SPARK NETWORKS SE
This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q")
contain forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve risks and uncertainties.
Forward-looking statements provide current expectations of future events based
on certain assumptions and include any statement that does not directly relate
to any historical or current fact. Forward-looking statements can be identified
by words such as "future," "anticipates," "believes," "estimates," "expects,"
"intends," "plans," "predicts," "will," "would," "could," "can," "may," and
similar terms. Forward-looking statements are not guarantees of future
performance and the Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, those discussed in Part I,
Item 1A of the Company's Annual Report on Form 10-K for the year ended December
31, 2020 under the heading "Risk Factors." The Company assumes no obligation to
revise or update any forward-looking statements for any reason, except as
required by law.
Overview
We are a leading global operator of premium online dating sites and mobile
applications. Our focus is on catering to the 40+ age demographic and religious
minded singles looking for serious relationships in
Our strategy is to become the social dating for meaningful relationships leader. We will continue to expand our presence inNorth America through significant marketing investment in this region as we look to drive both organic growth of our existing brand portfolio and expansion through the launch of new or acquired brands. We intend to incorporate more social features in our products with content, community and social discovery functionality to allow our users to meet in more informal ways and to provide new ways to date online. Our portfolio of strong brands along with our improved financial strength positions us to deliver a superior user experience to our customers and drive long-term value to shareholders. Our ability to compete effectively will depend upon our ability to address the needs of our members and paying subscribers, on the timely introduction and performance of innovative features and services associated with our brands, and our ability to respond to services and features introduced by competitors. We must also achieve these objectives within the parameters of our consolidated and operating segment profitability targets. We are focused on enhancing and augmenting our portfolio of services while also continuing to improve the efficiency and effectiveness of our operations. We believe we have sufficient available cash resources on hand to accomplish the enhancements currently contemplated.
Operations Overview
We offer services both via websites and mobile applications and utilize a "subscription" business model, where certain basic functionalities are provided free of charge, while providing premium features (such as interacting with other community members via messages) only to paying subscribers. We generate revenues primarily through paid membership subscriptions. We manage our operations through one reportable segment. In addition to operating inthe United States ("U.S."), we also operate in various markets outside theU.S. , primarily in various jurisdictions within theEuropean Union ("EU"), and as a result, are exposed to foreign exchange risk for the euro,U.S. dollar, British pound, Australian dollar, Canadian dollar, and Israeli New shekel ("ILS"). Financial statements of subsidiaries outside theU.S. are generally measured using the local currency as the functional currency. The revenue generated outside theU.S. is 13 -------------------------------------------------------------------------------- translated intoU.S. dollar at the date of transactions and subject to unpredictable fluctuations if the value of other currencies change relative to theU.S. dollar. Fluctuating foreign exchange rates result in foreign currency exchange gains and losses. We have not and do not intend to hedge any foreign currency exposures. We believe that any effect of inflation at current levels will be minimal. Historically, we have been able to increase prices at a rate equal to or greater than that of inflation and we believe that we will continue to be able to do so for the foreseeable future. In addition, we have been able to maintain a relatively stable variable cost structure for our products due, in part, to a continued optimization of marketing spend.
Key Business Metrics
We regularly review certain operating metrics in order to evaluate the effectiveness of our operating strategies and monitor the financial performance of the business. The key business metrics that we utilize include the following:
Total Registrations
Total registrations are defined as the total number of new members registering to the platforms with their email address. Those include members who enter into premium subscriptions and free memberships.
Average Paying Subscribers
Paying subscribers are defined as individuals who have paid a monthly fee for access to premium services, which include, among others, unlimited communication with other registered users, access to user profile pictures and enhanced search functionality. Average paying subscribers for each month are calculated as the sum of the paying subscribers at the beginning and the 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.
Monthly Average Revenue Per User ("ARPU")
Monthly ARPU represents the total net subscriber revenue for the period divided by the number of average paying subscribers for the period, divided by the number of months in the period.
Contribution
Contribution is defined as revenue, net of refunds and credit card chargebacks, less direct marketing.
Direct Marketing
Direct Marketing is defined as online and offline advertising spend and is included within Cost of revenue, exclusive of depreciation and amortization within our Consolidated Statement of Comprehensive Loss.
Unaudited selected statistical information regarding the key business metrics described above is shown in the table below:
Three Months Ended March 31,
2021 2020
Registrations 3,607,702 3,908,906
Average Paying Subscribers 896,344 924,181 Total Monthly ARPU $ 20.97$ 20.80 Net Revenue$ 56,379 $ 57,657 Direct Marketing 30,403 29,832 Contribution$ 25,976 $ 27,825 During the three months endedMarch 31, 2021 , 3.6 million new members registered to our platforms, a decrease of 0.3 million, or 7.7%, compared to 3.9 million new members during the three months endedMarch 31, 2020 . Average paying subscribers 14 --------------------------------------------------------------------------------
decreased by 3.0% to 896,344 during the three months ended
Monthly ARPU remained relatively flat at
Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles in theU.S. ("U.S. GAAP"). However, management believes that certain non-GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance.
Adjusted EBITDA
Adjusted EBITDA is one of the primary metrics by which we evaluate the performance of our business, budget, forecast and compensate management. We believe this measure provides management and investors with a consistent view, period to period, of the core earnings generated from the ongoing operations and excludes the impact of items that we do not consider representative of our ongoing performance. This includes: depreciation and amortization, share-based compensation, asset impairments, gains or losses on foreign currency transactions and net interest expense, acquisition related costs and other costs. Adjusted EBITDA has inherent limitations in evaluating the performance of the Company, including, but not limited to the following: •Adjusted EBITDA does not reflect the cash capital expenditures during the measurement period; •Adjusted EBITDA does not reflect any changes in working capital requirements during the measurement period; •Adjusted EBITDA does not reflect the cash tax payments during the measurement period; •Adjusted EBITDA may be calculated differently by other companies in our industry, thus limiting its value as a comparative measure; Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income and our otherU.S. GAAP results. The following table reconciles Net loss to Adjusted EBITDA for the periods presented: Three Months Ended March 31, (in thousands) 2021 2020 Net loss$ (6,504) $ (3,829) Net interest expense 3,440 3,345 Loss on foreign currency transactions 1,728 952 Income tax expense 2,340 2,844 Depreciation and amortization 2,290 2,321 Stock-based compensation expense 1,036
910
Acquisition related costs(1) - 791 Other costs(2) 472 128 Adjusted EBITDA $ 4,802$ 7,462 (1) Acquisition related costs primarily consist of transaction costs, including legal, consulting, advisory fees, and severance and retention costs. (2) Includes primarily consulting and advisory fees related to special projects, as well as post-merger integration activities and long-term debt transaction and advisory fees. 15 --------------------------------------------------------------------------------
Results of Operations
The following table shows our results of operations for the periods presented.
The period-over-period comparison of our historical results are not necessarily
indicative of the results that may be expected in the future.
Three Months Ended March 31,
2021 2020 $ Change % Change
Revenue $ 56,379 $ 57,657 $ (1,278) (2.2) %
Operating costs and expenses:
Cost of revenue, exclusive of depreciation
and amortization 36,918 36,541 377 1.0 %
Sales and marketing expenses 833 879 (46) (5.2) %
Customer service expenses 1,770 2,040 (270) (13.2) %
Technical operations and development
expenses 4,455 5,380 (925) (17.2) %
General and administrative expenses 9,093 7,184 1,909 26.6 %
Depreciation and amortization 2,290 2,321 (31) (1.3) %
Total operating costs and expenses 55,359 54,345 1,014 1.9 %
Operating income 1,020 3,312 (2,292) (69.2) %
Other income (expense):
Interest income - 31 (31) (100.0) %
Interest expense (3,440) (3,376) (64) 1.9 %
Loss on foreign currency transactions (1,728) (952) (776) 81.5 %
Other income (expense) (16) - (16) NM
Total other expense (5,184) (4,297) (887) 20.6 %
Loss before income taxes (4,164) (985) (3,179) 322.7 %
Income tax expense (2,340) (2,844) 504 (17.7) %
Net loss (6,504) (3,829) (2,675) 69.9 %
Comparison of Three Months Ended
Revenue
Revenue during the three months ended
Cost of revenue, exclusive of depreciation and amortization
Cost of revenue, exclusive of depreciation and amortization consists primarily of direct marketing expenses, data center expenses, credit card fees and mobile application processing fees. Cost of revenue increased by 1.0% to$36.9 million during the three months endedMarch 31, 2021 , compared to$36.5 million during the three months endedMarch 31, 2020 . The increase in cost of revenue was primarily attributable to increases in direct marketing expenses.
Sales and marketing expenses
Sales and marketing expenses consist primarily of salaries forSpark Networks' sales and marketing personnel and expenses for market research. Sales and marketing expenses remained relatively flat at$0.8 million during the three months endedMarch 31, 2021 , as compared to$0.9 million during the three months endedMarch 31, 2020 . Customer service expenses Customer service expenses consist primarily of third-party service fees and personnel costs associated withSpark Networks' customer service centers. The members ofSpark Networks' customer service team primarily respond to billing questions, detect and eliminate suspected fraudulent activity, and address site usage and dating questions fromSpark Networks' members. 16 -------------------------------------------------------------------------------- Customer service expenses decreased by 13.2% to$1.8 million during the three months endedMarch 31, 2021 , as compared to$2.0 million during the three months endedMarch 31, 2020 . The decrease was mainly attributable to a reduction in personnel costs due to consolidation of customer service employee headcount.
Technical operations and development expenses
Technical operations and development expenses consist primarily of the personnel and systems necessary to supportSpark Networks' corporate technology requirements as well as costs incurred in the development, enhancement and maintenance ofSpark Networks' new and existing technology platforms. Technical operations and development expenses decreased by$0.9 million to$4.5 million during the three months endedMarch 31, 2021 , as compared to$5.4 million during the three months endedMarch 31, 2020 . The decrease was driven by a reduction in personnel expenses due to lower engineer headcount and a decrease in consulting costs in relation to the integration ofZoosk , partially offset by an increase in software license expense due to new software vendors.
General and administrative expenses
General and administrative expenses consist primarily of corporate personnel-related costs, professional fees, occupancy and other overhead costs. General and administrative expenses increased by 26.6% to$9.1 million for the three months endedMarch 31, 2021 , compared to$7.2 million for the three months endedMarch 31, 2020 . The increase was primarily driven by an increase in personnel costs due to an increase in employee headcount.
Other income (expense)
Other expense, net, consist primarily of interest income and expenses, foreign exchange gains and losses, and other related finance costs. Other expenses, net, increased to$5.2 million for the three months endedMarch 31, 2021 , compared to$4.3 million for the three months endedMarch 31, 2020 . The increase was primarily related to net foreign exchange losses of$1.7 million during the three months endedMarch 31, 2021 compared to$1.0 million during the three months endedMarch 31, 2020 . Interest expense on borrowings under the Senior Secured Facilities Agreement remained relatively flat.
Income tax expense
Income tax expense was$2.3 million for the three months endedMarch 31, 2021 compared to$2.8 million for the three months endedMarch 31, 2020 , which reflects an effective tax rate of 112.5% and 104.9%, respectively. The increase in effective tax rate was primarily driven by change in valuation allowance related toCalifornia net operating losses. See Note 3. Income Taxes in the Notes to the Consolidated Financial Statements included in Item 1 of this quarterly report for further discussion of income taxes.
Liquidity and Capital Resources
Our ongoing liquidity requirements arise primarily from working capital needs, research and development requirements and the debt service. In addition, we may use liquidity to fund acquisitions or make other investments. Sources of liquidity are cash balances and cash flows from operations and borrowings. From time to time, we may obtain additional liquidity through the issuance of equity or debt. As ofMarch 31, 2021 , we had cash and cash equivalents of$17.3 million . We believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs for financial liabilities, capital expenditures and contractual obligations, for at least the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors and those set forth in Part II, Item 1A "Risk Factors" of our Form 10-K for the year endedDecember 31, 2020 , We do not anticipate requiring additional capital; however, if required or desirable, we may utilize our Revolving Credit Facility or issue additional equity in the private or public markets. Under the Senior Secured Facilities Agreement, we are subject to various financial covenants including a monthly liquidity requirement and quarterly tests including guarantor coverage test, maximum leverage ratio and minimum asset coverage ratio. Additionally, it includes covenants that, among other things, restricts our ability and the ability of its subsidiaries to: incur additional indebtedness, create liens, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions and make share repurchases, make certain acquisitions, engage in certain transactions with affiliates, and change lines of business. 17 --------------------------------------------------------------------------------
See Note 5. Long-term Debt in the Notes to the Consolidated Financial Statements included in Item 1 of this quarterly report for further discussion of our debt.
Cash Flows Information
The following table summarizes our cash flows for the periods presented:
Three Months Ended March 31,
(in thousands) 2021 2020
Net cash used in:
Operating activities $ (387) $ (4,312)
Investing activities (423) (710)
Financing activities (3,686) (2,984)
Net change in cash and cash equivalents $ (4,496) $ (8,006)
Operating Activities
Our cash flows from operating activities primarily include net loss adjusted for
(i) non-cash items included in net loss, such as depreciation and amortization,
impairment of goodwill and intangible assets, stock-based compensation and (ii)
changes in the balances of operating assets and liabilities.
Net cash used in operating activities was $0.4 million for the three months
ended March 31, 2021 , a decrease of $3.9 million compared to $4.3 million during
the three months ended March 31, 2020 . The decrease was primarily driven by the
increase in accounts payable due to timing of payments and increase in deferred
revenue, partially offset by the increase in net loss from $3.8 million to $6.5
million .
Investing Activities
Our cash flows from investing activities primarily include development of internal-use software, purchase of property and equipment and business acquisition.
Net cash used in investing activities was$0.4 million for the three months endedMarch 31, 2021 , a decrease of$0.3 million compared to$0.7 million during the three months endedMarch 31, 2020 . The decrease was primarily due to the cash paid for theZoosk acquisition final adjustment surplus of$0.5 million during the three months endedMarch 31, 2020 , partially offset by an increase in capital expenditures of$0.2 million .
Financing Activities
Our cash flows from financing activities primarily include changes in long-term debt.
Net cash used in financing activities was
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of
Recent Accounting Pronouncements
See Note 1 Basis of Presentation and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part I. Item 1. of this quarterly report for a discussion of recently issued and adopted accounting standards.
Critical Accounting Policies and Estimates
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Please refer to Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation, the "Critical Accounting Policies and Estimates" section of our 2020 Form 10-K for a full description of all of our critical accounting estimates. We believe there have been no new critical accounting policies and estimates, or material changes to our existing critical accounting policies and estimates during the three months endedMarch 31, 2021 .
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