Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 001-32750

 

 

SPARK NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   20-8901733

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

8383 Wilshire Boulevard, Suite 800

Beverly Hills, California

  90211
(Address of principal executive offices)   (Zip Code)

(323) 658-3000

(Registrant’s telephone number, including area code)

Not Applicable.

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller-Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The registrant had 20,594,670 shares of common stock, par value $0.001 per share, outstanding as of November 10, 2011.

 

 

 


Table of Contents

SPARK NETWORKS, INC.

Table of Contents to Quarterly Report on Form 10-Q

 

PART I.    FINANCIAL INFORMATION   

3

Item 1.    Financial Statements   

3

  

Consolidated Balance Sheets at September 30, 2011 (unaudited) and December 31, 2010

  

3

  

Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010

  

4

  

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010

  

5

  

Unaudited Notes to Consolidated Financial Statements

  

6

Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

12

Item 3.   

Quantitative and Qualitative Disclosures about Market Risk

  

19

Item 4.   

Controls and Procedures

  

19

PART II.    OTHER INFORMATION   
Item 1.   

Legal Proceedings

  

20

Item 1A.   

Risk Factors

  

20

Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

  

20

Item 3.   

Defaults upon Senior Securities

  

20

Item 4.   

Reserved

  

20

Item 5.   

Other Information

  

20

Item 6.   

Exhibits

  

21

  

Signatures

  

22

  

Exhibit 31.1

  
  

Exhibit 31.2

  
  

Exhibit 32.1

  

 

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Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SPARK NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

     September 30,
2011
    December 31,
2010
 
     (unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 14,667      $ 13,901   

Restricted cash

     926        996   

Accounts receivable

     962        847   

Deferred tax asset – current

     43        43   

Prepaid expenses and other

     1,199        911   
  

 

 

   

 

 

 

Total current assets

     17,797        16,698   

Property and equipment, net

     2,670        2,520   

Goodwill

     8,864        9,156   

Intangible assets, net

     3,086        3,017   

Deferred tax asset – non-current

     4,882        4,882   

Deposits and other assets

     490        295   
  

 

 

   

 

 

 

Total assets

   $ 37,789      $ 36,568   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable

   $ 587      $ 1,371   

Accrued liabilities

     4,337        3,635   

Deferred revenue

     5,419        4,331   
  

 

 

   

 

 

 

Total current liabilities

     10,343        9,337   

Deferred tax liability

     875        825   

Other liabilities – non-current

     1,036        1,036   
  

 

 

   

 

 

 

Total liabilities

     12,254        11,198   

Commitments and contingencies (Note 6)

    

Stockholders’ equity:

    

Authorized capital stock consists of 100,000,000 shares of common stock, $0.001 par value; issued and outstanding 20,594,670 and 20,587,336 at September 30, 2011 and December 31, 2010, respectively:

     22        21   

Additional paid-in-capital

     52,761        52,020   

Accumulated other comprehensive income

     699        773   

Accumulated deficit

     (27,947     (27,444
  

 

 

   

 

 

 

Total stockholders’ equity

     25,535        25,370   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 37,789      $ 36,568   
  

 

 

   

 

 

 

See accompanying notes.

 

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SPARK NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited, in thousands, except per share data)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  

Revenue

   $ 12,677      $ 9,916      $ 35,632      $ 30,742   

Cost and expenses:

        

Cost of revenue (exclusive of depreciation shown separately below)

     7,373        3,206        20,535        9,747   

Sales and marketing

     923        774        2,660        2,708   

Customer service

     531        403        1,441        1,181   

Technical operations

     336        252        1,086        930   

Development

     643        773        2,067        2,332   

General and administrative

     2,435        2,316        6,997        7,641   

Depreciation

     341        242        977        699   

Amortization of intangible assets

     90        98        281        324   

Impairment of long-lived assets and other assets

     45        —          45        121   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

   $ 12,717      $ 8,064      $ 36,089      $ 25,683   

Operating (loss) income

     (40     1,852        (457     5,059   

Interest expense (income) and other, net

     120        (182     18        18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (160     2,034        (475     5,041   

Provision for income taxes

     78        808        28        1,963   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (238   $ 1,226      $ (503   $ 3,078   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share – basic and diluted

   $ (0.01   $ 0.06      $ (0.02   $ 0.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding – basic

     20,595        20,587        20,592        20,585   

Weighted average shares outstanding – diluted

     20,595        20,590        20,592        20,588   
     Three Months Ended September 30,     Nine Months Ended September 30,  
     2011     2010     2011     2010  
Stock-based compensation:                         

Cost of revenue

   $ 2      $ 3      $ 6      $ 8   

Sales and marketing

     17        39        65        198   

Customer service

     0        0        0        1   

Technical operations

     30        30        88        134   

Development

     10        14        32        42   

General and administrative

     124        172        532        857   

See accompanying notes.

 

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SPARK NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

     Nine Months Ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net (loss) income

   $ (503   $ 3,078   

Adjustments to reconcile net (loss) income to cash provided by operating activities:

    

Depreciation and amortization

     1,258        1,023   

Foreign exchange gain on intercompany loan

     205        (129

Impairment of long-lived assets and other assets

     45        121   

Stock-based compensation

     723        1,240   

Income from asset received from legal judgment

     (247     —     

Deferred taxes

     49        108   

Other

     4        (13

Changes in operating assets and liabilities:

    

Accounts receivable

     (115     (10

Restricted cash

     70        74   

Prepaid expenses and other assets

     (220     386   

Accounts payable and accrued liabilities

     (82     419   

Deferred revenue

     1,088        (345
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,275        5,952   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,179     (1,023

Purchases of intangible assets

     (352     (25

Sale of property and other assets

     —          1,560   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (1,531     512   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock

     22        17   
  

 

 

   

 

 

 

Net cash provided by financing activities

     22        17   
  

 

 

   

 

 

 

Net increase in cash

     766        6,481   

Cash and cash equivalents at beginning of period

     13,901        6,223   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 14,667      $ 12,704   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ —        $ —     

Cash paid for income taxes

   $ 139      $ 294   

See accompanying notes.

 

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SPARK NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. The Company and Summary of Significant Accounting Policies

The Company

The common stock of Spark Networks, Inc., a Delaware corporation (the “Company”), is traded on the NYSE Amex.

The Company and its consolidated subsidiaries provide online personals services in the United States and internationally, whereby adults are able to post information about themselves (“profiles”) on the Company’s Web sites and search and contact other individuals who have posted profiles.

Membership to the Company’s online services, which includes the posting of a personal profile and photos, and access to its database of profiles, is free. The Company typically charges a subscription fee for varying subscription lengths (typically, one, three, six and twelve months) to members, allowing them to initiate communication with other members and subscribers utilizing the Company’s onsite communication tools, including anonymous email, Instant Messenger, chat rooms and message boards. For most of the Company’s services, two-way communications through the Company’s email platform can only take place between paying subscribers.

On December 31, 2010, Spark Networks Limited (“SNUK”) distributed its shareholdings in each of HurryDate, LLC; MingleMatch, Inc.; Kizmeet, Inc.; SN Holdco, LLC; SN Events, Inc.; Reseaux Spark Canada Ltd. and Spark SocialNet, Inc. by transferring its shares in those companies to Spark Networks, Inc. Spark Networks, Inc. subsequently transferred all of its shares in the same companies to LOV USA, LLC, a newly formed and wholly owned subsidiary of Spark Networks, Inc. SNUK continues to hold all of the shares of Spark Networks (Israel) Limited, VAP AG and JDate Limited. In addition, SNUK now holds all of the shares of Spark Networks USA, LLC, a newly formed subsidiary into which SNUK has transferred all of its United States based assets.

The Company has evaluated all subsequent events through the date the financial statements were issued.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and all of its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated interim financial statements reflect all adjustments, consisting of only normal recurring items, which, in the opinion of management, are necessary for a fair presentation of the results of operations for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to uncollectible receivables, the useful lives of long-lived assets including property and equipment, goodwill and other intangible assets, income taxes, and contingencies. In addition, the Company uses assumptions when employing the Black-Scholes option valuation model to calculate the fair value of granted stock-based awards. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results may differ from these estimates.

The consolidated financial statements on this Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet as of December 31, 2010 was derived from the Company’s audited financial statements for the year ended December 31, 2010.

 

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Comprehensive (Loss) Income

Comprehensive (loss) income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For the Company, comprehensive income consists of its reported net income and foreign currency translation adjustments. Comprehensive income for each of the periods presented is comprised as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
(in thousands)    2011     2010      2011     2010  

Net (loss) income

   $ (238   $ 1,226       $ (503   $ 3,078   

Foreign currency translation adjustment, net of taxes

     (149     106         (74     61   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive (loss) income, net of taxes

   $ (387   $ 1,332       $ (577   $ 3,139   
  

 

 

   

 

 

    

 

 

   

 

 

 

Recent Accounting Pronouncement

In June 2011, the Financial Accounting Standards Board issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance will be effective for the Company beginning January 1, 2012 and will have financial statement presentation changes only.

 

2. Net (Loss) Income per Share

The Company calculates and presents the net (loss) income per share of both basic and diluted net (loss) income per share. Basic net (loss) income per share is computed by dividing net (loss) income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted net income per share includes the effect of potential shares of stock outstanding, including dilutive stock options and warrants, using the treasury stock method.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011     2010      2011     2010  
(in thousands except per share data)                          

Income (Loss) per Share of Common Stock– Basic

         

Net (loss) income applicable to common stock

   $ (238   $ 1,226       $ (503   $ 3,078   

Weighted average shares outstanding-basic

     20,595        20,587         20,592        20,585   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic Net (Loss) Income per Share

   $ (0.01   $ 0.06       $ (0.02   $ 0.15   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income (Loss) per Share of Common Stock – Diluted

         

Net (loss) income applicable to common stock

   $ (238   $ 1,226       $ (503   $ 3,078   

Weighted average shares outstanding-basic

     20,595        20,587         20,592        20,585   

Dilutive options using the treasury stock method

     —          3         —          3   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding – diluted

     20,595        20,590         20,592        20,588   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted Net (Loss) Income per Share

   $ (0.01   $ 0.06       $ (0.02   $ 0.15   
  

 

 

   

 

 

    

 

 

   

 

 

 

The effect of all stock options on diluted weighted average shares outstanding has been excluded from the calculation of (loss) per share for the three and nine months ended September 30, 2011 because it would have been anti-dilutive. Options to purchase approximately 3.1 million shares for the three and nine months ending September 30, 2010, respectively, were not included in the computation of diluted net (loss) income per share because the options were anti-dilutive.

 

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3. Revolving Credit Facility

As of September 30, 2011, the Company and its wholly-owned subsidiary, Spark Networks USA, LLC, had a $15.0 million revolving credit facility with Bank of America which was entered into on February 14, 2008 with subsequent amendments (the “Credit Agreement”). The Credit Agreement matures on February 14, 2014. The per annum interest rate under the Credit Agreement is LIBOR, or the Eurodollar rate under certain circumstances, plus 1.75%, 2.00% and 2.50% based upon a financial leverage ratio of less than 1.00, 1.00 to 1.49 and 1.50 and greater, respectively. In the event the Company elects to borrow under a base rate loan, the corresponding interest rates are increased to the prime rate plus, 0.75%, 1.00% and 1.50%, respectively. The Company pays a 0.250% to 0.375% per annum commitment fee on all funds not utilized under the facility, measured on a daily basis. The Company is required to maintain a consolidated leverage ratio of no greater than 2.00 to 1.00, and a fixed charge coverage ratio of no less than 1.50 to 1.00. The Company is permitted to repurchase or redeem equity interests or issue dividends of up to $15 million during the first 365 days following February 7, 2011, the date of a subsequent amendment to the Credit Agreement.

On May 11, 2011, the parties executed a Third Amendment to the Credit Agreement (the “Amendment”). The Amendment requires the Company to maintain a consolidated adjusted EBITDA for each fiscal quarter ending on March 31, 2011 through September 30, 2011 of $400,000; for the quarter ending on December 31, 2011 of $750,000; for each quarter ending on March 31, 2012 through June 30, 2012 of $1,000,000; for each quarter ending on September 30, 2012 through December 31, 2012 of $1,500,000; and for each quarter ending on or after March 31, 2013 of $2,000,000. In addition, the Amendment requires the Company to maintain a trailing twelve month contribution level of $20,000,000 from its Jewish Networks segment for each fiscal quarter ending on or after March 31, 2011.

The Company was compliant with the Credit Agreement’s customary affirmative and negative covenants, as of September 30, 2011.

At September 30, 2011, there was no outstanding amount under the Credit Agreement. In connection with the original Credit Agreement and the Amendment, the Company paid deferred financing costs of approximately $446,000 and $80,000, respectively. Costs associated with both the original Credit Agreement and the Amendment were included in prepaid expenses and other, and deposits and other assets. The deferred financing costs are amortized to interest expense in the Consolidated Statements of Operations over the full term of the Credit Agreement. Amortization expense for the deferred financing costs for the three and nine months ended September 30, 2011 were $4,000 and $53,000, respectively. The deferred financing costs for the three and nine months ended September 30, 2010 were $35,000 and $37,000, respectively.

 

4. Stockholders’ Equity

Re-Pricing of Employees Options

In 2009, the Company offered to re-price options for certain employees. These employees could surrender their existing options in exchange for a like number of options with a new grant date, a lower exercise price, a lower number of vested options and a modified vesting schedule. The exchange of options was treated as a synthetic re-pricing, which includes a cancellation and replacement of equity instruments. The incremental expense was approximately $1 million and is being recognized over the four year vesting term of the newly issued options. The incremental expense recognized for the three months ended September 30, 2011 and 2010 was $43,000 and $43,000, respectively. The incremental expense recognized for the nine months ended September 30, 2011 and 2010 was $129,000 and $296,000, respectively.

Employee Stock Option Plans

On July 9, 2007, pursuant to the completion of the Scheme of Arrangement, the Company adopted the Spark Networks, Inc. 2007 Omnibus Incentive Plan (the “2007 Plan”) authorizing and reserving 2.5 million options. In connection with the Company’s Scheme of Arrangement, the 2004 Share Option Plan was frozen; however, all outstanding options previously granted thereunder continue in full force and effect.

 

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Awards under the 2007 Plan may include incentive stock options, nonqualified stock options, stock appreciation rights (“SARs”), restricted shares of common stock, restricted stock units, performance stock or unit awards, other stock-based awards and cash-based incentive awards.

The Compensation Committee may grant to a participant an award. The terms and conditions of the award, including the quantity, price, vesting periods and other conditions on exercise will be determined by the Compensation Committee.

The exercise price for stock options will be determined by the Compensation Committee in its discretion, but may not be less than 100% of the closing sale price of one share of the Company’s common stock on the NYSE Amex (or any other applicable exchange on which the stock is listed) on the date when the stock option is granted. Additionally, in the case of incentive stock options granted to a holder of more than 10% of the total combined voting power of all classes of stock of the Company on the date of grant, the exercise price may not be less than 110% of the closing sale price of one share of common stock on the date the stock option is granted.

As of September 30, 2011, total unrecognized compensation cost related to unvested stock options was $1.4 million. This cost is expected to be recognized over a weighted-average period of two years. The following table describes option activity for the nine months ended September 30, 2011:

 

     Number of
Shares
    Weighted
Average
Price Per Share
 
     (in thousands)        

Outstanding at December 31, 2010

     3,364      $ 3.12   

Granted

     55        3.20   

Exercised

     —          —     

Forfeited

     (12     2.92   

Expired

     —          —     
  

 

 

   

Outstanding at March 31, 2011

     3,407      $ 3.11   

Granted

     603        3.18   

Exercised

     (7     2.96   

Forfeited

     (449     3.00   

Expired

     (6     3.00   
  

 

 

   

Outstanding at June 30, 2011

     3,548      $ 3.13   

Granted

     20        3.45   

Exercised

     —          —     

Forfeited

     —          —     

Expired

     (3     3.00   
  

 

 

   

Outstanding at September 30, 2011

     3,565      $ 3.14   

Stockholder Rights Plan

In July 2007, the Company adopted a stockholder rights plan. The rights accompany each share of common stock of the Company and are evidenced by ownership of common stock. The rights are not exercisable except upon the occurrence of certain takeover-related events. Once triggered, the rights would entitle the stockholders, other than a person qualifying as an “Acquiring Person” pursuant to the rights plan, to purchase additional common stock at a 50% discount to their fair market value. The rights issued under the Rights Plan may be redeemed by the board of directors at a nominal redemption price of $0.001 per right, and the board of directors may amend the rights in any respect until the rights are triggered.

 

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5. Segment Information

The Company has four operating segments: (1) Jewish Networks, which consists of JDate.com, JDate.co.il, JDate.co.uk, JDate.fr, Cupid.co.il and their respective co-branded and private label Web sites; (2) Other Affinity Networks, which consists of the Company’s Provo, Utah-based properties which are primarily made up of sites targeted towards various religious, ethnic, geographic and special interest groups including BlackSingles.com and ChristianMingle.com; (3) General Market Networks, which consists of AmericanSingles.com and Date.ca which were both rebranded as Spark.com in December of 2009 and Date.co.uk which was rebranded as Spark.com in February 2010 and their respective co-branded and private label Web sites; and (4) Offline & Other Businesses, which consists of revenue generated from offline activities, HurryDate events and subscriptions to HurryDate.com.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
(in thousands)    2011     2010      2011     2010  

Revenue

         

Jewish Networks

   $ 6,724      $ 6,766       $ 20,354      $ 20,509   

Other Affinity Networks

     5,715        2,744         14,140        8,496   

General Market Networks

     127        264         471        932   

Offline & Other Businesses

     111        142         667        805   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 12,677      $ 9,916       $ 35,632      $ 30,742   
  

 

 

   

 

 

    

 

 

   

 

 

 

Direct Marketing

         

Jewish Networks

   $ 936      $ 696       $ 2,460      $ 1,735   

Other Affinity Networks

     5,526        1,601         14,819        4,855   

General Market Networks

     18        121         347        407   

Offline & Other Businesses

     32        39         463        473   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 6,512      $ 2,457       $ 18,089      $ 7,470   
  

 

 

   

 

 

    

 

 

   

 

 

 

Unallocated operating expenses

     6,205        5,607         18,000        18,213   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating (loss) income

   $ (40   $ 1,852       $ (457   $ 5,059   
  

 

 

   

 

 

    

 

 

   

 

 

 

Due to the Company’s integrated business structure, operating expenses, other than direct marketing expenses, are not allocated to the individual reporting segments. As such, the Company does not measure operating profit or loss by segment for internal reporting purposes. Assets and liabilities are not allocated to the different business segments for internal reporting purposes. Depreciation and amortization are included in unallocated operating expenses.

 

6. Commitments and Contingencies

Legal Proceedings

Please refer to our Annual Report on Form 10-K for the year ended December 31, 2010 and subsequent Quarterly Reports on Form 10-Q for a description of litigation and claims.

ISYSTEMS v. Spark Networks, Inc. et al.

On July 11, 2008, ISYSTEMS initiated a lawsuit against Spark Networks, Inc. and Spark Networks Limited (collectively, “Spark Networks”) and other parties in the United States District Court, Northern District of Texas, Dallas Division. The lawsuit was filed in response to an arbitration award ordering the transfer of the domain name, JDATE.NET, to Spark Networks Limited from ISYSTEMS. Spark Networks was apprised of the lawsuit after ISYSTEMS unsuccessfully attempted to utilize the filing of the lawsuit to prevent the domain transfer to Spark Networks Limited. On December 1, 2008, Spark Networks filed a Motion to Dismiss the Complaint, or, Alternatively, for Summary Judgment. On September 10, 2009, the Court granted Spark Networks’ motion and dismissed the case with prejudice. On September 22, 2009, ISYSTEMS filed a motion to vacate the order dismissing the action and requesting leave to amend its complaint. On October 26, 2009, the Court granted ISYSTEMS’ motion and ISYSTEMS

 

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filed its Amended Complaint on November 25, 2009. On January 19, 2010, Spark Networks filed a Motion to Dismiss the Amended Complaint, or Alternatively, for Summary Judgment. The court granted Spark Networks’ Motion to Dismiss on June 28, 2010 and entered a judgment in favor of Spark Networks. On July 25, 2010, ISYSTEMS filed a motion to vacate the order granting the motion to dismiss, which was denied by the court on August 11, 2010. On September 10, 2010, ISYSTEMS filed a notice of appeal of the district court’s order and judgment to the United States Court of Appeals for the Fifth Circuit. On June 13, 2011, the United States Court of Appeals for the Fifth Circuit issued its opinion affirming the District Court’s judgment. On June 29, 2011, ISYSTEMS filed a Petition for Rehearing with the United States Court of Appeals for the Fifth Circuit which was granted. Trial is scheduled for April 17, 2012.

Spark Networks USA, LLC v. Humor Rainbow, Inc. and Zoosk, Inc.

On February 16, 2011, Spark Networks, Inc.’s indirect subsidiary, Spark Networks USA, LLC, filed a complaint against Humor Rainbow, Inc., in the United States District Court for the Central District of California, Southern Division. On March 4, 2011, Spark Networks USA, LLC filed an amended complaint with the Court adding defendants Zoosk, Inc. and Embrace, Inc. The complaint alleges that, among other things, the defendants have infringed and continue to infringe on a patent owned by Spark Networks USA, LLC. On May 6, 2011, Spark Networks USA, LLC filed a Notice Of Dismissal Without Prejudice with the court in regards to the claim against Embrace, Inc. On September 13, 2011, Humor Rainbow was dismissed from the case following a settlement. On November 9, 2011, Zoosk was dismissed from the case following a settlement.

The Company has additional existing legal claims and may encounter future legal claims in the normal course of business. In the Company’s opinion, the resolutions of the existing legal claims are not expected to have a material impact on its financial position or results of operations. The Company believes it has accrued appropriate amounts where necessary in connection with the above litigation.

 

7. Income on Possession of Assets

In the third quarter of 2011, the Company became the record title owner of real property purchased in a sheriff’s sale to partially satisfy the Company’s outstanding judgment against Will Knedlik. The Company recorded other income of $247,000 in the Interest expense (income) and other, net line item on the Consolidated Statements of Operations and recorded the asset as Deposits and Other Assets on the Consolidated Balance Sheets. The Company plans to sell the property and it was recorded at fair value less the anticipated cost of sale.

 

8. Impairment of Long-lived Assets

In the nine months ending September 30, 2011 and 2010, the Company impaired approximately $45,000 and $121,000 of capitalized software development costs when it was determined that certain web-based products failed to perform to Company standards.

 

9. Income Taxes

Provision for income taxes for the nine months ended September 30, 2011 consists primarily of a $90,000 tax benefit related to our US operations and a $118,000 deferred tax expense related to an increase in the deferred tax liability associated with our Israeli subsidiary’s tax deductible goodwill amortization. No income tax benefit has been recorded on losses generated by our Israeli subsidiary as management cannot conclude that it is more likely than not that such tax benefits will be realized. As a result, for the Israeli subsidiary, the Company has recorded a net tax expense despite losses generated which results in a negative effective tax rate.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes that are included in this Quarterly Report and the audited consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”).

Some of the statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report are forward-looking statements that involve substantial risks and uncertainties. All statements other than historical facts contained in this report, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “may,” “will,” “continue,” “should,” “plan,” “predict,” “potential” and other similar expressions. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in these forward-looking statements, which are subject to a number of risks, uncertainties and assumptions including, but not limited to our ability to: attract members; convert members into paying subscribers and retain our paying subscribers; develop or acquire new product offerings and successfully implement and expand those offerings; keep pace with rapid technological changes; maintain the strength of our existing brands and maintain and enhance those brands and our dependence upon the telecommunications infrastructure and our networking hardware and software infrastructure; identify and consummate strategic acquisitions and integrate acquired companies or assets; obtain financing on acceptable terms; and successfully implement both cost cutting initiatives and our current long-term growth strategy, and other factors described in the “Risk Factors” section of our 2010 Annual Report.

General

The common stock of Spark Networks, Inc. (the “Company”) is traded on the NYSE Amex. We are a leading provider of online personals services in the United States and internationally. Our Web sites enable adults to meet online, participate in a community and form relationships.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these unaudited Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, uncollectible receivables, intangible and other long-lived assets, stock-based compensation and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. There were no significant changes to our critical accounting policies during the nine months ended September 30, 2011, as compared to those policies disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

Segment Reporting

For segment information, please refer to Note 5 of the Notes to the Consolidated Financial Statements the (“Notes”) elsewhere in this report.

 

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Key Metric – Average Paying Subscribers

We regularly review average paying subscribers as a key metric to evaluate the effectiveness of our operating strategies and monitor the financial performance of our business. Subscribers are defined as individuals for whom we collect a monthly fee for access to communication and Web site features beyond those provided to our non-paying members. Average paying subscribers for each month are calculated as the sum of the paying subscribers at the beginning and end of the month, divided by two. Average paying subscribers for periods longer than one month are calculated as the sum of the average paying subscribers for each month, divided by the number of months in such period.

Unaudited selected statistical information regarding average paying subscribers for our operating segments is shown in the table below.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Average Paying Subscribers

           

Jewish Networks

     88,976         89,792         90,205         90,694   

Other Affinity Networks

     113,972         62,026         97,311         64,744   

General Market Networks

     2,702         5,888         3,465         6,712   

Offline & Other Businesses

     449         716         537         681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     206,099         158,422         191,518         162,831   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average paying subscribers for the Jewish Networks segment decreased 0.9% and 0.5% to 88,976 and 90,205 for the three and nine months ended September 30, 2011 compared to 89,792 and 90,694 for the same periods last year. Average paying subscribers for the Other Affinity Networks segment increased 83.7% and 50.3% to 113,972 and 97,311 for the three and nine months ended September 30, 2011 compared to 62,026 and 64,744 for the same periods last year. Average paying subscribers for the General Market Networks segment decreased 54.1% and 48.4% to 2,702 and 3,465 for the three and nine months ended September 30, 2011 compared to 5,888 and 6,712 for the same periods last year.

Results of Operations

The following table presents our operating results as a percentage of revenue:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Revenues

     100.0     100.0     100.0     100.0

Cost and expenses:

        

Cost of revenue

     58.2        32.3        57.6        31.7   

Sales and marketing

     7.3        7.8        7.5        8.8   

Customer service

     4.2        4.1        4.0        3.8   

Technical operations

     2.7        2.5        3.0        3.0   

Development

     5.1        7.8        5.8        7.6   

General and administrative

     19.1        23.4        19.6        24.8   

Depreciation

     2.7        2.4        2.7        2.3   

Amortization of intangible

     0.7        1.0        0.8        1.1   

Impairment of goodwill and other assets

     0.4        —          0.1        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     100.4        81.3        101.1        83.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (0.4     18.7        (1.1     16.5   

Interest (income) and other expenses, net

     0.9        (1.8     0.2        0.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (1.3     20.5        (1.3     16.4   

Provision for income taxes

     0.6        8.1        0.1        6.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (1.9 )%      12.4     (1.4 )%      10.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Revenue

Approximately 4.7% and 4.0% of our revenue for the three months ended September 30, 2011 and 2010, respectively, are generated through offline social and travel events, and advertising revenue. Revenue is presented net of credits and credit card chargebacks. Our subscriptions are offered in durations of varying length (typically, one, three, six and twelve months). Plans with durations longer than one month are available at discounted monthly rates. Following their initial terms, most subscriptions renew automatically for subsequent one-month periods until subscribers terminate them.

Revenue increased 27.8% to $12.7 million in the third quarter of 2011 compared to $9.9 million in the third quarter of 2010. The increase can be attributed to higher subscription revenue in our Other Affinity Networks segment. Revenue for the Jewish Networks segment decreased 0.6% to $6.7 million in the third quarter of 2011 compared to $6.8 million in the third quarter of 2010. The decrease in revenue is primarily driven by a lower average paying subscriber base. Revenue for our Other Affinity Networks segment increased 108.3% to $5.7 million in the third quarter of 2011 compared to $2.7 million in the third quarter of 2010. The increase in revenue is due to an 83.7% increase in average paying subscribers and a 12.3% increase in average revenue per user, (ARPU). The higher average paying subscriber base is primarily driven by a 245.2% increase in direct marketing investment while the higher ARPU reflects a shift in the mix of plans purchased by our subscribers and their related price points as we shifted our focus to a select group of brands within this segment.

Cost and Expenses

Cost and expenses consist primarily of cost of revenue, sales and marketing, customer service, technical operations, development and general and administrative expenses. Cost and expenses for the third quarter of 2011 were $12.7 million, an increase of 57.7% compared to $8.1 million for the third quarter of 2010. The increase is primarily attributable to a $4.2 million increase in cost of revenue.

Cost of Revenue. Cost of revenue consists primarily of direct marketing costs, compensation and other employee-related costs (including stock-based compensation) for personnel dedicated to maintaining our data centers, data center expenses and credit card fees. Cost of revenue increased 130.0% to $7.4 million for the three months ended September 30, 2011, compared to $3.2 million for the same period in 2010. Direct marketing expenses increased 165.0% to $6.5 million for the three months ended September 30, 2011, compared to $2.5 million for the same period in 2010. The majority of this increase can be attributed to higher marketing investments in select Web sites affiliated with our Other Affinity Networks Segment. Direct marketing expenses for the Jewish Networks segment increased 34.5% to $936,000 in the third quarter of 2011 compared to $696,000 in the third quarter of 2010. The increase reflects higher offline marketing investments. Direct marketing expenses for the Other Affinity Networks segment increased 245.2% to $5.5 million for the third quarter of 2011 compared to $1.6 million in the third quarter of 2010, reflecting an increase in online and offline marketing expenses and a shift in brand focus.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries for our sales and marketing personnel and other associated costs such as public relations. Sales and marketing expenses increased 19.3% to $923,000 in the third quarter of 2011 compared to $774,000 in the third quarter of 2010. The increase can be primarily attributed to growth in compensation expense and consulting fees. The Company increased its marketing team headcount in the third quarter of 2011 which led to higher compensation expense.

 

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Customer Service. Customer service expenses consist primarily of costs associated with our call centers. Customer service expenses increased 31.8% to $531,000 in the third quarter of 2011 compared to $403,000 in the third quarter of 2010. The expense increase is primarily attributed to higher compensation costs, reflecting increased support for our growing Other Affinity Networks segment.

Technical Operations. Technical operations expenses consist primarily of the personnel and systems necessary to support our corporate technology requirements. Technical operations expenses increased 33.3% to $336,000 in the third quarter of 2011 compared to $252,000 in 2010. The increase reflects higher compensation expense associated with additional personnel.

Development. Development expenses consist primarily of costs incurred in the development, enhancement and maintenance of our Web sites and services. Development expenses decreased 16.8% to $643,000 in the third quarter of 2011 compared to $773,000 in 2010. The decreased costs reflect lower salary expense due to lower headcount and higher capitalized salaries associated with software development.

General and Administrative. General and administrative expenses consist primarily of corporate personnel-related costs, professional fees, occupancy expense and other overhead costs. General and administrative expenses increased 5.1% to $2.4 million in the third quarter of 2011 compared to $2.3 million in the third quarter of 2010.

Depreciation. Depreciation expenses consist primarily of depreciation of capitalized software costs, computer hardware and other fixed assets. Depreciation expense increased 40.1% to $341,000 in the third quarter of 2011 compared to $242,000 in 2010. Higher capitalized software during 2011 accounted for the increase in depreciation expenses.

Amortization of Intangible Assets. Amortization expenses consist primarily of amortization of intangible assets related to previous acquisitions, primarily MingleMatch, LDSSingles and HurryDate. Amortization expenses decreased 8.2% to $90,000 in the third quarter of 2011 compared to $98,000 in the third quarter of 2010. The decrease reflects the full amortization of MingleMatch and LDSSingles assets.

Impairment of Long-lived Assets. Impairment of long-lived assets primarily represents the write-down of investments in businesses and computer software. Long-lived assets impairment expense was $45,000 in the third quarter of 2011, compared to no expense in the third quarter of 2010. In the third quarter of 2011, the Company determined that certain Web-based software programs would not be used in the future.

Interest Income and Other Expenses, Net. Interest income and other expenses consist primarily of interest income associated with temporary investments in interest bearing accounts, foreign exchange gains and losses related to the intercompany loan with our wholly-owned Israeli subsidiary and other non-operating income or expense. Interest income and other expenses reflect expense of $120,000 for the third quarter of 2011 compared to income of $182,000 for the same period in 2010. The change is primarily due to non-cash foreign exchange rate fluctuations related to the intercompany loan with our Israel subsidiary, offset by a $247,000 gain recorded for assets received from a legal judgment.

Income Taxes. The $78,000 income tax expense for the three months ended September 30, 2011, consists primarily of a $47,000 tax expense related to our US operations and a $31,000 deferred tax expense related to an increase in the deferred tax liability associated with our Israeli subsidiary’s tax deductible goodwill amortization. No income tax benefit has been recorded on losses generated by our Israeli subsidiary as management cannot conclude that it is more likely than not that such tax benefits will be realized. As a result, for our Israeli subsidiary, we have recorded a net tax expense despite losses generated which results in a negative effective tax rate.

Net Loss and Net Loss Per Share. Net loss for the third quarter of 2011 was $238,000, or $0.01 per share, compared to net income of $1.2 million, or $0.06 per share for 2010. Net income decreased in the third quarter of 2011 primarily due to increases in direct marketing investments.

 

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Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Revenue

Approximately 4.9% and 5.2% of our net revenue for the nine months ended September 30, 2011 and 2010, respectively, are generated through offline social and travel events, and advertising revenue. Revenue is presented net of credits and credit card chargebacks. Our subscriptions are offered in durations of varying length (typically, one, three, six and twelve months). Plans with durations longer than one month are available at discounted monthly rates. Following their initial terms, most subscriptions renew automatically for subsequent one-month periods until subscribers terminate them.

Revenue increased 15.9% to $35.6 million in the first nine months of 2011 compared to $30.7 million in the first nine months of 2010. The increase can be attributed to higher subscription revenue in our Other Affinity Networks segment. Revenue for the Jewish Networks segment decreased 0.8% to $20.4 million in the first nine months of 2011 compared to $20.5 million in the first nine months of 2010. Revenue for our Other Affinity Networks segment increased 66.4% to $14.1 million in the first nine months of 2011 compared to $8.5 million in the first nine months of 2010. The revenue increase is due to a 50.3% increase in average paying subscribers and an 11% increase in ARPU. A 205.2% increase in direct marketing expense for the first nine months of 2011 accounted for the majority of growth in average paying subscribers. The higher ARPU reflects a shift in the mix of plans purchased by our subscribers and their related price points as we shifted our focus to a select group of brands within this segment.

Cost and Expenses

Cost and expenses consist primarily of cost of revenue, sales and marketing, customer service, technical operations, development and general and administrative expenses. Cost and expenses for the nine months ended September 30, 2011 were $36.1 million, an increase of 40.5% compared to $25.7 million for the nine months ended September 30, 2010. The increase is primarily attributable to a $10.8 million increase in cost of revenue, offset by a $644,000 decrease in general and administrative expenses.

Cost of Revenue. Cost of revenue consists primarily of direct marketing costs, compensation and other employee-related costs (including stock-based compensation) for personnel dedicated to maintaining our data centers, data center expenses and credit card fees. Cost of revenue increased 110.7% to $20.5 million for the nine months ended September 30, 2011 compared to $9.7 million for the same period in 2010. Direct marketing expenses increased 142.2% to $18.1 million for the nine months ended September 30, 2011, compared to $7.5 million for the same period in 2010. The majority of this increase can be attributed to an increase in online and offline marketing investments for the Jewish Networks and the Other Affinity Networks segments. Direct marketing expenses for the Jewish Networks segment increased 41.8% to $2.5 million in the nine months ended September 30, 2011 compared to $1.7 million in the nine months ended September 30, 2010. Direct marketing expenses for the Other Affinity Networks segment increased 205.2% to $14.8 million for the nine months ended September 30, 2011 compared to $4.9 million in the nine months ended September 30, 2010. The increase in direct marketing spend can be attributed to an increase in online and offline marketing investments.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries for our sales and marketing personnel. Sales and marketing expenses were $2.7 million for the first nine months of 2011 and 2010.

Customer Service. Customer service expenses consist primarily of costs associated with our customer service centers. Customer service expenses increased 22.0% to $1.4 million for the first nine months of 2011 compared to $1.2 million for the first nine months of 2010. The expense increase is primarily attributed to higher compensation costs, reflecting increased support for our growing Other Affinity Networks segment.

 

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Technical Operations. Technical operations expenses consist primarily of the personnel and systems necessary to support our corporate technology requirements. Technical operations expenses increased 16.8% to $1.1 million for the first nine months of 2011 compared to $930,000 for the first nine months of 2010. The increase is primarily due to higher salary and benefits expense, reflecting a higher headcount.

Development. Development expenses consist primarily of costs incurred in the development, enhancement and maintenance of our Web sites and services. Development expenses decreased 11.4% to $2.1 million for the first nine months of 2011 compared to $2.3 million for the first nine months of 2010. The decreased costs reflect a reduction in personnel and the associated compensation expense, and higher capitalized salaries.

General and Administrative. General and administrative expenses consist primarily of corporate personnel-related costs, professional fees, occupancy expense and other overhead costs. General and administrative expenses decreased 8.4% to $7.0 million for the first nine months of 2011 compared to $7.6 million for the first nine months of 2010. The decreased costs are primarily attributed to lower stock-based compensation, rent expense and directors’ fees associated with the Special Committee of the Board of Directors.

Depreciation. Depreciation expenses consist primarily of depreciation of capitalized software costs, computer hardware and other fixed assets. Depreciation expenses increased 39.8% to $977,000 for the nine months ended September 30, 2011, compared to $699,000 in 2010. Higher capitalized software during 2011 accounted for the increase in depreciation expenses.

Amortization of Intangible Assets. Amortization expenses consist primarily of amortization of intangible assets related to previous acquisitions, primarily MingleMatch, LDSSingles and HurryDate. Amortization expenses decreased 13.3% to $281,000 for the first nine months of 2011 compared to $324,000 for the first nine months of 2010. The decrease reflects the full amortization of MingleMatch, LDSSingles and certain HurryDate assets.

Impairment of Other Long-lived Assets. Impairment of other long-lived assets primarily represents the write-down of investments in businesses and computer software. The Company impaired approximately $45,000 and $121,000 of capitalized software development costs for the nine months ended September 30, 2011 and 2010, respectively. In both time periods, the Company determined that certain Web-based software programs would not be used in the future.

Interest Income and Other Expenses, Net. Interest income and other expenses consist primarily of interest income associated with temporary investments in interest bearing accounts, foreign exchange gains and losses related to the intercompany loan with our wholly-owned Israeli subsidiary and other non-operating income or expense. Interest income and other expenses, net reflect an expense of $18,000 for the first nine months of 2011 and 2010.

Income Taxes. The $28,000 income tax expense for the nine months ended September 30, 2011, consists primarily of a $90,000 tax benefit related to our US operations and a $118,000 deferred tax expense related to an increase in the deferred tax liability associated with our Israeli subsidiary’s tax deductible goodwill amortization. No income tax benefit has been recorded on losses generated by our Israeli subsidiary as Management cannot conclude that it is more likely than not that such tax benefits will be realized. As a result, for our Israeli subsidiary, we have recorded a net tax expense despite losses generated which results in a negative effective tax rate.

Net (Loss) Income and Net (Loss) Income Per Share. Net loss for the first nine months of 2011 was $503,000, or $0.02 per share, compared to net income of $3.1 million, or $0.15 per share for the first nine months of 2010. Net income decreased in the third quarter of 2011 primarily due to increases in direct marketing investments.

Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of $14.7 million. We have historically financed our operations with internally generated funds.

 

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Net cash provided by operations was $2.3 million for the nine months ended September 30, 2011 compared to $6.0 million for the same period in 2010. Higher direct marketing expenses for the first nine months of 2011 accounted for the majority of the decrease in net cash provided by operations.

Net cash used in investing activities was $1.5 million for the nine months ended September 30, 2011 compared to net cash provided by investing activities of $512,000 for 2010. In the nine months ended September 30, 2011, the Company invested $1.2 million in computer hardware and software.

Net cash provided from financing activities was $22,000 for the nine months ended September 30, 2011 compared to net cash provided by financing activities of $17,000 for the nine months ended September 30, 2010. Cash provided from financing activities was due to the exercise of stock options.

We believe our current cash and cash equivalents and cash flow from operations will be sufficient to meet our anticipated cash needs for working capital, planned capital expenditures and contractual obligations for at least the next 12 months. We may be required or find it desirable prior to such time to raise additional funds through bank financing or through the issuance of debt or equity.

Off-Balance Sheet Arrangements

We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually, limited purposes. We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts.

 

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Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

As of September 30, 2011, our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), performed an evaluation of the effectiveness and the operation of our disclosure controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2011.

(b) Changes in internal control over financial reporting

There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) Rule 13a-15 or Rule 15d-15 under the Exchange Act that occurred during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

 

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Table of Contents

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The information required by this item is contained in the Notes to the Consolidated Financial Statements contained in this report under Note 6 “Commitments and Contingencies—Legal Proceedings” and is incorporated herein by reference. Also, refer to our Annual Report on Form 10-K for the year ended December 31, 2010 and subsequent Quarterly Reports on Form 10-Q for a further description of litigation and claims.

 

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. RESERVED.

 

ITEM 5. OTHER INFORMATION

None.

 

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Table of Contents
ITEM 6. EXHIBITS

 

(a) Exhibits:

 

31.1   Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS**   XBRL Instance Document
101.SCH**   XBRL Taxonomy Extension Schema Document
101.CAL**   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF**   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB**   XBRL Taxonomy Extension Label Linkbase Document
101.PRE**   XBRL Taxonomy Extension Presentation Linkbase Document

 

* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.
** Attached as Exhibits 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). Pursuant to Rule 406T of Regulation S-T, these interactive date files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject on liability.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SPARK NETWORKS, INC.

/s/ Brett A. Zane

Brett A. Zane

Chief Financial Officer
Duly Authorized Officer
Date: November 10, 2011

 

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