UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q 

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

For the quarterly period ended September 30, 2013

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)

Delaware	20-3191847
(State or other jurisdiction of incorporation or organization)	(I.R.S.  Employer Identification No.)

462 7th Avenue, 4th 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 þ 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 þ 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):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ
(Do not check if a smaller reporting company)

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

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

Class	Outstanding at November 13, 2013
Common Stock, par value $0.001 per share	38,932,826

SNAP INTERACTIVE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2013

Table of Contents

		Page Number
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)	2
	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2013 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (Unaudited)	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	25
ITEM 4.	Controls and Procedures	25
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	26
ITEM 1A.	Risk Factors	26
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
ITEM 3.	Defaults Upon Senior Securities	26
ITEM 4.	Mine Safety Disclosures	26
ITEM 5.	Other Information	26
ITEM 6.	Exhibits	27
SIGNATURES		28

Unless the context otherwise indicates, references to “Snap,” “we,” “our,” “us” and the “Company” refer to Snap Interactive, Inc. and its subsidiaries on a consolidated basis.

AYI, the AYI logo, Snap, 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.

References in this report to “DAUs” and “MAUs” mean daily active users and monthly active users, respectively, of our application.  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 application is accessed.  References in this report to active subscribers mean subscribers who have prepaid for current access to premium features of the AYI application and the term of whose subscription period has not yet expired. The metrics for subscribers are based on internally-derived metrics across all platforms through which our application is accessed.

i

FORWARD-LOOKING STATEMENTS

Certain statements contained in this prospectus 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,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “began,” “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:

● our ability to generate and sustain increased revenue levels and achieve profitability in the future;

● our heavy reliance on the Facebook platform to run our application and Facebook’s ability to discontinue, limit or restrict access to its platform by us or our application, change its terms and conditions or other policies or features, including restricting methods of collecting payments and establish more favorable relationships with one or more of our competitors or develop an application or feature that competes with our application;

● our ability to maintain good relationships with Apple and Google;

● our reliance on our President, Chief Executive Officer and sole director;

● the intense competition in the online dating industry;

● our reliance on a small percentage of our total users for substantially all of our revenue;

● our ability to develop, establish and maintain a strong brand;

● our ability to develop and market new technologies to respond to rapid technological changes;

● our ability to effectively manage our growth, including attracting and retaining qualified employees;

● our ability to generate subscribers through advertising and marketing agreements with third party advertising and marketing providers;

● our reliance on email campaigns to convert users to subscribers and to retain subscribers;

● the effect of any interruption or failure of our data center;

● the effect of an interruption or failure of our programming code, servers or technological infrastructure;

● the effect of security breaches, computer viruses and computer hacking attacks;

● our ability to comply with laws and regulations regarding privacy and protection of user data;

● our reliance upon credit card processors and related merchant account approvals;

● governmental regulation or taxation of the online dating, social dating or Internet industries;

● the impact of any claim that we have infringed on intellectual property rights of others;

● our ability to protect our intellectual property rights;

● the risk that we might be deemed a “dating service” or an “Internet dating service” under various state regulations;

● the possibility that our users or third parties may be physically or emotionally harmed following interaction with other users;

● our ability to obtain additional capital or financing to execute our business plan; and

● our ability to maintain effective internal control over financial reporting.

For a more detailed discussion of these and other factors that may affect our business, see the discussion in “Risk Factors” and “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.

ii

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2013			2012
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	1,480,183		$	5,357,596
Restricted cash		375,211			105,000
Credit card holdback receivable		250,879			287,293
Accounts receivable, net of allowances and reserves of $39,724 and $36,129, respectively		347,301			320,019
Prepaid expense and other current assets		115,062			204,824
Total current assets		2,568,636			6,274,732
Fixed assets and intangible assets, net		567,082			548,549
Notes receivable		169,327			165,716
Investments		75,000			-
Total assets	$	3,380,045		$	6,988,997
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	836,247		$	799,183
Accrued expenses and other current liabilities		581,223			240,049
Deferred revenue		1,942,766			2,524,229
Total current liabilities		3,360,236			3,563,461
Long-term deferred rent		21,150			48,340
Warrant liability		609,050			1,616,325
Total liabilities		3,990,436			5,228,126
Stockholders' equity:
Preferred Stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding		-			-
Common Stock, $0.001 par value, 100,000,000 shares authorized, 49,737,826 and 44,007,826 shares issued, respectively, and 38,932,826 and 38,832,826 shares outstanding, respectively		38,933			38,833
Additional paid-in capital		10,412,291			9,437,422
Accumulated deficit		(11,061,615	)		(7,715,384	)
Total stockholders' equity		(610,391	)		1,760,871
Total liabilities and stockholders' equity	$	3,380,045		$	6,988,997

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

1

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 (Unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Revenues:
Subscription revenue	$	2,988,151		$	4,304,763		$	9,566,361		$	15,001,709
Advertising revenue		1,827			26,938			45,167			288,082
Total revenues		2,989,978			4,331,701			9,611,528			15,289,791
Costs and expenses:
Programming, hosting and technology		1,225,129			1,236,732			3,993,704			3,144,942
Compensation		1,223,555			756,549			3,123,161			2,726,401
Professional fees		200,619			156,354			674,426			488,580
Advertising and marketing		1,125,181			1,511,292			3,209,110			9,058,190
General and administrative		774,632			936,257			2,972,104			2,997,486
Total costs and expenses		4,549,116			4,597,184			13,972,505			18,415,599
Loss from operations		(1,559,138	)		(265,483	)		(4,360,977	)		(3,125,808	)
Interest income, net		1,405			5,589			4,510			24,190
Mark-to-market adjustment on warrant liability		(163,975	)		562,200			1,007,275			(609,050	)
Other expense		2,961			-			2,961			(16,885	)
Net income (loss) before income tax		(1,718,747	)		302,306			(3,346,231	)		(3,727,553	)
Provision for income taxes		-			-			-			-
Net income (loss)	$	(1,718,747	)	$	302,306		$	(3,346,231	)	$	(3,727,553	)
Net income (loss) per common share:
Basic	$	(0.04	)	$	0.01		$	(0.09	)	$	(0.10	)
Diluted	$	(0.04	)	$	0.01		$	(0.09	)	$	(0.10	)
Weighted average number of common shares used in calculating net income (loss) per common share:
Basic		38,932,826			38,593,304			38,924,767			38,584,641
Diluted		38,932,826			39,685,134			38,924,767			38,584,641

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

2

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 (Unaudited)

	Common Stock				Additional Paid-		Accumulated			Stockholders’
	Shares		Amount		in Capital		Deficit			Equity
Balance at December 31, 2012		38,832,826	$	38,833	$	9,437,422	$	(7,715,384	)	$	1,760,871
Stock issued in exchange for domain name		100,000		100		99,900		-			100,000
Stock-based compensation expense for stock options		-		-		265,704		-			265,704
Stock-based compensation expense for restricted stock awards		-		-		609,265		-			609,265
Net loss		-		-		-		(3,346,231	)		(3,346,231	)
Balance at September 30, 2013		38,932,826	$	38,933	$	10,412,291	$	(11,061,615	)	$	(610,391	)

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

3

SNAP INTERACTIVE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited)

	Nine Months Ended
	September 30,
	2013			2012
Cash flows from operating activities:
Net loss	$	(3,346,231	)	$	(3,727,553)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		130,020			112,509
Amortization of investment premium		-			6,205
Stock-based compensation expense		874,969			836,108
Mark-to-market adjustment on warrant liability		(1,007,275	)		609,050
Loss on disposal of fixed assets		-			16,885
Changes in operating assets and liabilities:
Restricted cash		(270,211	)		(105,000	)
Credit card holdback receivable		36,414			26,269
Accounts receivable, net		(27,282	)		69,344
Prepaid expense and other current assets		89,762			(87,837	)
Security deposit		-			19,520
Accounts payable and accrued expenses and other current liabilities		372,929			(191,600	)
Deferred rent		(21,881	)		(16,702	)
Deferred revenue		(581,463	)		179,384
Net cash used in operating activities		(3,750,249	)		(2,253,418	)
Cash flows from investing activities:
Purchase of fixed assets		(48,553	)		(124,479	)
Purchase of non-marketable equity securities		(75,000	)		-
Redemption of short-term investments		-			6,475,000
Repayment (issuance) of notes receivable and accrued interest		(3,611	)		8,340
Net cash (used in) provided by investing activities		(127,164	)		6,358,861
Cash flows from financing activities:
Proceeds from exercise of stock options		-			25,000
Net cash provided by financing activities		-			25,000
Net (decrease) increase in cash and cash equivalents		(3,877,413	)		4,130,443
Cash and cash equivalents at beginning of year		5,357,596			2,397,828
Cash and cash equivalents at end of period	$	1,480,183		$	6,528,271
Supplemental disclosure of noncash activity:
AYI.com domain purchase in exchange for 100,000 shares of common stock	$	100,000			-

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

4

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Snap Interactive, Inc. and its wholly owned subsidiaries, eTwine, Inc. and Snap Mobile Limited (collectively, the “Company”).  The condensed consolidated financial statements included in this report have been prepared 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.   We have not included certain information normally included in annual financial statements pursuant to those rules and regulations, although we believe 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 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 14, 2013.

In the opinion of management, the accompanying unaudited condensed consolidated financial information contains all normal and recurring adjustments necessary to fairly present the consolidated financial condition, results of operations, and changes in cash flows 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 nine months ended September 30, 2013 are not necessarily indicative of results for the year ending December 31, 2013, or for any other period.

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

2. Summary of Significant Accounting Policies

During the nine months ended September 30, 2013, there were no material changes to the Company’s significant accounting policies from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 14, 2013, except for the following:

The Company follows Accounting Standards Codification (“ASC”) 325-20, Cost Method Investments (“ASC 325-20”), to account for its ownership interest in noncontrolled entities. Under ASC 325-20, equity securities that do not have readily determinable fair values (i.e., non-marketable equity securities) and are not required to be accounted for under the equity method are typically carried at cost (i.e., cost method investments). Investments of this nature are initially recorded at cost. Income is recorded for dividends received that are distributed from net accumulated earnings of the noncontrolled entity subsequent to the date of investment. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions in the cost of the investment. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred.

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”), which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The revised guidance is effective for interim and annual periods within those years, beginning after December 15, 2013. The Company does not expect the adoption of ASU 2013-11 to have a material impact on its consolidated financial statements.

3. Restricted Cash

During 2012, the Company established a line of credit with JP Morgan Chase Bank, N. A. (“JP Morgan”) related to the Company’s corporate credit cards and placed a cash collateral guarantee of 105% of the monthly credit line of $100,000 in a certificate of deposit for twelve months as collateral.  Accordingly, the Company has recorded $105,211 as restricted cash on the balance sheet as of September 30, 2013.  During September 2013, the Company closed its corporate credit card account with JP Morgan.  JP Morgan will release the $105,211 held in the certificate of deposit after a 60-day waiting period (See Note 16).

On January 11, 2013, the Company obtained a letter of credit from JP Morgan in the amount of $200,000 in favor of Hewlett Packard Financial Services Company (“HP”).  This letter of credit expires on January 31, 2014 and was increased to $270,000 as of September 30, 2013.

4. Accounts Receivable, Net

Accounts receivable, net consisted of the following as of September 30, 2013 and December 31, 2012: 

	September 30,			December 31,
	2013			2012
	(Unaudited)
Accounts receivable	$	387,025		$	356,148
Less: Reserve for future chargebacks		(39,724	)		(36,129	)
Total accounts receivable, net	$	347,301		$	320,019

Credit card payments for subscriptions and micro-transactions typically settle several days after the date of purchase. As of September 30, 2013, the amount of unsettled transactions due from credit card payment processors amounted to $141,614, as compared to $112,885 at December 31, 2012. At September 30, 2013, the amount of accounts receivable due from Apple Inc. amounted to $234,048 as compared to $201,859 at December 31, 2012. These amounts are included in our accounts receivable.

5

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5. Fair Value Measurements

The fair value framework under the Financial Accounting Standards Board’s (“FASB”) 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:

● Level 1:  Fair value measurement of the asset or liability using observable inputs such as quoted prices in active markets for identical assets or liabilities;

● Level 2:  Fair value measurement of the asset or liability using inputs other than quoted prices that are observable for the applicable asset or liability, either directly or indirectly, such as quoted prices for similar (as opposed to identical) assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active; and

● Level 3:  Fair value measurement of the asset or liability using unobservable inputs that reflect the Company’s own assumptions regarding the applicable asset or liability.

The following table summarizes those liabilities as of September 30, 2013 and December 31, 2012:

	September 30, 2013 (Unaudited)								December 31, 2012
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
LIABILITIES:
Warrant liability	$	—	$	—	$	609,050	$	609,050	$	—	$	—	$	1,616,325	$	1,616,325
Total warrant liability	$	—	$	—	$	609,050	$	609,050	$	—	$	—	$	1,616,325	$	1,616,325

Interest earned on debt securities is recorded to “Interest income, net” on the Condensed Consolidated Statements of Operations.  

The Company issued common stock warrants in January 2011 in conjunction with an equity financing.  In accordance with ASC 480, Distinguishing Liabilities from Equity  (“ASC 480”), the fair value of these warrants is classified as a liability on the Company’s Condensed Consolidated Balance Sheets because, according to the terms of the warrants, a fundamental transaction could give rise to an obligation of the Company to pay cash to its warrant holders.  Corresponding changes in the fair value of the warrants are recognized in earnings on the Company’s Condensed Consolidated Statements of Operations in each subsequent period.

The Company’s warrant liability is carried at fair value and was 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 liability at each measurement date using a Monte-Carlo style simulation, as the value of certain features of the warrant liability would not be captured by the standard Black-Scholes model.

The following table summarizes the values of certain assumptions used in our custom model to estimate the fair value of the warrant liability as of September 30, 2013 and December 31, 2012:

	September 30,			December 31,
	2013			2012
	(Unaudited)
Stock price	$	0.90		$	1.25
Strike price	$	2.50		$	2.50
Remaining contractual term (years)		2.3			3.1
Volatility		113.7	%		171.9	%
Adjusted volatility		99.7	%		121.1	%
Risk-free rate		0.4	%		0.4	%
Dividend yield		0.0	%		0.0	%

For the purposes of determining fair value, the Company used “adjusted volatility” in favor of “historical volatility” in its Monte-Carlo style simulation.  Historical volatility of the Company was calculated using weekly stock prices over a look back period corresponding to the remaining contractual term of the warrants as of each valuation date.  Management considered the lack of marketability of these instruments by incorporating a 10% incremental discount rate through a reduction of the volatility estimate (“volatility haircut”) to calculate the adjusted historical volatility as of each valuation date.

ASU No. 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”), indicates that “in the absence of a Level 1 input, a reporting entity should apply premiums or discounts when market participants would do so when pricing the asset or liability.”  In accordance with ASU 2011-04, management estimated fair value from the perspective of market participants.

6

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6. Cost-Method Investment

On January 31, 2013, the Company entered into a subscription agreement with Darrell Lerner and DCL Ventures, Inc. (“DCL”) in connection with Mr. Lerner’s separation from the Company. Pursuant to this agreement, the Company has made multiple investments in DCL by purchasing (i) 50,000 shares of DCL’s common stock for an aggregate purchase price of $50,000 in April 2013, (ii) 25,000 shares of DCL’s common stock for an aggregate purchase price of $25,000 in July 2013 and (iii) 25,000 shares of DCL’s common stock for an aggregate purchase price of $25,000 in October 2013. These nonmarketable securities have been recorded in Investments on the Company’s Condensed Consolidated Balance Sheet measured on a cost basis (See Note 16).

As of September 30, 2013, the aggregate carrying amount of the Company’s cost-method investment in DCL, which was a noncontrolled entity, was $75,000. The Company assesses all cost-method investments for impairment quarterly. No impairment loss was recorded during the three and nine months ended September 30, 2013. The Company does not reassess the fair value of cost-method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments (See Note 16).

7. Fixed Assets and Intangible Assets, Net

Fixed assets and intangible assets, net consisted of the following at September 30, 2013 and December 31, 2012: 

	September 30,			December 31,
	2013			2012
	(Unaudited)
Computer equipment	$	252,878		$	211,896
Furniture and fixtures		142,856			142,856
Leasehold improvements		382,376			377,727
Software		10,968			8,047
Website domain name		124,938			24,938
Website costs		40,500			40,500
Total fixed assets		954,516			805,964
Less: Accumulated depreciation and amortization		(387,434	)		(257,415	)
Total fixed assets and intangible assets, net	$	567,082		$	548,549

The Company only holds fixed assets in the United States. Depreciation and amortization expense for the nine months ended September 30, 2013 was $130,020, as compared to $112,509 for the nine months ended September 30, 2012.

On January 23, 2013, the Company issued 100,000 shares of common stock with a fair value of $100,000 to an unrelated third party in exchange for the AYI.com domain name (See Note 13).  

8. Notes Receivable

At September 30, 2013, the Company had notes receivable in the aggregate amount of $169,327 due from one current and two former employees.  The employees issued the notes to the Company since the Company paid taxes for stock-based compensation on these employees’ behalf during 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 from 2.31% and 3.57% per annum.

9. Income Taxes

We had no income tax benefit or provision for the three and nine months ended September 30, 2013.  Since the Company incurred a net loss for the three and nine months ended September 30, 2013, there was no income tax expense for the period.  Increases in deferred tax balances have been offset by a valuation allowance and have no impact on our 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, 2013 and December 31, 2012:

	September 30,		December 31,
	2013		2012
	(Unaudited)
Compensation and benefits	$	402,583	$	39,344
Deferred rent		35,664		30,354
Professional fees		130,125		163,500
Other accrued expenses		12,851		6,851
Total accrued expenses and other current liabilities	$	581,223	$	240,049

7

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

11. Stock-Based Compensation

The Snap Interactive, Inc. Amended and Restated 2011 Long-Term Incentive Plan (the “Plan”) permits the Company to award stock options (both incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares of common stock, restricted stock units, shares of performance stock, 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 delivered pursuant to awards under the Plan is 7,500,000 shares, 100% of which may be pursuant to incentive stock options. As of September 30, 2013, there were 3,246,935 shares available for future issuance under the Plan.

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, 2013:

	Nine Months Ended September 30, 2013
Expected volatility	258.74		%
Expected life of option	6.20 Years
Risk free interest rate		1.13	%
Expected dividend yield		0	%

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 (“SAB”) 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.

The following table summarizes stock option activity for the nine months ended September 30, 2013:  

	Number of Options			Weighted Average Exercise Price
Stock Options:
Outstanding at December 31, 2012		4,525,205		$	0.97
Granted		1,330,360			0.57
Exercised		-			-
Expired or canceled, during the period		(750,000	)		1.08
Forfeited, during the period		(612,500	)		1.20
Outstanding at September 30, 2013		4,493,065			0.76
Exercisable at September 30, 2013		2,054,728		$	0.80

At September 30, 2013, the aggregate intrinsic value of stock options that were outstanding and exercisable was $1,100,260 and $509,047, respectively.  At September 30, 2012, the aggregate intrinsic value of stock options that were outstanding and exercisable was $1,487,773 and $823,785, 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.

Stock-based compensation expense was $265,704 and $600,613 during the nine months ended September 30, 2013 and 2012, respectively.  Stock-based compensation expense was $159,208 and $145,694 during the three months ended September 30, 2013 and 2012, respectively.  We estimate potential forfeitures of stock awards and adjust 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.  

Non-employee stock option activity is included in the table below, but is also included in the table for stock option activity above.  The following table summarizes non-employee stock option activity for the nine months ended September 30, 2013:

	Number of Options			Weighted Average Exercise Price
Non-Employee Stock Options:
Outstanding at December 31, 2012		900,000		$	1.08
Granted		50,000			0.54
Exercised		-
Expired or canceled, during the period		(750,000	)		1.08
Forfeited, during the period		-
Outstanding at September 30, 2013		200,000			0.93
Exercisable at September 30, 2013		200,000		$	0.93

8

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At September 30, 2013, the aggregate intrinsic value of non-employee stock options that were outstanding and exercisable was $24,500.  At September 30, 2012, the aggregate intrinsic value of non-employee stock options that were outstanding and exercisable was $89,810.

Stock-based compensation expense relating to non-employee stock options was $129,411 and $67,568 during the nine months ended September 30, 2013 and 2012, respectively.  

The following table summarizes unvested stock option activity for the nine months ended September 30, 2013:

	Number of Options			Weighted Average Grant Date Fair Value
Unvested Stock Options:
Unvested stock options outstanding at December 31, 2012		2,353,591		$	0.99
Granted		1,330,360			0.57
Vested		(353,114	)		0.97
Expired or canceled, during the period		(300,000	)		1.21
Forfeited, during the period		(592,500	)		0.90
Unvested stock options outstanding at September 30, 2013		2,438,337		$	0.69

There was $1,061,360 and $1,782,664 of total unrecognized compensation expense related to unvested stock options at September 30, 2013 and 2012, respectively, which is expected to be recognized over a weighted average remaining vesting period of 3.02 and 2.48 years, respectively.   

Restricted Stock Awards (“RSAs”)

The following table summarizes restricted stock award activity for the nine months ended September 30, 2013:

	Number of RSAs		Weighted Average Grant Date Fair Value
Restricted Stock Awards:
Outstanding at December 31, 2012		5,175,000	$	0.68
Granted		5,630,000		0.53
Vested		-
Forfeited, during the period		-
Outstanding at September 30, 2013		10,805,000	$	0.60

These restricted stock awards have voting rights, but are not transferable and are not considered outstanding as of September 30, 2013 since the awards had not vested.  Accordingly, 10,805,000 shares were recorded as issued but not outstanding on the Company’s Condensed Consolidated Balance Sheet at September 30, 2013.

At September 30, 2013, there was $5,534,038 of total unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over a weighted average period of 5.87 years.  At September 30, 2012, there was $2,884,673 of total unrecognized compensation expense related to unvested restricted stock awards, which is expected to be recognized over a weighted average period of 9.19 years.  

Stock-based compensation expense relating to restricted stock awards was $609,265 and $235,495 for the nine months ended September 30, 2013 and 2012, respectively.  Stock-based compensation expense relating to restricted stock awards was $270,692 and $80,621 for the three months ended September 30, 2013 and 2012, respectively.

9

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

12. Common Stock Purchase Warrants 

In January 2011, the Company completed an equity financing that raised gross proceeds of $8,500,000 from the issuance of 4,250,000 shares of common stock at a price of $2.00 per share and warrants to purchase an aggregate of 2,125,000 shares of common stock.  The warrants are exercisable any time on or before January 19, 2016 and have an exercise price of $2.50 per share.  The Company received $7,915,700 in net proceeds from the equity financing after deducting offering expenses of $584,300.  The exercise price of the warrants and number of shares of common stock to be received upon the exercise of the warrants are subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions.

The Company also issued warrants to purchase 255,000 shares of its common stock to the Company’s placement agent and advisors in January 2011 in connection with the equity financing as consideration for their services.  These warrants have the same terms, including exercise price, registration rights and expiration, as the warrants issued to the investors in the equity financing.

Warrant Liability

In connection with the issuance of these warrants, the Company recorded a warrant liability on its Condensed Consolidated Balance Sheet based on the estimated fair value of the warrants at the issuance date.  The warrants are valued at the end of each reporting period with changes recorded as mark-to-market adjustment on warrant liability on the Company’s Condensed Consolidated Statement of Operations.  The fair value of these warrants was $609,050 and $1,616,325 at September 30, 2013 and December 31, 2012, respectively, based on a model developed with the assistance of an independent third-party valuation expert.

The mark-to-market income (expense) on these warrants was ($163,975) and $562,200 for the three months ended September 30, 2013 and September 30, 2012, respectively, and $1,007,275 and ($609,050) for the nine months ended September 30, 2013 and September 30, 2012, respectively, and was not presented within loss from operations.

Common Stock Issued for Warrants Exercised

In April 2011, we issued 37,500 shares of our common stock and received net proceeds of $88,125 after an investor exercised warrants at an exercise price of $2.50 per share.

The following table summarizes warrant activity for the nine months ended September 30, 2013:

	Number of Warrants		Weighted Average Exercise Price
Stock Warrants:
Outstanding at December 31, 2012		2,342,500	$	2.50
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding at September 30, 2013		2,342,500		2.50
Warrants exercisable at September 30, 2013		2,342,500	$	2.50

10

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

13. Common Stock Issued for Domain Name

On January 23, 2013, the Company issued 100,000 shares of its common stock with a fair value of $100,000 to an unrelated third party in exchange for the AYI.com domain name.  For the nine months ended September 30, 2013, $100,000 was recorded to fixed assets and intangible assets for the new domain name, and $100 and $99,900 were recorded to common stock and additional paid-in capital, respectively, on the Company’s Condensed Consolidated Balance Sheets.

14. Net Income (Loss) Per Common Share

Basic income (loss) per common share is determined using the two-class method and is computed by dividing net income (loss) attributable to Snap Interactive Inc. common stockholders by the weighted-average number of common shares outstanding during the period.  The two-class method is an earnings allocation formula that determines income (loss) per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings.  Diluted income (loss) per common share reflects the more dilutive earnings per share amount calculated using the treasury stock method or the two-class method.

The following table provides a reconciliation of basic and diluted net income (loss) per common share attributable to Snap Interactive, Inc. common stockholders for the periods presented:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2013			2012		2013			2012
Net income (loss) attributable to Snap Interactive, Inc. stockholders	$	(1,718,747	)	$	302,306	$	(3,346,231	)	$	(3,727,553	)
Net income (loss) allocated to participating securities		-			35,591		-			-
Net income (loss) attributable to Snap Interactive, Inc. common stockholders – basic	$	(1,718,747	)	$	266,715	$	(3,346,231	)	$	(3,727,553	)
Average number of common shares outstanding – basic		38,932,826			38,593,304		38,924,767			38,584,641
Dilutive effect of equity awards		-			1,091,830		-			-
Average number of common shares outstanding – diluted		38,932,826			39,685,134		38,924,767			38,584,641
Net income (loss) per common share attributable to Snap Interactive, Inc. common stockholders:
Basic	$	(0.04	)	$	0.01	$	(0.09	)	$	(0.10	)
Diluted	$	(0.04	)	$	0.01	$	(0.09	)	$	(0.10	)

The following outstanding options, unvested restricted stock awards and warrants were excluded from the computation of diluted net income per share for the periods presented as their effect would have been anti-dilutive:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Options to purchase common stock		4,493,065		1,889,839		4,493,065		4,670,705
Unvested restricted stock awards		10,805,000		2,545,773		10,805,000		5,150,000
Common stock warrants		2,342,500		2,342,500		2,342,500		2,342,500

11

SNAP INTERACTIVE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

15. Commitments

Operating Lease Agreements

On May 23, 2011, the Company executed a non-cancelable operating lease for corporate office space which began on June 1, 2011 and expires on March 30, 2015.  Total base rent due during the term of the lease is $973,595.  Monthly rent escalates during the term, but is recorded on a straight-line basis over the term of the lease.  The Company can terminate the final five months of the lease with eight months prior notice and the payment of unamortized costs.  Rent expense under this lease for the nine months ended September 30, 2013 and 2012 was $190,486.

During 2012, the Company entered into multiple two-year lease agreements with HP for equipment and certain other assets.  Rent expense under this lease for the nine months ended September 30, 2013 totaled $141,886.  On January 11, 2013, the Company obtained a letter of credit from JP Morgan in the amount of $200,000 in favor of HP. This letter of credit expires on January 31, 2014 and was increased to $270,000 as of September 30, 2013 (See Note 3).

The Company entered into a two-year service agreement with Equinix Operating Co., Inc. (“Equinix”) whereby Equinix will 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 $123,934 for the nine months ended September 30, 2013.

16. Related Party Transactions

During the nine months ended September 30, 2013, there were no material changes to the Company’s transactions with related parties from those disclosed in “Note 14. Related Party Transactions” in the notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 14, 2013, which disclosure is hereby incorporated by reference herein, except for the following:

On January 31, 2013, the Company entered into a subscription agreement with Darrell Lerner and DCL in connection with Mr. Lerner’s separation from the Company.  Pursuant to this agreement, the Company purchased (i) 50,000 shares of DCL’s common stock for an aggregate purchase price of $50,000 in April 2013, (ii) 25,000 shares of DCL’s common stock for an aggregate purchase price of $25,000 in July 2013 and (iii) 25,000 shares of DCL’s common stock for an aggregate purchase price of $25,000 in October 2013.

On April 10, 2013, the Company awarded Mr. Lerner 5,000,000 restricted shares of common stock.  Pursuant to the terms of the restricted stock award agreement, (i) fifty percent (50%) of the restricted shares will vest on the third anniversary of grant date, and (ii) the remaining fifty percent (50%) shares will vest on the fourth anniversary of grant date; provided, that any unvested shares will immediately vest on the effective date of a change in control.

On April 10, 2013, the Company awarded Mr. Pedersen 480,000 restricted shares of common stock.  Pursuant to the terms of the restricted stock award agreement, (i) fifty percent (50%) of the restricted shares will vest on the third anniversary of grant date, and (ii) the remaining fifty percent (50%) of the restricted shares will vest on the fourth anniversary of grant date; provided, that any unvested shares will immediately vest on the effective date of a change in control.

On April 10, 2013, the Company also awarded Mr. Pedersen a stock option to purchase 700,000 shares of the Company’s common stock at an exercise price of $0.52 per share.  The shares of common stock underlying Mr. Pedersen’s stock option will vest one-fourth on each of the first, second, third and fourth anniversaries of the date of grant; provided, that (i) upon the effective date of a “change in control,” 50% of all then unvested shares of common stock underlying the option will vest immediately and the remaining unvested shares of common stock underlying the option will vest on the earlier of (a) the original vesting date or (b) equally on the first and second anniversary of the effective date of the change in control (subject to early termination or forfeiture in accordance with the terms of the stock option agreement), (ii) any vested options will be forfeited immediately upon violation of any non-competition or non-solicitation agreement between the Company and Mr. Pedersen and (iii) upon termination of Mr. Pedersen’s employment without cause, the option will remain exercisable until the tenth anniversary of the date of grant to the extent the shares underlying the option are vested.

On November 12, 2013, JP Morgan Chase released the $105,211 held in a certificate of deposit for the Company’s corporate credit card account (See Note 3).

12

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

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

Forward-Looking Statements

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

Overview

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

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

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

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

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

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

Operational and Financial Highlights

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

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

● We rebranded to “AYI”, a shorter name that is easier for our users to remember; and

● We launched new “social” features for AYI that are designed to integrate a user’s interest and social graphs into the online dating experience.

For the remainder of 2013, our business objectives include:

● Growing our base of paid subscribers;

● Continuing to build out our “social” features to improve the online dating experience for all of our users;

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

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

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

13

Sources of Revenue

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

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

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

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

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

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

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

Costs and Expenses

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

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

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

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

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

14

Non-Operating Expenses

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

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

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

Key Metrics

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013				2012
Condensed Consolidated Statements of Operations Data:
Total revenues	$	2,989,978		$	4,331,701			$	9,611,528		$	15,289,791
Condensed Consolidated Balance Sheets Data:
Deferred revenue at period end	$	1,942,766		$	3,317,790			$	1,942,766		$	3,317,790
Condensed Consolidated Statements of Cash Flows Data:
Net cash used in operating activities	$	(1,098,318	)	$	(555,460	)		$	(3,750,249	)	$	(2,253,418	)

15

Deferred Revenue

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

Bookings

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

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

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

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

Limitations of Bookings

Some limitations of bookings as a financial measure include that:

● Bookings does not reflect that we recognize subscription revenue from subscription fees and micro-transactions over the length of the subscription term; and

● Other companies, including companies in our industry, may calculate bookings differently or choose not to calculate bookings at all, which reduces its usefulness as a comparative measure.

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

Results of Operations

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

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

16

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

Revenues

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

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

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

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

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Costs and Expenses

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

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

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

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

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

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

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

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Non-Operating Income

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

	Three Months Ended								%
	September 30,					Increase			Increase
	2013			2012		(Decrease)			(Decrease)
Interest income, net	$	1,405		$	5,589	$	(4,184	)		(74.9	)%
Mark-to-market adjustment on warrant liability		(163,975	)		562,200		(726,175	)		(129.2	)%
Other expense		2,961			-		2,961			100.0	%
Total non-operating income	$	(159,609	)	$	567,789	$	(727,398	)		(128.1	)%

Interest Income, net

Interest income, net for the three months ended September 30, 2013 was $1,405, a decrease of $4,184, or 74.9%, as compared to $5,589 for the three months ended September 30, 2012.  Interest income, net represented 0.0% and 0.1% of total revenues for the three months ended September 30, 2013 and 2012, respectively.  

Mark-to-Market Adjustment

Our warrant liability is marked-to-market at each reporting period, with changes in fair value reported in earnings. The mark-to-market income adjustment of $163,975 for the three months ended September 30, 2013 and income of $562,200 for the three months ended September 30, 2012 represented the changes in fair value of the warrant liability during those periods. Mark-to-market adjustment on warrant liability represented 5.5% and 13.0% of total revenues for the three months ended September 30, 2013 and 2012, respectively.

Other Expense

We had other expense from fixed asset disposals totaling $2,961 for the three months ended September 30, 2012, as compared to no other expense for the three months ended September 30, 2013.  Other expense represented 0.1% and 0.0% of total revenues for the three months ended September 30, 2013 and 2012, respectively.  

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

Revenues

Revenues decreased to $9,611,528 for the nine months ended September 30, 2013, from $15,289,791 for the nine months ended September 30, 2012.  The decrease is primarily related to lower revenues from subscription sales on the AYI brand in the nine months ended September 30, 2013 as compared to the nine months ended September 30, 2012.  We believe the decrease in revenues from subscription sales for the nine months ended September 30, 2013 primarily resulted from our reduced advertising and marketing expense for the period as compared to the nine months ended September 30, 2012.  We intentionally reduced our user acquisition campaigns from the second half of 2012 through January 2013, which primarily affected new subscriptions, while we focused on rebuilding, testing and optimizing the redesigned AYI application.  We began to increase user acquisition campaigns in January 2013 and intend to increase our user acquisition campaigns during the remainder of 2013 and into 2014. The following table sets forth our subscription revenue, advertising revenue and total revenues for the nine months ended September 30, 2013 and 2012, the decrease between those periods, the percentage decrease between those periods, and the percentage of total revenue that each represented for those periods:

	Nine Months Ended September 30,										% Revenue Nine Months Ended September 30,
	2013		2012		Decrease			% Decrease			2013			2012
Subscription revenue	$	9,566,361	$	15,001,709	$	(5,435,348	)		(36.2	)%		99.5	%		98.1	%
Advertising revenue		45,167		288,082		(242,915	)		(84.3	)%		0.5	%		1.9	%
Total revenues	$	9,611,528	$	15,289,791	$	(5,678,263	)		(37.1	)%		100.0	%		100.0	%

Subscription – The results for the nine months ended September 30, 2013 reflect a decrease in subscription revenue of $5,435,348, or 36.2%, as compared to the nine months ended September 30, 2012.  The decrease in subscription revenue for the nine months ended September 30, 2013, was primarily driven by a decrease in our marketing and advertising expense versus the prior year period, which primarily affects new subscriptions.  Subscription revenue as a percentage of total revenue was 99.5% for the nine months ended September 30, 2013, as compared to 98.1% for the nine months ended September 30, 2012.

Advertising – The results for the nine months ended September 30, 2013 reflect a decrease in advertising revenue of $242,915 or 84.3%, as compared to the nine months ended September 30, 2012.  We believe the decrease in advertising revenue resulted from our discontinuation of online advertising campaigns in February 2013 in order to focus on improving a user’s experience on AYI, which we believe will be more valuable in the long-term.  Advertising revenue as a percentage of total revenue was 0.5% for the nine months ended September 30, 2013, as compared to 1.9% for the nine months ended September 30, 2012.

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Costs and Expenses

Total costs and expenses for the nine months ended September 30, 2013 reflect a decrease in costs and expenses of $4,443,094, or 24.1%, as compared to the nine months ended September 30, 2012.  The following table presents our costs and expenses for the nine months ended September 30, 2013 and the nine months ended September 30, 2012, the increase or decrease between those periods, and the percentage increase or decrease between those periods:

	Nine Months Ended							%
	September 30,				Increase			Increase
	2013		2012		(Decrease)			(Decrease)
Programming, hosting and technology	$	3,993,704	$	3,144,942	$	848,762			27.0	%
Compensation		3,123,161		2,726,401		396,760			14.6	%
Professional fees		674,426		488,580		185,846			38.0	%
Advertising and marketing		3,209,110		9,058,190		(5,849,080	)		(64.6	)%
General and administrative		2,972,104		2,997,486		(25,382	)		(0.8	)%
Total costs and expenses	$	13,972,505	$	18,415,599	$	(4,443,094	)		(24.1	)%

Programming, Hosting and Technology – The results for the nine months ended September 30, 2013 reflect an increase in programming, hosting and technology expense of $848,762, or 27.0%, as compared to the nine months ended September 30, 2012. The increase in this expense for the nine months ended September 30, 2013, was primarily driven by increased salary expenses due to expansion of our engineering and development staff and increased expenses related to hosting and bandwidth, primarily to support the redesigned AYI application. Programming, hosting and technology expense as a percentage of total revenues was 41.6% for the nine months ended September 30, 2013, as compared to 20.6% for the nine months ended September 30, 2012.

Compensation – The results for the nine months ended September 30, 2013 reflect an increase in compensation expense, which excludes the cost of developers and programmers included in programming, hosting and technology expense above, of $396,760, or 14.6%, as compared to the nine months ended September 30, 2012. The increase in compensation expense for the nine months ended September 30, 2013 was primarily driven by consulting fees and an increase in stock-based compensation. Compensation expense as a percentage of total revenues was 32.5% for the nine months ended September 30, 2013, as compared to 17.8% for the nine months ended September 30, 2012.

Professional fees – The results for the nine months ended September 30, 2013 reflect an increase in professional fees of $185,846 or 38.0%, as compared to the nine months ended September 30, 2012. The increase in professional fees for the nine months ended September 30, 2013, was primarily driven by an increase in accounting fees as a result of the change in accounting firms and an increase in legal expenses. Professional fees as a percentage of total revenues were 7.0% for the nine months ended September 30, 2013, as compared to 3.2% for the nine months ended September 30, 2012.

Advertising and Marketing – The results for the nine months ended September 30, 2013 reflect a decrease in advertising and marketing expense of $5,849,080, or 64.6%, as compared to the nine months ended September 30, 2012. The decrease in advertising and marketing expense for the nine months ended September 30, 2013 as compared to the prior year period, was primarily driven by reducing the number of user acquisition campaigns. We also significantly reduced our rate of advertising and marketing expense as we continued to optimize the redesigned AYI application. We anticipate that advertising and marketing expense will increase during the remainder of 2013 (as compared to our advertising and marketing expense for the three months ended September 30, 2013) as we promote the redesigned AYI application. Advertising and marketing expense as a percentage of total revenues was 33.4% for the nine months ended September 30, 2013, as compared to 59.2% for the nine months ended September 30, 2012.

General and Administrative – The results for the nine months ended September 30, 2013 reflect an decrease in general and administrative expense of $25,382, or 0.8%, as compared to the nine months ended September 30, 2012. The decrease in general and administrative expense for the nine months ended September 30, 2013 as compared to the comparable period in the prior year, was primarily driven by decreases in investor relations expense and branding expenses, other employee related expenses and other decreased costs. General and administrative expense as a percentage of total revenues was 30.9% for the nine months ended September 30, 2013, as compared to 19.6% for the nine months ended September 30, 2012.

21

Non-Operating Income

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

	Nine Months Ended											%
	September 30,							Increase				Increase
	2013			2012				(Decrease)				(Decrease)
Interest income, net		$	4,510		$	24,190			$	(19,680	)		(81.4	)%
Mark-to-market adjustment on warrant liability			1,007,275			(609,050	)			1,616,325			265.4	%
Other income (expense)			2,961			(16,885	)			19,846			117.5	%
Total non-operating income (expense)		$	1,014,746		$	(601,745	)		$	1,616,491			268.6	%

Interest Income, net

Interest income, net for the nine months ended September 30, 2013 was $4,510, a decrease of $19,680, or 81.4%, as compared to $24,190 for the nine months ended September 30, 2012.  Interest income, net represented 0.0% and 0.2% of total revenues for the nine months ended September 30, 2013 and 2012, respectively.

Mark-to-Market Adjustment

Our warrant liability is marked-to-market at each reporting period, with changes in fair value reported in earnings. The mark-to-market income adjustment of $1,007,275 for the nine months ended September 30, 2013 and expense adjustment of $609,050 for the nine months ended September 30, 2012 represented the changes in fair value of the warrant liability during those periods. Mark-to-market adjustment on warrant liability represented 10.5% and 4.0% for the nine months ended September 30, 2013 and 2012, respectively.

Other Income (Expense)

We had losses from fixed asset disposals totaling $16,885 for the nine months ended September 30, 2012, as compared to other income of $2,961 for the nine months ended September 30, 2013.  Other expense represented 0.0% and 0.1% of total revenues for the nine months ended September 30, 2013 and 2012, respectively.

22

Liquidity and Capital Resources

	Nine Months Ended
	September 30,
	2013			2012
Consolidated Statements of Cash Flows Data:
Net cash used in operating activities	$	(3,750,249	)	$	(2,253,418	)
Net cash (used in) provided by investing activities		(127,164	)		6,358,861
Net cash provided by financing activities		-			25,000
Net (decrease) increase in cash and cash equivalents	$	(3,877,413	)	$	4,130,443

We have historically financed our operations through cash generated from our equity offering in January 2011, subscription fees received from our application, fees for premium features on our application and revenues derived from advertisements purchased on our application.

As of September 30, 2013, we had $1,480,183 in cash and cash equivalents, as compared to cash and cash equivalents of $5,357,596 as of December 31, 2012. Historically, our working capital has been generated through operations and equity offerings. If we continue to grow and expand our operations, our need for working capital will increase. We do not anticipate being profitable during the remainder of 2013 because we expect to increase our marketing and advertising expense during the remainder of 2013 (as compared to our advertising and marketing expense for the three months ended September 30, 2013) to acquire new users and create brand awareness. We intend to finance our business and growth with cash on hand, cash provided from operations, borrowings, debt or equity offerings, or some combination thereof. To the extent that these are not successful, we expect that our cash and cash equivalents will further decrease during 2013.

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

Operating Activities

Net cash used in operating activities was ($3,750,249) for the nine months ended September 30, 2013, as compared to net cash used in operating activities of ($2,253,418) for the nine months ended September 30, 2012. This increase in net cash used in operating activities of $1,496,831 was primarily a result of the decrease in deferred revenue, as well as the increase in the amount of restricted cash. These uses of cash were offset in part by decrease in credit card holdback receivable and prepaid expenses, and an increase in accounts payable and accrued expenses and other current liabilities.

Significant items impacting cash flow in the nine months ended September 30, 2013 included significant cash outlays relating to advertising and marketing expense, the mark-to-market adjustment on warranty liability, and increases in programming, hosting and technology expense, professional fees and related benefits associated with the growth of our business.  These uses of cash were offset in part by collections in subscription revenues received during the period.

Significant items impacting cash flow in the nine months ended September 30, 2012 included increased cash outlays relating to advertising and marketing expense, and an increase in salaries and related benefits associated with the growth of our business. These uses of cash were offset in part by increased collections on subscription revenues, credit card collections, and payments received from the growth of advertising revenue during the quarter.

Investing Activities

Cash (used in) provided by investing activities for the nine months ended September 30, 2013 and 2012 was ($127,164) and $6,358,861, respectively. Cash used in investing activities included purchases of property and equipment totaling $48,553 and $124,479 during the nine months ended September 30, 2013 and 2012, respectively. These purchases consisted primarily of computers and servers during the periods. We continue to invest in technology hardware and software to support our growth. Purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and software development. In addition, we also acquired 75,000 shares of DCL’s common stock for an aggregate purchase price of $75,000 under our subscription agreement with DCL and Darrell Lerner during the nine months ended September 30, 2013. Redemption of investments during the nine months ended September 30, 2012 totaled $6,475,000 and consisted of redemptions of our certificates of deposit and U.S. Treasury notes purchased in the prior year. We also received cash during the nine months ended September 30, 2012 from the partial repayment of a note receivable issued to an employee.

Financing Activities

There was no cash provided by financing activities for the nine months ended September 30, 2013. We received $25,000 in cash pursuant to the exercise of a stock option during the nine months ended September 30, 2012.

23

Off-Balance Sheet Arrangements

As of September 30, 2013, we did not have any off-balance sheet arrangements.

Contractual Obligations and Commitments

During the nine months ended September 30, 2013, there were no material changes to the Company’s contractual obligations and commitments from those disclosed in “Note 13. Commitments” in the Notes to the Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 14, 2013, which is hereby incorporated by reference herein.

Critical Accounting Policies and Estimates

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

During the nine months ended September 30, 2013, there were no material changes to our significant accounting policies from those contained in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 14, 2013, which are hereby incorporated by reference herein.

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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, 2013, 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, 2013, the Company determined that the following item constituted a material weakness:

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

Changes in Internal Control over Financial Reporting

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

25

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

To the best of our knowledge, 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” of our Annual Report on Form 10-K for the year ended December 31, 2012.  For more information concerning our risk factors, please see “Item 1A. Risk Factors” of our Annual Report on Form 10-K.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

26

ITEM 6. EXHIBITS 

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

Exhibit Number	Description
3.1	Certificate of Incorporation, dated July 19, 2005 (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 of the Company filed on February 11, 2011 by the Company with the SEC).
3.2	Amendment to Certificate of Incorporation, dated November 20, 2007 (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 of the Company filed on February 11, 2011 by the Company with the SEC).
3.3	Amended and Restated By-Laws of Snap Interactive, Inc., as amended April 19, 2012 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K of the Company filed on April 25, 2012 by the Company with the SEC).
31.1 *	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 *	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language), (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements.

† Management contract or compensatory plan arrangement.

*Filed herewith.

27

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.

	SNAP INTERACTIVE, INC.
Date:  November 14, 2013	By:	/s/ Clifford Lerner
		Clifford Lerner President and Chief Executive Officer (Principal Executive Officer)
Date:  November 14,2013	By:	/s/ Jon D. Pedersen, Sr.
		Jon D. Pedersen, Sr. Chief Financial Officer (Principal Financial and Accounting Officer)

28