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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2021
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 001-38252
Spark Networks SE
(Exact name of Registrant as specified in its Charter)
 
Germany
N/A
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

Kohlfurter Straße 41/43
Berlin
Germany
10999
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (+49) 30 868000
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class 
Trading
Symbol(s)
 Name of each exchange on which registered
American Depository Shares each representing one-tenth of an ordinary share LOV New York Stock Exchange
Ordinary shares, €1.00 nominal value per share*
LOVNew York Stock Exchange

* Not for trading purposes, but only in connection with the registration of American Depository Shares pursuant to the requirements of the Securities and Exchange Commission.

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 No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Yes No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  Accelerated filer 
Non-accelerated filer  Smaller reporting company 
Emerging growth company     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The number of ordinary shares outstanding as of November 5, 2021 was 2,614,914.



 Table of Contents
 
  Page
 
  
 
  

2


PART I
Financial Information

Item 1. Financial Statements

Spark Networks SE
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)

September 30, 2021December 31, 2020
Assets
Current assets:
Cash and cash equivalents$12,440 $19,267 
Accounts receivable, net of allowance of $435 and $93, respectively
7,135 5,507 
Prepaid expenses3,936 4,366 
Other current assets1,059 2,140 
Total current assets24,570 31,280 
Property and equipment, net of accumulated depreciation of $6,204 and $6,252, respectively
9,982 11,418 
Goodwill134,759 156,582 
Intangible assets, net of accumulated amortization of $15,159 and $18,631, respectively
44,834 58,999 
Deferred tax assets5,697 23,522 
Other assets8,521 8,642 
Total assets$228,363 $290,443 
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt$12,600 $19,037 
Accounts payable10,828 11,127 
Deferred revenue40,479 38,304 
Accrued expenses and other current liabilities26,738 28,429 
Total current liabilities90,645 96,897 
Long-term debt, net of current portion72,067 80,109 
Deferred tax liabilities6,382 993 
Other liabilities18,120 17,541 
Total liabilities187,214 195,540 
Contingencies (Note 7)
Shareholders' Equity:
Common stock, €1.00 nominal value; 2,661,386 shares issued as of September 30, 2021 and December 31, 2020; 2,614,914 and 2,605,689 shares outstanding as of September 30, 2021 and December 31, 2020, respectively
3,064 3,064 
Treasury stock, at €1.00 nominal value; 46,472 and 55,697 shares as of September 30, 2021 and December 31, 2020, respectively
(51)(61)
Additional paid-in capital222,523 220,852 
Accumulated deficit(190,469)(132,248)
Accumulated other comprehensive income6,082 3,296 
Total shareholders' equity41,149 94,903 
Total liabilities and shareholders' equity$228,363 $290,443 


The accompanying notes are an integral part of these consolidated financial statements.
3



Spark Networks SE
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(in thousands, except share and per share data)

Three Months Ended September 30,Nine Months Ended September 30,
2021202020212020
Revenue$53,297 $60,784 $164,929 $174,968 
Operating costs and expenses:
Cost of revenue, exclusive of depreciation and amortization34,804 39,459 104,603 109,223 
Sales and marketing expenses1,271 962 3,474 3,202 
Customer service expenses1,842 1,821 5,605 5,834 
Technical operations and development expenses5,195 4,480 14,889 14,139 
General and administrative expenses6,133 8,647 21,548 23,870 
Depreciation and amortization1,060 2,512 5,648 7,165 
Impairment of intangible assets and goodwill  32,086  
Total operating costs and expenses50,305 57,881 187,853 163,433 
Operating income (loss)2,992 2,903 (22,924)11,535 
Other income (expense):
Interest income 34  74 
Interest expense(3,110)(3,135)(10,352)(9,987)
(Loss) gain on foreign currency transactions(978)1,539 (2,122)1,332 
Other income (expense)7  (11)200 
Total other expense, net(4,081)(1,562)(12,485)(8,381)
(Loss) income before income taxes(1,089)1,341 (35,409)3,154 
Income tax expense(1)
(1,601)(1,485)(22,812)(4,626)
Net loss(2,690)(144)(58,221)(1,472)
Other comprehensive income (loss):
Foreign currency translation adjustment1,232 (2,127)2,786 (2,012)
Comprehensive loss$(1,458)$(2,271)$(55,435)$(3,484)
Loss per share:
Basic loss per share$(1.03)$(0.06)$(22.31)$(0.56)
Diluted loss per share$(1.03)$(0.06)$(22.31)$(0.56)
Weighted average shares outstanding:
Basic2,613,708 2,605,689 2,609,285 2,605,689 
Diluted2,613,708 2,605,689 2,609,285 2,605,689 

(1) The Company 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. Basis of Presentation and Summary of Significant Accounting Policies for additional information.





The accompanying notes are an integral part of these consolidated financial statements.
4



Spark Networks SE
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)
(in thousands, except share data)

Three Months Ended September 30, 2021
Common StockTreasury Stock
SharesAmountSharesAmountAdditional Paid-in CapitalAccumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
shareholders'
equity
Balance at July 1, 20212,661,386 $3,064 (48,128)$(53)$222,082 $(187,779)$4,850 $42,164 
Stock-based compensation— — — — 482 — — 482 
Treasury stock issued pursuant to equity-based plans1,656 2 (41)(39)
Net loss— — — — — (2,690)— (2,690)
Foreign currency translation adjustments— — — — — — 1,232 1,232 
Balance at September 30, 20212,661,386 $3,064 (46,472)$(51)$222,523 $(190,469)$6,082 $41,149 
Three Months Ended September 30, 2020
Common StockTreasury Stock
SharesAmountSharesAmountAdditional Paid-in CapitalAccumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
shareholders'
equity
Balance at July 1, 20202,661,386 $3,064 (55,697)$(61)$218,416 $(86,968)$7,866 $142,317 
Stock-based compensation —   1,506   1,506 
Net loss— — — — — (144)— (144)
Foreign currency translation adjustments— — — — — — (2,127)(2,127)
Balance at September 30, 20202,661,386 $3,064 (55,697)$(61)$219,922 $(87,112)$5,739 $141,552 

Nine Months Ended September 30, 2021
Common StockTreasury Stock
SharesAmountSharesAmountAdditional Paid-in CapitalAccumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
shareholders'
equity
Balance at January 1, 20212,661,386 $3,064 (55,697)$(61)$220,852 $(132,248)$3,296 $94,903 
Stock-based compensation —   2,098  2,098 
Treasury stock issued pursuant to equity-based plans — 9,225 10 (427) (417)
Net loss— — — — — (58,221)— (58,221)
Foreign currency translation adjustments— — — — — — 2,786 2,786 
Balance at September 30, 20212,661,386 $3,064 (46,472)$(51)$222,523 $(190,469)$6,082 $41,149 
Nine Months Ended September 30, 2020
Common StockTreasury Stock
SharesAmountSharesAmountAdditional Paid-in CapitalAccumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
shareholders'
equity
Balance at January 1, 20202,661,386 $3,064 (55,697)$(61)$216,072 $(85,640)$7,751 $141,186 
Stock-based compensation —   3,850   3,850 
Net loss— — — — — (1,472)— (1,472)
Foreign currency translation adjustments— — — — — — (2,012)(2,012)
Balance at September 30, 20202,661,386 $3,064 (55,697)$(61)$219,922 $(87,112)$5,739 $141,552 


The accompanying notes are an integral part of these consolidated financial statements.
5



Spark Networks SE
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

Nine Months Ended September 30,
20212020
Net loss$(58,221)$(1,472)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization5,648 7,165 
Impairment of goodwill and intangible assets32,086  
Loss on tangible and intangible assets 341 
Unrealized loss (gain) on foreign currency transactions2,218 (1,465)
Stock-based compensation expense2,098 3,850 
Amortization of debt issuance costs and accretion of debt discounts3,204 2,516 
Deferred tax expense22,812 4,626 
Provision for credit losses331 246 
Non-cash lease expense1,421 1,441 
Change in operating assets and liabilities:
Accounts receivable(2,103)(3,276)
Prepaid expenses and other current assets(116)(131)
Other assets188 58 
Accounts payable, accrued expenses, and other current liabilities(1,416)(3,211)
Other liabilities(1,902)(1,409)
Deferred revenue3,341 4,088 
Net cash provided by operating activities$9,589 $13,367 
Capital expenditures(905)(2,108)
Acquisitions of businesses, net of cash acquired (513)
Net cash used in investing activities$(905)$(2,621)
Repayment of debt(16,243)(12,320)
Payments directly related to debt facility(523) 
Net cash used in financing activities$(16,766)$(12,320)
Net change in cash and cash equivalents and restricted cash(8,082)(1,574)
Effects of exchange rate fluctuations on cash and cash equivalents and restricted cash(453)(711)
Net decrease in cash and cash equivalents and restricted cash$(8,535)$(2,285)
Cash and cash equivalents and restricted cash at beginning of period21,117 17,457 
Cash and cash equivalents and restricted cash at end of period$12,582 $15,172 
Supplemental disclosure of cash flow information:
Cash paid for interest$7,089 $8,049 
Cash paid for income taxes$114 $744 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheetsSep-21Dec-20
Cash and cash equivalents$12,440 $19,267 
Restricted cash included in other current assets142 1,850 
Total cash and cash equivalents and restricted cash as shown on the condensed statements of cash flows$12,582 $21,117 

The accompanying notes are an integral part of these consolidated financial statements.
6



Spark Networks SE
Notes to Condensed Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Spark Networks SE (the "Company") is domiciled in Germany and is a leader in social dating platforms for meaningful relationships focusing on the 40+ demographic and faith-based affiliations, including Zoosk, Inc. ("Zoosk"), EliteSingles, SilverSingles, Christian Mingle, Jdate, and JSwipe, among others. The Company's brands are tailored to quality dating with real users looking for love and companionship in a safe and comfortable environment.

Basis of Presentation and Consolidation

The Company prepares its consolidated financial statements in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), regarding interim financial reporting. The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

In management's opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect, in management’s opinion, all adjustments, consisting of normal and recurring adjustments, necessary for the fair presentation of the Company's balance sheets, statement of operations and comprehensive loss, statement of shareholders' equity and statement of cash flows for the periods presented. Interim results are not necessarily indicative of the results that may be expected for the Company's entire fiscal year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2020.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. 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. Significant estimates and assumptions are required in the determination of: revenue reserves, deferred tax asset valuation allowances, unrecognized tax benefits, accounting for business combinations, classification and measurement of virtual stock option plans, and annual impairment testing of goodwill and indefinite-lived intangible assets. The Company evaluates its estimates and judgements on an ongoing basis based on historical experience, expectations of future events and various other factors that it believes to be reasonable under the circumstances and revises them when necessary. Actual results may differ from the original or revised estimates.

Liquidity and Capital Resources

The Company's financial statements are prepared in accordance with U.S. GAAP, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of the date of the financial statements, the Company has generated losses from operations, incurred impairment charges to its Zoosk goodwill and intangible assets and has a working capital deficiency. These factors are potential indications of the Company's inability to continue as a going concern.

The Company's plans to alleviate these indicators include growing its subscriber base by improving its marketing techniques and implementing new features to increase customer engagement on its various platforms. If the Company is unable to achieve its plan, it has the ability to control its direct marketing spend to achieve compliance with its debt covenants. The Company's plan including adjusting its direct marketing spend, along with its current cash and cash equivalents, and cash flow from operations, is expected to be sufficient to meet its anticipated cash requirements for financial liabilities, capital expenditures and contractual obligations, for at least the next 12 months from the issuance of these financial statements.

COVID-19 Update

During 2020, the novel coronavirus ("COVID-19") outbreak spread worldwide and was declared a global pandemic in March 2020. Despite challenging economic conditions on consumers, the Company maintained stable churn levels during the period and experienced positive user engagement. The global outbreak of COVID-19 continues to rapidly evolve. Management is actively monitoring the global situation and potential impact on the Company's business. The effects of COVID-19 did not have
7



a material impact on the Company's result of operations or financial condition for the period ended September 30, 2021. However, given the evolution of the COVID-19 situation, and the global responses to curb its spread, the Company is not able to estimate the effects COVID-19 may have on its future results of operations or financial condition.

Revision of Prior Period Consolidated Financial Statements

During the second quarter of 2021, management identified an overstatement of income tax provision for the quarter ended March 31, 2020. Management concluded that this error was not material to previously issued consolidated financial statements and would be corrected through a revision to the comparative consolidated income statement presented for the six months ended June 30, 2020. The impact of the error for the quarter ended March 31, 2020 was $1.7 million overstatement of income tax provision. The prior period comparative figures for the three and nine months ended September 30, 2020 that are presented herein reflect the correct figures.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standard Board ("FASB") issued Accounting Standard Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improved consistent application of and simplify the accounting for other areas of Topic 740 by clarifying and amending existing guidance. The Company adopted the standard in the first quarter of 2021 and it did not have a material impact to the financial statements.

Note 2. Revenue

For the three and nine months ended September 30, 2021 and 2020, revenue was as follows:

Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
Subscription revenue$51,503 $59,210 $159,746 $170,272 
Virtual currency revenue970 896 2,877 2,740 
Advertising revenue824 678 2,306 1,956 
Total Revenue$53,297 $60,784 $164,929 $174,968 

Revenue disaggregated by geography, based on the billing address of the Company's customers, consists of the following:

Three Months Ended September 30,Nine Months Ended September 30,
(in thousands)2021202020212020
United States$35,063 $41,030 $107,653 $117,383 
France5,006 3,100 15,727 8,961 
Germany266 426 904 1,310 
Rest of world12,962 16,228 40,645 47,314 
Total Revenue$53,297 $60,784 $164,929 $174,968 

The Company's deferred revenue balances as of September 30, 2021 and December 31, 2020 are $40.5 million and $38.3 million, respectively. During the nine months ended September 30, 2021 and 2020, the Company recognized $35.9 million and $37.5 million of revenue, respectively, that was included in the deferred revenue balances as of December 31, 2020 and 2019, respectively.

Note 3. Income Taxes

For the three months ended September 30, 2021 and 2020, the Company recorded income tax expense of $1.6 million and $1.5 million, respectively, which reflects an effective tax rate of (146.0)% and 126.6%, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded income tax expense of $22.8 million and $4.6 million, respectively, which reflect an effective tax rate of (64.5)% and 147.0%, respectively. The increase in the income tax expense for the three and nine months ended September 30, 2021 was primarily driven by a change in valuation allowance for U.S. deferred tax assets and impairment of goodwill and intangible assets.

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The Company regularly assesses the need for a valuation allowance related to its deferred income tax assets, which includes consideration of both positive and negative evidence related to the likelihood of realization of such deferred income tax assets to determine, based on the weight of the available evidence, whether it is more-likely-than-not that some or all of its deferred tax assets will not be realized. In its assessment, the Company considers recent financial operating results, projected future taxable income, the reversal of existing taxable differences and tax planning strategies. During the nine months ended September 30, 2021, as a result of a U.S. cumulative loss over the last three years and lower financial expectations for the remainder of 2021, the Company concluded that it was not more likely than not that a portion of the U.S. deferred income tax assets would be realized. The Company provided a valuation allowance on U.S. federal and state net operating loss carryforwards, and other U.S. net deferred income tax assets that have a limited life and are not supportable by indefinite-lived intangibles deferred tax liability sourced income as of September 30, 2021. The Company accordingly recognized a charge of $21.5 million to establish a valuation allowance related to the U.S. deferred income tax assets which was recorded discretely in the quarter ended June 30,2021. In addition, the Company intends to continue maintaining a valuation allowance on its Israel and German deferred tax assets until there is sufficient evidence to support reversal of all or some portion of these allowances. There were no material changes to the facts or the amount of the valuation allowances as of September 30, 2021.

As of September 30, 2021 and December 31, 2020, the Company has $4.7 million and $4.6 million of unrecognized tax benefits, respectively, all of which would impact the effective tax rate if recognized. As of September 30, 2021 and December 31, 2020, the Company has recorded $0.5 million and $0.4 million of interest and penalties related to unrecognized tax benefits, respectively, all of which would impact the effective tax rate if recognized. The Company recognized an increase to interest and penalties of $0.1 million primarily due to U.S. tax credits and state nexus. The Company’s policy is to classify interest and penalties as a component of income tax expense. There were no significant changes to unrecognized tax benefits during the nine months ended September 30, 2021. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next twelve months. Based on the current status of German, U.S. federal, state, local and other foreign audits, the Company does not expect the amount of unrecognized tax benefits to significantly decrease in the next 12 months as a result of settlements of tax audits and/or the expiration of statutes of limitations.

As a matter of course, the Company may be audited by German, U.S. federal and state, Israeli, French, U.K. and other foreign tax authorities within the countries it operates. From time to time, these audits may result in proposed assessments. The Company was notified during 2020 that the Israeli tax authorities were auditing the Company's subsidiary, Spark Networks Ltd., for the tax years 2015-2019. There is minimal activity in the entity and while the Company does not expect adverse findings, any adverse finding could result in a reduction of the net operating loss carryforward, which has a full valuation allowance against it. The Company's two German entities are currently being audited by German tax authorities for the tax years 2017-2018 for Spark SE and for the tax years 2016-2018 for Spark GmbH. The Company is responding to questions and requests for information. At this point, there is no indication of any uncertainty with respect to both Israeli and German tax returns.

Note 4. Goodwill and Intangible Assets

The Company completes its annual goodwill impairment test during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment in one or more of its reporting units. 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. No triggering events were identified during the third quarter of 2021.

Goodwill

The following table summarizes the changes in the carrying amount of goodwill for the nine months ended September 30, 2021 and the year ended December 31, 2020:

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(in thousands)
Balance as of January 1, 2020$199,238 
Impairment charges(42,713)
Impact of currency translation57 
Balance as of December 31, 2020$156,582 
Impairment charges(21,786)
Impact of currency translation(37)
Balance as of September 30, 2021$134,759 

For the quarter ended June 30, 2021, as a result of the interim goodwill impairment test, the fair value of the Spark reporting unit exceeded the carrying amount, and as a result, no goodwill impairment was recorded. Goodwill assigned to the Spark reporting unit was $24.5 million. For the Zoosk reporting unit, the fair value did not exceed the carrying value, and the Company recorded a goodwill impairment charge of $21.8 million. The Company estimated the fair value of its reporting units utilizing a present value cash flow model. The Company believes this non-cash impairment charge does not impact its ability to generate cash flow in the future and it is not tax deductible. There was no additional goodwill impairment charge for the quarter ended September 30, 2021.

The total accumulated impairment loss of the Company's goodwill was $84.5 million and $62.7 million as of September 30, 2021 and December 31, 2020, respectively.

Intangible Assets

Intangible assets consists of the following as of September 30, 2021 and December 31, 2020:

September 30, 2021
(in thousands)Weighted-Average Remaining Amortization Period (Years)Gross Carrying AmountAccumulated Impairment ChargesAccumulated AmortizationCurrency Translation Impact on Carrying AmountNet Carrying Amount
Indefinite-lived intangible assets:
Brands and trademarks$63,800 $(21,260)$— $ $42,540 
Long-lived intangible assets:
Brands and trademarks0.186  (48)1 39 
Acquired technology1.75,910  (3,715) 2,195 
Customer relationships0.010,780  (10,760) 20 
Licenses and domains0.0205  (177)1 29 
Other0.0470  (459) 11 
Total intangible assets1.8$81,251 $(21,260)$(15,159)$2 $44,834 

December 31, 2020
(in thousands)Weighted-Average Remaining Amortization Period (Years)Gross Carrying AmountAccumulated Impairment ChargesAccumulated AmortizationCurrency Translation Impact on Carrying AmountNet Carrying Amount
Indefinite-lived intangible assets:
Brands and trademarks$63,800 $(10,960)$— $ $52,840 
Long-lived intangible assets:
Brands and trademarks0.13,025 (2,573)(409)4 47 
Acquired technology1.37,300  (3,997) 3,303 
Customer relationships0.411,420  (8,762) 2,658 
Licenses and domains0.0410  (361)3 52 
Other0.05,203  (5,102)(2)99 
Total intangible assets1.8$91,158 $(13,533)$(18,631)$5 $58,999 

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For the interim assessment for the quarter ended June 30, 2021, the Company recognized a Zoosk trademark impairment charge of $10.3 million. The Company estimated the fair value using an income approach, specifically the relief-from-royalty method, based on the present value of future cash flows. The Company used a royalty rate of 4.0% and discount rate of 14.5%. There was no additional impairment charge for the quarter ended September 30, 2021. No impairment charge was recorded for the long-lived intangible assets for the nine months ended September 30, 2021 and the year ended December 31, 2020.

Amortization expense for the nine months ended September 30, 2021 and the year ended December 31, 2020 were $3.9 million and $7.3 million, respectively.

At September 30, 2021, amortization of long-lived intangible assets for each of the next five years and thereafter is estimated to be as follows:

(in thousands)Amortization Expense
2021$363 
20221,280 
2023632 
20249 
20259 
Thereafter1 
Total estimated amortization expense$2,294 

Note 5. Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities consist of the following as of September 30, 2021 and December 31, 2020:

(in thousands) September 30, 2021December 31, 2020
Accrued advertising$8,358 $8,691 
Accrued employee compensation and benefits2,356 2,085 
Accrued professional fees1,504 1,819 
Accrued service providers1,716 2,433 
Accrued value-added, sales, and other non-income-based taxes7,835 8,897 
Current portion of income tax payable1,335 1,536 
Current portion of lease liabilities1,532 1,932 
Other2,102 1,036 
Accrued expenses and other current liabilities$26,738 $28,429 

Other liabilities consist of the following as of September 30, 2021 and December 31, 2020:

(in thousands) September 30, 2021December 31, 2020
Deferred payment to Zoosk's shareholders$11,249 $10,373 
Lease liabilities, less current portion4,364 4,650 
Sublease security deposit1,038 1,038 
Other1,469 1,480 
Other liabilities$18,120 $17,541 

Note 6. Long-term Debt

On July 1, 2019, in connection with the acquisition of Zoosk, the Company entered into a Loan Agreement with Zoosk, Spark Networks, Inc., the subsidiary guarantors party thereto, the lenders party thereto, and Blue Torch Finance LLC ("Administrative Agent"), as administrative agent and collateral agent (the "Senior Secured Facilities Agreement") that provides for a four-year $125.0 million Senior Secured Facility, maturing July 1, 2023 (the "Maturity Date"). The Senior Secured Facilities Agreement provides for a term loan facility in an aggregate amount equal to $120.0 million (the "Term Loan Facility") and a revolving
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credit facility in an aggregate amount equal to $5.0 million (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Facilities"). Borrowings under the Facilities bear interest at a rate equal to either LIBOR plus an applicable margin of 8.0% per annum.

Term Loan Facility

On December 2, 2020, the Company entered into the Second Amendment to Loan Agreement (the "Second Amendment" and together with the Term Loan Facility, the "Amended Term Loan Facility"), which established an additional $6.0 million of term loan commitment to its existing Term Loan Facility. The additional borrowing was applied to pay the quarterly Term Loan Facility principal and interest payments on December 31, 2020 and March 31, 2021. The Second Amendment was accounted for as a modification of debt, and as such, the third-party costs incurred in connection with the Second Amendment of approximately $1.3 million were expensed as incurred. The debt issuance costs of $1.3 million that were paid directly to the lender at the closing date were capitalized and will be amortized using the effective interest method over the term of the loan. The effective interest rate on the modified loan is 11.3%. The Second Amendment requires repayment of the principal amount of $0.15 million quarterly, beginning on March 31, 2021, in addition to the $3.0 million quarterly principal repayment of the original Term Loan Facility and the modified interest.

On March 5, 2021, the Company entered into a Limited Waiver under Loan Agreement (the "Limited Waiver") with the Administrative Agent and the lenders pursuant to which certain defaults under the Senior Secured Facilities Agreement were waived. In consideration of the Limited Waiver, the Company agreed to pay the Administrative Agent, for the ratable benefit of the lenders, a fee of $0.5 million upon the execution of the Limited Waiver, plus $0.3 million paid in kind by capitalizing such amount into the principal balance under the Senior Secured Facilities Agreement. The aggregated fees were capitalized and will be amortized using the effective interest rate of 11.8%. The aggregated outstanding principal balance of the existing Term Loan Facility and the Second Amendment is $88.7 million and $104.7 million as of September 30, 2021 and December 31, 2020, respectively. The amortized cost basis of the Amended Term Loan Facility is $84.7 million and $99.1 million as of September 30, 2021 and December 31, 2020, respectively.

In addition, pursuant to the terms of the Amended Term Loan Facility, within 5 days after the annual financial statements are required to be delivered to the lender, the Company is required to make a prepayment of the loan principal in an amount equal to a percentage of the excess cash flow, as defined in the Term Loan Facilities, of the most recently completed fiscal year. For the nine months ended September 30, 2021 and 2020, the Company made a prepayment of $6.8 million and $3.3 million, respectively.

Revolving Credit Facility

The $5.0 million Revolving Credit Facility has a commitment fee of 0.75% per annum on the unutilized commitments thereunder payable on the Maturity Date. As the Revolving Credit Facility is not expected to be drawn down, transaction costs and upfront fees totaling $0.3 million related to the Revolving Credit Facility were deferred and are being amortized over the term of the agreement. There were no outstanding borrowings under the Revolving Credit Facility as of September 30, 2021 and December 31, 2020.

Covenants

The Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, the Company's 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.

In addition, the Facilities, as revised by the Second Amendment, require the following financial covenants to be maintained: (i) a fixed charge coverage ratio of no less than 0.90 and 1.25 for the quarter ended September 30, 2021 and December 31, 2020, respectively, (ii) a net leverage ratio of no greater than 2.50 and 2.60 for the quarter ended September 30, 2021 and December 31, 2020, respectively, and (iii) a minimum liquidity threshold of $10.0 million at the end of each month following the closing date of the loan, consisting of available cash funds and availability under the Revolving Credit Facility. The Facilities also contain certain customary affirmative covenants and events of default, including a change of control. The Company is in compliance with all of its financial covenants as of September 30, 2021 and December 31, 2020.

Note 7. Contingencies

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The Company is involved in lawsuits, claims and proceedings incident to the ordinary course of business and establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where the Company believes an unfavorable outcome is not probable and, therefore, no reserve is established. Any claims against the Company, whether meritorious or not, could result in costly litigation, require significant amounts of management's time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, the Company believes that the ultimate resolution of these current matters will not have a material adverse effect on its liquidity, results of operations or financial condition.

Cybersecurity Matters

On July 22, 2020, a putative class action was filed against the Company and Zoosk in the U.S. District Court for the Northern District of California by individuals claiming to be Zoosk users whose information was affected by the 2020 security incident disclosed by Zoosk. The complaint, as subsequently amended, asserts that by reason of the Zoosk security incident Spark and Zoosk violated the California Consumer Privacy Act ("CCPA"), the California Unfair Competition Law ("UCL"), and common-law obligations. Based on these assertions, the complaint seeks statutory damages, compensatory damages, punitive damages, attorneys' fees, and injunctive relief. On December 14, 2020, plaintiffs voluntarily withdrew their claim under the CCPA. On January 30, 2021, the district court granted in part, and denied in part, Zoosk's motion to dismiss the remainder of the complaint for failure to state a claim by dismissing the UCL claim, but allowing the common-law claim to go forward. The court held in abeyance the Company's motion to dismiss itself on jurisdictional grounds and for failure to state a claim. The court granted plaintiffs limited jurisdictional discovery as to the Company. Zoosk answered the portion of the complaint that asserts the one remaining common-law claim by denying its material allegations and asserting a number of affirmative defenses. The court stayed the case pending resolution of the jurisdictional discovery. On May 6, 2021, plaintiffs voluntarily dismissed the Company from the case and the stay was lifted. On July 28, 2021, plaintiffs filed a second amended complaint re-alleging the UCL claim on behalf of a subclass. The court granted Zoosk’s motion to dismiss that amended claim on October 5, 2021. On October 28, 2021, plaintiffs sought leave to file a third amended complaint that re-alleges a UCL claim. The court is set to rule on that request on January 13, 2022. Zoosk and plaintiffs are currently engaged in discovery and the case is scheduled for trial commencing September 12, 2022.

Separately, a group of lawyers that is different from those who filed the putative class action described above filed 77 separate arbitration demands against Zoosk in the Judicial Arbitration and Mediation Services, Inc. ("JAMS") arbitration forum. Zoosk has objected that neither JAMS nor any arbitrator appointed by JAMS has authority to arbitrate any of these claims or to rule on the issue of arbitrability. JAMS has nonetheless determined to commence arbitration proceedings in regard to one of the arbitration claims filed to date and has appointed an arbitrator for that one claim. Zoosk is participating in that arbitration under protest and reserving its arbitrability objections. That arbitration is scheduled for hearing on January 18, 2022. JAMS has initiated three further arbitration claims previously filed and intends to proceed with those arbitrations if requisite fees are paid. Zoosk will continues to refuse to pay the respondents’ share but will participate under protest if the arbitration proceeds.

On May 5, 2021, the same group of attorneys that filed the arbitration demands, described above, filed a petition to compel arbitration in the U.S. District Court for the Northern District of California on behalf of three individuals claiming to be Zoosk users affected by the 2020 security incident. Counsel for the petitioners voluntarily dismissed the petition in its entirety on July 15, 2021.

Elite Connexion v. Spark GmbH

On September 20, 2018, Elite Connexion filed a cease and desist order and damage claim in France against Spark GmbH, alleging that Spark GmbH bid on search engine terms which violated an agreement between the parties. In Elite Connexion's claim, which was amended in September 2019, Elite Connection claimed damages for loss of profit, legal fees, and court fees. The parties agreed in principle to a settlement in September 2020 subject to negotiation of the settlement agreement. The Company recorded an accrual for the loss contingency in relation to a potential settlement of these matters. On August 10, 2021, the Company entered into a settlement agreement with Elite Connexion to settle the dispute. There was no material impact to the financial statement as of September 30, 2021.

Intellectual Property

Trademarks are an important element in running online dating websites and mobile applications. Given the large number of markets and brands, the Company deals with claims against its trademarks from time to time in the ordinary course of business. The Company vigorously defends against each of the above legal proceedings. In August 2021, the Company settled certain national trademark disputes in Europe.

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The Company may encounter future legal claims in the normal course of business.

At this time, management does not believe the above matters, either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition and believes the recorded legal provisions as of September 30, 2021 are adequate with respect to the probable and estimable liabilities. However, no assurance can be given that these matters will be resolved in the Company's favor.


Note 8. Financial Instruments and Fair Value Measurements

The Company records long-term debt at carrying value less unamortized discount and unamortized fees as it is not required to be carried at fair value on a recurring basis. The fair value of long-term debt was determined using observable inputs (Level 2). The valuation considers the present value of expected future repayments, discounted using a market interest rate equal to the interest margin on the borrowings and variable interest rate.

The following table presents the carrying values and the estimated fair values of long-term debt as of September 30, 2021 and December 31, 2020:

September 30, 2021December 31, 2020
(in thousands) Carrying ValueFair ValueCarrying ValueFair Value
Long-term debt, including current portion(1)
$84,667 $101,158 $99,146 $107,504 

(1) At September 30, 2021 and December 31, 2020, the carrying value of long-term debt is net of unamortized original issue discount and debt issuance costs of $4.0 million and $5.5 million, respectively.

The Company's financial instruments, including cash and cash equivalents, deposits, accounts receivable, and accounts payable are carried at cost, which approximates their fair value due to the short-term nature of these instruments. The Company does not have financial instruments that are measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020.

Note 9. Stock-based Compensation

Stock-based compensation expense reflects share awards issued under the Company's 2018 virtual stock option plan and the Long Term Incentive Plan adopted in 2020 (the "LTIP").

2020 Long Term Incentive Plan

In January 2020, the Administrative Board of the Company (the "Administrative Board") adopted the LTIP for applicable executives and employees of the Company and its subsidiaries as part of their remuneration for future services. The LTIP provides for the grant of virtual stock options. Each option represents the right to receive, upon exercise, a certain amount in cash determined based on the relevant American Depository Shares ("ADS") Stock Price of the option minus the strike price of such option; provided, however, that the Company may elect to settle options in ADSs or ordinary shares of the Company instead of cash at its sole discretion. The LTIP provides that the strike price can be set at any amount determined by the Administrative Board, including zero. Under the LTIP, the "ADS Stock Price" is, as of the grant date, the average closing price of one of the Company's ADSs trading on the NYSE American for the period of five trading days prior to such date. The Company classifies awards under the LTIP as equity-settled.

Options granted under the LTIP have a contractual term of 85 months and vest, subject to the employee's continued service to the Company, as follows: (i) 25% of the total number of options granted to a participant vest 12 months after the grant date of such option, and (ii) an additional 6.25% of such options shall vest at the end of each additional three-month period thereafter until the end of the 48th month after the relevant grant date.

In connection with the adoption of the LTIP, the Administrative Board authorized for 2020 the issuance of virtual options for up to three million ADSs, including up to one million zero-priced options. As of September 30, 2021, 142,097 virtual options, and 356,941 zero-priced options were available for future grant.

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The fair value of the virtual stock options and zero-priced options are measured using a Black-Scholes option-pricing model for the nine months ended September 30, 2021. The inputs used in the measurement of the fair values at the date of grant are summarized below:

Virtual Stock OptionsZero-Priced Options
Long CallShort CallLong CallShort Call
OptionOption (Cap)OptionOption (Cap)
Stock price
$3.21 - $5.42
$3.21 - $5.42
$3.21 - $5.42
$3.21 - $5.42
Strike price
$3.13 - $5.34
$31.30 - $53.40
$$50.00
Term
4.65 - 4.67
4.65 - 4.67
4.65 - 4.67
4.65 - 4.67
Volatility
62.7% - 64.0%
62.7% - 64.0%
62.7% - 64.0%
62.7% - 64.0%
Dividend % % % %
Risk-free rate
0.7% - 0.9%
0.7% - 0.9%
0.7% - 0.9%
0.7% - 0.9%

The following table summarizes the activity for the Company's options under the LTIP during the nine months ended September 30, 2021:

Number of OptionsWeighted Average Exercise PriceWeighted Average Remaining Contractual TermAggregate Intrinsic Value
(in years)
Outstanding as of December 31, 20201,550,000$4.746.22$0.90
Granted523,4004.50
Exercised(7,250)3.14
Forfeited(208,247)4.57
Outstanding as of September 30, 20211,857,903$4.705.88$0.05
Vested at September 30, 2021514,571

Number of OptionsWeighted Average Grant Date Fair Value
Unvested as of December 31, 20201,550,000$2.99
Granted523,4001.89
Vested(521,821)3.08
Forfeited(208,247)2.86
Unvested as of September 30, 20211,343,332$2.54


The following table summarizes the activity for the Company's zero priced options under the LTIP during the nine months ended September 30, 2021:

15


Number of Shares
Outstanding as of December 31, 2020