SPARK NETWORKS, INC UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Exhibit 99.4
SPARK NETWORKS, INC
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On October 14, 2015, Spark Networks, Inc. (the “Company”) and its subsidiary, LOV USA LLC, entered into an agreement and plan of merger (the “Agreement”) with Smooch Labs Inc. (“Smooch”), an unrelated third party and owner of the dating application, JSwipe, and certain other parties related to Smooch, including the founders of Smooch.
The following unaudited pro forma condensed combined financial information and related notes present the historical condensed combined financial information of the Company and Smooch after giving effect to the Company’s acquisition of Smooch based on the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined balance sheet as of September 30, 2015 is presented as if the acquisition of Smooch had occurred on September 30, 2015. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2015 and the year ended December 31, 2014 are presented as if the acquisition had occurred on January 1. The historical financial information is adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) with respect to the condensed combined statements of operations, expected to have a continuing impact on the combined results.
The preliminary allocation of the purchase consideration used in the unaudited pro forma condensed combined financial information is based upon preliminary estimates of the identifiable assets acquired and the resulting goodwill recognized, which are subject to change upon finalization.
The unaudited pro forma adjustments are not necessarily indicative of or intended to represent the results that would have been achieved had the transaction been consummated as of the dates indicated or that may be achieved in the future. The actual results reported by the combined company in periods following the acquisition may differ significantly from those reflected in the unaudited pro forma condensed combined financial information for a number of reasons, including cost saving synergies from operating efficiencies and the effect of incremental costs incurred to integrate the two companies.
The unaudited pro forma condensed combined financial information should be read in conjunction with our historical consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2014, our Quarterly Report on Form 10-Q for the quarterly period ended September 20, 2015, the historical financial statements of Smooch for the period of January 6, 2014 (inception) to December 31, 2014, and the historical unaudited financial statements of Smooch as of and for the nine months ended September 30, 2015 contained in this Form 8-K/A.
SPARK NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2015
(in thousands)
|
Historical |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Spark Networks, Inc. |
|
|
Smooch Labs, Inc. |
|
|
|
Pro Forma Adjustments |
|
Pro Forma Combined |
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
|
14,442 |
|
|
$ |
|
69 |
|
|
$ |
|
(6,069 |
) |
(A)(C) |
|
$ |
|
8,442 |
|
Restricted cash |
|
823 |
|
|
|
— |
|
|
|
— |
|
|
|
|
823 |
|
||||
Accounts receivable, net |
|
|
1,133 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
1,133 |
|
||
Deferred tax asset – current |
|
9 |
|
|
|
— |
|
|
|
— |
|
|
|
|
9 |
|
||||
Prepaid expenses and other |
|
766 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
766 |
|
|||
Total current assets |
|
|
17,173 |
|
|
|
|
69 |
|
|
|
|
(6,069 |
) |
|
|
|
|
11,173 |
|
Property and equipment, net |
|
|
5,346 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
5,346 |
|
||
Goodwill |
|
|
8,522 |
|
|
|
— |
|
|
|
|
5,904 |
|
(B) |
|
|
|
14,426 |
|
|
Intangible assets, net |
|
|
2,439 |
|
|
|
— |
|
|
|
|
1,090 |
|
(B) |
|
|
|
3,529 |
|
|
Deferred tax asset – non-current |
|
68 |
|
|
|
— |
|
|
|
— |
|
|
|
|
68 |
|
||||
Deposits and other assets |
|
127 |
|
|
|
|
6 |
|
|
|
— |
|
|
|
|
|
133 |
|
||
Total assets |
$ |
|
33,675 |
|
|
$ |
|
75 |
|
|
$ |
|
925 |
|
|
|
$ |
|
34,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
$ |
|
1,664 |
|
|
$ |
|
197 |
|
|
$ |
|
(197 |
) |
(C) |
|
$ |
|
1,664 |
|
Accrued liabilities |
|
|
4,785 |
|
|
|
|
240 |
|
|
|
|
(240 |
) |
(C) |
|
|
|
4,785 |
|
Deferred revenue |
|
|
6,307 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
6,307 |
|
||
Deferred tax liability – current |
|
601 |
|
|
|
— |
|
|
|
— |
|
|
|
|
601 |
|
||||
Convertible notes payable |
|
— |
|
|
|
315 |
|
|
|
|
(315 |
) |
(C) |
|
|
— |
|
|||
Related party loans payable |
|
— |
|
|
|
145 |
|
|
|
|
(145 |
) |
(C) |
|
|
— |
|
|||
Total current liabilities |
|
|
13,357 |
|
|
|
|
897 |
|
|
|
|
(897 |
) |
|
|
|
|
13,357 |
|
Deferred tax liability – non-current |
|
|
1,593 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
1,593 |
|
||
Convertible notes payable, net of current portion |
|
— |
|
|
|
|
402 |
|
|
|
|
(402 |
) |
(C) |
|
|
— |
|
||
Related party loans payable, net of current portion |
|
— |
|
|
|
|
70 |
|
|
|
|
(70 |
) |
(C) |
|
|
— |
|
||
Derivative liability |
|
— |
|
|
|
|
378 |
|
|
|
|
(378 |
) |
|
|
|
|
0 |
|
|
Other liabilities |
|
609 |
|
|
|
— |
|
|
|
— |
|
|
|
|
609 |
|
||||
Total liabilities |
|
|
15,559 |
|
|
|
|
1,747 |
|
|
|
|
(1,747 |
) |
|
|
|
|
15,559 |
|
Commitments and contingencies |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
— |
|
||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
|
25 |
|
||||
Additional paid-in-capital |
|
|
75,082 |
|
|
|
|
141 |
|
|
|
|
859 |
|
(A)(C) |
|
|
|
76,082 |
|
Accumulated other comprehensive income |
|
754 |
|
|
|
— |
|
|
|
— |
|
|
|
|
754 |
|
||||
Accumulated deficit |
|
|
(57,745 |
) |
|
|
|
(1,813 |
) |
|
|
|
1,813 |
|
(C) |
|
|
|
(57,745 |
) |
Total stockholders’ equity |
|
|
18,116 |
|
|
|
|
(1,672 |
) |
|
|
|
2,672 |
|
|
|
|
|
19,116 |
|
Total liabilities and stockholders’ equity |
$ |
|
33,675 |
|
|
$ |
|
75 |
|
|
$ |
|
925 |
|
|
|
$ |
|
34,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma condensed combined financial information |
|
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
(in thousands)
|
Historical |
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Spark Networks, Inc. |
|
|
Smooch Labs, Inc. |
|
|
Pro Forma Adjustments |
|
|
Pro Forma Combined |
|
||||||||
Revenue |
$ |
|
61,645 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
61,645 |
|
||
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
|
34,321 |
|
|
|
|
140 |
|
|
|
— |
|
|
|
|
34,461 |
|
|
Sales and marketing |
|
|
5,127 |
|
|
|
— |
|
|
|
— |
|
|
|
|
5,127 |
|
||
Customer service |
|
|
3,038 |
|
|
|
— |
|
|
|
— |
|
|
|
|
3,038 |
|
||
Technical operations |
|
1130 |
|
|
|
2 |
|
|
|
— |
|
|
|
|
1,132 |
|
|||
Development |
|
|
3,446 |
|
|
|
|
203 |
|
|
|
— |
|
|
|
|
3,649 |
|
|
General and administrative |
|
|
13,300 |
|
|
|
|
88 |
|
|
|
— |
|
|
|
|
13,388 |
|
|
Depreciation |
|
|
2,053 |
|
|
|
— |
|
|
|
— |
|
|
|
|
2,053 |
|
||
Amortization of intangible assets |
|
40 |
|
|
|
— |
|
|
|
273 |
|
(B) |
|
313 |
|
||||
Impairment of long-lived assets |
|
128 |
|
|
|
— |
|
|
|
— |
|
|
|
128 |
|
||||
Total cost and expenses |
|
|
62,583 |
|
|
|
|
433 |
|
|
|
|
273 |
|
|
|
|
63,289 |
|
Operating income (loss) |
|
|
(938 |
) |
|
|
|
(433 |
) |
|
|
|
(273 |
) |
|
|
|
(1,644 |
) |
Unrealized loss on derivative |
|
— |
|
|
|
|
1 |
|
|
|
|
(1 |
) |
(D) |
|
— |
|
||
Interest expense and other, net |
|
564 |
|
|
|
19 |
|
|
|
|
(19 |
) |
(E) |
|
|
564 |
|
||
Income (loss) before income taxes |
|
|
(1,502 |
) |
|
|
|
(453 |
) |
|
|
|
(253 |
) |
|
|
|
(2,208 |
) |
Provision for income taxes |
|
|
(375 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|||
Net loss |
$ |
|
(1,127 |
) |
|
$ |
|
(453 |
) |
|
$ |
|
(253 |
) |
|
$ |
|
(2,208 |
) |
Net loss per share—basic and diluted |
$ |
|
(0.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
(0.09 |
) |
Weighted average shares outstanding – basic and diluted |
|
|
24,064 |
|
|
|
|
|
|
|
|
|
315 |
|
(F) |
|
|
24,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma condensed combined financial information |
|
SPARK NETWORKS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(in thousands)
|
Historical |
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Spark Networks, Inc. |
|
|
Smooch Labs, Inc. |
|
|
Pro Forma Adjustments |
|
|
Pro Forma Combined |
|
||||||||
Revenue |
$ |
|
37,430 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
37,430 |
|
||
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue (exclusive of depreciation shown separately below) |
|
|
19,058 |
|
|
|
|
386 |
|
|
|
— |
|
|
|
|
19,444 |
|
|
Sales and marketing |
|
|
2,895 |
|
|
|
— |
|
|
|
— |
|
|
|
|
2,895 |
|
||
Customer service |
|
|
2,239 |
|
|
|
— |
|
|
|
— |
|
|
|
|
2,239 |
|
||
Technical operations |
|
636 |
|
|
|
3 |
|
|
|
— |
|
|
|
639 |
|
||||
Development |
|
|
2,978 |
|
|
|
|
226 |
|
|
|
— |
|
|
|
|
3,204 |
|
|
General and administrative |
|
|
7,704 |
|
|
|
|
471 |
|
|
|
|
(218 |
) |
(G) |
|
|
7,957 |
|
Depreciation |
|
|
1,607 |
|
|
|
— |
|
|
|
— |
|
|
|
|
1,607 |
|
||
Amortization of intangible assets |
|
30 |
|
|
|
— |
|
|
|
204 |
|
(B) |
|
234 |
|
||||
Impairment of long-lived assets |
|
132 |
|
|
|
— |
|
|
|
— |
|
|
|
132 |
|
||||
Total cost and expenses |
|
|
37,279 |
|
|
|
|
1,086 |
|
|
|
|
(14 |
) |
|
|
|
38,351 |
|
Operating income (loss) |
|
151 |
|
|
|
|
(1,086 |
) |
|
|
|
14 |
|
|
|
|
(921 |
) |
|
Unrealized loss on derivative |
|
— |
|
|
|
|
164 |
|
|
|
|
(164 |
) |
(D) |
|
— |
|
||
Interest expense and other, net |
|
79 |
|
|
|
110 |
|
|
|
|
(110 |
) |
(E) |
|
|
79 |
|
||
Income (loss) before income taxes |
|
72 |
|
|
|
|
(1,360 |
) |
|
|
|
124 |
|
|
|
|
(1,000 |
) |
|
Provision for income taxes |
|
266 |
|
|
|
— |
|
|
|
— |
|
|
|
|
266 |
|
|||
Net loss |
$ |
|
(194 |
) |
|
$ |
|
(1,360 |
) |
|
$ |
|
124 |
|
|
$ |
|
(1,266 |
) |
Net loss per share—basic and diluted |
$ |
|
(0.01 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
(0.05 |
) |
Weighted average shares outstanding – basic and diluted |
|
|
24,991 |
|
|
|
|
|
|
|
|
|
315 |
|
(F) |
|
|
25,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited pro forma condensed combined financial information |
|
SPARK NETWORKS, INC.
NOTES TO PRO FORMA CONDENSED CONBINED FINANCIAL STATEMENTS
(unaudited)
1. |
BASIS OF PRO FORMA PRESENTATION |
The unaudited pro forma condensed combined balance sheet as of September 30, 2015 combines Spark Networks, Inc.’s (the “Company” or “our”) historical condensed consolidated balance sheet with the historical condensed balance sheet of Smooch and has been prepared as if our acquisition of Smooch had occurred on September 30, 2015. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2015 and for the year ended December 31, 2014 combine our historical condensed consolidated statements operations with Xxxxxx’s historical statements of operations and have been prepared as if the acquisition had occurred on January 6, 2014, the date that Smooch was incorporated. The historical financial information is adjusted in the unaudited pro forma condensed combined financial information to give effect to pro forma events that are (1) directly attributable to the acquisition, (2) factually supportable, and (3) with respect to the condensed combined statements of operations, expected to have a continuing impact on the combined results.
We have accounted for the acquisition in this unaudited pro forma condensed combined financial information using the acquisition method of accounting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 805 “Business Combinations” (“ASC 805”). In accordance with ASC 805, we use our best estimates and assumptions to assign fair value to the tangible and intangible assets acquired at the acquisition date. Goodwill as of the acquisition date is measured as the excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired.
The pro forma adjustments described below were developed based on management’s assumptions and estimates, including assumptions related to the consideration paid and the allocation thereof to the assets acquired from Smooch based on preliminary estimates of fair value. The final allocation of the purchase consideration may differ from that reflected in the unaudited pro forma condensed combined financial information after final valuation procedures are performed and intangible and goodwill amounts are finalized.
The unaudited pro forma condensed combined financial information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of the combined company would have been had the acquisition occurred on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or financial position.
The unaudited pro forma condensed combined financial information does not reflect any integration activities or cost savings from operating efficiencies, synergies, asset dispositions, or other restructurings that could result from the acquisition.
Pursuant to the merger agreement, we issued 315,108 shares of common stock and paid $6.0 million in cash on October 14, 2015.
The following table summarizes the components of the purchase consideration transferred based on the volume weighted average sale price of one share of the Company’s common stock, as reported on the New York Stock Exchange, for the twenty consecutive trading days ended October 13, 2015 (in thousands):
Cash paid |
|
$ |
|
6,000 |
|
Shares of Spark Networks, Inc. common stock (at $3.37 per share) |
|
|
|
1,000 |
|
Total purchase consideration |
|
$ |
|
7,000 |
|
The purchase agreement also included contingent earnout consideration up to an additional $10.0 million to be paid with a combination of one-third cash and two-thirds stock based upon Smooch Lab’s performance against certain agreed-upon operating objectives for the years ending December 31, 2016, and December 31, 2017. Management has completed a preliminary evaluation of the probability of the performance milestones being achieved within the related earnout periods, and determined that the performance milestones would not likely be achieved. As such, management has not recorded any contingent consideration as of September 30, 2015 or as of the acquisition date.
The following table summarizes the preliminary purchase price allocation to the assets acquired based on their estimated fair values on the acquisition date and the related estimated useful lives of the amortizable intangible assets acquired (in thousands):
|
|
|
|
|
Preliminary estimated useful life |
Deposits and other assets |
$ |
|
6 |
|
|
Developed technology |
|
|
480 |
|
4 years |
Monthly active users |
|
|
370 |
|
4 years |
Covenant not to compete |
|
|
240 |
|
4 years |
Goodwill |
|
|
5,904 |
|
|
Total preliminary purchase price |
$ |
|
7,000 |
|
|
We believe the amount of goodwill resulting from the allocation of purchase consideration is primarily attributable to expected synergies from future growth, potential monetization opportunities, an increase in development capabilities, increased offerings to customers, and enhanced opportunities for growth and innovation. Goodwill will not be amortized but instead will be tested for impairment at least annually or more frequently if certain indicators of impairment are present. In the event that goodwill has been impaired, the Company will record an expense for the amount impaired during the quarter in which the determination is made.
As part of the acquisition, the Company recorded deferred tax liabilities of $398 related to acquired intangible assets and $607 of deferred tax assets, of which $467 relate to net operating loss carry forwards. Given the uncertainty of generating taxable income at both the Company and Smooch Labs, a full valuation allowance would be recognized against deferred tax assets; therefore, there was no recognition of deferred tax assets or liabilities in the pro forma information.
Management anticipates that the final purchase price allocation may differ from the preliminary assessment outlined above, upon completion of the fair value assessment. Any changes to the preliminary estimates of the fair value of the assets acquired will be recorded as adjustments to those assets and the residual amounts will be allocated to goodwill.
The pro forma adjustments included in the unaudited pro forma condensed combined financial information are as follows:
A. |
To record the cash consideration paid of $6.0 million and the issuance of common stock with a value of $1.0 million. |
B. |
To record the preliminary fair value of the intangible assets acquired in connection with the Smooch Labs, Inc. acquisition of $1.1 million and associated amortization expenses, as well as the resulting goodwill of $5.9 million. |
|
|
Preliminary fair value |
|
|
Preliminary estimated useful life |
|
Nine months amortization based upon preliminary fair values |
|
Annual amortization based upon preliminary fair values |
|
Developed Technology |
$ |
480 |
|
|
4 years |
|
90 |
|
120 |
|
Monthly active users |
|
370 |
|
|
4 years |
|
69 |
|
93 |
|
Covenant Not To Compete |
|
240 |
|
|
4 years |
|
45 |
|
60 |
|
|
$ |
|
1,090 |
|
|
|
|
|
|
|
C. |
To remove the liabilities of Smooch Labs Inc. not assumed in the acquisition and the historical equity balances. |
D. |
To reverse the historical unrealized loss on derivatives, based on the repayment of the associated convertible notes. |
E. |
To reverse the historical interest expense related to the repayment of loans payable and convertible notes. |
F. |
To reflect the issuance of 315,108 shares of Spark Networks, Inc. common stock, as if they had been issued as of January 1, 2014. |
G. |
To eliminate acquisition related costs of $129 and $89 recorded by Spark Networks and Smooch Labs, respectively, in the historical condensed combined statements of operations for the nine months ended September 30, 2015. |