Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 20-F 
 

 
(Mark One)
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2018
 
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
for the transition period from                      to
 
OR 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report
 
Commission file number: 001-38252
 
Spark Networks SE
(Exact name of Registrant as specified in its charter)
 
Not Applicable
(Translation of Registrant’s name into English)
 
Germany
(Jurisdiction of incorporation)
 
Kohlfurter Straße 41/43
Berlin 10999
Germany
(Address of principal executive offices)
 
Robert W. O’Hare, Tel: (+49) 30 868 000 102 Kohlfurter Straße 41/43 Berlin 10999 Germany
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 

 
Securities registered or to be registered, pursuant to Section 12(b) of the Act 
Title of each class
 
Name of each exchange on which registered
American Depositary Shares each representing one-tenth of an ordinary share
 
New York Stock Exchange
Ordinary shares, €1.00 nominal value per share*
 
New York Stock Exchange
 
* Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.
 
None
(Title of Class)
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act
 
None
(Title of Class)
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report. 1,298,797 ordinary shares.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.     Yes  o    No  x
 
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  x    No  o
 
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  x    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  o           Accelerated filer  o           Non-accelerated filer  x           Emerging growth company  x
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, 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.  o
 
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP  o
 
International Financial Reporting Standards as issued
by the International Accounting Standards Board  x
 
Other  o
 
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  o    Item 18  o
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
 





TABLE OF CONTENTS
 

 
 
Page 
 
 
 
Presentation of Financial and Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



2



TERMS
 
As used herein, and unless the context suggests otherwise, the terms “the Company,” “Group,” “Spark Networks,” “we,” “us” or “our” refer to Spark Networks SE and its consolidated subsidiaries. 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This annual report contains statements that constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause Spark Networks’ performance or achievements to be materially different from those of any expected future results, performance, or achievements. Forward-looking statements speak only as of the date they are made, and Spark Networks does not assume any duty to update forward-looking statements. Readers are cautioned that a number of important factors could cause actual results to differ materially from those expressed in, or implied or projected by, such forward-looking statements. Words and expressions reflecting optimism, satisfaction, or disappointment with current prospects, as well as words such as “believes,” “hopes,” “intends,” “estimates,” “expects,” “projects,” “plans,” “anticipates,” and variations thereof, or the use of future tense, identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Forward-looking statements include, but are not limited to, statements about operating a diverse global platform of premium online dating sites, statements about providing exceptional user experience and driving stockholder value, statements about projected financial results, statements about the company’s plans, objectives, expectations and intentions and other statements that are not historical facts. Such forward-looking statements are not guarantees of performance and actual results could differ materially from those contained in such statements. Factors that could cause or contribute to such differences include, but are not limited to: risks related to the degree of competition in the markets in which Spark Networks operates; the ability of Spark Networks to retain and hire key personnel; Spark Networks’ ability to continue to control costs and operating expenses; Spark Networks’ ability to achieve its intended cost savings; Spark Networks’ ability to generate cash from operations, lower-than-expected revenue, credit quality deterioration or a reduction in net earnings; Spark Networks’ ability to raise outside capital and to repay debt as it comes due; Spark Networks’ ability to introduce new competitive products and the degree of market acceptance of such new products; the timing and market acceptance of new products introduced by Spark Networks’ competitors; Spark Networks’ ability to identify potential acquisitions; Spark Networks’ ability to successfully integrate acquired businesses and the ability of acquired businesses to perform as expected; Spark Networks’ ability to maintain strong relationships with branded channel partners; changes in Spark Networks’ stock price due to broader stock market movements and the performance of peer group companies; Spark Networks’ ability to enforce intellectual property rights and protect their respective intellectual property; general competition and price measures in the market place; general economic conditions; and the other factors identified in Item 3.D “Risk Factors.”
 
Although Spark Networks believes the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The underlying expected actions or Spark Networks’ results of operations involve risks and uncertainties, many of which are outside the company’s control, and any one of which, or a combination of which, could materially affect Spark Networks’ results of operations and whether the forward-looking statements ultimately prove to be correct. In light of the significant uncertainties inherent in the forward-looking statements, readers should not place undue reliance on forward-looking statements.
 
These forward-looking statements speak only as of the date on which the statements were made and Spark Networks does not undertake any obligation to update or revise any forward-looking statements made in this annual report or elsewhere as a result of new information, future events, or otherwise, except as required by law.
 
In addition to other factors and matters contained or incorporated in this document, the factors discussed under “Risk Factors” could cause actual results to differ materially from those discussed in the forward-looking statements.
 
Many of the factors that will determine Spark Networks’ future results are beyond Spark Networks’ ability to control or predict. Spark Networks cannot guarantee any future results, levels of activity, performance, or achievements.
 
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found elsewhere in this annual report.
 
Spark Networks cautions further that, as it is not possible to predict or identify all relevant factors that may impact forward-looking statements, the foregoing list should not be considered a complete statement of all potential risks and uncertainties.
 
Readers should carefully consider the cautionary statements contained or referred to in this section in connection with any subsequent forward-looking statements that may be issued by Spark Networks or persons acting on behalf of Spark Networks.

Note regarding trademarks

The trademarks, trade names or service marks appearing in this annual report are the property of the Company. Solely for convenience, trademarks and trade names referred to in this annual report may appear without the ® or TM symbol.


3



PART I
 
Item 1. Identity of Directors, Senior Management and Advisers
 
Not applicable.

Item 2. Offer Statistics and Expected Timetable
 
Not applicable. 

Item 3. Key Information
 
A.
Selected financial data.
 
The selected financial data set forth in the table below for 2018, 2017, and 2016 has been derived from our audited consolidated financial statements as of December 31, 2018, 2017 and 2016 and for the years then ended. This selected financial data should be read in conjunction with the consolidated financial statements and accompanying notes included herein.
 
Statement of Comprehensive Loss/Income Data: 
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
2018
Continuing operations
(in € thousands)
 
(in $ thousands)(1)
Revenue
104,551

 
85,637

 
73,491

 
123,475

Cost of revenue
(69,490
)
 
(58,776
)
 
(51,202
)
 
(82,068
)
Gross profit
35,061

 
26,861

 
22,289

 
41,407

Other income
240

 
54

 
126

 
283

Other operating expenses
(36,299
)
 
(32,030
)
 
(19,742
)
 
(42,869
)
Sales and marketing expenses
(4,938
)
 
(5,540
)
 
(3,919
)
 
(5,832
)
Customer service expenses
(4,626
)
 
(3,971
)
 
(2,791
)
 
(5,463
)
Technical operations and development expenses
(7,195
)
 
(6,428
)
 
(3,305
)
 
(8,497
)
General and administrative expenses
(19,540
)
 
(16,091
)
 
(9,727
)
 
(23,077
)
Operating (loss)/profit
(998
)
 
(5,115
)
 
2,673

 
(1,179
)
Interest income and similar income
478

 
239

 
157

 
565

Interest expense and similar charges
(1,436
)
 
(782
)
 
(425
)
 
(1,696
)
Net finance expenses
(958
)
 
(543
)
 
(268
)
 
(1,131
)
(Loss)/income before taxes
(1,956
)
 
(5,658
)
 
2,405

 
(2,310
)
Income tax benefit (expense)
(1,147
)
 
84

 
(1,082
)
 
(1,355
)
(Loss)/income from continuing operations
(3,103
)
 
(5,574
)
 
1,323

 
(3,665
)
Discontinued operations
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax

 

 
(632
)
 

Net (loss)/income
(3,103
)
 
(5,574
)
 
691

 
(3,665
)
Other comprehensive (loss)/income
1,617

 
(883
)
 

 
1,910

Total comprehensive (loss)/income
(1,486
)
 
(6,457
)
 
691

 
(1,755
)
Earnings per share
 
 
 
 
 
 
 
Basic earnings/(loss) per share
(2.39
)
 
(24.23
)
 
27.64

 
$
(2.82
)
Diluted earnings/(loss) per share
(2.39
)
 
(24.23
)
 
27.64

 
$
(2.82
)
Earnings per share - continuing operations
 
 
 
 
 
 
 
Basic earnings/(loss) per share
(2.39
)
 
(24.23
)
 
52.92

 
$
(2.82
)
Diluted earnings/(loss) per share
(2.39
)
 
(24.23
)
 
52.92

 
$
(2.82
)
 
 
 
 
 
 
 
 
(1) Amounts in this column are not audited and have been converted from euros to U.S. dollars solely for the convenience of the reader. Balance sheet positions and income statement positions are converted at the exchange rate on December 31, 2018 of $1.1450 per euro and the average exchange rate from January 1 until December 31, 2018 of $1.1810 per euro, respectively.



4




Key Performance Indicators:
 
# of Registrations(1)
 
Average Paying
Subscribers
(2)
 
Monthly ARPU(3)
 
Adjusted EBITDA
(in thousands)
2018
10,144,173

 
483,413

 
18.02

 
10,952

2017
8,451,633

 
379,403

 
18.81

 
6,605

2016
6,897,649

 
317,276

 
19.30

 
5,869

 
 
 
 
 
 
 
 
(1) Total registrations are defined as the total number of new members registering to the platforms with their email address. Those include members who enter into premium subscriptions and free memberships.

(2) 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.

(3) Monthly Average Revenue Per User (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.


The following table presents certain selected information and Adjusted EBITDA(2) for the periods presented:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
2018
 
(in € thousands)
 
(in $ thousands)(1)
Net (loss)/income
(3,103
)
 
(5,574
)
 
691

 
(3,665
)
Discontinued operations

 

 
632

 

Net finance expenses
958

 
543

 
268

 
1,131

Income tax (benefit) expense
1,147

 
(84
)
 
1,082

 
1,355

Depreciation and amortization
3,565

 
3,084

 
1,278

 
4,210

Impairment of intangible assets and goodwill
3,324

 
25

 

 
3,926

Share-based compensation expense
4,091

 
488

 
991

 
4,831

Non-recurring costs
970

 
8,123

 
927

 
1,145

Adjusted EBITDA (2)
10,952

 
6,605

 
5,869

 
12,933

 
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
2018
Summary of non-recurring costs
(in € thousands)
 
(in $ thousands)(1)
Contract liabilities write-offs
289

 
603

 

 
341

Restructuring expenses

 

 
642

 

Transaction and advisory fees
264

 
3,995

 
162

 
312

Merger integration costs
101

 
2,042

 

 
119

Other employee payments

 
1,053

 

 

Severance costs
316

 
430

 
123

 
373

Total adjustments
970


8,123


927


1,145

 
 
 
 
 
 
 
 
(1) Amounts in this column are not audited and have been converted from euros to U.S. dollars solely for the convenience of the reader. Balance sheet positions and income statement positions are converted at the

5



exchange rate on December 31, 2018 of $1.1450 per euro and the average exchange rate from January 1 until December 31, 2018 of $1.1810 per euro, respectively.    

(2) Adjusted EBITDA is not a measure defined by International Financial Reporting Standards ("IFRS"). The most directly comparable IFRS measure for Adjusted EBITDA is our net (loss)/profit for the relevant period. This measure is one of the primary metrics by which we evaluate the performance of our businesses, 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 ongoing operations and excludes the impact of items that we do not consider representative of our ongoing operating performance, including: (i) non-cash items such as share-based compensation, asset impairments, net finance expenses and (ii) one-time items that have not occurred in the past two years and are not expected to recur in the next two years including severance, transaction advisory fees, and merger integration costs, and (iii) discontinued operations. 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.

Adjusted EBITDA should not be construed as a substitute for net (loss) / profit (as determined in accordance with IFRS) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by IFRS.
 

Statement of Financial Position Data: 
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2018
 
 
(in € thousands)
 
(in $ thousands)(1)
Cash and cash equivalents
 
11,095

 
8,214

 
12,704

Current trade and other receivables
 
7,004

 
13,820

 
8,020

Intangible assets and goodwill
 
33,015

 
35,136

 
37,802

Total Assets
 
62,862

 
69,182

 
71,977

Total Liabilities
 
43,453

 
49,705

 
49,754

Total Shareholders' Equity
 
19,409

 
19,477

 
22,223

 
 
 
 
 
 
 
 
(1) Amounts in this column are not audited and have been converted from euros to U.S. dollars solely for the convenience of the reader. Balance sheet positions and income statement positions are converted at the exchange rate on December 31, 2018 of $1.1450 per euro and the average exchange rate from January 1 until December 31, 2018 of $1.1810 per euro, respectively.

Exchange Rate Information:
 
We publish our financial statements in euros. Fluctuations in the exchange rate between the euro and the U.S. dollar will affect the U.S. dollar amounts received by owners of our American Depositary Shares (“ADSs”) on conversion of dividends, if any, paid in euro on the ADSs. The following table presents information on the exchange rates between the euro and the U.S. dollar for the periods indicated. 
 
 
High
 
Low
 
Average
 
Year End
Year Ended December 31, 2018
 
1.2493

 
1.1261

 
1.1810

 
1.1450

Year Ended December 31, 2017
 
1.2060

 
1.0385

 
1.1297

 
1.1993

Year Ended December 31, 2016
 
1.1569

 
1.0364

 
1.1069

 
1.0541

 

6



Months ended
 
High
 
Low
 
Average
 
Month End
January 2018
 
1.2457

 
1.1932

 
1.2200

 
1.2457

February 2018
 
1.2493

 
1.2214

 
1.2348

 
1.2214

March 2018
 
1.2421

 
1.2171

 
1.2336

 
1.2321

April 2018
 
1.2388

 
1.2070

 
1.2276

 
1.2079

May 2018
 
1.2007

 
1.1558

 
1.1812

 
1.1699

June 2018
 
1.1836

 
1.1534

 
1.1678

 
1.1658

July 2018
 
1.1789

 
1.1588

 
1.1686

 
1.1736

August 2018
 
1.1710

 
1.1321

 
1.1549

 
1.1651

September 2018
 
1.1777

 
1.1562

 
1.1659

 
1.1576

October 2018
 
1.1606

 
1.1318

 
1.1484

 
1.1318

November 2018
 
1.1487

 
1.1261

 
1.1367

 
1.1359

December 2018
 
1.1454

 
1.1285

 
1.1384

 
1.1450


B.
Capitalization and Indebtedness.
 
Not applicable.
 
C.
Reasons for Offer and Use of Proceeds.
 
Not applicable.
 
D.
Risk Factors.
 
Our business faces significant risks. You should carefully consider all of the information set forth in this annual report and in our other filings with the United States Securities and Exchange Commission, or the SEC, including the following risks that we face and that are faced by our industry. Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. See “Cautionary statement regarding forward-looking statements” above.
 
Risks Related to Our Business
 
Spark Networks’ business depends on establishing and maintaining strong brands, and if Spark Networks is not able to maintain and enhance its brands, it may be unable to expand or maintain its member and paying subscriber bases.
 
Spark Networks believes that establishing and maintaining its brands is essential to its efforts to attract and expand its member and paying subscriber bases. It believes that the importance of brand recognition will continue to increase, given the growing number of online dating sites and applications, or “apps,” and the low barriers to entry for companies offering online dating and other types of personals services. As of December 31, 2018, Spark Networks’ services were available in 29 countries. To attract and retain members and paying subscribers, and to promote and maintain its brands in response to competitive pressures, Spark Networks may have to substantially increase its financial commitment to creating and maintaining its distinct brand. If visitors, members and paying subscribers to its products do not perceive its existing services to be of higher quality, or if it introduces new services or enters into new business ventures that are not favorably received by such parties, the value of its brands could be diluted, thereby decreasing the attractiveness of its websites to such parties. As a result, its results of operations may be adversely affected by decreased brand recognition or negative brand perception.
 

7



If Spark Networks’ efforts to attract new members, convert members into paying subscribers and retain its paying subscribers are not successful, its revenue and operating results will suffer.
 
Since it was launched in 2008, Spark Networks and its predecessor companies has had nearly 60 million users register with its dating platforms. A registration is deemed complete once a user has inserted an email/password combination, accepted the terms of service and clicked the registration button in order to create a profile with the respective site (such user, a “registered user”). For the twelve months ended December 31, 2018, Spark Networks had an average of approximately 483,000 paying members across all of its platforms. Spark Networks’ future growth depends on its ability to attract new members that fit within its target audience, convert members into paying subscribers and retain its paying subscribers. This in turn depends on its ability to deliver a relevant, high-quality online personals experience to these members and its ability to remain attractive to its existing and potential paying customers. As a result, it must continue to invest significant resources in order to enhance its existing products and services and introduce new high-quality products and services that people will use. If Spark Networks is unable to predict user preferences or industry changes, or if it is unable to modify its products and services on a timely basis, it may lose existing members and paying subscribers and may fail to attract new members and paying subscribers. For example, one of Spark Networks’ strategies is to target single people with high socio-economic status who are looking for a serious and long-term relationship. If its user preferences change, or the market for this niche otherwise decreases, or this strategy is otherwise unsuccessful, Spark Networks could lose users, including paying subscribers, and its market share and revenue could decrease. Spark Networks’ revenue and expenses will also be adversely affected if its innovations are not responsive to the needs of its members and paying subscribers or are not brought to market in an effective or timely manner.
 
Spark Networks revenue could be adversely affected if subscriptions cannot be automatically renewed.
 
Spark Networks generally provides its premium memberships pursuant to 1-month, 3-month, 6-month, 12-month and 24-month subscriptions, which are generally automatically renewed unless canceled by the subscriber. In each of the years ended December 31, 2018, 2017 and 2016, subscription revenue accounted for over 99% of Spark Networks’ total revenue. Although Spark Networks has historically experienced a high percentage of subscribers that choose an auto-renewal payment option, a significant portion of Spark Networks’ members may choose not to do so in the future or Spark Networks may encounter difficulties during the technical processing of the renewal of credit card processing due to, for instance, the expiration or blocking of the applicable credit card. Spark Networks has successfully taken steps to increase renewal rates by, for example, improving the auto-renewal success, but there can be no assurance that these efforts will remain successful in maintaining, and even increasing renewal rates in the future.
 
The EU has introduced the EU Consumer Rights Directive (the “Directive”), enforced in EU member states since June 2014, that restricts the use of auto-renewals, and Spark Networks has implemented a membership subscription model which is compliant with the Directive. Numerous U.S. states also have laws regulating auto-renewal clauses in contracts, and proposals to restrict auto-renewals are also under consideration in the United States. To the extent that Spark Networks must reduce or eliminate the use of auto-renewals in these or other markets, renewal rates may fall, potentially reducing the number of membership subscription users. Consequently, the growth of subscription revenue will depend significantly on attracting new subscription users, and this dependence could increase due to regulations concerning auto-renewal that are outside of Spark Networks’ control. Any failure to maintain or improve the renewal rates of membership subscription users or to attract new subscription users could have a material adverse effect on results of operations.
 
Moreover, some credit card processors have announced the application of more stringent rules for credit card processing in the EU, which will likely require users to take additional steps when paying online. This may have an adverse effect on the authorization levels of Spark Networks’ users.
 

8



Spark Networks’ growth strategy includes acquisitions that entail significant execution, integration and operational risks.
 
Spark Networks pursues a growth strategy based in part on acquisitions, with the objective of creating a combined company that Spark Networks believes can achieve increased cost savings and operating efficiencies through economies of scale, especially in the integration of administrative services. Spark Networks will seek to make additional acquisitions in the future to increase its scale and profitability. For instance, on September 30, 2016, Spark Networks consummated the acquisition of Samadhi, an unrelated third party and owner of the Attractive World platform, and on November 2, 2017, Spark Networks consummated the merger of Spark Networks Services GmbH (f/k/a Affinitas GmbH), a German limited company (“Affinitas”) and Spark Networks, Inc., a Delaware corporation (“Spark”). This growth strategy involves significant risks. Spark Networks exposes itself to operational and financial risks in connection with historical and future acquisitions if it is unable to:
 
properly value prospective acquisitions, especially those with limited operating histories;
successfully integrate the operations, as well as the accounting, financial controls, management information, technology, human resources and other administrative systems of acquired businesses with its existing operations and systems;
successfully identify and realize potential synergies among acquired and existing businesses;
retain or hire senior management and other key personnel at acquired businesses; and
successfully manage acquisition-related strain on its management, operations and financial resources and those of the various brands in its portfolio.

Furthermore, Spark Networks may not be successful in addressing other challenges encountered in connection with its acquisitions. The anticipated benefits of one or more of its acquisitions may not be realized or the value of goodwill and other intangible assets acquired could be impacted by one or more continuing unfavorable events or trends, which could result in significant impairment charges. The occurrence of any these events could have an adverse effect on its business, financial condition and results of operations. While Spark Networks has successfully integrated acquisitions in the past, such as in the Affinitas / Spark Merger, no assurance can be provided that Spark Networks will experience similar success with future acquisitions.
 
Acquisitions also involve operational risks and uncertainties, such as unknown or contingent liabilities with no available manner of recourse, exposure to unexpected problems, the retention of key employees and customers, and other issues that could negatively affect our business. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our business.
 
Spark Networks faces significant competition for acquisition opportunities.
 
There is significant competition for acquisition targets in the markets within which Spark Networks operates.
 
Consequently, Spark Networks may not be able to identify suitable acquisitions or may have difficulty finding attractive businesses for acquisition at reasonable prices. If Spark Networks is unable to identify future acquisition opportunities, reach agreement with such third parties or obtain the financing necessary to make such acquisitions, Spark Networks could lose scale relative to competitors who are able to make such acquisitions. This loss of relative scale in the industry could negatively impact Spark Networks’ capacity to compete and reduce future growth potential.
 
In addition, current and potential competitors are making, and are expected to continue to make, strategic acquisitions, or establishing cooperatives and in some cases, establishing exclusive relationships with significant companies or competitors to expand their businesses or to offer more comprehensive products and services. To the extent these competitors or potential competitors establish exclusive relationships with major portals, search engines and Internet Service Providers (“ISPs”), our ability to reach potential members through online advertising may be restricted. Any of these competitors could cause difficulty in attracting and retaining members and converting members into paying subscribers.
 




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Spark Networks may fail to adequately protect its intellectual property rights or may be accused of infringing the intellectual property rights of third parties.
 
Spark Networks relies heavily upon its trademarks and related domain names and logos to market its brands and to build and maintain brand loyalty and recognition, as well as upon trade secrets.
 
In addition, Spark Networks relies on a combination of laws, and contractual restrictions with employees, customers, suppliers, affiliates and others, to establish and protect its various intellectual property rights. For example, Spark Networks has generally registered, and continues to apply to register and renew, or secure by contract where appropriate, trademarks and service marks as they are developed and used, and reserve, register and renew domain names as it deems appropriate. Effective trademark protection may not be available or may not be sought in every country in which Spark Networks’ products are made available, and contractual disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available or be registered, even if available.
 
Despite these measures, Spark Networks’ intellectual property rights may still not be protected in a meaningful manner, challenges to contractual rights could arise or third parties could copy or otherwise obtain and use its intellectual property without authorization. In addition, litigation may be necessary in the future to enforce its intellectual property rights, protect its trade secrets or to determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources.
 
For instance, Spark Networks is currently in a dispute with a competitor related to its registered figurative trademark for EliteSingles and country specific related trademarks in BeneLux, Finland, Hungary, Ireland, Sweden and the UK. Although Spark Networks believes it will ultimately prevail and intends to prosecute and defend its interest vigorously, if Spark Networks were to lose these disputes, it may be required to rebrand EliteSingles and the country specific brands in the given countries, which may have an adverse effect on the performance of the respective EliteSingles brands. For the twelve months ended December 31, 2018, the affected EliteSingles brands' average paying members constituted approximately 15.4% of Spark Networks’ overall average paying member count.
 
The occurrence of any of these events could result in the erosion of Spark Networks’ brands and limit its ability to market its brands using its various domain names, as well as impede its ability to effectively compete against competitors with similar technologies, any of which could adversely affect its business, financial condition and results of operations.
 
If Spark Networks fails to keep pace with rapid technological change, its competitive position will suffer.
 
Spark Networks operates in a market characterized by rapidly changing technologies, evolving industry standards, frequent new product and service announcements, enhancements and changing customer demands. Accordingly, its performance depends on its ability to adapt to rapidly changing technologies and industry standards, and the ability to continually improve the speed, performance, features, ease of use and reliability of services in response to both evolving demands of the marketplace and competitive service and product offerings. Spark Networks’ industry has been subject to constant innovation and competition. When one competitor introduces new features perceived as attractive to users, other competitors replicate such new features. Over the last few years, such new feature introductions in the industry have included instant messaging, message boards, e-cards, personality profiles, the delivery of content through cell phones and linking of profiles to social media accounts. There have also been subsequent enhancements on new features such as the ability to send videos and photos through instant messaging or customize user experience based on machine learning and artificial intelligence. Integration of new technologies into systems involves numerous technical challenges, substantial amounts of capital and personnel resources, and often takes many months to complete. Spark Networks intends to continue to devote efforts and funds toward the development of additional technologies and services so that it can both innovate and stay competitive in the competitive landscape in which it operates. For example, in 2018, 2017 and 2016, Spark Networks introduced a number of new features such as an open search functionality and a new personality test, and it anticipates the introduction of additional features in 2019 and beyond. Spark Networks may not be able to effectively integrate new technologies into its websites on a timely basis or at all, which may degrade the responsiveness and speed of its websites. Such technologies, even if integrated, may not function as expected. 





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Spark Networks needs to maintain or increase its number of paying subscribers to maintain or increase its current level of revenue.
 
The vast majority of Spark Networks’ revenue is generated by users that pay it a subscription fee. Internet and app users in general, and users of online personals services specifically, freely navigate and use the services offered by a variety of providers. Spark Networks cannot assure that it will be able to grow or even maintain the current size of its subscriber base. If it does not constantly attract new paying subscribers at a faster rate than subscription terminations, it will not be able to maintain or increase its current level of revenue.
 
Spark Networks’ growth and profitability rely, in part, on its ability to attract and retain users through cost-effective marketing efforts. Any failure in these efforts could adversely affect its business, financial condition and results of operations.
 
Costs for Spark Networks to acquire paying subscribers are dependent, in part, upon its ability to purchase advertising at a reasonable cost. Its advertising costs vary over time depending upon a number of factors, many of which are beyond its control. Historically, Spark Networks has used online and offline advertising as the primary means of marketing its services. During 2018, cost of revenue substantially increased compared to the prior year based on direct marketing investment in SilverSingles following its December 2017 launch. During both 2017 and 2016, cost of revenue substantially increased compared to the prior year primarily as a result of growing Spark Networks' newly established North American business under the brand EliteSingles, which was launched in May 2015.
 
Evolving consumer behavior can affect the availability of profitable marketing opportunities. For example, as traditional television viewership declines and as consumers spend more time on mobile devices rather than desktop computers, the reach of many traditional advertising channels is contracting. To continue to reach potential users and grow its businesses, Spark Networks must identify and devote more of its overall marketing expenditures to newer advertising channels, such as mobile and online video platforms, as well as targeted campaigns in which it communicates directly with potential, former and current users via new virtual means. Positive user experiences can provide gratuitous promotional opportunities for Spark Networks, as satisfied subscribers can encourage others to join; Spark Networks can also capitalize on such success stories in its marketing. Many of its competitors have also engaged in live marketing efforts such as organized social events for its members, an area that Spark Networks has not yet tried at scale. Generally, the opportunities in and sophistication of newer advertising channels are relatively undeveloped and unproven, and there can be no assurance that Spark Networks will be able to continue to appropriately manage and fine-tune its marketing efforts in response to these and other trends in the advertising industry. Any failure to do so could adversely affect its business, financial condition and results of operations.
 
In addition, the cost of online and/or offline advertising has historically increased over time. If Spark Networks is not able to reduce its other operating costs, increase its paying subscriber base or increase revenue per paying subscriber to offset increased marketing costs, its profitability will be adversely affected.
 
Communicating with Spark Networks’ users is critical to its success, and any erosion in Spark Networks’ ability to communicate with its users could adversely affect its business, financial condition and results of operations.
 
To be successful, Spark Networks must communicate with its subscribers and other users to, among other things, update them on their profile and related activity and to introduce them to new products and services. As a result, Spark Networks must ensure that its methodology for communication with its subscribers and other users evolves in step with the communication habits of its consumers. For instance, most of Spark Networks’ communications currently take the form of email and push notifications.
 
Any failure to effectively communicate with current users or develop or take advantage of new means of communication could have an adverse effect on its business, financial condition and results of operations.
 
Spark Networks’ success depends, in part, on the integrity of its systems and infrastructure and on its ability to enhance, expand and adapt these systems and infrastructure in a timely and cost-effective manner.
 
In order for Spark Networks to succeed, its systems and infrastructure must perform well on a consistent basis. From time to time, it may experience system interruptions that make some or all of its systems or data unavailable and prevent its products from functioning properly for its users; any such interruption could arise for any number of reasons, including human errors. Further, its systems and infrastructure are vulnerable to damage from fire, power loss, hardware and operating software errors, telecommunications failures and similar events. While it has backup systems in place for

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certain aspects of its operations, its systems and infrastructure are not fully redundant, disaster recovery planning is not sufficient for all eventualities and its property and business interruption insurance coverage may not be adequate to compensate it fully for any losses that it may suffer. Any interruptions or outages, regardless of the cause, could negatively impact its users’ experiences with its products, tarnish its brands’ reputation and decrease demand for its products, any or all of which could adversely affect its business, financial condition and results of operations. Moreover, even if detected, the resolution of such interruptions may take a long time, during which customers will not be able to access, or will have limited access to, the service.
 
Spark Networks also continually works to expand and enhance the efficiency and scalability of its technology and network systems to improve the experience of its users, accommodate substantial increases in the volume of traffic to its various dating products, ensure acceptable page load times or general accessibility for its dating products and keep up with changes in technology and user preferences. Any failure to do so in a timely and cost-effective manner could adversely affect its users’ experience with its various products and thereby negatively impact the demand for its products, and could increase its costs, either of which could adversely affect its business, financial condition and results of operations.
 
Spark Networks’ services are highly technical and may contain undetected bugs or errors, which could manifest in ways that could seriously harm its reputation and its business.
 
Spark Networks’ services are highly technical and complex, and any services Spark Networks may introduce in the future may contain undetected bugs, errors, and other vulnerabilities. These bugs and errors can manifest in any number of ways in its services, including through diminished performance, security vulnerabilities, malfunctions, or even permanently disabled services. Spark Networks has a practice of rapidly updating its services, but some errors in its services may be discovered only after its service is used by users, and may in some cases be detected only under certain circumstances or after extended use. Any such defects discovered in Spark Networks’ services after commercial release could result in a loss of sales and users, which could seriously harm its business. Any errors, bugs, or vulnerabilities discovered in its code after release could damage its reputation, drive away users, lower revenue, and expose us to damages claims, any of which could seriously harm its business. 

Spark Networks may not be able to protect its systems and infrastructure from cyberattacks and may be adversely affected by cyberattacks experienced by third parties.
 
Like any other business, there is a risk that Spark Networks will experience cyberattacks, computer viruses, worms, hacking, phishing, bot attacks or other destructive or disruptive software, distributed denial of service attacks, and attempts to misappropriate customer information. While Spark Networks has invested (and continues to invest) heavily in the protection of its systems and infrastructure and in related training, there can be no assurance that its efforts will prevent significant breaches in its systems or other such events from occurring. Any cyber or similar attack it is unable to protect itself against could damage its systems and infrastructure, prevent it from providing its products and services, erode its reputation and brands, result in the disclosure of confidential information of its users and/or be costly to remedy, as well as subject it to investigations by regulatory authorities and/or litigation that could result in liability to third parties. In light of the nature of its business, the unintended disclosure of personal information, whether as a result of a cyber attack or not, would be particularly damaging to Spark Networks’ reputation.
 
Similarly, online scammers and other similar groups may use Spark Networks’ services and products to engage in illegal activities and it is likely that as more people use Spark Networks’ services, these groups will increasingly seek to misuse Spark Networks’ products. Although Spark Networks invests resources to combat these activities, including by suspending or terminating accounts it believes violate its guidelines, Spark Networks believes these groups will continue to seek ways to act inappropriately and illegally on its services. Combating these groups requires Spark Networks’ engineering and customer service teams to divert significant time and focus from improving its services.
 
Further, the impact of cyber security events experienced by third parties with whom Spark Networks does business (or upon whom it otherwise relies in connection with its day-to-day operations such as credit card processors) could have a similar effect on Spark Networks. If breaches, scamming and other similar activities increase at third-parties with whom Spark Networks does business, Spark Networks’ reputation, business and results of operations could be materially adversely affected.
 

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Spark Networks relies on a number of third party providers and their failure or unwillingness to continue to perform could harm us.
 
Spark Networks relies on third parties to provide important services and technologies to it, including third parties that manage and monitor its offsite data center, ISPs, search engine marketing providers and credit card processors, among others. In addition, it licenses technologies from third parties to facilitate its ability to provide its services. Any failure on its part to comply with the terms of these licenses could result in the loss of its rights to continue using the licensed technology, and it could experience difficulties obtaining licenses for alternative technologies. Furthermore, any failure of these third parties to provide these and other services, or errors, failures, interruptions or delays associated with licensed technologies, could significantly harm its business. Any financial or other difficulties its providers face may have negative effects on its business, the nature and extent of which it cannot predict. Except to the extent of the terms of its contracts with such third party providers, Spark Networks exercises little or no control over them, which increases its vulnerability to problems with the services and technologies they provide and license to it. In addition, if any fees charged by third party providers were to substantially increase, Spark Networks could incur significant additional losses.
 
Spark Networks depends, in part, upon arrangements with third parties to drive traffic to its various websites.
 
Spark Networks engages in a variety of activities designed to attract traffic to its various websites and convert visitors into members and paying subscribers. How successful it is in these efforts depends, in part, upon its continued ability to enter into arrangements with third parties to drive traffic to its various websites and its oversight of such third parties to ensure that they are appropriately communicating with online users. Pursuant to these arrangements, third parties generally promote Spark Networks’ services on their websites or through email campaigns and it pays them based upon a variety of arrangements (cost per registration, cost per one thousand impressions, a percentage of sales, etc.). Depending on how a third party communicates with online users via email, third party email service providers could treat such email campaign as spam, and ultimately limit Spark Networks’ ability to communicate with its members and paying subscribers via email.
 
These arrangements are generally not exclusive, are short-term in nature and are generally terminable by either party given notice. If existing arrangements with third parties are terminated (or are not renewed upon their expiration) and Spark Networks fails to replace this traffic and related revenue, or if it is unable to enter into new arrangements with existing and/or new third parties in response to industry trends, or if such third parties improperly manage email campaigns, its business, financial condition and results of operations could be adversely affected.
 
Distribution and use of Spark Networks’ dating products depends, in significant part, on a variety of third party publishers, platforms and mobile app stores. If these third parties limit, prohibit or otherwise interfere with the distribution or use of Spark Networks’ dating products in any material way, it could adversely affect its business, financial condition and results of operations.
 
Spark Networks markets and distributes its dating products (including related mobile applications) through a variety of third party publishers and distribution channels. Its ability to market its brands on any given property or channel is subject to the policies of the relevant third party. Certain publishers and channels have, from time to time, limited or prohibited advertisements for dating products for a variety of reasons, including as a result of poor behavior by other industry participants. There is no assurance that Spark Networks will not be limited or prohibited from using certain current or prospective marketing channels in the future. If this were to happen in the case of a significant marketing channel and/or for a significant period of time, Spark Networks’ business, financial condition and results of operations could be adversely affected. 

Additionally, Spark Networks’ mobile applications are accessed through the Apple App Store and the Google Play Store, among other platforms. Both Apple and Google have broad discretion to change their respective terms and conditions applicable to the distribution of Spark Networks’ applications as well as to the pricing of Spark Networks’ services, and to interpret their respective terms and conditions in ways that may limit, eliminate or otherwise interfere with Spark Networks’ ability to distribute its applications through their stores. There is no assurance that Apple or Google will not limit or eliminate or otherwise interfere with the distribution of our applications. If either or both entities were to do so, Spark Networks’ business, financial condition and results of operations could be adversely affected.
 

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As the distribution of Spark Networks’ dating products through app stores increases, Spark Networks will need to offset increasing app store fees.
 
As Spark Networks’ user base continues to shift to mobile solutions, it increasingly relies on the Apple App Store and the Google Play Store to distribute its mobile applications and related in-app products. While its mobile applications are generally free to download from these stores, it offers its users the opportunity to purchase paid memberships through these applications. Spark Networks determines the prices at which these memberships and features are sold and, in exchange for facilitating the purchase of these memberships and features through these applications to users who download its applications from these stores, it pays Apple and Google, as applicable, a share (generally 30%) of the revenue it receives from these transactions. As the distribution of its dating products through app stores increases, Spark Networks will need to offset these increased app store fees by decreasing traditional marketing costs, or by engaging in other efforts to increase revenue or decrease costs generally, or its business, financial condition and results of operations could be adversely affected.

Increases in credit card processing fees and high chargeback costs could increase operating expenses and adversely affect results of operations, and an adverse change in, or the termination of, Spark Networks’ relationship with any major credit card company would have a severe, negative impact on our business.
 
A significant portion of Spark Networks’ customers purchase its products using credit or debit cards. The major credit card companies or the issuing banks may increase the fees that they charge for transactions using their cards. An increase in those fees would require Spark Networks to either increase the prices it charges for its products, or suffer a negative impact on its profitability, either of which could adversely affect its business, financial condition and results of operations.
 
In addition, Spark Networks has potential liability for chargebacks associated with the transactions processed on its behalf. If a customer claims that a subscription to one of Spark Networks’ products was purchased fraudulently, the subscription price is “charged back” to Spark Networks or its bank, as applicable. If Spark Networks or its sponsoring banks are unable to collect the chargeback from the persons processing transactions on its behalf, or, if the credit card processor refuses or is financially unable to reimburse for the chargeback, Spark Networks bears the loss for the amount of the refund paid.
 
Spark Networks is vulnerable to credit card fraud. Card fraud occurs when a customer uses a stolen card (or a stolen card number in a card-not-present-transaction) to purchase merchandise or services. In a traditional card-present transaction, if the merchant swipes the card, receives authorization for the transaction from the card issuing bank and verifies the signature on the back of the card against the paper receipt signed by the customer, the card issuing bank remains liable for any loss. In a fraudulent card-not-present transaction, even if the processor receives authorization for the transaction, the Spark Networks or the card processor are liable for any loss arising from the transaction. Because all of Spark Networks’ sales via credit card are card-not-present transactions, Spark Networks is more vulnerable to customer fraud.


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If the security of personal and confidential user information that Spark Networks maintains and stores is breached or otherwise accessed by unauthorized persons, it may be costly to mitigate the impact of such an event and Spark Networks’ reputation could be harmed.
 
Spark Networks receives, processes, stores and transmits a significant amount of personal user and other confidential information, including credit card information, and enables its users to share their personal information with each other. In some cases, it retains third party vendors to store this information. Spark Networks continuously develops and maintains systems to protect the security, integrity and confidentiality of this information, but cannot guarantee that inadvertent or unauthorized, including as a result of cyber attacks, use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite its efforts. Some advertisers and partners may store information that Spark Networks shares with them. If these third parties fail to implement adequate data-security practices or fail to comply with Spark Networks’ terms and policies, its users’ data may be improperly accessed or disclosed. Even if these third parties take all these steps, their networks may still suffer a breach, which could compromise Spark Networks’ users’ data. In addition, third parties may attempt to fraudulently induce employees or users to disclose information to gain access to Spark Networks’ data or its users’ data. If any such event were to occur, it may not be able to remedy the event, and it may have to expend significant capital and resources to mitigate the impact of such an event, and to develop and implement protections to prevent future events of this nature from occurring again. If a breach of its security (or the security of its vendors and partners) occurs, the perception of the effectiveness of its security measures and its reputation may be harmed, it could lose current and potential users and the recognition of its various brands and their competitive positions could be diminished, any or all of which could adversely affect its business, financial condition and results of operations. In addition, affected users or government authorities could initiate legal or regulatory action against Spark Networks over those incidents, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices.
 
Unauthorized access of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights.
 
Security breaches or other unauthorized access to, or the use or transmission of, personal user information could result in a variety of claims against Spark Networks, including privacy-related claims.
 
In 2016, the European Commission adopted the General Data Protection Act, a comprehensive European Union privacy and data protection reform that became effective in May 2018 in all countries of the European Union. Pursuant to Sec. 3 of the European Data Protection Directive and Sec. 3 of the German Telecommunication and Media Act, Spark Networks has to comply with the European and German data protection laws regarding all countries in the European Union and with the laws of countries outside of the European Union where Spark Networks operates. These rules include rules related to the storage, sharing, use, processing, disclosure and protection of personal data.
 
In addition, legislation concerning data protection has been enacted or is pending enactment in many other jurisdictions, including the United States and Russia. It is possible that these laws may conflict with Spark Networks’ data practices. If so, in addition to the possibility of fines, this could result in an order requiring that Spark Networks change its data practices, which could have an adverse effect on its business. Complying with these laws as they evolve could cause it to incur substantial costs or require it to change its business practices in a manner adverse to its business. These laws and regulations are constantly changing, may in some instances be inconsistent with or conflict with each other, and can be subject to differing interpretations.
 
While Spark Networks believes that it complies with industry standards and applicable laws and industry codes of conduct relating to privacy and data protection in all material respects, there is no assurance that it will not be subject to claims that it has violated applicable laws or codes of conduct, that it will be able to successfully defend against such claims or that it will not be subject to significant fines and penalties in the event of non-compliance.
 
If Spark Networks or its affiliates are found to be in violation of these laws and regulations, it may become subject to administrative fines or litigation or be required to change its data practices, which could materially increase its expenses, adversely affect its results of operations and cause the value of Spark Networks’ ADSs to decline.
 

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Any failure or perceived failure by Spark Networks (or the third parties with whom it has contracted to store such information) to comply with applicable privacy and security laws, policies or related contractual obligations, or any compromise of security that results in unauthorized access to personal information, may result in governmental enforcement actions, significant fines and litigation. In the case of such an event, Spark Networks’ reputation may be harmed, it could lose current and potential users and the competitive positions of its various brands could be diminished, any or all of which could adversely affect its business, financial condition and results of operations.
 
Spark Networks is subject to a number of risks related to credit card payments, including data security breaches and fraud that it or third parties experience or additional regulation, any of which could adversely affect its business, financial condition and results of operations.
 
Spark Networks accepts payment from its users primarily through credit card transactions and online payment service providers. While Spark Networks uses third-parties to handle and process credit card transactions, it still faces risks related to security breaches involving these third party providers. For instance, a large breach at a third party credit card processor could cause people to cancel their credit cards, which could affect Spark Networks’ ability to process auto-renewals. In addition, breaches at third party processors could affect consumer confidence in Spark Networks because consumers may not distinguish between Spark Networks and the third party when informed of the breach. The occurrence of this or similar events could have a material adverse effect on Spark Networks’ business, results of operations, and financial conditions. 

Inappropriate actions by certain of Spark Networks’ users could be attributed to Spark Networks and damage our brands’ reputations, which in turn could adversely affect our business.
 
The reputation of Spark Networks’ brands may be adversely affected by the actions of its users that are deemed to be hostile, offensive, defamatory, inappropriate or unlawful. While Spark Networks monitors and reviews the appropriateness of the content accessible through its dating products and has adopted policies and technical solutions to address and prevent illegal, offensive or inappropriate use of its dating services, its users could nonetheless engage in activities that violate its policies or circumvent the solutions. These safeguards may not be sufficient to avoid harm to Spark Networks’ reputation and brands, especially if such hostile, offensive or inappropriate use is well-publicized.
 
In addition, it is possible that a user of Spark Networks’ services could be physically, financially, emotionally or otherwise harmed by an individual that such user met through the use of one of Spark Networks’ services. While Spark Networks checks every new profile, and certain of its services only allow new members who are peer-approved, it is not certain that every harm posed by other individuals can be eliminated. If one or more of Spark Networks’ users suffers or alleges to have suffered any such harm, it could experience negative publicity or legal action that could damage its reputation and its brands. Similar events affecting users of Spark Networks’ competitors’ dating services could result in negative publicity for the dating industry, which could in turn negatively affect Spark Networks’ business. Concerns about such harms and the use of dating services and social networking platforms for illegal conduct, such as romance scams and financial fraud, could produce future legislation or other governmental action that could require changes to Spark Networks’ dating services, restrict or impose additional costs upon the conduct of its business generally, subject it to liability for user conduct or cause users to abandon its dating services.
 
Spark Networks may be liable as a result of information retrieved from or transmitted over the internet.
 
Spark Networks may be sued for defamation, civil rights infringement, negligence, copyright or trademark infringement, invasion of privacy, personal injury, product liability or under other legal theories relating to information that is published or made available on its websites and the other sites linked to it. These types of claims have been brought, sometimes successfully, against online services in the past. Spark Networks could incur significant costs in investigating and defending such claims, even if it ultimately is not held liable. If any of these events occurs, its revenue could be materially adversely affected or it could incur significant additional expense.
 

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Spark Networks operates in various international markets, including certain markets in which it has limited experience. As a result, it faces additional risks in connection with certain of its international operations.
 
Spark Networks’ brands are available in 29 countries. Operating internationally exposes it to a number of additional risks, including:
 
operational and compliance challenges caused by distance, language and cultural differences;
difficulties in staffing and managing international operations;
differing levels of social and technological acceptance of its dating services or lack of acceptance of them generally;
foreign currency fluctuations;
restrictions on the transfer of funds among countries and costs associated with repatriating funds;
differing and potentially adverse tax laws;
multiple, conflicting and changing laws, rules and regulations, and difficulties understanding and ensuring compliance with those laws by both Spark Networks’ employees and its business partners, over whom it exerts no control;
compliance challenges due to different laws and regulatory environments, particularly in the case of privacy and data security;
competitive environments that favor local businesses;
limitations on the level of intellectual property protection; and
trade sanctions, political unrest, terrorism, war and epidemics or the threat of any of these events.

While Spark Networks employs people from 49 nationalities that help to build and maintain knowledge about the geographies, countries and cultures the company operates in, the occurrence of any or all of the events described above could adversely affect Spark Networks’ international operations, which could in turn adversely affect its business, financial condition and results of operations.
 
Spark Networks is subject to litigation and adverse outcomes in such litigation could have an adverse effect on its financial condition.
 
Spark Networks is, and from time to time may become, subject to litigation and various legal proceedings, including litigation and proceedings related to intellectual property matters, privacy and consumer protection laws and other matters that involve claims for substantial amounts of money or for other relief or that might necessitate changes to its business or operations. In addition, Spark Networks might be subject to potential class action suits in the United States, Canada, the United Kingdom or Australia for possible violations of the consumer protections laws. The defense of these actions may be both time consuming and expensive. Spark Networks evaluates litigation claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments and estimates, it may establish reserves and/or disclose the relevant litigation claims or legal proceedings, as and when required or appropriate. These assessments and estimates are based on information available to management at the time of such assessment or estimation and involve a significant amount of judgment. As a result, actual outcomes or losses could differ materially from those envisioned by Spark Networks’ current assessments and estimates. Spark Networks’ failure to successfully defend or settle any such legal proceedings could result in liability that, to the extent not covered by applicable insurance, could have an adverse effect on its business, financial condition and results of operations.
 

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Spark Networks’ business depends, in part, on the growth and maintenance of the internet, and its ability to provide services to its members and paying subscribers may be limited by outages, interruptions and diminished capacity of the internet, as well as by new laws and regulations governing the internet.
 
Spark Networks’ performance will depend, in part, on the continued growth and maintenance of the internet. This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security for providing reliable internet services. internet infrastructure may be unable to support the demands placed on it if the number of internet users continues to increase or if existing or future internet users access the internet more often or increase their bandwidth requirements. In addition, viruses, worms and similar programs may harm the performance of the internet. Spark Networks has no control over the third party telecommunications, cable or other providers of access services to the internet that its members and paying subscribers rely upon. There have been instances where regional and national telecommunications outages have caused it to experience service interruptions during which its members and paying subscribers could not access its services. Any additional interruptions, delays or capacity problems experienced with any points of access between the internet and its members could adversely affect its ability to provide services reliably to its members and paying subscribers. The temporary or permanent loss of all, or a portion, of its services on the internet, the internet infrastructure generally, or its members’ and paying subscribers’ ability to access the internet could disrupt its business activities, harm its business reputation and result in a loss of revenue. Additionally, the internet, electronic communications and telecommunications industries are subject to federal, state and foreign governmental regulation, including those related to privacy, rights of publicity, data protection, content regulation, intellectual property, health and safety, competition, protection of minors, consumer protection, employment, and taxation. New laws and regulations governing such matters could be enacted or amendments may be made to existing regulations at any time that could adversely impact Spark Networks’ services. Any such new laws, regulations or amendments to existing regulations could disrupt or adversely affect the profitability of its business.
 
Loss or material modification of Spark Networks’ credit card acceptance privileges would have a material adverse effect on its business and operating results.
 
A significant percentage of Spark Networks’ users pay for its services by credit card. The loss of credit card acceptance privileges would significantly limit Spark Networks’ ability to renew paying subscribers or secure new paying subscribers.
 
Most of Spark Networks’ users purchase a membership, for which payment is made at the beginning of the term. In addition, almost all membership renewals are paid by auto-renewal, charging the renewal fee to the client’s credit card. There is a risk that, if Spark Networks fails to fully perform its obligations under the terms of service or the client objects to the auto-renewal payment made by credit card, the credit card companies could be obligated to reimburse these clients for all or a portion of the membership fee. Spark Networks might be obligated to pay all such amounts under its agreements under which it has obtained its credit card acceptance privileges. As a result of this risk, credit card companies may require Spark Networks to set aside additional cash reserves, may not renew acceptance privileges or may increase the transaction fees they charge for these privileges.
 
The card networks, such as Visa, MasterCard, and American Express, have adopted rules and regulations that apply to all merchants who process and accept credit cards and include the Payment Card Industry Data Security Standards (“PCI DSS”). Under the PCI DSS, Spark Networks is required to adopt and implement internal controls over the use, storage and security of card data to help prevent credit card fraud. Spark Networks assesses its compliance with the PCI DSS on a periodic basis and makes necessary improvements to its internal controls. If Spark Networks fails to comply with the rules and regulations adopted by the card networks, including the PCI DSS, it would be in breach of its contractual obligations to payment processors and merchant banks. Such failure to comply may subject it to fines, penalties, damages and civil liability and could eventually prevent it from processing or accepting credit cards. Further, there is no guarantee that, even if it complies with the rules and regulations adopted by the card networks, it will be able to maintain its compliance. It also cannot guarantee that such compliance will prevent illegal or improper use of its payments systems or the theft, loss or misuse of the credit card data of customers or participants.
 
The loss of, or the significant modification of, the terms under which Spark Networks obtains credit card acceptance privileges would have a material adverse effect on its business, revenue and operating results.
 

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Risks Relating to an Investment in Spark Networks
 
The dating industry is competitive, with low barriers to entry, low switching costs and new products and entrants constantly entering the market.
 
The dating industry is competitive, with new products and entrants constantly being developed and released. Some of Spark Networks’ competitors may enjoy better competitive positions in certain geographical regions or user demographics that Spark Networks will currently serve or may serve in the future. These advantages could enable these competitors to offer products that are more appealing to users and potential users than Spark Networks’ products, or to respond more quickly and/or cost-effectively than Spark Networks to new or changing opportunities. The attractiveness of these products could also allow these companies to sell their products at higher prices and with higher margins.
 
Spark Networks competes with traditional personals services, as well as newspapers, magazines and other traditional media companies that provide personals services. It also competes with a number of large and small companies, including internet portals and specialty-focused media companies that provide online and offline products and services to the markets served. Principal online personals services competitors include Match Group (which operates the Match.com, OkCupid, Plenty of Fish, and Tinder properties), Parship Elite Group (which operates the eHarmony, Parship and ElitePartner properties) and Zoosk. In addition, we face competition from new entrants that have recently offered free and freemium mobile applications such as Bumble, as well as social networking sites such as Facebook. Many of Spark Networks’ current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger customer bases than Spark currently has. These factors may allow competitors to respond more quickly to new or emerging technologies and changes in customer preferences. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies that may allow them to build larger member and paying subscriber bases. Spark Networks’ competitors may develop products or services that are equal or superior to its products and services or that achieve greater market acceptance than its products and services. These activities could attract members and paying subscribers away from its websites and reduce its market share. Customers may utilize multiple dating services simultaneously, and cease using a particular service that comparatively lags behind or is duplicative of another service.
 
In addition, Spark Networks currently competes with other companies that direct all or portions of their websites toward each of their respective targeted and actual subscribers. For example, Spark Networks currently competes with generalist personals services platforms, some of which have substantially greater resources and brand recognition than they do, which, unlike more targeted or segmented personal services platforms, permit customers access to a broad array of people with a wide variety of backgrounds and interests, as well as personal services platforms focused specifically on the type of clients serviced by them, which tend to be highly educated and desirous of finding a longer term relationship.
 
In addition, within the dating industry generally, costs to develop new products are comparatively low and costs for consumers to switch between products are low as well, resulting in significant customer churn and low brand loyalty. As a result, new products, entrants and business models are likely to continue to emerge. It is possible that a new product could gain rapid scale at the expense of existing brands through harnessing a new technology or distribution channel, creating a new approach to connecting people or some other means. If Spark Networks is not able to compete effectively against its current or future competitors, whether or not such competitors operate traditional or non-traditional platforms, the size and level of engagement of its user base may decrease, which could have an adverse effect on its business, financial condition and results of operations.
 
Spark Networks believes that its ability to compete depends upon many factors both within and beyond its control, including the following:
 
brand strength in the marketplace relative to competitors;
attractiveness to target niches;
the size and diversity of member and paying subscriber bases;
efficacy in user acquisition and marketing optimization;
the timing and market acceptance of its products and services, including developments and
enhancements to products and services relative to those offered by its competitors; and
customer service and support efforts.


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Spark Networks has no present intention to pay dividends on its ordinary shares in the foreseeable future and, consequently, your only opportunity to achieve a return on your investment during that time is if the price of Spark Networks’ ADSs appreciates.
 
Spark Networks has no present intention to pay dividends on Spark Networks ADSs in the foreseeable future. Any recommendation by the Administrative Board to pay dividends will depend on many factors, including financial condition, results of operations, legal requirements and other factors. Accordingly, if the price of Spark Networks ADSs declines in the foreseeable future, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends. 

You may experience dilution of your ownership interests because of the future issuance of additional ordinary shares, preferred stock or other securities that are convertible into or exercisable for such securities.
 
In the future, Spark Networks may issue authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of direct or indirect holders of Spark Networks ordinary shares, including Spark Networks ADSs. Spark Networks may issue additional Spark Networks ordinary shares or other securities that are convertible into or exercisable for Spark Networks ordinary shares in connection with hiring or retaining employees, future acquisitions, future sales of securities for capital raising purposes, or for other business purposes. The future issuance of any such additional Spark Networks ordinary shares may create downward pressure on the trading price of the Spark Networks ADSs. Spark Networks may need to raise additional capital in the near future to meet working capital needs, and there can be no assurance that Spark Networks will not be required to issue additional Spark Networks ordinary shares in the future in conjunction with these capital raising efforts. While stockholder approval will be needed to issue additional Spark Networks ordinary shares beyond those currently authorized, the approval does not have to authorize a specific use of the shares and management will have broad discretion in determining how, when and for what purpose the shares should be issued.
 
Spark Networks will depend on its key personnel.
 
Spark Networks’ future success will depend upon its continued ability to identify, hire, develop, motivate and retain highly skilled individuals, with the continued contributions of its senior management being especially critical to its success. In particular, the loss of Jeronimo Folgueira, Robert O’Hare, and Michael Schrezenmaier, current managing directors of Spark Networks, and Benjamin Hoskins, the current Chief Technology Officer of Spark Networks, could materially and adversely affect Spark Networks. For a discussion of Spark Networks’ senior management, see ‘‘Directors and senior management.’’ Its continued ability to compete effectively depends, in part, upon its ability to attract new employees. While it has established programs to provide incentives to retain existing employees, particularly its senior management, it cannot assure you that it will be able to attract new employees or retain the services of its senior management or any other key employees in the future. Effective succession planning is also important to Spark Networks’ future success. If Spark Networks fails to ensure the effective transfer of senior management knowledge and smooth transitions involving senior management across its various businesses, its ability to execute short and long term strategic, financial and operating goals, as well as its business, financial condition and results of operations generally, could be adversely affected.
 
Changes in tax treatment of companies engaged in e-commerce could materially adversely affect the commercial use of Spark Networks’ platforms and its business, financial condition and operating results.
 
Due to the global nature of the internet, it is possible that various countries and local jurisdictions might attempt to impose additional or new regulation on Spark Networks’ business or levy additional or new sales, income or other taxes relating to its activities. Tax authorities at the national and local levels are currently reviewing the appropriate treatment of companies engaged in e-commerce. New or revised tax regulations may subject Spark Networks or its customers to additional sales, income and other taxes. For example, certain jurisdictions have considered various approaches to legislation that would require companies engaged in e-commerce to collect sales tax on internet revenue. In January 2015, new regulations entered into effect in the European Union with respect to the collection of value-added tax (a form of sales tax). In June 2018, the U.S. Supreme Court decided the South Dakota v. Wayfair, Inc. sales tax nexus case. As a result of the Supreme Court ruling, states now have the ability to adopt laws requiring taxpayers to collect and remit sales tax on a basis of economic nexus, even in states in which the taxpayer has no presence. Spark Networks cannot predict the effect of current attempts to impose sales, income or other taxes on e-commerce. New or revised taxes and, in particular, sales taxes, value-added taxes and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of our services. New taxes could also create significant increases in internal costs necessary

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to capture data and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.
 
Adverse capital and credit market conditions could limit Spark Networks’ access to capital and increase its cost of capital, which may significantly affect its ability to meet liquidity needs.
 
The capital and credit markets have been experiencing extreme volatility over the last few years. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers.
 
While on December 31, 2018, Spark Networks had cash and cash equivalents of €11.1 million, and Spark Networks expects to have positive operating cash flow, Spark Networks may in the future be in need of liquidity to implement its growth strategy, including to raise capital to finance acquisitions. In such a scenario, Spark Networks may be forced to curtail certain operations and may be unable to operate its business as Spark Networks deems appropriate. Disruptions, uncertainty or volatility in the capital and credit markets may also limit Spark Networks’ access to capital required to operate its business. Such market conditions may limit its ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow its business. As such, Spark Networks may be forced to delay raising capital or bear an unattractive cost of capital which could decrease its profitability and significantly reduce our financial flexibility. Spark Networks’ results of operations, financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets.
 
Goodwill, intangible assets and other long-lived assets are subject to impairment risk.
 
Spark Networks had €20.8 million of goodwill, €4.9 million of brands and trademarks and €7.3 million of other intangible assets as of December 31, 2018. Spark Networks reviews the potential impairment of goodwill and indefinite-lived intangible assets at least annually, or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable and test property, plant and equipment and other intangible assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
 
Indicators that may signal that an asset has become impaired include a significant decline in actual or projected revenue, a significant decline in the market value of the Spark Networks ADSs, a significant decline in performance of certain acquired companies relative to its original projections, an excess of its net book value over its market value, a significant decline in its operating results relative to its operating forecasts, a significant change in the manner of its use of acquired assets or the strategy for its overall business, a significant decrease in the fair value of an asset, a shift in technology demands and development, or a significant turnover in key management or other personnel.
 
The assessment for potential impairment of goodwill, intangible assets or other long-term assets requires management to make judgments on a number of significant estimates and assumptions, including projected cash flows, discount rates, projected long-term growth rates and terminal values. Spark Networks may be required to record a significant charge in its consolidated financial statements during the period in which any impairment of its goodwill, intangible assets or other long-term assets is identified and this could negatively impact its financial condition and results of operations. Changes in management estimates and assumptions as they relate to valuation of goodwill, intangible assets or other long-lived assets could affect its financial condition or results of operations in the future.
 
Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation could result in fines, criminal penalties and an adverse effect on Spark Networks’ business.
 
Spark Networks operates in a number of countries throughout the world, including countries known to have a reputation for corruption. Spark Networks is committed to doing business in accordance with applicable anti-corruption laws. Spark Networks is subject, however, to the risk that its officers, board members, employees, agents and collaborators may take action determined to be in violation of such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act 2010 and the European Union Anti-Corruption Act, as well as trade sanctions administered by the Office of Foreign Assets Control and the U.S. Department of Commerce. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties or curtailment of operations in certain jurisdictions, and might adversely affect results of operations. In addition, actual or alleged violations could damage its reputation and ability to do business.
 

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Failure to comply with U.S. federal securities laws and regulations applicable to public companies could result in an adverse effect on Spark Networks' business.
 
As a U.S. reporting company, Spark Networks incurs significant legal, accounting and other expenses. Compliance with reporting and corporate governance obligations from which foreign private issuers and emerging growth companies (“EGCs”) are not exempt may require members of Spark Networks’ management and finance and accounting staff to divert time and resources from other responsibilities to ensure these regulatory requirements are fulfilled and may increase legal, insurance and financial compliance costs. Spark Networks cannot predict or estimate the amount of additional costs Spark Networks may incur or the timing of such costs. In addition, if Spark Networks fails to comply with any significant rule or requirement associated with being a public company, such failure could result in the loss of investor confidence and could harm Spark Networks’ reputation and cause the market price of the Spark Networks ADSs to decline.
 
As a “foreign private issuer” under the rules and regulations of the SEC, Spark Networks is permitted to, and will, file less information with the SEC than a U.S. issuer.
 
Spark Networks is considered a “foreign private issuer” under the Exchange Act and therefore exempt from certain rules under the Exchange Act, including the proxy rules, which impose disclosure and procedural requirements for proxy solicitations for U.S. and other issuers. Moreover, Spark Networks will not be required to file periodic reports and financial statements with the SEC as frequently or within the same time frames as U.S. companies with securities registered under the Exchange Act and will be permitted to cease filing quarterly reports. Spark Networks currently prepares financial statements in accordance with IFRS and will not be required to file financial statements prepared in accordance with or reconciled to U.S. GAAP so long as its financial statements are prepared in accordance with IFRS as issued by the International Accounting Standards Board. Spark Networks is not required to comply with Regulation FD, which imposes restrictions on the selective disclosure of material information to stockholders. In addition, officers, board members and principal stockholders are exempt from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Spark Networks ordinary shares or ADSs.
 
In addition, as a “foreign private issuer” whose ADSs are listed on the NYSE American, Spark Networks is permitted to follow certain home country corporate governance practices in lieu of certain NYSE American requirements. Such German home country practices may afford less protection to holders of the Spark Networks ADSs. A foreign private issuer listed on the NYSE American must disclose in its Annual Reports filed with the SEC or on its website significant ways in which its corporate governance practices differ from those followed by domestic companies pursuant to the NYSE American’s standards. Spark Networks intends to comply with NYSE American requirements applicable to U.S. issuers. However, as a foreign private issuer incorporated in Germany and listed on the NYSE American, in the future, it may choose to follow home country corporate governance practices in lieu of certain NYSE American requirements.
 
Spark Networks could lose its status as a “foreign private issuer” under current SEC rules and regulations if more than 50% of its outstanding voting securities become directly or indirectly held of record by U.S. holders and one of the following is true: (i) the majority of board members or executive officers are U.S. citizens or residents; (ii) more than 50% of assets are located in the United States; or (iii) its business is administered principally in the United States. If Spark Networks loses its status as a foreign private issuer in the future, it will no longer be exempt from the rules described above and, among other things, will be required to file periodic reports and annual and quarterly financial statements as if it were a company incorporated in the United States, and such financial statements will need to be prepared in accordance with U.S. GAAP. If this were to happen, Spark Networks would likely incur substantial costs in fulfilling these additional regulatory requirements, and members of management would likely have to divert time and resources from other responsibilities to ensure these additional regulatory requirements are fulfilled. Spark Networks currently expects to lose its status as a foreign private issuer in 2020, following the closing of its previously announced transaction with Zoosk, Inc. because Spark Networks will no longer meet all of the above requirements for foreign private issuer status.
 

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Spark Networks is an EGC within the meaning of the Securities Act, and Spark Networks intends to take advantage of certain exemptions from disclosure requirements available to EGCs, which may make it more difficult to compare Spark Networks’ performance with other public companies.
 
Spark Networks is an EGC within the meaning of the Securities Act, as modified by the JOBS Act, and Spark Networks intends to advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs, including, but not limited to, not being required to include in SEC filings detailed information with respect to executive compensation or to comply with the auditor attestation requirements of SOX 404. As a result, holders of Spark Networks ADSs may not have access to certain information they may deem important. Spark Networks could be an EGC for up to five years, although circumstances could cause Spark Networks to lose that status earlier, including if Spark Networks is deemed to be a large accelerated filer (as defined in Rule 12b-2 under the Exchange Act), in which case Spark Networks would no longer be an EGC as of the following December 31. Spark Networks cannot predict whether investors will find the Spark Networks ADSs less attractive because Spark Networks will rely on these exemptions. If some investors find the Spark Networks ADSs less attractive as a result of Spark Networks’ reliance on these exemptions, the trading prices of the Spark Networks ADSs may be lower than they otherwise would be, there may be a less active trading market for its securities, including the Spark Networks ADSs, and the trading prices of Spark Networks’ securities, including the Spark Networks ADSs, may be more volatile.
 
Foreign currency exchange rate fluctuations could adversely affect Spark Networks’ results of operations.
 
Spark Networks operates in various international markets, primarily in various jurisdictions within the EU, and as a result, is exposed to foreign exchange risk for the euro, U.S. dollar, Great British Pound (“GBP”), and Israeli New Shekel (“ILS”). Spark Networks will translate international revenue into euro-denominated operating results, so during periods of a strengthening euro, Spark Networks’ international revenue will be reduced when translated into euro. In addition, as foreign currency exchange rates fluctuate, the translation of international revenue into euro-denominated operating results affects the period-over-period comparability of such results. Spark Networks faces similar risks as a result of revenue earned in other currencies.
 
Spark Networks reports in euros. Spark Networks’ primary exposure to foreign currency exchange risk relates to investments in non-EU subsidiaries that transact business in a functional currency other than the euro, primarily the U.S. dollar. To the extent that the U.S. dollar weakens relative to the euro, the translation of international revenue into euro will reduce Spark Networks’ euro-denominated operating results and will affect period-over-period comparability. 

Fluctuating foreign exchange rates can also result in foreign currency exchange gains and losses. Spark Networks does not intend to hedge any foreign currency exposures. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk.” The continued growth and expansion of international operations into new countries increases its exposure to foreign exchange rate fluctuations. Significant foreign exchange rate fluctuations, in the case of one currency or collectively with other currencies, could adversely affect future results of operations.
 

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U.S. investors may have difficulty enforcing civil liabilities against Spark Networks or members of its Administrative Board.
 
Certain of the members of the Administrative Board are non-residents of the United States, and all or a substantial portion of the assets of such persons are located outside the United States. As a result, it may not be possible, or may be very difficult, to serve process on such persons or Spark Networks in the United States or to enforce judgments obtained in U.S. courts against them or Spark Networks based on civil liability provisions of the securities laws of the United States. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in Germany. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered and is intended to punish the defendant. The enforceability of any judgment in Germany will depend on the particular facts of the case as well as the laws and treaties in effect at the time. Litigation in Germany is also subject to rules of procedure that differ from the U.S. rules, including with respect to the taking and admissibility of evidence, the conduct of the proceedings and the allocation of costs. Proceedings in Germany would have to be conducted in the German language, and all documents submitted to the court would, in principle, have to be translated into German. For these reasons, it may be difficult for a U.S. investor to bring an original action in a German court predicated upon the civil liability provisions of the U.S. federal securities laws against Spark Networks and the members of its Administrative Board. The United States and Germany do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters, though recognition and enforcement of foreign judgments in Germany is possible in accordance with applicable German laws.
 
If Spark Networks fails to maintain an effective system of internal control over financial reporting in the future, it may not be able to accurately report its financial condition, results of operations or cash flows, which may adversely affect investor confidence.
 
The Sarbanes-Oxley Act requires, among other things, that Spark Networks maintain effective internal control over financial reporting and disclosure controls and procedures. Spark Networks is required, under SOX 404, to perform system and process evaluations and testing of internal controls over financial reporting to allow management to report annually on the effectiveness of internal control over financial reporting. This assessment requires disclosure of any material weaknesses in Spark Networks’ internal control over financial reporting identified by management. SOX 404 also generally requires an attestation from Spark Networks’ independent registered public accounting firm on the effectiveness of internal control over financial reporting. However, for as long as Spark Networks remains an EGC, it intends to take advantage of the exemption permitting it not to comply with the independent registered public accounting firm attestation requirement. At the time when Spark Networks is no longer an EGC, its independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which Spark Networks’ controls are documented, designed or operating. Remediation efforts may not enable Spark Networks to avoid a material weakness in the future.
 
Compliance with SOX 404 requires the incurrence of substantial accounting expense and consumes significant management efforts. Spark Networks may not be able to complete evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if Spark Networks identifies one or more material weaknesses in internal control over financial reporting, it will be unable to assert that its internal control over financial reporting is effective. Spark Networks cannot assure you that there will not be material weaknesses or significant deficiencies in its internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit its ability to accurately report financial condition, results of operations or cash flows. If Spark Networks is unable to conclude that internal control over financial reporting is effective, or if its independent registered public accounting firm determines Spark Networks has a material weakness or significant deficiency in internal control over financial reporting, it could lose investor confidence in the accuracy and completeness of its financial reports, the market price of the Spark Networks ADSs could decline, and Spark Networks could be subject to sanctions or investigations by the NYSE American, the SEC or other regulatory authorities. Failure to remedy any material weakness in internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict future access to the capital markets.
 
U.S. investors could suffer adverse tax consequences if Spark Networks is characterized as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes.
 
Generally, if, for any taxable year, at least 75% of Spark Networks’ gross income is passive income, or at least 50% of the gross average quarterly value of Spark Networks’ assets is attributable to assets that produce passive income or are held for the production of passive income, Spark Networks would be characterized as a PFIC for U.S. federal income tax

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purposes. If Spark Networks is characterized as a PFIC, U.S. holders of Spark Networks ordinary shares or ADSs may suffer adverse tax consequences, including having gains realized on the sale of Spark Networks ordinary shares or ADSs treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends paid by Spark Networks to individuals who are U.S. holders, and having interest charges apply to distributions by Spark Networks and the proceeds of sales of Spark Networks ADSs or shares.
 
Risks Relating to the Spark Networks ADSs
 
There may be limited trading volume for Spark Networks’ ADSs, which could reduce liquidity for the holders of Spark Networks ADSs and may cause the price of Spark Networks ADSs to be volatile, all of which may lead to losses by investors.
 
There may be limited trading volume for Spark Networks ADSs on the NYSE American, such that trading does not reach the level that enables holders of Spark Networks ADSs to freely sell their Spark Networks ADSs in substantial quantities on an ongoing basis and thereby readily achieve liquidity for their investment. In addition, if there is limited trading volume, the Spark Networks ADSs may experience significant market price and volume fluctuations in the future, in response to factors such as announcements of developments related to Spark Networks and its subsidiaries, announcements by competitors of Spark Networks and its subsidiaries, fluctuations in financial results and general conditions in the dating services industry.
 
Future sales of Spark Networks ADSs or Spark Networks ordinary shares or securities convertible or exchangeable for Spark Networks ADSs or Spark Networks ordinary shares, or the perception that such sales might occur, may cause the price of Spark Networks ADSs to decline and may dilute your voting power and your ownership interest in Spark Networks.
 
If existing stockholders or option holders sell, or indicate an intention to sell, substantial amounts of Spark Networks ADSs (or Spark Networks ordinary shares that can be deposited with the Spark Networks ADS Depositary in exchange for Spark Networks ADSs) in the public market, the price of Spark Networks ADSs could decline. The perception in the market that these sales may occur could also cause the price of Spark Networks ADSs to decline.
 
The price of Spark Networks ADSs may fluctuate significantly.
 
The stock market generally has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of listed companies. Broad market and industry factors may negatively affect the market price of Spark Networks ADSs, regardless of Spark Networks’ actual operating performance. The market price and liquidity of the market for Spark Networks ADSs may fluctuate and may be significantly affected by numerous factors, some of which are beyond Spark Networks’ control.
 
These factors include:
 
significant volatility in the market price and trading volume of securities of companies in the sector within which Spark Networks operates, which is not necessarily related to the operating performance of these companies;
the mix of services that Spark Networks provides, during any period; delays between its expenditures to develop and market new services and the generation of sales from those services and the related risk of obsolete services;
changes in the amount that Spark Networks spends to develop, acquire or license new services, technologies or businesses;
changes in Spark Networks’ expenditures to promote its services;
success or failure of research and development projects of Spark Networks or its competitors;
announcements of acquisitions by Spark Networks or one of its competitors;
the general tendency towards volatility in the market prices of shares of companies that rely on technology and innovation;
changes in regulatory policies or tax guidelines;
changes or perceived changes in earnings or variations in operating results;
any shortfall in revenue or net income from levels expected by investors or securities analysts; and
general economic trends and other factors.


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Your rights as a holder of ADSs representing ordinary shares of a German company organized as a European stock corporation may differ from your rights as a stockholder in a U.S. corporation.
 
Spark Networks is organized as a European stock corporation (Societas Europaea, SE) under the laws of Germany. You should be aware that the rights of stockholders under German law differ in important respects from those of stockholders in a U.S. corporation. These differences include, in particular:
 
Under German law, certain important resolutions, including, for example, capital decreases, measures under the German Transformation Act (Umwandlungsgesetz), such as mergers, conversions and spin-offs, the issuance of convertible bonds or bonds with warrants attached and the dissolution of the German stock corporation apart from insolvency and certain other proceedings, require the vote of a 75% majority of the capital present or represented at the relevant stockholders’ meeting. Therefore, the holder or holders of a blocking minority of 25% or, depending on the attendance level at the stockholders’ meeting, the holder or holders of a smaller percentage of the shares in a German stock corporation may be able to block any such votes, possibly to Spark Networks’ detriment or the detriment of other stockholders.
As a general rule under German law, in the case of a one-tier European stock corporation a stockholder has no direct recourse against the members of the administrative board and managing directors, in the event that it is alleged that they have breached their duty of loyalty or duty of care to the corporation. Apart from insolvency or other special circumstances, only the European stock corporation itself has the right to claim damages from members of the board and executive officers. A European stock corporation may waive or settle these damages claims only if at least three years have passed and the stockholders approve the waiver or settlement at the stockholders’ meeting with a simple majority of the votes cast, provided that a minority holding, in the aggregate, 10% or more of the European stock corporation’s share capital does not have its opposition formally noted in the minutes maintained by a German civil law notary. For more information, Spark Networks has provided summaries of relevant German corporation law and of its articles of association, which are available on the Company's website.

Holders of Spark Networks ADSs will not have the same voting rights as Spark Networks stockholders, which may affect the value of Spark Networks ADSs.
 
Holders of Spark Networks ADSs will not be able to directly vote underlying Spark Networks ordinary shares. Holders of Spark Networks ADSs may instruct the Spark Networks ADS Depositary how to vote the Spark Networks ordinary shares underlying their ADSs. If Spark Networks asks it to, the Spark Networks ADS Depositary will send out information about stockholder meetings and solicit voting instructions and will try to carry out voting instructions it receives. However, Spark Networks is not required to instruct the Spark Networks ADS Depositary to take action with respect to stockholder meetings. If it does not do so, holders of Spark Networks ADSs can still send voting instructions to the Spark Networks ADS Depositary, and the Spark Networks ADS Depositary may try to carry out those instructions, but it is not required to do so. However, holders of Spark Networks ADSs may not become aware of stockholder meetings if the Spark Networks ADS Depositary does not send out information. Even if the Spark Networks ADS Depositary does solicit voting instructions, holders of Spark Networks ADSs may not receive the information in time. Because of these factors, holders of Spark Networks ADSs may not be able to effectively exercise voting rights that they would have if they held Spark Networks ordinary shares directly.
 
The principal stockholders and management of Spark Networks own a significant percentage of Spark Networks Ordinary Shares and will be able to exert significant influence over matters subject to stockholder approval.
 
Members of the Administrative Board and holders of 5% or more of Spark Networks ordinary shares beneficially own a majority of Spark Networks ordinary shares (including Spark Networks ordinary shares represented by Spark Networks ADSs). Currently, the principal stockholders (those stockholders owning at least 5% of Spark Networks ordinary shares) and management of Spark Networks hold approximately 66% (excluding any shares underlying options) of the Spark Networks ordinary shares (which may be held in the form of Spark Networks ADSs). These stockholders have significant influence over the outcome of all matters requiring stockholder approval. For example, these stockholders may be able to influence the outcome of elections of members of Administrative Board, amendments of Spark Networks’ organizational documents, or approval of any merger, sale of assets, or other major corporate transactions. This may prevent or discourage unsolicited acquisition proposals or offers for Spark Networks ADSs that you may feel are in your best interest as a holder of Spark Networks ADSs. The interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders, and they may act in a manner that advances their best interests and not necessarily those of other stockholders, including seeking a premium value for their Spark Networks ordinary shares, which might affect the prevailing market price for Spark Networks ADSs.

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You might not receive distributions on Spark Networks ordinary shares represented by the Spark Networks ADSs or any value for them.
 
Under the terms of the Spark Networks Deposit Agreement, the Spark Networks ADS Depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on the Spark Networks ordinary shares after deducting fees and expenses. You will receive these distributions in proportion to the number of Spark Networks ordinary shares represented by your Spark Networks ADSs. However, in accordance with the limitations set forth in the Spark Networks Deposit Agreement, the Spark Networks ADS Depositary is not required to make a distribution if it decides it may be unlawful or impractical to make a distribution available to holders of Spark Networks ADSs.
 
Certain or all of the holders of Spark Networks ADSs may be unable to claim tax credits with respect to, or tax refunds to reduce German withholding tax applicable to the payment of dividends, or a dividend may be effectively taxed twice.
 
Spark Networks does not anticipate paying dividends on its Spark Networks ADSs for the foreseeable future. As a German tax resident company, however, if Spark Networks pays dividends, such dividends will be subject to German withholding tax. Currently, the applicable German withholding tax rate is 26.375% of the gross dividend. This German tax can be reduced to the applicable U.S.-Germany income tax treaty (“Treaty”) rate, which is generally 15%, if the applicable taxpayer is eligible for such Treaty rate and files an application containing a specific German tax certificate with the German Federal Central Tax Office (Bundeszentralamt für Steuern). If such a tax certificate cannot be delivered to the Spark Networks ADS holder due to applicable settlement mechanics or lack of information regarding the Spark Networks ADS holder, holders of the New Spark ADSs may be unable to benefit from the double tax treaty relief (including “Eligible U.S. Holders” as defined under the Treaty) and may be unable to file for a credit of such withholding tax in its jurisdiction of residence. Further, the payment made to the Spark Networks ADS holder equal to the net dividend may, under the tax law applicable to the Spark Networks ADS holder, qualify as taxable income that is in turn subject to withholding, which could mean that a dividend is effectively taxed twice. There can be no guarantee that the information delivery requirement can be satisfied in all cases, which could result in adverse tax consequences for affected Spark Networks ADS holders. Spark Networks ADS holders should note that the applicable interpretation circular (Besteuerung von American Depositary Receipts (ADR) auf inländische Aktien) issued by the German Federal Ministry of Finance (Bundesministerium der Finanzen), dated May 24, 2013 (reference number IV C 1-S2204/12/10003) (the “ADR Tax Circular”), is not binding on German courts, and there is no certainty as to whether a German tax court will follow the ADR Tax Circular in determining the German tax treatment of the Spark Networks ADSs. In addition, the ADR Tax Circular does not include details on how an ADR program should be designed. If the Spark Networks ADSs are determined not to fall within the scope of application of the ADR Tax Circular, or a German tax court does not follow the ADR Tax Circular, and profit distributions made with respect to the Spark Networks ADSs were not treated as a dividend for German tax purposes, the Spark Networks ADS holder would not be entitled to a refund of any taxes withheld on the dividends under German tax law and profit distributions made with respect to the Spark Networks ADSs may be effectively taxed twice.
 
You may have less access to information about Spark Networks and less opportunity to exercise your rights as a security holder if you hold Spark Networks ADSs instead of Spark Networks ordinary shares.
 
The rights and terms of the Spark Networks ADSs are designed to replicate, to the extent reasonably practicable, the rights attendant to Spark Networks ordinary shares, for which there is no active trading market in the United States. However, because of aspects of German law, Spark Networks’ Articles of Association and the terms of the Spark Networks Deposit Agreement under which the Spark Networks ADSs are issued, your rights as a holder of Spark Networks ADSs will differ in various ways from a stockholder’s rights, and you may be affected in other ways, including:
 
you may not be able to participate in rights offerings or dividend alternatives;
the Spark Networks Deposit Agreement may be amended by Spark Networks and the Spark Networks ADS Depositary, or may be terminated by Spark Networks or the Spark Networks ADS Depositary, without your consent in a manner that could prejudice your rights; and
the Spark Networks Deposit Agreement limits Spark Networks’ obligations and liabilities and those of the Spark Networks ADS Depositary.


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Item 4. Information on the Company
 
A.
History and development of the company.
 
Spark Networks SE was incorporated as a European stock corporation (Societas Europaea, SE) with the legal name Blitz 17-655 SE under the laws of Germany and the European Union, with entry into the German commercial register on April 5, 2017, by its stockholders, Blitzstart Beteiligungs Ltd. and Blitz Beteiligungs GmbH. It was acquired by Affinitas GmbH on April 12, 2017, for the purpose of becoming the ultimate holding company of Spark Networks, Inc., a Delaware corporation (“Spark”), Spark Networks Services GmbH (f/k/a Affinitas GmbH), a German limited company (“Affinitas”) following the completion of the merger between Spark and Affinitas (the “Affinitas / Spark Merger”). On August 29, 2017, Spark Networks SE changed its name from Blitz 17-655 SE to Spark Networks SE. Spark Networks SE is registered with the commercial register (Handelsregister) of the local court (Amtsgericht) of Munich, Germany, under the registration number HRB 232591 under the legal name Spark Networks SE. Spark Networks SE currently does not use a commercial name different from its legal name. Spark Networks SE has been formed for an unlimited duration.
 
On November 2, 2017, Spark Networks SE completed the Affinitas / Spark Merger pursuant to the Agreement and Plan of Merger dated May 2, 2017, entered into by Spark Networks SE, Affinitas, Spark and Chardonnay Merger Sub, Inc.
 
The registered offices of Spark Networks SE are located at Kohlfurter Straße 41/43, Berlin 10999, Germany and its telephone number at that address is (+49) 30 868 000 102. Our website is www.spark.net. As a European stock corporation incorporated in Germany, Spark Networks SE is subject to the laws of Germany and the European Union. Spark Networks SE’s fiscal year is the calendar year.

Our SEC filings are available to you on the SEC’s website at http://www.sec.gov. This site contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
 
B.
Business overview.
 
Our Business
 
Spark Networks SE is a leading global operator of premium online dating sites and mobile applications. Its focus is on catering to professionals and highly educated singles with serious relationship intentions in North America and other international markets. Since its inception, Spark Networks has had nearly 60 million users register with its dating platforms (which includes inactive accounts). Spark Networks currently operates one or more of its brands in 29 countries. Information regarding the geographical source of our revenue and data on our reportable segments can be found in Note 4.1 Operating Segments to our Consolidated Financial Statements included in this annual report.
 
Spark Networks’ vision is to be the world’s leading premium dating company and encompasses the following four pillars:
 
“We focus on quality over quantity to provide the world’s best dating community; active, committed and sophisticated.
We excel in customer safety, privacy and care.
We create engaging brands and innovative products to help our customers find true love.
We build a profitable business that benefits all our stakeholders: customers, employees, shareholders and society.”

Spark Networks offers its services both via websites and mobile applications and utilizes a “subscription” business model, where certain basic functionalities are provided free of charge, while providing premium features (such as interacting with other community members via messages) only to paying subscribers.
 
Subscription revenue is Spark Networks’ primary source of income, with membership subscriptions accounting for the majority of its revenue for the years ended December 31, 2018, 2017, and 2016, respectively. Subscription length ranges from 1-month to 24-months, with most subscriptions renewing automatically unless the member opts to terminate the subscription.
 
Like many other internet-based communities and marketplaces, Spark Networks has become a predominately mobile-based company. Spark Networks has created innovative and tailored mobile applications for all of its platforms to

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address the proliferation of mobile devices and the continuing shift of “online” activity to mobile devices. Spark Networks will continue to invest resources to improve the features, functionality and engagement of its mobile websites and applications.
 
The ADSs of Spark Networks SE are traded on the NYSE American.
 
Our Industry
 
Our primary businesses are in the online personals industry, which we believe fulfills significant needs for single adults looking to meet a companion. Traditional methods such as printed personals advertisements, offline dating services and public gathering places often do not meet the needs of single people. Printed personals advertisements offer individuals limited personal information and interaction before meeting. Offline dating services are time-consuming, expensive and offer a smaller number of potential partners. Public gathering places such as restaurants, bars and other social venues provide a limited opportunity to learn about others prior to an in-person meeting. In contrast, online personals services facilitate interaction between singles by allowing them to screen and communicate with a large number of potential companions before they meet in-person. With features such as detailed personal profiles, email, mobile chat and instant messaging, this medium allows users to communicate with other singles at their convenience and affords them the ability to meet multiple people in an anonymous, convenient and secure setting.
 
The global online personals industry has experienced significant growth in recent years. Industry research from Statista estimates that in 2018, revenue within the global online personals industry exceeded $5 billion.

The United States is currently the largest geographic market, representing approximately $3 billion in revenue, according to IBISWorld. In recent years, Spark has increased its market share in the United States through the launch of EliteSingles and SilverSingles in conjunction with the 2017 acquisition of the largely North American brands; Jdate, Christian Mingle, and Jswipe.

According to a Pew Research study released in early 2016, the percentage of the U.S. population using online personals websites or mobile applications grew approximately 40% from 11% in 2013 to 15% in 2015. Members of the millennial generation (individuals under 36 years old) tend to have the highest usage of online or mobile personals sites. However, members of older age groups represent approximately 60% of total paying users.
 
Our Competitive Strengths
 
Diverse global platform.
 
Spark Networks operates a diverse global platform of premium online dating sites in 29 countries and 16 different languages. This diversified suite of dating sites allows Spark Networks to implement best practices from each of the Spark and Affinitas businesses across its geographic footprint and will also enable rapid and effective roll-out of new brands and products.
 
Portfolio of strong brands.
 
Spark Networks owns a portfolio consisting of some of the most well-known and highest quality dating brands. Spark Networks’ brands are largely tailored for and attract users with a high socio-economic status. As education and profession are key criteria for singles when looking for a long-term relationship, Spark Networks’ brands serve an important need for this attractive user segment.
 
Operational and financial scale.
 
Spark Networks is one of the largest online dating companies worldwide by revenue. This allows for the operational and financial scale required for significant investments into new technologies and products, while also providing a better platform to attract and retain customers.
 
Efficient user acquisition.
 
Spark Networks has a deep understanding of how to use online and offline marketing to drive traffic to its websites, and it leverages proprietary technology to analyze the efficiency of all its marketing campaigns. This ensures an efficient and effective marketing budget allocation that ultimately translates into superior margins.

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Potential to share a significantly larger pool of users.
 
Spark Networks has the potential to build shared user pools for all its brands in each of its markets and use matchmaking algorithms to provide best possible matches to its users upon integration of all of its dating technology onto a single platform. Combining the user pools of the combined company’s portfolio of brands will add value to users of all of Spark Networks’ platforms, and it will allow Spark Networks to quickly and efficiently launch new products and services.
 
Industry consolidator role.
 
Spark Networks is one of the few companies in the dating industry to be publicly listed. This enables Spark Networks to issue public equity as consideration for acquisitions as it pursues further consolidation in the online dating industry.
 
Low-cost operating base in Berlin.
 
Spark Networks has assembled highly skilled teams with deep domain expertise across marketing, technology, and product within our headquarters in Berlin. Today, Berlin has a lower cost of living, and in turn, lower salaries than other major cities in Europe or North America. As a result, we require less capital to recruit and retain key employees. This cost advantage has allowed the Company to allocate significant capital to growth investments like direct marketing while also maintaining and scaling profitably.
 
Our strategy
 
Grow in North America.
 
Spark Networks will focus on continuing to expand its presence in North America. In recent years, we have grown our North American market share through (i) the introduction of established European brands such as EliteSingles, (ii) the launch of new brands such as SilverSingles, and (iii) acquiring established North American brands such as Jdate, Christian Mingle, and JSwipe. Going forward, we expect to continue to allocate significant marketing capital towards North America as we look to drive both the organic growth of our existing brand portfolio and expansion through the launch of new or acquired brands.
 
Create a global platform.
 
Spark Networks is developing lovOS, a new, scalable and unified technology platform that will support the Company’s future growth. Our new platform will be architected and built with a particular emphasis on supporting the mobile applications that many of our members utilize to access our products. With a single, shared platform to power our sites, we expect to match subscribers across brands, reduce the time and resources required to launch new brands or integrate potential acquisitions, and quickly adopt new features, trends and consumer preferences.
 
Consolidate the online dating industry.
 
Spark Networks expects to continue to participate in the consolidation of the global online dating industry.
 
Markets and Geographical Presence of Spark Networks
 
Spark Networks will continue to generally focus on premium online dating services catering to singles with a high socio-economic status. This strategy will include a focus on developing new and maintaining existing products and services tailored for mobile phones.
 
Spark Networks currently operates at least one brand in 29 countries. While Spark Networks expects that it will expand into new geographies in the future, Spark Networks’ primary focus will be to expand its presence in North America, which it considers the most attractive market for further growth based on the relative size of the U.S. and Canadian markets and the high potential for Spark Networks to garner additional market share. Spark Networks will also consider launching existing brands in markets where the Company already has a geographic presence to complement the Company’s service offering and create a broader offering in these markets.
 


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Sales and Marketing
 
We engage in a variety of marketing activities intended to drive consumer traffic to our websites and allow us the opportunity to introduce our products and services to prospective visitors, members and subscribers. Our marketing efforts are focused online and offline. Our online marketing approach employs a combination of banner and other display advertising. We also rely on search engine marketing and direct email campaigns to attract potential members and paying subscribers, and use a network of online affiliates, through which we acquire traffic.
 
We supplement our online marketing by employing a variety of offline marketing and business development activities. These include print, television, public relations, event sponsorship and promotional alliances. We believe a more consistent, targeted marketing message, delivered through an array of available marketing channels, will improve consumer awareness of our brands, drive more traffic to our websites, and therefore increase the number of visitors, members and paying subscribers.
 
Customer Service
 
Our multi-lingual call centers and email support teams monitor our sites for fraudulent activity, assist members with billing questions, help members complete personal profiles and answer technical questions. Customer service representatives receive ongoing training in an effort to better personalize the experience for members and paying subscribers who call or email us and to capitalize on upselling opportunities.
 
Technology
 
Our internal product teams are focused on the development and maintenance of products in addition to building and managing our software and hardware infrastructure. We intend to continue investing in the development of new products, such as mobile applications, and enhancing the efficiency and functionality of our existing products and infrastructure.
 
Our network infrastructure and operations are designed to deliver high levels of availability, performance, security and scalability in a cost-effective manner.
 
Intellectual Property
 
We rely on a combination of patent, trademark, copyright and trade secret laws in the United States, Europe and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brands. We also enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties.
 
Spark Networks, Spark, Jdate, Christian Mingle, SilverSingles and BlackSingles.com are registered trademarks in the United States. Spark Networks, Jdate and Christian Mingle are registered trademarks in the EU. Jdate and Christian Mingle are registered trademarks in Australia. Jdate is also a registered trademark in Norway, Russia, Ukraine, Israel and Canada. Our rights to these registered trademarks are perpetual as long as we use them and renew them periodically. We also have a number of other registered and unregistered trademarks. We hold two United States patents for our Click! technology, the first of which expired on January 24, 2017, and the second of which expires on November 3, 2020, that pertain to an automated process for confidentially determining whether people feel mutual attraction or have mutual interests. Click! is important to our business in that it is a method and apparatus for detection of reciprocal interests or feelings and subsequent notification of such results. The patents describe the method and apparatus for the identification of a person’s level of attraction and the subsequent notification when the feeling or attraction is mutual.
 
EliteSingles is a registered trademark in numerous countries such as the United States, the United Kingdom, South Africa, Poland, New Zealand, Ireland, Denmark, and Canada. We are currently waiting for the EliteSingles trademark to be registered in additional countries including the Russian Federation, Iceland, Peru and Czech Republic. Furthermore, there are numerous registered country specific trademarks related to the EliteSingles brand such as Elit Singlar in Sweden, Elittars in Hungary, Eliitti Kumppani in Finland, Elite Solteros in Chile, Elite Solteros in the United States, Elitarne Randki in Poland, Partner med Niveau in Denmark and Elite Rencontre in France. We hold a WIPO (World Intellectual Property Organization) and DPMA (Deutsche Patent - und Markenamt / German Trademark and Patent Office) design trademark for the “heart and arrow” design which is associated with the EliteSingles brand for Australia, the European Union, New Zealand, Norway, Singapore, South Africa, the United States and Germany.


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SilverSingles is a registered trademark in the EU and New Zealand. We are currently waiting for the SilverSingles trademark to be registered in Australia, Canada and South Africa. Furthermore, there exists a specific trademark related to the SilverSingles brand, No Belles Annees, in the EU.
 
eDarling is a registered trademark in Germany, Mexico and is also a WIPO word trademark (for Belarus, Switzerland, China (partially), EU, Croatia, Norway, Serbia, Turkey, Ukraine (partially), USA (partially) and Russia). We hold country specific trademarks for Slovakia named Partner na Urovni associated with the Elite Singles and the eDarling brands.
 
We hold trademarks for Attractive World in France, Australia, Canada, the European Union (EUIPO), Germany, the United Kingdom, Switzerland, New Zealand, Norway, the Russian Federation and the United States.
 
We also have a number of other registered and unregistered trademarks.
 
Competition
 
We operate in a highly competitive environment with minimal barriers to entry. We believe the primary competitive factors in creating a community on the internet are functionality, brand recognition, reputation, critical mass of members, member affinity and loyalty, ease-of-use, quality of service and reliability. We compete with a number of large and small companies, including vertically integrated internet portals and specialty-focused media companies that provide online and offline products and services to the markets we serve. Our principal online personals services competitors include Match Group (which operates the Match.com, OkCupid, Plenty of Fish, and Tinder properties), Parship Elite Group (which operates the eHarmony, Parship and ElitePartner properties) and Zoosk. In addition, we face competition from new entrants that have recently offered free and freemium mobile applications such as Bumble, as well as social networking sites such as Facebook.
 
Government Regulation
 
Our business is regulated by diverse and evolving laws and governmental authorities in North America and other countries in which we operate. We are subject to laws and regulations related to internet communications, privacy, consumer protection, security and data protection, intellectual property rights, commerce, taxation, entertainment, recruiting and advertising. These laws and regulations are becoming more prevalent, and new laws and regulations are under consideration by the United States Congress, state legislatures and foreign governments. Any failure by us to comply with existing laws and regulations may subject us to liabilities. New laws and regulations governing such matters could be enacted or amendments may be made to existing regulations at any time that could adversely impact our services. Plus, legal uncertainties surrounding domestic and foreign government regulations could increase our costs of doing business, require us to revise our services, prevent us from delivering our services over the internet or slow the growth of the internet, any of which could materially adversely affect our business, financial condition and results of operations.
 


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C.
Organizational structure.
 
As of December 31, 2018, we directly held the percentage indicated of the outstanding capital stock of the following subsidiaries:
Company
Jurisdiction of
Incorporation
Percentage
Ownership

Spark Networks Services GmbH
Germany
100
%
Samadhi SAS
France
100
%
EliteSingles LLC
United States
100
%
Spark Networks, Inc.
United States
100
%
Spark Networks Limited
United Kingdom
100
%
LOV USA, LLC
United States
100
%
Spark Networks USA, LLC
United States
100
%
Spark Networks (Israel) Limited
Israel
100
%
JDate Limited
United Kingdom
100
%
HurryDate, LLC
United States
100
%
MingleMatch, Inc.
United States
100
%
Kizmeet, Inc.
United States
100
%
Reseaux Spark Canada Ltd.
Canada
100
%
SocialNet, Inc.
United States
100
%
SN Events, Inc.
United States
100
%
SN Holdco, LLC
United States
100
%
Smooch Labs, Inc.
United States
100
%
SilverSingles LLC
United States
100
%
 
D.     Property, plant and equipment.
 
Our principal administrative activities are located in our approximately 2,620 square meter leased facility in Berlin, Germany. We also lease office space in New York and Utah in the United States. We believe that our facilities are adequate for our current needs and suitable additional or substitute space will be available in the future to replace our existing facilities, if necessary, or accommodate expansion of our operations. The leases for our facilities vary in dates and terms, with the main facility’s lease expiring on January 31, 2022.
 
Item 4A. Unresolved Staff Comments
 
Not applicable.
 
Item 5. Operating and Financial Review and Prospects
 
The information contained in this section should be read in conjunction with our consolidated financial statements for the year ended December 31, 2018 and the related notes that are included in this annual report. Our financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. As a result of many factors, such as those set forth under Item 3.D "Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” our actual results may differ materially from those anticipated in these forward-looking statements.

A.    Operating results.
 
Overview
 
The ADSs of Spark Networks SE are traded on the NYSE American under the ticker symbol “LOV.” We are a leading global operator of premium online dating sites and mobile applications. Our focus is on catering to professionals and highly educated singles with serious relationship intentions in North America and other international markets. Since

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our inception, we have had nearly 60 million users register with our dating platforms (which includes inactive accounts). We currently operate one or more of our brands in 29 countries.
 
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 cash resources on hand to accomplish the enhancements currently contemplated.
 
On September 30, 2016, we completed the acquisition of Samadhi SAS, an unrelated third party and owner of the Attractive World platform (“Samadhi”), whereby Affinitas acquired all of the outstanding shares of Samadhi (the "Samadhi Acquisition"). As of the date of the Samadhi Acquisition, Samadhi became a wholly owned subsidiary of Affinitas.
 
On November 2, 2017, we completed the Affinitas / Spark Merger in a stock-for-stock transaction. We believe that this combination created one of the world’s premier online dating platforms, leveraging our leading, complementary brands. Our portfolio of strong brands and improved financial strength positions us to deliver a superior user experience to our customers and drive long-term value to shareholders.
 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of these financial statements requires us to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, cost of revenue, website and software development costs, goodwill, intangible and other long-lived assets, accounting for business combinations, legal contingencies, income taxes and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
We believe the following critical accounting policies reflect the more significant judgments and estimates we used in the preparation of our consolidated financial statements:
 
Revenue Recognition and Contract Liabilities
 
Spark Networks derives the vast majority of its revenue from subscription fees. The Group recognizes revenue in accordance with IFRS 15. The Group accounts for a contract when it has approval and commitment from all parties, the rights of the parties and payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when control of the promised services is transferred to our customers, and in an amount that reflects the consideration the Group is contractually due in exchange for those services. The Company’s revenue is primarily derived directly from users in the form of recurring subscriptions. Subscription revenue is presented net of refunds and credit card chargebacks. Subscribers pay in advance, primarily by credit card or through mobile app stores, and subject to certain conditions identified in our terms and conditions. Revenue is initially deferred and is recognized using the straight-line method over the terms of the applicable subscription period, which primarily range from one to twelve months.
 
For revenue earned through certain mobile applications, including iOS and Android, the Group recognizes subscription revenue gross of the application processing fees primarily because the Group is the primary obligor and it has the contractual right to determine the price paid by the subscriber. The Group records the related application processing fees as cost of revenue in the period incurred.
 
The Group also earns a small amount of revenue from advertising revenue. The Group records advertising revenue as it is earned and includes advertising revenue in the total revenue of each segment that generates advertising revenue.
 

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Cost of Revenue
 
Cost of revenue consists primarily of direct marketing costs, compensation and other employee-related costs for personnel dedicated to maintaining Spark Networks’ data centers, data center expenses, credit card fees and mobile application processing fees. Spark Networks incurs substantial advertising expenses in order to generate traffic to our websites. These advertising costs consist of offline marketing, particularly television and out-of-home advertising, as well as online advertising and are directly attributable to the revenue Spark Networks receives from our subscribers.
 
Intangible Assets and Goodwill
 
Goodwill arising on the acquisition of subsidiaries and intangible assets with infinite useful lives are measured at acquisition date fair value less accumulated impairment losses.
 
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. In addition to the recoverability assessment, we routinely review the remaining estimated useful lives of our amortizable intangible assets. If Spark Networks reduces its estimate of the useful life assumption for any asset, the remaining unamortized balance would be amortized over the revised estimated useful life. We also routinely review whether events and circumstances continue to support an infinite useful life for intangible assets that are not being amortized.
 
Development expenditures such as internally generated software are capitalized only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and Spark Networks intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognized in the Consolidated Statements of Operations and Comprehensive Loss/Income as incurred. Costs incurred in the planning and post-implementation stages of a project are expensed as incurred while direct and indirect costs associated with the development phase are capitalized and amortized on a straight-line basis over the estimated useful lives after completion. Costs associated with minor enhancements and maintenance are included in expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss/Income. Subsequent to initial recognition, development expenditure is measured at cost less accumulated amortization and any accumulated impairment losses.
 
Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in the Consolidated Statements of Operations and Comprehensive Loss/Income as incurred.
 
Valuation of Goodwill and Identified Intangibles Assets
 
Spark Networks assesses the potential impairment of assets, which include intangible assets, whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events and circumstances that may indicate that an asset is impaired may include significant decreases in the market value of an asset, a significant decline in actual or projected revenue, a change in the extent or manner in which an asset is used, shifts in technology, loss of key management or personnel, changes in Spark Networks’ operating model or strategy and competitive forces, as well as other factors. In addition, intangible assets with infinite useful lives including goodwill are tested annually for impairment.
 
For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash-generating units (“CGUs”). Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.
 
If events and circumstances indicate that the carrying amount of an asset may not be recoverable and the expected discounted future cash flows attributable to the asset or CGU are less than the carrying amount of the asset or CGU, an impairment loss equal to the excess of the asset’s carrying value over its estimated recoverable amount is recorded. The recoverable amount is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, and quoted market prices or appraised values, depending on the nature of the assets. Fair value measurements utilized for assets under nonrecurring measurements were measured with Level 3 unobservable inputs. 


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Spark Networks performed its annual impairment test for goodwill as of October 31, 2018. The existing goodwill of €20,804 thousand as of December 31, 2018 is allocated to the following CGUs:
(in € thousands)
 
As of December 31, 2018
Samadhi
 

Christian Networks
 
7,865

Jdate USA
 
4,023

Jdate Israel
 
111

JSwipe
 
8,631

Other Networks
 
174

Total Goodwill
 
20,804

 
The fair value less cost of disposal was determined based on the discounted cash flow method. The free cash flows (FCF) were derived based on the financial forecast for each CGU for the next five years. The cash flow plans are based on experience as well as on expected market trends in the future. For the CGU Samadhi, a finite life until financial year 2038 with a long-term growth rate of -10.0% was assumed. For the all other CGUs, a terminal value was assumed with growth rates of 3.0% for Christian Networks, 2.0% for Jdate USA, 1.5% for Jdate Israel, 1.5% for JSwipe, and 0.5% for Other Networks.
 
For discounting the future cash flows, a post-tax weighted average cost of capital (WACC) was applied for each CGU. A WACC of 10.0% for Samadhi, 9.4% for Christian Networks, 9.4% for Jdate USA, 10.6% for Jdate Israel, 9.4% for JSwipe, and 9.4% for Other Networks was assumed.
 
An impairment according to IAS 36 is required if the carrying amount exceeds the recoverable amount. The recoverable amount is the higher of the CGU's fair value less cost of disposal or value in use. For Samadhi, as the recoverable amount was lower than the carrying amount, the annual impairment test resulted in an impairment loss of €3,324 thousand as of December 31, 2018. For all other CGUs, as the recoverable amount of each CGU was significantly higher than the carrying amount, the annual impairment test did not result in any impairment loss.
 
Accounting for Business Combinations
 
From time to time, Spark Networks acquires the stock or specific assets of companies in transactions that may be considered to be business acquisitions under IFRS 3. Under the acquisition method of accounting, Spark Networks allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed, and intangible assets acquired based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. Such valuations require Spark Networks’ management to make significant estimates and assumptions, especially with respect to estimating the fair value and expected useful life assigned to each class of assets and liabilities acquired. Different classes of assets will have varying useful lives. For example, the useful life of a member database, which was two years in the acquisition of Samadhi, is not the same as the useful life of a paying subscriber list, which is typically two to six months, or a domain name, which is was 20 years for Samadhi. Consequently, to the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset, there may be less amortization recorded in a given period or no amortization for indefinite lived intangibles.
 
Spark Networks’ management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which can be up to one year from the acquisition date, Spark Networks may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded in net financial result in the consolidated statement of comprehensive income/loss.
 
Legal Contingencies
 
Spark Networks is currently involved in certain legal proceedings, as discussed in the notes to the consolidated financial statements and under Item 8 – Legal Proceedings. To the extent that a loss related to a contingency is reasonably estimable and probable, Spark Networks accrues an estimate of that loss. Because of the uncertainties related to both the amount and range of loss on certain pending litigation, Spark Networks may be unable to make a

36



reasonable estimate of the liability that could result from an unfavorable outcome of such litigation. As additional information becomes available, Spark Networks will assess the potential liability related to such pending litigation and make, or if necessary, revise its estimates. Such revisions in Spark Networks’ estimates of the potential liability could materially impact its consolidated results of operations and consolidated financial position.
  
Accounting for Income Taxes
 
Income tax expense comprises current and deferred tax. It is recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income or loss.
 
Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty related to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date.
 
Deferred tax is recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for:
 
temporary differences related to the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;
temporary differences related to investments in subsidiaries, associates and joint arrangements to the extent that Spark Networks is able to control the timing of the reversal of the temporary differences and it is probable that such differences will not be reversed in the foreseeable future; and
taxable temporary differences arising upon the initial recognition of goodwill.

Deferred tax assets are recognized for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Future taxable profits are determined based on business plans for Spark Networks and each of its subsidiaries and the reversal of temporary differences. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized; such reductions are reversed when the probability of future taxable profits improves.
 
Unrecognized deferred tax assets are reassessed at each reporting date and recognized to the extent that it has become probable that future taxable profits will be available against which such tax assets can be used. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they are reversed, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which Spark Networks expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset only if certain criteria are met.
 
Accordingly, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
 
In assessing the potential realization of deferred tax assets, Spark Networks’ management considers whether it is probable that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which Spark Networks’ tax loss carryforwards remain deductible.
 
In Germany, the Group has tax loss carryforwards for corporate taxes amounting to €42,175 thousand as of December 31, 2018 (December 31, 2017: €39,002 thousand) and €41,463 thousand for trade taxes (December 31, 2017: €38,629 thousand). Of these tax loss carryforwards, €14,841 thousand were unused.

In general, the net operating loss carry-forwards in Germany do not expire. They are subject to review and possible adjustment by the German tax authorities. Furthermore, under current German tax laws, certain substantial changes in the Group’s ownership and business may further limit the amount of net operating loss carry forwards, which could be utilized annually to offset future taxable income.

37



 
In March 2017, the Federal Constitutional Court released a court order to declare that forfeiture of tax losses due to certain substantial changes in a company’s ownership are unconstitutional.
 
The restrictions on the utilization of tax losses were mitigated through Economic Growth Acceleration Act (“Wachstumsbeschleunigungsgesetz”). According to the provisions of this act, unused tax losses of a corporation are preserved to the extent they are compensated by an excess of the fair value of equity for tax purposes above its carrying amount of the Group.
 
At December 31, 2018, Spark has gross net operating loss carry-forwards for U.S. income tax purposes of approximately €16,056 thousand and €14,660 thousand available to reduce future federal and state taxable income, respectively, which expire beginning in the years 2025 for federal purposes and in 2019 for state purposes. Under Section 382 of the U.S. Internal Revenue Code, the utilization of the net operating loss carry-forwards may be limited based on changes in the percentage ownership of the Group. Of these unused tax losses, there was no deferred tax asset recognized.

At December 31, 2018, Spark has U.S. federal income tax carry-forwards for income tax purposes of approximately €314 thousand (December 31, 2017: €295 thousand), which if not previously utilized, are allowable as refundable credits under the Tax Cuts and Job Act through 2022. However, the refundability of the credit will be determined through additional guidance to properly interpret the interaction between Internal Revenue Code Section 383 with the Tax Cuts and Jobs Act.
 
In addition, as of December 31, 2018, the Group had tax losses carryforward in France of €176 thousand (December 31, 2017: €1,084 thousand), for which deferred tax assets were recognized. There was also approximately €8,860 thousand in net operating loss carryforwards for Israeli tax purposes at December 31, 2018 (December 31, 2017: €8,688 thousand), which do not expire, and for which no deferred tax asset was recognized.
 
Spark Networks capitalizes deferred tax assets on loss carry-forwards to the extent that it is probable that those can be used to reduce future taxable income. Following Spark Networks’ evaluation, deferred tax assets of €10,434 thousand and €10,845 thousand were capitalized as of December 31, 2018 and December 31, 2017, respectively.

No deferred taxes on the aggregate amount of temporary differences associated with investments in subsidiaries of €2,690 thousand as of December 31, 2018 (December 31, 2017: €0 thousand) were recognized.
 
Spark Networks operates in multiple taxing jurisdictions, both within and outside of Germany and the United States. Spark Networks has filed tax returns with positions that may be challenged by the tax authorities. These positions relate to the deductibility of certain expenses and intercompany transactions as well as other matters. Although the outcome of tax audits is uncertain, Spark Networks regularly assesses its tax position for such matters and, in its management’s opinion, adequate provisions for income taxes have been made for potential liabilities resulting from such matters. To the extent reserves are recorded, they will be utilized or reversed once the statute of limitations has expired and/or at the conclusion of the tax examination. Spark Networks believes that the ultimate outcome of these matters will not have a material impact on its financial position or liquidity.

The U.S. Tax Act was signed into law on December 22, 2017. The U.S. Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, adding additional limitations on the deductibility of interest expense, and changing how foreign earnings are subject to U.S. tax. The U.S. Tax Act also enhanced and extended the option to claim accelerated depreciation deductions by allowing full expensing of qualified property, primarily equipment, through 2022. These new provisions did not have a material effect on the financial statements.
 

38



Share-Based Compensation
 
Share-based compensation expense reflected in the Company's consolidated financial statements consists of expense related to the Affinitas virtual employee share option plan (the “Affinitas VESOP”), the Spark 2007 Omnibus Incentive Plan (“Spark 2007 Plan”), the Spark Networks 2017 virtual stock option plan (the “Spark Networks 2017 VSOP”) and the Spark Networks 2018 virtual stock option plan (the “Spark Networks 2018 VSOP”). The Affinitas VESOP was independently established by Affinitas in 2013 and the Spark 2007 Plan was independently established by Spark in 2007, in each case prior to the Affinitas / Spark Merger. In connection with the Affinitas / Spark Merger, the Affinitas VESOP was terminated and replaced by the Spark Networks 2017 VSOP. The Spark Networks 2017 VSOP was subsequently replaced by the Spark Networks 2018 VSOP in 2018. Share-based compensation expense incurred in periods prior to the close of the Affinitas / Spark Merger resulted solely from share-based compensation granted by Affinitas.

The grant-date fair value of equity-settled share-based payment arrangements granted to employees is generally recognized as an expense, with a corresponding increase in shareholders' equity over the vesting period of the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service and non-market performance conditions at the vesting date.
 
Under the Affinitas VESOP, Spark Networks had a choice of settlement whereby the cash amount or equal value in shares to be received by the beneficiaries for a single vested option shall equal the price or proceeds per common share in case of a change in control event (“Share Sale”) or an Initial Public Offering (“IPO”) of Affinitas’ shares minus the exercise price. In connection with the Affinitas / Spark Merger, shareholders of Affinitas elected to settle all the options outstanding at the merger date at a fixed valuation of €3,839 thousand, which was equivalent to a total equity value of €90 million for Affinitas. This equity value of Affinitas was determined based on the Spark share price and the exchange ratio that Affinitas and Spark agreed on in relation to the Affinitas / Spark Merger.
 
In connection with the Affinitas / Spark Merger, Spark established the Chardonnay Trust, with the purpose of holding such number of shares of Spark Networks SE ADSs as shall be necessary to satisfy the obligations under all unexercised Spark stock options awarded under the Spark 2007 Plan. Following the completion of the Affinitas / Spark Merger, Spark no longer has any rights to revoke or amend the Chardonnay Trust in a manner that is detrimental to Spark 2007 Plan participants.
 
In connection with the Affinitas / Spark Merger, each Spark stock option was converted into an award to acquire ADSs from the Chardonnay Trust, on the same terms and conditions as were applicable under the Spark stock option, and subject to adjustment based on the exchange ratio stipulated in the merger agreement. The shares underlying the ADSs held in the Chardonnay Trust are recognized as treasury stock within the Consolidated Statement of Shareholders' Equity. Only nonqualified stock options were outstanding as of the merger date, which are vested and exercisable as of December 31, 2018.
 
During the year ended December 31, 2017, Spark Networks established the Spark Networks 2017 VSOP for selected executives and employees of Spark Networks and its subsidiaries, which entitles Spark Networks to a choice of settlement whereby the cash amount or equal value in ADSs to be received by the beneficiaries for a single vested option shall equal the market price per Spark Networks ADS minus the exercise price. Spark Networks' policy is to avoid cash payments to participants if possible, which means that settlement of the outstanding options is expected to be made in Spark Networks ADSs. Based on this stated policy, the arrangement is classified as equity-settled unless settlement in cash is most probable.

During the year ended December 31, 2018, Spark Networks replaced the Spark Networks 2017 VSOP by establishing the Spark Networks 2018 VSOP for selected executives and employees of Spark Networks and its subsidiaries if and to the extent that the plan participants under the Spark Networks 2017 VSOP have agreed to such replacement. Under the Spark Networks 2018 VSOP, Spark Networks granted participants a certain number of virtual stock options in exchange for options granted under the Spark Networks 2017 VSOP and/or a certain number of new virtual stock options, and can grant additional options in the future. The Spark Networks 2018 VSOP entitles Spark Networks to a choice of settlement whereby the cash amount or equal value in shares to be received by the beneficiaries for a single vested option shall equal the market price per Spark Networks ADS minus the exercise price. Based on Spark Networks' policy, the Spark Networks 2018 VSOP is classified as equity-settled.
 

39



The grant-date fair value of equity-settled share-based payment arrangements granted to employees is generally recognized as an expense, with a corresponding increase in shareholders' equity, over the vesting period of the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognized is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. Spark Networks recognizes compensation expense on a straight-line basis from the beginning of the service period, even when the grant date is subsequent to the service commencement date. During the period between service commencement date and grant date, the share-based payment expense recognized is based on an estimated grant date fair value of the award. Once the grant date has been established for equity-settled awards, the estimated fair value is revised so that the expense recognized is based on the actual grant date fair value of the equity instruments granted. For awards with graded-vesting features, each installment of the award is treated as a separate grant. This means that each installment is separately expensed over the related vesting period.
 
Spark Networks estimates the fair value of each stock option grant using a binomial option-pricing model, which uses as inputs the fair value per Spark Networks share and assumptions Spark Networks makes with respect to the volatility of Spark Networks shares, the expected terms of Spark Networks’ stock options, the risk-free interest rates for a period that approximates the expected term of the stock option and the expected dividend yield.
 
Segment Reporting
 
Segment reporting requires the use of the management approach in determining the reportable operating segments. The management approach considers the internal organization and reporting used by Spark Networks’ chief operating decision maker for making operating decisions and assessing performance. Spark Networks’ internal financial reporting includes separate data for each country, and all countries other than the United States and Canada (together, “North America”) have been aggregated into one reportable segment as the business model and long-term margin expectations are similar. Spark Networks reports two separate reportable segments: (1) North America, which consists of Spark Networks’ operations in the United States and Canada; and (2) International, which consists of all other operations except for the United States and Canada.
 
The performance of the operating segments is measured on the basis of revenue and direct marketing costs only. Due to Spark Networks’ integrated business structure, costs and expenses other than direct marketing expenses are not allocated to the individual reportable segments. As such, Spark Networks does not measure operating profit or loss by segment for internal reporting purposes.


40



Results of Operations
 
The following is a more detailed discussion of our financial condition and results of operations for the periods presented:
 
 
Years Ended December 31,
(in € thousands)
 
2018
 
2017
 
2016
Revenue
 
104,551

 
85,637

 
73,491

Cost of revenue
 
(69,490
)
 
(58,776
)
 
(51,202
)
Gross profit
 
35,061


26,861


22,289

Other income
 
240

 
54

 
126

Other operating expenses
 
(36,299
)
 
(32,030
)
 
(19,742
)
Sales and marketing expenses
 
(4,938
)
 
(5,540
)
 
(3,919
)
Customer service expenses
 
(4,626
)
 
(3,971
)
 
(2,791
)
Technical operations and development expenses
 
(7,195
)
 
(6,428
)
 
(3,305
)
General and administrative expenses
 
(19,540
)
 
(16,091
)
 
(9,727
)
Operating (loss)/profit
 
(998
)

(5,115
)

2,673

Interest income and similar income
 
478

 
239

 
157

Interest expense and similar charges
 
(1,436
)
 
(782
)
 
(425
)
Net finance expenses
 
(958
)

(543
)

(268
)
(Loss)/income before taxes
 
(1,956
)
 
(5,658
)
 
2,405

Income tax benefit (expense)
 
(1,147
)
 
84

 
(1,082
)
(Loss)/income from continuing operations
 
(3,103
)

(5,574
)

1,323

Discontinued operations
 
 
 
 
 
 
Loss from discontinued operations, net of tax
 

 

 
(632
)
Net (loss)/income
 
(3,103
)

(5,574
)

691

 


41



The following table presents certain selected information and Adjusted EBITDA(1) for the periods presented: 
 
 
Years Ended December 31,
(in € thousands)
 
2018
 
2017
 
2016
Net (loss)/income
 
(3,103
)
 
(5,574
)
 
691

Discontinued operations
 

 

 
632

Net finance expenses
 
958

 
543

 
268

Income tax (benefit) expense
 
1,147

 
(84
)
 
1,082

Depreciation and amortization
 
3,565

 
3,084

 
1,278

Impairment of intangible assets and goodwill
 
3,324

 
25

 

Share-based compensation expense
 
4,091

 
488

 
991

Non-recurring costs
 
970

 
8,123

 
927

Adjusted EBITDA(1)
 
10,952

 
6,605

 
5,869


 
 
Years Ended December 31,
Summary of non-recurring costs (in € thousands)
 
2018
 
2017
 
2016
Contract liabilities write-offs
 
289

 
603

 

Restructuring expenses
 

 

 
642

Transaction and advisory fees
 
264

 
3,995

 
162

Merger integration costs
 
101

 
2,042

 

Other employee payments
 

 
1,053

 

Severance costs
 
316

 
430

 
123

Total adjustments
 
970

 
8,123

 
927


(1) Adjusted EBITDA is not a measure defined by International Financial Reporting Standards ("IFRS"). The most directly comparable IFRS measure for Adjusted EBITDA is our net (loss)/profit for the relevant period. This measure is one of the primary metrics by which we evaluate the performance of our businesses, 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 ongoing operations and excludes the impact of items that we do not consider representative of our ongoing operating performance, including: (i) non-cash items such as share-based compensation, asset impairments, net finance expenses and (ii) one-time items that have not occurred in the past two years and are not expected to recur in the next two years including severance, transaction advisory fees, and merger integration costs, and (iii) discontinued operations. 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.

Adjusted EBITDA should not be construed as a substitute for net (loss) / profit (as determined in accordance with IFRS) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by IFRS.
 

42



The following table presents our historical operating results as a percentage of revenue for the periods presented:
 
Years Ended December 31,
 
2018
 
2017
 
2016
Revenue
100.0

%
 
100.0

%
 
100.0

%
Cost of revenue
(66.5
)
 
 
(68.6
)
 
 
(69.7
)
 
Gross profit
33.5

 
 
31.4

 
 
30.3

 
Other income
0.2

 
 
0.1

 
 
0.2

 
Other operating expenses
(34.7
)
 
 
(37.4
)
 
 
(26.9
)
 
Sales and marketing expenses
(4.7
)
 
 
(6.5
)
 
 
(5.3
)
 
Customer service expenses
(4.4
)
 
 
(4.6
)
 
 
(3.8
)
 
Technical operations and development expenses
(6.9
)
 
 
(7.5
)
 
 
(4.5
)
 
General and administrative expenses
(18.7
)
 
 
(18.8
)
 
 
(13.2
)
 
Operating (loss)/profit
(1.0
)
 
 
(6.0
)
 
 
3.6

 
Interest income and similar income
0.5

 
 
0.3

 
 
0.2

 
Interest expense and similar charges
(1.4
)
 
 
(0.9
)
 
 
(0.6
)
 
Net finance expenses
(0.9
)
 
 
(0.6
)
 
 
(0.4
)
 
(Loss)/income before taxes
(1.9
)
 
 
(6.6
)
 
 
3.3

 
Income tax benefit (expense)
(1.1
)
 
 
0.1

 
 
(1.5
)
 
(Loss)/income from continuing operations
(3.0
)
 
 
(6.5
)
 
 
1.8

 
Discontinued operations
 
 
 
 
 
 
 
 
Loss from discontinued operations, net of tax

 
 

 
 
(0.9
)
 
Net (loss)/income
(3.0
)
%
 
(6.5
)
%
 
0.9

%
 
Unaudited pro forma financial information
 
The unaudited pro forma financial information in the table below presents the combined results of the Company and Spark as if the Affinitas / Spark Merger had occurred on January 1, 2017. The unaudited pro forma financial information includes adjustments required under the acquisition method of accounting and is presented for informational purposes only. This presentation is not necessarily indicative of the results that would have been achieved had the acquisition actually occurred on January 1, 2017.

For the year ended December 31, 2017, pro forma adjustments include a reduction in revenue of €943 thousand due to the write-offs of contract liabilities at the assumed date of acquisition, as well as decreases in depreciation and amortization expense of €2,089 thousand and the removal of transaction related costs of €11,921 thousand as they are one-time in nature and will not have a continuing impact on operations. The post-tax impact to net loss resulting from the pro forma adjustments applied in 2017 assumes a 40% rate. The transaction related costs include merger integration costs of €2,663 thousand, transaction and advisory fees of €6,650 thousand, and severance and other employee costs of €2,608 thousand related to the Affinitas / Spark Merger.
 
Years Ended December 31,
 
2018
 
2017
(in € thousands)
(pro forma)
 
(pro forma)
Revenue
104,840

 
105,911

Net loss
(2,814
)
 
(3,134
)
 

43



The following table presents certain selected information and Adjusted EBITDA(1) for the periods presented:
 
Years Ended December 31,
 
2018
 
2017
(in € thousands)
(pro forma)
 
(pro forma)
Net loss
(2,814
)
 
(3,134
)
Net finance expenses
958

 
261

Income tax (benefit) expense
1,147

 
5,057

Depreciation and amortization
3,565

 
4,266

Impairment of intangible assets and goodwill
3,324

 
46

Share-based compensation expense
4,091

 
1,175

Non-recurring costs
681

 
943

Adjusted EBITDA(1)
10,952


8,614

 
 
Years Ended December 31,
 
2018
 
2017
Summary of non-recurring costs
(pro forma)
 
(pro forma)
Contract liabilities write-offs

 
943

Transaction and advisory fees
264

 

Merger integration costs
101

 

Severance costs
316

 

Total adjustments
681


943

 
(1)       Adjusted EBITDA is not a measure defined by International Financial Reporting Standards ("IFRS"). The most directly comparable IFRS measure for Adjusted EBITDA is our net (loss)/profit for the relevant period. This measure is one of the primary metrics by which we evaluate the performance of our businesses, 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 ongoing operations and excludes the impact of items that we do not consider representative of our ongoing operating performance, including: (i) non-cash items such as share-based compensation, asset impairments, net finance expenses and (ii) one-time items that have not occurred in the past two years and are not expected to recur in the next two years including severance, transaction advisory fees, and merger integration costs, and (iii) discontinued operations. 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.

Adjusted EBITDA should not be construed as a substitute for net (loss) / profit (as determined in accordance with IFRS) for the purpose of analyzing our operating performance or financial position, as Adjusted EBITDA is not defined by IFRS.
 
Unaudited pro forma revenue during the year ended December 31, 2018 decreased by 1.0% to €104,840 thousand compared to unaudited pro forma revenue of €105,911 thousand during the year ended December 31, 2017. Pro forma revenue in the periods ended December 31, 2018 and December 31, 2017 reflects a reduction of €0 thousand and €943 thousand, respectively, due to the write-off of contract liabilities related to the Affinitas / Spark Merger.
 
Unaudited pro forma net loss during the year ended December 31, 2018 decreased by €320 thousand to €2,814 thousand compared to the unaudited pro forma net loss of €3,134 thousand during the year ended December 31, 2017. The decrease in unaudited pro forma net loss was the result of an increase in revenue driven by the growth of

44



SilverSingles following its launch in December 2017, and a decrease in other operating expenses from the prior year as a result of the elimination of redundant costs following the Affinitas / Spark Merger in 2017.
 
Unaudited pro forma Adjusted EBITDA during the year ended December 31, 2018 increased by €2,338 thousand to €10,952 thousand compared to the unaudited pro forma adjusted EBTIDA of €8,614 thousand during the year ended December 31, 2017. The increase was the result of an increase in revenue driven by the growth of SilverSingles following its launch in December 2017, and a decrease in other operating expenses from the prior year as a result of the elimination of redundant costs following the Affinitas / Spark Merger in 2017.
 
Key Business Metrics
 
Spark Networks regularly reviews certain operating metrics in order to evaluate the effectiveness of its operating strategies and monitor the financial performance of its business. The key business metrics that Spark Networks utilizes include the following:
 
Total Registrations:
 
Total registrations are defined as the total number of new members registering to the platforms with their email address. Those include members who enter into premium subscriptions and free memberships.
 
Average Paying Subscribers:
 
Paying subscribers are defined as individuals who have paid a monthly fee for access to premium services, which include, among others, unlimited communication with other registered users, access to user profile pictures and enhanced search functionality. 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 Average Revenue Per User (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 credits, less direct marketing.
 
Direct Marketing:
 
Direct Marketing is defined as online and offline advertising spend, and is included within Cost of Revenue within the Group’s Consolidated Statement of Comprehensive (Loss)/Income.
 


45



Unaudited selected statistical information regarding the key business metrics described above for Spark Networks’ reportable segments is shown in the table below:
 
Years Ended December 31,
 
2018
 
2017
 
2016
# of Registrations
 
 
 
 
 
North America
4,376,883

 
2,289,036

 
1,616,963

International
5,767,290

 
6,162,597

 
5,280,686

Total # of Registrations
10,144,173


8,451,633


6,897,649

 
 
 
 
 
 
Average Paying Subscribers
 
 
 
 
 
North America
183,794

 
83,870

 
46,453

International
299,619

 
295,533

 
270,823

Total Average Paying Subscribers
483,413

 
379,403

 
317,276

 
 
 
 
 
 
Monthly ARPU
 
 
 
 
 
North America
21.98

 
24.42

 
28.71

International
15.60


17.22


17.69

Total Monthly ARPU
18.02

 
18.81

 
19.30

 
 
 
 
 
 
Total Net Revenue
 
 
 
 
 
North America
48,470

 
24,574

 
16,004

International
56,081

 
61,063

 
57,487

Total Net Revenue
104,551

 
85,637

 
73,491

 
 
 
 
 
 
Direct Marketing





North America
27,862

 
17,980

 
15,059

International
32,026

 
35,489

 
33,311

Total Direct Marketing
59,888

 
53,469

 
48,370

 





Contribution
 
 
 
 
 
North America
20,608

 
6,594

 
944

International
24,055

 
25,574

 
24,177

Total Contribution
44,663


32,168


25,121

 
During the year ended December 31, 2018, 10,144 thousand new members registered to Spark Networks’ platforms, compared to 8,452 thousand new members during the year ended December 31, 2017. The 20.0% total increase in new registrations is due to new registrations in the North America segment with 4,377 thousand registrations compared to 2,289 thousand in the previous year, partially offset by a decrease in new registrations in the International segment with 5,767 thousand registrations compared to 6,163 thousand in the previous year. The increase in the North America segment was due to the addition of Jdate and Christian Mingle following the Affinitas / Spark Merger in November 2017 and increased direct marketing efforts. Registrations in the year ended December 31, 2018 include 1,046 thousand new registrations in North America and 66 thousand new International registrations from the Spark brands.
 
Average paying subscribers increased by 27.4% to 483,413 during the year ended December 31, 2018, compared to 379,403 during the year ended December 31, 2017. Average paying subscribers for the North America segment increased by 119.1% to 183,794 during the year ended December 31, 2018, compared to 83,870 during the year ended December 31, 2017. The increase was primarily the result of the addition of Jdate and Christian Mingle following the Affinitas / Spark Merger in November 2017 and increased marketing efforts in North America. Average paying subscribers in the North America segment from the Spark brands accounted for 65.7% of the increase relative to the prior year. Average paying subscribers in the International segment increased by 1.4% to 299,619 during the year ended December 31, 2018, compared to 295,533 during the year ended December 31, 2017. Average paying subscribers in the International segment from the Spark brands accounted for 68.5% of the increase relative to the prior year.

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Monthly ARPU decreased by 4.2% to €18.02 during the year ended December 31, 2018, compared to €18.81 during the year ended December 31, 2017. Monthly ARPU of the North America segment decreased by 10.0% to €21.98 during the year ended December 31, 2018 compared to €24.42 during the year ended December 31, 2017. Monthly ARPU for the North America segment from the Spark brands accounted for 48.8% of the decrease relative to the prior year period. Monthly ARPU within the International segment decreased by 9.4% to €15.60 during the year ended December 31, 2018 compared to €17.22 during the year ended December 31, 2017. Monthly ARPU is lower in the International segment than in the North America segment primarily because the segment includes Eastern European countries in which subscription fees are significantly lower than Spark Networks' overall average. The proportion of Eastern European customers within the International segment increased in 2018, contributing to the modest decrease in International segment ARPU.
 
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
 
Revenue
 
Revenue during the year ended December 31, 2018 increased by 22.2% to €104,551 thousand from €85,637 thousand during the year ended December 31, 2017. The growth was primarily attributable to the 27.4% increase in the number of average paying subscribers, offset by the 4.2% decrease in Monthly ARPU. Spark contributed €17,710 thousand, or 93.6%, of the revenue increase through the addition of Jdate, JSwipe and Christian Mingle following the close of the Affinitas / Spark Merger in November 2017. Spark revenue in the period was reduced by a €289 thousand write-off of contract liabilities related to the Affinitas / Spark Merger.
 
During the year ended December 31, 2018, revenue in Spark Networks’ North America segment increased by 97.2% to €48,470 thousand from €24,574 thousand during the year ended December 31, 2017, mainly due to the addition of Jdate, JSwipe and Christian Mingle following the Affinitas / Spark Merger in November 2017. Revenue for the North America segment from the Spark brands accounted for 71.7% of the increase relative to the prior year. During the year ended December 31, 2018, revenue in Spark Networks' International segment decreased by 8.2% to €56,081 thousand from €61,063 thousand during the year ended December 31, 2017. Spark contributed €662 thousand to revenue for the International segment in the period. The decrease in 2018 revenue within the International segment is the result of the 9.8% decrease in 2018 International segment direct marketing costs, as the Company focused its marketing efforts within the North American market.
 
Cost of revenue
 
Cost of revenue consists primarily of direct marketing costs, data center expenses, credit card fees and mobile application processing fees. Cost of revenue increased by 18.2% to €69,490 thousand during the year ended December 31, 2018, compared to €58,776 thousand during the year ended December 31, 2017. The increase in cost of revenue was primarily attributable to increases in direct marketing costs within the North America segment. Spark contributed €5,622 thousand, or 52.5%, of the year over year increase due to the addition of Jdate, JSwipe and Christian Mingle following the Affinitas / Spark Merger in November 2017. The increase in cost of revenue was also attributable to €12,839 thousand of direct marketing investment in SilverSingles during the year ended December 31, 2018 following its December 2017 launch, compared to €361 thousand during the year ended December 31, 2017. Additionally, mobile application processing fees increased by €1,741 thousand as a result of the addition of Jdate, JSwipe and Christian Mingle, which generates a higher proportion of revenue from the Apple App Store and the Google Play Store. Subscriptions sold through these app stores incur a commission equal to 30% of revenue. Cost of revenue as a percentage of revenue decreased by 2.2% to 66.5% as a result of revenue growth outpacing growth in direct marketing costs within North America.

Sales and marketing expenses
 
Sales and marketing expenses consist primarily of salaries for Spark Networks’ sales and marketing personnel, expenses for market research, and amortization of sales related intangible assets. Sales and marketing expenses decreased by 10.9% to €4,938 thousand during the year ended December 31, 2018, as compared to €5,540 thousand during the year ended December 31, 2017. The decrease was primarily attributable to reductions in amortization expense, marketing research costs, and television advertising production costs.
 

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Customer service expenses
 
Customer service expenses consist primarily of personnel costs and third party service fees associated with Spark Networks’ customer service centers. The members of Spark Networks’ customer service team primarily respond to billing questions, detect and eliminate suspected fraudulent activity, and address site usage and dating questions from Spark Networks’ members. Customer service expenses increased by 16.5% to €4,626 thousand during the year ended December 31, 2018, as compared to €3,971 thousand during the year ended December 31, 2017. The increase was mainly attributable to increased customer support staffing to support the newly acquired Spark brands and the December 2017 launch of SilverSingles.

Technical operations and development expenses
 
Technical operations and development expenses consist primarily of the personnel and systems necessary to support Spark Networks’ corporate technology requirements as well as costs incurred in the development, enhancement and maintenance of Spark Networks’ new and existing technology platforms. Technical operations and development expenses increased by 11.9% to €7,195 thousand during the year ended December 31, 2018, as compared to €6,428 thousand during the year ended December 31, 2017. The increase is primarily due to an increase in amortization expense on internally generated intangible assets and an increase in personnel expenses to facilitate the transition of technological oversight of the Spark tools and systems from the United States based development team to the development team in Berlin. Further, expenses also increased as a result of higher average salaries in the department.
 
General and administrative expenses
 
General and administrative expenses consist primarily of personnel costs, professional fees, occupancy and other overhead costs. General and administrative expenses increased by 21.4% to €19,540 thousand for the year ended December 31, 2018, compared to €16,091 thousand for the year ended December 31, 2017. The increase was due to Samadhi goodwill impairment and an increase in personnel expenses and related overhead, partially offset by a year over year decrease in legal and consulting costs that related to the Affinitas / Spark Merger in November 2017. Spark contributed €605 thousand, or 17.5%, of the year over year increase following the Affinitas / Spark Merger in November 2017.
 
Net Finance expenses
 
Net finance expenses consist primarily of interest income and expenses, foreign exchange gains and losses, and other related finance costs. Net finance expenses increased to €958 thousand for the year ended December 31, 2018, compared to €543 thousand for the year ended December 31, 2017. The increase was mainly due to the early termination fee of €307 thousand that was paid in March 2018 pursuant to the Termination Agreement (as defined below) and net foreign exchange losses of €388 thousand during the year ended December 31, 2018 compared to €53 thousand during the year ended December 31, 2017. The increase in net finance expenses was partially offset by income of €220 thousand related to the repayment on a related party loan receivable in August 2018. Net finance expenses in 2018 include expense of €241 thousand from Spark related to foreign exchange losses.
 
Income tax benefit (expense)
 
Income tax expense for the year ended December 31, 2018, was €1,147 thousand compared to income tax benefit of €84 thousand for the year ended December 31, 2017. The income tax expense during the year ended December 31, 2018 consists of an expense of €531 thousand from origination and reversal of temporary differences mainly related to intangible assets and income tax credits, a deferred tax expense of €397 thousand relating to net operating loss carryforwards, and €219 thousand of current income tax expense. The income tax expense for the year ended December 31, 2018 is significantly impacted by current year losses for which no deferred tax assets are recognized with an impact of €1,997 thousand, and an adjustment to deferred taxes on foreign net operating loss carryforwards of
€604 thousand, due to new information that became available to Spark Networks.

The income tax benefit during the year ended December 31, 2017 consists of €159 thousand of deferred tax benefit relating to the addition of net operating loss carryforwards, offset by €67 thousand of current income tax expense and an expense of €8 thousand from origination and reversal of temporary differences, mainly attributable to intangible assets recognized as a result of the Affinitas / Spark Merger and deferred taxes on the fair value adjustment on deferred income.
 

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Total comprehensive (loss) income.
 
Total comprehensive loss was €1,486 thousand for the year ended December 31, 2018, compared to total comprehensive loss of €6,457 thousand for the year ended December 31, 2017. The reduction in total comprehensive loss was primarily due to a reduction in net operating loss and an increase in other comprehensive income related to foreign currency translation.
 
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
 
Revenue
 
Revenue during the year ended December 31, 2017 increased 16.5% to €85,637 thousand from €73,491 thousand during the year ended December 31, 2016. The increase was primarily attributable to 19.6% growth in our average paying subscribers resulting from extensive marketing efforts in North America and the addition of Jdate and Christian Mingle following the Affinitas / Spark Merger in November 2017. Revenue in 2017 includes €2,719 thousand from Spark since the date of the Affinitas / Spark Merger, which reflects a reduction in revenue during this period of €603 thousand due to the write-off of contract liabilities related to the Affinitas / Spark Merger.
 
During the year ended December 31, 2017, revenue in Spark Networks’ North America segment increased 53.6% from €16,004 thousand during the year ended December 31, 2016 to €24,574 thousand during the year ended December 31, 2017. The North America revenue increases resulted from increased marketing efforts and the addition of Jdate and Christian Mingle following the Affinitas / Spark Merger in November 2017. North America revenue in 2017 includes €2,622 thousand from Spark since the date of the Affinitas / Spark Merger, or 30.6% of the increase in the period. During the year ended December 31, 2017, revenue in Affinitas’ International segment increased by 6.2% from €57,487 thousand during the year ended December 31, 2016 to €61,063 thousand during the year ended December 31, 2017. International revenue increases resulted primarily from increased marketing efforts.
 
Cost of revenue
 
Cost of revenue consists primarily of direct marketing costs, data center expenses, credit card fees and mobile application processing fees. Cost of revenue increased by 14.8% to €58,776 thousand during the year ended December 31, 2017, compared to €51,202 thousand during the year ended December 31, 2016. The increase in cost of revenue was primarily attributable to increases in direct marketing costs within the North America segment, as mentioned above. Cost of revenue expenses in 2017 include €1,893 thousand from Spark since the date of the Affinitas / Spark Merger, or 25.0% of the 2017 increase. Additionally, mobile application processing fees increased due to increases in the proportion of customer subscriptions sold through the Apple App Store and the Google Play Store. Cost of revenue as a percentage of revenue decreased by 1.1% to 68.6% as a result of revenue growth outpacing growth in direct marketing costs within North America.
 
Sales and marketing expenses
 
Sales and marketing expenses consist primarily of salaries for Spark Networks’ sales and marketing personnel, expenses for market research, and amortization of sales related intangible assets. Sales and marketing expenses increased by 41.4% to €5,540 thousand during the year ended December 31, 2017, as compared to €3,919 thousand during the year ended December 31, 2016. The increase was primarily attributable to higher personnel expenses caused by hiring to grow the sales and marketing team and termination costs. The increase was also attributable to increased amortization expenses resulting from the amortization of acquired intangible assets resulting from the Samadhi Acquisition and the Affinitas / Spark Merger. Sales and marketing expenses in 2017 include €327 thousand from Spark since the date of the Affinitas / Spark Merger, or 20.2% of the 2017 increase.
 

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Customer service expenses
 
Customer service expenses consist primarily of personnel costs and third party service fees associated with Spark Networks’ customer service centers. The members of Spark Networks’ customer service team primarily respond to billing questions, detect and eliminate suspected fraudulent activity, and address site usage and dating questions from Spark Networks’ members. Customer service expenses increased by 42.3% from €2,791 thousand during the year ended December 31, 2016, to €3,971 thousand during the year ended December 31, 2017. The increase was primarily attributable to an increase in third party services of €515 thousand, resulting from the strategic decision to reduce internal customer service staffing and engage external service providers to increase overall customer responsiveness. As a result, personnel expenses decreased by €95 thousand. Customer service expense increases were also driven by higher customer claim volumes in North America. Customer service expenses in 2017 include €276 thousand from Spark since the date of the Affinitas / Spark Merger, or 23.4% of the 2017 increase.
 
Technical operations and development expenses
 
Technical operations and development expenses consist primarily of the personnel and systems necessary to support Spark Networks’ corporate technology requirements as well as costs incurred in the development, enhancement and maintenance of Spark Networks’ websites and services. Technical operations and development expenses increased 94.5% from €3,305 thousand during the year ended December 31, 2016, to €6,428 thousand during the year ended December 31, 2017, due to an increase in personnel expenses stemming from the hiring of senior team members and retention and severance payments made to Spark personnel, and an increase in amortization on intangible assets identified in the Samadhi Acquisition. Technical operations and development expenses in 2017 include €932 thousand from Spark since the date of the Affinitas / Spark Merger, or 29.8% of the 2017 increase.
 
General and administrative expenses
 
General and administrative expenses consist primarily of corporate personnel-related costs, professional fees, occupancy and other overhead costs. General and administrative expenses increased by 65.4% to €16,091 thousand for the year ended December 31, 2017, compared to €9,727 thousand for the year ended December 31, 2016. The increase was due to higher bad debt expenses and write-offs of receivables, an increase in personnel expenses, and professional fees resulting from the Affinitas / Spark Merger. General and administrative expenses in 2017 include €2,038 thousand from Spark since the date of the Affinitas / Spark Merger, or 32.0% of the 2017 increase.
 
Net Finance expenses
 
Net finance expenses consist primarily of interest income and expenses and foreign exchange gains and losses. Net finance expenses increased to €543 thousand for the year ended December 31, 2017, compared to €268 thousand for the year ended December 31, 2016. The increase was due to higher interest expenses of €516 thousand for the year ended December 31, 2017 compared to €129 thousand for the year ended December 31, 2016, mainly relating to a loan facility drawn in September 2016 to finance a portion of the consideration for the Samadhi Acquisition. Net currency translation losses were €53 thousand during the year ended December 31, 2017, compared to €139 thousand during December 31, 2016. Net finance expenses in 2017 include income of €76 thousand from Spark since the date of the Affinitas / Spark Merger.
 
Income tax benefit (expense)
 
Income tax benefit for the year ended December 31, 2017, was €84 thousand compared to income tax expense of €1,082 thousand for the year ended December 31, 2016. The income tax benefit during the year ended December 31, 2017 consists of €67 thousand of current income tax expense and €159 thousand of deferred tax benefit relating to the addition of net operating loss carryforwards, offset by an expense of €8 thousand from origination and reversal of temporary differences, mainly attributable to intangible assets recognized as a result of the Affinitas / Spark Merger and deferred taxes on the fair value adjustment on deferred income.
 
The expense for income tax during the year ended December 31, 2016 consists of €752 thousand of current income tax expense and €541 thousand deferred tax expense relating to the use of net operating loss carryforwards, offset by an income tax benefit of €211 thousand from origination and reversal of temporary differences, mainly attributable to intangible assets recognized as a result of the Samadhi Acquisition and deferred taxes on the fair value adjustment on deferred income.
 

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Discontinued operations.
 
The loss from discontinued operations during the year ended December 31, 2016 was €632 thousand and relates to Affinitas’s interest in Top 10 Media UG and its subsidiary, Top 10 Advantage GmbH (together, “Top 10”). The equity interest was sold on December 29, 2016 for gross proceeds of €250 thousand. The entities generated losses from operating activities of €1,013 thousand during 2016. Net assets at the time of the sale amounted to €(131) thousand.
 
Total comprehensive (loss) income.
 
Total comprehensive loss was €6,457 thousand for the year ended December 31, 2017, compared to total comprehensive income of €691 thousand for the year ended December 31, 2016. The decrease in total comprehensive income was primarily due to higher professional fees and other integration costs resulting from the Affinitas / Spark Merger in 2017.

B.    Liquidity and capital resources.
 
Spark Networks’ ongoing liquidity requirements arise primarily from working capital needs, research and development requirements and the repayment of debt. In addition, Spark Networks may use liquidity to fund acquisitions or make other investments. Sources of liquidity are cash balances and cash flows from operations and from time to time, Spark Networks may obtain additional liquidity through the issuance of equity or debt. As of December 31, 2018, Spark Networks had cash and cash equivalents of €11,095 thousand.
 
We believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs for working capital, capital expenditures and contractual obligations, for at least the next 12 months. We do not anticipate requiring additional capital; however, if required or desirable, we may utilize our revolving credit facility, raise additional debt or issue additional equity in the private or public markets.
 
Cash Flows
 
The following table summarizes Spark Networks´ cash flows for the periods presented: 
 
 
December 31,
(in € thousands)
 
2018
 
2017
 
2016
Net cash inflow (outflow) from operating activities
 
8,457

 
(1,180
)
 
6,840

Cash inflow (outflow) from investing activities
 
(3,531
)
 
2,388

 
(7,617
)
Cash inflow (outflow) from financing activities
 
(2,309
)
 
(885
)
 
5,854

Net change in cash and cash equivalents
 
2,617


323


5,077

 
Operating Activities
 
During the year ended December 31, 2018, net cash inflow was €8,457 thousand, primarily resulting from non-cash charges of €11,550 thousand and cash increases from operating assets and liabilities of €452 thousand, offset by Spark Networks’ net loss of €3,103 thousand and interest payments of €442 thousand. Net cash provided by changes in operating assets and liabilities for the year ended December 31, 2018 consisted primarily of a €4,209 thousand increase from changes in other working capital, a €932 thousand change in tax positions, and a €112 thousand cash increase from other operating assets and liabilities, offset by a €3,895 thousand decrease in contract liabilities and a €906 thousand change in provisions.
 
Investing Activities
 
During the year ended December 31, 2018, cash outflow from investing activities was €3,531 thousand as a result of the capitalization of internally generated software of €3,219 thousand and purchases of fixed assets of €312 thousand.
 

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Financing Activities
 
During the year ended December 31, 2018, cash outflow from financing activities was €2,309 thousand as a result of €6,157 thousand in shareholder loan repayments, cash merger consideration payments to Affinitas shareholders of €5,730 thousand, and cash paid for settlement of share-based payment arrangements of €3,161 thousand, offset by €12,036 thousand in net proceeds from bank loans, €483 thousand in proceeds from the exercise of stock options, and €220 thousand in proceeds from shareholder loans.
 
Inflation
 
Spark Networks believes that any effect of inflation at current levels will be minimal. Historically, Spark Networks has been able to increase prices at a rate equal to or greater than that of inflation and believes that it will continue to be able to do so for the foreseeable future. In addition, Spark Networks has been able to maintain a relatively stable variable cost structure for its products due, in part, to a continued optimization of marketing spend.
 
Termination of Loan Agreement relating to Affinitas GmbH and entry into New Debt Financing
 
On March 15, 2018, Affinitas entered into a termination agreement (the “Termination Agreement”) to its Loan Agreement dated as of September 2016 (the “Loan Agreement”), by and among Affinitas and certain persons and entities, including certain of its stockholders and officers, named as lenders thereunder (the “Lenders”), pursuant to which the Lenders had granted Affinitas certain loans with an interest rate of 8% per annum maturing on June 30, 2018 (the “Type A Loans”) and certain loans with an interest rate of 9% per annum maturing on March 31, 2019 (the “Type B Loans”) in an aggregate principal amount of €5.850 million (€1.850 million of which was under the Type A Loans and €4.0 million of which was under the Type B Loans). Pursuant to the terms of the Termination Agreement, in exchange for the early termination of the loans under the Loan Agreement effective as of March 15, 2018 and the repayment in full of the then outstanding principal amount of the loans under the Loan Agreement of €5.850 million, the parties agreed to an early termination fee of €307 thousand, consisting of a 2% fee on the repaid principal amount of the Type A loans and a 6.75% fee on the repaid principal amount of the Type B loans. In addition, the parties agreed that interest on the loans of approximately €40 thousand under the Loan Agreement was paid in full for the month of March 2018. All payments under the Termination Agreement were made on or before March 31, 2018.

Entry into €25 million Senior Facilities Agreement
On March 28, 2018, Spark Networks and Silicon Valley Bank entered into a four-year €25 million Senior Facilities Agreement (the "Senior Facilities Agreement"). The Senior Facilities Agreement provides for a multicurrency term loan facility in an aggregate amount equal to €15 million (the “Term Loan Facility”) and a multicurrency revolving credit facility in an aggregate amount equal to €10 million (the “Revolving Credit Facility” and, together with the Term Loan Facility, the “Facilities”). In addition, subject to the terms and conditions of the Senior Facilities Agreement, including compliance with certain financial covenants, Spark Networks may incur additional incremental facilities in an aggregate amount of up to €35 million.
Borrowings under the Facilities bear interest at a rate equal to LIBOR for deposits in the applicable currency plus an applicable margin ranging from 2.5% to 3.0% to be determined based on the net leverage ratio (as defined in the Facilities) for the most recently completed 12 month period ending on the last day of the fiscal year or quarterly period as applicable. The applicable margin and interest rate in effect for borrowings under the Term Loan Facility as of December 31, 2018 was 2.5%.
In addition to paying interest on outstanding principal under the Facilities, Spark Networks is required to pay a commitment fee to the lenders under the Revolving Credit Facility in respect of the unutilized commitments thereunder. The commitment fee rate is 0.60% per annum, and the Revolving Credit Facility currently has €10 million of undrawn availability.
Upon closing, a one-time facility fee of €150 thousand was payable, of which €90 thousand was allocated to the Term Loan Facility and €60 thousand was allocated to the Revolving Credit Facility. The facility fee on the Term Loan Facility is reflected as a debt discount and is deducted from the carrying value of the borrowings and amortized using the effective interest method. The facility fee on the Revolving Credit Facility is capitalized as a prepayment and amortized through the maturity of the Facilities on March 31, 2022. The facility fee is amortized to Interest expense and similar charges in the Consolidated Statements of Operations and Comprehensive Loss/Income.

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The Facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, the Company's ability and the ability of its subsidiaries to: incur additional indebtedness, create liens, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions and make share repurchases, make certain acquisitions, engage in certain transactions with affiliates, and change lines of business.
In addition, the Facilities require the following financial covenants to be maintained: (i) a fixed charge coverage ratio (as defined in the Facilities) of no less than 1:25 to 1:00 (other than for the first quarter of 2019 when it shall be no less than 1.10 to 1.00), (ii) a net leverage ratio of no greater than 2.50 to 1.00 (declining to 2.25 to 1.00 for 12-month periods ending June 30, 2019, September 30, 2019, December 31, 2019, and March 31, 2020, and declining further to 2.00 to 1.00 for 12-month periods ending June 30, 2020 and thereafter), and (iii) a minimum liquidity threshold of €5 million until March 31, 2019, consisting of available cash funds and availability under the Revolving Credit Facility. The Facilities also contain certain customary affirmative covenants and events of default, including a change of control. Spark Networks is in compliance with all of its debt covenants as of December 31, 2018.
The Term Loan Facility amortizes in equal quarterly installments of €938 thousand commencing on June 29, 2018, while principal amounts outstanding under the Revolving Credit Facility are due and payable in full at maturity. As of December 31, 2018, the outstanding principal balance of the Term Loan Facility is €12,098 thousand, and there were no outstanding borrowings under the Revolving Credit Facility.
 
C.    Research and development, patents and licenses, etc.
 
As of December 31, 2018, we had two issued U.S. patents and no pending patent applications in the United States.

Investing in product and development initiatives is a key part of our strategy. We are currently developing a new, scalable and unified technology platform that will support the Company’s future growth. Our new platform will be architected and built with a particular emphasis on supporting the mobile applications that many of our members utilize to access our products. With a single, shared platform to power our sites, we expect to match subscribers across brands, reduce the time and resources required to launch new brands or integrate potential acquisitions, and quickly adopt new features, trends and consumer preferences. We expect to launch our new technology platform in 2019.

Implementing new systems carries substantial risk, including implementation delays, cost overruns, disruption of operations, potential loss of data or information, and lower customer satisfaction resulting in lost customers or sales, many of which are outside Spark Networks’ control. If Spark Networks does not implement this platform successfully, its ability to perform key business processes could be disrupted and its financial performance could be adversely affected. Currently, Spark Networks believes it has sufficient cash resources on hand to accomplish the enhancements contemplated.

D.    Trend information.
 
Spark Networks’ performance each year is affected by the ability to attract and retain paying subscribers, particularly within the North American market. In recent years, we have grown our North American market share through (i) the introduction of established European brands such as EliteSingles, (ii) the launch of new brands such as SilverSingles, and (iii) acquiring established North American brands such as Jdate, Christian Mingle, and JSwipe. Going forward, we expect to continue to allocate significant marketing capital towards North America as we look to drive both the organic growth of our existing brand portfolio and expansion through the launch of new or acquired brands.
 
Additionally, as mentioned above, Spark Networks is currently in the process of developing a new technology platform.
 
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the year ended December 31, 2018 that are reasonably likely to have a material adverse effect on our revenue, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
 

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E.    Off-balance sheet arrangements.
 
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not have any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts.

F.    Contractual obligations.
 
The following table describes our contractual commitments and obligations as of December 31, 2018:
(in € thousands)
 
Less than 1 year
 
1 - 3 years
 
3 - 5 years
 
More than 5 years
 
Total
Operating lease commitments
 
1,225

 
1,003

 
33

 

 
2,261

Debt obligations
 
4,020

 
7,758

 
943

 

 
12,721

Other commitments and contingencies
 
968

 
53

 

 

 
1,021

Total contractual obligations
 
6,213


8,814


976




16,003

 
We had non-cancelable contractual obligations consisting of operating lease commitments, debt obligations, and other non-cancelable commitments and obligations. Amounts in the table reflect payments due for Spark Networks' principal administrative office space and related premises in Berlin, Germany, under an operating lease agreement that expires in January 2022, as well as payments for office space within the United States, and the lease of certain office equipment. Amounts also reflect the contractually required principal and interest payments payable under the Senior Facilities Agreement entered into on March 28, 2018. Other commitments and obligations totaled €1,021 thousand and primarily relate to a legal settlement and contracts with marketing service providers. For contingences related to our tax positions, we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months. As a result, these amounts are not included in the table above.
 
G.    Safe Harbor