SEC Form 10-Q Summary
Filing identity: The source filing identifies the registrant as Snap Interactive, Inc., not Intelligent Protection Management Corp. Investors should verify that this is the intended filing. The report covers the quarter and six months ended June 30, 2011, with unaudited consolidated results for Snap Interactive and its wholly owned subsidiaries.
Business Context and Reporting Period
Snap Interactive develops and operates online dating and social-networking applications and websites, including AreYouInterested.com and WhoIsNear.com, across Facebook, iPhone and Internet platforms. Revenue was primarily generated from subscriptions and premium points, while WhoIsNear.com was being developed without material revenue generation. The company reported more than 49 million cumulative installations as of August 5, 2011.
Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $4.827 million | $1.243 million | $8.564 million | $2.171 million |
| Operating loss | $(0.639) million | $(0.072) million | $(1.570) million | $(0.888) million |
| Net loss | $(0.633) million | $(0.069) million | $(1.554) million | $(0.872) million |
| Operating margin | (13.2%) | (5.8%) | (18.3%) | (40.9%) |
| Net margin | (13.1%) | (5.5%) | (18.1%) | (40.2%) |
- Advertising and marketing expense was $3.837 million in the second quarter and $7.209 million for the six months, representing 79.5% and 84.2% of revenue, respectively.
- Subscription and points revenue was $4.824 million in the quarter and $8.548 million for the six months. Advertising revenue was $2,425 in the quarter and $15,763 for the six months.
- Cash and cash equivalents were $3.072 million at June 30, 2011. Including marketable securities and certificates of deposit, cash and investments totaled approximately $9.836 million.
- Total assets were $10.891 million, compared with $3.626 million at December 31, 2010. Stockholders’ equity was $7.206 million, compared with $0.665 million.
- Current liabilities were $3.685 million, including $2.824 million of deferred revenue. The company had approximately $45,486 of convertible notes payable to a related party, plus $25,461 of accrued related-party interest.
- Deferred revenue increased 46% from $1.938 million at December 31, 2010, reflecting cash collected for multi-month subscriptions that had not yet been recognized as revenue.
- Net cash used in operating activities was $1.144 million for the six months, compared with $0.480 million in the prior-year period. Net cash used in investing was $6.806 million, primarily for investments. Net cash provided by financing was $8.004 million.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased 288%, and six-month revenue increased 295%, driven by substantially higher subscription sales.
- Second-quarter operating expenses increased 316%; six-month expenses increased 231%. Advertising and marketing expense rose 648% in the quarter and 437% for the six months due to user-acquisition campaigns.
- Despite significant revenue growth, the second-quarter net loss increased 819% and the six-month net loss increased 78% because spending on customer acquisition and other operating infrastructure outpaced revenue growth.
- The company completed a January 2011 private placement of 4.25 million shares and warrants to purchase 2.125 million shares for gross proceeds of $8.5 million. Net financing proceeds were $8.004 million after offering costs.
- Shares outstanding increased to 37,718,256 at August 9, 2011, from 33,210,756 at December 31, 2010. Potential dilution included 6.245 million options, 2.088 million warrants and 525,555 shares issuable upon conversion of related-party debt, although these securities were excluded from diluted loss per share as antidilutive.
Guidance, Outlook, Risks and Unusual Items
- No formal quantitative earnings or revenue guidance was provided. Management stated that it did not expect near-term profitability because it planned to continue increasing marketing, user-acquisition and hiring costs.
- Management believed cash on hand, investments and operating cash flows would fund operations for the next twelve months, but the company had no line of credit or short-term borrowing facility.
- Management reported a temporary decline in active AreYouInterested.com Facebook users around late June and early July due, in its view, to reduced advertising inventory. July revenue was reported as comparable to June revenue, which management identified as the highest-revenue month through the end of the quarter.
- The company planned continued investment in mobile products, user acquisition, product integration and the WhoIsNear.com platform, while acknowledging that significant near-term mobile revenue was not expected.
- Key risks include dependence on Facebook and other third-party platforms, reliance on a single hosting vendor for most application traffic, email deliverability restrictions, payment-processor relationships, credit-card chargebacks, cybersecurity and privacy incidents, intense competition, volatile user-acquisition costs, and difficulty developing commercially successful mobile applications.
- Credit risk was concentrated: 40% of accounts receivable was due from one payment processor and 20% from another. Credit-card holdback receivables totaled $431,345, and $65,736 was accrued for potential future chargebacks.
- The company disclosed material weaknesses in internal control over financial reporting. Disclosure controls and procedures were concluded to be ineffective due to delays in issuing certain employee stock certificates and the absence of an audit committee.
- Employment, consulting and facility commitments included approximately $541,250 of salaries and bonuses through June 30, 2013 and $973,595 of base rent under a new office lease through March 2015. No material pending legal proceedings or off-balance-sheet arrangements were reported.
Most Important Facts to Verify
- Confirm that the filing belongs to Snap Interactive, Inc. rather than Intelligent Protection Management Corp.
- Assess whether rapid subscription growth can offset unusually high and potentially increasing user-acquisition spending.
- Review liquidity after considering recurring operating cash burn, restricted payment-processor holdbacks, investments and the absence of a credit facility.
- Evaluate dilution from the January 2011 equity and warrant issuance, outstanding options and related-party convertible notes.
- Investigate the disclosed material weaknesses, lack of an audit committee and any remediation progress.
- Validate the sustainability of Facebook traffic, advertising inventory, email deliverability and payment-processor access.