# Intelligent Protection Management Corp.: Form 10-K for the period ended Dec 31, 2012 - Company: [Intelligent Protection Management Corp.](/companies/ipm.md) (CIK 1355839) - Form: 10-K - Filed: 2013-03-14 - Accepted by EDGAR: Mar 14, 2013, 17:22 ET - Period: 2012-12-31 - Accession: 0001213900-13-001092 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1355839/000121390013001092/f10k2012_snap.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1355839/000121390013001092/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2012-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 12 months, 2012-01-01 to 2012-12-31 | $19.2m | us-gaap:Revenues | | Cost of revenue | 12 months, 2012-01-01 to 2012-12-31 | $4.4m | us-gaap:CostOfRevenue | | Operating income | 12 months, 2012-01-01 to 2012-12-31 | −$3.4m | us-gaap:OperatingIncomeLoss | | Diluted EPS | 12 months, 2012-01-01 to 2012-12-31 | −$0.10 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 12 months, 2012-01-01 to 2012-12-31 | −$0.10 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2012-01-01 to 2012-12-31 | 38,611,758 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2012-01-01 to 2012-12-31 | −$3.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2012-01-01 to 2012-12-31 | $138.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2012-12-31 | $5.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2012-12-31 | $6.3m | us-gaap:AssetsCurrent | | Total assets | at 2012-12-31 | $7.0m | us-gaap:Assets | | Current liabilities | at 2012-12-31 | $3.6m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2012-12-31 | $5.2m | us-gaap:Liabilities | | Shareholders' equity | at 2012-12-31 | $1.8m | us-gaap:StockholdersEquity | ## Business As filed, 15,812 characters. Unless the context otherwise requires, references in this Annual Report on Form 10-K to the terms “Snap,” “we,” “our,” “us” and the “Company” refer to Snap Interactive, Inc. and its subsidiaries on a consolidated basis. ### Overview We are an Internet company providing services in the expanding social dating market. We own and operate a social dating application under the *AreYouInterested.com* brand that can be accessed on Facebook®, mobile devices such as iPhone® and Android®, as well as a stand-alone website. Our product is fully integrated across all gateways we offer and incorporates the Facebook Connect® integration tool, which allows users to “connect” their Facebook profile to our website. Since August 2007, *AreYouInterested.com* has been one of the leading dating applications on Facebook based on the publicly reported number of DAUs and MAUs. As of March 8, 2013, we had more than 3.1 million MAUs of the *AreYouInterested.com* application on Facebook platform. We primarily generate revenue from subscription fees and, as of March 8, 2013, we had approximately 90,000 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. We believe that our extensive user base and scale of Facebook connected profiles allows us to create a one-of-a-kind experience for users looking to meet people with similar interests. Snap Interactive, Inc. was incorporated under the laws of the State of Delaware on July 19, 2005. Our principal executive office is located at 462 7th Ave, 4th Floor, New York, New York 10018. Our telephone number is (212) 967-5120. ### Recent Developments *Restatement.* On November 15, 2012, we concluded that our previously filed financial statements did not properly account for certain features of our common stock warrants that were issued in January 2011 in connection with an equity financing. Based on the recommendation of management and after discussions with our current independent accountants, Ernst & Young LLP, we restated certain of our financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2011 and the Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2012 and March 31, 2012. We completed the restatement by filing amendments to these reports on December 7, 2012. *Launch of Redesigned Product*. During 2012, we redesigned the *AreYouInterested.com* product to focus on interest-based matching and we officially launched the redesigned *AreYouInterested.com* product in August 2012. During the third quarter of 2012, we tested and developed designs, features, pricing and payment methods to increase user engagement and installed a new performance analytics structure to allow us to analyze and react to the performance of the redesigned product in near real-time. ### Our Product We have developed and published a social dating application, *AreYouInterested.com,* that is designed to appeal to a large number of Internet and iPhone users. Our social dating application can be accessed on Facebook, mobile devices such as iPhone and Android and a stand-alone website. Our application attracts a community of users that is demographically and geographically diverse and is continually updated with new features to increase user engagement, make them more social and to increase the number of users that are converted to paying subscribers. *AreYouInterested.com* users create a personal profile which can be synced to their Facebook profile and then can search for potential matches. Users are able to view pictures of other users meeting that criteria and indicate if they are “interested” in a user by clicking on a “fave” button above the picture of that user. We notify users when there is a mutually interested match. In addition, once users become paid subscribers, they are able to communicate on an unlimited basis with potential matches. ### Product Development Our application development processes are designed to enable us to rapidly and cost effectively develop our application to meet the expectations and preferences of users and the requirements of the third party platforms on which we offer our product. Expanding our presence on mobile platforms is currently a core objective for us. Although revenue opportunities on our mobile product are still in their early stages, we are investing heavily in engineering on our mobile product while we continue to develop our product and user acquisition costs are relatively inexpensive given our user base. We believe that our mobile dating application will offer significant opportunities in the future and have increased the resources allocated to this product with the goal of positioning us as a leader in online dating. A primary component of our mobile initiatives is to continue creating a seamless experience for users of our product across multiple platforms. We believe that this approach will better position us as a provider of mobile dating services in the future as web browsing and web activity shifts to smartphones and other mobile devices. During February 2013, approximately 16% of logins to *AreYouInterested.com* were made through a mobile device. The majority of our logins occur on third party platforms, such as Facebook. We believe we provide value to these third party platforms by (i) creating and maintaining user engagement on, and integrating with, the platforms, (ii) driving traffic to the platforms to generate advertising revenue for such platforms, including through the placement of advertisements on our application, and (iii) directly purchasing advertising from the platforms. With our network of more than 3.1 million MAUs of the *AreYouInterested.com* application on Facebook as of March 8, 2013, along with the vast amount of data that we have accumulated for several years across multiple platforms, we believe that leveraging this user base and data therefrom in conjunction with Facebook platform's real-time application programming interface allows us to create a one-of-a-kind experience for users looking to meet people with similar interests. ### Marketing Strategy Our initial user base for the *AreYouInterested.com* brand was cultivated primarily through Facebook’s viral channels. Our current marketing activities aim to raise awareness of the *AreYouInterested.com* brand and attract subscribers by promoting the unique content and quality of our product and services. We primarily advertise through Internet and mobile advertising and run hundreds of user acquisition campaigns at any given time, targeting various classifications of users. We have a full-time media buyer and in-house tools to track and measure the success of our advertising campaigns. We expect to increase our advertising and marketing expenditures in 2013 with a focus on campaigns that we believe will produce a positive return over the lifetime of new users. ### Payment Options Our users have a variety of methods by which to purchase subscriptions to *AreYouInterested.com.* Users can pay by credit card, PayPal, Boku, TrialPay 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. Regardless of which payment method is utilized, users may access the *AreYouInterested.com* product through any of the gateways we offer. ### Competition We face substantial competition from dominant online dating websites such as Match.com and eHarmony.com, as well as Facebook application providers in the online dating space such as Zoosk, Badoo and Cupid. We believe that users often utilize multiple dating websites or applications, and the use of one dating website or application is not necessarily to the exclusion of others. According to AppData.com, a website that measures user engagement with Facebook applications, we are consistently one of the leading dating applications as measured by MAUs. Achieving a critical mass of subscribers is crucial for online dating websites and online dating applications. As a result of our user base, we believe we are well-positioned to continue as a leader in online dating. We believe that our user base also allows us to compete favorably in the marketplace with future products that we may offer. Additionally, we seek to offer products and services that are unique in the industry, superior in quality, and more appealing than those of our competitors. Additionally, we believe that we have the tools and certain inherent efficiencies to attract new users through Facebook at a lower cost per subscriber than certain of our traditional online dating competitors. We also believe that the industry offers substantial room for growth as social networking application platforms and mobile platforms continue to expand and as the Internet continues to become more of a socially-acceptable method for finding a mate. ### Patent and Trademarks To establish and protect our proprietary rights, we rely on a combination of trademarks, copyrights, trade secrets, license agreements, patent applications, confidentiality agreements and other contractual rights. We have three registered trademarks relating to the *AreYouInterested.com* brand and two registered trademarks for Snap Interactive, Inc. We are currently pursuing patents related to certain feature sets on the *AreYouInterested.com* brand currently under development. ### Discontinued Product We periodically evaluate applications and websites that we create for their strategic fit within our business plan and operations. In February 2012, we announced the strategic decision to indefinitely suspend production and development of the *WhoIsNear.com* brand. *WhoIsNear.com* was a location-based service that enabled users to easily access their online social graph, including the network of friends and contacts created on the Facebook platform. ### Governmental Regulations We are subject to a number of federal and state laws and regulations that affect companies conducting business on the Internet, many of which are still evolving and being litigated in the courts, and could be interpreted in ways that could harm our business. These laws and regulations may involve user privacy, data protection, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation and online payment services. The application and interpretation of these laws and regulations are often uncertain, particularly in the rapidly evolving industry in which we operate. We are also subject to federal laws and regulations regarding privacy and the protection of user data, including The Communications Decency Act of 1996, The Children’s Online Privacy Protection Act of 1998 and The Electronic Communications Privacy Act of 1986, among others. Many states have passed laws requiring notification to users when there is a security breach for personal data or the adoption of minimum information security standards that are often vaguely defined and difficult to implement. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Any failure by us to comply with privacy related laws and regulations or our privacy policy, could expose us to costly or time-consuming proceedings against us by governmental authorities or others, which could harm our business. Further, any failure by us to adequately protect our users’ privacy and data could result in loss of user confidence in our product and services and ultimately in a loss of subscribers, which could adversely affect our business. There are a number of legislative proposals before Congress and various state legislatures regarding privacy issues related to the Internet generally. We are unable to determine if and when such legislation may be adopted. If certain proposals were to be adopted, it could have an adverse effect on our business. In addition, rising concern about the use of social networking technologies for illegal conduct may in the future produce legislation or other governmental action that could require changes to our product or restrict or impose additional costs upon the conduct of our business. These regulatory and legislative developments, including excessive taxation, may prevent or significantly limit our ability to expand our business. In addition, certain states have enacted legislation requiring us to display safety warnings and disclosures to users that we do not conduct background checks. ### Employees As of March 8, 2013, we had 49 employees, all of whom are employed on a full-time basis. We believe that our future success depends in part on our continued ability to hire, assimilate and retain qualified personnel. ### Executive Officers Our executive officers are appointed by our Board of Directors and hold office until removed by the Board of Directors. The following table and text sets forth certain information with respect to our executive officers as of March 8, 2013: | Name | Age | Position | | --- | ---: | --- | | Clifford Lerner | 35 | President, Chief Executive Officer and Chairman of the Board of Directors | | Jon D. Pedersen, Sr. | 42 | Chief Financial Officer | **CLIFFORD LERNER** is our President, Chief Executive Officer and Chairman of our Board of Directors. Mr. Lerner has served as our President and Chief Executive Officer since joining us in 2005 and served as our principal financial officer and principal accounting officer from 2005 to October 2011. Prior to joining us in 2005, Mr. Lerner spent his professional career from 2000 to 2005 at Lehman Brothers Inc. as an Analyst in its Equities division. Mr. Lerner worked as an Analyst in the Product Management Group where his duties included, among other things, coordinating the morning and afternoon equity research calls. Mr. Lerner has a strong knowledge and understanding of the online dating industry and has managed the product development and growth for all of our applications and websites since their inception. Mr. Lerner received a bachelor’s degree in applied economics and business management from Cornell University. **JON D. PEDERSEN, SR.** is our Chief Financial Officer. Mr. Pedersen has served as our Chief Financial Officer since November 2011. Mr. Pedersen served as Senior Vice President – Controller from September 2008 to August 2011 and Vice President – Assistant Controller from May 2005 to September 2008 at Warner Music Group. Warner Music Group is a music company with interests in recorded music, music publishing and artist services that was acquired by Access Industries, Inc. in July 2011. Mr. Pedersen also previously served as Chief Financial Officer, Director and Assistant Director of WestLB Securities Inc., a New York based broker-dealer and subsidiary of WestLB AG from July 2000 to May 2005, and as Director from April 2003 to May 2005 and as Assistant Director from July 2000 to April 2003. Mr. Pedersen also previously served as Vice President for Global Management Reporting and Associate – Fixed Income Derivatives at Goldman, Sachs & Co. from April 2000 to July 2000 and July 1998 to April 2000, respectively. Prior to July 1998, Mr. Pedersen served as a Senior Financial Analyst and Senior Accountant at Price Waterhouse LLP in Stamford, Connecticut. Mr. Pedersen holds a master’s degree in business administration from Columbia Business School and a bachelor’s degree in business administration with an emphasis in accounting from the University of Connecticut. ## Risk factors As filed, 45,711 characters. The risks below are those that we believe are the material risks that we currently face, but are not the only risks facing us and our business. If any of the events contemplated by the following discussion should occur, our business, financial condition and operating results could be adversely affected. ### Risks Relating to Our Business ### Our heavy reliance on Facebook may negatively affect our business. Facebook is the primary third-party platform on which our application operates. During 2012, we generated substantially all of our revenue from subscribers acquired through the Facebook platform and expect to continue to do so in the foreseeable future. We are subject to Facebook’s standard terms and conditions for application developers, which govern the development, promotion, distribution, operation and use of our application on the Facebook platform. Accordingly, we are subject to numerous risks and uncertainties and our business would be harmed if: - Facebook discontinues, limits or restricts access to its platform by us or our application; - Facebook changes its terms and conditions or other policies and features, including restricting the methods of collecting payments through the Facebook platform; or - Facebook establishes more favorable relationships with one or more of our competitors. If any of these actions occur, they could have a material adverse effect on our business or results of operations. ***We derive a portion of our revenue from the Apple and Google platforms, and if we are unable to maintain a good relationship with Apple and Google, our business could suffer.*** A portion of our revenue, primarily our revenue from mobile platforms, is derived from Apple’s iOS and Google’s Android platforms and we believe that we have a good relationship with Apple and Google. Any deterioration in our relationship with either Apple or Google could materially harm our business and results of operations. We are subject to each of Apple’s and Google’s standard terms and conditions for application developers, which govern the promotion, distribution and operation of our application on their respective storefronts. Each of Apple and Google has broad discretion to change its standard terms and conditions. In addition, these standard terms and conditions can be vague and subject to changing interpretations by Apple or Google. In addition, each of Apple and Google has the right to prohibit a developer from distributing applications on the storefront if the developer violates the standard terms and conditions. In the event that either Apple or Google ever determines that we are in violation of its standard terms and conditions and prohibits us from distributing our application on its storefront, it could materially harm our business and results of operations. We also rely on the continued function of the Apple App Store and the Google Play Store, as a portion of our revenue is derived from these two digital storefronts. There have been occasions in the past when these digital storefronts were unavailable for short periods of time or where there have been issues with the In-App purchasing functionality from the storefront. In the event that either the Apple App Store or the Google Play Store is unavailable or if In-App purchasing functionality from the storefront is non-operational for a prolonged period of time, it could have a material adverse effect on our revenues and results of operations. ### We have a history of losses and may not achieve profitability in the future. We generated a net loss of approximately $4.0 million and used $3.4 million of cash in operating activities during 2012. We will need to generate and sustain increased revenue levels in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. We may incur losses in the future for a number of reasons, including marketing and advertising expenses and the risks described herein, and unforeseen expenses, difficulties, complications and delays and other unknown risks. If we are unable to achieve profitability in the future, it will have a material adverse effect on our business, results of operations and financial condition. ### We rely on a small portion of our total users for nearly all of our revenue. Compared to the number of users in any period, only a small portion are paying subscribers. We primarily generate revenue through subscription sales to this small portion of users and secondarily generate revenue through paid advertisements displayed to all users. Users discontinue the use of our product in the ordinary course of business and to sustain our revenue levels, we must attract, retain and increase the number of users or more effectively monetize our existing users. To retain existing users, and particularly those users who are paying subscribers, we must devote significant resources so that our application retains their interest. If we fail to grow or sustain the number of our users, or if the rates at which we attract and retain existing users declines or the rate at which users become paying subscribers declines, it could have a material adverse effect on our revenues and results of operations. ***Our business depends on establishing and maintaining a strong brand. If we are unable to maintain and enhance our brand, we may be unable to expand or retain our user and paying subscriber bases.*** Establishing and maintaining our brand is critical to our efforts to attract and expand our user and paying subscriber bases. During 2012, we launched a redesigned *AreYouInterested.com* brand that incorporates interest-based matching and social dating to attract and retain users and paying subscribers. This redesigned *AreYouInterested.com* brand may not be successful. If paying subscribers to our product do not perceive our existing services to be of high quality, or if new services, new business ventures or the rebuilding of the *AreYouInterested.com* brand are not favorably received by such subscribers, the value of our brand could diminish, thereby decreasing the attractiveness of our product to such subscribers. As a result, our results of operations may be adversely affected by decreased brand recognition. ***As an online dating company, we are in an intensely competitive industry and any failure to attract new users and subscribers could diminish or suspend our development and possibly cease our operations.*** The online dating industry is highly competitive, and has few barriers to entry. There are numerous other competitors that offer similar services, have established user bases that are similar in size or larger than ours, and have more capital than us. If we are unable to efficiently and effectively attract new users and subscribers as a result of intense competition or a saturated market, we may not be able to continue the development and enhancement of our application and website or become profitable on a consistent basis. Important factors affecting our ability to successfully compete include: - our ability to hire and retain talented employees, including technical employees, executives, and marketing experts; - competition for acquiring users that could result in increased user acquisition costs; - reliance upon the platforms on which we build and the platforms’ ability to control our activities on such platforms; and - our ability to remain innovative in our ever-changing industry. We face substantial competition from online dating websites such as Match.com and eHarmony.com, as well as Facebook application providers in the online dating space such as Zoosk, Badoo and Cupid. According to AppData.com, a website that measures user engagement with Facebook application, we are consistently one of the leading dating applications as measured by MAUs. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger user or subscriber bases than we do. These factors may allow our competitors to more quickly respond to new or emerging technologies and changes in user preferences. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies that may allow them to build larger user and paying subscriber bases. Our competitors may develop products or services that are equal or superior to our product and services or that achieve greater market acceptance than our product and services. In addition, new and different types of social discovery may also increase in popularity at the expense of online dating. These activities could attract users and subscribers away from our application and website, reduce our market share and have a material adverse effect on our business, results of operations and financial condition. ***Our social dating application relies heavily on email campaigns. As our subscriber base has grown, we face a risk that any disruptions in or restrictions on the sending or receipt of emails, or any increase in the associated costs could adversely affect our business and results of operations.*** Our emails are an important driver of our subscribers’ activities. We send a large volume of emails to our subscribers notifying them of a variety of activities on our application, such as new matches. As our subscriber base has grown, we face a risk that service providers or email applications may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails to our subscribers. Third parties may also block our emails as spam, impose restrictions on, or start to charge for, the delivery of emails through their email systems. Without the ability to email these subscribers, we may have limited means of inducing subscribers to return to our website and application and to utilize our services. Due to the importance of email to our business, any disruptions or restrictions on the distribution or receipt of emails or increase in the associated costs could have a material adverse effect on our business and results of operations. ***Our business depends in large part upon the availability of advertising space through a variety of media.*** We depend upon the availability of advertising space through a variety of media, including third party applications on platforms such as Facebook, to recruit new subscribers, generate activity from existing subscribers and direct traffic to our product. The availability of advertising space varies, and a shortage of advertising space in any particular media or on any particular platform, or the elimination of a particular medium on which we advertise, could limit our ability to generate new subscribers, generate activity from existing subscribers or direct traffic to our product, any of which could have a material adverse effect on our business, results of operations and financial condition. ***If we are unable to achieve desired results from, or maintain our advertising and marketing arrangements with certain third-party advertising or marketing providers to generate subscribers, our ability to generate revenue and our business could be adversely affected.*** We have entered into multiple advertising and marketing arrangements with certain affiliate advertising and marketing providers that are designed to increase traffic to our application on the Facebook platform. Our ability to attract new subscribers and retain existing subscribers is based in part on our ability to generate increased traffic or better retention rates through these user acquisition campaigns. We may be unable to control the advertisements and actions that are taken by these providers on Facebook. If we are unable to enter into such arrangements on favorable terms, are unable to achieve the desired results under these arrangements and programs, are unable to maintain these relationships, fail to generate sufficient traffic or revenue from purchases pursuant to these arrangements and programs, or properly manage the actions of these providers, our ability to generate revenue to attract and retain our subscribers may be impacted, which could have a material adverse effect on our business and results of operations. In addition, if Facebook restricts our ability to use such arrangements and programs or takes limits or restricts access to its platform by us or our applications, it could have a material adverse effect on our business, results of operations and financial condition. ***If we fail to effectively manage our growth, our business and operating results could be harmed.*** We continue to experience growth in our headcount and operations, which will continue to place significant demands on our management and our operational and financial infrastructure. As of December 31, 2012, approximately 46% of our employees had been with us for less than one year and approximately 75% for less than two years. As we continue to grow, we must expend significant resources to identify, hire, integrate, develop and motivate a number of qualified employees. If we fail to effectively manage our hiring needs and successfully integrate our new hires, our ability to launch new applications and enhance our existing application could suffer. ***Our success depends upon our ability to attract and hire key personnel. Our inability to hire qualified individuals will negatively affect our business, and we will not be able to implement or expand our business plan.*** Our business is greatly dependent on our ability to attract key personnel. We will need to attract, develop, motivate and retain highly skilled technical employees. Competition for qualified personnel is intense and we may not be able to hire or retain qualified personnel. Our management has limited experience in recruiting key personnel, which may hurt our ability to recruit qualified individuals. If we are unable to hire or retain such employees, we will not be able to implement or expand our business plan. ***Our market is characterized by rapid technological change and the development of new products, and if we fail to develop and market new technologies rapidly or timely develop and launch new products, we may not become profitable in the future.*** The online dating industry is characterized by rapid technological change and the development of new products that could render our existing application and website obsolete. The development of our application and website entails significant technical and business risks. We may be unable to successfully use new technologies effectively, adapt our application and website to user preferences or needs or timely develop and launch new products. If our management is unable to adapt in a timely manner in response to changing market conditions or user trends and preferences, we may never become consistently profitable and we may face limited market acceptance of newly developed products, which could have a material adverse effect on our revenues. ***Our growth prospects will suffer if we are unable to develop and support our application for mobile platforms.*** We have limited experience developing and supporting our application for mobile platforms. We expect to continue devoting substantial resources to the development and support of our mobile application, and we do not know whether we will succeed in developing and supporting such application. The uncertainties we face include: - our experience in developing and supporting our application for use primarily on Facebook may not be relevant for developing and supporting our application for mobile platforms; - we have limited experience working with wireless carriers, mobile platform providers and other partners whose cooperation we may need in order to be successful; - we may encounter difficulty in integrating features on applications developed for mobile platforms that a sufficient number of subscribers will pay for; - we have encountered, and may continue to encounter, difficulties in developing a mobile application for Android and Mobile Web; and - we may need to allow for a variety of payment methods and systems based on mobile platforms, geographies and other factors. These and other uncertainties make it difficult to know whether we will succeed in developing and supporting our application for mobile platforms. If we do not succeed in doing so, our prospects for growth will suffer. ***We may need additional financing to execute our business plan. If we do not obtain additional financing, it could have a material adverse effect on our business.*** Revenues and capital raised to date may be inadequate to support our expansion, marketing efforts and product development programs. Due to planned expansion and advertising expenditures, we do not anticipate that we will operate at a profit in 2013. We may need substantial additional financing to: - effectuate our long-term growth strategy and expand our product development; - market our product to attract more paying subscribers; and - hire additional technical and managerial talent. We may be unable to obtain future financing on favorable terms or at all. If we cannot obtain additional financing, we will need to reduce, defer or cancel product development programs, planned initiatives, or overhead expenditures. The failure to obtain additional financing in favorable terms, if at all, could have a material adverse effect on our business, financial condition and results of operations. ***Our future success is dependent, in part, on the performance and continued service of Clifford Lerner, our Chief Executive Officer and sole director. Without his continued service, we may be forced to interrupt or eventually cease our operations.*** We are dependent to a great extent upon the experience, abilities and continued service of Clifford Lerner, our Chief Executive Officer and sole director. The loss of his services would substantially affect our business operations and could have a material adverse effect on our business and product. ***A significant majority of our application traffic is hosted by a single vendor and any failure or significant interruption in our network could impact our operations and harm our business.*** Our technology infrastructure is critical to the performance of our application and to our subscribers’ satisfaction. Significant elements of this system are operated by third parties that we do not control and which would require significant time to replace. We expect this dependence on third parties to continue during the near future. In particular, a significant majority of our application traffic is hosted by a single vendor. We have experienced, and may in the future experience, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. If a particular application is unavailable when subscribers attempt to access it or interaction through an application is slower than expected, subscribers may stop using the application and may be less likely to return to the application as often, if at all. A failure or significant interruption in the availability of our application would harm our reputation and operations. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate increasing traffic, our business and operating results may suffer. We do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance. ***We are exposed to risks associated with credit card processors and related merchant account approvals that, if not properly addressed, could increase our operating expenses or preclude us from accepting credit cards as a method of payment.*** We depend on the ability to accept credit and debit card payments from our subscribers and the related merchant account approval to process subscription payments. Our reliance on credit card and related merchant account approvals exposes us to fraud and credit card chargebacks. We have suffered losses and may continue to suffer losses as a result of subscriptions placed with fraudulent credit card data as well as users who chargeback their purchases. Under current credit card practices, a merchant is liable for fraudulent credit card transactions when, as is the case with the transactions we process, that merchant does not obtain a cardholder’s signature. Our failure to adequately control fraudulent credit card transactions and keep our chargebacks under an acceptable threshold would result in significantly higher credit card-related costs and, therefore, increase our operating expenses or even preclude us from accepting credit cards as a means of payment. ***If government regulation or taxation of the online dating, social networking or Internet industries increase, it may adversely affect our business and operating results.*** We may be subject to additional operating restrictions and government regulations in the future. Companies engaging in e-commerce, online dating, social dating and related businesses face uncertainty related to future government regulation of the Internet. Due to the rapid growth and widespread use of the Internet, federal and state governments are enacting and considering various laws and regulations relating to the Internet in areas including, but not limited to, billing practices, privacy, online safety and taxation. Furthermore, the application of existing laws and regulations to Internet companies remains somewhat unclear. The adoption of new laws and regulations could adversely affect the growth, popularity or use of the Internet, including laws limiting Internet neutrality, decreasing the demand for our application or the usage of our services and increase our cost of doing business. Our business and operating results may be negatively affected by new laws, and such existing or new regulations may expose us to substantial compliance costs and liabilities and may impede the growth in use of the Internet. In addition, sales tax for business conducted on the Internet is rapidly being legislated in the various states and abroad. We may incur substantial liabilities or expenses necessary to comply with these laws and regulations or penalties for any failure to comply. ***If there are changes in regulations regarding privacy and protection of user data, or we fail to comply with such laws, we may face claims brought against us under any of these regulations and it could adversely affect our business.*** Federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we receive from and about our users. Any failure, or perceived failure, by us to comply with regulations of privacy and protection of user data or with any data-related consent orders, Federal Trade Commission requirements or orders, or other federal, state, or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business. As a result of these regulations, we may be subject to a claim or class-action lawsuit regarding online services. The successful assertion of these claims against us could result in potentially significant monetary damages, diversion of management resources and require us to make significant payments and incur substantial legal expenses. Any claims with respect to violation of privacy or user data brought against us may have a material adverse effect on our business. ***If we are unable to protect our intellectual property rights, we may be unable to compete with competitors developing similar technologies.*** Our success and ability to compete are often dependent upon the development of software technology for our application and website. While we rely on copyright, trade secret and trademark law to protect our intellectual property, we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent enhancements to our product and reliable maintenance are more essential to establishing a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our technology, making it more difficult for us to compete. ***If we are subject to intellectual property infringement claims, it could cause us to incur significant expenses, pay substantial damages and prevent service delivery.*** Third parties may claim that our product or services infringe or violate their intellectual property rights. Any such claims could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages and prevent us from using licensed technology that may be fundamental to our application and website. Even if we were to prevail, any litigation regarding intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations. We may also be obligated to indemnify our business partners in any such litigation, which could further exhaust our resources. Furthermore, as a result of an intellectual property challenge, we may be prevented from providing some of our services unless we enter into royalty, license or other agreements. We may not be able to obtain such agreements at all or on terms acceptable to us, and as a result, we may be precluded from offering our product and services. ***Programming errors or flaws in our product could harm our reputation or decrease market acceptance of our product, which would harm our operating results.*** Our application and website may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent as we release new features to our product under tight time constraints. We believe that if our users have a negative experience with our application or website, they may be less inclined to continue or resume using our product or recommend our product to other potential users. In addition, programming errors or defects may allow users access to premium features even if they do not pay for such content. Undetected programming errors, defects and data corruption can disrupt our operations, adversely affect the experience of our users, harm our reputation, cause our users to stop using our application or website, divert our resources and delay market acceptance of our product, any of which could result in a material adverse effect on our business, results of operations and financial condition. ***Interruption or failure of our programming code, servers, or technological infrastructure could hurt our ability to effectively provide our product, which could damage our reputation and harm our operating results.*** The availability of our product depends on the continuing operation of our programming code, servers and technological infrastructure. Any damage to, or failure of, our systems could result in interruptions in our service, which could reduce our revenue and damage our brand. Our systems are vulnerable to damage or interruption from terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses, computer denial of service attacks or other attempts to harm our systems. Our data centers are subject to break-ins, sabotage and intentional acts of vandalism and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning cannot account for all eventualities. The occurrence of a natural disaster, a decision to close an information technology facility we are using without adequate notice, or other unanticipated problems at our data centers could result in lengthy interruptions in our service. ***Security breaches, computer viruses and computer hacking attacks could harm our business and results of operations.*** Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry. Any security breach caused by hacking, including efforts to gain unauthorized access to our applications, servers or websites, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business, financial condition and results of operations. Though it is difficult to determine what harm may directly result from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our application, servers or website may result in significant expenses, loss of revenue and have a material adverse effect on our business. ***We have a limited amount of insurance coverage, and if we were found liable for an uninsured claim, or claim in excess of our insurance limits, we may be forced to expend significant capital to resolve the uninsured claim.*** We have a limited amount of insurance to cover potential risks and liabilities, including, but not limited to, director and officer insurance and error and omission insurance. Even if we decide to obtain additional insurance coverage in the future, it is possible that: (1) we may not be able to get enough insurance to meet our needs; (2) we may have to pay very high premiums for the additional coverage; (3) we may not be able to acquire any insurance for certain types of business risk; or (4) we may have gaps in coverage for certain risks. We may be exposed to potential uninsured claims for which we could have to expend significant amounts of capital. Consequently, if we were found liable for a significant uninsured claim in the future, we may be forced to expend a significant amount of our capital to resolve the uninsured claim. ***We face certain risks related to the physical and emotional safety of users, paying subscribers and third parties.*** We cannot control the actions of our users and subscribers in their communications or physical actions. There is a possibility that users, subscribers or third parties could be physically or emotionally harmed following interaction with another user or subscriber. We warn our users and subscribers that we do not screen other users and subscribers and, given our lack of physical presence, we do not take any action to ensure personal safety on a meeting between users or subscribers arranged following contact initiated via our application or website. If an unfortunate incident of this nature occurred in a meeting of two people following contact initiated on our application or website or a website of one of our competitors, any resulting negative publicity could materially and adversely affect us or the industry in general. Any such incident involving our application or website could damage our reputation and our brands, which could have a material adverse effect on our business. In addition, the affected users, subscribers or third parties could initiate legal action against us, which could divert management attention from operations, cause us to incur significant expenses, whether we are successful or not, and damage our reputation. ***We face risks of litigation and regulatory actions if we are deemed a dating service or Internet dating service.*** In certain states, companies that provide dating services or Internet dating services are subject to various regulations. Because our application and website promote social dating, we could be exposed to regulation as a dating or Internet dating service. If we were considered to be a dating service or Internet dating service in any of the jurisdictions in which we operate, we would be required to comply with regulations that require us to, among other things, (i) provide language in our contracts that would allow users to rescind their contracts within a certain period of time, demand reimbursement of a portion of the contract price if the user dies during the term of the contract and cancel their contract in the event of disability or relocation and (ii) provide disclosures regarding our screening practices and warnings on our application and website regarding the dangers associated with the use of our product. If a court determines that we have provided and are providing dating services or Internet dating services of the type that the dating services or Internet dating services regulations are intended to regulate, we could be deemed to be out of compliance with such regulations and could be liable for any damages as a result of our past non-compliance, either of which could have a material adverse effect on our business, financial condition or results of operations. ***We have identified a material weakness in our internal control over financial reporting. This material weakness, if not corrected, could affect the reliability of our financial statements and have other adverse consequences.*** We have identified a material weakness in our internal control over financial reporting. This material weakness, if not corrected, could affect the reliability of our financial statements and have other adverse consequences. Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on internal control over financial reporting. This report must contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by our management. We have identified a material weakness in our internal control over financial reporting as of December 31, 2012, as disclosed in “Item 9A. Controls and Procedures.” We determined that we had a material weakness with respect to the lack of an independent audit committee, which would provide oversight of our officers, operations and financial reporting function. Failure to have effective internal controls could impair our ability to produce accurate financial statements on a timely basis and could lead to a restatement of our financial statements. If, as a result of deficiencies in our internal controls, we cannot provide reliable financial statements, our business decision processes may be adversely affected, our business and operating results could be harmed, investors could lose confidence in our reported financial information and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. In addition, failure to maintain effective internal control over financial reporting could result in investigations or sanctions by regulatory authorities. We intend to take action to remediate the material weakness and improve the effectiveness of our internal control over financial reporting. However, we can give no assurances that the measures we may take will remediate the material weakness identified or that any additional material weaknesses will not arise in the future due to our failure to implement and maintain adequate internal control over financial reporting. In addition, even if we are successful in strengthening our controls and procedures, those controls and procedures may not be adequate to prevent or identify irregularities or ensure the fair presentation of our financial statements included in our periodic reports filed with the Securities and Exchange Commission (the “SEC”). ***The restatement of certain of our financial statements has subjected us to additional risks and uncertainties, including the increased possibility of legal proceedings.*** As a result of the restatement of our financial statements for the year ended December 31, 2011 and the quarters ended March 31, 2012 and June 30, 2012, we have become subject to additional risks and uncertainties, including, among others, the increased possibility of legal proceedings, the review of the SEC and other regulatory bodies which could cause investors to lose confidence in our reported financial information and could subject us to civil or criminal penalties, shareholder class actions or derivative actions. We could face monetary judgments, penalties or other sanctions that could have a material adverse effect on our business, financial condition and results of operations and could cause our stock price to decline. ***We maintain cash balances and credit card holdback receivables that at times exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit.*** At times, we have cash in bank accounts in excess of FDIC insurance limits. As of December 31, 2012 and 2011, we had approximately $5.0 million and $1.6 million in excess of FDIC insurance limits, respectively. We also had credit card holdback receivables of $287,293 and $441,840, which were held by payment processors, and $139,389 and $248,534 of which were not FDIC insured as of December 31, 2012 and 2011, respectively. The failure of such institutions could result in the loss of a portion or all of such cash balances and credit card holdback receivables in excess of the federally insured limit, which could have a material adverse effect on our liquidity, capital resources and financial position. ### Risks Related to Our Common Stock ***Our operating results are volatile and difficult to predict, and our stock price may decline if we fail to meet the expectations of securities analysts or investors.*** Our revenue and operating results could vary significantly from quarter-to-quarter and year-to-year and may fail to match our past performance because of a variety of factors, many of which are outside of our control. Any of these events could cause the market price of our common stock to fluctuate. Factors that may contribute to the variability of our operating results include: - changes in expectations as to our future financial performance; - announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships or capital commitments; - the timing of the launch and the popularity of new applications and enhancements to our existing application by us or our competitors; - the amount of advertising and marketing that is available and spent on user acquisition campaigns; - changes to the third party platforms on which we operate; - disruptions in the availability of our application or of third party platforms; - actual or perceived violations of privacy obligations and compromises of our subscribers data; - the entrance of new competitors in our market whether by established companies or the entrance of new companies; - additions or departures of key personnel and the cost of attracting and retaining application developers and other software engineers; and - general market conditions, including market volatility. Given our short operating history and the rapidly evolving industry in which we operate, our historical operating results may not be useful in predicting our future operating results. In addition, metrics available from third parties regarding our industry and the performance of our application may not be indicative of our financial performance. ***At times when our common stock is thinly traded, you may be unable to sell at or near ask prices or at all if you need to liquidate your shares and the price of our common stock may be volatile.*** In the past, the shares of our common stock have been thinly-traded on the OTC Bulletin Board (the “OTC Bulletin Board”), meaning that the number of persons interested in purchasing our common stock at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company that is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on stock price. A broader or more active public trading market for our common stock may not develop or be sustained, and the current trading level of our common stock may not be sustained. Due to these conditions, you may be unable to sell your common stock at or near ask prices or at all if you desire to sell shares of common stock. Because of the limited trading market for our common stock, and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss because of such illiquidity and because the price for our common stock may suffer greater declines because of its price volatility. ***We may obtain additional financing by issuing additional shares of common stock, which would dilute the ownership of our stockholders.*** We may need to raise additional financing through debt or issuing shares of our common stock in order to achieve our business goals. Although there are no present plans, agreements, commitments or undertakings with respect to the issuance of additional shares or securities convertible into any such shares by us, any shares issued would dilute the percentage ownership of our current stockholders. ***Clifford Lerner’s control may prevent you from directing the course of our operations and may affect the price of our common stock.*** Clifford Lerner beneficially owned approximately 56% of our outstanding shares as of March 8, 2013. As long as Mr. Lerner beneficially owns more than 50% of our outstanding shares, he will be able to elect our entire board of directors, control all matters that require a stockholder vote (such as mergers, acquisitions and other business combinations) and exercise a significant amount of influence over our management and operations. This concentration of ownership could result in a reduction in value to the common stock you own because of the ineffective voting power, and could have the effect of preventing us from undergoing a change of control in the future. ***The large number of shares issuable upon exercise of warrants could have an adverse effect on our stock price.*** In January 2011, we issued warrants to purchase an aggregate of 2,380,000 shares of common stock with an exercise price of $2.50 per share to investors and a placement agent. The price of our common stock could significantly decline if such persons elect to exercise their warrants and sell shares in the market at times when there are not a corresponding number of investors willing to purchase such shares at the asked prices. In addition, the large number of outstanding warrants may cause an overhang on the market and prevent the market price of the common stock from rising above the warrant exercise price. ***If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board, which would limit the ability of broker-dealers to sell our common stock and the ability of stockholders to sell their common stock in the secondary market.*** Companies trading on the OTC Bulletin Board must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and must be current in their quarterly and annual reports that are required to be filed under the Exchange Act to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our common stock could be adversely affected by limiting the ability of broker-dealers to sell our common stock and the ability of stockholders to sell their common stock in the secondary market. ***We do not expect to pay dividends and stockholders should not expect to receive dividends.*** We have not paid any dividends on our common stock in the past, and do not anticipate that we will declare or pay any dividends in the foreseeable future. Consequently, stockholders will only realize an economic gain on their investment in our common stock if the price appreciates. Stockholders should not purchase our common stock expecting to receive cash dividends. Because we do not pay dividends, and there may be limited trading, stockholders may not have any manner to liquidate or receive any payment on their investment. Therefore, our failure to pay dividends may cause stockholders to not see any return on their investment even if we are successful in our business operations. In addition, because we do not pay dividends we may have trouble raising additional funds which could affect our ability to expand our business operations. ## Properties As filed, 469 characters. Our principal executive office is located at 462 7th Avenue, 4th Floor, New York, NY 10018. We currently do not own any real property. We lease approximately 9,000 square feet of office space, and our office rental expense on a monthly basis is approximately $21,000. The office lease term for our principal executive office runs through March 2015. Our wholly owned subsidiaries, SNAP Mobile Limited and eTwine Inc., also operate out of our principal executive office. ## Management's discussion and analysis As filed, 29,903 characters. *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 our audited consolidated financial statements and the accompanying notes thereto included in “Item 8. Financial Statements and Supplementary Data.” Unless the context otherwise requires, references to “Snap,” “we,” “our,” “us” and the “Company” refer to Snap Interactive, Inc. and its subsidiaries.* ### 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 this Annual Report on Form 10-K. ### Overview We are an Internet company providing services in the expanding social dating market. We own and operate a dating and social discovery software application under the *AreYouInterested.com* brand that can be accessed on Facebook®, mobile devices such as iPhone® and Android®, as well as a stand-alone website. Our product is fully integrated across all gateways we offer and incorporates the Facebook Connect® integration tool, which allows users to “connect” their Facebook profile and friends to our website. Since August 2007, *AreYouInterested.com* has been one of the leading dating applications on Facebook based on the publicly reported number of DAUs and MAUs. As of March 8, 2013, we had more than 3.1 million MAUs of the *AreYouInterested.com* application on Facebook platform. We primarily generate revenue from subscription fees and, as of March 8, 2013, we had approximately 90,000 active subscribers. The number of our DAUs and MAUs as publicly reported by AppData®, 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. We believe that our extensive user base and scale of Facebook connected profiles allows us to create a one-of-a-kind experience for users looking to meet people with similar interests. ### Recent Developments *Restatement.* On November 15, 2012, we concluded that our previously filed financial statements did not properly account for certain features of our common stock warrants that were issued in January 2011 in connection with an equity financing. Based on the recommendation of management and after discussions with our current independent accountants, Ernst & Young LLP, we restated certain of our financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2011 and the Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, 2012 and March 31, 2012. We completed the restatement by filing amendments to these reports on December 7, 2012. *Launch of Redesigned Product.* During 2012, we redesigned the *AreYouInterested.com* product to focus on interest-based matching and we officially launched the redesigned *AreYouInterested.com* product in August 2012. During the third quarter of 2012, we tested and developed designs, features, pricing and payment methods to increase user engagement and installed a new performance analytics structure to allow us to analyze and react to the performance of the redesigned product in near real-time. ### Operational and Financial Highlights During the year ended December 31, 2012, we executed key components of our long-term strategy for our redesigned *AreYouInterested.com* product, including: - the official launch of the redesigned *AreYouInterested.*com product in early August 2012; - the testing and development of designs, features, pricing and payment methods to increase user engagement; and - the installation of a new performance analytics structure that allows us to analyze and react to our product’s performance in closer to real-time. During 2012, we reduced our advertising and marketing expenses to preserve liquidity as we transitioned to and launched our new product. While we believe that these actions will yield positive results, these actions have caused: - a decrease in bookings and a slight increase in revenue for 2012, as compared to 2011; - a decrease in the number of active subscribers during 2012, as compared to 2011; and - an increase in net loss for 2012, as compared to 2011. We are continuing to optimize the new product and are adding new features that we expect will increase user engagement and improve rates at which installs are converted into paying subscribers. During 2012, we reduced advertising and marketing expenses, which resulted in declines in bookings and our subscriber count. We anticipate increasing our advertising and marketing expenses in 2013, which we expect to increase revenue, bookings and our overall subscriber count. ### 2013 Highlights and Objectives During the first quarter of 2013, we executed key components of our 2013 objectives, including: - We acquired and transitioned to the “AYI.com” domain; - New subscription sales increased in both January and February 2013 from December 2012; - We launched new “social” features for *AreYouInterested.com* that are designed to integrate a user’s interest and social graphs into the online dating experience; and - We have begun to rebrand *AreYouInterested.com* as “*AYI”*, a shorter and easier name for our users to remember. For the remainder of 2013, our business objectives include: - Building a recognizable brand for *AreYouInterested.com* 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 product, particularly with regard to Android and mobile web; - Increasing our rate of advertising and marketing expenditures to increase traffic to the *AreYouInterested.com* brand; and - Growing our base of paid subscribers. 15 ### How We Generate Revenue We generate the majority of our revenue through subscription fees and premium sales on our *AreYouInterested.com* application. Most of our revenue is generated from subscriptions originating on our *AreYouInterested.com* Facebook application, and an increasing amount of our revenue is being generated through subscriptions on our mobile platforms. We also generate a small portion of our revenue through advertisements on our product and micro-transactions that allow users to access certain other premium features. Our users have a variety of methods by which to purchase subscriptions to *AreYouInterested.com.* Users can pay by credit card, PayPal, Boku, TrialPay 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. Regardless of which payment method is utilized, users may access the *AreYouInterested.com* product through any of the gateways we offer. We recognize revenue from monthly premium subscription fees in the month in which the services are provided. Revenues are presented net of refunds, credits, and known and estimated credit card chargebacks. During 2012, subscriptions were offered in durations of one-, three- and six-month terms. A twelve-month subscription term was added in February 2012. Longer-term plans (those with durations longer than one month) are generally available at discounted monthly rates. All subscription fees, however, are collected at the time of purchase regardless of the length of the subscription term. Revenues from multi-month subscriptions are recognized over the length of the subscription term rather than when the subscription is purchased. Pursuant to our terms of service, subscriptions automatically renew for periods of the same length as the original subscription term until subscribers terminate their subscriptions. During January 2012, we recognized revenue from the direct sale of “points” over a two-month time period. Users could either purchase or earn points by performing activities, such as by browsing profiles that could be used in exchange for accessing certain premium features on our application. Determining whether the criteria for spending points had been satisfied often involved management making assumptions and judgments that may have had an impact on the timing and amount of revenue we recognized in each period. In February 2012, we discontinued the sale of points. During August 2012, in conjunction with the launch of the *AreYouInterested.com* product, we introduced micro-transactions to allow users to access certain premium features by paying for such features without purchasing a recurring subscription. While micro-transactions are not a significant driver of revenue at this time, we believe that such micro-transactions may increase user engagement with the product and increase the likelihood that they will become a subscriber. Revenue from micro-transactions is recognized over a two-month period. We recognize advertising revenue as earned on a “click-through,” impression, registration or subscription basis. ### 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 revenue 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. | Consolidated Statements of Operations Data: | Year Ended December 31, 2012 | 2011 | | --- | ---: | ---: | | Total revenues | $19,246,736 | $19,155,543 | | **Consolidated Balance Sheets Data:** | | | | Deferred revenue (at period end) | $2,524,229 | $3,138,406 | | **Consolidated Statements of Cash Flows Data:** | | | | Net cash used in operating activities | $(3,401,191) | $(1,455,542) | 16 #### 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 sales occurred 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 non-GAAP financial measure representing the aggregate dollar value of subscription fees and micro-transactions received during the period. We calculate bookings as subscription revenue recognized during the period plus the change in deferred revenue 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. In addition to subscription revenue, bookings is a “top-line” financial metric that we use to manage our business. 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. In addition, we use bookings to evaluate our results of operations as well as to assess the effectiveness of, and plan future, user acquisition campaigns. Over the long term, the factors impacting our bookings and subscription revenue are the same. However, in the short term, factors exist that may cause subscription revenue to exceed or be less than 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 generally accepted accounting principles in the United States of America (“GAAP”). The following table presents a reconciliation of subscription revenue to bookings for each of the periods presented: | Reconciliation of Subscription Revenue to Bookings | Year Ended December 31, 2012 | 2011 | | --- | ---: | ---: | | Subscription revenue | $18,910,070 | $18,781,368 | | Change in deferred revenue | (614,177) | 1,200,491 | | Bookings | $18,295,893 | $19,981,859 | #### Limitations of Bookings Some limitations of bookings as a financial measure include that: - Bookings does not reflect that we recognize 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 Consolidated Statements of Operations data for each of the periods indicated as a percentage of total revenues. | | Year Ended December 31, 2012 | 2011 | | --- | ---: | ---: | | Revenues | 100.0% | 100.0% | | Costs and expenses: | | | | Programming, hosting and technology | 23.1% | 13.5% | | Compensation | 18.8% | 10.3% | | Professional fees | 3.7% | 2.9% | | Advertising and marketing | 51.3% | 76.4% | | General and administrative | 20.5% | 16.0% | | Total costs and expenses | 117.4% | 119.1% | | Loss from operations | (17.4)% | (19.1)% | | Interest income, net | 0.1% | 0.2% | | Mark-to-market adjustment on warrant liability | (3.5)% | 10.6% | | Other income (expense) | (0.1)% | 0.0% | | Net loss before income taxes | (20.9)% | (8.3)% | | Provision for income taxes | 0.0% | 0.0% | | Net loss | (20.9)% | (8.3)% | 17 ### Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 ### Revenues Revenues increased to $19,246,736 for the year ended December 31, 2012, from $19,155,543 for the year ended December 31, 2011. The increase in revenues is due primarily to an increase in subscription revenue from the *AreYouInterested.com* brand in the year ended December 31, 2012 as compared to the year ended December 31, 2011. While advertising and marketing expenses decreased for 2012 compared to the prior year, which primarily affects new subscriptions, we benefited from a higher number of recurring subscriptions. The following table sets forth our subscription revenue, advertising revenue and total revenue for the year ended December 31, 2012, as compared to the year ended December 31, 2011, the increase or decrease between those periods, the percentage increase or decrease between those periods, and the percentage of total revenues that each represented for those periods: | | Year Ended December 31, 2012 | 2011 | Increase (Decrease) | % Increase (Decrease) | % Revenue Year Ended December 31, 2012 | 2011 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Subscription revenue | $18,910,070 | $18,781,368 | $128,702 | 0.7% | 98.3% | 98.0% | | Advertising revenue | 336,666 | 374,175 | (37,509) | (10.0)% | 1.7% | 2.0% | | Total revenues | $19,246,736 | $19,155,543 | $91,193 | 0.5% | 100.0% | 100.0% | *Subscription –* The results for the year ended December 31, 2012 reflect an increase in subscription revenue of $128,702, or 0.7%, as compared to the year ended December 31, 2011. The increase in subscription revenue for the year ended December 31, 2012, was primarily driven by an increase in our subscriber base as compared to the prior year. Subscription revenue as a percentage of total revenue was 98.3% for the year ended December 31, 2012, as compared to 98.0% for the year ended December 31, 2011. *Advertising –* The results for the year ended December 31, 2012 reflect a decrease in advertising revenue of $37,509, or 10.0%, as compared to the year ended December 31, 2011. The decrease in advertising revenue for the year ended December 31, 2012 was primarily driven by a decrease in our online advertising campaigns as compared to the prior year. Advertising revenue as a percentage of total revenue was 1.7% for the year ended December 31, 2012, as compared to 2.0% for the year ended December 31, 2011. Advertising revenue is dependent upon traffic as well as the advertising inventory we place on our product. During the year ended December 31, 2012, we did not actively manage our advertising revenue. ### Costs and Expenses Total costs and expenses for the year ended December 31, 2012 reflect a decrease in costs and expenses of $216,799, or 1.0%, as compared to the year ended December 31, 2011. The following table presents our costs and expenses for the year ended December 31, 2012, as compared to the year ended December 31, 2011, the increase or decrease between those periods, and the percentage increase or decrease between those periods: | | Year Ended December 31, 2012 | 2011 | Increase (Decrease) | % Increase (Decrease) | | --- | ---: | ---: | ---: | ---: | | Programming, hosting and technology | $4,444,550 | $2,587,822 | $1,856,728 | 71.7% | | Compensation | 3,625,117 | 1,976,384 | 1,648,733 | 83.4% | | Professional fees | 703,125 | 558,136 | 144,989 | 26.0% | | Advertising and marketing | 9,876,097 | 14,626,963 | (4,750,866) | (32.5)% | | General and administrative | 3,953,795 | 3,070,178 | 883,617 | 28.8% | | Total costs and expenses | $22,602,684 | $22,819,483 | $(216,799) | (1.0)% | *Programming, Hosting and Technology –* The results for the year ended December 31, 2012 reflect an increase in programming, hosting and technology expense of $1,856,728, or 71.7%, as compared to the year ended December 31, 2011. The increase in product development expense for the year ended December 31, 2012, was primarily driven by increased salary expenses due to expansion of our engineering and development staff as well as increased expenses related to hosting and bandwidth, primarily to support the redesigned *AreYouInterested.com* product. Programming, hosting and technology expense as a percentage of total revenues was 23.1% for the year ended December 31, 2012, as compared to 13.5% for the year ended December 31, 2011. *Compensation –* The results for the year ended December 31, 2012 reflect an increase in compensation expense, which excludes the cost of developers and programmers included in programming, hosting and technology expense above, of $1,648,733, or 83.4%, as compared to the year ended December 31, 2011. The increase in compensation expense for the year ended December 31, 2012, was primarily driven by increased headcount in management and support areas compared to the year ended December 31, 2011. Compensation expense as a percentage of total revenues was 18.8% for the year ended December 31, 2012, as compared to 10.3% for the year ended December 31, 2011. *Professional fees –* The results for the year ended December 31, 2012 reflect an increase in professional fees of $144,989, or 26.0%, as compared to the year ended December 31, 2011. The increase in professional fees for the year ended December 31, 2012, was primarily driven by an increase in accounting fees as a result of the change in accounting firms. Professional fees as a percentage of total revenues were 3.7% for the year ended December 31, 2012, as compared to 2.9% for the year ended December 31, 2011. *Advertising and Marketing –* The results for the year ended December 31, 2012 reflect a decrease in advertising and marketing expense of $4,750,866, or 32.5%, as compared to the year ended December 31, 2011. The decrease in advertising and marketing expense for the year ended December 31, 2012, as compared to the prior year period, was primarily driven by decreasing the number of user acquisition campaigns. During the year ended December 31, 2012, we also significantly reduced our rate of advertising and marketing expense as compared to the prior year period as we concentrated our focus on the migration of all users to the redesigned AreYouInterested.com product and the optimization of the new product. Advertising and marketing as a percentage of total revenues was 51.3% for the year ended December 31, 2012, as compared to 76.4% for the year ended December 31, 2011. *General and Administrative –* The results for the year ended December 31, 2012 reflect an increase in general and administrative expense of $883,617, or 28.8%, as compared to the year ended December 31, 2011. The increase in general and administrative expense for the year ended December 31, 2012, as compared to the prior year period, was primarily driven by increases in recruiting expense, other employee related expenses and other increased costs associated with the overall expansion of our business. General and administrative expense as a percentage of total revenues was 20.5% for the year ended December 31, 2012, as compared to 16.0% for the year ended December 31, 2011. ### Non-Operating Income (Expense) The following table presents the components of non-operating income (expense) for the year ended December 31, 2012, as compared to the year ended December 31, 2011, the decrease between those periods and the percentage decrease between those periods: | | Year Ended December 31, 2012 | 2011 | Decrease | % Decrease | | --- | ---: | ---: | ---: | ---: | | Interest income, net | $21,517 | $28,858 | $(7,341) | (25.4%) | | Mark-to-market adjustment on warrant liability | (679,325) | 2,038,000 | (2,717,325) | (133.3%) | | Other income (expense) | (16,885) | 3,909 | (20,794) | (532.0%) | | Total non-operating income (expense) | $(674,693) | $2,070,767 | $(2,745,460) | (132.6%) | #### Interest Income, net Interest income, net for the year ended December 31, 2012 was $21,517, a decrease of $7,341, or 25.4%, as compared to $28,858 for the year ended December 31, 2011. Interest income, net represented 0.1% and 0.2% of total revenues for the years ended December 31, 2012 and 2011, 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 expense of $679,325 for the year ended December 31, 2012 and income of $2,038,000 for the year ended December 31, 2011 represented the changes in fair value of the warrant liability during those periods, which fluctuates inversely with our stock price. #### Other Income (Expense) We had losses from fixed asset disposals totaling $16,885 for the year ended December 31, 2012, as compared to $3,909 of other income earned for the year ended December 31, 2011. Other income (expense) represented 0.1% and 0.0% of total revenues for the years ended December 31, 2012 and 2011, respectively. ### Liquidity and Capital Resources | Consolidated Statements of Cash Flows Data: | Year Ended December 31, 2012 | 2011 | | --- | ---: | ---: | | Net cash used in operating activities | $(3,401,191) | $(1,455,542) | | Net cash provided by (used in) investing activities | 6,310,109 | (7,169,331) | | Net cash provided by financing activities | 50,850 | 8,003,825 | | Net increase in cash and cash equivalents | $2,959,768 | $(621,048) | We have historically financed our operations through cash generated from our equity financing in January 2011, subscription fees received from our *AreYouInterested.com* product, fees for premium features on our product and revenues derived from advertisements purchased on our product. Our overall liquidity consists of cash and cash equivalents and investments. As of December 31, 2012, we had $5,357,596 in cash and cash equivalents, as compared to cash and cash equivalents of $2,397,828 as of December 31, 2011. As of December 31, 2012, we did not have any investments, as compared to $6,481,205 of investments as of December 31, 2011. 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 2013 because we intend to increase our marketing and advertising expense to acquire new users and create brand awareness and we expect to hire additional employees. We expect that our cash and cash equivalents will further decrease during 2013. We intend to finance our growth with cash on hand, cash provided from operations, borrowings, debt or equity offerings, or some combination thereof. We believe that our cash provided from operations and cash on hand will provide sufficient capital to fund our operations for the next twelve months. A significant portion of our expenses is 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 $3,401,191for the year ended December 31, 2012, as compared to net cash used in operating activities of $1,455,542 for the year ended December 31, 2011. This increase of $1,945,649 is primarily a result of the increase in net loss, which was the result of increases in programming, hosting and technology expense, compensation expense and general and administrative expense as described above, as well as an increase in restricted cash and prepaid expenses and decreases in accounts payable, accrued expenses and other current liabilities and deferred revenue. These uses of cash were offset in part by decreases in the credit card holdback receivable and accounts receivable. Net cash used in operating activities during the year ended December 31, 2012, consisted of $2,047,259 in cash used in operations as well as a net decrease in our operating assets and liabilities of $1,353,932. Significant items impacting cash flow in the period included significant cash outlays relating to advertising and marketing expense and increases in programming, hosting and technology expense, recruiting, and salaries and related benefits associated with the growth of our business. These uses of cash were offset in part by increased collections in subscription revenues received during the period. Net cash used in operating activities during the year ended December 31, 2011, consisted of $3,132,411 in cash used in operations, partially offset by a net increase in our operating assets and liabilities of $1,676,869. Significant items impacting cash flow in the period included increased cash outlays relating to advertising and marketing expense and launching the *WhoIsNear.com* product, increases in salaries and related benefits associated with the growth of our business and our annual bonus payments of approximately $500,000 that were paid in February 2011. These uses of cash were offset in part by increased collections on subscription revenues. ### Investing Activities Cash provided by (used in) investing activities for the years ended December 31, 2012 and 2011 were $6,310,109 and ($7,169,331), respectively. Cash used in investing activities included purchases of property and equipment totaling $137,978 and $540,591 during the years ended December 31, 2012 and 2011, respectively. These purchases consisted primarily of computers and servers during the year ended December 31, 2012, and leasehold improvements during the year ended December 31, 2011. 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. Redemption of investments during the year ended December 31, 2012 totaled $6,475,000, consisting of redemptions of our certificates of deposit and U.S. Treasury notes purchased in the prior year. During the year ended December 31, 2012, we issued a new note receivable in the amount of $34,248 to an employee and accrued additional interest of $3,985 on the outstanding notes, which were offset by $11,320 in cash received through the partial repayment of two notes receivable. ### Financing Activities Cash provided by financing activities for the years ended December 31, 2012 and 2011 was $50,850 and $8,003,825, respectively. Cash provided by financing activities for the year ended December 31, 2012 consists of proceeds from the exercise of employee stock options during the year. Cash provided by financing activities for the year ended December 31, 2011 consists of proceeds from the issuance of common stock and warrants in January 2011, net of offering expenses. ### Off-Balance Sheet Arrangements As of December 31, 2012, we did not have any off-balance sheet arrangements. ### Recently Adopted Accounting Pronouncement For a discussion regarding the expected impact of the adoption of certain accounting pronouncements on future period consolidated financial statements, see Note 2 to the Consolidated Financial Statements, which is incorporated by reference herein. ## Controls and procedures As filed, 4,287 characters. ### 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. Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. 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 December 31, 2012, 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. ### Management's Annual Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to, in general, provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our chief executive officer and chief financial officer evaluated the effectiveness of our internal control over financial reporting as of December 31, 2012, and based on that evaluation they concluded that our internal control over financial reporting was not effective. The framework used by management in making that assessment was the criteria set forth in the document entitled “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that re-evaluation due to material weakness identified below, our management, including our chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were not effective as of December 31, 2012 to ensure that information required to be disclosed in our Exchange Act reports was (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure, because of material weaknesses in our internal controls over financial reporting. 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 December 31, 2012, 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 were no changes that have affected, or are reasonably likely to materially affect, 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, except as follows: - We implemented additional monitoring controls, improved internal processes and installed a third-party software program to assist with the accounting, disclosure and reporting of the Company’s outstanding equity instruments. Filed Mar 14, 2013. Source: SEC EDGAR, the filing index for accession 0001213900-13-001092. 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