Spark Networks SE
Spark Networks SE
08/09/2022 | Press release | Distributed by Public on 08/09/2022 14:15
Amendment to Quarterly Report - Form 10-Q/A
lov-20220331
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2022
Or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to ____
Commission File Number 001-38252
Spark Networks SE
(Exact name of Registrant as specified in its Charter)
| Germany |
N/A
|
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
|
Kohlfurter Straße 41/43
Berlin
Germany
|
10999 |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (+49) 30868000
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading
Symbol(s)
|
Name of each exchange on which registered | ||
| American Depository Shares each representing one-tenth of an ordinary share | LOV | 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.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes☒No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
| Non-accelerated filer | ☐ | Smaller reporting company | ☒ | |||
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of ordinary shares outstanding as of May 2, 2022 was 2,619,586.
Explanatory Note
Spark Networks SE ( the "Company") is filing this Amendment No. 1 on Form 10Q/A (the "Amended Report") to amend its Quarterly Report for the quarter ended March 31, 2022, that was originally filed with the U.S. Securities and Exchange Commission (the "SEC") on May 10, 2022 (the "Original Report"), to restate the Company's unaudited condensed consolidated financial statements for the period ended March 31, 2022. Consequently, the previously filed unaudited condensed consolidated financial statements for the period ended March 31, 2022, should no longer be relied upon. Unless the context otherwise requires, references in this Amended Report to "the Company," "Spark Networks," "we," "us" or "our" refer to Spark Networks SE and its consolidated subsidiaries.
Background
On August 5, 2022, the Audit Committee of the Company's Board of Directors of the Company, after consideration of the relevant facts and circumstances and after consultation with management and BDO USA, LLP, the Company's independent auditors, concluded that the Company's unaudited condensed consolidated interim financial statements as of March 31, 2022 and for the quarterly period ended March 31, 2022 included in the Original Report should be restated, and that such financial statements previously filed with the SEC should no longer be relied upon as a result of a system error related to revenue recognition which resulted in the Company's consolidated revenue for the three months ended March 31, 2022 being overstated by $2.5 million in the Original Report.
With this error being corrected in this Amended Report, net loss increased by $2.1 million. Additionally, the change impacted our basic and diluted net loss per common share calculations. See restated Note 1. Basis of Presentation and Summary of Significant Accounting Policies to our unaudited condensed consolidated financial statements included in this Amended Report for the adjustments to the consolidated financial statements related to this misstatement. The Company has also made corresponding amendments to Management's Discussion and Analysis of Financial Condition and Results of Operations and applicable footnote disclosures.
Because these revisions are treated as corrections of errors to our prior period financial results, the revisions are considered to be a "restatement" under U.S. generally accepted accounting principles ("US GAAP"). Accordingly, the revised financial information included in this Amended Report has been identified as "As Restated."
In connection with the restatement, the Company's management concluded that as of March 31, 2022, the Company continued to have material weaknesses in its internal control over financial reporting as previously identified in the Company's Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2021, and that its disclosure controls and procedures were not effective. For a discussion of management's considerations of the Company's disclosures controls and procedures, internal controls over financial reporting, and material weaknesses identified, refer to "Part I, Item 4. Controls and Procedures," which remains unchanged from the Original Report.
Items Amended in this Amended Report
The following sections in the Original Report are revised in this Amended Report, solely as a result of, and to reflect, the restatement:
● Part I - Item 1. Financial Information
● Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
● Part II - Item 6. Exhibits and Signatures
In addition, in accordance with SEC rules, Part II, Item 6 of the Original Report has been amended to include the currently-dated certifications from the Company's principal executive officer and principal financial officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the principal executive officer and principal financial officer are included in this Amended Report as Exhibits 31.1, 31.2, 32.1 and 32.2.
2
For the convenience of the reader, this Amended Report sets forth the information in the Original Report in its entirety, as such information is modified and superseded where necessary to reflect the restatements. This Amended Report does not amend, update or change any other items or disclosures in the Original Report and does not purport to reflect any information or events subsequent to the filing thereof. As such, this Amended Report speaks only as of the filing date of the Original Report, and the Company has not undertaken herein to amend, supplement or update any information contained in the Original Report to give effect to any subsequent events. Accordingly, this Amended Report should be read in conjunction with the Company's filings made with the SEC subsequent to the filing of the Original Report, including any amendment to those filings.
3
Table of Contents
| Page | ||
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PART I
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Item 1.
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Financial Statements (Unaudited)
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5
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Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 (As Restated)
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5
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Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022 and 2021 (As Restated)
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6
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Condensed Consolidated Statements of Shareholders' Equity for the three months ended March 31, 2022 and 2021 (As Restated)
|
7
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Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021 (As Restated)
|
8
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Notes to Condensed Consolidated Financial Statements
|
9
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Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
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9
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Note 2 - Revenue (As Restated)
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11
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Note 3 - Income Taxes (As Restated)
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12
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Note 4 - Accrued Expenses and Other Liabilities (As Restated)
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12
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Note 5 - Long-term Debt
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13
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Note 6 - Contingencies
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14
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Note 7 - Financial Instruments and Fair Value Measurements
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16
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Note 8 - Stock-based Compensation
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16
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
|
19
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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24
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Item 4.
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Controls and Procedures
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24
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PART II
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||
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Item 1.
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Legal Proceedings
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26
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Item 1A.
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Risk Factors
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26
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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26
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Item 3.
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Defaults Upon Senior Securities
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26
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Item 4.
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Mine Safety Disclosures
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26
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Item 5.
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Other Information
|
26
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Item 6.
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Exhibits
|
27
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Signatures
|
28
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|
4
PART I
Financial Information
Item 1. Financial Statements
Spark Networks SE
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)
| March 31, 2022 | December 31, 2021 | |||
| (As Restated) | ||||
| Assets | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 13,007 | $ | 16,141 |
|
Accounts receivable, net of allowance of $361 and $368, respectively
|
5,753 | 6,261 | ||
| Prepaid expenses | 4,395 | 3,201 | ||
| Other current assets | 886 | 1,085 | ||
| Total current assets | 24,041 | 26,688 | ||
|
Property and equipment, net of accumulated depreciation of $4,212 and $3,998, respectively
|
3,748 | 3,613 | ||
| Goodwill | 134,733 | 134,744 | ||
|
Intangible assets, net of accumulated amortization of $15,799 and $15,522, respectively
|
29,049 | 29,369 | ||
| Deferred tax assets | 7,471 | 7,623 | ||
| Other assets | 7,142 | 7,764 | ||
| Total assets | $ | 206,184 | $ | 209,801 |
| Liabilities and Shareholders' Equity | ||||
| Current liabilities: | ||||
| Current portion of long-term debt | $ | - | $ | 17,593 |
| Accounts payable | 2,098 | 11,474 | ||
| Deferred revenue | 37,784 | 36,973 | ||
| Accrued expenses and other current liabilities | 26,012 | 27,042 | ||
| Total current liabilities | 65,894 | 93,082 | ||
| Long-term debt, net of current portion | 94,282 | 64,531 | ||
| Deferred tax liabilities | 999 | 1,077 | ||
| Other liabilities | 18,192 | 18,418 | ||
| Total liabilities | 179,367 | 177,108 | ||
| Contingencies (Note 6) | ||||
| Shareholders' Equity: | ||||
|
Common stock, €1.00 nominal value; 3,521,005 shares authorized; 2,661,386 shares issued; 2,617,397 shares outstanding as of March 31, 2022 and December 31, 2021
|
3,064 | 3,064 | ||
|
Treasury stock, at €1.00 nominal value; 43,989 shares as of March 31, 2022 and December 31, 2021
|
(48) | (48) | ||
| Additional paid-in capital | 223,605 | 223,103 | ||
| Accumulated deficit | (207,874) | (200,403) | ||
| Accumulated other comprehensive income | 8,070 | 6,977 | ||
| Total shareholders' equity | 26,817 | 32,693 | ||
| Total liabilities and shareholders' equity | $ | 206,184 | $ | 209,801 |
The accompanying notes are an integral part of these consolidated financial statements.
5
Spark Networks SE
Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
(in thousands, except share and per share data)
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| (As Restated) | ||||
| Revenue | $ | 49,907 | $ | 56,379 |
| Operating costs and expenses: | ||||
| Cost of revenue, exclusive of depreciation and amortization | 34,246 | 36,918 | ||
| Other operating expenses | 15,435 | 16,151 | ||
| Depreciation and amortization | 603 | 2,290 | ||
| Total operating costs and expenses | 50,284 | 55,359 | ||
| Operating (loss) income | (377) | 1,020 | ||
| Other income (expense): | ||||
| Interest expense | (6,882) | (3,440) | ||
| Loss on foreign currency transactions | (767) | (1,728) | ||
| Other income (expense) | 263 | (16) | ||
| Total other expense, net | (7,386) | (5,184) | ||
| Loss before income taxes | (7,763) | (4,164) | ||
| Income tax benefit (expense) | 292 | (2,340) | ||
| Net loss | (7,471) | (6,504) | ||
| Other comprehensive income (loss): | ||||
| Foreign currency translation adjustment | 1,093 | 2,354 | ||
| Comprehensive loss | $ | (6,378) | $ | (4,150) |
| Loss per share: | ||||
| Basic loss per share | $ | (2.85) | $ | (2.50) |
| Diluted loss per share | $ | (2.85) | $ | (2.50) |
| Weighted average shares outstanding: | ||||
| Basic | 2,617,397 | 2,605,689 | ||
| Diluted | 2,617,397 | 2,605,689 |
The accompanying notes are an integral part of these consolidated financial statements.
6
Spark Networks SE
Condensed Consolidated Statements of Shareholders' Equity (Unaudited)
(in thousands, except share data)
| Three Months Ended March 31, 2022 | ||||||||||||||
| Common Stock | Treasury Stock | |||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
Total shareholders' equity |
|||||||
| (As Restated) | (As Restated) | (As Restated) | ||||||||||||
| Balance at January 1, 2022 | 2,661,386 | $ | 3,064 | (43,989) | $ | (48) | $ | 223,103 | $ | (200,403) | $ | 6,977 | $ | 32,693 |
| Stock-based compensation | - | - | - | - | 502 | - | - | 502 | ||||||
| Net loss | - | - | - | - | - | (7,471) | - | (7,471) | ||||||
| Foreign currency translation adjustments | - | - | - | - | - | - | 1,093 | 1,093 | ||||||
| Balance at March 31, 2022 | 2,661,386 | $ | 3,064 | (43,989) | $ | (48) | $ | 223,605 | $ | (207,874) | $ | 8,070 | $ | 26,817 |
| Three Months Ended March 31, 2021 | ||||||||||||||
| Common Stock | Treasury Stock | |||||||||||||
| Shares | Amount | Shares | Amount | Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
Total shareholders' equity |
|||||||
| Balance at January 1, 2021 | 2,661,386 | $ | 3,064 | (55,697) | $ | (61) | $ | 220,852 | $ | (132,248) | $ | 3,296 | $ | 94,903 |
| Stock-based compensation | - | - | - | - | 1,036 | - | - | 1,036 | ||||||
| Net loss | - | - | - | - | - | (6,504) | - | (6,504) | ||||||
| Foreign currency translation adjustments | - | - | - | - | - | - | 2,354 | 2,354 | ||||||
| Balance at March 31, 2021 | 2,661,386 | $ | 3,064 | (55,697) | $ | (61) | $ | 221,888 | $ | (138,752) | $ | 5,650 | $ | 91,789 |
The accompanying notes are an integral part of these consolidated financial statements.
7
Spark Networks SE
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| (As Restated) | ||||
| Net loss | $ | (7,471) | $ | (6,504) |
| Adjustments to reconcile net loss to cash used in operating activities: | ||||
| Depreciation and amortization | 603 | 2,290 | ||
| Loss on tangible and intangible assets | 15 | - | ||
| Unrealized loss on foreign currency transactions | 1,078 | 340 | ||
| Stock-based compensation expense | 502 | 1,036 | ||
| Amortization of debt issuance costs and accretion of debt discounts | 805 | 916 | ||
| Loss on extinguishment of debt | 3,964 | - | ||
| Deferred tax expense | (79) | 2,340 | ||
| Provision for credit losses | 142 | 95 | ||
| Non-cash lease expense | 546 | 470 | ||
| Change in operating assets and liabilities: | ||||
| Accounts receivable | 261 | (3,328) | ||
| Prepaid expenses and other current assets | (1,053) | (2,095) | ||
| Other assets | (31) | (33) | ||
| Accounts payable, accrued expenses, and other current liabilities | (10,282) | 1,533 | ||
| Other liabilities | (599) | (93) | ||
| Deferred revenue | 1,124 | 2,646 | ||
| Net cash used in operating activities | $ | (10,475) | $ | (387) |
| Capital expenditures | (490) | (423) | ||
| Net cash used in investing activities | $ | (490) | $ | (423) |
| Proceeds from debt, net of discount and issuance costs | $ | 97,750 | $ | - |
| Repayment of debt | (85,552) | (3,163) | ||
| Debt issuance costs paid to third parties | (3,531) | - | ||
| Payment of early extinguishment of debt charge | (893) | - | ||
| Payments directly related to debt | - | (523) | ||
| Net cash provided by (used in) financing activities | $ | 7,774 | $ | (3,686) |
| Net change in cash and cash equivalents and restricted cash | (3,191) | (4,496) | ||
| Effects of exchange rate fluctuations on cash and cash equivalents and restricted cash | 55 | 781 | ||
| Net decrease in cash and cash equivalents and restricted cash | $ | (3,136) | $ | (3,715) |
| 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 | $ | 13,143 | $ | 17,402 |
| Supplemental disclosure of cash flow information: | ||||
|
Cash paid for interest including payment of early extinguishment of debt charges of $893 and $0, respectively
|
$ | 2,953 | $ | 2,497 |
| Cash paid for income taxes | $ | 29 | $ | - |
| Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets | Mar-22 | Dec-21 | ||
| Cash and cash equivalents | $ | 13,007 | $ | 16,141 |
| Restricted cash included in other current assets | 136 | 138 | ||
| Total cash and cash equivalents and restricted cash as shown on the condensed consolidated statements of cash flows | $ | 13,143 | $ | 16,279 |
The accompanying notes are an integral part of these consolidated financial statements.
8
Spark Networks SE
Notes to Condensed Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business
Spark Networks SE (the "Company") is a leader in social dating platforms for meaningful relationships focusing on the 40+ age demographic and faith-based affiliations, including 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 generally accepted accounting principles in the United States ("U.S. GAAP") and applicable rules and regulations of the U.S. Securities and Exchange Commission ("SEC"), regarding interim financial reporting. The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
In management's opinion, the unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and reflect, in management's opinion, all adjustments, consisting of normal and recurring adjustments, necessary for the fair presentation of the Company's balance sheets, statement of operations and comprehensive loss, statement of shareholders' equity and statement of cash flows for the periods presented. Interim results are not necessarily indicative of the results that may be expected for the Company's entire fiscal year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2021.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Significant estimates and assumptions are required in the determination of: revenue reserves, deferred tax asset valuation allowances, unrecognized tax benefits, classification and measurement of virtual stock option plans, and annual impairment testing of goodwill and indefinite-lived intangible assets. The Company evaluates its estimates and judgements on an ongoing basis based on historical experience, expectations of future events and various other factors that it believes to be reasonable under the circumstances and revises them when necessary. Actual results may differ from the original or revised estimates.
Liquidity and Capital Resources
The Company's financial statements are prepared in accordance with U.S. GAAP, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of the date of the financial statements, the Company has generated losses from operations, incurred historical impairment charges to its Zoosk goodwill and intangible assets and has a working capital deficiency. These factors are potential indications of the Company's inability to continue as a going concern. In accordance with Accounting Standards Codification ("ASC") 205-40, Going Concern, the Company evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date that these consolidated financial statements are issued.
The Company's plans to alleviate these indicators include growing its subscriber base by improving its marketing techniques and implementing new features to increase customer engagement on its various platforms. Further, on March 11, 2022, the Company completed the successful refinancing of its existing term and revolving facility, which provides more covenant flexibility and allows more resources to be invested into the business to drive growth. Refer to Note 5. Long-term Debtfor additional information. The Company's plans, along with its current cash and cash equivalents, is expected to be sufficient to meet its anticipated cash requirements for financial liabilities, capital expenditures and contractual obligations, for at least the next 12 months from the issuance of these financial statements.
9
COVID-19 Update
During 2020, the novel coronavirus ("COVID-19") outbreak spread worldwide and was declared a global pandemic in March 2020. Despite challenging economic conditions on consumers, we maintained stable churn levels during the period and experienced positive user engagement. The global outbreak of COVID-19 continues to rapidly evolve. Management is actively monitoring the global situation and potential impact on the Company's business. The effects of COVID-19 did not have a material impact on the Company's result of operations or financial condition for the period ended March 31, 2022. However, given the evolution of the COVID-19 situation, and the global responses to curb its spread, the Company is not able to estimate the effects COVID-19 may have on its future results of operations or financial condition.
Restatement of Previously Issued Financial Statements
The Company has restated its unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2022 to correct a system error related to a revenue recognition (the "Restatement"), which resulted in our consolidated revenue for the three months ended March 31, 2022 being overstated by $2.5 million in the Original Report. The Restatement resulted in an increase in the reported net loss by $2.1 million for the three months ended March 31, 2022, and an increase to reported accumulated deficit as of March 31, 2022 by $2.1 million. The Restatement also impacted the Company's basic and diluted net loss per common share calculations. The following tables present the Restatement on all affected line items of our previously issued Condensed Consolidated Balance Sheets as of March 31, 2022, Condensed Consolidated Statements of Operations and Comprehensive Loss, and Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022. The effect of the Restatement on the March 31, 2022 stockholders' equity balances is presented in the Condensed Consolidated Statements Shareholder's Equity Sheet below. Regarding the Condensed Consolidated Statements of Cash Flows, the adjustment to net loss was offset by adjustments to change in operating assets and liabilities within cash flows used in operating activities. The Restatement had no effect on total net cash flows from operating, investing or financing activities. The Restatement also impacted Note 2. Revenue,Note 3. Income Taxes, and Note 4.Accrued Expenses and Other Liabilities, which were restated in this Amended Report.
| Condensed Consolidated Balance Sheet | ||||||
| March 31, 2022 | ||||||
| (in thousands) | As Previously Reported | Restatement Adjustment | As Restated | |||
| Deferred revenue | $ | 35,299 | $ | 2,485 | $ | 37,784 |
| Accrued expenses and other current liabilities | 26,359 | (347) | 26,012 | |||
| Total current liabilities | 63,756 | 2,138 | 65,894 | |||
| Total liabilities | 177,229 | 2,138 | 179,367 | |||
| Accumulated deficit | (205,752) | (2,122) | (207,874) | |||
| Accumulated other comprehensive income | 8,086 | (16) | 8,070 | |||
| Total shareholders' equity | $ | 28,955 | $ | (2,138) | $ | 26,817 |
| Condensed Consolidated Statements of Operations and Comprehensive Loss | ||||||
| Three months ended March 31, 2022 | ||||||
| (in thousands, except per share data) | As Previously Reported | Restatement Adjustment | As Restated | |||
| Revenue | $ | 52,374 | $ | (2,467) | $ | 49,907 |
| Operating income (loss) | 2,090 | (2,467) | (377) | |||
| Loss before income taxes | (5,296) | (2,467) | (7,763) | |||
| Income tax (expense) benefit | (53) | 345 | 292 | |||
| Net loss | (5,349) | (2,122) | (7,471) | |||
| Foreign currency translation adjustments | 1,109 | (16) | 1,093 | |||
| Comprehensive loss | (4,240) | (2,138) | (6,378) | |||
| Loss per share - basic and diluted ($) | $ | (2.04) | $ | (0.81) | $ | (2.85) |
10
| Condensed Consolidated Statements of Cash Flows | ||||||
| Three months ended March 31, 2022 | ||||||
| (in thousands) | As Previously Reported | Restatement Adjustment | As Restated | |||
| Operating activities | ||||||
| Net loss | $ | (5,349) | $ | (2,122) | $ | (7,471) |
| Change in operating assets and liabilities: | ||||||
| Accounts payable, accrued expenses, and other current liabilities | (9,937) | (345) | (10,282) | |||
| Deferred revenue | $ | (1,343) | $ | 2,467 | $ | 1,124 |
| Condensed Consolidated Statements of Shareholders' Equity | ||||||
| Accumulated Deficit | ||||||
| (in thousands) | As Previously Reported | Restatement Adjustment | As Restated | |||
| Net loss | $ | (5,349) | $ | (2,122) | $ | (7,471) |
| Balance at March 31, 2022 | (205,752) | (2,122) | (207,874) | |||
| Accumulated Other Comprehensive Income | ||||||
| Foreign currency translation adjustments | 1,109 | (16) | 1,093 | |||
| Balance at March 31, 2022 | 8,086 | (16) | 8,070 | |||
| Total Shareholders' Equity | ||||||
| Net loss | (5,349) | (2,122) | (7,471) | |||
| Foreign currency translation adjustments | 1,109 | (16) | 1,093 | |||
| Balance at March 31, 2022 | $ | 28,955 | $ | (2,138) | $ | 26,817 |
Recently Adopted Accounting Pronouncements
There were no new accounting pronouncements issued by the Financial Accounting Standards Board during the three months ended March 31, 2022 and through the date of filing of this report that had or are expected to have a material impact on the Company's financial position, results of operations or cash flows.
Note 2. Revenue(As Restated)
For the three months ended March 31, 2022 and 2021, revenue was as follows:
| Three Months Ended March 31, | ||||
| (in thousands) | 2022 | 2021 | ||
| ( As Restated ) | ||||
| Subscription revenue | $ | 47,542 | $ | 54,546 |
| Virtual currency revenue | 1,525 | 1,096 | ||
| Advertising revenue | 840 | 737 | ||
| Total Revenue | $ | 49,907 | $ | 56,379 |
Revenue disaggregated by geography, based on where the revenue is generated, consists of the following:
11
| Three Months Ended March 31, | ||||
| (in thousands) | 2022 | 2021 | ||
| ( As Restated ) | ||||
| United States | $ | 33,431 | $ | 36,550 |
| France | 2,883 | 5,374 | ||
| Germany | 284 | 333 | ||
| Rest of world | 13,309 | 14,122 | ||
| Total Revenue | $ | 49,907 | $ | 56,379 |
The Company's deferred revenue balances as of March 31, 2022 and December 31, 2021 are $37.8 million (as restated) and $37.0 million, respectively. During the three months ended March 31, 2022 and 2021, the Company recognized $26.1 million and $28.8 million of revenue, respectively, that was included in the deferred revenue balances as of December 31, 2021 and 2020, respectively.
Note 3. Income Taxes (As Restated)
For the three months ended March 31, 2022 and 2021, the Company recorded income tax benefit of $0.3 million (as restated) and income tax expense of $2.3 million, respectively, which reflects an effective tax rate of 3.8% (as restated) and 112.5%, respectively. The decrease in the income tax expense for the three months ended March 31, 2022 was primarily driven by the Company benefiting from year to date losses in the U.S. jurisdiction.
The Company had a valuation allowance against certain U.S., Israel, and German deferred tax assets as of both March 31, 2022 and December 31, 2021. The Company evaluates on a quarterly basis whether the deferred tax assets are realizable which requires significant judgement. The Company considers all available positive and negative evidence, including historical operating performance and expectations of future operating performance.
As of March 31, 2022 and December 31, 2021, the Company has $4.8 million and $4.7 million of unrecognized tax benefits, respectively. Of the $4.8 million of unrecognized tax benefits as of March 31, 2022, $1.4 million would impact the effective tax rate if recognized, and $2.9 million would result in an increase in the valuation allowance. As of March 31, 2022 and December 31, 2021, the Company has recorded $0.7 million of interest and penalties for both periods related to unrecognized tax benefits. The Company's policy is to classify interest and penalties as a component of income tax expense.
As a matter of course, the Company may be audited by Germany, U.S. Federal and state, Israel, France, the U.K. and other foreign tax authorities within which it operates. From time to time, these audits result in proposed assessments. The Company was notified during 2020 that the Israeli tax authorities were auditing Spark Networks Ltd. for the tax years 2016-2019. There is minimal activity in the entity and, while we do not expect adverse findings, any potential finding would result in a reduction of the net operating loss carryforward which has a full valuation allowance against it. The Company received correspondence from the German tax authorities auditing Spark SE for the tax years 2017-2018, as well as Spark GmbH for the tax years 2016-2018 after March 31, 2022. While the Company is in the process of assessing the correspondence, there does not appear to be any material changes or adjustments.
Based on the current status of Germany, U.S. Federal, state, local and other foreign audits, the Company does not expect the amount of unrecognized tax benefits to significantly decrease in the next 12 months as a result of settlements of tax audits and/or the expiration of statutes of limitations.
Note 4. Accrued Expenses and Other Liabilities (As Restated)
Accrued expenses and other current liabilities consist of the following as of March 31, 2022 and December 31, 2021:
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| (in thousands) | March 31, 2022 | December 31, 2021 | ||
| ( As Restated ) | ||||
| Accrued advertising | $ | 7,824 | $ | 6,483 |
| Accrued employee compensation and benefits | 1,619 | 1,487 | ||
| Accrued professional fees | 1,001 | 835 | ||
| Accrued service providers | 2,018 | 1,806 | ||
| Accrued value-added, sales, and other non-income-based taxes | 7,629 | 8,837 | ||
| Current portion of income tax payable | 3,326 | 3,733 | ||
| Current portion of lease liabilities | 2,344 | 2,325 | ||
| Other | 251 | 1,536 | ||
| Accrued expenses and other current liabilities | $ | 26,012 | $ | 27,042 |
Other liabilities consist of the following as of March 31, 2022 and December 31, 2021:
| (in thousands) | March 31, 2022 | December 31, 2021 | ||
| Deferred payment to Zoosk's shareholders | $ | 11,833 | $ | 11,545 |
| Lease liabilities, less current portion | 3,272 | 3,887 | ||
| Sublease security deposit | 1,038 | 1,038 | ||
| Other | 2,049 | 1,948 | ||
| Other liabilities | $ | 18,192 | $ | 18,418 |
Note 5. Long-term Debt
MGG Term Loan Agreement
On March 11, 2022, the Company entered into a 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 "Term Loan"). The agreement provides for senior secured term loans of $100.0 million. Substantially all of the Company's assets are pledged as collateral. Borrowings under the Term Loan bear interest at a rate equal to LIBOR plus an applicable margin of 7.5% per annum. The proceeds were used to repay in full all amounts outstanding under the Loan Facilities with Blue Torch Finance LLC. The outstanding principal amounts will be repayable in quarterly payments of $1.25 million commencing with the quarter ending June 30, 2023 through March 31, 2025, and $2.50 million commencing with the quarter ending June 30, 2025 and thereafter.
The Term Loan was issued at a discount of 2.0% of the aggregate principal amount of the $100.0 million. Transaction costs and overhead fees of $3.5 million and $0.3 million, respectively, were paid at closing. Through the effective interest rate method, the discount and overhead fees on the Term Loan are amortized to interest expense in the Consolidated Statements of Operations and Comprehensive Loss through the maturity on March 11, 2027 ("Maturity Date"). The effective interest on the loan was 10.1%. In addition, pursuant to the terms of the Term Loan, within 5 days after the annual financial statements are required to be delivered to the lender, commencing with the delivery of the fiscal year 2022 audited financial statements, the Company is required to make a prepayment of the loan principal in an amount equal to a percentage of the excess cash flow of the most recently completed fiscal year.
The Loan Agreement requires the following financial covenants to be maintained: (i) quarterly leverage ratio no greater than 4.50 to 1.00 for the quarter ending June 30, 2022, 4.25 to 1.00 through June 30, 2023, 3.75 to 1.00 through June 30, 2024, 3.25 to 1.00 through June 30, 2025, 2.75 to 1.00 through June 30, 2026 and 2.25 to 1.00 through the maturity date of the loan; (ii) marketing efficiency ratio to be less than 1.36 to 1.00 for the quarter ending June 30, 2022 through the maturity date of the loan; and (iii) minimum liquidity of $5.0 million at any time. In addition, the Term Loan contains a number of covenants that, among other things, restrict, subject to certain exceptions, the Company and its subsidiaries' ability to: incur additional indebtedness, create liens, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions, make share repurchases, make certain acquisitions, engage in certain transactions with affiliates and change lines of business.
As of March 31, 2022, the aggregated outstanding principal balance and amortized cost basis of the Term Loan was $100.0 million and $94.3 million, respectively.
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Blue Torch Term Loan Facility
On July 1, 2019, in connection with the acquisition of Zoosk, the Company entered into a Loan Agreement with Zoosk, Spark Networks, Inc., the subsidiary guarantors party thereto, the lenders party thereto, and Blue Torch Finance LLC ("Administrative Agent"), as administrative agent and collateral agent (the "Senior Secured Facilities Agreement") that provides for a four-year $125.0 million Senior Secured Facility, maturing July 1, 2023 (the "Maturity Date"). The Senior Secured Facilities Agreement provides for a term loan facility in an aggregate amount equal to $120.0 million (the "Term Loan Facility") and a revolving credit facility in an aggregate amount equal to $5.0 million (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Facilities"). Borrowings under the Facilities bear interest at a rate equal to either LIBOR plus an applicable margin of 8.0% per annum.
On December 2, 2020, the Company entered into the Second Amendment to Loan Agreement (the "Second Amendment" and together with the Term Loan Facility, the "Amended Term Loan Facility"), which established an additional $6.0 million of term loan commitment to its existing Term Loan Facility. The additional borrowing was applied to pay the quarterly Term Loan Facility principal and interest payments on December 31, 2020 and March 31, 2021. The Second Amendment was accounted for as a modification of debt, and as such, the third-party costs incurred in connection with the Second Amendment of approximately $1.3 million were expensed as incurred. The debt issuance costs of $1.3 million that were paid directly to the lender at the closing date were capitalized and will be amortized using the effective interest method over the term of the loan. The effective interest rate on the modified loan is 11.3%. The Second Amendment required repayment of the principal amount of $0.15 million quarterly, beginning on March 31, 2021, in addition to the $3.0 million quarterly principal repayment of the original Term Loan Facility and the modified interest.
On March 5, 2021, the Company entered into a Limited Waiver under Loan Agreement (the "Limited Waiver") with the Administrative Agent and the lenders pursuant to which certain defaults under the Senior Secured Facilities Agreement were waived. In consideration of the Limited Waiver, the Company agreed to pay the Administrative Agent, for the ratable benefit of the lenders, a fee of $0.5 million upon the execution of the Limited Waiver, plus $0.3 million paid in kind by capitalizing such amount into the principal balance under the Senior Secured Facilities Agreement. The aggregated fees were capitalized and was amortized using the effective interest rate of 11.8%.
On March 11, 2022, the Company entered into the Term Loan Agreement with MGG as described above and the facility was terminated. The aggregated outstanding principal balance of the existing Term Loan Facility and the Second Amendment was $85.6 million, and the amortized cost basis was $82.1 million as of December 31, 2021. The Company recognized a loss on extinguishment of debt of $3.9 million in the first quarter of Fiscal 2022, which is comprised of $3.0 million of unamortized debt issuance cost offset by the debt discount with the Blue Torch term loan facility, and a prepayment penalty of $0.9 million. The loss on extinguishment of debtis included as a component of Interest expense in the Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022.
Blue Torch Revolving Credit Facility
The $5.0 million Revolving Credit Facility has a commitment fee of 0.75% per annum on the unutilized commitments thereunder payable on the Maturity Date. As the Revolving Credit Facility is not expected to be drawn down, transaction costs and upfront fees totaling $0.3 million related to the Revolving Credit Facility were deferred and are being amortized over the term of the agreement. On March 11, 2022, the Company entered in to the Term Loan Agreement as described above and the facility was terminated, and there were no outstanding borrowings under the Revolving Credit Facility as of December 31, 2021. The Company recognized a loss on extinguishment of debt of $0.1 million in the first quarter of Fiscal 2022 for unamortized transaction costs and upfront fees related to the Revolving Credit Facility, which is included as a component of Interest expense in the Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022.
The Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, the Company's ability and the ability of its subsidiaries to: incur additional indebtedness, create liens, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions and make share repurchases, make certain acquisitions, engage in certain transactions with affiliates, and change lines of business. The Company was in compliance with all applicable financial covenants as of March 31, 2022.
Note 6. Contingencies
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The Company is involved in lawsuits, claims and proceedings incident to the ordinary course of business and establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where the Company believes an unfavorable outcome is not probable and, therefore, no reserve is established. Any claims against the Company, whether meritorious or not, could result in costly litigation, require significant amounts of management's time and result in the diversion of significant operational resources. The results of these lawsuits, claims and proceedings cannot be predicted with certainty. However, the Company believes that the ultimate resolution of these current matters will not have a material adverse effect on its liquidity, results of operations or financial condition.
Cybersecurity Matters
On July 22, 2020, a putative class action was filed against the Company and Zoosk in the U.S. District Court for the Northern District of California by individuals claiming to be Zoosk users whose information was affected by the 2020 security incident disclosed by Zoosk. The complaint, as subsequently amended, asserts that by reason of the Zoosk security incident Spark and Zoosk violated the California Consumer Privacy Act ("CCPA"), the California Unfair Competition Law ("UCL"), and common-law obligations. Based on these assertions, the complaint seeks statutory damages, compensatory damages, punitive damages, attorneys' fees, and injunctive relief. On December 14, 2020, plaintiffs voluntarily withdrew their claim under the CCPA. On January 30, 2021, the district court granted in part, and denied in part, Zoosk's motion to dismiss the remainder of the complaint for failure to state a claim by dismissing the UCL claim, but allowing the common-law claim to go forward. The court held in abeyance the Company's motion to dismiss itself on jurisdictional grounds and for failure to state a claim. The court granted plaintiffs limited jurisdictional discovery as to the Company. Zoosk answered the portion of the complaint that asserts the one remaining common-law claim by denying its material allegations and asserting a number of affirmative defenses. The court stayed the case pending resolution of the jurisdictional discovery. On May 6, 2021, plaintiffs voluntarily dismissed the Company from the case and the stay was lifted. On July 28, 2021, plaintiffs filed a second amended complaint re-alleging the UCL claim on behalf of a subclass. The court granted Zoosk's motion to dismiss that amended claim on October 5, 2021. On October 28, 2021, plaintiffs sought leave to file a third amended complaint that re-alleges a UCL claim. Following briefing and oral argument, the court granted plaintiffs' motion for leave to file an amended complaint as to one theory of UCL liability and ordered plaintiffs either file the third amended complaint or seek leave to file a fourth amended complaint by February 17, 2022. Plaintiffs filed a third amended complaint, then sought leave to file a fourth amended complaint to substitute one of the two named plaintiffs. On March 31 2022, the court granted Zoosk's motion to dismiss with prejudice one named plaintiff for failure to prosecute. The court also granted Plaintiffs' motion to substitute the dismissed plaintiff with a new plaintiff but ordered Plaintiffs to reimburse Zoosk for reasonable costs and attorney fees incurred in connection with the dismissed named plaintiff. Fact discovery concluded on April 29, 2022 except as to discovery from the new named plaintiff, and the parties are engaged in expert discovery. The parties have submitted a proposed order to the court setting the deadline for plaintiffs' motion for class certification on May 20, 2022 and trial in late 2022.
Separately, a group of lawyers that is different from those who filed the putative class action described above filed 77 separate arbitration demands against Zoosk in the Judicial Arbitration and Mediation Services, Inc. ("JAMS") arbitration forum. Zoosk has objected that neither JAMS nor any arbitrator appointed by JAMS has authority to arbitrate any of these claims or to rule on the issue of arbitrability. JAMS decided to commence arbitration proceedings in regard to one of the arbitration claims filed to date, but that claim was withdrawn in November 2021 as it was established that the claimant was not affected by the incident. On May 5, 2021, the same group of attorneys that filed the arbitration demands, described above, filed a petition to compel arbitration in the U.S. District Court for the Northern District of California on behalf of three other individuals claiming to be Zoosk users affected by the 2020 security incident. The attorneys then voluntarily dismissed the petition in its entirety on July 15, 2021. JAMS has initiated three further arbitration claims previously filed and intends to proceed with those arbitrations if requisite fees are paid. Zoosk has refused to pay the respondents' share of the initiation fee for those arbitrations. On December 8, 2021, the same attorneys then filed a petition to compel arbitration in Orange County Superior Court in California on behalf of those three individuals. In response, Zoosk filed a motion to dismiss the California petition based on the forum selection clause in the Zoosk Terms of Use that selects New York as the venue for any dispute. Zoosk's motion to dismiss was granted in April 2022. Zoosk has also filed a petition to stay arbitration in New York on the basis that the claimants breached the TOU when they filed their arbitration demands and Zoosk is therefore under no obligation to arbitrate.
Intellectual Property
Trademarks are an important element in running online dating websites and mobile applications. Given the large number of markets and brands, the Company deals with claims against its trademarks from time to time in the ordinary course of business. The Company vigorously defends against each of the above legal proceedings.
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The Company may encounter future legal claims in the normal course of business.
At this time, management does not believe the above matters, either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition and believes the recorded legal provisions as of March 31, 2022 are adequate with respect to the probable and estimable liabilities. However, no assurance can be given that these matters will be resolved in the Company's favor.
Note 7. Financial Instruments and Fair Value Measurements
The Company records long-term debt at carrying value less unamortized discount and unamortized fees as it is not required to be carried at fair value on a recurring basis. The fair value of long-term debt was determined using observable inputs (Level 2). The valuation considers the present value of expected future repayments, discounted using a market interest rate equal to the interest margin on the borrowings and variable interest rate.
The following table presents the carrying values and the estimated fair values of long-term debt as of March 31, 2022 and December 31, 2021:
| March 31, 2022 | December 31, 2021 | |||||||
| (in thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||
|
Long-term debt, including current portion(1)
|
$ | 94,282 | $ | 100,161 | $ | 82,124 | $ | 96,089 |
(1)At March 31, 2022 and December 31, 2021, the carrying value of long-term debt is net of unamortized original issue discount and debt issuance costs of $5.7 million and $3.4 million, respectively.
The Company's financial instruments, including cash and cash equivalents, deposits, accounts receivable, and accounts payable are carried at cost, which approximates their fair value due to the short-term nature of these instruments. The Company does not have financial instruments that are measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021.
Note 8. Stock-based Compensation
Stock-based compensation expense reflects share awards issued under the Company's 2018 virtual stock option plan and the Long Term Incentive Plan adopted in 2020 (the "LTIP"). For the three months ended March 31, 2022 and 2021, the Company recognized total stock-based compensation expense for all the plans of $0.5 million and $1.0 million, respectively, which is included as a component of Other operating expenses in the Consolidated Statements of Operations and Comprehensive Loss.
2020 Long Term Incentive Plan
In connection with the adoption of the LTIP, the Administrative Board authorized for 2020 the issuance of virtual options for up to three million ADSs, including up to one million zero-priced options. In 2021, the Administrative Board authorized the issuance of an additional 500,000 ADSs, which can be used for the issuance of both options and zero-priced options. The additional authorized ADSs were used in connection with the options granted in the first quarter of 2022. As of March 31, 2022, 215,833 virtual options, and 208,867 zero-priced options were available for future grant under the LTIP.
The fair value of the virtual stock options and zero-priced options are measured using a Black-Scholes option-pricing model for the three months ended March 31, 2022. The inputs used in the measurement of the fair values at the date of grant are summarized below:
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| Virtual Stock Options | Zero-Priced Options | |||
| Long Call | Short Call | Long Call | Short Call | |
| Option | Option (Cap) | Option | Option (Cap) | |
| Stock price | $2.70 | $2.70 | $2.70 | $2.70 |
| Strike price | $2.93 | $29.30 | $- | $50.00 |
| Term | 4.65 | 4.65 | 4.65 | 4.65 |
| Volatility | 65.0% | 65.0% | 65.0% | 65.0% |
| Dividend | -% | -% | -% | -% |
| Risk-free rate | 2.4% | 2.4% | 2.4% | 2.4% |
The following table summarizes the activity for the Company's options under the LTIP during the three months ended March 31, 2022:
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |
| (in years) | ||||
| Outstanding as of December 31, 2021 | 1,802,228 | $4.71 | 5.62 | $0.01 |
| Granted | 530,000 | 2.93 | ||
| Forfeited | (48,061) | 5.24 | ||
| Outstanding as of March 31, 2022 | 2,284,167 | 4.29 | 5.76 | 0.01 |
| Vested and exercisable at March 31, 2022 | 684,513 | $4.81 | 4.95 | $0.01 |
| Number of Options | Weighted Average Grant Date Fair Value | |
| Unvested as of December 31, 2021 | 1,190,967 | $2.53 |
| Granted | 530,000 | 1.20 |
| Vested | (73,252) | 3.03 |
| Forfeited | (48,061) | 2.56 |
| Unvested as of March 31, 2022 | 1,599,654 | $2.06 |
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The following table summarizes the activity for the Company's zero priced options under the LTIP during the three months ended March 31, 2022:
| Number of Options | |
| Outstanding as of December 31, 2021 | 584,068 |
| Granted | 220,000 |
| Forfeited | (12,935) |
| Outstanding as of March 31, 2022 | 791,133 |
| Vested and exercisable at March 31, 2022 | 104,233 |
| Number of Options | Weighted Average Grant Date Fair Value | |
| Unvested as of December 31, 2021 | 514,370 | $5.29 |
| Granted | 220,000 | 2.59 |
| Vested | (34,535) | 6.21 |
| Forfeited | (12,935) | 5.35 |
| Unvested as of March 31, 2022 | 686,900 | $4.38 |
The total unrecognized compensation expense related to awards granted under the LTIP at March 31, 2022 was $3.2 million, which will be recognized over a weighted-average period of 3.00 years.
As of March 31, 2022 and 2021, diluted loss per share excludes 1,096,902 and 806,280 potentially dilutive common shares, respectively, related to vested option awards, as their effect was anti-dilutive.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "will," "would," "could," "can," "may," and similar terms. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2021 under the heading "Risk Factors." The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
We are a leader in social dating platforms for meaningful relationships focusing on the 40+ age demographic and faith-based affiliations. Since our inception, we have had 103 million users register with our dating platforms (which includes inactive accounts). We currently operate one or more of our brands worldwide.
We will continue to expand our presence in North America through significant marketing investment in this region as we look to drive both organic growth of our existing brand portfolio and expansion through the launch of new or acquired brands. We intend to incorporate more social features in our products with content, community and social discovery functionality to allow our users to meet in more informal ways and to provide new ways to date online. Our portfolio of strong brands along with our improved financial strength positions us to deliver a superior user experience to our customers and drive long-term value to shareholders.
Our ability to compete effectively will depend upon our ability to address the needs of our members and paying subscribers, on the timely introduction and performance of innovative features and services associated with our brands, and our ability to respond to services and features introduced by competitors. We must also achieve these objectives within the parameters of our consolidated and operating segment profitability targets. We are focused on enhancing and augmenting our portfolio of services while also continuing to improve the efficiency and effectiveness of our operations. We believe we have sufficient available cash resources on hand to accomplish the enhancements currently contemplated.
Operations Overview
We offer services both via websites and mobile applications and utilize a "subscription" business model, where certain basic functionalities are provided free of charge, while providing premium features (such as interacting with other community members via messages) only to paying subscribers. We generate revenues primarily through paid membership subscriptions. We manage our operations through one reportable segment.
In addition to operating in the United States ("U.S."), we also operate in various markets outside the U.S., primarily in various 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. The revenue generated outside the U.S. is translated into U.S. dollar at the date of transactions and subject to unpredictable fluctuations if the value of other currencies change relative to the U.S. dollar. Fluctuating foreign exchange rates result in foreign currency exchange gains and losses. We have not and do not intend to hedge any foreign currency exposures.
We believe that any effect of inflation at current levels will be minimal. Historically, we have been able to increase prices at a rate equal to or greater than that of inflation and we believe that we will continue to be able to do so for the foreseeable future. In addition, we have been able to maintain a relatively stable variable cost structure for our products due, in part, to a continued optimization of marketing spend.
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COVID-19 Update
Management continues to actively monitor the novel coronavirus ("COVID-19") developments and potential impact on our employees, business and operations. The effects of COVID-19 did not have a material impact on our result of operations or financial condition for the period ended March 31, 2022. However, given the evolution of the COVID-19 situation, and the global responses to curb its spread, we are not able to estimate the effects COVID-19 may have on our future results of operations or financial condition.
Key Business Metrics
We regularly review certain operating metrics in order to evaluate the effectiveness of our operating strategies and monitor the financial performance of the business. The key business metrics that we utilize include the following:
Total Registrations
Total registrations are defined as the total number of new members registering to our platforms with their email address. Those include members who enter into premium subscriptions and free memberships.
Average Paying Subscribers
Paying subscribers are defined as individuals who have paid a monthly fee for access to premium services, which include, among others, unlimited communication with other registered users, access to user profile pictures and enhanced search functionality. Average paying subscribers for each month are calculated as the sum of the paying subscribers at the beginning and the end of the month, divided by two. Average paying subscribers for periods longer than one month are calculated as the sum of the average paying subscribers for each month, divided by the number of months in such period.
Monthly Average Revenue Per User ("ARPU")
Monthly ARPU represents the total net subscriber revenue for the period divided by the number of average paying subscribers for the period, divided by the number of months in the period.
Contribution
Contribution is defined as revenue, net of refunds and credit card chargebacks, less direct marketing.
Direct Marketing
Direct Marketing is defined as online and offline advertising spend and is included within Cost of revenue, exclusive of depreciation and amortization within our Condensed Consolidated Statements of Operations and Comprehensive Loss.
Unaudited selected statistical information regarding the key business metrics described above is shown in the table below:
| Three Months Ended March 31, | ||||
| 2022 | 2021 | |||
| ( As Restated ) | ||||
| Registrations | 3,415,750 | 3,607,702 | ||
| Average Paying Subscribers | 838,961 | 896,344 | ||
| Total Monthly ARPU | $ | 19.83 | $ | 20.97 |
| Net Revenue | $ | 49,907 | $ | 56,379 |
| Direct Marketing | 27,696 | 30,403 | ||
| Contribution | $ | 22,211 | $ | 25,976 |
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During the three months ended March 31, 2022, new members registered to our platforms decreased by 0.2 million, or 5.3%, compared to the same period in 2021. Average paying subscribers during the three months ended March 31, 2022 decreased by 0.1 million, or 6.4%, compared to the same period in 2021. The decreases were primarily driven by a reduction in marketing spend.
Monthly ARPU for three months ended March 31, 2022 decreased by 5.4% (as restated) compared to the same period in 2021.
Results of Operations
The following table shows our results of operations for the periods presented. The period-over-period comparison of our historical results are not necessarily indicative of the results that may be expected in the future.
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | $ Change | % Change | |||||
| ( As Restated ) | ||||||||
| Revenue | $ | 49,907 | $ | 56,379 | $ | (6,472) | (11.5) | % |
| Operating costs and expenses: | ||||||||
| Cost of revenue, exclusive of depreciation and amortization | 34,246 | 36,918 | (2,672) | (7.2) | % | |||
| Other operating expenses | 15,435 | 16,151 | (716) | (4.4) | % | |||
| Depreciation and amortization | 603 | 2,290 | (1,687) | (73.7) | % | |||
| Total operating costs and expenses | 50,284 | 55,359 | (5,075) | (9.2) | % | |||
| Operating (loss) income | (377) | 1,020 | (1,397) | (137.0) | % | |||
| Other income (expense): | ||||||||
| Interest expense | (6,882) | (3,440) | (3,442) | 100.1 | % | |||
| Loss on foreign currency transactions | (767) | (1,728) | 961 | (55.6) | % | |||
| Other income (expense) | 263 | (16) | 279 | (1743.8) | % | |||
| Total other expense, net | (7,386) | (5,184) | (2,202) | 42.5 | % | |||
| Loss before income taxes | (7,763) | (4,164) | (3,599) | 86.4 | % | |||
| Income tax benefit (expense) | 292 | (2,340) | 2,632 | (112.5) | % | |||
| Net loss | $ | (7,471) | $ | (6,504) | $ | (967) | 14.9 | % |
Comparison of Three Months Ended March 31, 2022 and March 31, 2021
Revenue
Revenue during the three months ended March 31, 2022 decreased by $6.5 million (as restated), or 11.5% (as restated), compared to the same period in 2021. The decrease in revenue was attributable to the 6.4% decrease in the number of average paying subscribers, driven by a reduction in marketing spend.
Cost of revenue, exclusive of depreciation and amortization
Cost of revenue, exclusive of depreciation and amortization consists primarily of direct marketing expenses, data center expenses, credit card fees and mobile application processing fees. Cost of revenue during the three months ended March 31, 2022 decreased by $2.7 million, or 7.2%, compared to the same period in 2021. The decrease was primarily due to a reduction in marketing spend and a decrease in commission expense for mobile application due to the decline in revenue.
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Other operating expenses
Other operating expenses consists primarily of costs for sales and marketing, customer service, technical operations and development, and corporate functions. These costs include personnel, technology platform and system costs, third-party service and professional fees, occupancy and other overhead costs. Other operating expenses during the three months ended March 31, 2022 decreased by $0.7 million, or 4.4%, compared to the same period in 2021. The decrease was primarily driven by higher accounting and audit fees in connection with the U.S. GAAP conversion in the first quarter of 2021, and decreases in personnel costs driven by lower stock-based compensation, and recruiting fees.
Other income (expense)
Other expense, net, consist primarily of interest income and expenses, foreign exchange gains and losses, and other related finance costs. Other expenses, net, during the three months ended March 31, 2022 increased by $2.2 million, or 42.5%, compared to the same period in 2021. The increase was primarily related the $4.0 millionloss recognized on extinguishment of debt in connection with the Amended Term Loan Facility and Revolving Credit Facility,as discussed in Note 5. Long-term Debt. The increase was partially offset by a $1.0 million decrease in losses on foreign currency transactions compared to the same period in 2021.
Income tax expense
Income tax benefit was $0.3 million (as restated) for the three months ended March 31, 2022 compared to income tax expense of $2.3 million for the three months ended March 31, 2021, which reflects an effective tax rate of 3.8% (as restated) and 112.5%, respectively. The decrease in income tax expense was primarily driven by the Company benefiting from year to date losses in the U.S. jurisdiction.
See Note 3. Income Taxes (As Restated) in the Notes to the Consolidated Financial Statements included in Item 1 of this quarterly report for further discussion of income taxes.
Non-U.S. GAAP Financial Measures
We report our financial results in accordance with U.S. GAAP. However, management believes that certain non-U.S. GAAP financial measures provide users of our financial information with additional useful information in evaluating our performance.
Adjusted EBITDA
Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), a non-U.S. GAAP financial measure, is one of the primary metrics by which we evaluate the performance of our business, budget, forecast and compensate management. We believe this measure provides management and investors with a consistent view, period to period, of the core earnings generated from the ongoing operations and allows for greater transparency with respect to key metrics used by senior leadership in its financial and operational decision-making. We define Adjusted EBITDA as net earnings (loss) excluding interest expense, (gain) loss on foreign currency transactions, income tax (benefit) expense, depreciation and amortization, asset impairments, stock-based compensation expense, acquisition related costs and other costs. Adjusted EBITDA has inherent limitations in evaluating the performance of the Company, including, but not limited to the following:
•Adjusted EBITDA does not reflect the cash capital expenditures during the measurement period;
•Adjusted EBITDA does not reflect any changes in working capital requirements during the measurement period;
•Adjusted EBITDA does not reflect the cash tax payments during the measurement period; and
•Adjusted EBITDA may be calculated differently by other companies in our industry, thus limiting its value as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other U.S. GAAP results. The following table reconciles Net loss to Adjusted EBITDA for the periods presented:
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| Three Months Ended March 31, | ||||
| (in thousands) | 2022 | 2021 | ||
| ( As Restated ) | ||||
| Net loss | $ | (7,471) | $ | (6,504) |
| Interest expense | 6,882 | 3,440 | ||
| Loss on foreign currency transactions | 767 | 1,728 | ||
| Income tax (benefit) expense | (292) | 2,340 | ||
| Depreciation and amortization | 603 | 2,290 | ||
| Stock-based compensation expense | 502 | 1,036 | ||
|
Other costs(1)
|
22 | 795 | ||
| Adjusted EBITDA | $ | 1,013 | $ | 5,125 |
(1)Includes primarily consulting and advisory fees related to special projects, as well as non-cash acquisition related expenses, post-merger integration activities and long-term debt transaction and advisory fees.
Liquidity and Capital Resources
The Company's principal sources of liquidity are cash balances and cash flows from operations and borrowings. Our ongoing liquidity requirements arise primarily from working capital needs, research and development requirements and the debt service. In addition, we may use liquidity to fund acquisitions or make other investments. As of March 31, 2022, we had cash and cash equivalents of $13.0 million.
On March 11, 2022, the Company completed the successful refinancing of its existing term and revolving facility with borrowings under a new term loan facility with MGG Investment Group LP (the "Term Loan"). As of March 31, 2022 and December 31, 2021, we had outstanding principal debt balance of $100.0 million and $85.6 million, respectively. See Note 5. Long-term Debtin the Notes to the Consolidated Financial Statements included in Item 1 of this quarterly report for further discussion of our debt.
We believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs for financial liabilities, capital expenditures and contractual obligations, for at least the next 12 months. Our future capital requirements and the adequacy of available funds will depend on many factors and those set forth in Part II, Item 1A "Risk Factors" of our Form 10-K for the year ended December 31, 2021. We do not have any off-balance sheet arrangements as of March 31, 2022.
Cash Flows Information
The following table summarizes our cash flows for the periods presented:
| Three Months Ended March 31, | ||||
| (in thousands) | 2022 | 2021 | ||
| Net cash provided by (used in): | ||||
| Operating activities | $ | (10,475) | $ | (387) |
| Investing activities | (490) | (423) | ||
| Financing activities | 7,774 | (3,686) | ||
| Net change in cash and cash equivalents and restricted cash | $ | (3,191) | $ | (4,496) |
Operating Activities
Our cash flows from operating activities primarily include net loss adjusted for (i) non-cash items included in net loss, such as depreciation and amortization, and stock-based compensation and (ii) changes in the balances of operating assets and liabilities.
Net cash used in operating activities was $10.5 million for the three months ended March 31, 2022, an increase of $10.1 million compared to $0.4 million during the same period in 2021. The increase was primarily driven by a decrease in accounts payable due to the timing of payments.
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Investing Activities
Our cash flows from investing activities primarily include development of internal-use software, and purchase of property and equipment.
Net cash used in investing activities was $0.5 million for the three months ended March 31, 2022, an increase of $0.1 million compared to $0.4 million during the three months ended March 31 2021. The increase was primarily due to the additional capital expenditures of $0.1 million during the three months ended March 31, 2022.
Financing Activities
Our cash flows from financing activities primarily include changes in long-term debt.
Net cash provided by financing activities was $7.8 million for the three months ended March 31, 2022, an increase of $11.5 million compared to net cash used in financing activities of $3.7 million during the same period in 2021. The increase was primarily attributable to $97.8 million of proceeds, net of discount and issuance costs, received from the Term Loan, partially offset by the $85.6 million repayment of debt under the existing Term Loan Facility and the Second Amendment,transaction costs of $3.5 million paid to third parties in connection with the Term Loan, and a $0.9 million prepayment penalty in connection with the existing Term Loan Facility and the Second Amendment, as discussed in Note 5. Long-term Debt.
Recent Accounting Pronouncements
See Note 1. Basis of Presentation and Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements included in Part I. Item 1. of this quarterly report for a discussion of recently issued and adopted accounting standards.
Critical Accounting Policies and Estimates
Please refer to Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation, the "Critical Accounting Policies and Estimates" section of our Form 10-K for the fiscal year ended December 31, 2021 ("2021 Form 10-K") for a full description of all of our critical accounting estimates. We believe there have been no new critical accounting policies and estimates, or material changes to our existing critical accounting policies and estimates during the three months ended March 31, 2022.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of its principal executive officer and principal financial officer, evaluated the effectiveness of its disclosure controls and procedures as of December 31, 2021. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission (the "SEC"). Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our management concluded that, as of March 31, 2022, due to the material weakness in our internal control over financial reporting previously identified in our 2021 Form 10-K which continues to exist, our disclosure controls and procedures were not effective.
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Remediation Plan for Material Weakness in Internal Control over Financial Reporting
In connection with the audit of our consolidated financial statements as of and for the years ended December 31, 2021 and 2020, we identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Please refer to Part II. Item 9A. "Controls and Procedures" of our 2021 Form 10-K for a full description of the material weakness in our internal control over financial reporting and remediation plan.
Our remediation of the identified material weaknesses and the strengthening of our internal control environment is ongoing. We continue to focus on the design and implementation of processes and procedures to improve our new and existing controls and remediate our material weaknesses. We are committed to maintaining a strong control environment and believe that these remediation efforts represent continued improvements in our control environment. As we continue to evaluate and take actions to improve our internal control over financial reporting, we may determine it is necessary to take additional action to address control deficiencies or modify certain of the remediation measures. The material weaknesses will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these enhanced internal controls are operating effectively. We will continue to monitor and evaluate the effectiveness of our internal control over financial reporting in the areas affected by the material weaknesses. Our management is committed to remediating the material weakness in a timely manner.
Changes in Internal Control over Financial Reporting
There has been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Other Information
Item 1. Legal Proceedings
For information that updates the disclosure set forth under Part I. Item 3. Legal Proceedings in our 2021 Form 10-K, refer to Note 6. Contingencies to the Consolidated Financial Statements in this Form 10-Q.
Item 1A. Risk Factors
Please refer to Part I. Item 1A. Risk Factors of our 2021 Form 10-K for a discussion of our risk factors. The risks and uncertainties are not limited to those set forth in the 2021 Form 10-K. 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 believe there have been no new risk factors, or material changes to our existing risk factors, during the three months ended March 31, 2022.
Item 2. Recent Sales of Unregistered Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
On May 9, 2022, the Company and David Clark amended Mr. Clark's Employment Agreement with the Company dated as of August 10, 2021, to provide that the amount of severance paid under the agreement shall no longer be subject to offset for any other remuneration paid to Mr. Clark during the severance period. A copy of the amendment is attached hereto as Exhibit 10.2 and incorporated herein by reference.
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Item 6. Exhibits
| Incorporated by Reference |
Filed/Furnished
Herewith
|
|||||||
|
Exhibit
Number
|
Description | Form | File No. |
Exhibit
Filing Date
|
Exhibit No. | |||
|
10.1
|
8-K |
001-38252
|
March 14, 2022 | 10.1 | ||||
|
10.2
|
First Amendment to Employment Agreement with David Clark, dated May 9, 2022.
|
X | ||||||
| 31.1 |
Certification of Principal Executive Officer pursuant to rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
X | ||||||
| 31.2 |
Certification of Principal Financial Officer pursuant to rules 13a-14(a) and 15d-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
X | ||||||
| 32.1 |
Certification of Principal Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
|
X | ||||||
| 32.2 |
Certification of Principal Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
|
X | ||||||
| 101.1 |
The following financial statements from the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, formatted in Extensible Business Reporting Language ("XBRL"):
•unaudited condensed consolidated balance sheets;
•unaudited condensed consolidated statements of operations and comprehensive loss;
•unaudited condensed consolidated statements of shareholders' equity;
•unaudited condensed consolidated statement of cash flows; and
•notes to unaudited condensed consolidated financial statements.
|
X | ||||||
| 104 |
Cover Page Interactive Data File - the cover page
from this Quarterly Report on Form 10-Q for the
quarter ended March 31, 2022, is formatted in
Inline XBRL and contained in Exhibit 101.1
|
| ** | The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and are not deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall they be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Spark Networks SE | |||
|
Date: August 9, 2022
|
By: | /s/ Eric Eichmann | |
| Eric Eichmann | |||
| Chief Executive Officer | |||
|
(Principal Executive Officer)
|
|||
|
Date: August 9, 2022
|
By: | /s/ David Clark | |
| David Clark | |||
| Chief Financial Officer | |||
|
(Principal Financial Officer and Principal Accounting Officer)
|
28