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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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) 30 868000
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class 
Trading
Symbol(s)
 Name of each exchange on which registered
American Depository Shares each representing one-tenth of an ordinary share LOV 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 August 1, 2022 was 2,617,397.



 Table of Contents
 
  Page
 
  
 
  

2


PART I
Financial Information

Item 1. Financial Statements

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

June 30, 2022December 31, 2021
Assets
Current assets:
Cash and cash equivalents$11,350 $16,141 
Accounts receivable, net of allowance of $338 and $368, respectively
5,584 6,261 
Prepaid expenses4,421 3,201 
Other current assets2,323 1,085 
Total current assets23,678 26,688 
Property and equipment, net of accumulated depreciation of $4,268 and $3,998, respectively
4,064 3,613 
Goodwill134,693 134,744 
Intangible assets, net of accumulated amortization of $16,162 and $15,522, respectively
28,725 29,369 
Deferred tax assets6,990 7,623 
Other assets6,515 7,764 
Total assets$204,665 $209,801 
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt$1,182 $17,593 
Accounts payable8,319 11,474 
Deferred revenue34,877 36,973 
Accrued expenses and other current liabilities25,690 27,042 
Total current liabilities70,068 93,082 
Long-term debt, net of current portion93,343 64,531 
Deferred tax liabilities928 1,077 
Other liabilities17,900 18,418 
Total liabilities182,239 177,108 
Contingencies (Note 7)
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 June 30, 2022 and December 31, 2021
3,064 3,064 
Treasury stock, at €1.00 nominal value; 43,989 shares as of June 30, 2022 and December 31, 2021
(48)(48)
Additional paid-in capital224,095 223,103 
Accumulated deficit(216,635)(200,403)
Accumulated other comprehensive income11,950 6,977 
Total shareholders' equity22,426 32,693 
Total liabilities and shareholders' equity$204,665 $209,801 


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



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

Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Revenue$48,035 $55,253 $97,942 $111,632 
Operating costs and expenses:
Cost of revenue, exclusive of depreciation and amortization36,356 32,881 70,602 69,799 
Other operating expenses14,520 14,924 29,955 31,075 
Depreciation and amortization577 2,298 1,180 4,588 
Impairment of goodwill and intangible assets 32,086  32,086 
Total operating costs and expenses51,453 82,189 101,737 137,548 
Operating loss(3,418)(26,936)(3,795)(25,916)
Other income (expense):
Interest expense(2,706)(3,802)(9,588)(7,242)
(Loss) gain on foreign currency transactions(2,441)584 (3,208)(1,144)
Other (expense) income(3)(2)260 (18)
Total other expense, net(5,150)(3,220)(12,536)(8,404)
Loss before income taxes(8,568)(30,156)(16,331)(34,320)
Income tax (expense) benefit(193)(18,871)99 (21,211)
Net loss(8,761)(49,027)(16,232)(55,531)
Other comprehensive income (loss):
Foreign currency translation adjustment3,880 (800)4,973 1,554 
Comprehensive loss$(4,881)$(49,827)$(11,259)$(53,977)
Loss per share:
Basic loss per share$(3.35)$(18.80)$(6.20)$(21.30)
Diluted loss per share$(3.35)$(18.80)$(6.20)$(21.30)
Weighted average shares outstanding:
Basic2,617,397 2,608,370 2,617,397 2,607,038 
Diluted2,617,397 2,608,370 2,617,397 2,607,038 


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



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

Three Months Ended June 30, 2022
Common StockTreasury Stock
SharesAmountSharesAmountAdditional Paid-in CapitalAccumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
shareholders'
equity
Balance at April 1, 20222,661,386 $3,064 (43,989)$(48)$223,605 $(207,874)$8,070 $26,817 
Stock-based compensation— — — — 490 — — 490 
Net loss— — — — — (8,761)— (8,761)
Foreign currency translation adjustments— — — — — — 3,880 3,880 
Balance at June 30, 20222,661,386 $3,064 (43,989)$(48)$224,095 $(216,635)$11,950 $22,426 
Three Months Ended June 30, 2021
Common StockTreasury Stock
SharesAmountSharesAmountAdditional Paid-in CapitalAccumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
shareholders'
equity
Balance at April 1, 20212,661,386 $3,064 (55,697)$(61)$221,888 $(138,752)$5,650 $91,789 
Stock-based compensation —   580   580 
Treasury stock issued pursuant to equity-based plans — 7,569 8 (386)  (378)
Net loss— — — — — (49,027)— (49,027)
Foreign currency translation adjustments— — — — — — (800)(800)
Balance at June 30, 20212,661,386 $3,064 (48,128)$(53)$222,082 $(187,779)$4,850 $42,164 

Six Months Ended June 30, 2022
Common StockTreasury Stock
SharesAmountSharesAmountAdditional Paid-in CapitalAccumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
shareholders'
equity
Balance at January 1, 20222,661,386 $3,064 (43,989)$(48)$223,103 $(200,403)$6,977 $32,693 
Stock-based compensation— — — — 992 — — 992 
Net loss— — — — — (16,232)— (16,232)
Foreign currency translation adjustments— — — — — — 4,973 4,973 
Balance at June 30, 20222,661,386 $3,064 (43,989)$(48)$224,095 $(216,635)$11,950 $22,426 
Six Months Ended June 30, 2021
Common StockTreasury Stock
SharesAmountSharesAmountAdditional Paid-in CapitalAccumulated
Deficit
Accumulated Other Comprehensive IncomeTotal
shareholders'
equity
Balance at January 1, 20212,661,386 $3,064 (55,697)$(61)$220,852 $(132,248)$3,296 $94,903 
Stock-based compensation —   1,616   1,616 
Treasury stock issued pursuant to equity-based plans — 7,569 8 (386)  (378)
Net loss— — — — — (55,531)— (55,531)
Foreign currency translation adjustments— — — — — — 1,554 1,554 
Balance at June 30, 20212,661,386 $3,064 (48,128)$(53)$222,082 $(187,779)$4,850 $42,164 


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



Spark Networks SE
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Six Months Ended June 30,
20222021
Net loss$(16,232)$(55,531)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization1,180 4,588 
Impairment of goodwill and intangible assets 32,086 
Loss on tangible and intangible assets30  
Unrealized loss on foreign currency transactions3,837 1,630 
Stock-based compensation expense992 1,616 
Amortization of debt issuance costs and accretion of debt discounts1,343 2,275 
Loss on extinguishment of debt3,964  
Deferred tax expense(158)21,211 
Provision for credit losses256 214 
Non-cash lease expense1,092 563 
Change in operating assets and liabilities:
Accounts receivable326 (4,099)
Prepaid expenses and other current assets(2,687)(793)
Other assets(5)525 
Accounts payable, accrued expenses, and other current liabilities(2,980)(774)
Other liabilities(1,045)(814)
Deferred revenue(608)1,932 
Net cash (used in) provided by operating activities$(10,695)$4,629 
Capital expenditures(1,268)(661)
Net cash used in investing activities$(1,268)$(661)
Proceeds from debt, net of discount and issuance costs$97,750 $ 
Repayment of debt(85,552)(13,087)
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 $(13,610)
Net change in cash and cash equivalents and restricted cash(4,189)(9,642)
Effects of exchange rate fluctuations on cash and cash equivalents and restricted cash(613)(275)
Net decrease in cash and cash equivalents and restricted cash$(4,802)$(9,917)
Cash and cash equivalents and restricted cash at beginning of period16,279 21,117 
Cash and cash equivalents and restricted cash at end of period$11,477 $11,200 
Supplemental disclosure of cash flow information:
Cash paid for interest including payment of early extinguishment of debt charges of $893 and $0, respectively
$5,107 $4,849 
Cash paid for income taxes$2,538 $ 
Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheetsJun-22Dec-21
Cash and cash equivalents$11,350 $16,141 
Restricted cash included in other current assets127 138 
Total cash and cash equivalents and restricted cash as shown on the condensed consolidated statements of cash flows$11,477 $16,279 

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



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

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

Description of Business

Spark Networks SE (the "Company") is 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. Except where the context clearly indicates otherwise, the terms “the Company,” “Spark Networks,” “we,” “us” or “our” refer to Spark Networks SE and its consolidated subsidiaries.

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 ("2021 Form 10-K").

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 with borrowings under a new term loan facility with MGG Investment Group LP (the "Term Loan"), which provides more covenant flexibility and allows more resources to be invested into the business to drive growth. The Term Loan was amended on August 5, 2022 to, among other things, revise certain financial covenants related to quarterly testing of the Company's leverage ratio. Refer to Note 6. Long-term Debt for additional information. The Company's plans, along with its current cash and cash equivalents, is expected to be
7



sufficient to meet its anticipated cash requirements for financial liabilities, capital expenditures and contractual obligations, for at least the next 12 months from the issuance of these financial statements.

COVID-19 Update

During 2020, the novel coronavirus ("COVID-19") outbreak spread worldwide and was declared a global pandemic in March 2020. Despite challenging economic conditions on consumers, 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 June 30, 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.

Recently Adopted Accounting Pronouncements

There were no new accounting pronouncements issued by the Financial Accounting Standards Board during the three and six months ended June 30, 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

For the three and six months ended June 30, 2022 and 2021, revenue was as follows:

Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2022202120222021
Subscription revenue$45,975 $53,697 $93,517 $108,243 
Virtual currency revenue1,440 811 2,965 1,907 
Advertising revenue620 745 1,460 1,482 
Total Revenue$48,035 $55,253 $97,942 $111,632 

Revenue disaggregated by geography, based on where the revenue is generated, consists of the following:

Three Months Ended June 30,Six Months Ended June 30,
(in thousands)2022202120222021
United States$32,616 $36,039 $66,047 $72,588 
Germany278 305 562 638 
Rest of world15,141 18,909 31,333 38,406 
Total Revenue$48,035 $55,253 $97,942 $111,632 

During the six months ended June 30, 2022 and 2021, the Company recognized $33.5 million and $34.1 million of revenue, respectively, that was included in the deferred revenue balances as of December 31, 2021 and 2020, respectively.

Note 3. Income Taxes

For the three months ended June 30, 2022 and 2021, the Company recorded income tax expense of $0.2 million and $18.9 million, respectively, which reflects an effective tax rate of (2.3)% and (62.7)%, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded income tax benefit of $0.1 million and income tax expense of $21.2 million, respectively, which reflects an effective rate of 0.6% and (61.9)%, respectively. The change in the provision for the three and six months ended June 30, 2022 was primarily driven by the Company benefiting from year to date losses in the U.S. jurisdiction and the June 2021 establishment of a valuation allowance against US deferred tax assets.

The Company had a valuation allowance against certain U.S., Israel, and German deferred tax assets as of both June 30, 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.
8



As of June 30, 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 June 30, 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 June 30, 2022 and December 31, 2021, the Company has recorded $0.8 million and $0.7 million of interest and penalties, respectively, 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 findings 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 during the quarter ending June 30, 2022. While the Company is in the process of assessing and responding to 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. Goodwill and Intangible Assets

The Company performs its annual goodwill impairment test during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment in one or more of its reporting units. During the second quarter of 2021, the Company lowered its financial expectations for the remainder of 2021 due to increased cyberattacks, delays in product initiatives and a more uncertain COVID-19 outlook. These factors constituted an interim triggering event as of the end of the Company's second quarter of 2021, and the Company performed an impairment analysis with regard to its indefinite-lived intangible assets and goodwill.

Goodwill

The following table summarizes the changes in the carrying amount of goodwill for the six months ended June 30, 2022 and June 30, 2021:

(in thousands)
Balance as of January 1, 2022$134,744 
Impairment charges 
Impact of currency translation(51)
Balance as of June 30, 2022$134,693 
Balance as of January 1, 2021$156,582 
Impairment charges(21,786)
Impact of currency translation(21)
Balance as of June 30, 2021$134,775 

For the quarter ended June 30, 2021, the Company recognized $21.8 million impairment charges for its Zoosk reporting unit. No goodwill impairment was recognized during the six months ended June 30, 2022.

The total accumulated impairment loss of the Company's goodwill was $84.5 million as of June 30, 2022 and December 31, 2021.

Intangible Assets

Intangible assets consists of the following as of June 30, 2022 and December 31, 2021:

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June 30, 2022
(in thousands)Gross Carrying AmountAccumulated Impairment ChargesAccumulated AmortizationCurrency Translation Impact on Carrying AmountNet Carrying Amount
Indefinite-lived intangible assets:
Brands and trademarks$63,800 $(36,360)$— $ $27,440 
Long-lived intangible assets:
Brands and trademarks86  (54)(2)30 
Acquired technology5,910  (4,663) 1,247 
Customer relationships10,780  (10,780)  
Licenses and domains205  (195)(2)8 
Other470  (470)  
Total intangible assets$81,251 $(36,360)$(16,162)$(4)$28,725 

December 31, 2021
(in thousands)Gross Carrying AmountAccumulated Impairment ChargesAccumulated AmortizationCurrency Translation Impact on Carrying AmountNet Carrying Amount
Indefinite-lived intangible assets:
Brands and trademarks$63,800 $(36,360)$— $ $27,440 
Long-lived intangible assets:
Brands and trademarks86  (50) 36 
Acquired technology5,910  (4,039) 1,871 
Customer relationships10,780  (10,780)  
Licenses and domains205  (183) 22 
Other470  (470)  
Total intangible assets$81,251 $(36,360)$(15,522)$ $29,369 

During the quarter ended June 30, 2021, the Company recognized a Zoosk trademark impairment charge of $10.3 million. No impairment charge was recorded for the six months ended June 30, 2022.

Amortization expense for the three months ended June 30, 2022 and June 30, 2021 was $0.3 million and $1.7 million, respectively. Amortization expense for the six months ended June 30, 2022 and June 30, 2021 was $0.6 million and $3.4 million, respectively.


Note 5. Accrued Expenses and Other Liabilities

Accrued expenses and other current liabilities consist of the following as of June 30, 2022 and December 31, 2021:

(in thousands) June 30, 2022December 31, 2021
Accrued advertising$9,984 $6,483 
Accrued employee compensation and benefits1,396 1,487 
Accrued professional fees1,198 835 
Accrued service providers1,359 1,806 
Accrued value-added, sales, and other non-income-based taxes8,399 8,837 
Current portion of income tax payable606 3,733 
Current portion of lease liabilities2,331 2,325 
Other417 1,536 
Accrued expenses and other current liabilities$25,690 $27,042 

Other liabilities consist of the following as of June 30, 2022 and December 31, 2021:

10


(in thousands) June 30, 2022December 31, 2021
Deferred payment to Zoosk's shareholders$12,126 $11,545 
Lease liabilities, less current portion2,639 3,887 
Sublease security deposit1,038 1,038 
Other2,097 1,948 
Other liabilities$17,900 $18,418 

Note 6. Long-term Debt

MGG Term Loan Agreement

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 "Term Loan"). The Financing 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 Term 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 Financing 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 Financing Agreement 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.

On August 5, 2022, the Company entered into an amendment to the Financing Agreement (the "Amendment"). The Amendment revised certain financial covenants associated with the quarterly leverage ratio and requires the Company to maintain quarterly leverage ratio no greater than 5.25 to 1.00 for the quarter ending June 30, 2022, 5.50 to 1.00 for the quarter ending September 30, 2022, 5.75 to 1.00 for the quarter ending December 31, 2022, and 5.50 to 1.00 for the quarter ending March 31, 2023. The remaining quarterly leverage ratio did not change. The Amendment also requires the Company's minimum marketing spend for the twelve consecutive month period ending at the end of each fiscal quarter, commencing with the fiscal quarter ending December 31, 2022, not to be less than $80.0 million.

Additionally, the Amendment amended the margin for the Term Loan interest to be set at the levels based on the period for which the leverage ratio is calculated. Specifically, from August 5, 2022 to June 30, 2023, the margin shall be 7.5% or 8.5% on reference rate or LIBOR rate, respectively, based on the leverage ratio greater than or equal to 4.25 to 1.00, or 7.0% or 8.0% on reference rate or LIBOR rate, respectively, based on the leverage ratio less than 4.25 to 1.00, and after June 30, 2023, the margin shall be 7.5% or 8.5% on reference rate or LIBOR rate, respectively, based on the leverage ratio greater than or equal to 3.75 to 1.00, or 7.0% or 8.0% on reference rate or LIBOR rate, respectively, based on the leverage ratio less than 3.75 to 1.00.

As of June 30, 2022, we were in compliance with all such covenants, and the aggregated outstanding principal balance and amortized cost basis of the Term Loan was $100 million and $94.5 million, respectively.

11


Termination of Blue Torch Term Loan Facility and Blue Torch Revolving Credit Facility

During the quarter ended March 31, 2022, the Company used funds borrowed under the Financing Agreement to pay off the outstanding balance of the debt under the existing Blue Torch term loan facility (the "Blue Torch Term Loan Facility") with a principal amount of $85.6 million, and the amortized cost basis of $82.1 million as of December 31, 2021. The Company recognized a loss on extinguishment of debt of $3.9 million, 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 debt is included in the Interest expense on the Company's Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2022, The existing Blue Torch Term Loan Facility was terminated.

Additionally, the Company terminated the existing Blue Torch revolving credit facility (the "Blue Torch Revolving Credit Facility") and recognized a loss on extinguishment of debt of $0.1 million during the quarter ended March 31, 2022 for unamortized transaction costs and upfront fees related to the Blue Torch Revolving Credit Facility, which was included in Interest expense in the Company's Condensed Consolidated Statements of Operations and Comprehensive Loss. There was no outstanding debt under the Blue Torch Revolving Credit Facility at the time of termination.


Note 7. Contingencies

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. On July 27, 2022, the U.S. District Court for the Northern District of California denied the plaintiff's move for class certification due to the valid class action waiver the plaintiff agreed to in Zoosk's Terms of Use (the "TOU").

12


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 TOU 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.

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 June 30, 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.

Hungarian Proceeding

On May 18, 2022, the Hungarian Competition Authority (the “GVH”) initiated a proceeding against Spark Networks Services GmbH alleging unfair commercial practices concerning the Company’s Hungarian EliteSingles (in Hungarian: Elittárs) dating service. As a result of the proceeding, the GVH could determine that certain commercial practices were not compliant with Hungarian laws and may need to be changed. In addition, the GVH could impose fines. We expect the proceeding to take 12-18 months; at this early stage, we cannot predict the outcome of the proceeding. Accordingly, we cannot predict what the GVH may determine regarding the Company’s compliance with Hungarian laws or whether the GVH might impose any fines.

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 June 30, 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 8. Financial Instruments and Fair Value Measurements

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

The following table presents the carrying values and the estimated fair values of long-term debt as of June 30, 2022 and December 31, 2021:

June 30, 2022December 31, 2021
(in thousands) Carrying ValueFair ValueCarrying ValueFair Value
Long-term debt, including current portion(1)
$94,525 $95,158 $82,124 $96,089 
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(1) At June 30, 2022 and December 31, 2021, the carrying value of long-term debt is net of unamortized original issue discount and debt issuance costs of $5.5 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 June 30, 2022 and December 31, 2021.

Note 9. Stock-based Compensation

Stock-based compensation expense reflects share awards issued under the Company's 2018 virtual stock option plan and the Long Term Incentive Plan adopted in 2020 (the "LTIP"). For the three months ended June 30, 2022 and 2021, the Company recognized total stock-based compensation expense for all the plans of $0.5 million and $0.6 million, respectively, and for the six months ended June 30, 2022 and 2021, the Company recognized total stock-based compensation expense for all the plans of $1.0 million and $1.6 million, respectively. Total stock-based compensation expense is included as a component of Other operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Loss.

2020 Long Term Incentive Plan

The LTIP provides for the grant of virtual stock options, where each option represents the right to receive, upon exercise, a certain amount in cash determined based on the relevant ADS Stock Price of the option minus the strike price of such options; provided, however, that the Company may elect to settle options in ADSs or ordinary shares of the Company instead of cash. In connection with the adoption of the LTIP, the Administrative Board of the Company (the "Administrative Board") authorized the issuance of virtual options for up to 3.5 million American Depository Shares ("ADSs"), subject to limitations imposed by German law. As of June 30, 2022, 117,080 ADSs have been issued pursuant to previous exercises.

The fair value of the virtual stock options and zero-priced options are measured using a Black-Scholes option-pricing model for the six months ended June 30, 2022. The inputs used in the measurement of the fair values at the date of grant are summarized below:

Virtual Stock OptionsZero-Priced Options
Long CallShort CallLong CallShort Call
OptionOption (Cap)OptionOption (Cap)
Stock price
$2.30 - $2.70
$2.30 -$2.70
$2.30 - $3.19
$2.30 - $3.19
Strike price$2.93$29.30$$50.00
Term4.654.654.654.65
Volatility65.0%65.0%
65.0% - 69.0%
65.0% - 69.0%
Dividend%%%%
Risk-free rate
2.4% - 2.9%
2.4% - 2.9%
2.4% - 3.0%
2.4% - 3.0%

The following table summarizes the activity for the Company's options under the LTIP during the six months ended June 30, 2022:

14


Number of OptionsWeighted Average Exercise PriceWeighted Average Remaining Contractual TermAggregate Intrinsic Value
(in years)
Outstanding as of December 31, 20211,802,228$4.715.62$0.01
Granted943,0002.93
Forfeited(215,611)4.43
Outstanding as of June 30, 20222,529,6174.075.720.25
Vested and exercisable at June 30, 2022792,015$4.844.77$0.01

Number of OptionsWeighted Average Grant Date Fair Value
Unvested as of December 31, 20211,190,967$2.53
Granted943,0001.10
Vested(180,754)2.91
Forfeited(215,611)2.26
Unvested as of June 30, 20221,737,602$1.75



The following table summarizes the activity for the Company's zero priced options under the LTIP during the six months ended June 30, 2022:

Number of Options
Outstanding as of December 31, 2021584,068
Granted493,000
Forfeited(69,106)
Outstanding as of June 30, 20221,007,962
Vested and exercisable at June 30, 2022149,892

Number of OptionsWeighted Average Grant Date Fair Value
Unvested as of December 31, 2021514,370$5.29
Granted493,0002.56
Vested(80,194)6.04
Forfeited(69,106)4.58
Unvested as of June 30, 2022858,070$3.71

The total unrecognized compensation expense related to awards granted under the LTIP at June 30, 2022 was $3.2 million, which will be recognized over a weighted-average period of 3.11 years.

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As of June 30, 2022 and 2021, diluted loss per share excludes 1,250,688 and 938,384 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 ("2021 Form 10-K") under the heading "Risk Factors." The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law. Except the context clearly indicates otherwise, the terms “the Company,” “Spark Networks,” “we,” “us” or “our” refer to Spark Networks SE and its consolidated subsidiaries.

Overview

We are a leader in social dating platforms for meaningful relationships focusing on the 40+ age demographic and faith-based affiliations. Since our inception, we have had 107 million users register with our dating platforms (which includes inactive accounts). We currently operate one or more of our brands worldwide.

We intend to continue to expand our presence 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. We believe our portfolio of strong brands along with our improved financial strength positions us to deliver a superior user experience to our customers and drive long-term value to shareholders.

Our ability to compete effectively will depend upon our ability to address the needs of our members and paying subscribers, on the timely introduction and performance of innovative features and services associated with our brands, and our ability to respond to services and features introduced by competitors. We must also achieve these objectives within the parameters of our consolidated and operating segment profitability targets. We are focused on enhancing and augmenting our portfolio of services while also continuing to improve the efficiency and effectiveness of our operations. We believe we have sufficient available cash resources on hand to accomplish the enhancements currently contemplated.

Operations Overview

We offer services both via websites and mobile applications and utilize a "subscription" business model, where certain basic functionalities are provided free of charge, while providing premium features (such as interacting with other community members via messages) only to paying subscribers. We generate revenues primarily through paid membership subscriptions. We manage our operations through one reportable segment.

Foreign Currency Exchange and Inflation Risks

In addition to operating 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. 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. During the six months ended June 30, 2022, 32.6% of our total revenue was non-U.S. revenue. The average U.S. dollar versus Euro exchange rate was 13.3% and 10.3% higher, respectively, during the three months and six months ended June 30, 2022 compared to the same periods 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 periods. Historically, we have not hedged any foreign currency exposures. If U.S. dollar continue strengthening against Euro and other foreign currency our revenue earned in, our exposure to exchange rate fluctuations and as a result such fluctuations could adversely affect our future results of operations.
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Inflation has increased during the periods covered by this Quarterly Report, and is expected to continue to increase for the near future. Inflationary factors, such as increases in customer acquisition costs, interest rates and overhead costs may adversely affect our operating results. Historically, we have been able to increase prices at a rate equal to or greater than that of inflation and we do not believe that inflation has had a material impact on our financial position or results of operations to date, we may experience some effect in the future, especially if inflation rates continue to rise.

COVID-19 Update

Management continues to actively monitor the novel coronavirus ("COVID-19") developments and potential impact on our employees, business and operations. The effects of COVID-19 did not have a material impact on our result of operations or financial condition for the period ended June 30, 2022. However, given the evolution of the COVID-19 situation, and the global responses to curb its spread, we are not able to estimate the effects COVID-19 may have on our future results of operations or financial condition.

Key Business Metrics

We regularly review certain operating metrics in order to evaluate the effectiveness of our operating strategies and monitor the financial performance of the business. The key business metrics that we utilize include the following: