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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, 2019
 
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)
 
Bert Althaus, 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
Trading Symbols(s)
Name of each exchange on which registered
American Depositary Shares each representing one-tenth of an ordinary share
LOV
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. 2,605,689 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
 
EXPLANATORY NOTE

Spark Networks SE (the “Company”) is relying on the order issued by the U.S. Securities and Exchange Commission (Release No. 34-88465) to extend the filing date of the Company’s Annual Report on Form 20-F for the year ended December 31, 2019. The order provides public companies with up to an additional 45 days to file with the Securities and Exchange Commission reports under the Securities Exchange Act of 1934, as amended, including Annual Reports on Form 20-F, if the company is unable to meet the filing deadline due to circumstances relating to the novel coronavirus, COVID-19. The Company’s operations and business have been disrupted due to the unprecedented conditions and travel restrictions surrounding the COVID-19 pandemic, and have resulted in the Company’s employees, including its accounting and finance team, working remotely from home. These disruptions have interfered with management’s ability to work with its independent accountants, professional advisors and support staff in order to complete the Company’s financial statements and related disclosures included in the Company’s Form 20-F.




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 United States 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 regarding Spark Network’s growth opportunities and initiatives, statements regarding the Company’s building of global, shared services for its dating brands' technology platforms, statements relating to the benefits and integration of Zoosk to the Company’s business, 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 acquisition of Zoosk, 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; Spark Networks' ability to comply with new and evolving regulations relating to data protection and data privacy; general competition and price measures in the market place; risks related to the duration and severity of the COVID-19 pandemic and its impact on Spark Networks’ business; the effects of social distancing, shelter-in-place orders and increased unemployment, in each case, as a result of the COVID-19 pandemic, on Spark Networks’ business and the online dating industry; the impact of the COVID-19 pandemic on the U.S. and global economies and financial markets generally and on Spark Networks' ability to access capital; 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 and Spark Networks’ results of operations involve risks and uncertainties, many of which are outside the Company’s control, and any one of which, or a combination of which, could materially affect Spark Networks’ results of operations and whether the forward-looking statements ultimately prove to be correct. In light of the significant uncertainties inherent in the forward-looking statements, readers should not place undue reliance on forward-looking statements.
 
These forward-looking statements speak only as of the date on which the statements were made and Spark Networks does not undertake any obligation to update or revise any forward-looking statements made in this annual report or elsewhere as a result of new information, future events, or otherwise, except as required by law.
 
In addition to other factors and matters contained or incorporated in this document, the factors discussed under “Risk Factors” could cause actual results to differ materially from those discussed in the forward-looking statements.
 
Many of the factors that will determine Spark Networks’ future results are beyond Spark Networks’ ability to control or predict. Spark Networks cannot guarantee any future results, levels of activity, performance, or achievements.
 
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found elsewhere in this annual report.
 
Spark Networks cautions further that, as it is not possible to predict or identify all relevant factors that may impact forward-looking statements, the foregoing list should not be considered a complete statement of all potential risks and uncertainties.
 
Readers should carefully consider the cautionary statements contained or referred to in this section in connection with any subsequent forward-looking statements that may be issued by Spark Networks or persons acting on behalf of Spark Networks.

Note regarding trademarks

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 2019, 2018, and 2017 has been derived from our audited consolidated financial statements as of December 31, 2019, 2018 and 2017 and for the years then ended. The financial data has been derived from our financial statements which have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and audited in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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,
 
2019
 
2018 (2)
 
2017 (2)
 
2019
 
(in € thousands)
 
(in $ thousands)(1)
Revenue
149,141

 
103,438

 
83,529

 
166,963

Cost of revenue
(103,302
)
 
(69,490
)
 
(58,776
)
 
(115,647
)
Gross profit
45,839

 
33,948

 
24,753

 
51,316

Other income
1,558

 
240

 
54

 
1,744

Other operating expenses
(57,211
)
 
(36,299
)
 
(32,030
)
 
(64,047
)
Sales and marketing expenses
(6,108
)
 
(4,938
)
 
(5,540
)
 
(6,838
)
Customer service expenses
(6,830
)
 
(4,626
)
 
(3,971
)
 
(7,646
)
Technical operations and development expenses
(19,433
)
 
(7,195
)
 
(6,428
)
 
(21,755
)
General and administrative expenses
(24,840
)
 
(19,540
)
 
(16,091
)
 
(27,808
)
Operating loss
(9,814
)
 
(2,111
)
 
(7,223
)
 
(10,987
)
Finance income
4,236

 
478

 
239

 
4,742

Finance costs
(13,186
)
 
(1,436
)
 
(782
)
 
(14,762
)
Net finance expenses
(8,950
)
 
(958
)
 
(543
)
 
(10,020
)
Loss before taxes
(18,764
)
 
(3,069
)
 
(7,766
)
 
(21,007
)
Income tax benefit (expense)
3,590

 
(811
)
 
720

 
4,019

Net loss
(15,174
)
 
(3,880
)
 
(7,046
)
 
(16,988
)
Other comprehensive income/(loss)
3,661

 
1,617

 
(883
)
 
4,098

Total comprehensive loss
(11,513
)
 
(2,263
)
 
(7,929
)
 
(12,890
)
Loss per share
 
 
 
 
 
 
 
Basic earnings/(loss) per share
€
(7.68
)
 
€
(2.99
)
 
€
(30.63
)
 
$
(8.60
)
Diluted earnings/(loss) per share
€
(7.68
)
 
€
(2.99
)
 
€
(30.63
)
 
$
(8.60
)
 
 
 
 
 
 
 
 
(1) Amounts in this column are not audited and have been converted from Euros to United States dollars solely for the convenience of the reader. Balance sheet positions and income statement positions are converted at the exchange rate on December 31, 2019 of $1.1234 per Euro and the average exchange rate from January 1 until December 31, 2019 of $1.1195 per Euro, respectively.

(2) Comparative figures for the years ended December 31, 2018 and 2017 were restated for errors. For further information, see Part III, Item 18. Financial Statements, Note 8.4.     


    

4




Statement of Financial Position Data: 
 
 
Years Ended December 31,
 
 
2019
 
2018 (2)
 
2019
 
 
(in € thousands)
 
(in $ thousands)(1)
Cash and cash equivalents
 
15,450

 
11,095

 
17,357

Current trade and other receivables
 
11,911

 
6,936

 
13,381

Intangible assets and goodwill
 
278,862

 
33,015

 
313,274

Total Assets
 
332,042

 
63,872

 
373,016

Total Liabilities
 
189,922

 
46,957

 
213,358

Total Shareholders' Equity
 
142,120

 
16,915

 
159,658

 
 
 
 
 
 
 
 
(1) Amounts in this column are not audited and have been converted from Euros to United States dollars solely for the convenience of the reader. Balance sheet positions and income statement positions are converted at the exchange rate on December 31, 2019 of $1.1234 per Euro and the average exchange rate from January 1 until December 31, 2019 of $1.1195 per Euro, respectively.

(2) Comparative figures for the year ended December 31, 2018 were restated for errors. For further information, see Part III, Item 18. Financial Statements, Note 8.4.


Key Performance Indicators:
 
Registrations(1)
 
Average Paying
Subscribers(2)
 
Monthly ARPU(3)
 
Adjusted EBITDA
(in € thousands)
2019
12,718,080

 
731,088

 
€
17.00

 
€
8,178

2018 (4)
10,144,173

 
483,413

 
€
17.83

 
€
9,839

2017 (4)
8,451,633

 
379,403

 
€
18.35

 
€
4,497

 
 
 
 
 
 
 
 
(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.

(4) Comparative figures for the years ended December 31, 2018 and 2017 were restated for errors. For further information, see Part III, Item 18. Financial Statements, Note 8.4.











5


The following table reconciles Net loss to Adjusted EBITDA(2)(4) for the periods presented:
 
Years Ended December 31,
 
2019
 
2018 (3)
 
2017 (3)
 
2019
 
(in € thousands)
 
(in $ thousands)(1)
Net loss
(15,174
)
 
(3,880
)
 
(7,046
)
 
(16,988
)
Net finance expenses
8,950

 
958

 
543

 
10,020

Income tax expense (benefit)
(3,590
)
 
811

 
(720
)
 
(4,019
)
Depreciation and amortization
7,696

 
3,565

 
3,084

 
8,616

Impairment of intangible assets and goodwill
703

 
3,324

 
25

 
787

Share-based compensation expense
2,335

 
4,091

 
488

 
2,614

Acquisition costs and other
7,258

 
970

 
8,123

 
8,126

Adjusted EBITDA (2)(4)
8,178

 
9,839

 
4,497

 
9,156

 
 
Years Ended December 31,
 
2019
 
2018
 
2017
 
2019
Summary of acquisition costs and other
(in € thousands)
 
(in $ thousands)(1)
Gain realized upon sublease commencement
(1,259
)
 
—

 
—

 
(1,409
)
Transaction and advisory fees
4,761

 
264

 
3,995

 
5,330

Merger integration costs
493

 
101

 
2,042

 
552

Other employee payments
2,052

 
—

 
1,053

 
2,297

Severance costs
1,211

 
316

 
430

 
1,356

Other
—

 
289

 
603

 
—

Total adjustments
7,258


970


8,123


8,126

 
 
 
 
 
 
 
 
(1) Amounts in this column are not audited and have been converted from Euros to United States dollars solely for the convenience of the reader. Balance sheet positions and income statement positions are converted at the exchange rate on December 31, 2019 of $1.1234 per Euro and the average exchange rate from January 1 until December 31, 2019 of $1.1195 per Euro, respectively.    

(2) Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization ("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. This includes: (i) items such as share-based compensation, asset impairments, gains or losses on foreign currency transactions and interest expense, and (ii) items related to acquisitions or other costs that are non-recurring, infrequent, or unusual in nature including gains realized upon sublease commencement, transaction and advisory fees, merger integration costs, other employee payments, and severance. 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.


6


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.

(3) Comparative figures for the years ended December 31, 2018 and 2017 were restated for errors. For further information, see Part III, Item 18. Financial Statements, Note 8.4.

(4) Adjusted EBITDA as of December 31, 2019 excludes a fair value adjustment of €14,371 thousand which reduced the value of contract liabilities acquired from Zoosk. The fair value of contract liabilities acquired represents the estimated cost plus a reasonable profit margin to perform services related to subscriptions paid by Zoosk's customers as of July 1, 2019. The Group's Adjusted EBITDA as of December 31, 2019 would have been €22,549 thousand assuming this fair value adjustment to contract liabilities (which represents a reduction in future revenues on acquired subscriptions) in connection with the Spark Networks / Zoosk Merger (as defined below) would not have been made. The Group previously reported in its preliminary earnings release for the year ended December 31, 2019, Adjusted EBITDA including the fair value adjustment to such contract liabilities. The Group modified its calculation of Adjusted EBITDA in this Annual Report on Form 20-F to exclude such contract liabilities as provided herein.
 
Exchange Rate Information:
 
We publish our financial statements in Euros. Fluctuations in the exchange rate between the Euro and the United States dollar will affect the United States 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 United States dollar for the periods indicated. 
 
 
High
 
Low
 
Average
 
Year End
Year Ended December 31, 2019
 
1.1535

 
1.0889

 
1.1195

 
1.1234

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

 
Months ended
 
High
 
Low
 
Average
 
Month End
January 2019
 
1.1535

 
1.1341

 
1.1416

 
1.1488

February 2019
 
1.1471

 
1.1260

 
1.1351

 
1.1416

March 2019
 
1.1387

 
1.1218

 
1.1302

 
1.1235

April 2019
 
1.1321

 
1.1123

 
1.1238

 
1.1218

May 2019
 
1.1245

 
1.1134

 
1.1185

 
1.1151

June 2019
 
1.1394

 
1.1185

 
1.1293

 
1.1380

July 2019
 
1.1349

 
1.1115

 
1.1218

 
1.1151

August 2019
 
1.1222

 
1.1036

 
1.1126

 
1.1036

September 2019
 
1.1096

 
1.0889

 
1.1004

 
1.0889

October 2019
 
1.1173

 
1.0898

 
1.1053

 
1.1154

November 2019
 
1.1158

 
1.0982

 
1.1051

 
1.0982

December 2019
 
1.1234

 
1.1023

 
1.1113

 
1.1234


B.
Capitalization and Indebtedness.
 
Not applicable.
 
C.
Reasons for Offer and Use of Proceeds.
 
Not applicable.
 

7


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 Relating 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. 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.
 
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 72 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, 2019, Spark Networks had an average of approximately 731,000 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, 2019, 2018 and 2017, subscription revenue accounted for over 97% 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.
 

8


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. In the United States, numerous 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.

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 July 1, 2019, Spark Networks consummated the acquisition of Zoosk, Inc. ("Zoosk"), pursuant to which Zoosk became a wholly owned subsidiary of Spark Networks ("the Spark Networks / Zoosk Merger"). Zoosk is a global online dating platform, allowing its members to discover and communicate with each other from their mobile phones, tablets, or personal computers. 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 publicly listed Delaware corporation (“Spark”) and owner of the Jdate, Christian Mingle, and JSwipe platforms, among others. 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;
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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
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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.


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Although Spark Networks expects the Spark Networks / Zoosk Merger will result in synergies and other benefits, those synergies and benefits may not be realized or may not be realized within the expected time frame.

The ability of Spark Networks to realize the anticipated benefits of the Spark Networks / Zoosk Merger will depend, to a large extent, on the combined company’s ability to integrate the businesses of Spark Networks and Zoosk in a manner that facilitates growth opportunities and achieves projected cost savings and revenue growth without adversely affecting current revenues and investments in future growth. In addition, some of the anticipated synergies may not occur for a significant time period and will require substantial capital expenditures in the near term to be fully realized, such as the ones required to harmonize Spark Networks' technology platforms. Even if Spark Networks is able to integrate the business and operations of Zoosk successfully, the anticipated benefits of the Spark Networks / Zoosk Merger, including the expected synergies, may not be realized fully or at all or may take longer to realize than expected.

The combination of two independent businesses is complex, costly and time-consuming and may divert significant management attention and resources. The difficulties of combining the operations of the companies include, among others:

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the diversion of management attention to integration matters;
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difficulties in integrating operations and systems, including intellectual property and communications systems, administrative and information technology infrastructure and financial reporting and internal control systems;
•
challenges in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the two companies;
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differences in control environments, cultures, and auditor expectations may result in future material weaknesses, significant deficiencies, and/or control deficiencies while we work to integrate the companies and align guidelines and practices;
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difficulties in attracting and retaining key personnel;
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challenges in retaining existing customers and obtaining new customers;
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difficulties in achieving anticipated cost savings, synergies, business opportunities, financing plans and growth prospects;
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difficulties in managing the expanded operations of a significantly larger and more complex company;
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the transition of management to the combined company management team, and the need to address possible differences in corporate cultures and management philosophies;
•
known or potential unknown liabilities of Zoosk that are larger than expected; and
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other potential adverse consequences and unforeseen increased expenses or liabilities associated with the acquisition.

Some of these factors are outside of the control of Spark Networks, and any one of them could result in lower revenues, higher costs and diversion of management time and energy, which could materially impact the business, financial condition and results of operations of Spark Networks.

A failure to successfully build global, shared services for our dating brands' technology platforms could have a material adverse effect on the Company’s business.

In 2019, Spark Networks began developing a new, scalable and unified technology platform with a particular emphasis on supporting the mobile applications that many of its members utilize to access its products. To mitigate a prolonged interruption in development, Spark Networks expanded the development of the unified platform in 2019 to modular technology services that it anticipates will provide the Company with global, highly flexible, shared technology for all of its global dating brands. These new services are expected to support future growth and to harmonize key processes. Spark Networks believes that these new services will be essential to the Company’s growth initiatives and business plans. Such technology service implementations are complex and time-consuming and involve significant expenditures on system software and implementation activities, as well as changes in business processes. A failure or prolonged interruption in our technology services, or any difficulty encountered in upgrading these services, may compromise the Company’s ability to meet customer needs, or to operate its business without a material adverse effect on its financial condition.


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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 consumer facing internet players or smart phone apps including, but not limited to, search engines and social networks, 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.

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, Poland 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, 2019, the affected EliteSingles brands' revenue constituted approximately 8.9% of Spark Networks’ overall revenue.
 
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

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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 2019, 2018 and 2017, 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 2020 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. 

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 2019, cost of revenue substantially increased compared to the prior year as a result of growing Spark Networks' North American business with the addition of Zoosk following the Spark Networks / Zoosk Merger in July 2019. 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 2017, 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.
 

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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 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, it has experienced cyberattacks, hacking and similar disruptions in the past and, while to date none of those incidents has been material to Spark Networks' operations, it does expect to continue to face such threats in the future.


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Any cyber or similar attack Spark Networks 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 loss of funds, 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 cyberattack or not, could be 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.
 
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.
 

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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.
 
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,

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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.

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. While Spark Networks continuously develops and maintains systems to protect the security, integrity and confidentiality of this information, Spark Networks has experienced data privacy incidents in the past. Accordingly, Spark Networks cannot guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite its efforts, including as a result of cyberattacks or other fradulent or illegal activity.

Spark Networks also retains third party vendors to store some of the personal user and other confidential information received, processed, stored and transmitted by Spark Networks, and some of Spark Networks' advertisers and partners also may store information that Spark Networks shares with them. If any of these third parties fail to implement adequate data-security practices or fail to comply with Spark Networks’ terms and policies, user 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’ user data. Spark Networks learned in May 2020 that an unauthorized third party gained access in January 2020 to Zoosk customer data stored in a database hosted by a third party. Although the database did not contain financial or credit card data or taxation or government identity information, it has resulted in investigation and remediation costs and could damage Spark Networks’ reputation.

If we experience data privacy incidents again in the future, Spark Networks 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.
 
The varying and rapidly-evolving regulatory framework on privacy and data protection across jurisdictions could result in claims, changes to the Company’s business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm the Company’s business.

There are numerous laws in the countries in which the Company operates regarding privacy and the storage, sharing, use, processing, disclosure and protection of this kind of information, the scope of which are constantly changing, and in some cases, inconsistent and conflicting and subject to differing interpretations, as new laws of this nature are proposed and adopted. For example, in 2016, the European Commission adopted the General Data Protection Regulation ("GDPR"), a comprehensive European Union privacy and data protection reform that became effective in May 2018. The act applies to companies established in the European Union or otherwise providing services or monitoring the behavior of people located in the European Union and provides for significant penalties in case of non-compliance as well as a private right of action for individual claimants. GDPR will continue to be interpreted by EU data protection regulators, which may require that the Company make changes to the Company’s business practices, and could generate additional risks and liabilities. The European Union is also considering an update to the EU’s Privacy and Electronic Communications (so called “e-Privacy”) Directive, notably to amend rules on the use of cookies. The Court of Justice of the European Union issued a judgment in October 2019 indicating that affirmative consent would be required for non-essential tracking tools. At the same time, many countries in which the Company does business have already adopted or are also currently considering adopting privacy and data protection laws and regulations. Multiple legislative proposals concerning privacy and the protection of user information are being considered by the United States Congress. Various United States state legislatures, including those in New York, Washington, Virginia, and Illinois, intend to consider privacy legislation in 2020. Other United States state legislatures have already passed and enacted privacy legislation, most prominent of which is the California Consumer Privacy Act of 2018, which was signed into law in June 2018 and came into effect on January 1, 2020. A ballot initiative to address privacy concerns has also been filed with the Office of the California Attorney General and, provided it meets appropriate legal requirements, is expected to be presented to

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California voters on the November 2020 ballot. Additionally, the Federal Trade Commission has increased its focus on privacy and data security practices at digital companies.
 
While the Company 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 the Company 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. Additionally, to the extent multiple state-level laws are introduced with inconsistent or conflicting standards and there is no federal law to preempt such laws, compliance with such laws could be difficult to achieve and the Company could be subject to fines and penalties in the event of non-compliance.

Any failure or perceived failure by Spark Networks (or the third parties with whom the Company has contracted to process such information) to comply with applicable privacy and security laws, policies or related contractual obligations, or any compromise of security that results in unauthorized access, or the use or transmission of, personal user information, could result in a variety of claims against the Company, including governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties, and adverse publicity. When such events occur, the Company’s reputation may be harmed, the Company may lose current and potential users and the competitive positions of various brands could be diminished, any or all of which could adversely affect the Company's business, financial condition and results of operations.

Lastly, compliance with the numerous laws in the countries in which the Company operates regarding privacy and the storage, sharing, use, processing, disclosure and protection of personal data could be costly, as well as result in delays in the development of new products and features as resources are allocated to these compliance projects, particularly as these laws become more comprehensive in scope, more commonplace and continue to evolve. In addition, the varying and rapidly-evolving regulatory frameworks across jurisdictions may result in decisions to introduce products in certain jurisdictions but not others or to cease providing certain services or features to users located in certain jurisdictions. If these costs or other impacts are significant, the Company’s business, financial condition and results of operations could be adversely affected.

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, 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

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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.
 
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 worldwide. 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;
•competitive environments that favor local businesses;
•limitations on the level of intellectual property protection; and
•trade sanctions, political unrest, terrorism, war, health and safety epidemics, or the threat of any of these events.

While Spark Networks employs people from 45 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 faces risks related to health epidemics and other outbreaks such as COVID-19, which could significantly change consumer behavior and materially and adversely impact its business.

Spark Networks' business could be materially adversely impacted by epidemics or pandemics, such as the COVID-19 pandemic. The COVID-19 pandemic has, or is likely to, significantly negatively impact the business in the following ways:

•The COVID-19 pandemic has resulted and is likely to continue to result in volatility and uncertainty in international markets, including as a result of prolonged economic downturn or recession. Consumer sentiment in many of Spark Networks' countries of operation has already been adversely affected, which has led to a reduction in discretionary spending, and many of our customers may be unable to make payments for our services. In addition, Spark Networks may not have access to capital, including from bank lenders, on the terms or timelines previously obtained, or may have difficulty complying with covenants in its existing bank facilities.
•Spark Networks may incur increased operating costs during the term of the pandemic as all Spark Networks employees are working remotely and require respective equipment. Working remotely also exposes our employees and our networks to increased risks of cyberattacks.
•Working remotely during the pandemic could negatively impact employee productivity and the development of the Company's products.


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As a result, the effects of the COVID-19 pandemic may adversely affect the Company's business, financial condition, and results of operations. Spark Networks may be required, or may decide, to reduce its expenses, including through a review of its size of operations and of the remuneration of its work force. Any decision to reduce expenses may negatively impact Spark Networks' operations and reputation, which may lead to a decline in its usage indicators and revenue. Further, the COVID-19 pandemic may lead to unrest, instability and crisis in Spark Networks' countries of operation, which may further negatively impact its business. The COVID-19 pandemic may also negatively affect Spark Networks' ability to change the funding of the business, as its business results may be negatively affected and as markets and investors may not be willing to invest in companies such as Spark Networks.

Spark Networks’ business is subject to complex and evolving United States and international laws and regulations. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm Spark Networks’ business.

Spark Networks is subject to a variety of laws and regulations in the United States and abroad that involve matters that are important to or may otherwise impact its business, including, among others, broadband internet access, online commerce, advertising, user privacy, data protection, intermediary liability, protection of minors, consumer protection, sex-trafficking, taxation and securities law compliance. The introduction of new products, expansion of Spark Networks’ activities in certain jurisdictions, or other actions that it may take may subject Spark Networks to additional laws, regulations or other government scrutiny. In addition, foreign laws and regulations can impose different obligations or be more restrictive than those in the United States.

These United States federal, state, municipal and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which the Company operates, and may be interpreted and applied inconsistently from state to state and country to country and inconsistently with the Company’s current policies and practices. These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede the development of new products, require that the Company change or cease certain business practices, result in negative publicity, increase our operating costs, require significant management time and attention, and subject the Company to remedies that may harm its business, including fines or demands or orders that the Company modify or cease existing business practices.

Proposed or new legislation and regulations could also adversely affect the Company’s business, including the adoption of any laws or regulations that adversely affect the popularity or growth in use of the internet or the Company’s services, including laws or regulations that undermine open and neutrally administered internet access. The promulgation of new laws or regulations, or the new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably impact the Company’s business or its ability or the manner in which the Company provide the Company’s services, could require us to change certain aspects of the Company’s business and operations to ensure compliance, which could decrease demand for services, reduce revenues, increase costs and subject us to additional liabilities.
    
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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The Company’s ability to comply with the Senior Secured Facilities Agreement is subject to its future performance and other factors.

On July 1, 2019, in connection with the Spark Networks / Zoosk Merger, the Company entered into the Senior Secured Facilities Agreement that provides for a term loan facility in an aggregate amount equal to $120 million (€106 million) (the “Term Loan Facility”) and a revolving credit facility in an aggregate amount equal to $5 million (€4 million) (the “Revolving Credit Facility”) and, together with the Term Loan Facility, the “Facilities.” Borrowings under the Senior Secured Facilities Agreement mature on July 1, 2023 and are secured by substantially all of the Company’s assets. The Senior Secured Facilities Agreement contains certain financial covenants including quarterly testing of a maximum First Lien Net Leverage Ratio and a minimum Fixed Charge Coverage Ratio (each as defined in the Senior Secured Facilities Agreement) and monthly testing of a minimum liquidity covenant. Spark Networks’ ability to comply with these covenants in the future is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control, and there can be no assurance that the Company will be able to maintain compliance with these covenants in the future. The breach of any of the debt covenants could result in a default under the Senior Secured Facilities Agreement. Upon the occurrence of an event of default, the lenders could make an immediate demand of the amount outstanding under the credit facility. If a default was to occur and such a demand was to be made, there can be no assurance that the Company’s assets would be sufficient to repay the indebtedness in full. If any of these events were to occur, the Company’s ability to fund our operations could be seriously harmed.

Changes in how LIBOR is determined, or the potential replacement of LIBOR with an alternative reference rate, may adversely affect our interest expense.

Spark Networks' Senior Secured Facilities Agreement has an interest rate tied to the London Interbank Offered Rate (“LIBOR”). On July 27, 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced its intention to stop persuading or compelling banks to submit LIBOR quotations by the end of 2021. Spark Networks cannot predict the impact of the potential phase out of LIBOR on its debt agreement and interest rate. There can be no assurances as to what the alternative base rate may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. Spark Networks intends to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with its lender to ensure any transition away from LIBOR will have minimal impact on its financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR on its financial condition or whether the discontinuation of LIBOR would have a material adverse effect on its results of operations.

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), and Parship Elite Group (which operates the eHarmony, Parship and ElitePartner properties). 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. Some of Spark Networks’ competitors have longer operating histories, 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

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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.

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. 


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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 Eric Eichmann, Gitte Bendzulla and/or Bert Althaus, 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 Item 6.A. 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.

Spark Networks has experienced significant turnover in its top executives, and its business could be adversely affected by these and other transitions in its senior management team or if any of the resulting vacancies cannot be filled with qualified replacements in a timely manner.

During 2019, Spark Networks experienced significant turnover in its top executives, including the departures of its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer and the replacement of these positions with new officers.

Management transition is often difficult and inherently causes some loss of institutional knowledge, which could negatively affect the Company’s results of operations and financial condition. The company’s ability to execute our business strategies may be adversely affected by the uncertainty associated with these transitions and the time and board and management attention needed to fill the vacant roles could disrupt our business. Further, the Company cannot guarantee that it will not face similar turnover in the future. Although the Company generally enters into employment agreements with its executives, its executive officers are at-will employees. As a result, they may terminate their employment relationship with the Company at any time, and the Company cannot ensure that it will be able to retain the services of any of them. Spark Networks’ senior management’s knowledge of its business and industry would be difficult to replace, and any further turnover could negatively affect the Company’s business, growth, financial conditions, results of operations and cash flows.


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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 United States 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 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, most recently in light of the ongoing COVID-19 pandemic and the response by U.S. and international governments thereto, including the lowering of short-term interest rates by the U.S. Federal Reserve in the first quarter of 2020, and the potential global recession resulting therefrom. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. We may not be able to access cash or to incur indebtedness if the ongoing macroeconomic effects of the COVID-19 pandemic cause the closure of banks for an extended period of time or a sudden increase in requests for indebtedness at one time by many potential borrowers, either or both of which could overwhelm the banking industry.
 
While on December 31, 2019, Spark Networks had cash and cash equivalents of €15.5 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, including as a result of the COVID-19 pandemic, 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 €158.2 million of goodwill, €101.5 million of brands and trademarks and €19.1 million of other intangible assets as of December 31, 2019. 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.
 

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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 United States 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 United States Foreign Corrupt Practices Act of 1977, the United Kingdom 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 United States Department of Commerce. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties or curtailment of operations in certain jurisdictions and might adversely affect results of operations. In addition, actual or alleged violations could damage its reputation and ability to do business.
 
Failure to comply with United States federal securities laws and regulations applicable to public companies could result in an adverse effect on Spark Networks' business.
 
As a United States 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.
 
Spark Networks is currently a “foreign private issuer” under the rules and regulations of the SEC and is therefore permitted to file less information with the SEC than a United States issuer. As a result of the Spark Networks / Zoosk Merger, Spark Networks expects to lose its “foreign private issuer” status in 2020.
 
Spark Networks is currently 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 United States and other issuers. Moreover, Spark Networks is not required to file periodic reports and financial statements with the SEC as frequently or within the same time frames as United States companies with securities registered under the Exchange Act and is permitted to cease filing quarterly reports. Spark Networks currently prepares financial statements in accordance with IFRS and is not 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 currently 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 currently complies with, and intends to continue to comply with, NYSE American requirements applicable to United States issuers.


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As a result of the Spark Networks / Zoosk Merger, Spark Networks expects to lose its status as a “foreign private issuer” under current SEC rules and regulations as of the next measurement date at the end of its second fiscal quarter on June 30, 2020, because, among other things, more than 50% of the assets of Spark Networks will be located in the United States. As a result, beginning on January 1, 2021, Spark Networks 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. The conversion of the financial statements of Spark Networks from IFRS to U.S. GAAP will involve significant time and expense, and may result in the identification of differences between the accounting standards that could have a material impact on Spark Networks' consolidated financial statements. Management will need to evaluate the effectiveness of its disclosure controls and procedures and changes in internal control over financial reporting on a quarterly basis. In addition, Spark Networks expects to incur substantial costs in fulfilling the additional regulatory requirements applicable to a United States reporting company, and members of management will likely have to divert substantial time and resources from other responsibilities to ensure these additional regulatory requirements are fulfilled.
 
Spark Networks is currently 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 currently an EGC within the meaning of the Securities Act, as modified by the JOBS Act, and Spark Networks intends to take 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, United States dollar, Great British pound, Australian dollar, Canadian dollar, 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 United States dollar. To the extent that the United States 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. 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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United States 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 United States 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 United States 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 United States 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 United States investor to bring an original action in a German court predicated upon the civil liability provisions of the United States 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 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.
 

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United States investors could suffer adverse tax consequences if Spark Networks is characterized as a passive foreign investment company (“PFIC”) for United States 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 United States federal income tax purposes. If Spark Networks is characterized as a PFIC, United States 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 United States 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;

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•changes in regulatory policies or tax guidelines;
•changes or perceived changes in earnings or variations in operating results;
•any shortfall in revenue or net income from levels expected by investors or securities analysts; and
•general economic trends and other factors.

Your rights as a holder of ADSs representing ordinary shares of a German company organized as a European stock corporation may differ from your rights as a stockholder in a United States 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 United States 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 45% (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’

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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.

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 United States-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 United States 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.
 

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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.


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”), and Spark Networks Services GmbH (f/k/a Affinitas GmbH), a German limited company (“Affinitas”) following the completion of the merger between Spark and Affinitas (the “Affinitas / Spark Merger”). On August 29, 2017, Spark Networks SE changed its name from Blitz 17-655 SE to Spark Networks SE. Spark Networks SE is registered with the commercial register (Handelsregister) of the local court (Amtsgericht) of Munich, Germany, under the registration number HRB 232591 under the legal name Spark Networks SE. Spark Networks SE currently does not use a commercial name different from its legal name. Spark Networks SE has been formed for an unlimited duration.
 
On November 2, 2017, 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.

On July 1, 2019, Spark Networks SE completed the Spark Networks / Zoosk Merger whereby Spark Networks acquired 100% of Zoosk's shares for a combination of cash and Spark Networks ADSs. Prior to the Spark Networks / Zoosk Merger, Zoosk was an unrelated third party and owner of the Zoosk platform, which is a leading global online dating platform. The acquisition made Spark Networks the second-largest online dating company in North America in revenue. As of the date of the Zoosk acquisition, Zoosk became a wholly owned subsidiary of Spark Networks SE. Following the acquisition, Zoosk became a wholly owned subsidiary of Spark Networks, Inc. on October 17, 2019.

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 72 million users register with its dating platforms (which includes inactive accounts). Spark Networks currently operates one or more of its brands worldwide. Information regarding the geographical source of our revenue and data on our reportable segments can be found in Note 4.1 to our Consolidated Financial Statements included in this annual report.
 
Spark Networks’ vision is to be the world’s leader in premium and community-based dating. It 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 of our stakeholders: customers, shareholders and employees.”

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, 2019, 2018, and 2017, respectively. Subscription length ranges

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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 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 Verified Market Research estimates that in 2018, revenue within the global online personals industry exceeded $6.5 billion and projects the market size to reach $9.4 billion in 2026.

North America is currently the largest geographic market, representing approximately $3 billion in revenue, according to Canaccord Genuity. 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 and 2019 acquisitions of the largely North American brands; Jdate, Christian Mingle, JSwipe, and Zoosk.

According to a Pew Research study released in early 2020, the percentage of the United States population using online personals websites or mobile applications reached 30% and doubled compared to 2015. Members of the millennial generation (individuals under 37 years of age) tend to have the highest usage of online or mobile personals sites. However, adults over 65 years of age are the fastest growing demographic, with 13% of adults saying they have used a dating site or app.
 
Our Competitive Strengths
 
Diverse global platform.
 
Spark Networks operates a diverse global platform of premium online dating sites available worldwide. This diversified suite of dating sites allows Spark Networks to implement best practices from each of the Spark, Affinitas, and Zoosk 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 primarily tailored to quality dating with real users looking for love and companionship in a safe, comfortable environment. With shared values being one of the most important factors in successful, long-term relationships, the Spark Networks portfolio holds some of the most established and well-respected value-based dating brands in the world. Additionally, the Zoosk brand provides the potential to be turned into a high-quality product providing an additional option for a younger demographic looking for high-quality profiles.
 

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Operational and financial scale.
 
Spark Networks is the second-largest dating company in North America based on revenue. This allows for the operational and financial scale required for significant investments into new technologies and products, while also providing a better platform to attract and retain customers.
 
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.

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, Germany.
 
Spark Networks has assembled highly skilled teams with deep domain expertise across marketing, technology, and product within our headquarters in Berlin, Germany. Today, Berlin has a lower cost of living, and in turn, lower salaries than other major cities in Europe or North America. As a result, we require less capital to recruit and retain key employees. This cost advantage has allowed 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, JSwipe, and Zoosk. 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.

Cement and grow our leadership position in premium and community-based dating.

Spark Networks will invest in product innovation, brand building, customer acquisition and partnerships to provide the best products and strongest brands in the premium and community-based dating areas. We intend to develop solutions and strengthen our brands that speak to the specific needs of our target audiences.

Create global technology services to enable flexible and powerful dating platforms.
 
Spark Networks is developing new, scalable technology services that will support the Company’s future growth. Our new services will be architected and built with a particular emphasis on supporting all platforms and applications that many of our members utilize to access our products. With shared services to power our platforms, we expect to match subscribers across brands, reduce the time and resources required to launch new brands or to integrate potential acquisitions, and to quickly adopt new features, trends and consumer preferences.
 
Continue to help consolidate offerings across the dating industry through acquisitions and partnerships.

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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 several of its brands worldwide. While Spark Networks expects to enter new geographies in the future, its 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 United States 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 offerings and create a broader offering in these markets.
 
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, Zoosk, Jdate, Christian Mingle, SilverSingles and BlackSingles.com are registered trademarks in the United States. Spark Networks, Zoosk, Jdate and Christian Mingle are registered trademarks in the EU. We also have a number of other registered and unregistered trademarks, and many of our trademarks are also registered in other jurisdictions. Our rights to these registered trademarks are perpetual as long as we use them and renew them periodically. We also hold several United States patents that are important to our business.

34



We rely on internal and external controls, including applicable laws and regulations and contractual regulations with employees, contractors, customers and others, to protect and control access to our intellectual property rights.

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), and Parship Elite Group (which operates the eHarmony, Parship and ElitePartner properties). 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. For more information on the risks and related matters, see “Risk Factors-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 may not be able to protect its systems and infrastructure from cyberattacks and may be adversely affected by cyberattacks experienced by third parties,” “-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,” and “-The varying and rapidly-evolving regulatory framework on privacy and data protection across jurisdictions could result in claims, changes to the Company’s business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm the Company’s business.”
 


35


C.
Organizational structure.
 
As of December 31, 2019, 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
%
LDS Singles LLC
United States
100
%
Adventist Singles LLC
United States
100
%
Charm Labs LLC
United States
100
%
Zoosk, Inc.
United States
100
%
Zoosk Limited
United Kingdom
100
%
Zoosk Ireland Limited
Ireland
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 additional office space in Berlin, Germany, and in New York, Utah, and California 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.
 

36


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, 2019 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 our inception, we have had nearly 72 million users register with our dating platforms (which includes inactive accounts). We currently operate one or more of our brands worldwide.
 
Our ability to compete effectively will depend upon our ability to address the needs of our members and paying subscribers, on the timely introduction and performance of innovative features and services associated with our brands, and our ability to respond to services and features introduced by competitors. We must also achieve these objectives within the parameters of our consolidated and operating segment profitability targets. We are focused on enhancing and augmenting our portfolio of services while also continuing to improve the efficiency and effectiveness of our operations. We believe we have sufficient available cash resources on hand to accomplish the enhancements currently contemplated.

On July 1, 2019, we completed the Spark Networks / Zoosk Merger in a stock and cash transaction. The combination created the second largest online dating platform in North America based on revenues and second largest publicly-listed dating company in the world.
 
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 as issued by the IASB. 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 valuation of goodwill and identified intangible 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:
 
Impairment Test of Goodwill and Indefinite-lived Intangible Assets
 
Goodwill is Spark Networks' largest asset with a carrying value of €158,228 thousand and €20,804 thousand at December 31, 2019 and December 31, 2018, representing 47.7% and 32.6%, respectively, of the Company’s Total

37


assets. Indefinite-lived intangible assets, which consist of brands and trademarks, have a carrying value of €100,040 thousand and nil as of December 31, 2019 and December 31, 2018, respectively. 

Spark Networks performed its annual impairment test for goodwill and indefinite-lived intangible assets as of October 31, 2019. The existing goodwill of €158,228 thousand as of December 31, 2019 is allocated to the following CGUs:
(in € thousands)
 
As of December 31, 2019
Zoosk
 
137,025

Christian Networks
 
8,016

Jdate USA
 
4,100

Jdate Israel
 
113

JSwipe
 
8,797

Other Networks
 
177

Total Goodwill
 
158,228


The goodwill resulting from the Spark Networks / Zoosk Merger was not allocated to the North America and International operating segments as of the impairment testing date, due to the fact that the latest planning was completed on the legal entity level only. Management will perform a further allocation of the entity into regional CGUs (North America and International) based on a business plan that will provide that level of detail. In accordance with IAS 36 Impairment of Assets, the allocation is to be performed before the end of the first annual period beginning after the acquisition date.

As of December 31, 2019, indefinite-lived intangible assets of €100,040 thousand are allocated to the following CGUs:
(in € thousands)
 
As of December 31, 2019
Zoosk
 
97,423

Christian Networks
 
1,665

Jdate USA
 
792

Jdate Israel
 
116

Other Networks
 
44

Total indefinite-lived intangible assets
 
100,040


The impairment test was performed in accordance with IAS 36 Impairment of Assets. For impairment test purposes under IFRS, the concept of value in use was applied. The value in use 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 impact of market trends anticipated in the future. For the financial forecasts for each CGU and resulting cash flow plans, long-term EBITDA margins vary between 19.7% (for Zoosk) and 56.2% (for JSwipe).

For the terminal value growth rate, management has materially revised the long-term growth expectation compared to previous years' impairment tests, which is based on internal experience and in line with market expectations. For the impairment test performed as of October 31, 2019, a terminal value for all CGUs was assumed with growth rates of 0.5% for Zoosk, 0.5% for Christian Networks, 0.5% for Jdate USA, 0.5% for Jdate Israel, 1.0% for JSwipe, and 0.5% for Other Networks.
 
For discounting the future cash flows, an after-tax weighted average cost of capital (WACC) was derived as of the impairment testing date of October 31, 2019 and applied for each CGU. The WACC used for each CGU was as follows: 9.2% for Zoosk, 9.2% for Christian Networks, 9.2% for Jdate USA, 10.3% for Jdate Israel, 9.2% for JSwipe, and 9.2% for Other Networks.
 
An impairment according to IAS 36 is required if the carrying amount exceeds the recoverable amount. The recoverable amount is assumed to equal the calculated value in use. Based on the result of the impairment tests

38


performed, the recoverable amount of each CGU exceeded the carrying amount, and, accordingly, no impairment was necessary.

For the Zoosk CGU, the estimated recoverable amount exceeded the carrying amount of the CGU by €20,086 thousand, or 8.9%. Management has identified that a reasonable change in the long-term EBITDA margin assumption could cause the carrying amount to exceed the recoverable amount. An adjustment of the long-term EBITDA margin by 2.0 percentage points to 17.7% would lead to an estimated recoverable amount approximating the carrying amount.

As part of the annual impairment testing, for all other CGUs, a sensitivity analysis was also conducted in which EBITDA margins decline by 5.0% and the terminal value growth rates decline by 0.5% to zero, which does not indicate a potential risk for impairment of goodwill.

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 Business Combinations. 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 acquisition-date fair values of the identifiable assets acquired and the liabilities assumed and assessing the useful life of each intangible asset. Different classes of assets will have varying useful lives. For example, the useful life of customer relationships, which was one year in the Spark Networks / Zoosk Merger, is not the same as the useful life of licenses and domains, which is typically two to five years, or a trademark, which is indefinite for Zoosk. 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 Statements of Operations and Comprehensive 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 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 Statements of Operations and Comprehensive Loss and Consolidated Balance Sheets.
  
Accounting for Income Taxes
 
Income tax expense is comprised of 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.
 
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.
 

39


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 €58,037 thousand as of December 31, 2019 (December 31, 2018: €45,747 thousand) and €57,266 thousand for trade taxes (December 31, 2018: €45,035 thousand). Of these available tax loss carryforwards, deferred tax assets in the amount of €10,956 thousand were recognized as of December 31, 2019 (December 31, 2018: €11,512 thousand). As of December 31, 2019, the Group had interest carryforwards in the amount of €5,419 thousand for which no deferred tax assets have been recorded. As of December 31, 2019, there are corporate tax loss carryforwards of €21,407 thousand (December 31, 2018: €7,469 thousand) and trade tax loss carryforwards of €21,310 thousand (December 31, 2018: €7,372 thousand) for which no temporary differences were recognized. No temporary differences for which no deferred tax assets were recognized existed.

In 2018, a German subsidiary realized a tax loss. The Group has concluded that the deferred tax assets will be recoverable based on the estimated future taxable income supported by the approved business plans and budgets for the subsidiary.

In general, the net operating loss carryforwards 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 carryforwards, which could be utilized annually to offset future taxable income.
 
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, 2019, the Group has gross net operating loss carryforwards for United States income tax purposes of approximately €73,393 thousand and €77,122 thousand available to reduce future federal and state taxable income, respectively, which expire beginning in the years 2026 for federal purposes and in 2028 for state purposes. Federal net operating losses generated after December 31, 2017 are indefinite in nature and do not expire. The increase in net operating loss carryforwards is attributable to the acquisition of Zoosk in 2019. Under Section 382 of the United States Internal Revenue Code, the utilization of the net operating loss carryforwards may be limited based on changes in the percentage ownership of the Group. The Company conducted a study to account for any limitation of attributes and noted it did not materially impact its net operating loss carryforwards acquired as part of the Zoosk acquisition. Of these available tax loss carryforwards, deferred tax assets in the amount of €18,833 thousand were recognized as of December 31, 2019, of which €3,380 thousand relate to the recognition of Spark deferred tax assets which were not previously recorded and €15,453 thousand relate to Zoosk and were recorded through purchase accounting.

At December 31, 2019, the Group has United States federal and state income tax credit carryforwards of approximately €8,289 thousand (December 31, 2018: €314 thousand) net of unrecognized tax benefits, which

40


primarily relate to research and development (“R&D”) tax credits that expire beginning in the years 2028 for federal purposes and do not expire for state purposes. The increase in United States federal income tax carryforwards is attributable to the acquisition of Zoosk in 2019. Deferred tax assets related to R&D tax credits generated post-acquisition of Zoosk in the amount of €494 thousand were recorded in the period.
 
In addition, as of December 31, 2019, the Group had net operating loss carryforwards in Israel of €9,668 thousand (December 31, 2018: €8,860 thousand), which do not expire, and for which no deferred tax asset was recognized. Management does not believe it is probable that Israel’s deferred tax assets will be realized based on historical and projected income.
 
Spark Networks records deferred tax assets on operating loss and credit carryforwards 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 €29,789 thousand and €11,512 thousand were recorded as of December 31, 2019 and December 31, 2018, respectively. Such deferred tax assets primarily relate to the Group's operations in the United States and Germany.
 
Spark Networks operates in multiple taxing jurisdictions, both within and outside of Germany and the United States. Significant judgments are involved in determining the provision for income taxes including judgment on whether it is probable that a taxation authority will accept an uncertain tax treatment. 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 reassesses its judgments or estimates if the facts and circumstances on which the judgment or estimate was based change or as a result of new information that affects the judgment or estimate. In its management’s opinion, adequate provisions for the effect of uncertainty have been made for potential liabilities resulting from such matters. Spark Networks believes that the ultimate outcome of these matters will not have a material impact on its financial position or liquidity.
 
Share-Based Compensation
 
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 virtual stock option grant using a binomial option-pricing model, which uses as inputs the fair value per Spark Networks ADS and assumptions Spark Networks makes with respect to the volatility of Spark Networks ADSs, the expected terms of Spark Networks’ virtual stock options, the risk-free interest rates for a period that approximates the expected term of the virtual stock option and the expected dividend yield.

Spark Networks' share-based payment arrangements entitle 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. Spark Networks classifies these share-based payment arrangements as equity-settled.


41


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)
 
2019
 
2018 (1)
 
2017 (1)
Revenue
 
149,141

 
103,438

 
83,529

Cost of revenue
 
(103,302
)
 
(69,490
)
 
(58,776
)
Gross profit
 
45,839


33,948


24,753

Other income
 
1,558

 
240

 
54

Other operating expenses
 
(57,211
)
 
(36,299
)
 
(32,030
)
Sales and marketing expenses
 
(6,108
)
 
(4,938
)
 
(5,540
)
Customer service expenses
 
(6,830
)
 
(4,626
)
 
(3,971
)
Technical operations and development expenses
 
(19,433
)
 
(7,195
)
 
(6,428
)
General and administrative expenses
 
(24,840
)
 
(19,540
)
 
(16,091
)
Operating loss
 
(9,814
)

(2,111
)

(7,223
)
Finance income
 
4,236

 
478

 
239

Finance costs
 
(13,186
)
 
(1,436
)
 
(782
)
Net finance expenses
 
(8,950
)

(958
)

(543
)
Loss before taxes
 
(18,764
)
 
(3,069
)
 
(7,766
)
Income tax benefit (expense)
 
3,590

 
(811
)
 
720

Net loss
 
(15,174
)

(3,880
)

(7,046
)

(1) Comparative figures for the years ended December 31, 2018 and 2017 were restated for errors. For further information, see Part III, Item 18. Financial Statements, Note 8.4.
 

The following table presents certain selected information and Adjusted EBITDA(1)(3) for the periods presented: 
 
 
Years Ended December 31,
(in € thousands)
 
2019
 
2018 (2)
 
2017 (2)
Net loss
 
(15,174
)
 
(3,880
)
 
(7,046
)
Net finance expenses
 
8,950

 
958

 
543

Income tax expense (benefit)
 
(3,590
)
 
811

 
(720
)
Depreciation and amortization
 
7,696

 
3,565

 
3,084

Impairment of intangible assets and goodwill
 
703

 
3,324

 
25

Share-based compensation expense
 
2,335

 
4,091

 
488

Acquisition costs and other
 
7,258

 
970

 
8,123

Adjusted EBITDA(1)(3)
 
8,178

 
9,839

 
4,497


 
 
Years Ended December 31,
Summary of acquisition costs and other (in € thousands)
 
2019
 
2018
 
2017
Gain realized upon sublease commencement
 
(1,259
)
 
—

 
—

Transaction and advisory fees
 
4,761

 
264

 
3,995

Merger integration costs
 
493

 
101

 
2,042

Other employee payments
 
2,052

 
—

 
1,053

Severance costs
 
1,211

 
316

 
430

Other
 
—

 
289

 
603

Total adjustments
 
7,258

 
970

 
8,123



42


(1) Adjusted EBITDA is not a measure defined by 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. This includes: (i) items such as share-based compensation, asset impairments, gains or losses on foreign currency transactions and interest expense, and (ii) items related to acquisitions or other costs that are non-recurring, infrequent, or unusual in nature including gains realized upon sublease commencement, transaction and advisory fees, merger integration costs, other employee payments, and severance. 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.

(2) Comparative figures for the years ended December 31, 2018 and 2017 were restated for errors. For further information, see Part III, Item 18. Financial Statements, Note 8.4.

(3) Adjusted EBITDA as of December 31, 2019 excludes a fair value adjustment of €14,371 thousand which reduced the value of contract liabilities acquired from Zoosk. The fair value of contract liabilities acquired represents the estimated cost plus a reasonable profit margin to perform services related to subscriptions paid by Zoosk's customers as of July 1, 2019. The Group's Adjusted EBITDA as of December 31, 2019 would have been €22,549 thousand assuming this fair value adjustment to contract liabilities (which represents a reduction in future revenues on acquired subscriptions) in connection with the Spark Networks / Zoosk Merger (as defined below) would not have been made. The Group previously reported in its preliminary earnings release for the year ended December 31, 2019, Adjusted EBITDA including the fair value adjustment to such contract liabilities. The Group modified its calculation of Adjusted EBITDA in this Annual Report on Form 20-F to exclude such contract liabilities as provided herein.
 

43


The following table presents our historical operating results as a percentage of revenue for the periods presented:
 
Years Ended December 31,
 
2019
 
2018 (1)
 
2017 (1)
Revenue
100.0

%
 
100.0

%
 
100.0

%
Cost of revenue
(69.3
)
 
 
(67.2
)
 
 
(70.4
)
 
Gross profit
30.7

 
 
32.8

 
 
29.6

 
Other income
1.0

 
 
0.2

 
 
0.1

 
Other operating expenses
(38.4
)
 
 
(35.2
)
 
 
(38.4
)
 
Sales and marketing expenses
(4.1
)
 
 
(4.8
)
 
 
(6.6
)
 
Customer service expenses
(4.6
)
 
 
(4.5
)
 
 
(4.8
)
 
Technical operations and development expenses
(13.0
)
 
 
(7.0
)
 
 
(7.7
)
 
General and administrative expenses
(16.7
)
 
 
(18.9
)
 
 
(19.3
)
 
Operating loss
(6.7
)
 
 
(2.2
)
 
 
(8.7
)
 
Finance income
2.8

 
 
0.5

 
 
0.3

 
Finance costs
(8.8
)
 
 
(1.4
)
 
 
(0.9
)
 
Net finance expenses
(6.0
)
 
 
(0.9
)
 
 
(0.6
)
 
Loss before taxes
(12.7
)
 
 
(3.1
)
 
 
(9.3
)
 
Income tax benefit (expense)
2.4

 
 
(0.8
)
 
 
0.9

 
Net loss
(10.3
)
%
 
(3.9
)
%
 
(8.4
)
%

(1) Comparative figures for the years ended December 31, 2018 and 2017 were restated for errors. For further information, see Part III, Item 18. Financial Statements, Note 8.4.

 
Unaudited pro forma financial information
 
The unaudited pro forma financial information in the table below presents the combined results of the Company and Zoosk as if the Spark Networks / Zoosk Merger had occurred on January 1, 2019. The unaudited pro forma financial information includes adjustments required under the acquisition method of accounting but excludes certain costs and charges that are deemed to be non-recurring in nature. This presentation is for informational purposes only and is not necessarily indicative of the results that would have been achieved had the acquisition actually occurred on January 1, 2019 or in future periods.

For the year ended December 31, 2019, pro forma adjustments include the removal of transaction related costs of €23,112 thousand as they are one-time in nature and will not have a continuing impact on operations. The transaction related costs include transaction and advisory fees of €17,793 thousand, severance costs of €2,648 thousand, other employee payments of €2,178 thousand, and merger integration costs of €493 thousand related to the Spark Networks / Zoosk Merger. Pro forma adjustments also include an increase in amortization expense of €3,324 thousand related to Zoosk intangible assets acquired in the Spark Networks / Zoosk Merger, and an increase in net finance expenses of €3,688 thousand as if the Group had paid off the remaining balance on the Senior Facilities Agreement (as defined in Note 5.9 to the accompanying consolidated financial statements) and entered into the Senior Secured Facilities Agreement (as defined in Note 5.9) on the assumed date of acquisition. Additionally, these pro forma amounts exclude the effect of fair value adjustments recorded in purchase accounting which resulted in a €14,371 thousand reduction in contract liabilities. Such adjustment is non-recurring in nature and had the effect of reducing future subscription revenue for customer subscriptions in place at the Zoosk acquisition date. The post-tax impact to net income resulting from the pro forma adjustments applied in 2019 to Zoosk and non-Zoosk entities assumes a 25% and 30% tax rate, respectively.
 
Year Ended December 31,
 
2019
(in € thousands)
(pro forma)
Revenue
234,482

Net loss
(3,113
)
 

44


The following table presents certain selected information and Adjusted EBITDA(1) for the periods presented:
 
Year Ended December 31,
 
2019
(in € thousands)
(pro forma)
Net loss
(3,113
)
Net finance expenses
12,195

Income tax expense (benefit)
4,592

Depreciation and amortization
11,872

Impairment of intangible assets and goodwill
788

Share-based compensation expense
3,305

Acquisition costs and other
(118
)
Adjusted EBITDA(1)
29,521

 
 
Year Ended December 31,
 
2019
Summary of acquisition costs and other (in € thousands)
(pro forma)
Gain realized upon sublease commencement
(1,315
)
Project consultant costs
194

Other employee payments
853

Severance costs
150

Total adjustments
(118
)
 
(1)       Adjusted EBITDA is not a measure defined by 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. This includes: (i) items such as share-based compensation, asset impairments, gains or losses on foreign currency transactions and interest expense, and (ii) items related to acquisitions or other costs that are non-recurring, infrequent, or unusual in nature including gains realized upon sublease commencement, transaction and advisory fees, merger integration costs, other employee payments, and severance. 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.
 
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:
 

45


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.
 


46


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,
 
2019
 
2018 (1)
 
2017 (1)
Registrations
 
 
 
 
 
North America
7,507,959

 
4,376,883

 
2,289,036

International
5,210,121

 
5,767,290

 
6,162,597

Total Registrations
12,718,080


10,144,173


8,451,633

 
 
 
 
 
 
Average Paying Subscribers
 
 
 
 
 
North America
425,193

 
183,794

 
83,870

International
305,895

 
299,619

 
295,533

Total Average Paying Subscribers
731,088

 
483,413

 
379,403

 
 
 
 
 
 
Monthly ARPU
 
 
 
 
 
North America
€
18.91

 
€
21.81

 
€
23.77

International
€
14.34


€
15.39


€
16.81

Total Monthly ARPU
€
17.00

 
€
17.83

 
€
18.35

 
 
 
 
 
 
Total Net Revenue
 
 
 
 
 
North America
€
96,508

 
€
48,105

 
€
23,919

International
€
52,633

 
€
55,333

 
€
59,610

Total Net Revenue
€
149,141

 
€
103,438

 
€
83,529

 
 
 
 
 
 
Direct Marketing





North America
€
58,292

 
€
27,862

 
€
17,980

International
€
27,292

 
€
32,026

 
€
35,489

Total Direct Marketing
€
85,584

 
€
59,888

 
€
53,469

 





Contribution
 
 
 
 
 
North America
€
38,216

 
€
20,243

 
€
5,939

International
€
25,341

 
€
23,307

 
€
24,121

Total Contribution
€
63,557


€
43,550


€
30,060


(1) Comparative figures for the years ended December 31, 2018 and 2017 were restated for errors. For further information, see Part III, Item 18. Financial Statements, Note 8.4.

During the year ended December 31, 2019, 12,718 thousand new members registered to Spark Networks’ platforms, compared to 10,144 thousand new members during the year ended December 31, 2018. The 25.4% total increase in new registrations is due to new registrations in the North America segment with 7,508 thousand registrations compared to 4,377 thousand in the previous year, partially offset by a decrease in new registrations in the International segment with 5,210 thousand registrations compared to 5,767 thousand in the previous year. The decline in new registrations is a result of significantly lower direct marketing expenses within the International segment. The increase in the North America segment and increased direct marketing efforts within this segment was due to the addition of Zoosk following the Spark Networks / Zoosk Merger in July 2019. Registrations in the year ended December 31, 2019 include 3,064 thousand new registrations in North America and 1,080 thousand new International registrations from the Zoosk brand.
 
Average paying subscribers increased by 51.2% to 731,088 during the year ended December 31, 2019, compared to 483,413 during the year ended December 31, 2018. This increase was due to the addition of Zoosk following the Spark Networks / Zoosk Merger, and partially offset by a decline in average paying subscribers for non-Zoosk brands of 11.0%. Average paying subscribers for the North America segment increased by 241,399 to 425,193 during the year ended December 31, 2019, compared to 183,794 during the year ended December 31, 2018. The increase was the

47


result of the addition of Zoosk following the Spark Networks / Zoosk Merger in July 2019, totaling 238,984, while the development of average paying subscribers for non-Zoosk brands was flat compared to 2018. Average paying subscribers in the International segment increased by 2.1% to 305,895 during the year ended December 31, 2019, compared to 299,619 during the year ended December 31, 2018. The increase was the result of the addition of Zoosk in July 2019, which contributed 61,842 average paying subscribers, and was offset by a decrease in average paying subscribers among the other Group brands.

Monthly ARPU decreased by 4.7% to €17.00 during the year ended December 31, 2019, compared to €17.83 during the year ended December 31, 2018. Monthly ARPU for the North America segment decreased by 13.3% to €18.91 during the year ended December 31, 2019 compared to €21.81 during the year ended December 31, 2018. Monthly ARPU for the North America segment from Zoosk resulted in a €5.15 decrease relative to the prior year period. This was partially offset by an increase of 10.3% of monthly ARPU for the non-Zoosk brands during 2019. Monthly ARPU for the International segment decreased by 6.8% to €14.34 during the year ended December 31, 2019 compared to €15.39 during the year ended December 31, 2018. Monthly ARPU for the International segment from Zoosk resulted in a €0.50 decrease relative to the prior year period. Monthly ARPU for the International segment from non-Zoosk brands decreased by 3.6% during 2019. Monthly ARPU is lower in the International segment as compared to the North America segment primarily because the segment includes Eastern European countries for which subscription fees are significantly lower than Spark Networks' overall average.
 
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
 
Revenue
 
Revenue during the year ended December 31, 2019 increased by 44.2% to €149,141 thousand from €103,438 thousand during the year ended December 31, 2018. The growth was primarily attributable to the addition of Zoosk following the Spark Networks / Zoosk Merger in July 2019, which increased the number of average paying subscribers by 51.2%. Zoosk contributed €51,927 thousand of the revenue increase following the Spark Networks / Zoosk Merger. Non-Zoosk revenue during the period decreased by 6.0% to €97,214 thousand from €103,438 thousand during the year ended December 31, 2018 due to significantly lower direct marketing investment within the International segment in 2019.
 
During the year ended December 31, 2019, revenue in Spark Networks’ North America segment increased by €48,403 thousand to €96,508 thousand from €48,105 thousand during the year ended December 31, 2018, mainly due to the addition of Zoosk following the Spark Networks / Zoosk Merger in July 2019. Revenue for the North America segment from the Zoosk brand accounted for 88.3% of the increase relative to the prior year. During the year ended December 31, 2019, revenue in Spark Networks' International segment decreased by 4.9% to €52,633 thousand from €55,333 thousand during the year ended December 31, 2018. The decrease in 2019 revenue within the International segment is the result of the 14.8% decrease in 2019 International segment direct marketing expenses, as the Company focused its marketing efforts within the North American market. Zoosk contributed €9,186 thousand to revenue for the International segment in the period.
 
Cost of revenue
 
Cost of revenue consists primarily of direct marketing expenses, data center expenses, credit card fees and mobile application processing fees. Cost of revenue increased by 48.7% to €103,302 thousand during the year ended December 31, 2019, compared to €69,490 thousand during the year ended December 31, 2018. The increase in cost of revenue was primarily attributable to increases in direct marketing expenses within the North America segment. Zoosk contributed €42,209 thousand of the year over year increase in cost of revenue following the Spark Networks / Zoosk Merger in July 2019, of which €33,142 thousand represents increases in direct marketing expenses. This increase in Cost of revenue was partially offset by lower direct marketing spend within the International Segment.

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 23.7% to €6,108 thousand during the year ended December 31, 2019, as compared to €4,938 thousand during the year ended December 31, 2018. The increase was primarily attributable to increased personnel expenses, termination costs and marketing support services as a result of the Spark Networks / Zoosk Merger in July 2019, as

48


well as an impairment loss of €703 thousand recognized on Samadhi brands and trademarks. This increase was partially offset by reductions in amortization expense.
 
Customer service expenses

Customer service expenses consist primarily of third-party service fees and personnel costs 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 47.6% to €6,830 thousand during the year ended December 31, 2019, as compared to €4,626 thousand during the year ended December 31, 2018. The increase was mainly attributable to €2,462 thousand of increased external service provider costs and customer support staffing to support the newly acquired Zoosk brand, and an increase in amortization expense on Zoosk intangible assets acquired in the Spark Networks / Zoosk Merger.

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 €12,238 thousand to €19,433 thousand during the year ended December 31, 2019, as compared to €7,195 thousand during the year ended December 31, 2018. The increase is primarily due to an increase of €10,922 thousand in personnel expenses to ensure the transition of technological oversight of the Zoosk tools and systems from the United States based tech team to the development team in Germany, and higher data processing costs with the addition of Zoosk. Expenses also increased as a result of an increase in amortization expense on Zoosk intangible assets acquired in the Spark Networks / Zoosk Merger.
 
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 27.1% to €24,840 thousand for the year ended December 31, 2019, compared to €19,540 thousand for the year ended December 31, 2018. The increase was primarily due to transaction and advisory fees of €4,761 thousand related to the Spark Networks / Zoosk Merger in July 2019, as well as an increase in amortization expense on Zoosk intangible assets acquired in the Spark Networks / Zoosk Merger, and increases in third party services, licenses and personnel costs. This increase was partially offset by a decrease in goodwill impairment and decreases in impairment losses recognized on trade receivables.
 
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 €8,950 thousand for the year ended December 31, 2019, compared to €958 thousand for the year ended December 31, 2018. The increase was primarily related to €6,425 thousand of interest expense on borrowings under the Senior Secured Facilities Agreement and net foreign exchange losses of €2,147 thousand during the year ended December 31, 2019 compared to €388 thousand during the year ended December 31, 2018.
 
Income tax benefit (expense)
 
The income tax benefit of €3,590 thousand during the year ended December 31, 2019 was primarily driven by deferred tax benefits related to the recognition of net operating loss carryforwards in the United States, the origination of Federal R&D tax credits (net of unrecognized tax benefit), and reversal of temporary differences mainly due to contract liabilities and finite lived intangibles. The income tax benefit was also partially offset by €1,577 thousand of current income tax expense, of which €497 thousand was recognized in Germany and €1,080 thousand was recognized in the United States. The income tax benefit for the year ended December 31, 2019 is significantly impacted by current year losses for which no deferred tax assets are recognized in Germany with an impact of €5,876 thousand, and a recognition of previously unrecognized net deferred tax assets in the United States of €4,437 thousand.

The income tax expense of €811 thousand during the year ended December 31, 2018 consists of an expense of €531 thousand from the origination and reversal of temporary differences mainly related to intangible assets and income tax

49


credits, a deferred tax expense of €61 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.
 
Total comprehensive (loss) income.
 
Total comprehensive loss was €11,513 thousand for the year ended December 31, 2019, compared to total comprehensive loss of €2,263 thousand for the year ended December 31, 2018. The increase in total comprehensive loss was due to an increase in Net loss, offset by an increase in Other comprehensive income related to foreign currency translation.
 
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
 
Revenue
 
Revenue during the year ended December 31, 2018 increased by 23.8% to €103,438 thousand from €83,529 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 2.8% decrease in Monthly ARPU. Spark contributed €17,710 thousand, or 89.0%, 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 €24,186 thousand to €48,105 thousand from €23,919 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 70.9% of the increase relative to the prior year. During the year ended December 31, 2018, revenue in Spark Networks' International segment decreased by 7.2% to €55,333 thousand from €59,610 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 expenses, as the Company focused its marketing efforts within the North American market.

Cost of revenue
 
Cost of revenue consists primarily of direct marketing expenses, 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 expenses 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 3.2% to 67.2% as a result of revenue growth outpacing growth in direct marketing expenses 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. 


50


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 €811 thousand compared to income tax benefit of €720 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 €61 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 €795 thousand of deferred tax benefit relating to the addition of net operating loss carryforwards, offset by deferred tax 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. Income tax benefit was also offset by €67 thousand of current income tax expense.

51



Total comprehensive (loss) income.
 
Total comprehensive loss was €2,263 thousand for the year ended December 31, 2018, compared to total comprehensive loss of €7,929 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.

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 borrowings under the Senior Secured Facilities Agreement (as defined below) from time to time) and from time to time, Spark Networks may obtain additional liquidity through the issuance of equity or debt. As of December 31, 2019, Spark Networks had cash and cash equivalents of €15,450 thousand.
 
We believe that our current cash and cash flow from operations will be sufficient to meet our anticipated cash needs for financial liabilities, capital expenditures and contractual obligations, for at least the next 12 months. We do not anticipate requiring additional capital; however, if required or desirable, we may utilize our Revolving Credit Facility (as defined below), raise additional debt to a limited extent according to the Senior Secured Facilities Agreement 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)
 
2019
 
2018
 
2017
Net cash inflow (outflow) from operating activities
 
8,634

 
8,457

 
(1,180
)
Cash inflow (outflow) from investing activities
 
(85,013
)
 
(3,531
)
 
2,388

Cash inflow (outflow) from financing activities
 
80,610

 
(2,309
)
 
(885
)
Net change in cash and cash equivalents
 
4,231


2,617


323

 
Operating Activities
 
During the year ended December 31, 2019, net cash inflow of €8,634 thousand from operating activities was attributable to adjustments to net loss consisting primarily of €5,736 thousand of amortization, €1,960 thousand of depreciation, and €703 thousand of impairment of intangible assets, and net cash generated from changes in operating assets and liabilities of €10,472 thousand. Changes in operating assets and liabilities were mainly related to an increase in contract liabilities of €9,365 thousand due to growth in subscription revenue, changes in provisions of €1,232 thousand, and changes in working capital of €3,746 thousand mainly attributable to a decrease in the trade receivables acquired in connection with the Spark Networks / Zoosk Merger, offset by a change in tax positions of €3,488 thousand and changes in other operating assets and liabilities of €383 thousand. These increases were also partially offset by interest payments of €5,893 thousand primarily related to the Senior Secured Facilities Agreement.

During the year ended December 31, 2018, net cash inflow was €8,457 thousand, primarily resulting from non-cash charges of €11,938 thousand and cash increases from operating assets and liabilities of €841 thousand, offset by Spark Networks’ net loss of €3,880 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 €556 thousand increase from changes in other working capital, a €596 thousand change in tax positions, and a €722 thousand increase in contract liabilities, offset by a €906 thousand change in provisions and a €127 thousand cash decrease from other operating assets and liabilities. Cash generated by changes in other working capital primarily consisted of a decrease in current trade and other receivables resulting in an increase of cash received of €3,486 thousand offset in part by a decrease in current trade and other payables resulting in a decrease in cash of €2,930 thousand. Non-cash changes consisted primarily of €4,091 thousand of share-based compensation expense, €3,324 thousand of impairment of intangible assets and goodwill and €3,180 thousand of amortization of intangible assets.

52



Investing Activities
 
During the year ended December 31, 2019, cash outflow from investing activities was €85,013 thousand as a result of cash paid for business combinations, net of cash acquired of €81,048 thousand, the capitalization of internally generated software of €3,882 thousand, and purchases of fixed assets of €83 thousand.

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.
 
Financing Activities
 
During the year ended December 31, 2019, cash inflow from financing activities was €80,610 thousand as a result of
proceeds from bank loans of €99,288 thousand and proceeds from stock option exercises of €381 thousand, partially offset by the repayment of bank loans of €17,539 thousand and the payment of lease liabilities of €1,008 thousand.

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.
 
Borrowings
 
On March 15, 2018, Spark Networks Services GmbH (f/k/a Affinitas GmbH), a limited liability company incorporated under the laws of Germany (“Affinitas”), and wholly-owned subsidiary of Spark Networks SE, 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 is under the Type A Loans and €4.0 million of which is 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.

On March 28, 2018, Spark Networks and Silicon Valley Bank entered into a four-year €25 million Senior Facilities Agreement. The Senior Facilities Agreement provides for a multicurrency term loan facility in an aggregate amount equal to €15 million and a multicurrency revolving credit facility in an aggregate amount equal to €10 million. Borrowings under the Senior Facilities Agreement 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 is 2.5%. As part of the new debt agreement referenced below, Spark Networks and SVB agreed to terminate the debt agreement, with a one time early termination fee of €56 thousand, representing 0.50% of the outstanding commitment remaining. Spark Networks utilized a portion of the proceeds from the new debt agreement to pay down the remaining balance on the debt outstanding plus the applicable termination fee.


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On July 1, 2019, in connection with the acquisition of Zoosk, Spark Networks entered into a Loan Agreement with Zoosk, Spark Networks, Inc., the subsidiary guarantors, the lenders party thereto, and Blue Torch Finance LLC (“Blue Torch”), as administrative agent and collateral agent (the "Senior Secured Facilities Agreement") that provides for a four-year $125 million (€110 million) Senior Secured Facility. The Senior Secured Facilities Agreement provides for a term loan facility in an aggregate amount equal to $120 million (€106 million) (the “Term Loan Facility”) and a revolving credit facility in an aggregate amount equal to $5 million (€4 million) (the “Revolving Credit Facility”) and, together with the Term Loan Facility, the “Facilities”. Borrowings under the Facilities bear interest at a rate equal to either LIBOR plus an applicable margin of 8% (per annum) or the Base Rate with an applicable margin of 7% (per annum). A portion of the proceeds from the issuance of the Facilities was utilized to pay down the remaining balance on the debt outstanding with Silicon Valley Bank, which was €11,447 thousand at the time of payment.

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 Term Loan Facility and the Revolving Credit Facility. For the Term Loan Facility, the initial commitment fee is equal to 0.50% of the aggregate principal amount of the Term Loan Facility. The commitment fee related to the Revolving Credit Facility is calculated based on the unutilized commitments thereunder. The commitment fee rate is 0.75% per annum, and the Revolving Credit Facility currently has $5 million of undrawn availability. As the Revolving Credit Facility is not expected to be drawn down, any costs related to the commitment fee and any other transaction fees related to the Revolving Credit Facility are deferred and amortized over the term of the agreement.

The Facilities were issued at a discount at the closing date equal to three percent (3%) of the aggregate principal amount of the Term Loan Facility funded on the closing date ($120 million). This discount was calculated as $3.60 million (€3.17 million). Upon closing, transaction costs and commitment fees of $4,010 thousand (