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 and Canadian dollar. 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 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.
COVID-19 Update
During 2020, the novel coronavirus ("COVID-19") outbreak spread worldwide and
was declared a global pandemic in
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experienced positive user engagement. The global outbreak of COVID-19 continues
to rapidly evolve as of the date these interim condensed consolidated financial
statements are issued. Management is actively monitoring the global situation on
its business. The effects of COVID-19 did not have a material impact on our
result of operations or financial condition for the period ended June 30, 2021 .
However, given the daily evolution of the COVID-19 situation, and the global
responses to curb its spread, we are not able to estimate the effects COVID-19
may have on our future results of operations or financial condition.
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 our 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 Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited).
Unaudited selected statistical information regarding the key business metrics described above is shown in the table below:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Registrations 3,186,853 3,759,674 6,794,555 7,668,580Average Paying Subscribers 878,618 905,416 887,481 914,799 Total Monthly ARPU$ 20.96 $ 20.81 $ 20.96 $ 20.80 Net Revenue$ 55,253 $ 56,527 $ 111,632 $ 114,184 Direct Marketing 26,426 26,798 56,829 56,630 Contribution$ 28,827 $ 29,729 $ 54,803 $ 57,554 During the three and six months endedJune 30, 2021 , new members registered to our platforms decreased by 0.6 million, or 15.2%, and 0.9 million, or 11.4%, respectively, compared to the same periods in 2020. Average paying subscribers during the three and six months endedJune 30, 2021 decreased by 3.0% for both periods compared to the same periods in 2020. The decreases were primarily driven by declines in registration of the Zoosk brand. 19 --------------------------------------------------------------------------------
Monthly ARPU for both the three and six months ended
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 June 30,
2021 2020 $ Change % Change
Revenue $ 55,253 $ 56,527 $ (1,274) (2.3) %
Operating costs and expenses:
Cost of revenue, exclusive of depreciation
and amortization 32,881 33,223 (342) (1.0) %
Sales and marketing expenses 1,152 1,185 (33) (2.8) %
Customer service expenses 1,902 1,938 (36) (1.9) %
Technical operations and development
expenses 4,774 4,189 585 14.0 %
General and administrative expenses 7,096 8,340 (1,244) (14.9) %
Depreciation and amortization 2,298 2,332 (34) (1.5) %
Impairment of intangible assets and
goodwill 32,086 - 32,086 100.0 %
Total operating costs and expenses 82,189 51,207 30,982 60.5 %
Operating (loss) income (26,936) 5,320 (32,256) (606.3) %
Other income (expense):
Interest income - 9 (9) (100.0) %
Interest expense (3,802) (3,395) (407) 12.0 %
Gain on foreign currency transactions 584 746 (162) (21.7) %
Other income (expense) (2) 200 (202) (101.0) %
Total other expense, net (3,220) (2,440) (780) 32.0 %
(Loss) income before income taxes (30,156) 2,880 (33,036) (1147.1) %
Income tax expense(1) (18,871) (2,046) (16,825) 822.3 %
Net (loss) income $ (49,027) $ 834 $ (49,861) (5978.5) %
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Six Months Ended June 30,
2021 2020 $ Change % Change
Revenue $ 111,632 $ 114,184 $ (2,552) (2.2) %
Operating costs and expenses:
Cost of revenue, exclusive of depreciation
and amortization 69,799 69,764 35 0.1 %
Sales and marketing expenses 2,203 2,240 (37) (1.7) %
Customer service expenses 3,763 4,013 (250) (6.2) %
Technical operations and development
expenses 9,694 9,659 35 0.4 %
General and administrative expenses 15,415 15,223 192 1.3 %
Depreciation and amortization 4,588 4,653 (65) (1.4) %
Impairment of intangible assets and
goodwill 32,086 - 32,086 100.0 %
Total operating costs and expenses 137,548 105,552 31,996 30.3 %
Operating (loss) income (25,916) 8,632 (34,548) (400.2) %
Other income (expense):
Interest income - 40 (40) (100.0) %
Interest expense (7,242) (6,852) (390) 5.7 %
Loss on foreign currency transactions (1,144) (207) (937) 452.7 %
Other income (expense) (18) 200 (218) (109.0) %
Total other expense, net (8,404) (6,819) (1,585) 23.2 %
(Loss) income before income taxes (34,320) 1,813 (36,133) (1993.0) %
Income tax expense(1) (21,211) (3,141) (18,070) 575.3 %
Net (loss) income $ (55,531) $ (1,328) $ (54,203) 4081.6 %
(1) We identified an error related to the calculation of tax provision that
impacted the comparative consolidated financial statements for the quarter ended
March 31, 2020 . Management evaluated these adjustments and concluded they were
not material to any previously issued financial statements. For comparability,
the prior period comparative figures that are presented herein have been revised
to present the correct figures. Refer to Note 1 for additional information.
Comparison of Three and Six Months Ended
Revenue
Revenue during the three and six months endedJune 30, 2021 decreased by$1.3 million , or 2.3%, and$2.6 million , or 2.2%, respectively, compared to the same periods in 2020. The decrease was attributable to the 3.0% decrease in the number of average paying subscribers related to Zoosk brand, partially offset by the increase in the core Spark brands.
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 during the three and six months endedJune 30, 2021 remained relatively flat compared to the same periods in 2020. Sales and marketing expenses Sales and marketing expenses consist primarily of salaries for our sales and marketing personnel and expenses for market research. During the three and six months endedJune 30, 2021 , sales and marketing expenses remained relatively flat compared to the same periods in 2020.
Customer service expenses
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Customer service expenses consist primarily of third-party service fees and
personnel costs associated with our customer service centers. The members of our
customer service team primarily respond to billing questions, detect and
eliminate suspected fraudulent activity, and address site usage and dating
questions from our members. Customer service expenses remained relatively flat
during the three months ended June 30, 2021 compared to the same period in 2020.
During the six months ended June 30, 2021 , customer service expenses decreased
by $0.3 million , or 6.2%, compared to the same period in 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 support our corporate technology requirements as well as costs incurred in the development, enhancement and maintenance of our new and existing technology platforms. Technical operations and development expenses during the three months endedJune 30, 2021 increased by$0.6 million , or 14.0%, compared to the same period in 2020. The increase was primarily driven by an increase in personnel costs due to higher headcount in the second quarter of 2021 compared to the second quarter of 2020. Technical operations and development expenses during the six months endedJune 30, 2021 remained relatively flat compared to the same period in 2020.
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 decreased by$1.2 million , or 14.9%, for the three months endedJune 30, 2021 , while it increased by$0.2 million , or 1.3%, during the six months endedJune 30, 2021 compared to the same period in 2020. The decrease during the three months endedJune 30, 2021 was primarily driven by a decrease in the business tax expense inSan Francisco as the Company no longer has operations in the city and stock-based compensation expense. The increase during the six months endedJune 30, 2021 was primarily driven by an increase in insurance and professional fees, partially offset by a decrease in the business tax expense inSan Francisco and stock-based compensation expense.
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, during the three and six months endedJune 30, 2021 increased by$0.8 million , or 32.0%, and$1.6 million , or 23.2%, compared to the same periods in 2020. The increase in both periods was primarily related to an increase in interest expense on the deferred payment toZoosk's shareholders due to an increase in the stated interest rate from 2% to 12% per annum, an increase in effective interest on borrowings under the Senior Secured Facilities Agreement, and losses on foreign currency transactions. During the three and six months endedJune 30, 2021 , interest expense on the deferred payment toZoosk's shareholders increased$0.2 million and$0.4 million , respectively, compared to the same periods in 2020. Effective interest on borrowings under the Senior Secured Facilities Agreement during the three and six months endedJune 30, 2021 increased$0.2 million and$0.1 million , respectively, as compared to the same periods in 2020. During the three months endedJune 30, 2021 , net foreign exchange gains decreased by$0.2 million compared to the same period in 2020. During the six months endedJune 30, 2021 , net foreign exchange losses increased by$0.9 million compared to the same period in 2020.
Impairment
During the second quarter of 2021, the Company lowered its financial expectations for the remainder of 2021 due to increased cyberattacks, delays in product initiatives and a more uncertain Covid-19 outlook. These factors constituted an interim triggering event as of the end of the Company's second quarter of 2021, and the Company performed an impairment analysis with regard to its indefinite-lived intangible assets and goodwill. For the quarter endedJune 30, 2021 , the fair value of the Spark reporting unit exceeded the carrying amount, and as a result, no goodwill impairment was recorded. For theZoosk reporting unit, the Company recorded a goodwill impairment charge of$21.8 million . In addition, the Company recognized aZoosk trademark impairment charge of$10.3 million .
See Note 4.
Income tax expense
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Income tax expense was $18.9 million for the three months ended June 30, 2021
compared to $2.0 million for the three months ended June 30, 2020 , which
reflects an effective tax rate of (62.7)% and 69.2%, respectively. For the six
months ended June 30, 2021 and 2020, the Company recorded income tax expense of
$21.2 million and $3.1 million , respectively, which reflect an effective tax
rate of (61.9)% and 159.3%, respectively. The increase in income tax expense was
primarily driven by change in valuation allowance for U.S. deferred tax assets
and impairment of goodwill and intangible assets.
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.
Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting
principles in the U.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 our performance, 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; and •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 other
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2021 2020 2021 2020
Net (loss) income $ (49,027) $ 834 $ (55,531) $ (1,328)
Net interest expense 3,802 3,386 7,242 6,812
(Gain) loss on foreign currency (584) (746) 1,144 207
transactions
Income tax expense 18,871 2,046 21,211 3,141
Depreciation and amortization 2,298 2,332 4,588 4,653
Impairment of intangible assets and
goodwill 32,086 - 32,086 -
Stock-based compensation expense 580 1,434 1,616 2,344
Acquisition related costs(1) - 673 - 1,464
Other costs(2) 292 149 764 277
Adjusted EBITDA $ 8,318 $ 10,108 $ 13,120 $ 17,570
(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.
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
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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 of
June 30, 2021 , we had cash and cash equivalents of $11.1 million .
As of June 30, 2021 and December 31, 2020 , we had outstanding principal debt
balance of $91.9 million and $104.7 million , respectively. We believe that we
will continue to have adequate liquidity on hand to meet our payment requirement
under the Loan Agreement in the amount of $6.3 million during the second half of
fiscal year 2021. We are in compliance with all of our financial covenants with
a net leverage ratio of 2.30 as of June 30, 2021 . See Note 6. Long-term Debt in
the Notes to the Consolidated Financial Statements included in Item 1 of this
quarterly report for further discussion of our debt.
We believe that our current cash and cash flow from operations will be
sufficient to meet our anticipated cash needs for financial liabilities, capital
expenditures and contractual obligations, for at least the next 12 months. Our
future capital requirements and the adequacy of available funds will depend on
many factors and those set forth in Part II, Item 1A "Risk Factors" of our Form
10-K for the year ended December 31, 2020 . We do not anticipate requiring
additional capital; however, if required or desirable, we may utilize our
Revolving Credit Facility or issue additional equity in the private or public
markets. Under the Senior Secured Facilities Agreement, we are subject to
various financial covenants including a monthly liquidity requirement and
quarterly tests including guarantor coverage test, maximum leverage ratio and
minimum asset coverage ratio. Additionally, it includes covenants that, among
other things, restricts our ability and the ability of its subsidiaries to:
incur additional indebtedness, create liens, engage in mergers or
consolidations, sell or transfer assets, pay dividends and distributions and
make share repurchases, make certain acquisitions, engage in certain
transactions with affiliates, and change lines of business. We do not have any
off-balance sheet arrangements as of June 30, 2021 .
Cash Flows Information
The following table summarizes our cash flows for the periods presented:
Six Months Ended June 30,
(in thousands) 2021
2020
Net cash provided by (used in): Operating activities$ 4,629 $ 7,207 Investing activities (661) (1,951) Financing activities (13,610) (9,319) Net change in cash and cash equivalents$ (9,642) $ (4,063) 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 provided by operating activities was$4.6 million for the six months endedJune 30, 2021 , a decrease of$2.6 million compared to$7.2 million during the three months endedJune 30, 2020 . The decrease was primarily driven by an increase in net loss from$1.3 million to$55.5 million and the decrease in accounts receivable due to timing.
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$0.7 million for the six months endedJune 30, 2021 , a decrease of$1.3 million compared to$2.0 million during the six months endedJune 30, 2020 . The decrease was primarily due to the cash paid for theZoosk acquisition final adjustment surplus of$0.5 million during the six months endedJune 30, 2020 , and the additional capital expenditures of$0.8 million during the first six months of 2020.
Financing Activities
Our cash flows from financing activities primarily include changes in long-term debt.
Net cash used in financing activities was$13.6 million for the six months endedJune 30, 2021 , an increase of$4.3 million compared to$9.3 million during the three months endedJune 30, 2020 . The increase was primarily attributable to the fee paid 24 -------------------------------------------------------------------------------- in connection with the execution of the Limited Waiver under Loan Agreement inMarch 2021 of$0.5 million and a higher mandatory prepayment made during the second quarter of 2021 compared to same period in 2020.
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
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 Form 10-K for the fiscal year endedDecember 31,2020 ("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 endedJune 30, 2021 .
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