SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|☒||ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended December 31, 2022
|☐||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)
(State or other jurisdiction of
incorporation or organization)
Kohlfurter Straße 41/43
|(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|| |
| ||Name of each exchange on which registered|
|American Depository Shares each representing one-tenth of an ordinary share|| ||LOV|| |
The Nasdaq Stock Market, LLC
Ordinary shares, €1.00 nominal value per share*
* 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.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒
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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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|| |
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The aggregate market value of the registrant’s American Depository Shares held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $65.6 million.
The number of ordinary shares outstanding as of March 22, 2023 was 2,625,476.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Definitive Proxy Statement on Schedule 14A to be filed subsequently and delivered to shareholders in connection with the 2023 annual meeting of shareholders are incorporated herein by reference in response to Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the Registrant’s fiscal year ended December 31, 2022.
Table of Contents
As used herein, and unless the context suggests otherwise, the terms “the Company,” “Spark Networks,” “we,” “us” or “our” refer to Spark Networks SE and its consolidated subsidiaries.
WEBSITES USED IN THIS REPORT
Website addresses referenced in this Annual Report on Form 10-K are provided for convenience only, and the content on the referenced websites does not constitute a part of this Annual Report on Form 10-K.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This annual report contains statements that constitute “forward-looking statements” within the meaning of U.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause Spark Networks’ performance or achievements to be materially different from those of any expected future results, performance, or achievements. Forward-looking statements speak only as of the date they are made, and Spark Networks does not assume any duty to update forward-looking statements. Readers are cautioned that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. Words and expressions reflecting optimism, satisfaction, or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates,” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Forward-looking statements include, but are not limited to, statements about operating a diverse global platform of premium online dating sites and mobile applications (or “apps”), statements about providing exceptional user experience and driving stockholder value, statements about projected financial results, statements regarding Spark Network’s growth opportunities and initiatives, statements about the Company’s plans, objectives, expectations and intentions and other statements that are not historical facts. Such forward-looking statements are not guarantees of performance and actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, but are not limited to: risks related to the degree of competition in the markets in which Spark Networks operates; risk of a potential economic downturn; rising inflation and the government response thereto; the ability of Spark Networks to continue as a going concern; the ability of Spark Networks to retain and hire key personnel; Spark Networks’ ability to continue to control costs and operating expenses; Spark Networks’ ability to achieve its intended cost savings; Spark Networks’ ability to generate cash from operations, lower-than-expected revenue, credit quality deterioration or a reduction in net earnings; Spark Networks’ ability to raise outside capital and to repay debt as it comes due; Spark Networks’ ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new products introduced by Spark Networks’ competitors; Spark Networks’ ability to identify potential acquisitions; Spark Networks’ ability to successfully integrate acquired businesses and the ability of acquired businesses to perform as expected; Spark Networks’ ability to maintain strong relationships with branded channel partners; changes in Spark Networks’ stock price due to broader stock market movements and the performance of peer group companies; Spark Networks’ ability to enforce intellectual property rights and protect their respective intellectual property; Spark Networks' ability to comply with new and evolving government regulations relating to data protection and data privacy; consumer protection; geopolitical conflict; general competition and price measures in the market place; Spark Networks' ability to access capital; general economic conditions; and the other factors identified in Item 1.A “Risk Factors.”
Although Spark Networks believes the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The underlying expected actions and Spark Networks’ results of operations involve risks and uncertainties, many of which are outside the Company’s control, and any one of which, or a combination of which, could materially affect Spark Networks’ results of operations and whether the forward-looking statements ultimately prove to be correct. In light of the significant uncertainties inherent in the forward-looking statements, readers should not place undue reliance on forward-looking statements.
These forward-looking statements speak only as of the date on which the statements were made and Spark Networks does not undertake any obligation to update or revise any forward-looking statements made in this annual report or elsewhere as a result of new information, future events, or otherwise, except as required by law.
In addition to other factors and matters contained or incorporated in this document, the factors discussed under “Risk Factors” could cause actual results to differ materially from those discussed in the forward-looking statements.
Many of the factors that will determine Spark Networks’ future results are beyond Spark Networks’ ability to control or predict. Spark Networks cannot guarantee any future results, levels of activity, performance, or achievements.
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found elsewhere in this annual report.
Spark Networks cautions further that, as it is not possible to predict or identify all relevant factors that may impact forward-looking statements, the foregoing list should not be considered a complete statement of all potential risks and uncertainties.
Readers should carefully consider the cautionary statements contained or referred to in this section in connection with any subsequent forward-looking statements that may be issued by Spark Networks or persons acting on behalf of Spark Networks.
Note regarding trademarks
Except as indicated, the trademarks, trade names or service marks appearing in this annual report are the property of the Company. Solely for convenience, trademarks and trade names referred to in this annual report may appear without the symbol ® or TM, as applicable.
Item 1. Business.
When used in this report, the terms "we," "us," "our" and "the Company" refer to Spark Networks SE and its subsidiaries.
We are a leader in social dating platforms for meaningful relationships focusing on the 40+ demographic and faith-based affiliations. Since our inception, we have had 112 million users register with our dating platforms (which includes inactive accounts). We currently operate a portfolio of brands accessible to customers across the globe. However, our focus is in five key geographies – the United States of America ("U.S."), Canada, Australia, the United Kingdom ("UK") and France – from which we generate the majority of our revenues.
Our vision is to be the world’s leader in social dating for meaningful relationships. It encompasses the following pillars:
•We build world’s best dating communities focused on the 40+ age demographic and religious communities: our users are active, committed and sophisticated.
•We excel in customer safety, privacy and social dating features.
•We create engaging brands and innovative products to help our customers find true love seamlessly.
We offer services both via websites and mobile applications accessed mostly through 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.
Subscription revenue is our primary source of income, with membership subscriptions accounting for the vast majority of our revenue for the years ended December 31, 2022 and 2021, respectively. Subscription length ranges from one-month to 12-months, with most subscriptions renewing automatically unless the member opts to terminate the subscription. We also offer users "pay as you go" features and have a small but growing advertising revenue stream.
The majority of our users' activity is on mobile devices. We have created innovative and tailored mobile applications and plan to continue to improve the features, functionality and engagement of our mobile websites and applications.
Our American Depository Shares ("ADS") are traded on the Nasdaq Capital Market ("Nasdaq").
Our primary businesses are in the online personals industry, which fulfills the needs of single adults looking to meet a companion. Traditional methods such as offline dating services and public gathering places often do not meet the needs of single people. Offline dating services are time-consuming, expensive and offer a smaller number of potential partners. Public gathering places such as restaurants, bars and other social venues provide a limited opportunity to learn about others prior to a one-on-one meeting. In contrast, online personals services facilitate interaction between singles by allowing them to screen and communicate with a large number of potential companions before they meet in-person. With features such as detailed personal profiles, email, mobile chat and instant messaging, this medium allows users to communicate with other singles at their convenience and affords them the ability to meet multiple people in an anonymous, convenient and secure setting.
The global online personals industry has experienced significant growth in recent years. North America is currently the largest geographic market in the online personals industry, according to industry research. Industry research estimates that the dating services industry revenue in the U.S. is expected to increase an annualized 1.0% totaling $4.4 billion by 2027. In recent years, we have increased our market share in the United States through the launch of EliteSingles and SilverSingles in conjunction with the 2017 and 2019 acquisitions of the largely North American brands Jdate, Christian Mingle, JSwipe, and Zoosk.
Our Competitive Strengths
Portfolio of strong brands.
We own a portfolio consisting of some of the most well-known and highest quality dating brands. Our brands are primarily tailored to quality dating with real users looking for love and companionship in a safe, comfortable environment. With shared values being one of the most important factors in successful, long-term relationships, our portfolio holds some of the most established and well-respected value-based dating brands in the world.
The following is a list of our key brands:
Zoosk, EliteSingles, SilverSingles, Christian Mingle, Jdate and JSwipe
Diverse global platform.
We operate a diverse global platform of premium online dating sites and mobile applications. This diversified suite of dating sites and mobile applications allows us to implement best practices from each of the brands across our geographic footprint helps us to enable rapid and effective roll-out of new brands and products.
Operational and financial scale.
We are one of the largest online dating companies in the U.S. based on revenue. This allows for the operational and financial scale required for significant investments into new technologies and products, while also providing a better platform to attract and retain customers. Importantly, our marketing strength allows us to acquire a big enough pool of local customers at a national level to provide significant choice in potential partners.
Low-cost operating base in Berlin, Germany.
We have assembled highly skilled teams with deep domain expertise across marketing, technology, and product within our headquarters in Berlin, Germany. Today, Berlin has a lower cost of living, and in turn, lower salaries than other major cities in Europe or North America. As a result, we require less capital to recruit and retain key employees. This cost advantage has allowed us to allocate significant capital to growth investments like direct marketing while also maintaining and scaling profitably.
Grow in North America.
We continue to focus on expanding our presence in North America. In recent years, we have grown our North American market share through the (i) introduction of established European brands such as EliteSingles, (ii) launch of new brands such as SilverSingles, and (iii) acquisition of established North American brands such as Zoosk, Jdate, Christian Mingle and JSwipe.
We expect to continue to allocate significant marketing capital towards North America as we look to drive both the organic growth of our existing brand portfolio and expansion through the launch of new or acquired brands.
Cement and grow our leadership position in 40+ age demographic and religious dating segments.
We will continue to invest in product innovation, brand building, customer acquisition and partnerships to provide the best products and strongest brands in the premium and community-based dating areas. We intend to develop solutions and strengthen our brands that speak to the specific needs of our target audiences. In 2022, we developed updated versions of the EliteSingles app on iOS and Android, and we expect a launch in all markets by early third quarter of 2023. In addition, in 2022, we began to revamp our marketing approach for all our products with the aim of taking advantage of more effective and efficient modes of brand and performance marketing, such as TikTok and Instagram.
Create global technology services to enable flexible and powerful dating platforms.
We are developing new, scalable technology services that we believe will support future growth. We are designing and building our new services with a particular emphasis on supporting all platforms and applications that many of our members utilize to access our products. With shared services to power our platforms, we believe we can reduce the time and resources required to launch new brands or to integrate potential acquisitions, and more quickly adopt new features to trends and consumer preferences.
Markets and Geographical Presence of Spark Networks
We plan to continue to focus on premium online dating services catering to the 40+ demographic and faith-based affiliations. Our strategy includes a focus on developing new and maintaining existing products.
We currently operate a portfolio of brands accessible to customers across the globe. While we might enter new geographies in the future, our primary focus remains expanding our presence in North America, which we consider the most attractive market for further growth based on the relative size of the U.S. and Canadian markets and the potential for us to garner additional market share. We will also consider launching existing brands in markets where we already have a geographic presence to complement our service offerings and create a broader offering in these markets.
Industry research indicates that market demand is expected to have continued growth over the next five years as internet penetration continues to rise and continued trends towards destigmatizing online dating.
Sales and Marketing
We engage in a variety of marketing activities intended to drive consumer traffic to our websites and mobile applications and allow us the opportunity to introduce our products and services to prospective visitors, members and subscribers. Our marketing efforts are focused online and offline. Our online marketing approach employs a combination of search engine marketing, social media marketing and direct e-mail campaigns to attract potential members and paying subscribers, and use a network of online affiliates, through which we acquire traffic.
We supplement our online marketing by employing a variety of offline marketing. These include television, radio and podcasting. We believe a more consistent, targeted marketing message, delivered through an array of available marketing channels, will improve consumer awareness of our brands, drive more traffic to our products, and therefore increase the number of active users and paying subscribers.
Our customer support services aim to ensure an enjoyable, smooth and safe journey for all of our users. Our multi-lingual support teams provide comprehensive support for our users, which includes assisting members with billing questions, helping members complete personal profiles and answering technical questions. Customer support is also engaged in monitoring our products for fraudulent activity. Certain of our customer support services are provided by our third-party commercial partners, and all customer service personnel receive ongoing training in an effort to better personalize the experience for members and paying subscribers who contact us and to capitalize on upselling opportunities.
Our product teams are focused on the development and maintenance of products. They work in close cooperation with the technical teams, who build and manage our software and hardware infrastructure. We intend to continue investing in the development of new products, such as mobile applications, and enhancing the efficiency and functionality of our existing products and infrastructure.
Our network infrastructure and operations are designed to deliver high levels of availability, performance, security and scalability in a cost-effective manner.
We rely on a combination of patent, trademark, copyright and trade secret laws in the U.S., Europe and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brands. We also enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties.
Spark Networks, Spark, Zoosk, Jdate, Christian Mingle, SilverSingles and EliteSingles, amongst others, are registered trademarks in the U.S. Spark Networks, Zoosk, Jdate, Christian Mingle, EliteSingles and SilverSingles, amongst others, are registered trademarks in the European Union ("EU"). We also have a number of other registered and unregistered trademarks, and many of our trademarks are also registered in other jurisdictions, such as Switzerland, Iceland and Canada. Our rights to these registered trademarks generally continue as long as we use and renew them periodically.
We rely on internal and external controls, including applicable laws and regulations and contractual provisions with employees, contractors, customers and others, to protect and control access to our intellectual property rights.
We operate in a highly competitive environment with minimal barriers to entry. We believe the primary competitive factors in creating a community on the internet are functionality, brand recognition, reputation, critical mass of members, member affinity and loyalty, ease-of-use, quality of service and reliability. We compete with a number of large and small companies. Our principal online personals services competitors include Match Group (which operates the Match.com, OkCupid, Plenty of Fish, Tinder and Hinge brands), Bumble (which operates the Bumble and Badoo brands) and ParshipMeet Group (which operates the eHarmony, Parship, ElitePartner and Meet brands). In addition, we face competition in free and freemium mobile applications such as Tinder, Hinge and Bumble, as well as social networking sites such as Facebook.
Our business is regulated by diverse and evolving laws and governmental authorities in the European Union, North America and other jurisdictions in which we operate. We are subject to laws and regulations related to internet communications, privacy, consumer protection, security and data protection, intellectual property rights, commerce, taxation, entertainment, recruiting and advertising. These laws and regulations are becoming more prevalent, and new laws and regulations are under consideration by the European Union, individual EU Member States, the U.S. Congress, U.S. state legislatures and other governments. Failure by us to comply with existing laws and regulations may subject us to liabilities. New laws and regulations governing such matters could be enacted or amendments may be made to existing regulations at any time that could adversely impact our services. Plus, legal uncertainties surrounding domestic and foreign government regulations could increase our costs of doing business, require us to revise our services, prevent us from delivering our services over the internet or slow the growth of the internet, any of which could materially adversely affect our business, financial condition and results of operations. For more information on the risks and related matters, see e.g. “Risk Factors." The varying and rapidly evolving regulatory framework on privacy and data protection across jurisdictions could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.”
Human Capital Disclosure
As a human-capital intensive business, we believe the long-term success of our firm depends on our people. We are not only striving for communities and relationships that last for our users but also for our workforce by establishing a supportive and empowering culture. Our goal is to ensure that we have the right talent in the right place at the right time.
As of December 31, 2022, we had approximately 271 employees based in Germany and the U.S.
We monitor and evaluate various turnover and attrition metrics. We believe our annualized turnover among our high performing personnel is healthy for our industry, which we attribute to our strong values-based culture, commitment to career development, attractive compensation and benefit programs, and an inclusive, diverse and safe work environment.
Value Based Culture
We strive to attract individuals who are people-focused and share our core values. We promote recognition of behavior, initiatives, and projects which model our values across the organization. We continue to intensely focus on creating a highly engaged workforce, driving improvements across our communications, our culture, our reward programs, and our work environment and fostering a collaborative, inclusive and inspiring experience for all of our employees. These efforts are reflected in a strong commitment across our workforce. The results of our Year End 2022 Annual Employee Survey, which was completed by 79% of our workforce, revealed that more than 84% of our employees are satisfied with their employment and 86% are motivated to achieve our goals. 91% of our employees confirmed that we offer a supportive work environment. None of our employees is covered by a collective bargaining agreement, and we consider our employee relations to be good.
Commitment to Career Development
We prioritize and invest in creating opportunities to help employees grow and build their careers, through a multitude of training and development programs. We offer our employees several tools to help in their personal and professional development, including career development plans, and in-house learning opportunities, including Spark Academy (our in-house education program offering online, instructor-led and on-the-job learning formats). In addition, we invest in our executive talent through succession planning and individualized development planning.
Attractive Compensation and Benefit program
We are committed to providing a total compensation package to our employees that is market-competitive and performance based, with the goal of driving innovation and operational excellence. One of our primary objectives with respect to employee compensation is to attract and retain the best possible employee talent, to link annual compensation and long-term stock-based compensation to achievement of measurable corporate goals and individual performance, and to align employee’ incentives with stockholder value creation. Total direct compensation is generally positioned within a competitive range of the market median, with differentiation based on tenure, skills, proficiency, and performance to attract and retain key talent.
Diversity and Inclusion
Our employees reflect the communities in which we live and work. As of December 31, 2022, approximately 51% of our overall workforce are women. Our six person Board consists of three female directors, and one of the members of our Board is African American. Our Board, CEO and senior executives model high standards of diversity, equity and inclusion. We believe that that the diversity of our management and workforce is key to our success.
Healthy Work Environment
During 2022, we continued to focus significant attention on the effective handling of the COVID-19 pandemic. Our response has included a reorganization of our office plans to ensure compliance with social distancing and hygiene requirements and a safe work environment. We made additional investments in company-wide engagement events to ensure connectivity and collaboration across the organization and implemented the use of flexible and remote work arrangements and other creative solutions. We also modified training programs to comply with distancing requirements, limited visitor entry, increased virtual meetings, and provided additional support through mental and behavioral health resources. We also developed resources to support employees and their families with additional time off, flexible schedules and employer paid benefits.
Spark Networks SE was incorporated as a European stock corporation (Societas Europaea, SE) with the legal name Blitz 17-655 SE under the laws of Germany and the EU, with entry into the German commercial register on April 5, 2017, by its stockholders, Blitzstart Beteiligungs Ltd. and Blitz Beteiligungs GmbH. The Company was acquired by Affinitas GmbH on April 12, 2017, for the purpose of becoming the ultimate holding company of Spark Networks, Inc., a Delaware corporation (“Spark”), and Spark Networks Services GmbH (f/k/a Affinitas GmbH), a German limited company (“Affinitas”) following the completion of the merger between Spark and Affinitas (the “Affinitas / Spark Merger”). On August 29, 2017, Spark Networks SE changed its name from Blitz 17-655 SE to Spark Networks SE. Spark Networks SE is registered with the commercial register (Handelsregister) of the local court (Amtsgericht) of Munich, Germany, under the registration number HRB 232591 under the legal name Spark Networks SE. Spark Networks SE currently does not use a commercial name different from its legal name. Spark Networks SE has been formed for an unlimited duration.
On November 2, 2017, we completed the Affinitas / Spark Merger pursuant to the Agreement and Plan of Merger dated May 2, 2017.
On July 1, 2019, we completed the acquisition of Zoosk whereby we acquired 100% of Zoosk's shares for a combination of cash and Spark Networks ADS. Prior to the acquisition, Zoosk was an unrelated third party and owner of the Zoosk platform, which is a leading global online dating platform.
We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports with the Securities and Exchange Commission (“SEC”). You may obtain copies of these documents by accessing the SEC’s website at www.sec.gov. In addition, as soon as reasonably practicable after such materials are furnished to the SEC, we make copies of these documents available to the public, free of charge, through our website. Our website address is www.spark.net.
As a European stock corporation incorporated in Germany, we are subject to the laws of Germany and the EU. Our fiscal year is the calendar year.
Item 1A. Risk Factors.
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks described below, together with the other information contained in this annual report, including our consolidated financial statements and the related notes and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. We cannot assure you that any of the events discussed below will not occur. These events could have a material and adverse impact on our business, financial condition, results of operations and prospects. If that were to happen, the trading price of our ordinary shares could decline, and you could lose all or part of your investment.
Risk Factors Summary:
The risk factors summarized and detailed below could materially harm our business, operating results and/or financial condition, impair our future prospects and/or cause the price of our common stock to decline. These are not all of the risks we face and other factors not presently known to us or that we currently believe are immaterial may also affect our business if they occur. Material risks that may affect our business, operating results and financial condition include, but are not necessarily limited to, those relating to the following:
Risks Related to our Business, Brands, and Operations
•Establishing and maintaining strong brands;
•Our failure to meet the listing requirements of the Nasdaq Capital Market, resulting in a de-listing of our securities;
•The requirements of being a public company may strain our resources and divert management’s attention;
•Global economic conditions could materially adversely affect our revenue and results of operations;
•The dating industry is competitive with low barriers to entry, low switching costs and new products and entrants;
•Attracting new members, converting members into paying subscribers and retaining our paying subscribers;
•The ability to attract and retain users through cost-effective marketing efforts;
•Distribution and marketing of our products depends on third party publishers, platforms and mobile app stores;
•Access to our products depends on mobile app stores and other third party platforms;
•The possibility that revenue could be adversely affected if subscriptions cannot be automatically renewed;
•Inappropriate actions by certain users may damage our brand reputation;
•From time-to-time we pursue acquisitions that entail significant execution, integration and operational risks;
•Our success depends on our ability to identify, hire, develop, motivate and retain highly skilled individuals;
•Frequent turnover of our top executives;
•Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a “going concern.”;
•Failure to maintain an effective system of internal control over financial reporting;
•Risks relating to operations in international markets;
•Foreign currency exchange rate fluctuations;
•Risks related to Silicon Valley Bank ("SVB") events occurring in March, 2023
•Risks related to COVID-19; and
•Impairment risk of goodwill, intangible assets and other long-lived assets.
Risks Relating to Information Technology and Intellectual Property
•Failure to adequately protect our intellectual property rights or accusations of infringement of third-party intellectual property rights;
•Failure to keep pace with rapid technological change;
•Communicating with users and erosion of such ability could have an adverse effect;
•The integrity of our systems, infrastructure and ability to enhance, expand and adapt these systems and infrastructure in a timely and cost-effective manner;
•Services are highly technical and may contain undetected bugs or errors;
•Past cybersecurity incidents in the past and anticipation of being the target of future attacks;
•Reliance on third-party providers who may fail to continue to perform;
•Dependence on third parties to drive traffic to our websites;
•Growth and maintenance of the Internet;
•Ability to access, collect and use personal data about our users;
•Risks related to credit card payments;
•Certain open-source software risks;
•Credit card fees and chargeback costs of credit card companies;
•Loss or material modification of our credit card acceptance privileges; and
•User metrics subject to inherent challenges in measurement.
Risks Relating to our Indebtedness
•Level of indebtedness and compliance with our Financing Agreement (as defined below);
•Ability to generate sufficient cash to service all of our indebtedness; and
•The potential replacement of LIBOR with an alternative reference rate.
Risks Related to Government Regulation and Litigation
•Claims relating to the rapidly evolving regulatory framework on privacy, and consumer protection laws across jurisdictions;
•Litigation and legal risks from various U.S. states and government agencies, due to lack of U.S. federal data privacy legislation;
•Publisher liability for information made available on our sites or apps;
•Being subject to complex international laws;
•Risks relating to the United States Foreign Corrupt Practices Act of 1977 ("FCPA");
•Failure to comply with U.S. securities laws;
•Risk associated with operating as a U.S. public company;
•Difficulty enforcing civil liability against Spark Networks or members of its Administrative Board; and
•Changes in tax treatment of companies engaged in e-commerce.
Risks Relating to the Spark Networks ADSs
•Dilution of ownership interests and voting power;
•Limited trading volume for Spark Networks’ ADSs which can reduce liquidity and increase volatility;
•Fluctuation in the price of Spark Networks’ ADSs
•Differing rights as a holder of ADSs representing ordinary shares in a German company compared to rights a Stockholder of a U.S. corporation;
•Holders of ADSs do not have the same voting rights as actual stockholders, and holders of ADSs have less access to information and less opportunity to exercise rights as a holder of ADSs compared to a holder of ordinary shares.
•Principal stockholders own a significant percentage of the Company’s ordinary shares;
•Right to dividends or distributions on the Company’s ordinary shares as a holder of ADSs;
•Holders of ADSs may be unable to claim tax credits or refunds to reduce German withholding tax on dividends; and
•Adverse tax consequences if Spark Networks is classified as a passive foreign investment company.
Risks Relating to Our Business and Operations
Our business depends on establishing and maintaining strong brands, and if we are not able to maintain and enhance our brands, we may be unable to expand or maintain our member and paying subscriber bases.
We believe that establishing and maintaining our brands is essential to our efforts to attract and expand our member and paying subscriber bases. We believe that the importance of brand recognition will continue to increase, given the growing number of online dating sites and applications and the low barriers to entry for companies offering online dating and other types of personals services. To attract and retain members and paying subscribers, and to promote and maintain our brands in response to competitive pressures, we may have to substantially increase our financial commitment to creating and maintaining our distinct brands. A number of factors could negatively affect user retention, growth and engagement, including if:
•visitors, members and paying subscribers to our products do not perceive our existing services to be of higher quality;
•we introduce new services or enter into new business ventures that are not favorably received by such parties;
•users feel that their experience is diminished as a result of the decisions we make with respect to the frequency, prominence, format, size and quality of advertisements that we display;
•there are decreases in user sentiment due to questions about the quality or usefulness of our products or concerns related to safety, security, well-being of users or other factors;
•users are no longer willing to pay for subscriptions or in-app purchases;
•users have difficulty installing, updating or otherwise accessing our products on mobile devices as a result of actions by us or third parties that we rely on to distribute our products and deliver our services;
•we fail to keep pace with evolving online, market and industry trends (including the introduction of new and enhanced digital services);
•initiatives designed to attract and retain users and engagement are unsuccessful or discontinued, whether as a result of actions by us, third parties or otherwise;
•third-party initiatives that may enable greater use of our products are discontinued;
•we adopt terms, policies or procedures related to areas such as user data and privacy or advertising that are perceived negatively by our users or the general public;
•we, our partners or companies in our industry are the subject of adverse media reports or other negative publicity;
•there is decreased engagement with our products as a result of changes in prevailing social, cultural or political preferences in the markets where we operate.
If any of the foregoing, among other events, occur, the value of our brands could be diluted, thereby decreasing the attractiveness of our websites and mobile applications to such parties. As a result, our results of operations may be adversely affected by decreased brand recognition or negative brand perception.
Our common stock is listed on the Nasdaq Capital Market but there can be no assurance that we will be able to comply with the continued listing standards of Nasdaq in the future.
We cannot assure you that we will be able to comply with the standards that we are required to meet in order to maintain a listing of our common stock on Nasdaq in the future. Nasdaq listing rules require us to maintain a certain closing bid price, shareholders’ equity, and other financial metric criteria, as well as certain corporate governance requirements, for our common stock to continue trading on Nasdaq. If we fail to comply with the continued listing standards, our common stock could be delisted. In the event of a delisting, we would likely take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our securities, prevent our common stock from dropping below the Nasdaq's minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
The requirements of being a public company may strain our resources and divert management’s attention.
We are subject to the reporting requirements of the Exchange Act, as amended, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the Nasdaq Capital Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and may continue to increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our systems and resources. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. In addition, complying with public disclosure rules makes our business more visible, which could result in threatened or actual litigation by competitors and other third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results.
Global economic conditions could materially adversely affect our revenue and results of operations.
Our business has been and may continue to be affected by factors that are beyond our control, such as general geopolitical conditions, the invasion of Ukraine and the sanctions imposed in response thereto, economic and business conditions, conditions in the financial markets, and changes in the overall demand for dating subscriptions. A severe and/or prolonged economic downturn could adversely affect our customers’ financial condition and the levels of business activity of our customers. Weakness in, and uncertainty about, global economic conditions may cause businesses to postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for networking products. Adverse changes in economic conditions, including inflation, slower growth or recession, barriers to trade, changes to fiscal and monetary policy, tighter credit, higher interest rates, high unemployment and currency fluctuations could adversely impact consumer confidence and spending and correspondingly the demand for our subscriptions and make it more challenging to forecast our operating results and make business decisions.
The uncertainty in global and regional economic conditions have also affected the financial markets and financial institutions on which we rely and have resulted in a number of adverse effects including a low level of liquidity in many financial markets, extreme volatility in credit, equity, currency and fixed income markets, instability in the stock market, high inflation and high unemployment. Macroeconomic weakness and uncertainty also make it more difficult for us to accurately forecast revenue, gross margin and expenses. If we are unable to successfully anticipate changing economic, geopolitical and financial conditions, we may be unable to effectively plan for and respond to those changes which could further disrupt our business or limit our ability to access certain assets and materially adversely affect our business and results of operations.
Furthermore, uncertainty about, or worsening of economic conditions could adversely affect consumer sentiment and demand for our products and services. Consumer confidence and spending could be adversely affected by financial market volatility, negative financial news, conditions in the real estate, mortgage and technology markets, declines in income or asset values, changes to fuel and other energy costs, labor reductions, labor and healthcare costs and other economic factors. This could also impact the quantity of products our customers decide to purchase from us. These and other economic factors could materially and adversely affect our revenue and results of operations.
The dating industry is competitive, with low barriers to entry, low switching costs and new products and entrants constantly entering the market.
The dating industry is competitive, with new products and entrants constantly being developed and released. Some of our competitors may enjoy better competitive positions in certain geographical regions or user demographics that we currently serve or may serve in the future. These advantages could enable these competitors to offer products that are more appealing to users and potential users than our products, or to respond more quickly and/or cost-effectively than us to new or changing opportunities. The attractiveness of these products could also allow these companies to sell their products at higher prices and with higher margins.
We compete with traditional personals services, as well as newspapers, magazines and other traditional media companies that provide personals services. We also compete with a number of large and small companies, including internet portals and specialty-focused media companies that provide online and offline products and services to the markets served. Principal online personals services competitors include Match Group (which operates the Match.com, OkCupid, Plenty of Fish, Tinder and Hinge properties), Bumble (which operates the Bumble and Badoo brands) and ParshipMeet Group (which operates the eHarmony, Parship, ElitePartner and Meet brands). In addition, we face competition in free and freemium mobile applications such as Tinder, Bumble and Hinge or applications that compete in one of our niches such as Match Group's Upward as well as social networking sites like Facebook. Some of our competitors have longer operating histories, greater financial, technical, marketing and other resources and larger customer bases than we currently have. These factors may allow competitors to respond more quickly to new or emerging technologies and changes in customer preferences. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies that may allow them to build larger member and paying subscriber bases. Our competitors may develop products or services that are equal or superior to our products and services or that achieve greater market acceptance than our products and services. These activities could attract members and paying subscribers away from our websites and mobile applications and reduce our market share. Customers may utilize multiple dating services simultaneously, and cease using a particular service that comparatively lags behind or is duplicative of another service.
Further, within the online dating industry generally, costs to develop new products are comparatively low and costs for consumers to switch between products are low as well, resulting in significant customer churn and low brand loyalty. As a result, new products, entrants and business models are likely to continue to emerge. It is possible that a new product could gain rapid scale at the expense of existing brands through harnessing a new technology or distribution channel, creating a new approach to connecting people or some other means. If we are not able to compete effectively against our current or future competitors, whether or not such competitors operate traditional or non-traditional platforms, the size and level of engagement of our user base may decrease, which could have an adverse effect on our business, financial condition and results of operations.
We believe that our ability to compete depends upon many factors both within and beyond our control, including the following:
•brand strength in the marketplace relative to competitors;
•attractiveness to target niches;
•the size and diversity of member and paying subscriber bases;
•efficacy in user acquisition and marketing optimization;
•the timing and market acceptance of our products and services, including developments and enhancements to products and services relative to those offered by our competitors; and
•customer service and support efforts.
If our efforts to attract new members, convert members into paying subscribers and retain our paying subscribers are not successful, or if our users decrease their level of engagement with our products, our revenue and operating results will suffer.
Since we launched in 2008, we and our constituent companies have had 112 million users register with our dating platforms. A registration is deemed complete once a user has inserted an email/password combination, accepted the terms of service and clicked the registration button in order to create a profile with the respective site (such user, a “registered user”).
For the year ended December 31, 2022, we had an average of approximately 811,000 paying members across all of our platforms. The vast majority of our revenue is generated by users that pay a subscription fee. Our future growth depends on our ability to attract new members that fit within our target audience, convert members into paying subscribers, retain our paying subscribers and maintain or grow user engagement of our products. This in turn depends on our ability to deliver a relevant, high-quality online personals experience to these members and our ability to remain attractive to our existing and potential paying customers. As a result, we must continue to invest significant resources in order to enhance our existing products and services and introduce new high-quality products and services that people will use. If we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis, we may lose existing members and paying subscribers and may fail to attract new members and paying subscribers. We cannot assure that we will be able to grow or even maintain the current size of our subscriber base. If we do not constantly attract new paying subscribers at a faster rate than subscription terminations, we will not be able to maintain or increase our current level of revenue. Our revenue and expenses will also be adversely affected if our innovations are not responsive to the needs of our members and paying subscribers or are not brought to market in an effective or timely manner.
Our growth and profitability rely, in part, on our ability to attract and retain users through cost-effective marketing efforts. Any failure in these efforts could adversely affect our business, financial condition and results of operations.
Our costs to acquire paying subscribers are dependent, in part, upon our ability to purchase advertising at a reasonable cost. Our advertising costs vary over time depending upon a number of factors, many of which are beyond our control. Historically, we have used online and offline advertising as the primary means of marketing our services. During 2022, cost of revenue, exclusive of depreciation and amortization, decreased compared to the prior year in 2021 as a result of a reduction in marketing spend.
Evolving consumer behavior can affect the availability of profitable marketing opportunities. To continue to reach potential users and grow our businesses, we must identify and devote more of our overall marketing expenditures to newer advertising channels, such as mobile and online video platforms, as well as targeted campaigns in which we communicate directly with potential, former and current users via new virtual means. Positive user experiences can provide gratuitous promotional opportunities for us, as satisfied subscribers can encourage others to join; we can also capitalize on such success stories in our marketing. Generally, the opportunities in and sophistication of newer advertising channels are relatively undeveloped and unproven, and there can be no assurance that we will be able to continue to appropriately manage and fine-tune our marketing efforts in response to these and other trends in the advertising industry. Any failure to do so could adversely affect our business, financial condition and results of operations.
In addition, the cost of online and/or offline advertising has increased over time. If we are not able to reduce our other operating costs, increase our paying subscriber base or increase revenue per paying subscriber to offset increased marketing costs, our profitability will be adversely affected.
Distribution and marketing of our dating products depends, in significant part, on a variety of third-party publishers, platforms. If these third parties limit, prohibit or otherwise interfere with the distribution or marketing of our dating products in any material way, it could adversely affect our business, financial condition and results of operations.
We market and distribute our dating products (including related mobile applications) through a variety of third-party publishers and distribution channels. Our ability to market our brands on any given property or channel is subject to the policies of the relevant third party. Certain publishers and channels have, from time to time, limited or prohibited advertisements for dating products for a variety of reasons, including as a result of poor behavior by other industry participants. There is no assurance that we will not be limited or prohibited from using certain current or prospective marketing channels in the future. If this were to happen in the case of a significant marketing channel and/or for a significant period of time, our business, financial condition and results of operations could be adversely affected.
We also rely on large tech platforms such as Google for performance marketing. In the event that we are no longer able to conduct and performance marketing through such platforms, including because of increased costs of advertising on these platforms, or changes in government regulations in the countries where we advertise through these platforms (for example, under the EU Digital Services Act, online platforms must ensure that users can easily identify advertisements and understand who presents or pays for the advertisement), our user acquisition and revenue stream may be materially adversely affected. Any of these events could materially adversely affect our business, financial condition and results of operations.
Finally, many users historically registered for (and logged into) platforms using their Facebook profiles, Apple IDs or Google Account. While users can register for (and log into) our products through other methods, many users still choose to log in using their third-party services. Facebook, Apple and Google have broad discretion to change their terms and conditions in ways that could limit, eliminate or otherwise interfere with our users’ ability to use Facebook, Apple or Google as a registration or log in method. Our business, financial condition and results of operations could therefore be materially adversely affected if this were to occur. Additionally, if security on Facebook, Apple or Google is compromised, if our users are locked out from their accounts on Facebook, Apple or Google or if Facebook, Apple or Google experiences an outage, our users may be unable to access our products. As a result and even if for a limited time, user growth and engagement on our service could be materially adversely affected and we may owe users refunds.
Access to our products depends on mobile app stores and increasing adoption and enforcement by Apple App Store or Google Play Store of policies that limit, prohibit or eliminate our ability to distribute or update our applications through their stores, or increase the costs to do so, could materially adversely affect our business, financial condition and results of operations.
Our mobile applications are primarily accessed through the Apple App Store and the Google Play Store. As our user base continues to shift to mobile solutions, we increasingly rely on the Apple Store and Google Play Store to distribute our mobile applications and related in-app products. While our mobile applications are free to download from these stores, we offer our users the opportunity to purchase paid subscriptions through these applications, as well as certain add-on features. We determine the prices at which these subscriptions and features are sold and, in exchange for facilitating the purchase of these subscriptions and features from these stores, we pay Apple and Google, as applicable, a considerable share of the revenue we receive from these transactions. As the distribution of our dating products through app stores increases, we will need to offset any increased app store fees, as well as limitations imposed on us by Apple and Google when offering add-on features,(e.g. limitation of allowing only one reoccurring subscription per user) by decreasing traditional marketing costs, increasing subscription costs, or by engaging in other efforts to increase revenue or decrease costs generally, or our business, financial condition and results of operations could be adversely affected.
We are subject to both Apple's and Google's standard terms and conditions for app developers, which govern the promotion, distribution and operation of our apps. Each platform has broad discretion to change and interpret its standard terms and conditions and other policies with respect to us and those changes may be unfavorable to us. For example, there is no assurance that Apple or Google will not limit or eliminate or otherwise interfere with the distribution of our apps, including our ability to make bug fixes or other feature updates or upgrades, our ability to access native functionality or other aspects of mobile devices, and our ability to access information about our users that they collect. If we violate, or if a platform provider believes we have violated, these terms and conditions (or if there is any change or deterioration in our relationship with these platform providers), the particular platform provider may discontinue or limit our access to that platform, which could prevent us from making our apps available to or otherwise from serving our mobile customers. Any limit or discontinuation of our access to any platform could adversely affect our business, financial condition or results of operations. In the past, Apple and Google have removed or have threatened to remove our apps from their Stores and we have had to modify those apps in order to regain acceptance or prevent removal. Both the review process itself and any necessary resubmissions to Apple or Google require a significant amount of resources and can cause delays in the availability of our products. If this recurs on a prolonged or frequent basis, or other similar issues arise that impact users’ ability to download or use our apps, we may owe some of our customers refunds and/or lose revenue, which would increase our expenses and lower our gross margins. Delay or failure to gain Apple's or Google's acceptance — and, therefore, availability in the App Store — could adversely affect our business, financial condition or results of operations.
Our revenue could be adversely affected if subscriptions cannot be automatically renewed.
We generally provide our premium memberships pursuant to one-month, three-month, six-month and twelve-month subscriptions, which are generally automatically renewed unless canceled by the subscriber. In each of the years ended December 31, 2022 and 2021, subscription revenue accounted for over 94% of our total revenue. Although we have historically experienced a high percentage of subscribers that choose an auto-renewal payment option, a significant portion of our members may choose not to do so in the future or we may encounter difficulties during the technical processing of the renewal of credit card processing due to, for instance, the expiration or blocking of the applicable credit card. We have taken steps to increase renewal rates by, for example, improving the auto-renewal success, but there can be no assurance that these efforts will remain successful in maintaining, or increasing renewal rates in the future.
Recent legislation in Germany and France has imposed additional obligations on providers of subscription services regarding the automatic renewal and cancellation of online subscriptions. Similar laws regulating subscription payments and limiting the use of auto-renewals have been adopted or are being considered in many U.S. states, as well as Canada. To the extent that we must reduce, eliminate, or change the use of auto-renewals in these or other markets, renewal rates may fall, potentially reducing the number of subscription users or revenue earned on renewals. Consequently, the growth of subscription revenue will depend significantly on attracting new subscription users, and this dependence could increase due to regulations concerning auto-renewal that are outside of our control. Any failure to maintain or improve the renewal rates of membership subscription users or to attract new subscription users could have a material adverse effect on results of operations.
Moreover, the EU's Payment Services Directive 2 (PSD2), which applies stringent rules for payments and credit card processing in the EU, requiring users to take additional security steps when paying online. PSD2 could have an adverse effect on the authorization level of users in EU countries and in particular, France.
Inappropriate actions by certain of our users could be attributed to us and damage our brands’ reputations, which in turn could adversely affect our business.
The reputation of our brands may be adversely affected by the actions of our users that are deemed to be hostile, offensive, defamatory, inappropriate or unlawful. While we monitor and review the appropriateness of the content accessible through our dating products and have adopted policies and technical solutions to address and prevent illegal, offensive or inappropriate use of our dating services, our users could nonetheless engage in activities that violate our policies or circumvent the solutions. These safeguards may not be sufficient to avoid harm to our reputation and brands, especially if such hostile, offensive or inappropriate use is well-publicized.
Online scammers and other similar groups use our services and products to engage in illegal activities and it is likely that as more people use our services, these groups will increasingly seek to misuse our products. Although we invest significant resources to combat these activities, including suspending or terminating accounts we believe violate our guidelines, these groups continue to seek ways to act inappropriately and illegally on our services. Combating these groups requires our engineering and customer service teams to divert significant time and focus from improving our services. If such fraudulent accounts increase on our products, this could hurt our reputation, result in legal action and deter people from using our products.
In addition, it is possible that a user of our services could be physically, emotionally, or otherwise harmed by an individual that such user met through the use of one of our services. While we check profiles and monitor for fraudulent and inappropriate activity, we are not certain that the risk of harm posed by other individuals can be eliminated. If one or more of our users suffers or alleges to have suffered any such harm, we could experience negative publicity or legal action that could damage our reputation and our brands. Similar events affecting users of our competitors’ dating services could result in negative publicity for the dating industry, which could in turn negatively affect our business. Concerns about such harms and the use of dating services and social networking platforms for illegal conduct, such as romance scams and financial fraud, could produce future legislation or other governmental action that could require changes to our dating services, restrict or impose additional costs upon the conduct of our business generally, subject us to liability for user conduct or cause users to abandon our dating services.
From time-to-time we pursue acquisitions that entail significant execution, integration and operational risks.
From time-to-time we may pursue acquisitions, with the objective of creating a combined company that we believe can achieve increased cost savings and operating efficiencies through economies of scale, especially in the integration of administrative services. We may seek to make additional acquisitions in the future to increase our scale and profitability. We have consummated several acquisitions, including (i) the acquisition of Zoosk, Inc. in July 2019, pursuant to which Zoosk became a wholly owned subsidiary of Spark Networks; (ii) the merger of Affinitas and Spark Networks, Inc., a publicly listed Delaware corporation (“Spark”) and owner of the Jdate, Christian Mingle, and JSwipe platforms, among others in November 2, 2017, (iii) the acquisition of Samadhi, owner of the Attractive World in September 2016. We expose ourselves to operational and financial risks in connection with historical and future acquisitions if we are unable to:
•properly value prospective acquisitions, especially those with limited operating histories;
•fully identify potential risks and liabilities associated with acquired businesses;
•successfully integrate the operations, as well as the accounting, financial controls, management information, technology, human resources and other administrative systems of acquired businesses with our existing operations and systems;
•successfully identify and realize potential synergies among acquired and existing businesses;
•retain or hire senior management and other key personnel at acquired businesses; and
•successfully manage acquisition-related strain on our management, operations and financial resources and those of the various brands in our portfolio.
Furthermore, we may not be successful in addressing other challenges encountered in connection with our acquisitions. The anticipated benefits of one or more of our acquisitions may not be realized or the value of goodwill and other intangible assets acquired could be impacted by one or more continuing unfavorable events or trends, which could result in significant impairment charges. The occurrence of any of these events could have an adverse effect on our business, financial condition and results of operations. While we have successfully integrated acquisitions in the past, such as in the Affinitas / Spark Merger, we cannot provide assurance that we will experience similar success with future acquisitions.
Acquisitions also involve operational risks and uncertainties, such as unknown or contingent liabilities with no available manner of recourse, exposure to unexpected problems, the retention of key employees and customers, and other issues that could negatively affect our business. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business.
Our success will depend on our continued ability to identify, hire, develop, motivate and retain highly skilled individuals.
The continued contributions of our senior management are especially critical to our success. In particular, the loss of Chelsea Grayson, our Chief Executive Officer ("CEO"), David Clark our Chief Financial Officer, and/or Frederic Beckley, our Chief Administrative Officer and General Counsel, could materially and adversely affect us. For a discussion of our senior management, see Item 10—Directors, Executive Officers and Corporate Governance included in PART III of this report. Our continued ability to compete effectively depends, in part, upon our ability to attract new employees. While we have established programs to provide incentives to retain existing employees, particularly our senior management, we cannot assure that we will be able to attract new employees or retain the services of our senior management or any other key employees in the future. Effective succession planning is important to our future success. If we fail to ensure the effective transfer of senior management knowledge and smooth transitions involving senior management across our various businesses, our ability to execute short and long term strategic, financial and operating goals, as well as our business, financial condition and results of operations generally, could be adversely affected.
We have experienced frequent turnover in our top executives, and our business could be adversely affected by these and other transitions in our senior management team or if any of the resulting vacancies cannot be filled with qualified replacements in a timely manner.
We have experienced turnover in our top executives and the replacement of these positions with new officers. In March 2022, we saw the departure of our Chief Legal Officer, Gitte Bendzulla and in December 2022, we saw the departure of our former Chief Executive Officer ("CEO"), Eric Eichmann and the appointment of our current CEO, Chelsea Grayson. In April 2022 we appointed Frederic Beckley as our new Chief General Counsel and Chief Administrative Officer.
Management transition is often difficult and inherently causes some loss of institutional knowledge, which could negatively affect our results of operations and financial condition. Our ability to execute our business strategies may be adversely affected by the uncertainty associated with these transitions and the time and attention of the board and management needed to fill vacant roles could disrupt our business. Although we generally enter into employment agreements with our executives, our executive officers may terminate their employment relationship with us at any time, and we cannot ensure that we will be able to retain the services of any of them. Our senior management’s knowledge of our business and industry would be difficult to replace, and any further turnover could negatively affect our business, growth, financial conditions, results of operations and cash flows.
Our independent registered public accounting firm’s report contains an explanatory paragraph that expresses substantial doubt about our ability to continue as a “going concern.”
As of the date of the financial statements, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Principal conditions and events leading to this conclusion are that the Company has generated losses from operations, continued decline in revenues, incurred impairment charges to its Zoosk goodwill and intangible assets, cash outflows from operations and has a working capital deficiency. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 of this Annual Report on Form 10-K for additional information on our assessment of our ability to continue as a going concern. Uncertainty regarding our ability to continue as a going concern could also have a material and adverse impact on the price of our common stock, which could negatively impact our ability to raise sufficient funds for our operations and continue as a going concern. In addition, cash forecasts and capital requirements are subject to change as a result of a variety of risks and uncertainties. Developments in and expenses associated with our commercialization activities and other research and development activities may consume capital resources earlier than planned. Due to these and other factors, forecasts for any periods in which we indicate that we expect to have sufficient resources to fund our operations, as well as any other operational or business projection we have disclosed, or may disclose, may not be achieved.
We previously identified and continue to identify material weaknesses in our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We are required to perform system and process evaluations and testing of internal control over financial reporting to allow management to report annually on the effectiveness of internal control over financial reporting. This assessment requires disclosure of any material weaknesses in our internal control over financial reporting identified by management. SOX 404 also generally requires an attestation from our independent registered public accounting firm on the effectiveness of internal control over financial reporting. Remediation efforts may not enable us to avoid a material weakness in the future.
We previously identified in prior periods and have continued to identify material weaknesses in our internal control over financial reporting. We are taking steps to remediate these material weaknesses. However, we cannot at this time estimate how long it will take to remediate the material weaknesses, and we may not ever be able to remediate the material weaknesses. For additional information regarding these material weaknesses, see Item 9A—Controls and Procedures included in PART III of this report.
In addition, we cannot assure that there will not be other material weaknesses in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report financial condition, results of operations or cash flows. If we are unable to conclude that internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our ADSs could decline, and we could be subject to sanctions or investigations by the Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict future access to the capital markets.
Our brands are available in various international markets, including certain markets in which we have limited experience. As a result, we face additional risks in connection with our international operations.
Our brands are available worldwide, which exposes us to a number of additional risks, including:
•legal claims and compliance challenges caused by unfamiliarity with foreign laws, language and cultural differences;
•lack of staff experience in international markets;
•differing levels of social and technological acceptance of our dating services or lack of acceptance of them;
•competitive environments that favor local businesses;
•limitations on the level of intellectual property protection and;
•trade sanctions, political unrest, terrorism, war, health and safety epidemics, or the threat of any of these events.
The occurrence of any or all of the events described above could adversely affect our international operations, which could in turn adversely affect our business, financial condition and results of operations.
Foreign currency exchange rate fluctuations could adversely affect our results of operations.
We operate in various international markets, primarily in various jurisdictions within the EU, U.S. and other international locations, and as a result, are exposed to foreign exchange risk for the Euro ("EUR"), U.S. dollar ("USD"), Great British pound, Australian dollar and Canadian dollar, among others. We translate international revenue into USD-denominated operating results, so during periods of a strengthening USD, our non-USD revenue will be reduced when translated into USD. In addition, as foreign currency exchange rates fluctuate, the translation of international revenue into USD-denominated operating results affects the period-over-period comparability of such results. We face similar risks as a result of revenue earned in other currencies.
Fluctuating foreign exchange rates can also result in foreign currency exchange gains and losses. We do not intend to hedge any foreign currency exposures. Significant foreign exchange rate fluctuations, in the case of one currency or collectively with other currencies, could adversely affect future results of operations.
The ongoing COVID-19 pandemic has had, and may in the future have, an adverse effect on our business and results of operations.
The ongoing COVID-19 pandemic has resulted in and will likely continue to result to varying degrees in disruptions to the global economy, as well as businesses, supply chains and capital markets around the world. We are continuing to monitor and assess the ongoing effects of the COVID-19 pandemic on our operations in 2023.
We cannot at this time predict the full extent to which the COVID-19 pandemic will directly or indirectly impact future business, results of operations and financial condition, including sales, expenses, reserves and allowances, supply chain, and employee-related amounts, depends on future developments that continue to be uncertain, including as a result of new information that may emerge concerning new strains of the virus, the need for updated vaccines, the willingness of individuals to receive vaccines (including to protect against any new strains of the virus), and the actions taken to contain or treat the virus, including certain travel restrictions, as well as the economic impact on local, regional, national and international customers and markets.
Goodwill, intangible assets and other long-lived assets are subject to impairment risk.
We had $119.3 million of goodwill, $12.7 million of brands and trademarks and $0.6 million of other intangible assets as of December 31, 2022. We review the potential impairment of goodwill and indefinite-lived intangible assets at least annually, or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable and test property, plant and equipment and other intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Indicators that may signal that an asset has become impaired include a significant decline in actual or projected revenue, a significant decline in the market value of our ADSs, a significant decline in performance of certain acquired companies relative to our original projections, an excess of our net book value over our market value, a significant decline in our operating results relative to our operating forecasts, a significant change in the manner of our use of acquired assets or the strategy for our overall business, a significant decrease in the fair value of an asset, a shift in technology demands and development, or a significant turnover in key management or other personnel.
The assessment for potential impairment of goodwill, intangible assets or other long-term assets requires management to make judgments on a number of significant estimates and assumptions, including projected cash flows, discount rates, projected long-term growth rates and terminal values. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill, intangible assets or other long-term assets is identified and this could negatively impact our financial condition and results of operations. Changes in management estimates and assumptions as they relate to valuation of goodwill, intangible assets or other long-lived assets could affect our financial condition or results of operations in the future.
We maintain our cash at financial institutions, often in balances that exceed federally insured limits.
On March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver. The Company has deposit accounts at SVB. The standard deposit insurance is up to $250,000 per depositor, per insured bank, for each account ownership category. As of March 10, 2023, the company had approximately $4.9 million in deposit accounts at SVB. On March 12, 2023, the U.S. Federal Reserve, and FDIC announced that SVB depositors will have access to all of their money starting March 13, 2023. The Company withdrew the vast majority of its funds on deposit with SVB with an insignificant amount of funds remaining to settle certain fees. Thus, we do not view the risk as material to our financial condition. However, as the FDIC continues to address the situation with SVB and other similarly situated banking institutions, the risk of loss in excess of insurance limitations has generally increased. Any material loss that we may experience in the future could have an adverse effect on our ability to pay our operational expenses or make other payments and may require us to move our accounts to other banks, which could cause a temporary delay in making payments to our vendors and employees and cause other operational inconveniences.
Risks related to Information Technology and Intellectual Property
We may fail to adequately protect our intellectual property rights or may be accused of infringing the intellectual property rights of third parties.
We rely heavily upon our trademarks and related domain names and logos to market our brands and to build and maintain brand loyalty and recognition, as well as upon trade secrets. In addition, we rely on a combination of laws, and contractual restrictions with employees, customers, suppliers, affiliates and others, to establish and protect our various intellectual property rights. For example, we have generally registered, and continue to apply to register and renew, or secure by contract where appropriate, trademarks and service marks as they are developed and used, and reserve, register and renew domain names as we deem appropriate.
Despite these measures, our intellectual property rights may still not be protected in a meaningful manner, challenges to contractual rights could arise or third parties could copy or otherwise obtain and use our intellectual property without authorization. In addition, litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets or to determine the validity and scope of proprietary rights claimed by others, including in respect of alleged trademark or patent infringement. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources.
The occurrence of such events could result in the erosion of our brands and limit our ability to market our brands using our various domain names, as well as impede our ability to effectively compete against competitors with similar technologies, any of which could adversely affect our business, financial condition and results of operations.
If we fail to keep pace with rapid technological change, our competitive position will suffer.
We operate in a market characterized by rapidly changing technologies, evolving industry standards, frequent new product and service announcements, enhancements and changing customer demands. Accordingly, our performance depends on our ability to adapt to rapidly changing technologies and industry standards, and the ability to continually improve the speed, performance, features, ease of use and reliability of services in response to both evolving demands of the marketplace and competitive service and product offerings. Our industry has been subject to constant innovation and competition. When one competitor introduces new features perceived as attractive to users, other competitors replicate such new features. There have also been subsequent enhancements on new features such as the ability to send videos and photos through instant messaging or customize user experience based on machine learning and artificial intelligence. Integration of new technologies into systems involves numerous technical challenges, substantial amounts of capital and personnel resources, and often takes many months to complete. . Given that we often rely on third-party service providers to help integrate new features, we may not always be able to effectively integrate new technologies into our websites and mobile applications on a timely basis or at all, which may degrade the responsiveness and speed of our websites and mobile applications. Such technologies, even if integrated, may not function as expected.
Communicating with our users is critical to our success, and any erosion in our ability to communicate with our users could adversely affect our business, financial condition and results of operations.
To be successful, we must communicate with our subscribers and other users to, among other things, update them on their profile and related activity and to introduce them to new products and services. As a result, we must ensure that our technology and methodology for communication with our subscribers and other users evolves in step with the communication habits of our consumers. For instance, most of our communications currently take the form of email and push notifications. Failure to effectively communicate with current users or develop or take advantage of new means of communication could have an adverse effect on our business, financial condition and results of operations.
Our success depends, in part, on the integrity of our systems and infrastructure and on our ability to enhance, expand and adapt these systems and infrastructure in a timely and cost-effective manner.
Our systems and infrastructure must perform well on a consistent basis in order for us to succeed. From time to time, we may experience system interruptions that make some or all of our systems or data unavailable and prevent our products from functioning properly for our users. Further, our systems and infrastructure are vulnerable to damage from fire, power loss, hardware and operating software errors, telecommunications failures and similar events. While we have backup systems in place for certain aspects of our operations, our systems and infrastructure are not fully redundant, disaster recovery planning cannot account for all eventualities and our property and business interruption insurance coverage may not be adequate to compensate us fully for any losses that we may suffer. Any interruptions or outages, regardless of the cause, could negatively impact our users’ experiences with our products, tarnish our brands’ reputation and decrease demand for our products, any or all of which could adversely affect our business, financial condition and results of operations. Moreover, even if detected, the resolution of such interruptions may take a long time, during which customers will not be able to access, or will have limited access to, the service.
We also continually work to expand and enhance the efficiency and scalability of our technology and network systems to improve the experience of our users, accommodate substantial increases in the volume of traffic to our various dating products, ensure acceptable page load times or general accessibility for our dating products and keep up with changes in technology and user preferences. Any failure to do so in a timely and cost-effective manner could adversely affect our users’ experience with our various products and thereby negatively impact the demand for our products, and could increase our costs, either of which could adversely affect our business, financial condition and results of operations.
Our services are highly technical and may contain undetected bugs or errors, which could manifest in ways that could seriously harm our reputation and our business.
Our services are highly technical and complex, and any services we may introduce in the future may contain undetected bugs, errors, and other vulnerabilities. These bugs and errors can manifest in any number of ways in our services, including through diminished performance, security vulnerabilities, malfunctions, or even permanently disabled services. We have a practice of rapidly updating our services, but some errors in our services may be discovered only after our service are used by users, and may in some cases be detected only under certain circumstances or after extended use. Any such defects discovered in our services after commercial release could result in a loss of sales and users, which could seriously harm our business. Any errors, bugs, or vulnerabilities discovered in our code after release could damage our reputation, drive away users, lower revenue, and expose us to damages claims, any of which could seriously harm our business.
We have been subject to cybersecurity incidents in the past and our industry is prone to cyberattacks by unauthorized third parties. Any actual or perceived security or privacy breach affecting us or our third-party service providers could interrupt our operations, adversely affect our reputation, brand, business, financial condition and subject us to legal inquiries, investigations, lawsuits, or other disciplinary actions by U.S. or foreign regulatory authorities.
Our business involves the collection, storage, processing, and transmission of personal data, including certain categories of sensitive personal data. Additionally, we maintain sensitive and proprietary information relating to our business, such as our own proprietary information and personal data relating to our employees and customers. An increasing number of organizations, including large online and off-line businesses, Internet companies, financial institutions, and government institutions, have disclosed breaches of their information security systems and other information security incidents, including cyberattacks, ransomware, computer viruses, worms, hacking, phishing, bot attacks or other destructive or disruptive software, distributed denial of service attacks, other attempts to misappropriate customer information, some of which have involved sophisticated and highly targeted attacks. We have previously experienced a data incident on Zoosk and cannot exclude that we will continue to experience these types of breaches, attacks, and other incidents. See Note 9 Commitments and Contingencies to our "Consolidated Financial Statements".
Because techniques used to obtain unauthorized access to or to sabotage information systems change frequently and may not be known until launched against us, we or our service providers may be unable to anticipate or prevent these attacks, react in a timely manner, or implement adequate preventive measures, and we may face delays in our detection or remediation of, or other responses to, security breaches and other privacy and security-related incidents. Unauthorized parties have in the past gained access, and may in the future gain access, to systems or facilities used in our business through various means, including gaining unauthorized access into our systems or facilities, attempting to fraudulently induce our employees, users or others into disclosing user names, passwords, payment card information, or other sensitive information, which may in turn be used to access our information technology, or "IT", systems, or attempting to fraudulently induce our employees, or others into manipulating payment information, resulting in the fraudulent transfer of funds to bad actors. Unauthorized parties may also seek to disrupt or disable our or our service providers’ services through attacks such as ransomware attacks. In addition, we or our service providers may be unable to identify, or may be significantly delayed in identifying, cyberattacks and incidents due to the increasing use of techniques and tools that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic artifacts.
Users could have vulnerabilities on their own devices that are entirely unrelated to our systems, but could mistakenly attribute their own vulnerabilities to us. Further, breaches experienced by other companies may also be leveraged against us. Certain efforts may be supported by significant financial and technological resources, making them even more difficult to detect, remediate, and otherwise respond to.
Although we and our service providers have systems and processes that are designed to protect, prevent data loss, and prevent other security breaches and security incidents, these security measures have not fully protected our systems in the past and cannot guarantee complete security in the future. The IT and infrastructure used in our business and in the products of third parties we use may be vulnerable to cyberattacks or security breaches, and unauthorized third parties may be able to access data, including personal data and other sensitive and proprietary data of users, our employees’ personal data, or our other sensitive and proprietary data, accessible through those systems. Employee error, malfeasance, or other errors in the storage, use, or transmission of any of these types of data could result in an actual or perceived privacy or security breach, or other security incident. Although we have policies restricting the access to the personal information we store, there is a risk that these policies may not be effective in all cases.
Any actual or perceived breach of privacy, or any actual or perceived security breach or other incidents, could interrupt our operations, result in our platform being unavailable, result in loss or improper access to, or acquisition or disclosure of, data, result in fraudulent transfer of funds, harm our users, our reputation, brand, and competitive position, damage our relationships with third-party partners, or result in claims, regulatory investigations, and proceedings and significant legal, regulatory, and financial exposure, including ongoing monitoring by regulators, and any such incidents or any perception that our security measures are inadequate could adversely affect our business, financial condition, and results of operations. Any actual or perceived breach of privacy or security, or other security incident, impacting any entities with which we share or disclose data (including, for example, our third-party technology providers) could have similar effects. Further, any cyberattacks or actual or perceived security and privacy breaches and other incidents directed at, or suffered by, our competitors could reduce confidence in our industry as a whole and, as a result, reduce confidence in us. We also expect to incur significant costs in an effort to detect and prevent privacy and security breaches and other privacy and security-related incidents, and we may face increased costs and requirements to expend substantial resources in the event of an actual or perceived privacy or security breach or other incident.
Additionally, defending against claims or litigation based on any security breach or incident, regardless of their merit, is costly and diverts management’s attention, including the resulting business changes that may be required in settling or resolving such claims or litigation. We cannot be certain that our insurance coverage will be adequate for data handling or data security costs or liabilities actually incurred, that insurance will continue to be available to us on commercially reasonable terms or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our reputation, brand, business, financial condition, and results of operations.
Further, the impact of cyber security events experienced by third parties with whom we do business (or upon whom we otherwise rely in connection with our day-to-day operations such as credit card processors) could have a similar effect on us. If breaches, scamming and other similar activities increase at third parties with whom we do business, our reputation, business and results of operations could be materially adversely affected.
We rely on a number of third-party providers and their failure or unwillingness to continue to perform could harm us.
We rely on third parties to provide important services and technologies, including third parties that manage and monitor our offsite data center, ISPs, search engine marketing providers and credit card processors, among others. In addition, we license technologies from third parties to facilitate our ability to provide our services. Any failure on our part to comply with the terms of these licenses could result in the loss of our rights to continue using the licensed technology, and we could experience difficulties obtaining licenses for alternative technologies. Furthermore, any failure of these third parties to provide these and other services, or errors, failures, interruptions or delays associated with licensed technologies, could significantly harm our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. In addition, if any fees charged by third party providers were to substantially increase, we could incur significant additional losses.
We depend, in part, upon arrangements with third parties to drive traffic to our various websites and apps.
We engage in a variety of activities designed to attract traffic to our various websites and mobile applications and convert visitors into members and paying subscribers. Our success in these efforts depends, in part, upon our continued ability to enter into arrangements with third parties to drive traffic to our various websites and mobile applications and our oversight of such third parties to ensure that they are appropriately communicating with online users. Pursuant to these arrangements, third parties generally promote our services on their websites and mobile applications, through email campaigns, through radio and/or podcasts, and we pay them based on a variety of metrics (cost per registration, cost per one thousand impressions, a percentage of sales, etc.). Depending on how a third party communicates with online users via email, third party email service providers could treat such email campaign as spam, and ultimately limit our ability to communicate with our members and paying subscribers via email.
These arrangements are generally not exclusive, are short-term in nature and are generally terminable by either party given notice. If existing arrangements with third parties are terminated (or are not renewed upon their expiration) and we fail to replace this traffic and related revenue, or if we are unable to enter into new arrangements with existing and/or new third parties in response to industry trends, or if such third parties improperly manage email campaigns, our business, financial condition and results of operations could be adversely affected.
Our business depends, in part, on the growth and maintenance of the internet, and our ability to provide services to our members and paying subscribers may be limited by outages, interruptions and diminished capacity of the internet.
Our performance will depend, in part, on the continued growth and maintenance of the internet. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable internet services. Internet infrastructure may be unable to support the demands placed on it if the number of internet users continues to increase or if existing or future internet users access the internet more often or increase their bandwidth requirements. In addition, viruses, worms and similar programs may harm the performance of the internet. We have no control over the third-party telecommunications, cable or other providers of access services to the internet that our members and paying subscribers rely upon. There have been instances where regional and national telecommunications outages have caused us to experience service interruptions during which our members and paying subscribers could not access our services. Any additional interruptions, delays or capacity problems experienced with any points of access between the internet and our members could adversely affect our ability to provide services reliably to our members and paying subscribers. The temporary or permanent loss of all, or a portion, of our services on the internet, the internet infrastructure generally, or our members’ and paying subscribers’ ability to access the internet could disrupt our business activities, harm our business reputation and result in a loss of revenue.
Our success depends, in part, on our ability to access, collect and use personal data about our users and subscribers.
We depend on search engines, digital app stores and social media platforms, to market, distribute and monetize our products and services. Our subscribers and users engage with these platforms directly, and in the case of digital app stores, may be subject to requirements regarding the use of their payment systems for various transactions. As a result, these platforms may receive personal data about our users and subscribers that we would otherwise receive if we transacted with our users and subscribers directly. If these platforms limit, eliminate or otherwise interfere with our ability to access, collect and use personal data about our users and subscribers that they have collected, our ability to identify and communicate with a meaningful portion of our user and subscriber bases may be adversely impacted. If so, our customer relationship management efforts, our ability to identify, target and reach new segments of our user and subscriber bases and the population generally, the efficiency of our paid marketing efforts and our ability to develop and implement safety features, policies and procedures for certain of our products and services could be adversely affected. We cannot assure you that search engines, digital app stores and social media platforms upon which we rely will not limit, eliminate or otherwise interfere with our ability to access, collect and use personal data about our users and subscribers that they have collected. To the extent that any or all of them do so, our business, financial condition and results of operations could be adversely affected.
We are subject to a number of risks related to credit card payment transactions, including data security breaches and fraud that we or third parties experience or additional regulation, any of which could adversely affect our business, financial condition and results of operations.
In addition to purchases through the Apple App Store and the Google Play Store, we accept payment from our users primarily through credit card transactions and online payment service providers. While we use third parties to handle and process credit card transactions, we still face risks related to security breaches involving these third-party providers. For instance, a large breach at a third-party credit card processor could cause people to cancel their credit cards, which could affect our ability to process auto-renewals, which could materially adversely affect our business, financial condition and results of operations. In addition, breaches at third party processors could affect consumer confidence in us because consumers may not distinguish between us and the third party when informed of the breach. Additionally, if we fail to adequately prevent fraudulent credit card transactions, we may face litigation, fines, governmental enforcement action, civil liability, diminished public perception of our security measures, significantly higher credit card-related costs and remediation costs, or refusal by credit card processors to continue to process payments on our behalf. The occurrence of these or similar events could have a material adverse effect on our business, results of operations, and financial conditions.
Our use of “open source” software could subject our proprietary software to general release, adversely affect our ability to sell our products and services and subject us to possible litigation.
We use open source software in connection with a portion of our proprietary software and expect to continue to use open source software in the future. Under certain circumstances, some open source licenses require users of the licensed code to provide the user’s own proprietary source code to third parties upon request, or prohibit users from charging a fee to third parties in connection with the use of the user’s proprietary code. While we try to insulate our proprietary code from the effects of such open source license provisions, we cannot guarantee that we will be successful, or that all open source software is reviewed prior to use in our products. Accordingly, we may face claims from others challenging our use of open source software, claiming ownership of, or seeking to enforce the license terms applicable to such open source software, including by demanding release of the open source software, derivative works or our proprietary source code that was developed or distributed with such software. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs and. there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or provide our products.
Increases in credit card processing fees and high chargeback costs could increase operating expenses and adversely affect results of operations, and an adverse change in, or the termination of, our relationship with any major credit card company could have a material adverse impact on our business.
A significant portion of our customers purchase our products using credit or debit cards. The major credit card companies or the issuing banks may increase the fees that they charge for transactions using their cards. An increase in those fees would require us to either increase the prices we charge for our products, or suffer a negative impact on our profitability, either of which could adversely affect our business, financial condition and results of operations.
In addition, we have potential liability for chargebacks associated with the transactions processed on our behalf. If a customer claims that a subscription to one of our products was purchased fraudulently, the subscription price is “charged back” to us or our bank, as applicable. If we or our sponsoring banks are unable to collect the chargeback from the persons processing transactions on our behalf, or, if the credit card processor refuses or is financially unable to reimburse for the chargeback, we bear the loss for the amount of the refund paid. We also have potential liability related to fines that are levied by the major credit card companies when chargeback expenses exceed certain thresholds.
Loss or material modification of our credit card acceptance privileges would have a material adverse effect on our business and operating results.
A significant percentage of our users pay for our services by credit card. The loss of credit card acceptance privileges would significantly limit our ability to renew paying subscribers or secure new paying subscribers.
Most of our users purchase a membership, for which payment is made at the beginning of the term. In addition, almost all membership renewals are paid by auto-renewal, charging the renewal fee to the client’s credit card. There is a risk that, if we fail to fully perform our obligations under the terms of service or the client objects to the auto-renewal payment made by credit card, the credit card companies could be obligated to reimburse these clients for all or a portion of the membership fee. We might be obligated to pay all such amounts under our agreements under which we have obtained our credit card acceptance privileges. As a result of this risk, credit card companies may require us to set aside additional cash reserves, may not renew acceptance privileges or may increase the transaction fees they charge for these privileges.
The card networks, such as Visa, MasterCard, and American Express, have adopted rules and regulations that apply to all merchants who process and accept credit cards. If we fail to comply with the rules and regulations adopted by the card networks, we would be in breach of our contractual obligations to payment processors and merchant banks. Such failure to comply may subject us to fines, penalties, damages and civil liability and could eventually prevent us from processing or accepting credit cards. Further, there is no guarantee that, even if we comply with the rules and regulations adopted by the card networks, we will be able to maintain our compliance. We also cannot guarantee that such compliance will prevent illegal or improper use of our payments systems or the theft, loss or misuse of the credit card data of customers or participants.
The loss of, or the significant modification of, the terms under which we obtain credit card acceptance privileges would have a material adverse effect on our business, revenue and operating results.
Our user metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may seriously harm and negatively affect our reputation and our business.
We regularly review metrics, including our Average Revenue Per User ("ARPU") and average paying subscribers metrics, to evaluate growth trends, measure our performance, and make strategic decisions. These metrics are calculated using internal Company data gathered on an analytics platform that we developed and operate and have not been validated by an independent third party. While these metrics are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our products are used across large populations globally. Our user metrics are also affected by technology on certain mobile devices that automatically runs in the background of our application when another phone function is used, and this activity can cause our system to miscount the user metrics associated with such account. The methodologies used to measure these metrics require significant judgment and are also susceptible to algorithm or other technical errors. In addition, we are continually seeking to improve our estimates of our user base, and such estimates may change due to improvements or changes in our methodology.
Errors or inaccuracies in our metrics or data could also result in incorrect business decisions and inefficiencies. For instance, if a significant understatement or overstatement of active users were to occur, we may expend resources to implement unnecessary business measures or fail to take required actions to attract a sufficient number of users to satisfy our growth strategies. We continually seek to address technical issues in our ability to record such data and improve our accuracy, but given the complexity of the systems involved and the rapidly changing nature of mobile devices and systems, we expect these issues to continue.
Risks Relating to Our Indebtedness
Our substantial level of indebtedness could materially affect our ability to operate our business, which could have a material adverse effect on our financial condition and results of operations.
As of December 31, 2022, we had $100.0 million total outstanding indebtedness. Our significant indebtedness, and indebtedness that we may incur in the future, could materially adversely affect our business by:
•increasing our vulnerability to general adverse economic and industry conditions;
•requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, product development efforts, marketing expenditures, and other general corporate purposes;
•making business decisions that we might not otherwise make in order to comply with the covenants in our Financing Agreement (defined below);
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
•exposing us to the risk of increased interest rates as our borrowings are, and may in the future be, at variable interest rates.
The occurrence of any one of these events could have a material adverse effect on our business, results of operations, and financial condition, and ability to satisfy our obligations under our Financing Agreement (defined below)
Our ability to comply with the Financing Agreement (as defined below) is subject to our future performance and other factors.
On March 11, 2022, the Company entered into a Financing Agreement ( the "Financing Agreement" ) with Zoosk, Inc. and Spark Networks, Inc., the subsidiary guarantor party thereto, the lender party thereto, and MGG Investment Group LP ("MGG"), as administrative agent and collateral agent. The Financing Agreement provides for senior secured term loans with an aggregate principal amount of $100.0 million (collectively, the "Term Loan"). Substantially all of the Company's assets are pledged as collateral. The Financing Agreement was amended on August 5, 2022 and the amendment was further amended and restated on August 19, 2022. The Financing Agreement contains certain financial covenants including quarterly testing of a maximum leverage ratio and a minimum marketing efficiency ratio, an all-times testing of a minimum liquidity ratio, as well as a minimum marketing spending requirement. Additional covenants, among other things, limit our and our subsidiaries' abilities to:
•incur additional indebtedness;
•create or incur additional liens;
•engage in mergers or consolidations;
•sell or transfer assets;
•pay dividends and distributions on our and our subsidiaries’ capital stock;
•make share repurchases;
•make certain acquisitions and;
•engage in certain transactions with affiliates and change lines of business.
Our ability to comply with these covenants in the future is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control. There can be no assurance that we will be able to maintain compliance with these covenants in the future. The breach of any of the debt covenants could result in an event of default under the Financing Agreement. Upon the occurrence of an event of default, the lenders could make an immediate demand of the amount outstanding under the agreement. If a default was to occur and such a demand was to be made, there can be no assurance that our assets would be sufficient to repay the indebtedness in full. If any of these events were to occur, our ability to fund our operations could be materially impaired.
If we experience a decline in cash flow, we could have difficulty paying interest and the principal amount of our outstanding indebtedness. If we are unable to generate sufficient cash flow or otherwise obtain the funds necessary to make required payments under our Facilities, or if we fail to comply with the various requirements of our indebtedness, we could default under the Financing Agreement. Any such default that is not cured or waived could result in an acceleration of indebtedness then outstanding under the agreement, a requirement that we and our subsidiaries that have guaranteed our indebtedness pay the obligations in full, and would permit the lenders to exercise remedies with respect to all of the collateral that is securing our indebtedness, including substantially all of our and our subsidiary guarantors’ assets. We cannot be certain that our future operating results will be sufficient to ensure compliance with the covenants in the Financing Agreement or that we could remedy any potential defaults under such agreement.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.
Our ability to satisfy our debt obligations will depend upon, among other things:
•our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory, and other factors, many of which are beyond our control; and
•our future ability to borrow under our Financing Agreement, the availability of which will depend on, among other things, our complying with the covenants in the then-existing agreements governing our indebtedness.
There can be no assurance that our business will generate sufficient cash flow from operations, or that we will be able to draw under our Revolving Credit Facility or otherwise, in an amount sufficient to fund our liquidity needs.
On December 31, 2022, we had cash and cash equivalents of $11.4 million. We may be in need of liquidity in the future. In such a scenario, we may be forced to curtail certain operations and may be unable to operate our business as we deem appropriate. Disruptions, uncertainty or volatility in the capital and credit markets, including as a result of geopolitical conditions, may also limit our access to capital required to operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost of capital, which could decrease our profitability and significantly reduce our financial flexibility. In addition, the terms of future debt agreements could include more restrictive covenants, which could further restrict our business operations. Our results of operations, financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets.
If our cash flows and capital resources are insufficient to service our indebtedness, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. In addition, the terms of existing or future debt agreements may restrict us from adopting some of these alternatives.
The continued transition from LIBOR to an alternative reference rate may adversely affect our financial condition.
In 2021, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that all LIBOR tenors relevant to us will cease to be published and will no longer be representative after June 30, 2023. This coincides with an announcement made by the ICE Benchmark Administration Limited indicating that it would have to cease publication of LIBOR tenors immediately after the last publication on June 30, 2023, as a result of not having access to necessary input data to calculate such LIBOR tenors. Therefore, the Federal Reserve, along with the Federal Deposit Insurance Corporation (“FDIC”) and Office of the Comptroller of the Currency issued supervisory guidance encouraging financial institutions to cease entering into new contracts that are indexed off U.S. dollar LIBOR by December 31, 2021. The Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, announced replacement of U.S. dollar LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities called the Secured Overnight Financing Rate (“SOFR”). As of December 31, 2022, we have a Term Loan with a LIBOR-based variable interest rate and a maturity date on March 11, 2027. The Term Loan provides for alternate interest rate calculations if LIBOR is no longer widely available, including the SOFR. There can be no assurances as to what alternative interest rates may be and whether such interest rates, such as SOFR, will be more or less favorable than LIBOR and any other unforeseen impacts of the discontinuation of LIBOR. We intend to monitor the developments with respect to the potential phasing out of LIBOR and work with our lenders to ensure any transition away from LIBOR will have minimal impact on our financial condition.
Risks Related to Government Regulation and Litigation
The varying and rapidly evolving regulatory frameworks on privacy and data protection across jurisdictions could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
In the U.S., multiple comprehensive data privacy laws have come or will come into effect. In November 2020, California voters passed the California Privacy Rights and Enforcement Act of 2020 (“CPRA”). The CPRA further amends and expands the requirements of the California Consumer Privacy Act ("CCPA"), bringing the California law in many respects closer to the EU's GDPR. Compliance with the CPRA, which came into full force on January 1, 2023, imposes additional burdens on us and thereby could adversely affect our business. Virginia also introduced a comprehensive data privacy law, and laws in Colorado, Connecticut and Utah will come into effect this year. At a national level in the U.S., Congress continues to deliberate a comprehensive federal privacy statute. Federal agencies such as the Federal Trade Commission (“FTC”) have also been ramping up its privacy enforcement activities, mounting notable enforcement actions and is currently crafting privacy and data security rules that could upend how companies use and disclose consumer data.
Additionally, we are subject to laws, rules, and regulations regarding cross-border transfers of personal data, including laws relating to transfer of personal data outside the European Economic Area (“EEA”). For example, in July 2020, the European Court of Justice ("ECJ") invalidated the EU-US Privacy Shield Framework (“Privacy Shield”) under which personal data could be transferred from the EEA to US entities that had self-certified under the Privacy Shield scheme. While the ECJ upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it noted that reliance on them alone may not necessarily be sufficient in all circumstances; this has created uncertainty and increased the risk around our international operations. In March 2022, EU and U.S. leaders agreed in principle to replace the Privacy Shield data transfer framework, which should enable the freer flow of data transfers between the EEA and the US. However, additional costs may need to be incurred to implement necessary safeguards to comply with GDPR and potential new rules and restrictions on the flow of data across borders, which could increase the cost and complexity of conducting business in some markets and could adversely affect our financial results.
While we believe that we comply with industry standards and applicable laws and industry codes of conduct relating to privacy and data protection in all material respects, there is no assurance that we will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event of non-compliance. Additionally, to the extent multiple local-level laws are introduced with inconsistent or conflicting standards and there is no national law to preempt such laws, compliance with such laws could be difficult to achieve and we could be subject to fines and penalties in the event of non-compliance.
Any failure or perceived failure by us (or the third parties with whom we have contracted to process such information) to comply with applicable privacy and security laws, policies or related contractual obligations, or any compromise of security that results in unauthorized access, or the use or transmission of, personal user information, could result in a variety of claims against us, including governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties, and adverse publicity. When such events occur, our reputation may be harmed, we may lose current and potential users and the competitive positions of various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations.
Lastly, compliance with the numerous laws in the countries in which we operate regarding privacy and the storage, sharing, use, processing, disclosure and protection of personal data could be costly, as well as result in delays in the development of new products and features as resources are allocated to these compliance projects, particularly as these laws become more comprehensive in scope, more commonplace and continue to evolve. In addition, the varying and rapidly evolving regulatory frameworks across jurisdictions have and may result in decisions to introduce products in certain jurisdictions but not others or to cease providing certain services or features to users located in certain jurisdictions. If these costs or other impacts are significant, our business, financial condition and results of operations could be adversely affected.
We may be liable as a result of information retrieved from or transmitted over the internet.
On our platforms we maintain personal user information, including user-to-user communications, and enable our users to share their personal information with each other in such communications. In some cases, we engage third party service providers to store this information. We have systems to protect the integrity of this information, but we have experienced and may experience in the future incidents and breaches of such information, and cannot guarantee that inadvertent or unauthorized use or disclosure of such user information will not occur. When such events occur, we may not be able to remedy them and may be required by law to notify regulators and individuals whose personal information was used or disclosed without authorization. If such incidents occurred, we may be subject to claims, including government enforcement actions or fines, sued for defamation, civil rights infringement, negligence, copyright or trademark infringement, invasion of privacy, personal injury, product liability or under other legal theories relating to information that is published or made available on our websites and mobile applications and the other sites or applications linked to us. These types of claims have been brought, sometimes successfully, against online services in the past. We could incur significant costs in investigating and defending such claims, even if we ultimately are not held liable. If any of these events occurs, our revenue could be materially adversely affected, or we could incur significant additional expense.
Our business is subject to complex and evolving U.S. and international laws and regulations. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
We are subject to a variety of laws and regulations in the U.S. and abroad that involve matters that are important to or may otherwise impact our business, including, among others, broadband internet access, website accessibility, online commerce, advertising, user privacy, data protection, intermediary liability, protection of minors, consumer protection, sex-trafficking, taxation, export controls, economic sanctions and securities law compliance. The introduction of new products, expansion of our activities in certain jurisdictions, or other actions that we may take may subject us to additional laws, regulations or other government scrutiny.
These U.S. federal, state, municipal and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. For example, legislative changes in the U.S., at both the federal and state level, could impose new obligations in areas such as moderation of content posted on our platform by third parties, including with respect to requests for removal based on claims of copyright. Further, there are various Executive and Congressional efforts to restrict the scope of the protections from legal liability for content moderation decisions and third-party content posted on online platforms that are currently available to online platforms under Section 230 of the Communications Decency Act, and our current protections from liability for content moderation decisions and third-party content posted on our platform in the U.S. could decrease or change, potentially resulting in increased liability for content moderation decisions and third-party content posted on our platform and higher litigation costs. Relatedly, following such Executive and Congressional actions, more changes could be required to our products that would in turn restrict or impose additional costs upon the conduct of our business generally or cause users to abandon our products.
Foreign laws and regulations can impose different obligations or be more restrictive than those in the U.S. On November 16, 2022, the EU introduced the Digital Services Act (“DSA”), a package of legislation which goes into force in 2024 and imposes additional obligations on technology companies to ramp up content moderation, provide age or identity verification features, and improve overall safety and transparency. The UK will also likely pass its Online Safety Bill, which will have similar requirements to those provided in the DSA. The Online Safety Bill introduces criminal liability for senior managers of regulated entities if they fail to comply with certain child protection duties.
Concerns about harms and the use of dating products and social networking platforms for such illegal and harmful conduct have produced and could continue to produce future legislation or other governmental action. State Attorney Generals use their increasingly broader subpoena authorities and are taking increasing steps to review and, in some cases, launch broad investigations into consumer facing technology companies with a particular interest in companies offering online dating services. Government authorities may seek to restrict certain users’ access to our products if they consider such users to be in violation of laws or regulations or otherwise be a threat to public safety, as well as to impose obligations for us to use background checks on our platform, such removal and restriction of access may reduce our user growth and engagement. We have in the past been subject to such subpoena and/or investigation requests and have incurred significant costs to comply with the requests. If future legislation or governmental action is proposed or taken to address concerns regarding such harms, and if existing protections are limited or removed, we could continue to incur similar costs, and changes to our products may be necessary that could restrict or impose additional costs upon our business generally or cause users to abandon our products, which may in turn materially adversely affect our business, financial condition and results of operations.
We are subject to litigation and adverse outcomes in such litigation could have an adverse effect on our financial condition.
We are, and from time to time may become, subject to litigation and various legal proceedings, including litigation and proceedings related to intellectual property matters, privacy and consumer protection laws and other matters that involve claims for substantial amounts of money or for other relief or that might necessitate changes to our business or operations. In addition, we might be subject to potential class action suits or other collective proceedings in the U.S., Canada, the UK or Australia for possible violations of the consumer protections laws. The defense of these actions may be both time consuming and expensive. We evaluate litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, we may establish reserves and/or disclose the relevant litigation claims or legal proceedings, as and when required or appropriate. These assessments and estimates are based on information available to management at the time of such assessment or estimation and involve a significant amount of judgment. As a result, actual outcomes or losses could differ materially from those envisioned by our current assessments and estimates. Our failure to successfully defend or settle any such legal proceedings could result in liability that, to the extent not covered by applicable insurance, could have an adverse effect on our business, financial condition and results of operations.
Failure to comply with the FCPA or other applicable anti-corruption legislation could result in fines, criminal penalties and an adverse effect on Spark Networks’ business.
We operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject, however, to the risk that our officers, board members, employees, agents and collaborators may take action determined to be in violation of such anti-corruption laws, including the FCPA, the UK Bribery Act of 2010 and the EU Anti-Corruption Act, as well as trade sanctions administered by the Office of Foreign Assets Control and the United States Department of Commerce. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties or curtailment of operations in certain jurisdictions and might adversely affect results of operations. In addition, actual or alleged violations could damage our reputation and ability to do business.
Failure to comply with U.S. federal securities laws and regulations applicable to public companies could result in an adverse effect on our business.
As a U.S. reporting company, we incur significant legal, accounting and other expenses. Compliance with reporting and corporate governance obligations may require members of our management and finance and accounting staff to divert time and resources from other responsibilities to ensure these regulatory requirements are fulfilled and may increase legal, insurance and financial compliance costs. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. In addition, if we fail to comply with any significant rule or requirement associated with being a public company, such failure could result in the loss of investor confidence and could harm our reputation and cause the market price of our ADSs to decline.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies classified as "domestic filers" under the Exchange Act, particularly because we are no longer an emerging growth company, which could adversely affect our business, financial condition, and results of operations.
As of January 1, 2023, we are no longer an emerging growth company ("EGC"). Consequently, we will incur greater legal, accounting, finance, and other expenses than we incurred as a foreign private issuer.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for domestic filers, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from business operations to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be harmed.
As a result of the disclosure of information required of us, our business and financial condition will become more visible, which may result in an increased risk of threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition, and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition, and results of operations.
U.S. investors may have difficulty enforcing civil liabilities against us or members of our Administrative Board.
Certain of the members of the Administrative Board of the Company (the "Administrative Board") are non-residents of the U.S., and all or a substantial portion of the assets of such persons are located outside the U.S. As a result, it may not be possible, or may be very difficult, to serve process on such persons or the Company in the U.S., or to enforce judgments obtained in U.S. courts against them or the Company based on civil liability provisions of the securities laws of the U.S. In addition, awards of punitive damages in actions brought in the U.S. or elsewhere may be unenforceable in Germany. An award for monetary damages under the United States securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered, but instead is intended to punish the defendant. The enforceability of any judgment in Germany will depend on the particular facts of the case as well as the laws and treaties in effect at the time. Litigation in Germany is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in Germany would have to be conducted in the German language, and all documents submitted to the court would, in principle, have to be translated into German. For these reasons, it may be difficult for a U.S. investor to bring an original action in a German court predicated upon the civil liability provisions of the U.S. federal securities laws against Spark Networks and the members of our Administrative Board. The U.S. and Germany do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters, though recognition and enforcement of foreign judgments in Germany is possible in accordance with applicable German laws.
Changes in tax treatment of companies engaged in e-commerce could materially adversely affect the commercial use of our platforms and our business, financial condition and operating results.
Due to the global nature of the internet, it is possible that various countries and local jurisdictions might attempt to impose additional or new regulation on our business or levy additional or new sales, income or other taxes relating to our activities. Tax authorities at the national and local levels are currently reviewing the appropriate treatment of companies engaged in e-commerce. New or revised tax regulations may subject us or our customers to additional sales, income and other taxes. For example, certain jurisdictions have considered various approaches to legislation that would require companies engaged in e-commerce to collect sales tax on internet revenue. In June 2018, the U.S. Supreme Court decided the South Dakota v. Wayfair, Inc. sales tax nexus case. As a result of the Supreme Court ruling, states now have the ability to adopt laws requiring taxpayers to collect and remit sales tax on a basis of economic nexus, even in states in which the taxpayer has no physical presence. Furthermore, there is risk that some jurisdictions, where we are or will be subject to VAT, may increase their local VAT rates on e-commerce services in order to recover economic costs of the ongoing pandemic. New or revised taxes and, in particular, sales taxes, value-added taxes and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of our services. New taxes could also create significant increases in internal costs necessary to capture data and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.
Risks Relating to the Spark Networks ADSs
You may experience dilution of your ownership interests because of the future issuance of additional ordinary shares, preferred stock or other securities that are convertible into or exercisable for such securities.
In the future, we may issue authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of direct or indirect holders of our ordinary shares, including Spark Networks ADSs. We may issue additional ordinary shares or other securities that are convertible into or exercisable for our ordinary shares in connection with hiring or retaining employees, future acquisitions, future sales of securities for capital raising purposes, or for other business purposes. The future issuance of any such additional ordinary shares may create downward pressure on the trading price of our ADSs. We may need to raise additional capital in the near future to meet working capital needs, and there can be no assurance that we will not be required to issue additional ordinary shares in conjunction with these capital raising efforts. While stockholder approval will be needed to issue additional ordinary shares beyond those currently authorized, the approval does not have to authorize a specific use of the shares, and management will have broad discretion in determining how, when and for what purpose the shares should be issued. If existing stockholders or option holders sell, or indicate an intention to sell, substantial amounts of our ADSs (or our ordinary shares that can be deposited with our ADS Depositary in exchange for our ADSs) in the public market, the price of our ADSs could decline. The perception in the market that these sales may occur could also cause the price of our ADSs to decline.
There may be limited trading volume for our ADSs, which could reduce liquidity for the holders of our ADSs and may cause the price of our ADSs to be volatile, all of which may lead to losses by investors.
There may be limited trading volume for our ADSs on the Nasdaq, such that trading does not reach the level that enables holders of our ADSs to freely sell their ADSs in substantial quantities on an ongoing basis and thereby readily achieve liquidity for their investment. In addition, if there is limited trading volume, our ADSs may experience significant market price and volume fluctuations in the future, in response to factors such as announcements of developments related to us and our subsidiaries, announcements by our competitors, fluctuations in financial results and general conditions in the dating services industry.
The price of our ADSs may fluctuate significantly.
The stock market generally has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. Broad market and industry factors may negatively affect the market price of our ADSs, regardless of our actual operating performance. The market price and liquidity of the market for our ADSs may fluctuate and may be significantly affected by numerous factors, some of which are beyond our control.
These factors include:
•significant volatility in the market price and trading volume of securities of companies in the sector within which we operate, which is not necessarily related to the operating performance of these companies;
•the mix of services that we provide, during any period, delays between our expenditures to develop and market new services and the generation of sales from those services and the related risk of obsolete services;
•changes in the amount that we spend to develop, acquire or license new services, technologies or businesses;
•changes in our expenditures to promote our services;
•success or failure of our research and development projects or our competitors;
•announcements of acquisitions by us or those of our competitors;
•the general tendency towards volatility in the market prices of shares of companies that rely on technology and innovation;
•changes in regulatory policies or tax guidelines;
•changes or perceived changes in earnings or variations in operating results;
•any shortfall in revenue or net income from levels expected by investors or securities analysts; and
•general economic trends and other factors.
Your rights as a holder of ADSs representing ordinary shares of a German company organized as a European stock corporation may differ from your rights as a stockholder in a U.S. corporation.
We are organized as a European stock corporation (Societas Europaea, SE) under the laws of Germany. You should be aware that the rights of stockholders under German law differ in important respects from those of stockholders in a U.S. corporation.
These differences include, in particular:
•Under German law, certain important resolutions, including, for example, capital decreases, measures under the German Transformation Act (Umwandlungsgesetz), such as mergers, conversions and spin-offs, the issuance of convertible bonds or bonds with warrants attached, and the dissolution of the German stock corporation apart from insolvency and certain other proceedings, require the vote of a 75% majority of the capital present or represented at the relevant stockholders’ meeting. Therefore, the holder or holders of a blocking minority of 25% or, depending on the attendance level at the stockholders’ meeting, the holder or holders of a smaller percentage of the shares in a German stock corporation may be able to block any such votes, possibly to our detriment or the detriment of other stockholders.
•As a general rule under German law, in the case of a one-tier European stock corporation a stockholder has no direct recourse against the members of the administrative board and managing directors, in the event that it is alleged that they have breached their fiduciary duty of loyalty or duty of care to the corporation. Apart from insolvency or other special circumstances, only the European stock corporation itself has the right to claim damages from members of the board and executive officers. A European stock corporation may waive or settle these damages claims only if at least three years have passed and the stockholders approve the waiver or settlement at the stockholders’ meeting with a simple majority of the votes cast, provided that a minority holding, in the aggregate, 10% or more of the European stock corporation’s share capital does not have its opposition formally noted in the minutes maintained by a German civil law notary. For more information, we have provided summaries of relevant German corporation law and of our articles of association, which are available on our website.
Holders of our ADSs will not have the same voting rights as our stockholders, which may affect the value of our ADSs.
Holders of our ADSs will not be able to directly vote underlying our ordinary shares. Holders of our ADS may instruct our ADS Depositary how to vote the ordinary shares underlying their ADSs. If we ask it to, our ADS Depositary will send out information about stockholder meetings and solicit voting instructions and will try to carry out voting instructions it receives. However, we are not required to instruct our ADS Depositary to take action with respect to stockholder meetings. If we do not do so, holders of our ADSs can still send voting instructions to our ADS Depositary, and our ADS Depositary may try to carry out those instructions, but it is not required to do so. However, holders of our ADSs may not become aware of stockholder meetings if our ADS Depositary does not send out information. Even if our ADS Depositary does solicit voting instructions, holders of our ADSs may not receive the information in time. Because of these factors, holders of our ADSs may not be able to effectively exercise voting rights that they would have if they held our ordinary shares directly.
Our principal stockholders and management own a significant percentage of our ordinary shares and will be able to exert significant influence over matters subject to stockholder approval.
Members of the Administrative Board and holders of 5% or more of our ordinary shares beneficially own a majority of our ordinary shares (including our ordinary shares represented by our ADSs). Currently, our principal stockholders (those stockholders owning at least 5% of our ordinary shares) and management hold approximately 31% (excluding any shares underlying options) of our ordinary shares (which may be held in the form of our ADSs). These stockholders have significant influence over the outcome of all matters requiring stockholder approval. For example, these stockholders may be able to influence the outcome of elections of members of Administrative Board, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transactions. This may prevent or discourage unsolicited acquisition proposals or offers for our ADSs that you may feel are in your best interest as a holder of our ADSs. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders, as they may act in a manner that advances their best interests rather than those of other stockholders, including seeking a premium value for their ordinary shares, which might affect the prevailing market price for our ADSs.
We have no present intention to pay dividends on our ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of our ADSs appreciates.
We have no present intention to pay dividends on our ADSs in the foreseeable future. Any recommendation by the Administrative Board to pay dividends will depend on many factors, including financial condition, results of operations, legal requirements and other factors. Accordingly, if the price of our ADSs declines in the foreseeable future, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends.
You might not receive distributions on our ordinary shares represented by our ADSs or any value for them.
Under the terms of the Deposit Agreement, our ADS Depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares after deducting fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares represented by your ADSs. However, in accordance with the limitations set forth in the Deposit Agreement, our ADS Depositary is not required to make a distribution if it decides it may be unlawful or impractical to make a distribution available to holders of our ADSs.
Certain or all the holders of our ADSs may be unable to claim tax credits with respect to, or tax refunds to reduce German withholding tax applicable to the payment of dividends, or a dividend may be effectively taxed twice.
We do not anticipate paying dividends on our ADSs for the foreseeable future. As a German tax resident company, however, if we pay dividends, such dividends will be subject to German withholding tax. Currently, the applicable German withholding tax rate is 26.375% of the gross dividend. This German tax can be reduced to the applicable U.S.-Germany income tax treaty (“Treaty”) rate, which is generally 15%, if the applicable taxpayer is eligible for such Treaty rate and files an application containing a specific German tax certificate with the German Federal Central Tax Office (Bundeszentralamt für Steuern). If such a tax certificate cannot be delivered to our ADS holders due to applicable settlement mechanics or lack of information regarding our ADS holders, holders of our ADSs may be unable to benefit from the double tax treaty relief (including “Eligible United States Holders” as defined under the Treaty) and may be unable to file for a credit of such withholding tax in their jurisdiction of residence. Further, the payment made to our ADS holders equal to the net dividend may, under the tax law applicable to our ADS holders, qualify as taxable income that is in turn subject to withholding, which could mean that a dividend is effectively taxed twice. There can be no guarantee that the information delivery requirement can be satisfied in all cases, which could result in adverse tax consequences for affected ADS holders. Our ADS holders should note that the applicable interpretation circular (Besteuerung von American Depositary Receipts ("ADR") auf inländische Aktien) issued by the German Federal Ministry of Finance (Bundesministerium der Finanzen), dated May 24, 2013 (reference number IV C 1-S2204/12/10003) (the “ADR Tax Circular”), is not binding on German courts, and there is no certainty as to whether a German tax court will follow the ADR Tax Circular in determining the German tax treatment of our ADSs. In addition, the ADR Tax Circular does not include details on how an ADR program should be designed. If our ADSs are determined not to fall within the scope of application of the ADR Tax Circular, or a German tax court does not follow the ADR Tax Circular, and profit distributions made with respect to our ADSs are not treated as a dividend for German tax purposes, our ADS holders would not be entitled to a refund of any taxes withheld on the dividends under German tax law and profit distributions made with respect to our ADSs may be effectively taxed twice.
You may have less access to information about us and less opportunity to exercise your rights as a security holder if you hold our ADSs instead of our ordinary shares.
The rights and terms of our ADSs are designed to replicate, to the extent reasonably practicable, the rights attendant to our ordinary shares, for which there is no active trading market in the United States. However, because of certain aspects of German law, our Articles of Association and the terms of the Deposit Agreement under which our ADSs are issued, your rights as a holder of our ADSs will differ in various ways from a stockholder’s rights, and you may be affected in other ways, including:
•you may not be able to participate in rights offerings or dividend alternatives;
•the Deposit Agreement may be amended by us and our ADS Depositary, or may be terminated by us or our ADS Depositary, without your consent in a manner that could prejudice your rights; and
•the Deposit Agreement limits our obligations and liabilities and those of our ADS Depositary.
U.S. investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes.
Generally, if, for any taxable year, at least 75% of our gross income is passive income, or at least 50% of the gross average quarterly value of our assets is attributable to assets that produce passive income or are held for the production of passive income, we would be characterized as a PFIC for U.S. federal income tax purposes. If we are characterized as a PFIC, U.S. holders of our ordinary shares or ADSs may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares or ADSs treated as ordinary income, rather than capital gain. This characterization would result in the loss of the preferential rate applicable to dividends paid by us to individuals who are U.S. holders, and having interest charges apply to distributions by us and the proceeds of sales of our ADSs or shares.
Item 1B. Unresolved Staff Comments
Item 2. Properties.
Our principal administrative activities are located in our approximately 2,620 square meter leased facility in Berlin, Germany. We also lease additional office space in New York, Utah, and California in the U.S. We believe that our facilities are adequate for our current needs and suitable additional or substitute space will be available in the future to replace our existing facilities, if necessary, or accommodate expansion of our operations. The leases for our facilities vary in dates and terms, with the main facility’s lease expiring on January 31, 2024.
We believe our facilities, including our planned expansions, are sufficient for our current needs.
Item 3. Legal Proceedings.
Refer to Note 9. Commitments and Contingencies to our “Consolidated Financial Statements,” which is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Item 5. Market for Registrant’s ADSs, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information and Holders
Our ADSs are listed for trading on the Nasdaq under the symbol “LOV”.
As of March 22, 2023, the number of holders of record of our ADSs was 62. This number does not include beneficial owners whose ADSs are held in street name.
We have not declared or paid any cash dividends on our ordinary shares since our inception. We do not plan to pay dividends in the foreseeable future. We currently intend to retain all available funds and any future earnings, if any, for use in the operation of our business. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors ("Board"), subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our Board of Directors may deem relevant, and subject to the restrictions contained in future financing instruments. Consequently, stockholders will need to sell our ADSs to realize a return on their investment, if any.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
We did not repurchase any of our equity securities during the fiscal year 2022.
Recent Sales of Unregistered Securities
Securities Authorized for Issuance under Equity Compensation Plan
No securities were authorized for issuance during 2022. Information pertaining to our outstanding Stock-based Compensation plan is in Note 11. Stock-based Compensation of the "Consolidated Financial Statements", and is incorporated by reference herein.
Item 6. [Reserved.]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and consolidated results of operations should be read together with our Consolidated Financial Statements and accompanying notes, which are included in Part II. Item 8 of this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, particularly in the “Risk Factors” in Part I. Item 1A of this Annual Report.
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 112 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 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.
While we continue to grow our business, the Company has initiated an exploration of strategic alternatives since June of 2022. As part of this process, the Company is considering a wide range of options including a potential sale, merger or other strategic transaction, and continuing to operate as a public, independent company. As of the date that this Annual Report is issued, the review is still ongoing.
On March 11, 2022, the Company completed the successful refinancing of its existing term loan and revolving facility with borrowings under the Financing Agreement. The Financing Agreement was amended on August 5, 2022 and the amendment was further amended and restated on August 19, 2022 to, among other matters, revise certain financial covenants related to quarterly testing of the Company's leverage ratio. The refinance provided more covenant flexibility and allowed more resources to be invested into the business to drive growth. We believe that our current cash, cash flow from operations, and borrowing under the financing agreement will be sufficient to meet our anticipated cash needs for financial liabilities, capital expenditures and contractual obligations, for the next twelve months following the filing of this Annual Report.
We had $187.8 million revenue in fiscal year 2022 compared to $216.9 million in fiscal year 2021. The decrease in revenue was attributable to the decrease in the number of average paying subscribers of 7.3%, as well as the fluctuations of foreign exchange rates, strengthening the U.S. dollar's value against all major currencies. The net loss was $44.2 million in fiscal year 2022 compared to a net loss of $68.2 million in fiscal year 2021. The decrease in net loss was primarily due to trade name and goodwill impairment losses and income tax expense recognized in the prior year.
Foreign Currency Exchange and Inflation Risks
We operate our business in the U.S. and various markets outside the U.S., primarily in various jurisdictions within the 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 the U.S. are generally measured using the local currency as the functional currency. We translate revenue generated outside the U.S. (the "non-U.S. revenue") into U.S. dollar-denominated operating results and during periods of a strengthening U.S. dollar, such revenue will be reduced when translated into U.S. dollars. In addition, as foreign currency exchange rates fluctuate, the translation of the non-U.S. revenue into U.S. dollar-denominated operating results affects the period-over-period comparability of such results and can result in foreign currency exchange gains or losses. For the year ended December 31, 2022, 31.4% of our total revenue was non-U.S. revenue. The average U.S. dollar versus Euro exchange rate was 12.5% higher in year 2022 compared to 2021. The strengthening of the U.S. dollar against other major currencies has partially led to the decreases in our total revenue for the current periods. Historically, we have not hedged any foreign currency exposures. If the U.S. dollar continues strengthening against the Euro and other foreign currencies that contributes to our revenue, our exposure to exchange rate fluctuations will increase, and as a result, such fluctuations could adversely affect our future results of operations.
Inflation has increased during the periods covered by this Annual 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.
The global impact of the ongoing COVID-19 pandemic continued to evolve in 2022, and we continue to monitor the global situation and potential impact on our business. The effects of COVID-19 did not have a material impact on our result of operations or financial condition for 2022 and 2021. However, there is still significant uncertainty as a result of the pandemic and its continuing potential to negatively impact the global economy. 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 are defined as the total number of new members registering to the platforms with their email address. Those include members who enter into premium subscriptions and free memberships.
Average Paying Subscribers
Paying subscribers are defined as individuals who have paid a monthly fee for access to premium services, which include, among others, unlimited communication with other registered users, access to user profile pictures and enhanced search functionality. The 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
Monthly ARPU represents the 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 is defined as revenue, net of refunds and credit card chargebacks, less direct marketing.
Direct Marketing is defined as online and offline advertising spend and is included within Cost of Revenue, exclusive of depreciation and amortization within our Consolidated Statements of Operations and Comprehensive Loss.
Unaudited selected statistical information regarding the key business metrics described above is shown in the table below:
|Year Ended December 31,|
|Registrations||12,050,537 ||13,146,834 ||(1,096,297)||(8.3)||%|
|Average Paying Subscribers||811,268 ||874,922 ||(63,654)||(7.3)||%|
|Total Monthly ARPU||$||19.29 ||$||20.66 ||$||(1.37)||(6.6)||%|
|Year Ended December 31,|
|(in thousands)||2022||2021||Change||% Change|
|Net Revenue||$||187,763 ||$||216,905 ||$||(29,142)||(13.4)||%|
|Direct Marketing||93,447 ||105,805 ||(12,358)||(11.7)||%|
|Contribution||$||94,316 ||$||111,100 ||$||(16,784)||(15.1)||%|
New members registered to our platforms in 2022 decreased by 1.1 million, or 8.3%, compared to 2021. Average paying subscribers in 2022 decreased by 0.1 million, or 7.3%, compared to 2021. The decrease was primarily driven by lower marketing spend.
Monthly ARPU for 2022 decreased by 6.6% compared to 2021. The decline in ARPU was primarily a result of currency fluctuations.
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.
|Year Ended December 31,|
|(in thousands)||2022||2021||$ Change||% Change|
|Revenue||$||187,763 ||$||216,905 ||$||(29,142)||(13.4)||%|
|Operating costs and expenses:|
|Cost of revenue, exclusive of depreciation and amortization||117,907 ||131,974 ||(14,067)||(10.7)||%|
|Other operating expenses||56,536 ||59,408 ||(2,872)||(4.8)||%|
|Depreciation and amortization||2,387 ||6,593 ||(4,206)||(63.8)||%|
|Impairment of goodwill, intangible assets, and capitalized software||30,269 ||52,950 ||(22,681)||(42.8)||%|
|Total operating costs and expenses||207,099 ||250,925 ||(43,826)||(17.5)||%|
|Operating loss||(19,336)||(34,020)||14,684 ||(43.2)||%|
|Other income (expense):|
|Interest expense||(16,432)||(13,453)||(2,979)||22.1 ||%|
|Loss on foreign currency transactions||(2,031)||(2,918)||887 ||(30.4)||%|
|Other income||601 ||634 ||(33)||(5.2)||%|
|Total other expense, net||(17,862)||(15,737)||(2,125)||13.5 ||%|
|Loss before income taxes||(37,198)||(49,757)||12,559 ||(25.2)||%|
|Income tax expense||(6,992)||(18,398)||11,406 ||(62.0)||%|
|Net loss||(44,190)||(68,155)||23,965 ||(35.2)||%|
Comparison of Fiscal Years Ended December 31, 2022 and December 31, 2021
Revenue in 2022 decreased by $29.1 million, or 13.4%, compared to 2021. The decrease in revenue was attributable to the decrease in the number of average paying subscribers of 7.3%, as well as the fluctuations of foreign exchange rate as the U.S. dollar strengthened against all major currencies. In 2022, the Company recognized $2.5 million of revenue that had been included in the Company's deferred revenue balance related to the virtual currency that is held for longer than 12 months due to a change in accounting estimate. See Note 1. Basis of Presentation and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements for further discussion of change in accounting estimate.
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 in 2022 decreased by $14.1 million, or 10.7%, compared to 2021. The decreases were primarily due to the decline in marketing spend. Direct marketing costs in 2022 decreased by $12.4 million, or 11.7%, compared to 2021.
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 in 2022 decreased by $2.9 million, or 4.8%, compared to 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 software license and consulting costs. 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 software license and consulting costs.
Depreciation and amortization
Depreciation and amortization in 2022 decreased by $4.2 million, or 63.8%, compared to 2021. The decrease was primarily driven by the decrease in amortization of our customer relationships asset which was fully amortized in 2021.
In 2022, the Company recorded a goodwill impairment charge of $15.4 million for the Zoosk reporting unit and an impairment charge of $14.8 million for the Zoosk trade name. In 2021, the Company recorded a goodwill impairment charge of $21.8 million for the Zoosk reporting unit and recognized a Zoosk trade name impairment charge of $25.4 million. See Note 5. Goodwill and Intangible Assets in the Notes to the Consolidated Financial Statements for further discussion of impairment.
Other income (expense)
Other expense, net, consist primarily of interest expense, foreign exchange gains and losses, and other related finance costs. Other expense, net, in 2022 increased by $2.1 million, or 13.5%, compared to 2021, primarily due to higher interest expense. 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 ended March 31, 2022. See Note 8. Debt in the Notes to the Consolidated Financial Statements for further discussion of the debt extinguishment. The increase in interest expense was partially offset by a $0.9 million decrease in losses on foreign currency transactions compared to 2021.
Income tax expense
Income tax expense in 2022 was $7.0 million compared to $18.4 million in 2021, which reflects an effective tax rate of (18.8)% and (37.0)%, respectively. The income tax provision in 2022 was primarily driven by change in the valuation allowance on German and U.S. Federal and State deferred tax assets, impairment of goodwill and the foreign tax rate differential. The provision for income taxes in 2021 was primarily driven by U.S. Federal and state taxes, change in the valuation allowance on Federal and state deferred tax assets and German net operating losses and interest carryforwards, and non-deductible German share-based compensation arrangements. See Note 3. Income Taxes in the Notes to the Consolidated Financial Statements for further discussion of income taxes.
Non-GAAP Financial Measures
We report our financial results in accordance with U.S. Generally Accepted Accounting Principles ("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 earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), a non-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 net 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;
•Adjusted EBITDA may be calculated differently by other companies in our industry, thus limiting its value as a comparative measure;
Because of these limitations, Adjusted EBITDA should be considered in addition to other financial performance measures, including net income (loss) and our other U.S. GAAP results.
The following table reconciles Net loss to Adjusted EBITDA for the periods presented:
|Year Ended December 31,|
|(in thousands)||2022||2021||$ Change||% Change|
|Net loss||$||(44,190)||$||(68,155)||$||23,965 ||(35.2)||%|
|Net interest expense||16,377 ||13,453 ||2,924 ||21.7 ||%|
|Loss on foreign currency transactions||2,031 ||2,918 ||(887)||(30.4)||%|
|Income tax expense||6,992 ||18,398 ||(11,406)||(62.0)||%|
|Depreciation and amortization||2,387 ||6,593 ||(4,206)||(63.8)||%|
|Impairment of goodwill, intangible assets, and capitalized software||30,269 ||52,950 ||(22,681)||(42.8)||%|
|Stock-based compensation expense||1,536 ||2,725 ||(1,189)||(43.6)||%|
|3,146 ||4,155 ||(1,009)||(24.3)||%|
|Adjusted EBITDA||$||18,548 ||$||33,037 ||$||(14,489)||(43.9)||%|
(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
Our ongoing liquidity requirements arise primarily from working capital needs, research and development requirements and the debt service. In addition, we may use liquidity to fund acquisitions or make other investments. Sources of liquidity are cash balances and cash flows from operations and borrowings. From time to time, we may obtain additional liquidity through the issuance of equity or debt.
As of December 31, 2022, we had cash and cash equivalents of $11.4 million. The Company has generated losses from operations, incurred impairment charges to its Zoosk goodwill and intangible assets, and has a working capital deficiency. We have received a Forbearance Letter from our lender, MGG Investment Group LP, due to an Event of Default under our Financing Agreement. See Note 8. Debt in the Notes to the Consolidated Financial Statements for further discussion regarding the financing agreement with MGG. Management’s plans in regards to these matters are discussed in Note 1. Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated Financial Statements.
Cash Flows Information
The following table summarizes our cash flows for the periods presented:
|Year Ended December 31,|
|(in thousands)||2022||2021||$ Change||% Change|
|Net cash provided by (used in):|
|Operating activities||$||(9,571)||$||16,663 ||$||(26,234)||(157.4)||%|
|Investing activities||(2,502)||(1,086)||$||(1,416)||130.4 ||%|
|Financing activities||7,524 ||(19,920)||$||27,444 ||(137.8)||%|
|Net change in cash and cash equivalents and restricted cash||$||(4,549)||$||(4,343)||$||(206)||4.7 ||%|
Our cash flows from operating activities primarily include net loss adjusted for (i) non-cash items included in net loss, such as depreciation and amortization, impairment of goodwill and intangible assets, stock-based compensation and (ii) changes in the balances of operating assets and liabilities.
Net cash used in operating activities in 2022 was $9.6 million, an increase of $26.3 million compared to $16.7 million of net cash provided by operating activities in 2021. The increase in cash outflows was primarily driven by a decrease in revenue, higher cash payments of income taxes, and an increase in payments to our vendors as a result of timing of payments.
Our cash flows from investing activities primarily include development of internal-use software, purchase of property and equipment.
Net cash used in investing activities in 2022 was $2.5 million, an increase of $1.4 million compared to $1.1 million in 2021. The increase was primarily due to additional capital expenditures on personnel and freelancers working on software development projects in 2022.
Our cash flows from financing activities primarily include changes in debt.
Net cash provided by financing activities in 2022 was $7.5 million, an increase of $27.4 million compared to $19.9 million of net cash used in financing activities in 2021. Net cash provided by financing activities in 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 then 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, and $0.3 million amendment fee paid in connection with the Amended and Restated Amendment No. 1 to the Financing Agreement dated August 19, 2022 (the "Amendment"). See Note 8. Debt in the Notes to the Consolidated Financial Statements for detail information. Net cash used in financing activities in 2021 included $19.4 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 in March 2021.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as of December 31, 2022, as defined in the rules and regulations of the SEC.
Historically, we have experienced higher operating profits in the second half of the year due to higher marketing expenses during the first six months of the year. Revenue is at similar levels during the first and second half of the year.
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 Item 8 of this Annual Report for a discussion of recently issued and adopted accounting standards.
Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 1. Basis of Presentation and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements. As disclosed in Note 1, the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments.
Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. Our determinations regarding the recognition of income tax benefits are made in consultation with outside tax and legal counsel, where appropriate, and are based upon the technical merits of our tax positions in consideration of applicable tax statutes and related interpretations and precedents and upon the expected outcome of proceedings (or negotiations) with taxing and legal authorities. The tax benefits ultimately realized may differ from those recognized in our future financial statements based on a number of factors, including our decision to settle rather than litigate a matter, relevant legal precedent related to similar matters and our success in supporting our filing positions with taxing authorities.
Goodwill and Indefinite-Lived Intangible Assets
We assess goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill and indefinite-lived intangible assets may be impaired. We have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, we determine it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying amount, then additional impairment testing is not required. However, if we conclude otherwise, then we are required to perform a quantitative assessment for impairment. Goodwill impairment testing is performed for the Spark and Zoosk reporting units.
During the third quarter of 2022, the Company lowered its financial expectations for the remainder of 2022 due to continued appreciation of the U.S. Dollar and a tougher economic environment causing a temporary slowdown in demand for our products. The slower increase in projected revenue, as well as the rising interest rate and the cost of capital constituted an interim triggering event during the third quarter of 2022. As a result, the Company performed an impairment analysis with regard to its goodwill and indefinite-lived intangible assets as of September 30, 2022. The goodwill impairment test concluded that the fair value of the Company's reporting units (Spark and Zoosk) exceeded their carrying amounts, and no goodwill impairment was recognized.
During the fourth quarter of 2022, the Company further lowered its financial expectations due to the continued difficulty in the economic environment explained above. Interest rates and cost of capital continued to rise in the fourth quarter. This constituted a triggering event, and as a result the Company performed an impairment analysis as of December 31, 2022 with regard to its goodwill and indefinite-lived intangible assets. The goodwill impairment test concluded that the fair value of the Spark reporting unit exceeded the carrying amount, and as a result, no goodwill impairment was recorded. For the Zoosk reporting unit, the fair value did not exceed the carrying value, and the Company recorded a goodwill impairment charge of $15.4 million. The methodology and assumptions utilized in the fair value calculations for indefinite-lived intangible assets is further explained below.
To determine the fair value of the reporting units, we considered, among other things, expectations of projected revenue and cash flows, assumptions impacting the discount rate, changes in our stock price and changes in the carrying amounts of our reporting units with goodwill. We also considered overall business conditions. Management judgment is involved in estimating variables, and they include inherent uncertainties since they are forecasting future events. Certain assumptions and estimates in our model are highly sensitive and include inherent uncertainties that are often interdependent and do not change in isolation. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, change, then one or more of our reporting units might become impaired in the future.
We also utilize a fair value calculation to perform a quantitative assessment of indefinite-lived intangible assets, such as trade names, which are generally recorded and valued in connection with a business acquisition. We estimate the fair value using an income approach, specifically the relief-from-royalty method, based on the present value of future expected cash flows. Significant assumptions under the relief-from-royalty method include the royalty rate, projected revenue and the discount rate applied to the estimated cash flows. For the interim assessment for the quarter ended September 30, 2022 and the annual assessments in the fourth quarter of 2022, we performed a qualitative assessment for indefinite-lived intangibles related to Jdate and Christian Networks and a quantitative assessment for those related to Zoosk and recognized a Zoosk trade name impairment charge of $11.8 million and $3.0 million during the third and fourth quarter of 2022. We used a royalty rate of 3% and discount rate of 23%-27.5% to estimate the fair value of Zoosk trade name. For the interim assessment for the quarter ended June 30, 2021, we recorded an impairment charge of $10.3 million related to the Zoosk trade name. The royalty rate and discount rate used to estimate the fair value of the Zoosk trade name were 4% and 14.5%, respectively. As part of the Company's annual assessment during the quarter ended December 31, 2021, the Company recognized an additional impairment charge of $15.1 million for Zoosk, using a royalty rate of 4% and a discount rate of 21%.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (BDO USA, LLP; New York, NY; PCAOB ID: 243)
Consolidated Balance Sheets as of December 31, 2022 and 2021
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2022 and 2021
Consolidated Statements of Shareholders' (Deficit) Equity for the Years Ended December 31, 2022 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Shareholders and Administrative Board
Spark Networks SE
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Spark Networks SE (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, shareholders’ (deficit) equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 31, 2023 expressed an adverse opinion thereon.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered continued declines in revenue, recurring losses from operations and has a working capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of this critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment Assessments of Zoosk Reporting Unit’s Goodwill and Zoosk Trade Name
As described in Notes 1 and 5 to the consolidated financial statements, the Company’s consolidated balances of goodwill and intangible assets were $119.3 million and $13.3 million, respectively, as of December 31, 2022. The Company assesses goodwill and other indefinite-lived intangible assets for impairment at least annually, or more frequently if events or changes in circumstances indicate that such assets may be impaired. During the third and fourth quarters of 2022, triggering events were identified and management performed impairment assessments of the Zoosk reporting unit’s goodwill and Zoosk trade name and, as a result, recorded impairment of the Zoosk reporting unit goodwill of $15.4 million and impairment of the Zoosk trade name of $14.8 million for the year ended December 31, 2022. Management tests goodwill for impairment at the reporting unit level using a weighting of fair values derived from an income approach based on a discounted cash flow model and a market approach based on appropriate valuation multiples observed for the reporting unit's guideline public companies. Management estimates the fair value of the Zoosk trade name using an income approach, specifically the relief-from-royalty method.
We identified these impairment assessments of the Zoosk reporting unit’s goodwill and Zoosk trade name as a critical audit matter due to the subjectivity and complexity of management judgments in the revenue growth rates and discount rates used in the cash flow projections. Auditing the revenue growth rates and discount rates used by management in the cash flow projections involved especially challenging and subjective auditor judgment due to the nature and extent of audit effort required to address this matter, including the involvement of professionals with specialized skill or knowledge.
The primary procedures we performed to address this critical matter included:
•Evaluating the reasonableness of management’s revenue growth rate assumptions used in the cash flows projections by i) comparing revenue projections to prior period forecasts, historical revenues, internal and external communications made by the Company, and ii) obtaining publicly available industry and market information and comparing to the revenue projections, and considering whether these assumptions were consistent with evidence obtained in other areas of the audit.
•Utilizing personnel with specialized knowledge and skill in valuation to assist in i) evaluating the appropriateness of the valuation methodologies used by management in these impairment assessments, ii) testing the source information underlying the determination of the discount rates, and iii) developing a range of independent estimates of discount rates and comparing those to the discount rates selected by management.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2021.
New York, NY
March 31, 2023
Spark Networks SE
Consolidated Balance Sheets
(in thousands, except share data)
|December 31, 2022||December 31, 2021|
|Cash and cash equivalents||$||11,438 ||$||16,141 |
Accounts receivable, net of allowance of $85 and $368, respectively
|5,154 ||6,261 |
|Prepaid expenses||3,514 ||3,201 |
|Other current assets||1,557 ||1,085 |
|Total current assets||21,663 ||26,688 |
|Property and equipment, net||4,956 ||3,613 |
|Goodwill||119,276 ||134,744 |
|Intangible assets, net||13,299 ||29,369 |
|Deferred tax assets||— ||7,623 |
|Other assets||5,183 ||7,764 |
|Total assets||$||164,377 ||$||209,801 |
|Liabilities and Shareholders' (Deficit) Equity|
|Current portion of long-term debt||94,817 ||17,593 |
|Accounts payable||6,487 ||11,474 |
|Deferred revenue||28,085 ||36,973 |
|Accrued expenses and other current liabilities||24,247 ||27,042 |
|Total current liabilities||153,636 ||93,082 |
|Long-term debt, net of current portion||— ||64,531 |
|Deferred tax liabilities||409 ||1,077 |
|Other liabilities||17,118 ||18,418 |
|Total liabilities||171,163 ||177,108 |
|Commitments and Contingencies (Note 9)|
|Shareholders' (Deficit) Equity:|
Common stock, €1.00 nominal value; 3,992,078 and 3,521,005 shares authorized as of December 31, 2022 and 2021, respectively; 2,661,386 shares issued; 2,623,820 and 2,617,397 shares outstanding as of December 31, 2022 and 2021, respectively
|3,064 ||3,064 |
Treasury stock, at €1.00 nominal value; 37,566 and 43,989 shares as of December 31, 2022 and 2021, respectively
|Additional paid-in capital||224,506 ||223,103 |
|Accumulated other comprehensive income||10,279 ||6,977 |
|Total shareholders' (deficit) equity||(6,786)||32,693 |
|Total liabilities and shareholders' (deficit) equity||$||164,377 ||$||209,801 |
The accompanying notes are an integral part of these consolidated financial statements.
Spark Networks SE
Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share data)
|Year Ended December 31,|
|Revenue||$||187,763 ||$||216,905 |
|Operating costs and expenses:|
|Cost of revenue, exclusive of depreciation and amortization||117,907 ||131,974 |
|Other operating expenses||56,536 ||59,408 |
|Depreciation and amortization||2,387 ||6,593 |
|Impairment of goodwill, intangible assets, and capitalized software||30,269 ||52,950 |
|Total operating costs and expenses||207,099 ||250,925 |
|Other income (expense):|
|Loss on foreign currency transactions||(2,031)||(2,918)|
|Other income||601 ||634 |
|Total other expense, net||(17,862)||(15,737)|
|Loss before income taxes||(37,198)||(49,757)|
|Income tax expense||(6,992)||(18,398)|
|Other comprehensive income:|
|Foreign currency translation adjustment||3,302 ||3,681 |
|Loss per share:|
|Basic loss per share||$||(16.87)||$||(26.10)|
|Diluted loss per share||$||(16.87)||$||(26.10)|
|Weighted average shares outstanding:|
|Basic||2,619,174 ||2,610,873 |
|Diluted||2,619,174 ||2,610,873 |
The accompanying notes are an integral part of these consolidated financial statements.
Spark Networks SE
Consolidated Statements of Shareholders' (Deficit) Equity
(in thousands, except share data)
|Common Stock||Treasury Stock|
|Shares||Amount||Shares||Amount||Additional Paid-in Capital||Accumulated|
|Accumulated Other Comprehensive Income||Total|
|Balance at January 1, 2021||2,661,386 ||3,064 ||(55,697)||(61)||220,852 ||(132,248)||3,296 ||94,903 |
|Stock-based compensation||— ||— ||— ||— ||2,725 ||— ||— ||2,725 |
|Treasury stock issued pursuant to equity-based plans||— ||— ||11,708 ||13 ||(474)||— ||— ||(461)|
|Net loss||— ||— ||— ||— ||— ||(68,155)||— ||(68,155)|
|Foreign currency translation adjustments||— ||— ||— ||— ||— ||— ||3,681 ||3,681 |
|Balance at December 31, 2021||2,661,386 ||3,064 ||(43,989)||(48)||223,103 ||(200,403)||6,977 ||32,693 |
|Stock-based compensation||— ||— ||— ||— ||1,536 ||— ||— ||1,536 |
|Treasury stock issued pursuant to equity-based plans||— ||— ||6,423 ||6 ||(133)||— ||— ||(127)|
|Net loss||— ||— ||— ||— ||— ||(44,190)||— ||(44,190)|
|Foreign currency translation adjustments||— ||— ||— ||— ||— ||— ||3,302 ||3,302 |
|Balance at December 31, 2022||2,661,386 ||3,064 ||(37,566)||(42)||224,506 ||(244,593)||10,279 ||(6,786)|
The accompanying notes are an integral part of these consolidated financial statements.
Spark Networks SE
Consolidated Statements of Cash Flows
|Year Ended December 31,|
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities:|
|Depreciation and amortization||2,387 ||6,593 |
|Impairment of goodwill, intangible assets, and capitalized software||30,269 ||52,950 |
|Unrealized loss on foreign currency transactions||2,166 ||2,835 |
|Stock-based compensation expense||1,536 ||2,725 |
|Amortization of debt issuance costs and accretion of debt discounts||2,477 ||4,125 |
|Loss on extinguishment of debt||3,964 ||— |
|Deferred tax expense||6,233 ||15,341 |
|Provision for credit losses||318 ||458 |
|Non-cash lease expense||2,183 ||1,971 |
|Change in operating assets and liabilities:|
|Accounts receivable||622 ||(1,381)|
|Prepaid expenses and other current assets||(952)||547 |
|Other assets||287 ||337 |
|Accounts payable, accrued expenses, and other current liabilities||(6,769)||(61)|
|Deferred revenue||(7,695)||255 |
|Net cash (used in) provided by operating activities||(9,571)||16,663 |
|Net cash used in investing activities||(2,502)||(1,086)|
|Proceeds from debt, net of discount and issuance costs||97,750 ||— |
|Repayment of debt||(85,552)||(19,397)|
|Debt issuance costs paid to third parties||(3,531)||— |
|Payment of early extinguishment of debt charge||(893)||— |
|Payments directly related to debt||(250)||(523)|
|Net cash provided by (used in) financing activities||7,524 ||(19,920)|
|Net change in cash and cash equivalents and restricted cash||(4,549)||(4,343)|
|Effects of exchange rate fluctuations on cash and cash equivalents and restricted cash||(161)||(495)|
|Net decrease in cash and cash equivalents and restricted cash||(4,710)||(4,838)|
|Cash and cash equivalents and restricted cash at beginning of period||16,279 ||21,117 |
|Cash and cash equivalents and restricted cash at end of period||$||11,569 ||$||16,279 |
|Supplemental disclosure of cash flow information:|
Cash paid for interest including payment of early extinguishment of debt charges of $893 and $0, respectively
|$||10,814 ||$||9,251 |
|Cash paid for income taxes||$||3,029 ||$||114 |
|Non-cash investing and financing activities:|
|Property and equipment in accounts payable and accrued liabilities||$||169 ||$||— |
The accompanying notes are an integral part of these consolidated financial statements.
Spark Networks SE
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
Spark Networks SE (“Spark Networks” or the “Company”) is a leader in social dating platforms for meaningful relationships focusing on the 40+ age 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. The Company is domiciled in Germany with significant corporate operations, including executive leadership, accounting and finance, located in the United States.
Basis of Presentation and Consolidation
The Company prepares its consolidated financial statements in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). The financial statements assume the Company will continue as a going concern.
The 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.
Prior to January 1, 2023, the Company was an "emerging growth company", as defined in Section 2(a) of the Securities Act of 1933, as amended, (the "Securities Act" ), as modified by the Jumpstart our Business Startups Act of 2012, (the "JOBs Act" ), and took advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements. December 31, 2022, the last day of the fiscal year following the fifth anniversary of the Company’s initial public offering, was the Company's last day as an emerging growth company, and thereafter the Company is no longer exempt from the reporting requirements discussed above.
Use of Estimates
The preparation of 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: deferred tax asset valuation allowances, unrecognized tax benefits, and annual impairment testing of goodwill and indefinite-lived intangible assets. The Company evaluates its estimates and judgments on an ongoing basis based on historical experience, expectations of future events and various other factors that we believe to be reasonable under the circumstances and revises them when necessary. Actual results may differ from the original or revised estimates.
Change in Accounting Estimate
During the quarter ended September 30, 2022, the Company analyzed its virtual currency deferred revenue balance to determine the likelihood of redemption based on the actual redemption rate. Virtual currency is paid for upfront and is recorded as deferred revenue until the currency is redeemed, at which point the Company recognizes the revenue. The Company's analysis showed a likelihood of redemption of its virtual currency after 12 months of purchase is remote. Based on this analysis, starting in September 2022, the Company recognized revenue on a quarterly basis for all virtual currency that is held for longer than 12 months. This change is considered a change in accounting estimate in accordance with ASC 250 “Accounting Changes and Error Corrections”. The effect of the change in estimate increased the Company's revenue by $2.5 million, decreased the net loss by $2.3 million, and decreased both the basic and diluted loss per share by $0.87 for 2022.
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, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Principal conditions and events leading to this conclusion are that the Company has generated losses from operations, continued decline in revenues, incurred impairment charges to its Zoosk goodwill and intangible assets, cash outflows from operations and has a working capital deficiency. Based on these conditions and events, we may not be able to comply with the covenants under the MGG Term Loan Agreement (see Note 8. Debt) over the next 12 months, specifically related to the maximum leverage ratio covenant. The Company plans to alleviate these conditions and events by implementing additional cost reduction measures to reduce our operating expenses and optimize our net working capital and profit.
On March 29, 2023, we entered into an Amendment and Forbearance Agreement with our lender, MGG Investment Group LP, due to not delivering financial statements accompanied by a report and an opinion that does not include any qualification, exception or explanatory paragraph expressing substantial doubt about the ability to continue as a going concern (“Event of Default”). Among other terms, this agreement contains terms that state during the forbearance period, defined as the date of the Agreement through the earlier of May 15, 2023 or upon the occurrence of a Termination Event (as defined in the Amendment and Forbearance Agreement), our lender agrees to forbear from exercising any of its remedies with respect to this Event of Default. Based on these facts and circumstances, we have reclassified the debt from long-term to current within the Consolidated Balance Sheets.
We have determined that our offshore earnings will be indefinitely reinvested outside of Germany. As a result, we have not recorded a deferred tax liability related to undistributed earnings of foreign subsidiaries as of December 31, 2022 and December 31, 2021. The Company will continue to evaluate its reinvestment policy on a quarterly basis and will adjust its deferred tax liability accordingly to the extent there is a change and adjustment is required. As of December 31, 2022, the amount of undistributed earnings was $18.5 million. Upon distribution of these earnings, we would be subject primarily to German income taxes and foreign withholding taxes. Assuming the indefinitely reinvested earnings were repatriated under the laws and rates applicable on December 31, 2022, the incremental taxes are estimated to be $1.2 million.
Foreign Currency Exchange and Inflation Risks
We operate our business in United States ("U.S.") and various markets outside the U.S., primarily in jurisdictions within the European 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 the U.S. are generally measured using the local currency as the functional currency. We translate revenue generated outside the U.S. (the "non-U.S. revenue") into U.S. dollar-denominated operating results and during periods of a strengthening U.S. dollar, such revenue will be reduced when translated into U.S. dollars. In addition, as foreign currency exchange rates fluctuate, the translation of the non-U.S. revenue into U.S. dollar-denominated operating results affects the period-over-period comparability of such results and can result in foreign currency exchange gains or losses. For the year ended December 31, 2022, 31.4% of our total revenue was non-U.S. revenue. The average U.S. dollar versus Euro exchange rate was 12.5% higher in year 2022 compared to prior year. The strengthening in U.S. dollar against other major currencies has partially resulted in the decreases in our total revenue for the current period. Historically, we have not hedged any foreign currency exposures. If the U.S. dollar continues strengthening against the Euro and other foreign currencies that our revenue is earned in, our exposure to exchange rate fluctuations will increase, and as a result, such fluctuations could adversely affect our future results of operations.
Inflation has increased in 2022 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.
The Company generates revenue primarily from users in the form of recurring subscriptions. The Company recognizes revenue through the following steps: (1) identification of the contract, or contracts, with a customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, the Company satisfies a performance obligation.
The Company enters into contracts with customers that include promises to provide subscription services with enhanced access to our dating platforms. Revenue is recognized when the promised services are provided to our customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Subscription revenue is presented net of refunds and credit card chargebacks. Sales and value-added-taxes collected from customers and remitted to governmental authorities are not included in revenue and are reflected as Accrued expenses and other current liabilities on the balance sheet.
Subscribers pay in advance, primarily by credit card or through mobile app stores. The Company records deferred revenue when cash payments are received in advance of satisfying its performance obligations. Enhanced access to dating platforms represents a series of distinct services as the Company continually provides enhanced access over the subscription term and represents a single performance obligation that is satisfied over time. Revenue is recognized using the straight-line method over the terms of the applicable subscription period, which primarily range from one to twelve months. The Company applies the practical expedient for contracts with duration of one year or less and therefore does not consider the effects of the time value of money.
The Company evaluates whether it is appropriate to recognize revenue on a gross or net basis based upon its evaluation of whether the Company obtains control of the specified services. Whether the Company obtains control involve considering if it is primarily responsible for fulfillment of the promise and if it has latitude in establishing pricing and selecting suppliers, among other factors. Based on its evaluation of these factors, for revenue earned through certain mobile applications, including iOS and Android, the Company recognizes subscription revenue gross of the application processing fees primarily because the Company is the principal and has the contractual right to determine the price paid by the subscriber. The Company records the related application processing fees as cost of revenue, exclusive of depreciation and amortization, in the period incurred.
As subscriptions terms do not exceed one year, the Company applies the practical expedient for the recognition of incremental costs of obtaining a contract, and expenses them as incurred.
Revenue is also earned from virtual currency and advertising. Virtual currency may be redeemed by members and subscribers for certain premium features, delivery confirmation of messages, and virtual gifts. Virtual currency is paid upfront and is initially recorded as deferred revenue, and the Company records virtual currency revenue as it is redeemed. Effective September 30, 2022, the unredeemed virtual currency is now recognized into revenue when it is held for longer than 12 months. See Change in Accounting Estimate in this section for a detail discussion. Advertising revenues are derived primarily from sponsored links and display advertisements and is recognized when the ad is displayed, based on the number of clicks. For advertising revenue arrangements, we are the agent and recognize revenue on a net basis. Advertising and virtual currency revenues were each less than 4% of total revenues for all periods presented.
Cost of Revenue, exclusive of depreciation and amortization
Cost of revenue, exclusive of depreciation and amortization, consists primarily of direct marketing advertising expenses, compensation and other employee-related costs for personnel dedicated to maintaining the Company's data centers, data center expenses, credit card fees and mobile application processing fees. The Company incurs direct marketing advertising expenses in order to generate traffic to its websites and mobile applications. Direct marketing advertising expenses are directly attributable to the revenue the Company receives from its subscribers and consist of both online and offline marketing, particularly television and out-of-home advertising. Direct marketing advertising expenses are recognized as incurred and totaled $93.4 million and $105.8 million for 2022 and 2021, respectively.
Financial statements of subsidiaries outside the United States are generally measured using the local currency as the functional currency. All assets and liabilities denominated in foreign currencies are translated into the U.S. dollar using the exchange rate in effect at the reporting date. Revenue and expenses are translated using average exchange rates during the period. Foreign currency translation adjustments are reflected in shareholders' (deficit) equity as a component of other comprehensive income (loss). Transaction gains and losses including intercompany balances denominated in a currency other than the functional currency of the entity involved are included in foreign exchange gain (loss) within other income (expense) in the Consolidated Statements of Operations and Comprehensive Loss.
Defined Contribution Plan
The Company maintains a 401(k) savings plan covering all U.S. employees. Participating employees may contribute a portion of their salary into the saving plan, subject to certain limitations. The Company matches 100.0% of each employee's contributions, up to a maximum of 4.0% of the employee's eligible earnings. The Company's matching contribution expense in 2022 and 2021 totaled $0.2 million and $0.1 million, respectively.
Stock-based compensation is measured at the grant date based on the fair value of the award and is generally expensed over the requisite service period (generally the vesting period). The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service conditions at the vesting date.
The Company recognizes compensation expense on a straight-line basis from the beginning of the service period. For awards with graded-vesting features, each vesting tranche is separately expensed over the related vesting period.
The Company estimates the fair value of each stock option grant using the capped-call Black-Scholes option pricing model, which requires management to make certain assumptions of future expectations based on historical and current data. The assumptions include the expected term of the stock option, expected volatility, dividend yield, and risk-free interest rate. The expected term represents the amount of time that options granted are expected to be outstanding, using the simplified method, as the Company's historical share option exercise experience does not provide a reasonable basis upon which to estimate the expected term. The simplified method deems the term to be the average of the time-to-vesting and contractual life of the stock-based awards. Expected volatility is estimated based on a combination of implied market volatilities, historical volatility of our stock price and other factors. The Company’s dividend yield is based on forecasted expected payments, which are expected to be zero, and the risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
In a net settlement of an award, the Company does not receive payment of the exercise price from the employees but reduces the number of ADRs issued. In addition, the Company net settles for the purposes of payment of a grantee's minimum income tax obligation. ADRs issued pursuant to the exercise of the awards are issued from the Company's treasury shares.
Deferred income tax assets and liabilities are recorded with respect to temporary differences in the accounting treatment of items for financial reporting purposes and for income tax purposes. Where, based on the weight of available evidence, it is more-likely-than-not that some amount of recorded deferred tax assets will not be realized, a valuation allowance is established for the amount that, in management’s judgment, is sufficient to reduce the deferred tax asset to an amount that is more-likely-than-not to be realized.
The benefit of a tax position is recognized if it is more-likely-than-not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
Interest expense primarily includes interest for the Company's long-term debt obligations and the amortization of deferred issuance costs and original issue discounts on debt.
Earnings per share
Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding during the period after adjusting for dilutive securities, such as awards under equity compensation plans. Dilutive potential common shares from equity awards are determined using the average share price for each period under the treasury stock method. In addition, proceeds from exercise of equity awards and the average amount of unrecognized compensation expense for equity awards are assumed to be used to repurchase shares.
As of December 31, 2022 and 2021, diluted loss per share excludes 1,455,490 and 988,180 potentially dilutive common shares, respectively, related to vested option awards, as their effect was anti-dilutive.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include all bank balances and investments in money market funds representing overnight investments with a high degree of liquidity. We consider all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. Due to the short-term maturity of such investments, the carrying amounts are a reasonable estimate of fair value. The restricted cash represents cash held as a security deposit for one of our office leases.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the total amounts shown in the Consolidated Statements of Cash Flows:
|Cash and cash equivalents||$||11,438 ||$||16,141 |
|Restricted cash included in other current assets||131 ||138 |
|Total cash and cash equivalents and restricted cash as shown on the consolidated statements of cash flows||$||11,569 ||$||16,279 |
Accounts Receivable, net
Accounts receivable is primarily comprised of credit card payments for subscription fees, pending collection from the credit card processors. The Company recognizes current estimated credit losses for accounts receivable, net. The allowance for credit losses reflects the Company's current estimate of credit losses expected to be incurred for an estimated amount of receivables that will not be collected. The Company considers various factors in establishing, monitoring, and adjusting its allowance for credit losses, including the historical losses. Historically, the Company has not experienced significant credit losses. The Company also monitors other risk factors and forward-looking information, such as country specific risks and default rates across bank cards in establishing and adjusting its allowance for credit losses. Accounts receivable are written off after all collection efforts have ceased. In the years ended December 31, 2022 and 2021, the Company recognized credit loss expense of $0.3 million and $0.5 million, respectively, which is included as a component of other operating expenses in the Consolidated Statements of Operations and Comprehensive Loss.
Concentration of Credit Risk
Financial instruments that can potentially subject the Company to concentrations of credit risk consists of cash and receivables from credit card processors. The Company reduces credit risk by placing its cash with major financial institutions with high credit ratings. The Federal Deposit Insurance Corporation (“FDIC”) insures up to $250,000 per depositor at each financial institution.
Users primarily purchase our services through the Company's mobile app and desktop stores. Payments made through these stores are processed by third-party payment providers. At December 31, 2022, three payment providers accounted for approximately 28%, 41%, and 13%, respectively, of our accounts receivables, net. The comparable amounts at December 31, 2021 were 46% and 35%, and 3% respectively. Receivables from payment processors settle relatively quickly, and the Company has not experienced historical losses. Management monitors the creditworthiness of payment processors closely. The Company also maintains allowances to reserve for potential refunds or chargebacks issued to users. These amounts are based on historical evidence.
Segments are reflective of how the chief operating decision maker (“CODM”) reviews operating results for the purpose of allocating resources and assessing performance. The Company considers a combination of factors when evaluating the composition of its operating segments, including the results regularly reviewed by the CODM, economic characteristics, services offered, classes of customers, distribution channels, geographic and regulatory environment considerations. The Company has two operating segments, Zoosk and Spark, which share similar economic and other qualitative characteristics, and are aggregated together as one reportable segment.
Goodwill and Indefinite-Lived Intangible Assets
The Company's goodwill and indefinite-lived intangible assets resulted from business combinations in previous years. Goodwill and indefinite-lived intangible assets are not amortized but are subject to annual impairment testing. The Company assesses goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter, or more frequently if events or changes in circumstances indicate that goodwill or indefinite-lived intangible assets may be impaired. Triggering events that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate or a significant decrease in expected cash flows.
Goodwill represents the excess of the aggregate fair value of the consideration transferred in a business combination over the fair value of the asset acquired, net of liabilities assumed. The impairment tests for goodwill are conducted at the reporting unit level, which is defined as an operating segment or one level below an operating segment, for which discrete financial information is regularly reviewed by the segment manager. For the years ended December 31, 2022 and 2021, the Company had two reporting units.
The fair value of the reporting units is determined using an income approach based on discounted cash flow ("DCF") model and a market approach based on appropriate valuation multiples observed for the reporting unit's guideline public companies. The fair value is estimated based upon a complex series of judgments about future events and uncertainties and relies heavily on estimates and assumptions at a point in time. The DCF model incorporates a number of reporting unit specific market participant assumptions including future revenue growth rates and operating margins. The discount rates represent the weighted average cost of capital measuring the reporting unit's cost of debt and equity financing, which are weighted by the percentage of debt and percentage of equity in a company's target capital structure. The discount rates applied also include adjustments to reflect management's assessment of a market participant's view concerning other risks associated with the projected cash flows of the individual reporting units. We validate our estimates of fair value determined using the income approach by considering the implied control premium to determine if the estimated enterprise value is appropriate compared to external market indicators. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the Company determines that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then a quantitative assessment for impairment is required. The Company may elect not to perform the qualitative assessment for some or all reporting units.
Indefinite-Lived Intangible Assets
Indefinite-lived intangible asset consists of acquired trade names, which are expected to contribute to cash flows indefinitely. Similar to the goodwill impairment test, the Company may first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. If the Company chooses to bypass the qualitative assessment, or if the qualitative assessment indicates that the indefinite-lived intangible asset is more-likely-than-not impaired, a quantitative impairment test must be performed. If the fair value of the indefinite-lived intangible asset is less than the carrying amount, an impairment loss is recognized in an amount equal to the difference. The Company estimates the fair value using an income approach, specifically the relief-from-royalty method, based on the present value of future cash flows. Significant assumptions under the relief-from-royalty method include the royalty rate, projected sales and the discount rate applied to the estimated cash flows.
Property and Equipment, net
Property and equipment is stated at cost. Depreciation and amortization begin at the time the asset is placed into service and are recognized using the straight-line method over the following estimated useful lives as follows:
•Office and other equipment: 3 - 5 years
•Leasehold improvements: the shorter of the lease term or 5 years
Disposals are removed at cost less accumulated depreciation, and any gain or loss from disposition is reflected in the Consolidated Statements of Operations and Comprehensive Loss.
Internal-Use Software Development Costs
The Company capitalizes certain internal-use software development costs including external direct costs utilized in developing or obtaining the software and compensation for personnel directly associated with the development of the software. Capitalization of such costs begins when the preliminary project stage is complete and ceases when the project is substantially complete and ready for its intended purpose. Capitalized internal-use software costs less accumulated amortization are included in property and equipment, net within the Consolidated Balance Sheets. Depreciation and amortization are recognized using the straight-line method over the estimated useful lives of the internal use software, which range from 3 to 6 years. Additions and improvements that increase the value or extend the life of an asset are capitalized.
For property and equipment and internal-use software development costs, depreciation and amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate.
Definite-lived Intangible Assets
The Company's definite-lived intangible assets is primarily attributed to business combinations in previous years. Intangible assets with definite lives are amortized using the straight-line method over their estimated lives. The estimated lives of intangible assets for current and comparative periods are as follows:
•Brands and trademarks: 10 years
•Other intangible assets: 2 - 5 years
Impairment of Long-Lived Assets
Long-lived assets, which consist of right-of-use assets, property and equipment, and long-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value is deemed not to be recoverable, an impairment loss is recorded equal to the amount by which the carrying value of the long-lived asset exceeds its fair value. Amortization of definite-lived intangible assets is computed on a straight-line basis.
The Company leases office space in multiple locations under non-cancelable operating lease agreements. Operating right-of-use assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represents the Company's obligation to make lease payments arising from the lease, both of which are recognized based on the present value of future minimum lease payments over the lease term at the commencement date, increased for any prepaid lease costs and reduced by any lease incentives. Leases with a lease term of 12 months or less at inception are not recorded within the Consolidated Balance Sheets and are expensed on a straight-line basis over the lease term in the Consolidated Statements of Operations and Comprehensive Loss. The lease payments are discounted at the Company's incremental borrowing rate as the implicit rate in the lease is not readily determinable for most of the Company's leases, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. The Company elected to combine lease and non-lease components on all new or modified leases agreements, which are recognized on a straight-line basis over the term of the lease.
For contractual obligations related to the sublease of office space where the Company remains the primary obligor upon assignment of the lease and does not obtain a release from the lessor, the Company continues to recognize rent expense and operating lease assets and liabilities for the head lease on its Consolidated Balance Sheets. The related lease obligation to the lessor is presented separately from the sublease created by the lease assignment to the sublessee. The Company accounts for the head lease based on the original assessment at inception and determines if the sublease arrangement is either a sales-type, direct financing, or operating lease at inception. If the total remaining lease cost on the head lease for the term of the sublease is greater than the anticipated sublease income, the right-of-use asset is assessed for impairment. The Company's sublease is an operating lease and the Company recognizes sublease income on a straight-line basis over the sublease term.
Fair Value Measurements
Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurement or assumptions that market participants would use in pricing the assets or liabilities, such as inherent risk, transfer restrictions and credit risk.
The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
•Level 1— Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2— Other inputs that are directly or indirectly observable in the marketplace for similar assets or liabilities.
•Level 3— Unobservable inputs which are supported by little or no market activity.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company's material financial instruments consist primarily of cash, accounts receivable, long-term debt, and accounts payable. The fair value of long-term debt was determined using observable inputs (Level 2). The carrying values of the Company's accounts receivable and accounts payable approximated fair values at December 31, 2022 and 2021, due to the short period of time to maturity or repayment. The Company's non-financial assets, such as goodwill, intangible assets, right-of-use assets, and property and equipment are adjusted to fair value when an impairment is recognized.
The Company accrues for contingencies when the obligation is probable, and the amount can be reasonably estimated. As facts concerning contingencies become known, the Company reassesses its position and makes appropriate adjustments to the consolidated financial statements. Significant judgment is required to determine both the probability and the estimated amount of loss. These estimates have been based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based on new information and future events.
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and subsequent amendment to the initial guidance: ASU 2021-01, Reference Rate Reform (Topic 848): Scope (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In December 2022, the FASB issued ASU 2022-06 "Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848" ("ASU 2022-06"), which defers the expiration of ASC 848 from December 31, 2022, to December 31, 2024. The Company currently has a Term Loan that accrues interest at a rate equal to LIBOR plus an applicable margin. The Term Loan agreement provides the Company an option to convert from LIBOR rate to an alternate reference rate. We will monitor the LIBOR deadline and work with lender on the conversion to an alternative reference rate. It is not expected that the adoption of this standard will have a material effect on our financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and the payment terms and their effect on subsequent revenue recognized by the acquirer. ASU 2021-08 will become effective for the fiscal year beginning January 1, 2023, including interim periods within the fiscal year. Early adoption of the amendments is permitted. The amendments in this update should be applied prospectively to business combinations occurring on or after the effective date of the amendments. It is not expected that the adoption of this standard will have a material effect on our financial statements.
Note 2. Revenue
For the years ended December 31, 2022 and 2021, revenue was as follows:
|Year Ended December 31,|
|Subscription revenue||$||177,435 ||$||208,796 |
|Virtual currency revenue||7,333 ||4,885 |
|Advertising revenue||2,995 ||3,224 |
|Total Revenue||$||187,763 ||$||216,905 |
Virtual currency revenue for the year ended December 31, 2022 included $2.5 million of revenue that had been previously included in the Company's deferred revenue balance that was held for longer than 12 months due to changes in estimates starting on September 30, 2022. See Note 1. Basis of Presentation and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements for further discussion of change in accounting estimate.
Revenue disaggregated by geography, based on where the revenue is generated, consists of the following:
|Year Ended December 31,|
|United States||$||128,759 ||$||141,973 |
|Germany||1,084 ||1,468 |
|Rest of world||57,920 ||73,464 |
|Total Revenue||$||187,763 ||$||216,905 |
During the years ended December 31, 2022 and 2021, the Company recognized $37.0 million and $38.3 million of revenue that was included in the deferred revenue balances as of December 31, 2021 and December 31, 2020, respectively.
Note 3. Income Taxes
Income Tax Expense
For the years ended December 31, 2022 and 2021, the Company recorded income tax expense of $7.0 million and $18.4 million, respectively, which reflects an effective tax rate of (18.8)% and (37.0)%, respectively. The Company's income tax expense in 2022 was primarily driven by change in the valuation allowance on German and U.S. Federal and State deferred tax assets, impairment of goodwill and the foreign tax rate differential. The Company's income tax expense in 2021 was primarily driven by U.S. Federal and state taxes, change in the valuation allowance on Federal and state deferred tax assets and German net operating losses and interest carryforwards, and non-deductible German share-based compensation arrangements.
The components of the loss before income taxes are as follows:
|Year Ended December 31,|