# Intelligent Protection Management Corp.: Form 10-Q for the period ended Jun 30, 2014

- Company: [Intelligent Protection Management Corp.](/companies/ipm.md) (CIK 1355839)
- Form: 10-Q
- Filed: 2014-08-11
- Accepted by EDGAR: Aug 11, 2014, 16:10 ET
- Period: 2014-06-30
- Accession: 0001213900-14-005605
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1355839/000121390014005605/f10q0614_snapinteractive.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1355839/000121390014005605/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-04-01 to 2014-06-30 | $3.5m | us-gaap:Revenues |
| Revenue | 6 months, 2014-01-01 to 2014-06-30 | $6.7m | us-gaap:Revenues |
| Operating income | 3 months, 2014-04-01 to 2014-06-30 | −$254.1k | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2014-01-01 to 2014-06-30 | −$1.3m | us-gaap:OperatingIncomeLoss |
| Net income | 3 months, 2014-04-01 to 2014-06-30 | −$259.7k | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2014-01-01 to 2014-06-30 | −$1.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-04-01 to 2014-06-30 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2014-01-01 to 2014-06-30 | −$0.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-04-01 to 2014-06-30 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2014-01-01 to 2014-06-30 | −$0.03 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-04-01 to 2014-06-30 | 39,152,713 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2014-01-01 to 2014-06-30 | 39,155,340 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2014-01-01 to 2014-06-30 | −$765.7k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2014-01-01 to 2014-06-30 | $3.7k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2014-06-30 | $555.7k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-06-30 | $2.0m | us-gaap:AssetsCurrent |
| Total assets | at 2014-06-30 | $2.7m | us-gaap:Assets |
| Current liabilities | at 2014-06-30 | $4.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-06-30 | $4.3m | us-gaap:Liabilities |
| Shareholders' equity | at 2014-06-30 | −$1.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,565 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: (i) the accompanying unaudited condensed consolidated financial statements and notes thereto for the three and six months ended June 30, 2014, (ii) the consolidated financial statements and notes thereto for the year ended December 31, 2013 included in our Annual Report on Form 10-K (the “Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2014 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K. Aside from certain information as of December 31, 2013, all amounts herein are unaudited. Unless the context otherwise indicates, references to “Snap,” “we,” “our,” “us” and the “Company” refer to Snap Interactive, Inc. and its subsidiaries on a consolidated basis.*

### Forward-Looking Statements

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See “Forward-Looking Statements.” Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” of the Form 10-K, as updated by “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 filed with the SEC on May 5, 2014 (the “Form 10-Q”).

### Overview

We provide a leading online dating application under the “Are You Interested?” (“AYI”) brand that is native on Facebook, iOS and Android platforms, and is also accessible on the web, mobile devices and AYI.com. The vast majority of subscribers to our application are between the ages of 30 and 60, with an average age of 46 years old. We target our application to users in this age demographic because of their rapidly growing use of online dating and greater disposable income. We were the #1 grossing application in the Lifestyle Category on the iPhone in the United States as of August 11, 2014. As of August 11, 2014, we had approximately 100,000 active subscribers across all of our platforms.

We believe the success of our online dating application is the direct result of the superior user experience it provides. While many online dating applications and websites provide similar functionality, most competitive services require meaningful effort and initiative on the part of the user to make contact with other users. AYI is designed to eliminate effort and friction in user-to-user interaction by automating certain aspects of the introductory dialog between users. As a consequence, we believe AYI users find our experience more social and enjoyable than many competitive interactive dating services.

Our data-driven business practices are another differentiator of Snap in the competitive field. The user engagement of our application and the propensity of users to subscribe is continually enhanced through constant experimentation. Our sophisticated A/B testing framework can support millions of different versions of the application in parallel in order to test new features and functionality, design changes, and changes to our algorithms. We have also developed business processes and human capital dedicated to business intelligence to analyze and interpret A/B test data, with the result that every change we make to our application produces a verifiable benefit, and the user experience and economics of the application continually improve. We believe this capability to be a competitive advantage.

Our application is also available to confirmed users (those who have created a user name and password) and active subscribers (those confirmed users who have prepaid a subscription fee for current unrestricted communication on AYI and whose subscription period has not yet expired). As of July 31, 2014, we had approximately 99,500 active subscribers, which constituted a 28% increase in active subscribers since December 31, 2013. In addition, new subscription transactions increased approximately 34% from January 1, 2014 through July 31, 2014 as compared to the same period in 2013. Our online dating application is extremely scalable and requires limited incremental cost to add additional users or to create new tools catering to additional discrete audiences. We have experienced recent growth in the number of our active subscribers, as seen by the table below:

We generate revenues from subscriptions as well as advertising agreements with third parties. While we transitioned users to the redesigned AYI application during 2012, we significantly reduced advertising and marketing expenses for user acquisition campaigns which in part led to a significant decreased in the number of active subscribers and our revenues. For the years ended December 31, 2012 and 2013, our revenues were $19.2 million and $12.6 million, respectively. We had net losses of $4.0 million and $4.0 million for the years ended December 31, 2012 and 2013, respectively, and $1.6 million and $1.2 million in the six months ended June 30, 2013 and 2014, respectively. As of August 11, 2014, we had 33 employees, all of which were located in our New York City headquarters.

### Our Application

AYI attracts a demographically and geographically diverse user base, with users in approximately 200 different countries. Our application is intuitive, and allows users and subscribers to easily find, connect and communicate with each other. Key features and tools of our online dating application include:

#### Profile Creation

Users can join AYI by creating a personal profile that is connected to their email address or that is connected to a Facebook profile. An AYI user with a Facebook profile can nearly effortlessly import information from such profile, including the user’s photos, friends and interest data, their AYI profiles are updated in real time as they add interests on Facebook. Once a profile has been created, AYI users are able to search for potential matches, including other singles with mutual friends or similar interests. Using this information, AYI has designed features around mutual friends and interests that improve the online dating experience and, compared to traditional online dating websites, more closely mirrors the way singles traditionally meet offline. We continually update AYI’s feature set with new features to increase user engagement, make users more social and to increase the number of users that are converted to active subscribers.

#### Browse Function

AYI’s game-like “browse” function presents profiles of other users that match user criteria and prompts them to indicate if they are “interested” by either clicking on a “yes” or “skip” button above the profile picture or by sending a message when viewing that user’s profile. Users are notified when another user has clicked “yes” on their profile or if they have received a message from another user. In instances where users select "yes" on each other’s profile, the application automatically introduces the two users, who are likely to have mutual interest. In addition, AYI’s “friends of friends” function allows users view other users that have mutual friends. Users are also able to search for profiles of other users with similar interests.

#### Subscription Benefits

AYI operates on a “freemium” model, whereby certain application features are free to all users and other features are only available to paid subscribers. All users are allowed to create a profile, browse, search and view other user’s profiles, send instant messages and send an initial message to any user. Unlimited messaging and other premium features require a paid subscription.

#### Accessibility

Our easy-to-use mobile interface allows our users to engage with our online dating application from virtually anywhere at any time. The availability of our online dating application across mobile devices, tablets and personal computers enables our users to move seamlessly between devices, increasing the opportunities for user engagement and real-time interactions.

### Operational Highlights and Objectives

During the six months ended June 30, 2014, we executed key components of our objectives for 2014:

- increased our messaging activity, user engagement and user conversion rates;
- increased the number of new subscriptions primarily due to advertising and marketing efficiency;
- reduced total costs and expenses, including programming, hosting and technology expense by approximately 40%, general and administrative expense by approximately 27% and compensation expense by approximately 14% for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013;
- diversified our user acquisition sources, increasing the percentage of new users acquired through advertisements placed on sources other than Facebook media from 49% in December 2013 to 72% in June 2014; and
- increased advertising revenues due to the renewal of the advertising agreement with Match.com L.L.C. (“Match.com”) and secured future advertising revenues by entering into a new advertising agreement with Zoosk, Inc. (“Zoosk”).

For the remainder of 2014, our business objectives include:

- increasing revenue generated from subscribers by reducing subscriber attrition and presenting additional purchases opportunities;
- continuing to seek reductions in general and administrative expense, programming, hosting and technology expense, and in other expense areas in order to generate positive cash flow from operations;
- increasing the prominence of our mobile applications on iOS and Android platforms; and
- appointing independent directors to the Company's Board of Directors.

16

### Sources of Revenue

AYI operates on a “freemium” model, whereby certain application features are free to all users and other features are only available to paid subscribers. We generate revenue primarily when users purchase a subscription to obtain unlimited messaging and certain other premium features. We also generate a small portion of our revenue through micro-transactions that allow users to access other premium features and advertisements on our application.

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

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

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

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

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

*Advertising.* We generate advertising revenue from advertising agreements with third parties. We recognize advertising revenue from these agreements ratably over the term of the agreement.

In December 2013, we entered into a Business Development Agreement (the “Business Development Agreement”) with Match.com, which was amended in April 2014, whereby the Company received upfront payments in exchange for developing various integrations of Match.com’s dating properties into the core AYI.com experience. The initial upfront payments were recognized on the Company’s Consolidated Balance Sheet as deferred advertising revenue. The deferred advertising revenue is recognized on the Company’s Consolidated Statement of Operations ratably over the 90-day term of each agreement.

In June 2014, we entered into a Membership Acquisition Agreement (the “Acquisition Agreement”) with Zoosk, whereby we received an upfront payment of $500,000 in two installments in exchange for implementing certain integration features on our AYI.com website and application that advertise Zoosk during the term of the Acquisition Agreement. We are entitled to a payout (amount up to a maximum of $1,000,000) for each person that registers with Zoosk through the integration features during the term of the Acquisition Agreement. The term of the Acquisition Agreement commences on August 15, 2014 and ends ninety days thereafter, on November 13, 2014.

Prior to these agreements, our advertising revenue was historically a small portion of our revenue and primarily consisted of revenue from display ads. We generally reported our advertising revenue net of amounts due to agencies, brokers and counterparties. We recognized advertising revenue as earned on a click-through, impression, registration or subscription basis. When a user clicked an advertisement (CPC basis), viewed an advertisement impression (CPM basis), registered for an external website via an advertisement clicked on through our application (CPA basis), or clicked on an offer to subscribe to premium features on our application, the contract amount was recognized as revenue.

### Costs and Expenses

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

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

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

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

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

### Non-Operating Expenses

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

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

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

### Key Metrics

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

|  | Three Months Ended June 30, 2014 | 2013 | Six Months Ended June 30, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Active subscribers (at period end) | 98,000 | 79,200 | 98,000 | 79,200 |
| Bookings | $3,021,860 | $3,114,169 | $6,422,018 | $6,085,683 |
| Net cash used in operating activities | $(301,174) | $(1,480,086) | $(765,694) | $(2,651,931) |
| Net loss | $(259,678) | $(1,472,413) | $(1,192,775) | $(1,627,483) |
| Adjusted EBITDA | $61,746 | $(1,130,476) | $(677,760) | $(2,271,207) |
| Adjusted EBITDA as percentage of total revenues | 1.8% | (35.9)% | (10.1)% | (34.3)% |

#### Active Subscribers

We believe that the number of active subscribers is a key operating metric to evaluate the effectiveness of our operating strategies and monitor the financial performance of our business. "Active subscribers" means current users that have prepaid a subscription fee for current access to the AYI application and whose subscription period has not yet expired. We plan to increase this metric by increasing user acquisition campaigns, building a recognizable brand and increasing user engagement on AYI through the development of a superior feature set.

#### Bookings

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

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

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

| Reconciliation of Subscription Revenue to Bookings | Three Months Ended June 30, 2014 | 2013 | Six Months Ended June 30, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Subscription revenue | $3,151,002 | $3,150,319 | $6,290,022 | $6,578,210 |
| Change in deferred subscription revenue | (129,142) | (36,150) | 131,996 | (492,527) |
| Bookings | $3,021,860 | $3,114,169 | $6,422,018 | $6,085,683 |

#### Limitations of Bookings

Some limitations of bookings as a financial measure include that:

- Bookings does not reflect that we recognize subscription revenue from subscription fees and micro-transactions over the length of the subscription term; and
- Other companies, including companies in our industry, may calculate bookings differently or choose not to calculate bookings at all, which reduces its usefulness as a comparative measure.

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

#### Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA is defined as net loss adjusted to exclude interest income (expense), net, depreciation and amortization expense, gain on change in fair value of warrants and stock-based compensation expense.

We present Adjusted EBITDA because it is a key measure used by our management and Board of Directors to understand and evaluate our core operating performance and trends, to develop short- and long-term operational plans, and to allocate resources to expand our business. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of the cash operating income generated by our business. We believe that Adjusted EBITDA is useful to investors and others to understand and evaluate our operating results and it allows for a more meaningful comparison between our performance and that of competitors.

#### Limitations of Adjusted EBITDA

Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

- Adjusted EBITDA does not reflect cash capital expenditure requirements for assets underlying depreciation and amortization expense that may need to be replaced or for new capital expenditures;
- Adjusted EBITDA does not reflect our working capital requirements;
- Adjusted EBITDA does not consider the potentially dilutive impact of stock-based compensation;
- Adjusted EBITDA does not reflect interest expense or interest payments on our outstanding indebtedness;
- Adjusted EBITDA does not reflect the change in fair value of warrants; and
- Other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results. The following unaudited table presents a reconciliation from net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP, to Adjusted EBITDA for each of the periods indicated:

| Reconciliation of Net loss to Adjusted EBITDA: | Three Months Ended June 30, 2014 | 2013 | Six Months Ended June 30, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Net loss | $(259,678) | $(1,472,413) | $(1,192,775) | $(1,627,483) |
| Interest expense (income), net | 5,578 | (1,440) | 3,705 | (3,106) |
| Depreciation and amortization expense | 43,610 | 43,530 | 86,873 | 85,563 |
| Gain on change in fair value of warrants | - | (70,275) | (70,275) | (1,171,250) |
| Stock-based compensation expense | 272,236 | 370,122 | 494,712 | 445,069 |
| Adjusted EBITDA | $61,746 | $(1,130,476) | $(677,760) | $(2,271,207) |

### Results of Operations

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

|  | Three Months Ended June 30, 2014 | 2013 | Six Months Ended June 30, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: |
| Revenues | 100.0% | 100.0% | 100.0% | 100.0% |
| Costs and expenses: |  |  |  |  |
| Programming, hosting and technology expense | 19.4% | 42.5% | 23.9% | 40.8% |
| Compensation expense | 25.1% | 34.2% | 24.2% | 28.7% |
| Professional fees | 7.6% | 6.6% | 7.6% | 7.2% |
| Advertising and marketing expense | 32.2% | 30.2% | 38.3% | 31.5% |
| General and administrative expense | 23.1% | 35.5% | 24.6% | 34.2% |
| Total costs and expenses | 107.4% | 149.0% | 118.7% | 142.3% |
| Loss from operations | (7.4)% | (49.0)% | (18.7)% | (42.3)% |
| Interest income (expense), net | (0.2)% | 0.0% | (0.1)% | 0.0% |
| Gain on change in fair value of warrants | 0.0% | 2.2% | 1.0% | 17.7% |
| Loss before provision for income taxes | (7.5)% | (46.7)% | (17.7)% | (24.6)% |
| Provision for income taxes | 0.0% | 0.0% | 0.0% | 0.0% |
| Net loss | (7.5)% | (46.7)% | (17.7)% | (24.6)% |

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### Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

### Revenues

Revenues increased to $3,450,010 for the three months ended June 30, 2014, from $3,151,989 for the three months ended June 30, 2013. The increase is mainly driven by advertising revenue principally derived from our Business Development Agreement with Match.com.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the three months ended June 30, 2014 and the three months ended June 30, 2013, the increase between those periods, the percentage increase between those periods, and the percentage of total revenue that each represented for those periods:

|  | Three Months Ended June 30, 2014 | 2013 | Increase | % Increase | % Revenue Three Months Ended June 30, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 3,151,002 | 3,150,319 | 683 | 0.0% | 91.3% | 99.9% |
| Advertising revenue | 299,008 | 1,670 | 297,338 | 17,804.7% | 8.7% | 0.1% |
| Total revenues | 3,450,010 | 3,151,989 | 298,021 | 9.5% | 100.0% | 100.0% |

#### Subscription –

The results for the three months ended June 30, 2014 reflect a slight increase in subscription revenue of $683 or 0.0%, as compared to the three months ended June 30, 2013. This increase in subscription revenue for the three months ended June 30, 2014, was primarily driven by a slight increase in subscription volume partially offset by a slight decrease in subscription prices. We expect the increase in subscription volume to support revenue growth throughout the remainder of 2014. Subscription revenue as a percentage of total revenue was 91.3% for the three months ended June 30, 2014, as compared to 99.9% for the three months ended June 30, 2013.

*Advertising –* The results for the three months ended June 30, 2014 reflect an increase in advertising revenue of $297,338, or 17,804.7%, as compared to the three months ended June 30, 2013. The increase in advertising revenue resulted from revenue recognized under our Business Development Agreement with Match.com. We anticipate advertising revenue to continue to be a contributor to revenue in-line with 2014 quarter end results. Advertising revenue as a percentage of total revenue was 8.7% for the three months ended June 30, 2014, as compared to 0.1% for the three months ended June 30, 2013.

### Costs and Expenses

Total costs and expenses for the three months ended June 30, 2014 reflect a decrease in costs and expenses of $992,007, or 21.1%, as compared to the three months ended June 30, 2013. During the three months ended June 30, 2014, we reduced total costs and expenses, including employee headcount. The following table presents our costs and expenses for the three months ended June 30, 2014 and the three months ended June 30, 2013, the increase or decrease between those periods and the percentage increase or decrease between those periods:

|  | Three Months Ended% June 30, 2014 | 2013 | Increase (Decrease) | Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Programming, hosting and technology expense | $669,795 | $1,339,930 | $(670,135) | (50.0)% |
| Compensation expense | 864,859 | 1,078,536 | (213,677) | (19.8)% |
| Professional fees | 262,876 | 206,703 | 56,173 | 27.2% |
| Advertising and marketing expense | 1,110,726 | 952,248 | 158,478 | 16.6% |
| General and administrative expense | 795,854 | 1,118,700 | (322,846) | (28.9)% |
| Total costs and expenses | $3,704,110 | $4,696,117 | $(992,007) | (21.1)% |

*Programming, Hosting and Technology –* The results for the three months ended June 30, 2014 reflect a decrease in programming, hosting and technology expense of $670,135 or 50.0%, as compared to the three months ended June 30, 2013. The decrease in this expense for the three months ended June 30, 2014, was primarily driven by lower consulting expense and hosting expense, as well as reduced headcount. Programming, hosting and technology expense as a percentage of total revenues was 19.4% for the three months ended June 30, 2014, as compared to 42.5% for the three months ended June 30, 2013.

*Compensation –* The results for the three months ended June 30, 2014 reflect a decrease in compensation expense, which excludes the cost of developers and programmers included in programming, hosting and technology expense above, of $213,677, or 19.8%, as compared to the three months ended June 30, 2013. The decrease in compensation expense for the three months ended June 30, 2014 was primarily driven by decreased stock-based compensation expense and reduced headcount in management and support areas as compared to the comparable period in 2013. Compensation expense as a percentage of total revenues was 25.1% for the three months ended June 30, 2014, as compared to 34.2% for the three months ended June 30, 2013.

*Professional fees –* The results for the three months ended June 30, 2014 reflect an increase in professional fees of $56,173, or 27.2%, as compared to the three months ended June 30, 2013. The increase in professional fees for the three months ended June 30, 2014, was primarily driven by an increase in legal and accounting fees. Professional fees as a percentage of total revenues were 7.6% for the three months ended June 30, 2014, as compared to 6.6% for the three months ended June 30, 2013.

*Advertising and Marketing –* The results for the three months ended June 30, 2014 reflect an increase in advertising and marketing expense of $158,478, or 16.6%, as compared to the three months ended June 30, 2013. The increase in advertising and marketing expense for the three months ended June 30, 2014, as compared to the prior year period, was primarily driven by an increase in the number and magnitude of user acquisition campaigns. We anticipate that advertising and marketing expense will increase during the remainder of 2014 (as compared to our advertising and marketing expense for the three months ended June 30, 2014) as we promote our AYI application. Advertising and marketing expense as a percentage of total revenues was 32.2% for the three months ended June 30, 2014, as compared to 30.2% for the three months ended June 30, 2013.

*General and Administrative –* The results for the three months ended June 30, 2014 reflect a decrease in general and administrative expense of $322,846, or 28.9%, as compared to the three months ended June 30, 2013. The decrease in general and administrative expense for the three months ended June 30, 2014, as compared to the comparable period in the prior year, was primarily driven by lower recruiting and public relations expenses. General and administrative expense as a percentage of total revenues was 23.1% for the three months ended June 30, 2014, as compared to 35.5% for the three months ended June 30, 2013.

### Non-Operating Income (Expense)

The following table presents the components of non-operating income for the three months ended June 30, 2014 and the three months ended June 30, 2013, the decrease between those periods and the percentage decrease between those periods:

|  | Three Months Ended June 30, 2014 | 2013 | (Decrease) | % (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Interest income (expense), net | $(5,578) | 1,440 | (7,018) | (487.4)% |
| Gain on change in fair value of warrants | - | 70,275 | (70,275) | (100.0)% |
| Total non-operating income | $(5,578) | 71,715 | (77,293) | (107.8)% |

#### Interest income (expense), net

Interest expense, net for the three months ended June 30, 2014 was $5,578, an increase of $7,018, or 487.4%, as compared to interest income, net of $1,440 for the three months ended June 30, 2013. Interest income (expense), net represented (0.2%) and 0.0% of total revenues for the three months ended June 30, 2014 and 2013, respectively.

#### Gain on change in fair value of warrants

Our warrant liability is marked-to-market at each reporting period, with changes in fair value reported in earnings. The mark-to-market gain of $0 for the three months ended June 30, 2014 and $70,275 for the three months ended June 30, 2013 represented the changes in fair value of the warrant liability during those periods. Gain on change in fair value of warrants represented 0% and 2.2% of total revenues for the three months ended June 30, 2014 and 2013, respectively.

### Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

### Revenues

Revenues increased to $6,742,363 for the six months ended June 30, 2014, from $6,621,549 for the six months ended June 30, 2013. The increase is mainly driven by advertising revenue principally derived from our Business Development Agreement with Match.com.

The following table sets forth our subscription revenue, advertising revenue and total revenues for the six months ended June 30, 2014 and the six months ended June 30, 2013, the increase or decrease between those periods, the percentage increase or decrease between those periods, and the percentage of total revenue that each represented for those periods:

|  | Six Months Ended% June 30, 2014 | 2013 | Increase (Decrease) | Increase (Decrease) | % Revenue Six Months Ended June 30, 2014 | 2013 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Subscription revenue | 6,290,022 | 6,578,210 | (288,188) | (4.4)% | 93.3% | 99.3% |
| Advertising revenue | 452,341 | 43,339 | 409,002 | 943.7% | 6.7% | 0.7% |
| Total revenues | 6,742,363 | 6,621,549 | 120,814 | 1.8% | 100.0% | 100.0% |

*Subscription –* The results for the six months ended June 30, 2014 reflect a decrease in subscription revenue of $288,188, or 4.4%, as compared to the six months ended June 30, 2013. The decrease in subscription revenue for the six months ended June 30, 2014, was primarily driven by a decrease in subscription prices driven by periodic promotions which was partially offset by higher subscription volume. Subscription revenue as a percentage of total revenue was 93.3% for the six months ended June 30, 2014, as compared to 99.3% for the six months ended June 30, 2013.

*Advertising –* The results for the six months ended June 30, 2014 reflect an increase in advertising revenue of $409,002, or 943.7%, as compared to the six months ended June 30, 2013. The increase in advertising revenue resulted from revenue recognized under our Business Development Agreement with Match.com. We anticipate advertising revenue to continue to be a contributor to revenue in-line with 2014 year to date results. Advertising revenue as a percentage of total revenue was 6.7% for the six months ended June 30, 2014, as compared to 0.7% for the six months ended June 30, 2013.

### Costs and Expenses

Total costs and expenses for the six months ended June 30, 2014 reflect a decrease in costs and expenses of $1,421,680, or 15,1%, as compared to the six months ended June 30, 2013. During the six months ended June 30, 2014, we reduced total costs and expenses, including employee headcount. The following table presents our costs and expenses for the six months ended June 30, 2014 and the six months ended June 30, 2013, the increase or decrease between those periods and the percentage increase or decrease between those periods:

|  | Six Months Ended% June 30, 2014 | 2013 | Increase (Decrease) | Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Programming, hosting and technology expense | $1,612,206 | $2,701,321 | $(1,089,115) | (40.3)% |
| Compensation expense | 1,634,262 | 1,899,606 | (265,344) | (14.0)% |
| Professional fees | 513,031 | 473,807 | 39,224 | 8.3% |
| Advertising and marketing expense | 2,582,937 | 2,083,929 | 499,008 | 23.9% |
| General and administrative expense | 1,659,272 | 2,264,725 | (605,453) | (26.7)% |
| Total costs and expenses | $8,001,708 | $9,423,388 | $(1,421,680) | (15.1)% |

*Programming, Hosting and Technology –* The results for the six months ended June 30, 2014 reflect a decrease in programming, hosting and technology expense of $1,089,115 or 40.3%, as compared to the six months ended June 30, 2013. The decrease in this expense for the six months ended June 30, 2014, was primarily driven by reduced consulting expense, hosting expense and reduced headcount. Programming, hosting and technology expense as a percentage of total revenues was 23.9% for the six months ended June 30, 2014, as compared to 40.8% for the six months ended June 30, 2013.

*Compensation –* The results for the six months ended June 30, 2014 reflect a decrease in compensation expense, which excludes the cost of developers and programmers included in programming, hosting and technology expense above, of $265,344, or 14.0%, as compared to the six months ended June 30, 2013. The decrease in compensation expense for the six months ended June 30, 2014 was primarily driven by reduced headcount in management and support areas as compared to the comparable period in 2013. Compensation expense as a percentage of total revenues was 24.2% for the six months ended June 30, 2014, as compared to 28.7% for the six months ended June 30, 2013.

*Professional fees –* The results for the six months ended June 30, 2014 reflect an increase in professional fees of $39,224, or 8.3%, as compared to the six months ended June 30, 2013. The increase in professional fees for the six months ended June 30, 2014, was primarily driven by an increase in legal and accounting fees. Professional fees as a percentage of total revenues were 7.6% for the six months ended June 30, 2014, as compared to 7.2% for the six months ended June 30, 2013.

*Advertising and Marketing –* The results for the six months ended June 30, 2014 reflect an increase in advertising and marketing expense of $499,008, or 23.9%, as compared to the six months ended June 30, 2013. The increase in advertising and marketing expense for the six months ended June 30, 2014, as compared to the prior year period, was primarily driven by an increase in the number of user acquisition campaigns. We anticipate that advertising and marketing expense will increase during the remainder of 2014 (as compared to our advertising and marketing expense for the six months ended June 30, 2014) as we promote our AYI application. Advertising and marketing expense as a percentage of total revenues was 38.3% for the six months ended June 30, 2014, as compared to 31.5% for the six months ended June 30, 2013.

*General and Administrative –* The results for the six months ended June 30, 2014 reflect a decrease in general and administrative expense of $605,453, or 26.7%, as compared to the six months ended June 30, 2013. The decrease in general and administrative expense for the six months ended June 30, 2014, as compared to the comparable period in the prior year, was primarily driven by lower recruiting expenses, public relations expenses and reduced headcount. General and administrative expense as a percentage of total revenues was 24.6% for the six months ended June 30, 2014, as compared to 34.2% for the six months ended June 30, 2013.

### Non-Operating Income (Expense)

The following table presents the components of non-operating income for the six months ended June 30, 2014 and the six months ended June 30, 2013, the decrease between those periods and the percentage decrease between those periods:

|  | Six Months Ended June 30,% 2014 | 2013 | (Decrease) | (Decrease) |
| --- | ---: | ---: | ---: | ---: |
| Interest income (expense), net | $(3,705) | 3,106 | (6,811) | (219.3)% |
| Gain on change in fair value of warrants | 70,275 | 1,171,250 | (1,100,975) | (94.0)% |
| Total non-operating income | $66,570 | 1,174,356 | (1,107,786) | (94.3)% |

#### Interest income (expense), net

Interest expense, net for the six months ended June 30, 2014 was $3,705, an increase of $6,811, or 219.3%, as compared to the interest income, net $3,106 for the six months ended June 30, 2013. Interest expense, net represented 0.1% of total revenues for the six months ended June 30, 2014 as compared to 0.0% for the six months ended June 30, 2013.

#### Gain on change in fair value of warrants

Our warrant liability is marked-to-market at each reporting period, with changes in fair value reported in earnings. The mark-to-market gain of $70,275 for the six months ended June 30, 2014 and $1,171,250 for the six months ended June 30, 2013 represented the changes in fair value of the warrant liability during those periods. Gain on change in fair value of warrants represented 1.0% and 17.7% of total revenues for the six months ended June 30, 2014 and 2013, respectively.

### Liquidity and Capital Resources

| Consolidated Statements of Cash Flows Data: | Six Months Ended June 30, 2014 | 2013 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(765,694) | $(2,651,931) |
| Net cash used in investing activities | (5,913) | (87,932) |
| Net cash provided by financing activities | 400,000 | - |
| Net decrease in cash and cash equivalents | $(371,607) | $(2,739,863) |

We have historically financed our operations through cash generated from our equity offering in January 2011, subscription fees received from our application, fees for premium features on our application, advertising revenues and promissory notes from investors.

As of June 30, 2014, we had $555,745 in cash and cash equivalents, as compared to cash and cash equivalents of $927,352 as of December 31, 2013. 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. Though we have reduced cash used in operating activities, we do not anticipate being profitable during 2014. Our growth objectives require a continued investment in advertising and marketing expense during the remainder of 2014 to acquire new users. We intend to finance our business and growth with cash on hand, cash provided from operations, borrowings, debt or equity offerings, or some combination thereof. However, we expect to be cash flow positive during the remainder of 2014 without obtaining any additional capital.

We have also incurred debt as a means of generating liquidity. As of June 30, 2014, the outstanding principal amount of our debt was $400,000, which consisted of two promissory notes, each of which is discussed in more detail below.

#### Carrella Note

As of June 30, 2014, we had approximately $100,000 of outstanding indebtedness under a promissory note with Thomas Carrella. The promissory note with Mr. Carrella is due and payable on the earlier of February 20, 2015 and an event of default and bears interest at a rate of fifteen percent (15%) per annum. The Company calculated the fair value of the warrant using Black-Scholes option pricing model and recorded $4,750 of deferred financing costs related to the issuance of the warrant that will be amortized over the term of the promissory note.

We used the proceeds from this promissory note for general corporate purposes, including working capital.

#### Lerner Note

As of June 30, 2014, we had approximately $300,000 of outstanding indebtedness under a promissory note with Clifford Lerner. The promissory note with Mr. Lerner is due and payable on the earlier of January 24, 2015 and an event of default and bears interest at a rate of nine percent (9%) per annum. We used the proceeds from this promissory note for general corporate purposes, including working capital.

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

### Operating Activities

Net cash used in operating activities was $765,694 for the six months ended June 30, 2014, as compared to net cash used in operating activities of $2,651,931 for the six months ended June 30, 2013. This decrease in net cash used in operating activities of $1,886,237 was primarily a result of the increase in deferred subscription revenue and advertising revenue, as well as our efforts to reduce costs and expenses.

Significant items impacting cash flow in the six months ended June 30, 2014 included significant cash outlays relating to advertising and marketing expense and programming, hosting and technology expense, increases in compensation expense, professional fees and related benefits. These uses of cash were offset in part by collections in subscription revenues received during the period.

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

### Investing Activities

Cash used in investing activities for the six months ended June 30, 2014 and 2013 was $5,913 and $87,932, respectively. Cash used in investing activities included purchases of property and equipment totaling $3,731 and $35,550 during the six months ended June 30, 2014 and 2013, respectively. These purchases consisted primarily of computers and servers during the periods. We continue to invest in technology hardware and software to support our growth. These purchases were offset by the repayment of a promissory note for $47,818 during the six months ended June 30, 2014.

### Financing Activities

Cash provided by financing activities for the six months ended June 30, 2014 was $400,000. The increase relates to promissory notes issued during the period totaling $400,000 (See Note 11 in the Notes to the Condensed Consolidated Financial Statements).

There was no cash provided by financing activities for the six months ended June 30, 2013.

### Off-Balance Sheet Arrangements

As of June 30, 2014, we did not have any off-balance sheet arrangements.

### Contractual Obligations and Commitments

During the six months ended June 30, 2014, there were no material changes to the Company’s contractual obligations and commitments from those disclosed in “Note 15. Commitments” in the Notes to the Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 5, 2014, which is hereby incorporated by reference herein.

### Critical Accounting Policies and Estimates

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

During the six months ended June 30, 2014, there were no material changes to our significant accounting policies from those contained in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 5, 2014, which is hereby incorporated by reference herein.

## Controls and procedures

As filed, 2,600 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. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Based on the evaluation as of June 30, 2014, for the reasons set forth below, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. In its assessment of the effectiveness of internal control our financial reporting as of June 30, 2014, the Company determined that the following items constituted a material weakness:

- The Company did not have an independent audit committee in place, which would provide oversight of the Company’s officers, operations and financial reporting function; and
- The Company did not have effective internal controls in place over its financial statement close process, which could result in the Company's failure to detect material misstatements in the Company's financial statements.

### Changes in Internal Control over Financial Reporting

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

## Risk factors

As filed, 535 characters.

There were no material changes to the Risk Factors disclosed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013, as updated by the Risk Factors disclosed in “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014. For more information concerning our risk factors, please see “Item 1A. Risk Factors” of our Annual Report on Form 10-K, as updated by “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

Filed Aug 11, 2014.
Source: SEC EDGAR, the filing index for accession 0001213900-14-005605. Last ingested by Listed: Oct 24, 2026, 15:09 ET. No prices; not investment advice.