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 ("2021 Form 10-K") 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. Except the context clearly indicates
otherwise, the terms "the Company," "Spark Networks ," "we," "us" or "our" refer
to Spark Networks SE and its consolidated subsidiaries.
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 107 million users register with our dating platforms (which includes inactive accounts). We currently operate one or more of our brands worldwide. We intend to 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. We believe 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.
Foreign Currency Exchange and Inflation Risks
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. We translate revenue generated outside theU.S. (the "non-U.S. revenue") intoU.S. dollar-denominated operating results and during periods of a strengtheningU.S. dollar, such revenue will be reduced when translated intoU.S. dollars. In addition, as foreign currency exchange rates fluctuate, the translation of the non-U.S. revenue intoU.S. dollar-denominated operating results affects the period-over-period comparability of such results and can result in foreign currency exchange gains or losses. During the six months endedJune 30, 2022 , 32.6% of our total revenue was non-U.S. revenue. The averageU.S. dollar versus Euro exchange rate was 13.3% and 10.3% higher, respectively, during the three months and six months endedJune 30, 2022 compared to the same periods prior year. The strengthening inU.S. dollar against other major currencies has partially resulted in the decreases in our total revenue for the current periods. Historically, we have not hedged any foreign currency exposures. IfU.S. dollar continue strengthening against Euro and other foreign currency our revenue earned in, our exposure to exchange rate fluctuations and as a result such fluctuations could adversely affect our future results of operations. 17 -------------------------------------------------------------------------------- Inflation has increased during the periods covered by this Quarterly Report, and is expected to continue to increase for the near future. Inflationary factors, such as increases in customer acquisition costs, interest rates and overhead costs may adversely affect our operating results. Historically, we have been able to increase prices at a rate equal to or greater than that of inflation and we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience some effect in the future, especially if inflation rates continue to rise.
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 June 30, 2022 . However, given the
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 selected statistical information regarding the key business metrics described above is shown in the table below:
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Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change % Change 2022 2021 Change % Change
Registrations 3,604,992 3,186,853 418,139 13.1 % 7,020,742 6,794,555 226,187 3.3 %
Average Paying Subscribers 829,610 878,618 (49,008) (5.6) % 834,285 887,481 (53,196) (6.0) %
Total Monthly ARPU $ 19.30 $ 20.96 $ (1.66) (7.9) % $ 19.57 $ 20.96 $ (1.39) (6.6) %
Three Months Ended June 30, Six Months Ended June 30,
(in thousands) 2022 2021 Change % Change 2022 2021 Change % Change
Net Revenue $ 48,035 $ 55,253 $ (7,218) (13.1) % $ 97,942 $ 111,632 $ (13,690) (12.3) %
Direct Marketing 29,995 26,426 3,569 13.5 % 57,691 56,829 862 1.5 %
Contribution $ 18,040 $ 28,827 $ (10,787) (37.4) % $ 40,251 $ 54,803 $ (14,552) (26.6) %
During the three and six months ended June 30, 2022 , new members registered to
our platforms increased by 0.4 million, or 13.1%, and 0.2 million, or 3.3%,
respectively, compared to the same periods in 2021. The increases were primarily
driven by an increase in Zoosk registrations, as we began to scale our marketing
spend in the second quarter of 2022.
While the new member registration increased, average paying subscribers during
the three and six months ended June 30, 2022 decreased by less than 0.1 million,
or 5.6%, and 0.1 million, or 6.0%, respectively, compared to the same periods in
2021, as it took us longer than expected to scale our marketing spend during the
second quarter of 2022.
Monthly ARPU for the three and six months ended June 30, 2022 decreased by 7.9%
and 6.6%, respectively, compared to the same periods in 2021. The decline in
ARPU was a result of currency fluctuations and our emphasis on longer duration
subscriptions through price incentives.
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,
(in thousands) 2022 2021 $ Change % Change
Revenue $ 48,035 $ 55,253 $ (7,218) (13.1) %
Operating costs and expenses:
Cost of revenue, exclusive of
depreciation and amortization 36,356 32,881 3,475 10.6 %
Other operating expenses 14,520 14,924 (404) (2.7) %
Depreciation and amortization 577 2,298 (1,721) (74.9) %
Impairment of goodwill and intangible
assets - 32,086 (32,086) (100.0) %
Total operating costs and expenses 51,453 82,189 (30,736) (37.4) %
Operating loss (3,418) (26,936) 23,518 (87.3) %
Other income (expense):
Interest expense (2,706) (3,802) 1,096 (28.8) %
(Loss) gain on foreign currency
transactions (2,441) 584 (3,025) (518.0) %
Other expense (3) (2) (1) 50.0 %
Total other expense, net (5,150) (3,220) (1,930) 59.9 %
Loss before income taxes (8,568) (30,156) 21,588 (71.6) %
Income tax expense (193) (18,871) 18,678 (99.0) %
Net loss $ (8,761) $ (49,027) $ 40,266 (82.1) %
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Six Months Ended June 30,
(in thousands) 2022 2021 $ Change % Change
Revenue $ 97,942 $ 111,632 $ (13,690) (12.3) %
Operating costs and expenses:
Cost of revenue, exclusive of
depreciation and amortization 70,602 69,799 803 1.2 %
Other operating expenses 29,955 31,075 (1,120) (3.6) %
Depreciation and amortization 1,180 4,588 (3,408) (74.3) %
Impairment of goodwill and intangible
assets - 32,086 (32,086) (100.0) %
Total operating costs and expenses 101,737 137,548 (35,811) (26.0) %
Operating loss (3,795) (25,916) 22,121 (85.4) %
Other income (expense):
Interest expense (9,588) (7,242) (2,346) 32.4 %
Loss on foreign currency transactions (3,208) (1,144) (2,064) 180.4 %
Other income (expense) 260 (18) 278 (1544.4) %
Total other expense, net (12,536) (8,404) (4,132) 49.2 %
Loss before income taxes (16,331) (34,320) 17,989 (52.4) %
Income tax benefit (expense) 99 (21,211) 21,310 (100.5) %
Net loss $ (16,232) $ (55,531) $ 39,299 (70.8) %
Comparison of Three and Six Months Ended
Revenue
Revenue during the three and six months endedJune 30, 2022 decreased by$7.2 million , or 13.1%, and$13.7 million , or 12.3%, respectively, compared to the same periods in 2021. For the three and six months endedJune 30, 2022 , the decline in revenue was attributable to the decrease in the number of average paying subscribers of 5.6% and 6.0%, respectively, as well as the fluctuations of foreign exchange rate as theU.S. dollar strengthened against all major currencies. For the six months endedJune 30, 2022 , 32.6% of total revenue was generated outsidethe United States .
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, 2022 increased by$3.5 million , or 10.6%, and$0.8 million , or 1.2%, respectively, compared to the same periods in 2021, The increases were primarily due to the increased marketing spend.
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 and six months endedJune 30, 2022 decreased by$0.4 million , or 2.7%, and 1.1 million, or 3.6%, respectively, compared to the same periods in 2021. The decreases were primarily driven by increased capitalization of personnel and freelancer costs related to new product initiatives, as well as decreases in technical operations and development consulting costs, stock-based compensation expense, and accounting and audit fees due to higher fees in connection with theU.S. GAAP conversion in the first quarter of 2021. The decreases in other operating expenses were partially offset by an increase in sales and marketing expenses due to higher personnel costs driven by increased headcount, and higher consulting costs. 20 --------------------------------------------------------------------------------
Depreciation and amortization
Depreciation and amortization during the three and six months endedJune 30, 2022 decreased by$1.7 million , or 74.9%, and$3.4 million , or 74.3%, respectively, compared to the same periods in 2021. The decreases were primarily driven by the decrease in amortization of our customer relationships asset which was fully amortized in 2021.
Impairment of goodwill and intangible assets
During the three months endedJune 30 2021 , the Company recorded a goodwill impairment charge of$21.8 million for theZoosk reporting unit and recognized aZoosk trademark impairment charge of$10.3 million . No impairment was recorded for the three and six months endedJune 30, 2022 .
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 endedJune 30, 2022 increased by$1.9 million , or 59.9%, compared to the same period in 2021. The increase was primarily driven by a foreign currency transaction loss in the current period, partially offset by a decrease in interest expense due to a lower effective interest rate as a result of our debt refinancing in the first quarter of 2022. Other expenses, net, during the six months endedJune 30, 2022 increased by$4.1 million , or 49.2%, compared to the same periods in 2021. The increase was primarily driven by increases in interest expense and loss on foreign currency transactions. The increase in interest expense was primarily related to the$4.0 million loss on extinguishment of debt in connection with the Blue Torch Term Loan Facility and Blue Torch Revolving Credit Facility during the quarter endedMarch 31, 2022 . See Note 6. Long-term Debt for further discussion of the debt extinguishment. Income tax expense Income tax expense was$0.2 million for the three months endedJune 30, 2022 compared to$18.9 million for the three months endedJune 30, 2021 , which reflects an effective tax rate of (2.3)% and (62.7)%, respectively. Income tax benefit was$0.1 million for the six months endedJune 30, 2022 compared to income tax expense of$21.2 million for the six months endedJune 30, 2021 , which reflects an effective tax rate of 0.6% and (61.9)%, respectively. The changes in income tax provision were primarily driven by the Company benefiting from year to date losses in theU.S. jurisdiction and theJune 2021 establishment of a valuation allowance against US deferred tax assets. See Note 3. Income Taxes in the Notes to the Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q 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 21 --------------------------------------------------------------------------------
•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 June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Net loss$ (8,761) $ (49,027) $ (16,232) $ (55,531) Interest expense 2,706 3,802 9,588 7,242 Loss (gain) on foreign currency 2,441 (584) 3,208 1,144
transactions
Income tax expense (benefit) 193 18,871 (99) 21,211 Depreciation and amortization 577 2,298 1,180 4,588 Impairment of goodwill and intangible assets - 32,086 - 32,086 Stock-based compensation expense 490 580 992 1,616 Other costs(1) 614 615 636 1,410 Adjusted EBITDA$ (1,740) $ 8,641 $ (727)$ 13,766
(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.
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 ofJune 30, 2022 , we had cash and cash equivalents of$11.4 million . OnMarch 11, 2022 , the Company completed the successful refinancing of its existing term and revolving facility with borrowings under the Financing Agreement withMGG Investment Group LP , which provides more covenant flexibility and allows more resources to be invested into the business to drive growth. The Financing Agreement was amended onAugust 5, 2022 to, among other things, revise certain financial covenants related to quarterly testing of the Company's leverage ratio. As ofJune 30, 2022 andDecember 31, 2021 , we had outstanding principal debt balance of$100.0 million and$85.6 million , respectively. See Note 6. Long-term Debt in the Notes to the Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q 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 2021 Form 10-K. We do not have any off-balance sheet arrangements as ofJune 30, 2022 .
Cash Flows Information
The following table summarizes our cash flows for the periods presented:
Six Months Ended June 30,
(in thousands) 2022 2021 $ Change
Net cash provided by (used in):
Operating activities $ (10,695) $ 4,629 $ (15,324)
Investing activities (1,268) (661) (607)
Financing activities 7,774 (13,610) 21,384
Net change in cash and cash equivalents and
restricted cash $ (4,189) $ (9,642) $ 5,453
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Operating Activities
Our cash flows from operating activities primarily include net loss adjusted for (i) non-cash items included in net loss, such as unrealized loss on foreign currency transactions, amortization of debt issuance costs and accretion of debt discounts, depreciation and amortization, impairment of goodwill and intangible assets, and stock-based compensation and (ii) changes in the balances of operating assets and liabilities. Net cash used in operating activities was$10.7 million for the six months endedJune 30, 2022 , an increase of$15.3 million compared to$4.6 million net cash provided by operating activities during the same period in 2021. The increase was primarily driven by a decrease in cash collected from our customers, higher cash payments of income taxes, and an increase in payments to our vendors as a result of 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$1.3 million for the six months endedJune 30, 2022 , an increase of$0.6 million compared to$0.7 million during the six months endedJune 30, 2021 . The increase was primarily due to the additional capital expenditures on personnel and freelancers working on software development projects of$0.6 million during the six months endedJune 30, 2022 .
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 six months endedJune 30, 2022 , an increase of$21.4 million compared to net cash used in financing activities of$13.6 million during the same period in 2021. Net cash provided by financing activities for the six months endedJune 30, 2022 included$97.8 million of net cash proceeds from the Term Loan, partially offset by the$85.6 million repayment of debt and the$0.9 million prepayment penalty under the existing Blue Torch Term Loan Facility, as well as$3.5 million of transaction costs paid to third parties in connection with the Term Loan. See Note 6. Long-term Debt for detail information. Net cash used in financing activities for the six months endedJune 30, 2021 included$13.1 million principal payments made on the Blue Torch Term Loan Facility and a$0.5 million fee paid in connection with the execution of the Limited Waiver under Loan Agreement inMarch 2021 .
Recent Accounting Pronouncements
See Note 1. Basis of Presentation and Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements included in Part I. Item 1. of this Form 10-Q 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 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 six months endedJune 30, 2022 .
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