Business Context and Reporting Period
The supplied filing is Snap Interactive, Inc.’s Form 10-K for the fiscal year ended December 31, 2011, not Intelligent Protection Management Corp. The filing therefore does not clearly correspond to the company identified in the request. It reports consolidated results for Snap Interactive and its subsidiaries, which operated the AreYouInterested.com dating and social-networking application across Facebook, mobile devices and a standalone website. The filing provides annual, rather than fourth-quarter-only, financial information.
Financial Highlights
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $19.16 million | $6.67 million | +187% |
| Subscription/points revenue | $18.78 million | $6.41 million | +193% |
| Advertising revenue | $0.37 million | $0.25 million | +47% |
| Total costs and expenses | $22.82 million | $7.84 million | +191% |
| Operating loss | $3.66 million | $1.17 million | Loss increased |
| Net loss | $3.63 million | $1.17 million | +211% |
| Basic and diluted loss per share | $0.10 loss | $0.04 loss | Loss increased |
| Net cash used in operating activities | $1.46 million | $1.15 million provided | Negative swing |
Revenue growth was driven primarily by subscriptions and points. The filing does not provide gross-profit or gross-margin figures. Based on reported revenue and operating loss, the approximate operating margin was negative 19.1% in 2011 versus negative 17.6% in 2010; the approximate net margin was negative 19.0% versus negative 17.5%.
- Advertising and marketing expense rose 274% to $14.63 million, representing approximately 76% of revenue.
- Programming, hosting and technology expense increased 85% to $2.93 million.
- General and administrative expense increased 183% to $3.07 million.
- Deferred revenue increased 62% to $3.14 million, reflecting cash collected for subscriptions not yet recognized as revenue.
- Cash and cash equivalents were $2.40 million at December 31, 2011, compared with $3.02 million at December 31, 2010.
- Investments were $6.48 million, bringing reported liquidity including investments to $8.88 million versus $3.02 million in 2010.
- Total assets were $10.70 million and stockholders’ equity was $5.55 million at year-end.
- No convertible notes or related-party accrued interest remained outstanding at year-end; the balances were converted into common stock during 2011.
Material Changes Versus the Prior Comparable Period
- Revenue expanded sharply, but expenses grew slightly faster, producing a larger operating and net loss.
- Operating cash flow changed from $1.15 million provided in 2010 to $1.46 million used in 2011, primarily because of higher marketing, administrative and technology spending and increased receivables.
- Investing cash flow used $7.17 million, principally for purchases of investments, fixed assets, technology and office build-out, and employee notes receivable.
- Financing activities provided $8.00 million net from a January 2011 equity financing. The financing issued 4.25 million common shares and warrants exercisable for 2.125 million shares at $2.50 per share; additional warrants were issued to the placement agent.
- Common shares outstanding increased to 38.58 million at December 31, 2011 from 33.21 million at December 31, 2010. The filing states that 43.73 million shares were outstanding as of March 22, 2012.
- Mobile engagement increased to 13% of logins in December 2011. The company reported 1.9 million iPhone application downloads during 2011 and approximately 145,000 active subscribers as of March 22, 2012.
- In February 2012, the company discontinued sales of points, suspended development of WhoIsNear.com, and stated that it would focus on subscription and advertising revenue.
Guidance, Outlook, Risks and Unusual Items
Management expected additional marketing spending and hiring in 2012 and did not anticipate near-term profitability. It expected cash and cash equivalents to decline during 2012, although it believed cash, investments and operating resources would fund operations for the next twelve months. Priorities included rebuilding the AreYouInterested.com brand around interest-based matching and social discovery, expanding mobile products, integrating access across platforms, and refining marketing analytics.
- Revenue was heavily dependent on Facebook; the filing states that substantially all 2011 revenue came from subscribers acquired through Facebook.
- The company also depended on Apple and Google mobile platforms, third-party payment processors, email campaigns and a single vendor hosting a significant majority of application traffic.
- Only a small portion of users were paying subscribers, creating retention, conversion and monetization risk.
- Competition, rapid technological change, user-acquisition costs, privacy and data-security requirements, potential regulation as an Internet dating service, chargebacks and intellectual-property claims could materially affect results.
- Management disclosed material weaknesses in internal control over financial reporting: no independent audit committee and failure to timely disclose warrants issued in an equity financing. A prior weakness involving delayed stock certificates was reported as remediated during the fourth quarter of 2011.
- The company had no material pending legal proceedings disclosed and no off-balance-sheet arrangements at December 31, 2011.
- Unusual or potentially dilutive items included substantial stock-option grants, stock-based compensation of $438,395, 8.29 million options outstanding, and 2.34 million warrants outstanding at year-end.
- The company had future operating-lease payments totaling $955,215, primarily through 2015, and disclosed executive compensation, bonuses, equity awards and related-party arrangements.
Important Facts for Investors to Verify
- Verify the issuer identity: the supplied filing is for Snap Interactive, Inc., whereas the request names Intelligent Protection Management Corp.
- Confirm whether annual FY2011 results, rather than fourth-quarter-only results, are the intended reporting period.
- Assess whether the rapid revenue growth can offset user-acquisition spending and the continuing operating cash burn.
- Review Facebook, Apple, Google, hosting and payment-processor concentration and the effect of changes to their terms or availability.
- Evaluate the disclosed material weaknesses and whether management subsequently established an independent audit committee and corrected warrant-disclosure controls.
- Reconcile the January 2011 financing, share issuances, warrants, options and subsequent March 2012 share count for dilution.
- Review liquidity availability, investment maturities, deferred revenue, payment-processor holdbacks and management’s expectation that cash will decline during 2012.
- Confirm the effect of the February 2012 discontinuation of points and suspension of WhoIsNear.com on future revenue and expenses.