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 unaudited 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' (deficit) 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, 2022. The balance sheet as of December 31, 2022 included herein was derived from the audited financial statements as of that date, but does not include all disclosures, including certain notes required by U.S. GAAP on an annual reporting basis. We have condensed or omitted certain information and notes normally included in complete financial statements prepared in accordance with U.S. GAAP. As such, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2022, which are included in our 2022 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: deferred tax asset valuation allowances, unrecognized tax benefits, and annual impairment testing of goodwill and indefinite-lived intangible assets. The Company evaluates its estimates and judgments on an ongoing basis based on historical experience, expectations of future events and various other factors that 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
Going Concern
The Company's financial statements are prepared in accordance with U.S. GAAP, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of the date of the financial statements, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Principal conditions and events leading to this conclusion are that the Company has generated losses from operations, continues to have declines in revenues, incurred impairment charges to its Zoosk goodwill and intangible assets, has cash outflows from operations and has a working capital deficiency. Based on these conditions and events, we may not be able to comply with the covenants under our Financing Agreement (see Note 6. Debt) over the next 12 months, specifically related to the maximum leverage ratio covenant. The Company plans to alleviate these conditions and events by implementing additional cost reduction measures to reduce our operating expenses and optimize our net working capital and profit.
On March 29, 2023, we entered into an Amendment and Forbearance Agreement with our lender, MGG Investment Group LP, due to not delivering financial statements accompanied by a report and an opinion that does not include any qualification, exception or explanatory paragraph expressing substantial doubt about the ability to continue as a going concern (“Event of Default”). Among other terms, this agreement contains terms that state during the forbearance period, defined as the date of the Agreement through the earlier of May 15, 2023 or the occurrence of a Termination Event (as defined in the Amendment and Forbearance Agreement), our lender agrees to forbear from exercising any of its remedies with respect to this Event of Default. Based on these facts and circumstances, we have reclassified the debt from long-term to current within the Unaudited Condensed Consolidated Balance Sheets. On May 15, 2023, we entered into Amendment No. 1 to Forbearance Agreement with MGG, pursuant to which the forbearance period was extended through the earlier of May 25, 2023 or the occurrence of a Termination Event. We intend to renegotiate certain terms of our Financing Agreement (including possibly an additional extension of the forbearance period) during this additional forbearance period.
If we are not able to extend the forbearance period or renegotiate certain terms of the Financing Agreement, our lender could declare all or any portion of the loans then outstanding to be accelerated and due and payable, including the aggregate principal of loans outstanding, accrued and unpaid interest thereon, and all fees, premiums and other amounts payable under the Financing Agreement. Our lender could also require that we and our subsidiaries that have guaranteed our indebtedness pay the obligations in full, and exercise all of its available remedies as a secured party following an event of default with respect to all of our and our subsidiary guarantors’ assets that serve as collateral securing our indebtedness, including foreclosing on, and disposing of, our and our subsidiary guarantors’ assets. If any such demand was to be made, there can be no assurance that our assets would be sufficient to repay the indebtedness in full; if our assets were insufficient to repay the indebtedness in full following such a demand, and if we were not able to come to a satisfactory arrangement with our lender to restructure our indebtedness, possible outcomes for the Company would include filing for bankruptcy or being forced into bankruptcy. If any of these events were to occur, our ability to fund our operations could be materially impaired.
Recently Adopted Accounting Pronouncements
There were no new accounting pronouncements issued by the Financial Accounting Standards Board during the three months ended March 31, 2023 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 months ended March 31, 2023 and 2022, revenue was as follows:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 | | |
(in thousands) | | 2023 | | 2022 | | | | |
| | | | | | | | |
Subscription revenue | | $ | 39,361 | | | $ | 47,542 | | | | | |
Virtual currency revenue | | 1,332 | | | 1,525 | | | | | |
Advertising revenue | | 646 | | | 840 | | | | | |
Total Revenue | | $ | 41,339 | | | $ | 49,907 | | | | | |
Revenue disaggregated by geography, based on where the revenue is generated, consists of the following:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 | | |
(in thousands) | | 2023 | | 2022 | | | | |
| | | | | | | | |
United States | | $ | 28,936 | | | $ | 33,431 | | | | | |
Germany | | 253 | | | 284 | | | | | |
Rest of world | | 12,150 | | | 16,192 | | | | | |
Total Revenue | | $ | 41,339 | | | $ | 49,907 | | | | | |
During the three months ended March 31, 2023 and 2022, the Company recognized $22.9 million and $26.1 million of revenue, respectively, that was included in the deferred revenue balances as of December 31, 2022 and 2021, respectively.
Note 3. Income Taxes
For the three months ended March 31, 2023 and 2022, the Company recorded income tax expense of $0.0 million and income tax benefit of $0.3 million, respectively, which reflects an effective tax rate of (1.0)% and 3.8%, respectively. The decrease in the income tax expense for the three months ended March 31, 2023 was primarily driven by the reduced book income and changes in the valuation allowance.
The Company had a valuation allowance against certain U.S., Israel, and German deferred tax assets as of both March 31, 2023 and December 31, 2022. 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. The Company intends to maintain these valuation allowances until there is sufficient evidence to support reversal of all or some portion of them.
As of March 31, 2023 and December 31, 2022, the Company has $4.9 million and $4.5 million of unrecognized tax benefits, respectively. Of the $4.9 million of unrecognized tax benefits as of March 31, 2023, $1.9 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, 2023 and December 31, 2022, the Company has recorded $0.9 million and $0.8 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 2018-2019. 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 was notified that the German tax authorities are auditing Spark SE for the tax years 2017-2018, as well as Spark GmbH for the tax years 2016-2018. In the fourth quarter of 2022 we received draft reports from the German tax authorities and we are not expecting any material assessment.
Note 4. Goodwill and Intangible Assets
Goodwill
The Company completes its annual goodwill impairment test during the fourth quarter of each year, or more frequently if triggering events indicate a possible impairment in one or more of its reporting units. During the three months ended March 31, 2023, the Company did not identify any impairment triggering events related to goodwill.
The following table summarizes the changes in the carrying amount of goodwill for the periods indicated:
| | | | | | | | |
(in thousands) | | |
Balance as of January 1, 2023 | | $ | 119,276 | |
| | |
Impact of currency translation | | 11 | |
Balance as of March 31, 2023 | | $ | 119,287 | |
| | |
Balance as of January 1, 2022 | | $ | 134,744 | |
| | |
Impact of currency translation | | (11) | |
Balance as of March 31, 2022 | | $ | 134,733 | |
The total accumulated impairment loss of the Company's goodwill as of March 31, 2023 and December 31, 2022 was $99.9 million.
Intangible Assets
Intangible assets consists of the following as of March 31, 2023 and December 31 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2023 |
(in thousands) | | | | Gross Carrying Amount | | Accumulated Impairment Charges | | Accumulated Amortization | | Currency Translation Impact on Carrying Amount | | Net Carrying Amount |
Indefinite-lived intangible assets: | | | | | | | | | | | | |
Brands and trademarks | | | | $ | 63,800 | | | $ | (52,251) | | | $ | — | | | $ | — | | | $ | 11,549 | |
Long-lived intangible assets: | | | | | | | | | | | | |
Brands and trademarks | | | | 86 | | | — | | | (59) | | | (1) | | | 26 | |
Acquired technology | | | | 5,910 | | | — | | | (5,598) | | | — | | | 312 | |
Customer relationships | | | | 10,780 | | | — | | | (10,780) | | | — | | | — | |
Licenses and domains | | | | 205 | | | — | | | (204) | | | (1) | | | — | |
Other | | | | 470 | | | — | | | (470) | | | — | | | — | |
Total intangible assets | | | | $ | 81,251 | | | $ | (52,251) | | | $ | (17,111) | | | $ | (2) | | | $ | 11,887 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 |
(in thousands) | | | | Gross Carrying Amount | | Accumulated Impairment Charges | | Accumulated Amortization | | Currency Translation Impact on Carrying Amount | | Net Carrying Amount |
Indefinite-lived intangible assets: | | | | | | | | | | | | |
Brands and trademarks | | | | $ | 63,800 | | | $ | (51,151) | | | $ | — | | | $ | — | | | $ | 12,649 | |
Long-lived intangible assets: | | | | | | | | | | | | |
Brands and trademarks | | | | 86 | | | — | | | (58) | | | (2) | | | 26 | |
Acquired technology | | | | 5,910 | | | — | | | (5,286) | | | — | | | 624 | |
Customer relationships | | | | 10,780 | | | — | | | (10,780) | | | — | | | — | |
Licenses and domains | | | | 205 | | | — | | | (204) | | | (1) | | | — | |
Other | | | | 470 | | | — | | | (470) | | | — | | | — | |
Total intangible assets | | | | $ | 81,251 | | | $ | (51,151) | | | $ | (16,798) | | | $ | (3) | | | $ | 13,299 | |
During the three months ended March 31, 2023 the Company recognized impairment charges of $1.1 million related to the Zoosk tradename due to lowered revenue expectations. Note that during the three months ended March 31, 2022 there were no impairment charges. The Company estimated the fair value using an income approach, specifically the relief-from-royalty method, based on the present value of future cash flows. The Company used a royalty rate of 3% and weighted average cost of capital of 26% to estimate the fair value of Zoosk tradename.
Amortization expense for the three months ended March 31, 2023 and March 31, 2022 was $0.3 million and $0.3 million, respectively.
Note 5. Accrued Expenses and Other Liabilities
Accrued expenses and other current liabilities consist of the following as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
(in thousands) | | March 31, 2023 | | December 31, 2022 |
Accrued advertising | | $ | 7,077 | | | $ | 6,257 | |
Accrued employee compensation and benefits | | 2,229 | | | 1,614 | |
Accrued professional fees | | 1,003 | | | 944 | |
Accrued service providers | | 1,501 | | | 1,501 | |
Accrued value-added, sales, and other non-income-based taxes | | 10,300 | | | 9,078 | |
Current portion of income tax payable | | 1,750 | | | 1,812 | |
Current portion of lease liabilities | | 2,348 | | | 2,422 | |
Other | | 640 | | | 619 | |
Accrued expenses and other current liabilities | | $ | 26,848 | | | $ | 24,247 | |
Other liabilities consist of the following as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
(in thousands) | | March 31, 2023 | | December 31, 2022 |
Deferred payment to Zoosk's shareholders | | $ | 13,007 | | | $ | 12,716 | |
Lease liabilities, less current portion | | 911 | | | 1,416 | |
Sublease security deposit | | 1,038 | | | 1,038 | |
Other | | 2,061 | | | 1,948 | |
Other liabilities | | $ | 17,017 | | | $ | 17,118 | |
Note 6. 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 Financing Agreement provides for senior secured term loans with an aggregate principal of $100.0 million (collectively, the "Term Loan"). Substantially all of the Company's assets are pledged as collateral. Borrowings under the Term Loan initially accrued interest at a rate equal to LIBOR plus an applicable margin of 7.5% per annum (subject to changes set forth in the Amendment (as defined below)). 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 Financing Agreement requires the following financial covenants to be maintained: (i) subject to changes set forth in the Amendment, 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, as amended and restated by that certain Amended and Restated Amendment No. 1 to the Financing Agreement dated as of August 19, 2022 (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 6.50 to 1.00 through December 31, 2022, and 6.25 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 ended December 31, 2022, not to be less than $80.0 million. In connection with the Amendment, the Company paid a $0.3 million amendment fee during August 2022, which will be amortized as interest expense over the remaining life of the loan.
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 March 31, 2023, the aggregated outstanding principal balance and amortized cost basis of the Term Loan was $100.0 million and $95.1 million, respectively.
The Annual Report on Form 10-K for the year ended December 31, 2022 included an opinion with an explanatory paragraph expressing substantial doubt about the ability of the Company and its Subsidiaries to continue as a going concern which caused the Company to fail to comply with Section 7.01(a) under the Financing Agreement, which constitutes an Event of Default. See Note 1. Basis of Presentation and Summary of Significant Accounting Policies for further discussion. As of March 31, 2023, we were in compliance with all other covenants.
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 terminated the Blue Torch Loan Facility and 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 Statement of Operations and Comprehensive Loss for the fiscal quarter ended March 31, 2022.
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 Statement of Operations and Comprehensive Loss for the fiscal quarter ended March 31, 2022. 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
In July 2020, a group of lawyers different from those who filed a putative class action in July 2020 related to the Zoosk security incident , filed 77 separate arbitration demands against Zoosk in the Judicial Arbitration and Mediation Services, Inc. ("JAMS") arbitration forum. That same counsel subsequently filed three more substantially identical arbitration demands with JAMS and identified to Zoosk an additional 1,370 claimants on whose behalf such counsel threatened to file substantially identical demands with JAMS, for a total of 1,450 claimants represented by such counsel and identified to Zoosk. Zoosk objected that neither JAMS nor any arbitrator appointed by JAMS had 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, 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 initiated three further arbitration claims previously filed and indicated it intended to proceed with those arbitrations if requisite fees were paid. Zoosk 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 also filed a petition to stay arbitration in New York on the basis that the claimants breached the Terms of Use when they filed their arbitration demands and Zoosk was therefore under no obligation to arbitrate. As of April 8, 2023, Claimants’ counsel and Zoosk entered into an agreement under which all of the arbitrations filed with JAMS were dismissed; including the New York petition, and the 177 claimants represented by claimants’ counsel and identified to Zoosk who according to Zoosk’s records were affected by the 2020 security incident were given a settlement under which they released all their security-incident-related claims in exchange for an immaterial amount. Claimants’ counsel also withdrew from representing any security-incident-related claims of the claimants.
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 entire proceeding to take approximately 12-18 months. We have initiated commitment negotiations with the GVH but at this current stage, 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 March 31, 2023, 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
Financial Instruments
The Company records 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 the 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 debt as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
(in thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Debt(1) | | $ | 95,093 | | | $ | 92,424 | | | $ | 94,817 | | | $ | 93,511 | |
(1) At March 31, 2023 and December 31, 2022, the carrying value of debt is net of unamortized original issue discount and debt issuance costs and the amendment fee relating to the Amendment in an aggregate amount of $4.9 million and $5.2 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, 2023 and December 31, 2022.
Assets Measured at Fair Value on a Non-recurring Basis
Certain assets, such as goodwill and intangible assets, are measured at fair value on a non-recurring basis. For goodwill, the process involves using a market approach and income approach (using discounted estimated cash flows) to determine the fair value of each reporting unit on a stand-alone basis. That fair value is compared to the carrying value of the reporting unit, including its recorded goodwill. Impairment is considered to have occurred if the fair value of the reporting unit is lower than the carrying value of the reporting unit. For the indefinite lived intangible assets, the Company estimated the fair value using a relief-from-royalty method, which includes unobservable inputs, including projected revenues, royalty rates and weighted average cost of capital. Impairment is considered to have occurred if the fair value of the intangible asset is lower than its carrying value. The fair value measurements for goodwill and the indefinite lived intangible assets are considered Level 3 and these assets are recognized at fair value if they are deemed to be impaired. During the three months ended March 31, 2023, the Company recognized an impairment charge of $1.1 million for the Zoosk trade name. There were no impairment charges during the three months ended March 31, 2022. See Note 4. Goodwill and Intangible Assets for further discussion of the impairment.
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 March 31, 2023 and 2022, the Company recognized total stock-based compensation expense for all the plans of $0.2 million and $0.5 million, respectively, which is included as a component of Other operating expenses in the Unaudited 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 American Depository Shares ("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 ADSs, subject to limitations imposed by German law. As of March 31, 2023, 197,866 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. There were no options issued during the three months ended March 31, 2023.
The following table summarizes the activity for the Company's options under the LTIP during the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | | | | | (in years) | | |
Outstanding as of December 31, 2022 | | 2,155,998 | | $ | 3.91 | | | 5.36 | | $— |
| | | | | | | | |
| | | | | | | | |
Forfeited | | (210,387) | | $ | 3.45 | | | | | |
| | | | | | | | |
Outstanding as of March 31, 2023 | | 1,945,611 | | $ | 3.96 | | | 5.04 | | — |
Vested and exercisable at March 31, 2023 | | 1,081,461 | | $ | 4.68 | | | 4.25 | | $— |
| | | | | | | | | | | | | | |
| | Number of Options | | Weighted Average Grant Date Fair Value |
Unvested as of December 31, 2022 | | 1,152,508 | | $ | 1.26 | |
| | | | |
Vested | | (77,971) | | $ | 1.51 | |
Forfeited | | (210,387) | | $ | 1.54 | |
Unvested as of March 31, 2023 | | 864,150 | | $ | 1.17 | |
The following table summarizes the activity for the Company's zero priced options under the LTIP during the three months ended March 31, 2023:
| | | | | | | | |
| | Number of Options |
Outstanding as of December 31, 2022 | | 713,459 |
| | |
Exercised | | (28,063) |
Forfeited | | (110,611) |
Outstanding as of March 31, 2023 | | 574,785 |
Vested and exercisable at March 31, 2023 | | 141,813 |
| | | | | | | | | | | | | | |
| | Number of Options | | Weighted Average Grant Date Fair Value |
Unvested as of December 31, 2022 | | 574,215 | | $ | 2.72 | |
| | | | |
Vested | | (30,632) | | $ | 3.14 | |
Forfeited | | (110,611) | | $ | 3.07 | |
Unvested as of March 31, 2023 | | 432,972 | | $ | 2.60 | |
The total unrecognized compensation expense related to awards granted under the LTIP at March 31, 2023 was $1.2 million, which will be recognized over a weighted-average period of 2.99 years.
As of March 31, 2023 and 2022, diluted loss per share excludes 1,536,030 and 1,096,902 potentially dilutive common shares, respectively, related to vested option awards, as their effect was anti-dilutive.
Authorized Capital 2022
At the 2022 Annual Meeting of Shareholders of the Company held on August 31, 2022, the Company’s shareholders approved an amendment to the Company’s Articles of Association to: (a) cancel an authorized capital in the original amount of EUR 640,000 (the "Authorized Capital 2017") that could be utilized by the Company’s Administrative Board until October 31, 2022 on one or several occasions to increase the Company’s share capital against contributions in cash and/or in kind, and (b) create a new authorized capital in the amount of EUR 1,064,554 (the “Authorized Capital 2022”) that can be utilized by the
Administrative Board until August 29, 2027 on one or several occasions to increase the Company’s share capital against contributions in cash and/or in kind (the “Amended Articles of Association”). The Amended Articles of Association became effective on September 14, 2022 upon registration with the commercial register (Handelsregister) of the local court (Amtsgericht) of Munich, Germany. An amount of EUR 593,481 was available under the Authorized Capital 2017 at the time of its cancellation.
Note 10. Subsequent Events
On April 12, 2023, the Board of Directors of the Company and David Clark determined that Mr. Clark will resign as Managing Director and Chief Financial Officer of the Company and Spark Networks, Inc. effective April 14, 2023. On April 12, 2023, the Board appointed Kristie Goodgion, the Company's Global Controller, as the Company's Executive Director and Chief Financial Officer (principal financial officer and principal accounting officer).
On April 12, 2023, the Company received a written notice from Nasdaq dated April 12, 2023, notifying the Company that it is no longer in compliance with the minimum stockholders’ equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain stockholders’ equity of at least $2.5 million.
On April 13, 2023, the Company received a second written notice from Nasdaq notifying the Company that it is no longer in compliance with the $1.00 minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on the Nasdaq Capital Market (the “Bid Price Requirement”). The Bid Price Notice has no immediate effect on the listing of the Company’s securities on the Nasdaq Capital Market.
On May 15, 2023, we entered into Amendment No. 1 to Forbearance Agreement with MGG, pursuant to which the forbearance period was extended through the earlier of May 25, 2023 or the occurrence of a Termination Event. We intend to renegotiate certain terms of our Financing Agreement (including possibly an additional extension of the forbearance period) during this additional forbearance period.