Business Context and Reporting Period
The filing is a Form 10-Q for Snap Interactive, Inc. and its subsidiaries for the quarter and nine months ended September 30, 2011. The request metadata identifies Intelligent Protection Management Corp., but the filing itself identifies the registrant as Snap Interactive, Inc. The company develops and operates online dating and social-networking applications, including AreYouInterested.com and WhoIsNear.com, across Facebook, web and mobile platforms.
AreYouInterested.com generated most revenue through subscriptions and premium points. WhoIsNear.com was not generating revenue as of the reporting date. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $5.1 million, versus $1.7 million | $13.7 million, versus $3.9 million |
| Operating income (loss) | $(518,453), versus $86,972 | $(2.1 million), versus $(800,966) |
| Net income (loss) | $(511,290), versus $87,289 | $(2.1 million), versus $(785,022) |
| Basic and diluted loss per share | $(0.01), versus $0.00 | $(0.06), versus $(0.02) |
| Total costs and expenses | $5.6 million, versus $1.6 million | $15.7 million, versus $4.7 million |
- Approximate operating margin was negative 10.2% for the third quarter and negative 15.3% for the nine-month period.
- Approximate net margin was negative 10.0% for the third quarter and negative 15.1% for the nine-month period.
- Nine-month revenue consisted of $13.5 million from subscriptions and points and $153,234 from advertising.
- Advertising and marketing expense was $3.4 million in the quarter and $10.6 million for the nine months, compared with $759,363 and $2.1 million, respectively, in the prior-year periods.
Cash Flow, Liquidity and Capital Structure
- Cash and cash equivalents were $2.7 million at September 30, 2011, down from $3.0 million at December 31, 2010.
- Including investments, reported overall liquidity was $9.7 million. Investments totaled approximately $7.0 million, consisting of government securities and certificates of deposit classified as held-to-maturity.
- Operating activities used $931,661 during the first nine months of 2011, compared with $239,678 provided in the prior-year period.
- Investing activities used $7.4 million, primarily for marketable securities, certificates of deposit, fixed assets and a note receivable.
- Financing activities provided $8.0 million, primarily from the issuance of 4.25 million shares and warrants in January 2011.
- Current liabilities were $4.5 million, including $2.8 million of deferred revenue, $1.0 million of accounts payable and $551,113 of accrued expenses.
- Related-party convertible notes payable totaled $45,486, with accrued related-party interest of $26,134. The notes bear interest at 6% and mature in December 2011 and March 2012, subject to conversion provisions.
- Stockholders’ equity was $6.7 million, compared with $664,697 at December 31, 2010. Common shares outstanding increased to 37.7 million from 33.2 million.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue increased 198% to $5.1 million; nine-month revenue increased 252% to $13.7 million, driven primarily by higher subscription sales.
- Despite substantial revenue growth, the company moved from third-quarter net income of $87,289 to a net loss of $511,290 because expenses grew faster than revenue.
- Nine-month net loss increased 163% to $2.1 million, largely reflecting aggressive user-acquisition spending and expanded staffing and infrastructure.
- Third-quarter advertising and marketing expense increased 346%; nine-month expense increased 404%.
- Deferred revenue increased 46% from December 31, 2010 to $2.8 million, reflecting cash collected for subscription services to be recognized in future periods.
- Accounts receivable increased to $466,806 from $185,585, and credit-card holdback receivables increased to $445,405 from $239,452.
- The company launched an Android application and a mobile web version of AreYouInterested.com and added more than 3.3 million profiles during the quarter.
Guidance, Outlook, Commentary and Risks
- Management did not provide quantitative revenue or earnings guidance.
- Management stated that it did not anticipate near-term profitability because it expected continued increases in marketing expenditures and additional hiring.
- The company expected cash on hand, investments and operating cash flows to fund operations for the next twelve months, but it had no line of credit or short-term borrowing facility and acknowledged potential dependence on additional debt or equity financing if capital needs increased.
- Management expected further increases in marketing and advertising expenses during the remainder of 2011 and planned continued investment in mobile products and user acquisition. It did not expect significant near-term revenue from mobile products.
- Key risks include dependence on third-party platforms, payment processors and hosting vendors; intense online-dating competition; rapidly changing consumer and technology trends; cybersecurity, privacy and intellectual-property risks; email deliverability and programming risks; regulation; and the company’s ability to obtain financing and manage growth.
- Credit and concentration risks included approximately $445,405 held by payment processors, portions of which were not FDIC insured, and material receivables from a limited number of payment processors and advertising networks.
- The company recorded $52,644 for estimated future credit-card chargebacks. Actual chargebacks and refunds may differ from estimates.
- Management concluded that disclosure controls and procedures were not effective because of material weaknesses involving delayed issuance of certain stock certificates and the lack of an audit committee.
- No material pending legal proceedings and no off-balance-sheet arrangements were reported.
- Subsequent events included additional stock-option grants, a new CFO employment agreement with base salary and bonus provisions, additional related equity awards, and a new public-relations agreement.
Important Facts for Investors to Verify
- Confirm that the intended registrant is Snap Interactive, Inc., because the request metadata names a different company.
- Assess whether the company’s subscription-led revenue growth can outpace the substantial and continuing increase in user-acquisition costs.
- Review cash conversion, including the $931,661 operating cash outflow, $2.8 million deferred-revenue balance and $445,405 payment-processor holdback.
- Evaluate liquidity after considering current liabilities, related-party notes, contractual commitments and the absence of a credit facility.
- Review dilution from the January 2011 equity and warrant financing, outstanding options and warrants, and post-quarter-end equity awards.
- Investigate the disclosed material weaknesses in internal controls and the absence of an audit committee.
- Monitor reliance on Facebook and other third-party platforms, payment processors, hosting providers and a limited number of advertising networks.