine months ended September 30, 2015. The Company only holds fixed assets in the United States.

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

8. Notes Receivable

At September 30, 2016, the Company had notes receivable due in the aggregate amount of $82,452 from two former employees. The employees issued the notes to the Company since the Company paid taxes for stock-based compensation on these employees’ behalf in 2011 and 2012. The outstanding amounts under the notes are secured by pledged stock certificates and are due at various times during 2021-2023. Interest accrues on these notes at rates ranging from 2.80% to 3.57% per annum.

9. Income Taxes

The Company had no income tax benefit or provision for the nine months ended September 30, 2016 and 2015. Since the Company incurred a net loss for the nine months ended September 30, 2016 and 2015, there was no income tax expense for either period. Increases in deferred tax balances have been offset by a valuation allowance and have no impact on the Company’s deferred income tax provision.

In calculating the provision for income taxes on an interim basis, the Company estimates the annual effective income tax rate based upon the facts and circumstances known for the period and applies that rate to the earnings or losses for the most recent interim period. The Company’s effective income tax rate is based on expected income and statutory tax rates and takes into consideration permanent differences between financial statement income and tax return income applicable to the Company in the various jurisdictions in which the Company operates. The effect of a discrete item, such as changes in estimates, changes in enacted tax laws or rates or tax status, and unusual or infrequently occurring events, is recognized in the interim period in which the discrete item occurs. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the result of new judicial interpretations or changes in tax laws or regulations.

10. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following at September 30, 2016 and December 31, 2015:

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Notes and Convertible Note Payable

Term Note Payable

In connection with the entry into the Letter of Intent, on July 18, 2016, the Company entered into a subordinated multiple advance term note (the “Term Note”) with Paltalk, pursuant to which Paltalk agreed to advance to the Company, upon the Company’s request and subject to the terms and conditions set forth in the Term Note, up to $250,000. The Term Note would have matured on July 18, 2017, subject to certain exceptions, and advances under the Term Note bore interest at a rate of 8.0% per annum. The Company could have prepaid amounts due under the Term Note without penalty, but the Company could not reborrow any principal amount that had been repaid. As of September 30, 2016, the Company had borrowed $200,000 available under the Term Note.

The Term Note also contained customary events of default, including, among other things, payment defaults, breaches of covenants, cross-defaults and bankruptcy and insolvency events, subject to grace periods in certain instances. Upon an event of default, Paltalk could have declared all of the outstanding obligations of the Company under the Term Note to be immediately due and payable, and exercise any other rights provided for under the Term Note.

On October 7, 2016, as a result of the consummation of the Merger, the Term Note was deemed repaid in full.

Securities Purchase Agreement

On February 13, 2015, the Company closed a private placement of debt and equity securities for aggregate gross proceeds of $3,000,000 pursuant to a securities purchase agreement (the “Securities Purchase Agreement”). In connection with the Securities Purchase Agreement, the Company issued Sigma Opportunity Fund II, LLC (“Sigma II”) (i) 350,000 shares of the Company’s common stock, (ii) the Senior Note in the aggregate principal amount of $3,000,000 and (iii) a warrant to purchase up to 10,500,000 shares of the Company’s common stock. The Company incurred financing costs of $314,249 in connection with the Securities Purchase Agreement that will be amortized over the term of the Senior Note. Amortization expense for the three and nine months ended September 30, 2016 was $39,604 and $117,519, respectively; and $39,604 and $99,801 for the three and nine months ended September 30, 2015, respectively. The amortization expense was included as interest expense on the accompanying Condensed Consolidated Statement of Operations.

Pursuant to its terms, the Senior Note bore interest at a rate of 12% per annum and matured on the earlier of February 13, 2017 or a change in control. During any time while the Senior Note was outstanding, the outstanding principal balance of the Senior Note, together with all accrued and unpaid interest, was convertible into shares of the Company’s common stock at the option of Sigma II at a conversion price of $0.20 per share, subject to certain adjustments, including reset adjustments to the conversion price if the Company issued securities at lower prices in the future, as disclosed in Note 6. The Company’s obligations under the Senior Note were secured by a first priority lien on all of its assets and property. The Senior Note was also secured by up to 65% of the outstanding capital stock and other equity interests of Snap Mobile Limited, the Company’s wholly owned subsidiary. Snap Mobile Limited was also a guarantor of the Senior Note. An event of default under the Senior Note included, among other things, (i) the Company’s failure to pay any amounts due and payable when and as required, (ii) failure of a representation or warranty made by the Company to be correct and accurate when made, (iii) the institution of bankruptcy or similar proceedings against the Company and (iv) the Company’s inability to pay debts as they became due. The Senior Note also required the Company to maintain an aggregate cash balance of $1,350,000 in its bank accounts or it would have been required to make partial prepayments on the Senior Note. If the Company failed to maintain this aggregate cash balance in its bank accounts for a thirty day period, it would have been required to make a $125,000 prepayment on the Senior Note. For each subsequent calendar month that the aggregate cash balance in the Company’s bank accounts did not equal or exceed $1,500,000, the Company would have been required to make an additional $125,000 prepayment on the Senior Note.

The Senior Note contained a compound embedded derivative consisting of an embedded conversion feature and interest make-whole provisions and was accounted for as a derivative liability with an aggregate fair value of $950,000. In addition, the fair value of the warrants was $798,000 and was also required to be accounted for as a derivative liability. Both instruments were also recorded as debt discounts on the date the Senior Note was issued. The Company is amortizing the debt discount using the effective interest method over the life of the Senior Note, which would have been two years had the Senior Note not been fully repaid on October 7, 2016 in connection with the consummation of the Merger. Contractual interest expense under the Senior Note incurred for the three and nine months ended September 30, 2016 was $90,000 and $270,000 respectively. Contractual interest expense under the Senior Note incurred for the three and nine months ended September 30, 2015 was $90,000 and $226,000, respectively.

Simultaneously with the closing of the private placement, the Company entered into the Advisory Agreement with Sigma pursuant to which Sigma agreed to provide the Company with certain advisory and consulting services. In connection with the Advisory Agreement, the Company issued Sigma 150,000 shares of the Company’s common stock and a warrant to purchase up to 4,500,000 shares of the Company’s common stock. Both the common shares and the warrant issued were fully vested and non-forfeitable on the date the Advisory Agreement was entered into. Based on the terms of the Advisory Agreement and the criteria outlined in ASC 505-50, Equity-Based Payments to Non-Employees, the Company determined that the common stock and warrants issued were additional consideration provided to Sigma in connection with the issuance of the Senior Note. As a result, the Company recorded the grant date fair value of the common stock and warrants of $30,000 and $342,000, respectively, as debt discounts on the accompanying Condensed Consolidated Balance Sheet.

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In addition to the issuance of common stock and warrants under the Advisory Agreement, the Company also agreed to pay Sigma a monthly advisory fee of $10,000, up to an aggregate limit of $240,000, subject to certain exceptions, over the life of the Senior Note (the “Cash Payment”). If the Company had prepaid the Senior Note or the repayment of the Senior Note was accelerated for certain reasons, the Company would have still been required to remit either a portion or the full amount of the Cash Payment. The Company also agreed to pay Sigma a cash payment of $150,000 if the Company effectuated a dilutive issuance (as defined in the Senior Note) while the Senior Note was outstanding (the “Dilutive Cash Payment”). The Company determined that based on the make-whole features associated with the Cash Payment and the contingent make-whole features associated with the Dilutive Cash Payment, that these payments were required to be treated as derivative instruments in accordance with ASC 815. The fair value of these instruments was included in the value of the compound embedded derivative discussed above. 

Amortization expense related to the debt discount for the three and nine months ended September 30, 2016 was $267,178 and $792,822, respectively; and $267,178 and $665,041 for the three and nine months ended September 30, 2015, respectively. Amortization expense related to the debt discount was included as interest expense on the accompanying Condensed Consolidated Statements of Operations. 

On October 7, 2016, in connection with the consummation of the Merger, the Company fully repaid the Senior Note. As a result, all of the Company’s outstanding obligations under the Advisory Agreement, including the Cash Payment, were also deemed fully satisfied.

As described in Note 13, the Company recently entered into the Exchange Agreement with Sigma II and Sigma, pursuant to which the warrants held by Sigma II and Sigma were exchanged for an aggregate of 2,000,000 shares of the Company’s common stock. As a result, such warrants were automatically terminated and cancelled in full. 

12. Stock-Based Compensation 

The Snap Interactive, Inc. Amended and Restated 2011 Long-Term Incentive Plan (the “2011 Plan”) was terminated as to future awards on May 16, 2016. A total of 6,356,128 shares of the Company’s common stock may be delivered pursuant to outstanding options awarded under the 2011 Plan, however no additional awards may be granted under such plan. The Snap Interactive, Inc. 2016 Long-Term Incentive Plan (the “2016 Plan”) was adopted by the Company’s stockholders on May 16, 2016 and permits the Company to award stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other stock-based awards and cash-based incentive awards to its employees (including an employee who is also a director or officer under certain circumstances), non-employee directors and consultants. The maximum number of shares of common stock that may be issued pursuant to awards under the 2016 Plan is 15,000,000 shares, 100% of which may be issued pursuant to incentive stock options. In addition, the maximum number of shares of common stock that may be issued under the 2016 Plan may be increased by an indeterminate number of shares of common stock underlying outstanding awards issued under the 2011 Plan that are forfeited, expired, cancelled or settled in cash. As of September 30, 2016, there were 15,045,125 shares available for future issuance under the 2016 Plan. 

On October 7, 2016, as a result of the Merger, each outstanding Paltalk stock option was assumed by the Company and converted into a stock option representing the right to purchase shares of the Company’s common stock, with the number of shares underlying such stock option and the exercise price thereof being adjusted by the exchange ratio in the Merger, with any fractional shares rounded down to the next lowest number of whole shares.

Stock Options 

The following table summarizes the assumptions used in the Black-Scholes pricing model to estimate the fair value of the options granted during the nine months ended September 30, 2016 and 2015: 

The expected life of the options is the period of time over which employees and non-employees are expected to hold their options prior to exercise. The expected life of options has been determined using the "simplified" method as prescribed by Staff Accounting Bulletin 110, which uses the midpoint between the vesting date and the end of the contractual term. The volatility of the Company’s common stock is calculated using the Company’s historical volatilities beginning at the grant date and going back for a period of time equal to the expected life of the award. 

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes stock option activity for the nine months ended September 30, 2016:

At September 30, 2016, the aggregate intrinsic value of stock options that were outstanding and exercisable was $269,234 and $33,312, respectively. At September 30, 2015, the aggregate intrinsic value of stock options that were outstanding and exercisable was $151 and $0, respectively. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the fair value of such awards as of the period-end date. The aggregate fair value for the options granted during the nine months ended September 30, 2016 and 2015 was $61,405 and $119,184, respectively.

Stock-based compensation expense relating to stock options was $39,323 and $120,581 during the three and nine months ended September 30, 2016, as compared to $28,113 and $98,519, for the three and nine months ended September 30, 2015, respectively. The Company estimates potential forfeitures of stock awards and adjusts recorded stock-based compensation expense accordingly. The estimate of forfeitures is adjusted over the requisite service period to the extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock-based compensation expense that is recognized in future periods.

At September 30, 2016, there was $319,088 of total unrecognized compensation expense related to stock options, which is expected to be recognized over a weighted average period of 2.72 years.

Generally, under our outstanding stock option award agreements, the Merger constituted a change of control that caused the accelerated vesting of 50% of the shares underlying each outstanding stock option award, with the remaining 50% of the shares underlying each such award to vest on the one-year anniversary of the Merger. Accordingly, as a result of the Merger, the vesting of 6,363,878 shares underlying outstanding stock options was accelerated to October 7, 2016.

Restricted Stock Awards

The following table summarizes restricted stock award activity for the nine months ended September 30, 2016:

On March 3, 2016, the Company entered into a restricted stock cancellation and release agreement with Clifford Lerner, the Company’s Chairman of the Board of Directors, pursuant to which the Company cancelled a grant of 5,000,000 restricted shares of common stock awarded to Mr. Lerner on April 10, 2013 that would have vested 50% on the third anniversary of the date of grant and 50% on the fourth anniversary of the date of grant. Subsequently, on March 3, 2016, the Board of Directors awarded Mr. Lerner a replacement award of 5,000,000 restricted shares that vest 100% on the (10th) tenth anniversary of the date of grant, provided Mr. Lerner is providing services to the Company on such date.

Generally, under our outstanding restricted stock award agreements, the Merger constituted a change of control that caused the accelerated vesting of 50% of the shares underlying each restricted stock award, with the remaining 50% of the shares underlying each such award to vest on the one-year anniversary of the Merger. Accordingly, as a result of the Merger, the vesting of 1,075,000 shares of restricted stock was accelerated to October 7, 2016.

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At September 30, 2016, there was $2,337,195 of total unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over a weighted average period of 7.28 years.

Stock-based compensation expense relating to restricted stock awards for the three and nine months ended September 30, 2016 was $103,594 and $313,368, respectively, as compared to $215,162 and $651,211 for the three and nine months ended September 30, 2015, respectively.

13. Common Stock Warrants

On February 13, 2015, the Company issued a warrant to each of Sigma II and Sigma to purchase up to 10,500,000 shares and 4,500,000 shares, respectively, of the Company’s common stock in connection with the issuance of the Senior Note and the execution of the Advisory Agreement as previously disclosed in Note 11. The warrants were immediately exercisable on February 13, 2015 and would have expired on the earlier of (a) February 13, 2020 or (b) a change in control. The warrants had an exercise price of $0.35 per share, subject to certain adjustments, including reset adjustments to the exercise price if the Company issues securities at lower prices in the future, as disclosed in Note 6.

On July 13, 2016, the Company entered into the Exchange Agreement with Sigma II and Sigma, pursuant to which (i) Sigma II exchanged its warrant to purchase up to 10,500,000 shares of the Company’s common stock at an exercise price of approximately $0.35 per share for 1,400,000 newly issued shares of the Company’s common stock and (ii) Sigma exchanged its warrant to purchase up to 4,500,000 shares of the Company’s common stock at an exercise price of approximately $0.35 per share for 600,000 newly issued shares of the Company’s common stock, in each case effective as of July 13, 2016. Pursuant to the Exchange Agreement, the warrants were automatically terminated and cancelled in full and rendered null and void as a result of the exchange offer. The fair value of the warrants on the date of extinguishment was $950,000, which, when offset by the fair value of the common stock issued in exchange for the warrants of $300,000, resulted in a net gain on the extinguishment of the warrant liabilities of $650,000.

14.   Net Loss Per Share of Common Stock

Basic net loss per share of common stock is computed based upon the number of weighted average shares of common stock outstanding as defined by ASC Topic 260, Earnings Per Share. Diluted net loss per share of common stock includes the dilutive effects of stock options, warrants and stock equivalents. To the extent stock options, stock equivalents, shares underlying the Senior Note and warrants are antidilutive, they are excluded from the calculation of diluted net loss per share of common stock. For the three and nine months ended September 30, 2016, 16,661,003 shares issuable upon the conversion of the Senior Note, the exercise of stock options and warrants, and unvested restricted stock awards were not included in the computation of diluted net loss per share because their inclusion would be antidilutive. For the three and nine months ended September 30, 2015, 46,688,953 shares issuable upon the conversion of the Senior Note, the exercise of stock options and warrants, and unvested restricted stock awards were not included in the computation of diluted net loss per share.

15. Commitments

Operating Lease Agreements

During 2013, the Company entered into a two-year service agreement with Equinix Operating Co., Inc. (“Equinix”) whereby Equinix agreed to provide certain products and services to the Company from January 2013 to January 2015. Pursuant to the service agreement, the Company agreed to pay monthly recurring fees in the amount of $8,450 and certain nonrecurring fees in the amount of $9,700. The agreement automatically renews for additional twelve month terms unless earlier terminated by either party. Hosting expense under this lease totaled $15,531 and $139,840 for the nine months ended September 30, 2016 and 2015, respectively. On January 31, 2016, we cancelled the service agreement with Equinix.

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. Rent expense under this lease was $82,551 and $248,779 for the three and nine months ended September 30, 2016 and 2015, respectively.

Capital Lease Agreements

In October 2014, two HP lease agreements were canceled due to price negotiations and we entered into two new three-year lease agreements with HP for equipment and certain financed items. In December 2014, we cancelled our remaining operating lease agreements and entered into two additional three-year capital lease agreements with notes. The Company recognized these leases on its Condensed Consolidated Balance Sheets under capitalized lease obligations. Amortization for equipment under capital leases was $54,651 for the three and nine months ended September 30, 2016 and 2015. Rent payments for equipment under capital leases were $22,734 and $68,202 for the three and nine months ended September 30, 2016 and 2015, respectively.

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

16. Related Party Transactions

On January 31, 2013, the Company entered into a consulting agreement with Darrell Lerner, pursuant to which Mr. Lerner agreed to serve as a consultant to the Company for an initial term of three years, beginning on February 1, 2013 (the “Effective Date”). Pursuant to the agreement, Mr. Lerner agreed to assist and advise the Company on legal, financial and other matters for which he had knowledge that pertained to the Company, as the Company reasonably requested. As compensation for his services, the Company agreed to pay Mr. Lerner a monthly fee of $25,000 for the initial two year period of the agreement and a monthly fee of $5,000 for every month thereafter. On January 31, 2016, the Company amended the consulting agreement with Darrell Lerner, pursuant to which the monthly fee owed to Mr. Lerner was reduced to $3,000 and the term of the agreement was set to automatically renew for successive one-year periods beginning on February 1, 2016 unless either party provided written notice of nonrenewal. Consulting expense under this agreement for the three and nine months ended September 30, 2016 was $9,000 and $20,000, respectively, as compared to $15,000 and $50,000, respectively, for the three and nine months ended September 30, 2015, respectively.

Under the terms of the agreement, the Company or Mr. Lerner could terminate the agreement at any time without notice prior to or at the expiration of the term. If the Company terminated the agreement without “cause” (as defined in the agreement), the Company would be obligated to (i) pay Mr. Lerner the amount of the unpaid monthly fees owed to Mr. Lerner for the period from the Effective Date to the two year anniversary of the Effective Date and (ii) take all commercially reasonably actions to cause (A) 325,000 shares of restricted common stock of the Company previously granted to Mr. Lerner, (B) 600,000 shares of restricted common stock of the Company previously granted to Mr. Lerner and (iii) 150,000 shares of restricted common stock of the Company granted to Mr. Lerner pursuant to the agreement, to be vested as of the date of such termination. On October 7, 2016, all of the outstanding restricted stock held by Mr. Lerner vested in full as a result of the Merger. The Company terminated the consulting agreement effective as of October 31, 2016.

Stock-based compensation expense relating to non-employee restricted stock awards for the three and nine months ended September 30, 2016 was $13,321 and $44,064, respectively, as compared to $(18,004) and $(40,682), respectively, for the three and nine months ended September 30, 2015.

17. Legal Proceedings

Patent Litigation

On August 2, 2016, the Company became aware of a complaint filed against it in the United States District Court for the Eastern District of Texas, Marshall Division (Case No. 2:16-cv-00836). In the complaint, the plaintiff alleges, among other things, that the Company infringed upon one of the plaintiff’s patents. The Company has not been served with the complaint.

The Company operates in a technology environment and is subject to claims of infringement of patents in the ordinary course of business. We dispute the allegations made by the plaintiff and intend to vigorously defend ourselves in this litigation. At this time, management does not believe this matter will have a material adverse effect on the Company’s results of operations or financial condition. However, no assurance can be given that this matter will be resolved in our favor.

On October 25, 2016, the Company filed a complaint against Snap Inc. (“Snapchat”) in the United States District Court for the Southern District of New York (Case No. 1:16-cv-08313). The complaint alleges that Snapchat infringed upon the Company’s trade name and trademarks by changing its name from “Snapchat Inc.” to “Snap Inc.” The complaint seeks, among other things, a preliminary and permanent injunction enjoining Snapchat from the unauthorized use of the Company’s name and trademarks, an award of the Company’s costs and expenses, an award of the Company’s attorney’s fees and exemplary and punitive damages.

18. Subsequent Events

On October 7, 2016, the Company completed its previously announced merger with Paltalk, pursuant to which SAVM Acquisition Corporation, the Company’s wholly owned subsidiary, merged with and into Paltalk, with Paltalk surviving as a wholly owned subsidiary of the Company. As a result of the Merger, the former shareholders of Paltalk received shares of the Company’s common stock representing approximately 77.9% of the outstanding shares of common stock of the post-Merger combined company, and the Company’s former shareholders retained approximately 22.1% of the outstanding shares of common stock of the post-Merger combined company, in each case including 9,250,000 shares of unvested restricted stock in the total number of shares of common stock outstanding. In connection with the consummation of the Merger, the Company fully repaid the Senior Note.

Beginning with the Annual Report on Form 10-K for the fiscal year ending December 31, 2016, the Company will report on a consolidated basis representing the combined operations of the Company and Paltalk and their respective subsidiaries.  The quarter ending December 31, 2016 will be the first quarterly reporting period following the combination of the Company and Paltalk, which was consummated on October 7, 2016.  Because Paltalk was deemed the accounting acquirer under accounting principles generally accepted in the United States, the historical financial statements of Paltalk will be treated as the historical financial statements of the combined company and will be reflected in the post-Merger Company’s future quarterly and annual reports.

In addition, supplemental information concerning the business and properties of the post-combination Company (representing the combined operations of the Company and Paltalk and their respective subsidiaries) will be included in its Form 8-K/A to be filed on or before December 23, 2016.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis should be read in conjunction with: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and nine months ended September 30, 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.

Merger

On October 7, 2016, we completed our previously announced merger with A.V.M. Software, Inc. (d/b/a Paltalk) (“Paltalk”), pursuant to which SAVM Acquisition Corporation, our wholly owned subsidiary, merged with and into Paltalk, with Paltalk surviving as a wholly owned subsidiary of the Company (the “Merger”). As a result of the Merger, the former shareholders of Paltalk received shares of our common stock representing approximately 77.9% of the outstanding shares of common stock of the post-Merger combined company, and the Company’s former shareholders retained approximately 22.1% of the outstanding shares of common stock of the post-Merger combined company, in each case including 9,250,000 shares of unvested restricted stock in the total number of shares of common stock outstanding.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the financial condition and results of operations of the Company as of and for the period ended September 30, 2016, excluding Paltalk except as otherwise specifically noted herein. Management has included a discussion regarding how it believes the Merger may impact various aspects of the combined company’s future financial condition and/or results of operations.

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 Android^TM 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 targets users over 50 years of age. We expect that this new product will launch in the first quarter of 2017.

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 derived from a prior iteration of our application, “Are You Interested?” (“AYI”), which was rebranded as FirstMet in March 2016. We believe the rebranding has had positive effects in reactivating inactive users from our database, including the reengagement of approximately 1.4 million inactive users in the nine months ended September 30, 2016, and we expect it to reduce user acquisition costs in the longer term. FirstMet was the #23 grossing application in the U.S. Lifestyle Category on Apple® App Store^SM in the United States as of November 1, 2016.

Although the rebranding has had positive effects on reengaging inactive users, we believe that the number of active subscribers is strongly correlated to our spending on sales and marketing. For the nine months ended September 30, 2016, our spending on sales and marketing was 13.0% lower than the nine months ended September 30, 2015, which we believe resulted in a decrease in the number of active subscribers during 2016, as seen in the chart below:

As of September 30, 2016, FirstMet had approximately 71,900 active subscribers, which constituted a 14.5% decrease in active subscribers since September 30, 2015. New subscription transactions for FirstMet for the nine months ended September 30, 2016 decreased 28.5% as compared to the same period in 2015.

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.

We currently expect that we will continue to allocate the significant majority of our resources to 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.

Recent Developments

Merger

On October 7, 2016, we completed the Merger with Paltalk. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Merger” above for additional information.

Exchange Agreement

On July 13, 2016, we entered into an Exchange Agreement, dated July 13, 2016 (the “Exchange Agreement”), with Sigma Opportunity Fund II, LLC (“Sigma II”) and Sigma Capital Advisors, LLC (“Sigma”), pursuant to which (i) Sigma II exchanged its warrant to purchase up to 10,500,000 shares of our common stock at an exercise price of approximately $0.35 per share for 1,400,000 newly issued shares of our common stock and (ii) Sigma exchanged its warrant to purchase up to 4,500,000 shares of our common stock at an exercise price of approximately $0.35 per share for 600,000 newly issued shares of our common stock, in each case effective as of July 13, 2016. Pursuant to the Exchange Agreement, the warrants were automatically terminated and cancelled in full and rendered null and void as a result of the exchange offer.

Repayment of Indebtedness

On February 13, 2015, we issued Sigma II a 12% Senior Secured Convertible Note due February 13, 2017 in the original aggregate principal amount of $3,000,000 (the “Senior Note”). In addition, on July 18, 2016, we entered into a subordinated multiple advance term note (the “Term Note”) with Paltalk, pursuant to which Paltalk agreed to advance to us, upon our request and subject to the terms and conditions set forth in the Term Note, up to $250,000, of which we had borrowed $200,000 as of September 30, 2016.

On October 7, 2016, in connection with the consummation of the Merger, we repaid the Senior Note in full. In addition, as a result of the Merger, the Term Note was deemed repaid in full. Accordingly, as of the closing of the Merger, all of our outstanding long-term indebtedness had been fully repaid. 

Operational Highlights and Objectives

During the nine months ended September 30, 2016, we executed key components of our objectives: 

In addition, on October 7, 2016, we consummated the Merger with Paltalk. For the near term, our business objectives include, among other things:

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 up to 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 marketing 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. Our sales and marketing efforts are intended 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 the Senior Note, our 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 Senior Note and the warrants, (vi) risk-free interest rates that are commensurate with the term of the conversion feature in the Senior 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.

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. 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 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.

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 extinguishment and 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:

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:

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, 2016 Compared to Three Months Ended September 30, 2015

Revenues

Revenues decreased to $2,515,541 for the three months ended September 30, 2016, from $2,926,693 for the three months ended September 30, 2015. The decrease is mainly driven by a decrease in subscription revenue, which was primarily caused by a decrease in the number of new subscription transactions and a decrease in the number of active subscribers, partially offset by a slight increase in advertising revenue. In addition, a significant amount of management resources were diverted to activities related to the Merger during the three months ended September 30, 2016, which had an adverse effect on revenue performance.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the three months ended September 30, 2016 and the three months ended September 30, 2015, the decrease between those periods, the percentage decrease between those periods, and the percentage of total revenues that each represented for those periods:

Subscription – Our subscription revenue for the three months ended September 30, 2016 decreased by $418,449, or 15.0%, as compared to the three months ended September 30, 2015. This decrease in subscription revenue for the three months ended September 30, 2016 was primarily due to a decrease in new subscription revenue, principally from non-US territories, which was caused by lower marketing investments in the preceding periods of 2016, a shift of advertising spending back to domestic media sources and increasing costs of user acquisition. In addition, subscription revenue was impacted by adverse changes in foreign currency exchange rates of approximately 5% in the three months ended September 30, 2016 when compared to the same period in 2015.

Advertising – Our advertising revenue for the three months ended September 30, 2016 increased by $7,297, or 5.4%, as compared to the three months ended September 30, 2015. The increase in advertising revenue resulted from more advertisement placements.

Costs and Expenses

Total costs and expenses for the three months ended September 30, 2016 reflect an increase in costs and expenses of $207,949, or 7.4%, as compared to the three months ended September 30, 2015. This increase in expenses was primarily driven by legal expenses associated with the Merger. The following table presents our costs and expenses for the three months ended September 30, 2016 and 2015, the increase or decrease between those periods and the percentage increase or decrease between those periods:

Excluding non-recurring Merger related expenses, which we believe is useful for comparing total expenses as reported in prior periods, we would have had $2.7 million of total expenses for the three months ended September 30, 2016, representing a decrease of $87 thousand, or 3.1%, as compared to the three months ended September 30, 2015.

Cost of revenue - Our cost of revenue for the three months ended September 30, 2016 decreased by $26,926, or 6.3%, as compared to the three months ended September 30, 2015. This slight decrease for the three months ended September 30, 2016 was primarily driven by lower hosting expense. Cost of revenue as a percentage of total revenues was 15.8% for the three months ended September 30, 2016, as compared to 14.5% for the three months ended September 30, 2015.

Sales and marketing expense - Our sales and marketing expense for the three months ended September 30, 2016 increased by $126,564, or 12.1%, as compared to the three months ended September 30, 2015. The increase in sales and marketing expense was primarily driven by an increase in the scale of user acquisition campaigns. Sales and marketing expense as a percentage of total revenues was 46.5% for the three months ended September 30, 2016, as compared to 35.7% for the three months ended September 30, 2015. For the three months ended September 30, 2016 and 2015, advertising expense, which consists of advertising expenditures without taking into account employee-related costs for personnel engaged in sales and sales support functions, was $1,092,625 and $963,129, respectively.

Product development expense - Our product development expense for the three months ended September 30, 2016, decreased by $42,050, or 9.1%, as compared to the three months ended September 30, 2015. The decrease in product development expense was primarily due to reduced headcount in the product development and engineering teams. Product development expense as a percentage of total revenues was 16.8% for the three months ended September 30, 2016, as compared to 15.9% for the three months ended September 30, 2015.

General and administrative expense - Our general and administrative expense for the three months ended September 30, 2016 increased by $150,361, or 16.9%, as compared to the three months ended September 30, 2015. The increase in general and administrative expense was primarily driven by an increase of $310 thousand in professional fees mainly associated with the Merger, offset by a decrease in reduced headcount related expenses as compared to the same period in 2015. Excluding non-recurring professional fees related to the Merger, which we believe is helpful for comparing general and administrative expense as reported in prior periods, general and administrative expense would have been $746 thousand for the three months ended September 30, 2016, representing a decrease of approximately $145 thousand, or 16.2%, as compared to the same period in 2015. General and administrative expense as a percentage of total revenues was 41.4% for the three months ended September 30, 2016, as compared to 30.4% for the three months ended September 30, 2015.

Non-Operating Expense

The following table presents the components of non-operating expense for the three months ended September 30, 2016 and the three months ended September 30, 2015, the increase or decrease between those periods and the percentage increase or decrease between those periods:

Interest expense, net for the three months ended September 30, 2016 was $431,269, a net decrease of $2,082, or 0.5%, as compared to $433,351 for the three months ended September 30, 2015. The slight decrease of interest expense was mainly driven by the interest incurred on and the debt discount amortization of the Senior Note. Interest expense, net represented 17.1% and 14.8% of total revenues for the three months ended September 30, 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 gain of $360,000 for the three months ended September 30, 2016 and gain of $870,000 for the three months ended September 30, 2015 represented the changes in fair value of the derivative liability during those periods.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Revenues

Revenues decreased to $7,806,769 for the nine months ended September 30, 2016, from $9,301,314 for the nine months ended September 30, 2015. The decrease is mainly driven by a decrease in subscription revenue, which was primarily caused by a decrease in the number of new subscription transactions and a decrease in the number of active subscribers, partially offset by an increase in advertising revenue. In addition, a significant amount of management resources were diverted to activities related to the exploration of strategic alternatives, including the Merger, during the nine months ended September 30, 2016, which had an adverse effect on revenue performance.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the nine months ended September 30, 2016 and the nine months ended September 30, 2015, the decrease between those periods, the percentage decrease between those periods, and the percentage of total revenues that each represented for those periods:

Subscription – Our subscription revenue for the nine months ended September 30, 2016 decreased by $1,656,845, or 18.4%, as compared to the nine months ended September 30, 2015. This decrease in subscription revenue for the nine months ended September 30, 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 15.2% as compared to the nine months ended September 30, 2015. Also, a decrease in new and recurring six-month subscriptions contributed to the decrease in revenue. In addition, subscription revenue was impacted by adverse changes in foreign currency exchange rates of approximately 5% in the nine months ended September 30, 2016 as compared to the same period in 2015. Subscription revenue as a percentage of total revenues was 94.0% for the nine months ended September 30, 2016, as compared to 96.7% for the nine months ended September 30, 2015.

Advertising – Our advertising revenue for the nine months ended September 30, 2016 increased by $162,300, or 53.3%, as compared to the nine months ended September 30, 2015. The increase in advertising revenue resulted from new advertising partnerships and more advertisement placements. Advertising revenue as a percentage of total revenues was 6.0% for the nine months ended September 30, 2016, as compared to 3.3% for the nine months ended September 30, 2015.

Costs and Expenses

Total costs and expenses for the nine months ended September 30, 2016 reflect a decrease in costs and expenses of $1,460,440, or 14.0%, as compared to the nine months ended September 30, 2015. The following table presents our costs and expenses for the nine months ended September 30, 2016 and 2015, the increase or decrease between those periods and the percentage increase or decrease between those periods:

Excluding non-recurring Merger related expenses, which we believe is useful for comparing total expenses as reported in prior periods, we would have had $8.5 million of total expenses for the nine months ended September 30, 2016, representing a decrease of $1.9 million, or 18.0%, as compared to the nine months ended September 30, 2015.

Cost of revenue - Our cost of revenue for the nine months ended September 30, 2016 decreased by $66,532, or 5.1%, as compared to the nine months ended September 30, 2015. This slight decrease for the nine months ended September 30, 2016 was primarily driven by lower hosting expense and reduced credit card processing fees driven by fewer revenue transactions. Cost of revenue as a percentage of total revenues was 15.9% for the nine months ended September 30, 2016, as compared to 14.0% for the nine months ended September 30, 2015.

Sales and marketing expense - Our sales and marketing expense for the nine months ended September 30, 2016 decreased by $548,219, or 13.0%, as compared to the nine months ended September 30, 2015. The decrease in sales and marketing expense was primarily driven by a decrease in the scale of user acquisition campaigns. Sales and marketing expense as a percentage of total revenues was 47.1% for the nine months ended September 30, 2016, as compared to 45.4% for the nine months ended September 30, 2015. For the nine months ended September 30, 2016 and 2015, advertising expense, which consists of advertising expenditures without taking into account employee-related costs for personnel engaged in sales and sales support functions, was $3,368,048 and $3,972,612, respectively.

Product development expense - Our product development expense for the nine months ended September 30, 2016, decreased by $326,853, or 20.0%, as compared to the nine months ended September 30, 2015. The decrease in product development expense was primarily due to reduced headcount in the product development and engineering teams. Product development expense as a percentage of total revenues was 16.8% for the nine months ended September 30, 2016, as compared to 17.6% for the nine months ended September 30, 2015.

General and administrative expense - Our general and administrative expense for the nine months ended September 30, 2016 decreased by $518,806, or 15.9%, as compared to the nine months ended September 30, 2015. The decrease in general and administrative expense was primarily driven by reduced consulting fees and reduced headcount related expenses, offset by an increase in legal fees and other expenses related to the Merger as compared to the same period in 2015. Excluding non-recurring professional fees related to the Merger, which we believe is helpful for comparing general and administrative expense as reported in prior periods, general and administrative expense would have been $2.3 million for the nine months ended September 30, 2016, representing a decrease of approximately $934 thousand, or 28.7%, as compared to the same period in 2015. General and administrative expense as a percentage of total revenues was 35.0% for the nine months ended September 30, 2016, as compared to 35.0% for the nine months ended September 30, 2015.

Non-Operating Expense

The following table presents the components of non-operating expense for the nine months ended September 30, 2016 and the nine months ended September 30, 2015, the increase or decrease between those periods and the percentage increase or decrease between those periods:

Interest expense, net

Interest expense, net for the nine months ended September 30, 2016 was $1,284,245, a net increase of $183,879, or 16.7%, as compared to $1,100,366 for the nine months ended September 30, 2015. The increase of interest expense was mainly driven by the interest incurred on and debt discount amortization of the Senior Note, which was entered into on February 13, 2015 and therefore was only amortized for part of the first quarter in 2015 as compared to the full half of the year in 2016. Interest expense, net represented 16.5% and 11.8% of total revenues for the nine months ended September 30, 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 $496,575 for the nine months ended September 30, 2016 and a gain of $1,280,000 for the nine months ended September 30, 2015 represented the changes in fair value of the derivative liability during those periods.

Liquidity and Capital Resources

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, and we believe that the number of our active subscribers is strongly correlated to our spending on sales and marketing. 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. For the nine months ended September 30, 2016, our advertising expense was approximately 15.2% lower than the nine months ended September 30, 2015, which we believe resulted in a decrease in the number of active subscribers during 2016. As described above in “Results of Operations,” we believe that the decrease in the number of active subscribers for the nine months ended September 30, 2016 has negatively impacted our revenues as compared to the same period in 2015.

As of September 30, 2016, we had $1,460,494 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.

We have also incurred debt as a means of generating liquidity. As of September 30, 2016, the outstanding principal amount of our debt was $3,200,000, which consisted entirely of the Senior Note and the Term Note. As of October 7, 2016, both the Senior Note and the Term Note had been repaid in full.

Although we expect that our need for capital will increase as a result of the Merger, we believe that we will be able to finance our operations through cash on hand, cash flow from our operations and Paltalk’s operations, borrowings, debt or equity offerings or some combination thereof. However, our ability to fund our current working capital requirements and fund future capital requirements will depend principally upon our future operating performance, which is subject to the risks inherent in our business and our ability to effectively integrate our operations with the operations of Paltalk. In addition, we expect to grow and expand our business in the future, which will increase our need for working capital.

Operating Activities

Net cash used in operating activities was $803,155 for the nine months ended September 30, 2016, as compared to net cash used in operating activities of $1,186,337 for the nine months ended September 30, 2015. This decrease in net cash used in operating activities was a result of a decrease in our accrued expenses in 2015 mainly driven by the one-time repayment of the advance under the Acquisition Agreement with Zoosk and the funding of a security deposit made in connection with the relocation of our corporate office.

Significant items impacting cash flow in the nine months ended September 30, 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 nine months ended September 30, 2015 included significant cash outlays relating to sales and marketing expense, increases in 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 nine months ended September 30, 2016 and 2015 was $13,533 and $40,149, respectively. Cash used in investing activities included purchases of property and equipment totaling $12,204 and $44,210 during the nine months ended September 30, 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 provided by financing activities for the nine months ended September 30, 2016 and 2015 was $145,920 and $2,239,159, respectively.

The decrease relates to the issuance of the Senior 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 in 2015.

Off-Balance Sheet Arrangements

As of September 30, 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.

On August 26, 2016, the FASB issued ASU 2016-15, which amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. ASU 2016-15 is effective for for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. 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 nine months ended September 30, 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

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, 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 September 30, 2016, the Company determined that the following item constituted a material weakness:

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.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS 

On August 2, 2016, Banertek LLC filed a complaint against us in the United States District Court for the Eastern District of Texas, Marshall Division (Case No. 2:16-cv-00836). The complaint alleged that we infringed upon one of Banertek LLC’s patents (U.S. Patent No. 6,839,731 B2) by, among other things, using our FirstMet application as a system and method for providing data communication in a device network in violation of such patent. The complaint seeks damages, an award of Banertek LLC’s costs and expenses and an award of Banertek LLC’s attorney’s fees. We dispute the allegations made by the plaintiff and intend to vigorously defend ourselves in this litigation.

On October 25, 2016, we filed a complaint against Snap Inc. (“Snapchat”) in the United States District Court for the Southern District of New York (Case No. 1:16-cv-08313). The complaint alleges that Snapchat infringed upon our trade name and trademarks by changing its name from “Snapchat Inc.” to “Snap Inc.” The complaint seeks, among other things, a preliminary and permanent injunction enjoining Snapchat from the unauthorized use of our name and trademarks, an award of our costs and expenses, an award of our attorney’s fees and exemplary and punitive damages.

To our knowledge, other than as described above, there are no material pending legal proceedings to which we are a party or of which any of our property is the subject.

ITEM 1A. RISK FACTORS 

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. 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 

Unregistered Sales of Equity Securities 

There were no sales of unregistered securities during the quarter ended September 30, 2016 that were not previously reported on a Current Report on Form 8-K.

Dividend Policy 

We have never declared or paid dividends on our common stock. We do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Any future determination to declare dividends will be subject to the discretion of our Board of Directors and will depend on various factors, including applicable Delaware law, future earnings, capital requirements, results of operations and any other relevant factors. In general, as a Delaware corporation, we may pay dividends out of surplus capital or, if there is no surplus capital, out of net profits for the fiscal year in which a dividend is declared and/or the preceding fiscal year.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES 

None. 

ITEM 4. MINE SAFETY DISCLOSURES 

None. 

ITEM 5. OTHER INFORMATION

On August 8, 2016, our Board of Directors approved and adopted (i) a form of agreement for nonqualified stock option awards (the “NQSO Agreement”) to be granted pursuant to Snap Interactive, Inc. 2016 Long-Term Incentive Plan (the “2016 Plan”), (ii) a form of agreement for incentive stock option awards (the “ISO Agreement,” and together with the NQSO Agreement, the “Option Agreements”) to be granted pursuant to the 2016 Plan and (iii) a form of agreement for restricted stock awards (the “RS Agreement”) to be granted pursuant to the 2016 Plan.

Stock options granted pursuant to the Option Agreements (“Awarded Options”) generally must have an exercise price equal to the fair market value of our common stock on the date of grant, as determined in accordance with the terms of the 2016 Incentive Plan (except with respect to grants under the ISO Agreement to a ten percent (10%) or more stockholder, as provided in Section 422 of the Internal Revenue Code of 1986, as amended, in which case the exercise price must be at least one hundred and ten percent (110%) of the fair market value of our common stock on the date of grant). Awarded Options will be subject to either time-based or performance-based vesting conditions, as determined by our Board of Directors, in its discretion, and as set forth in the recipient’s Option Agreement at the time of grant. The Option Agreements provide that upon the occurrence of a “change in control,” fifty percent (50%) of the then unvested Awarded Options will vest immediately on the date of such change in control, and the remaining fifty percent (50%) will vest on the earlier of the original date such Awarded Options would have vested, or equally on the first and second anniversary of the effective date of such change in control. The Option Agreements provide that the Awarded Options will expire on the date immediately preceding the tenth anniversary of the date of grant (except with respect to grants under the ISO Agreement to a ten percent (10%) or more stockholder, in which case the Awarded Options will expire on the date immediately preceding the fifth anniversary of the date of grant), unless sooner terminated in accordance with the terms of the Option Agreement. The Option Agreements also provide that (i) unvested Awarded Options terminate on the date of the recipient’s termination of service for any reason, and (ii) vested but unexercised Awarded Options will terminate upon the first to occur of (A) the expiration date of the Awarded Options, (B) immediately upon the recipient’s termination of service by Snap for cause, (C) immediately upon the recipient’s violation of any non-compete or non-solicitation agreement entered with Snap, or (D) the date the Awarded Options are forfeited by a recipient for failing to pay the exercise price for, or accept delivery of the shares underlying the Awarded Options. Our Board of Directors may, in its sole discretion and in accordance with the terms of the 2016 Incentive Plan, grant stock option awards with terms that are different from those contained in the Option Agreements.

Shares of restricted stock granted pursuant to the RS Agreement (“Awarded Shares”) are generally subject to a substantial risk of forfeiture and to restrictions on their sale or other transfer by the recipient until such Awarded Shares are vested in accordance with the terms of the RS Agreement. Awarded Shares will be subject to either time-based or performance-based vesting conditions, as determined by our Board of Directors, in its discretion, and as set forth in the recipient’s RS Agreement at the time of grant. The RS Agreement provides that upon the occurrence of a “change in control,” fifty percent (50%) of the then unvested Awarded Shares will vest immediately on the date of such change in control, and the remaining fifty percent (50%) will vest on the earlier of the original date such Awarded Shares would have vested, or equally on the first and second anniversary of the effective date of such change in control. The RS Agreement provides that Awarded Shares that are not vested in accordance with the terms of the RS Agreement will be forfeited on the date of the recipient’s termination of service from Snap for any reason. Our Board of Directors may, in its sole discretion and in accordance with the terms of the 2016 Incentive Plan, grant restricted stock awards with terms that are different from those contained in the RS Agreement.

The foregoing description of the NQSO Agreement, the ISO Agreement and the RS Agreement is qualified in its entirety to the full text of such forms, which are filed herewith as Exhibits 10.1, 10.2 and 10.3, respectively.

ITEM 6. EXHIBITS

(a) Exhibits required by Item 601 of Regulation S-K.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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