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, 2021 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 leader in social dating platforms for meaningful relationships focusing
on the 40+ age demographic and faith-based affiliations. Since our inception, we
have had 103 million users register with our dating platforms (which includes
inactive accounts). We currently operate one or more of our brands worldwide.
We will continue to expand our presence in North 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
Management continues to actively monitor the novel coronavirus ("COVID-19")
developments and potential impact on our employees, business and operations. The
effects of COVID-19 did not have a material impact on our result of operations
or financial condition for the period ended March 31, 2022 . However, given the
evolution of the COVID-19 situation, and the
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--------------------------------------------------------------------------------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 selected statistical information regarding the key business metrics described above is shown in the table below:
Three Months Ended March 31,
2022 2021
Registrations 3,415,750 3,607,702
Average Paying Subscribers 838,961 896,344 Total Monthly ARPU $ 20.81$ 20.97 Net Revenue$ 52,374 $ 56,379 Direct Marketing 27,696 30,403 Contribution$ 24,678 $ 25,976
During the three months ended
Monthly ARPU for three months ended
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--------------------------------------------------------------------------------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,
2022 2021 $ Change % Change
Revenue $ 52,374 $ 56,379 $ (4,005) (7.1) %
Operating costs and expenses:
Cost of revenue, exclusive of
depreciation and amortization 34,246 36,918 (2,672) (7.2) %
Other operating expenses 15,435 16,151 (716) (4.4) %
Depreciation and amortization 603 2,290 (1,687) (73.7) %
Total operating costs and expenses 50,284 55,359 (5,075) (9.2) %
Operating income 2,090 1,020 1,070 104.9 %
Other income (expense):
Interest expense (6,882) (3,440) (3,442) 100.1 %
Loss on foreign currency transactions (767) (1,728) 961 (55.6) %
Other income (expense) 263 (16) 279 (1743.8) %
Total other expense, net (7,386) (5,184) (2,202) 42.5 %
Loss before income taxes (5,296) (4,164) (1,132) 27.2 %
Income tax expense (53) (2,340) 2,287 (97.7) %
Net loss $ (5,349) $ (6,504) $ 1,155 (17.8) %
Comparison of Three Months Ended
Revenue
Revenue during the three months endedMarch 31, 2022 decreased by$4.0 million , or 7.1%, compared to the same period in 2021. The decrease in revenue was attributable to the 6.4% decrease in the number of average paying subscribers, driven by a reduction in marketing spend.
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 months endedMarch 31, 2022 decreased by$2.7 million , or 7.2%, compared to the same period in 2021. The decrease was primarily due to a reduction in marketing spend and a decrease in commission expense for mobile application due to the decline in revenue.
Other operating expenses
Other operating expenses consists primarily of costs for sales and marketing, customer service, technical operations and development, and corporate functions. These costs include personnel, technology platform and system costs, third-party service and professional fees, occupancy and other overhead costs. Other operating expenses during the three months endedMarch 31, 2022 decreased by$0.7 million , or 4.4%, compared to the same period in 2021. The decrease was primarily driven by higher accounting and audit fees in connection with theU.S. GAAP conversion in the first quarter of 2021, and decreases in personnel costs driven by lower stock-based compensation, and recruiting fees.
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 months endedMarch 31, 2022 increased by$2.2 million , or 42.5%, compared to the same period in 2021. The increase was primarily related the$4.0 million loss recognized on extinguishment of 17 -------------------------------------------------------------------------------- debt in connection with the Amended Term Loan Facility and Revolving Credit Facility, as discussed in Note 5. Long-term Debt. The increase was partially offset by a$1.0 million decrease in losses on foreign currency transactions compared to the same period in 2021.
Income tax expense
Income tax expense was$0.1 million for the three months endedMarch 31, 2022 compared to$2.3 million for the three months endedMarch 31, 2021 , which reflects an effective tax rate of (1.0)% and 112.5%, respectively. The decrease in income tax expense was primarily driven by the Company benefiting from year to date losses in theU.S. jurisdiction. 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-
We report our financial results in accordance withU.S. GAAP. However, management believes that certain non-U.S. GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance. Adjusted EBITDA Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), a non-U.S. GAAP financial measure, 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 allows for greater transparency with respect to key metrics used by senior leadership in its financial and operational decision-making. We define Adjusted EBITDA as net earnings (loss) excluding interest expense, (gain) loss on foreign currency transactions, income tax (benefit) expense, depreciation and amortization, asset impairments, stock-based compensation 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; 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 (loss) 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) 2022 2021 Net loss$ (5,349) $ (6,504) Interest expense 6,882 3,440 Loss on foreign currency transactions 767 1,728 Income tax expense 53 2,340 Depreciation and amortization 603 2,290 Stock-based compensation expense 502 1,036 Other costs(1) 22 795 Adjusted EBITDA $ 3,480$ 5,125
(1) Includes primarily consulting and advisory fees related to special projects, as well as non-cash acquisition related expenses, post-merger integration activities and long-term debt transaction and advisory fees.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
The Company's principal sources of liquidity are cash balances and cash flows from operations and borrowings. 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. As ofMarch 31, 2022 , we had cash and cash equivalents of$13.0 million . OnMarch 11, 2022 , the Company completed the successful refinancing of its existing term and revolving facility with borrowings under a new term loan facility withMGG Investment Group LP (the "Term Loan"). As ofMarch 31, 2022 andDecember 31, 2021 , we had outstanding principal debt balance of$100.0 million and$85.6 million , respectively. 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. 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, 2021 . We do not have any off-balance sheet arrangements as ofMarch 31, 2022 .
Cash Flows Information
The following table summarizes our cash flows for the periods presented:
Three Months Ended March 31,
(in thousands) 2022 2021
Net cash provided by (used in):
Operating activities $ (10,475) $ (387)
Investing activities (490) (423)
Financing activities 7,774 (3,686)Net change in cash and cash equivalents and restricted cash $
(3,191)
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, and stock-based compensation and (ii) changes in the balances of operating assets and liabilities. Net cash used in operating activities was$10.5 million for the three months endedMarch 31, 2022 , an increase of$10.1 million compared to$0.4 million during the same period in 2021. The increase was primarily driven by a decrease in accounts payable due to the timing of payments.
Investing Activities
Our cash flows from investing activities primarily include development of internal-use software, and purchase of property and equipment.
Net cash used in investing activities was
Financing Activities
Our cash flows from financing activities primarily include changes in long-term debt.
Net cash provided by financing activities was$7.8 million for the three months endedMarch 31, 2022 , an increase of$11.5 million compared to net cash used in financing activities of$3.7 million during the same period in 2021. The increase was primarily attributable to$97.8 million of proceeds, net of discount and issuance costs, received from the Term Loan, partially offset by the$85.6 million repayment of debt under the existing Term Loan Facility and the Second Amendment, transaction 19 -------------------------------------------------------------------------------- costs of$3.5 million paid to third parties in connection with the Term Loan, and a$0.9 million prepayment penalty in connection with the existing Term Loan Facility and the Second Amendment, as discussed in Note 5. Long-term Debt.
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, 2021 ("2021 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, 2022 .
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