Item 1A. Risk Factors.
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider the risks described below, together with the other information contained in this annual report, including our consolidated financial statements and the related notes and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that affect us. We cannot assure you that any of the events discussed below will not occur. These events could have a material and adverse impact on our business, financial condition, results of operations and prospects. If that were to happen, the trading price of our ordinary shares could decline, and you could lose all or part of your investment.
Risk Factors Summary:
The risk factors summarized and detailed below could materially harm our business, operating results and/or financial condition, impair our future prospects and/or cause the price of our common stock to decline. These are not all of the risks we
face and other factors not presently known to us or that we currently believe are immaterial may also affect our business if they occur. Material risks that may affect our business, operating results and financial condition include, but are not necessarily limited to, those relating to the following:
Risks Related to our Business
•establishing and maintaining strong brands;
•attracting new members, converting members into paying subscribers and retaining our paying subscribers;
•the synergies and benefits of the Spark Networks / Zoosk Merger may not be realized or may not be realized within the expected time frame;
•failure to adequately protect our intellectual property rights or accusations of infringing the intellectual property rights of third parties;
•failure to keep pace with rapid technological change;
•maintaining or increasing our number of paying subscribers to maintain or increase our current level of revenue;
•our revenue could be adversely affected if subscriptions cannot be automatically renewed;
•ability to attract and retain users through cost-effective marketing efforts;
•communicating with users and erosion of such ability could have an adverse effect;
•the integrity of our systems and infrastructure and on ability to enhance, expand and adapt these systems and infrastructure in a timely and cost-effective manner;
•services are highly technical and may contain undetected bugs or errors;
•being subject to cybersecurity incidents in the past and anticipation of being the target of future attacks;
•reliance on a number of third-party providers who may fail to continue to perform;
•dependence on third parties to drive traffic to our websites;
•distribution and use of our products depends on third party publishers, platforms and mobile app stores;
•potential for increasing app store fees;
•ability to access, collect and use personal data about our users;
•credit card fees and chargeback costs of credit card companies;
•claims related to the rapidly evolving regulatory framework on privacy and data protection across jurisdictions;
•risks related to credit card payments;
•inappropriate actions by certain users could damage our brand reputation;
•publisher liability for information made available on our sites or apps;
•risks related to operations in international markets and being subject to complex international laws;
•impact of Brexit;
•risks related to COVID-19;
•litigation risk;
•certain open-source software risks;
•loss or material modification of our credit card acceptance privileges;
•compliance with our senior secured credit facility;
•level of indebtedness;
•user metrics subject to inherent challenges in measurement;
Risks Relating to an Investment in Spark Networks
•dating industry is competitive with low barriers to entry, low switching costs and new products and entrants;
•changes in tax treatment of companies engaged in e-commerce;
•adverse capital and credit market conditions could limit our access to capital and increase cost of capital;
•impairment risk of goodwill, intangible assets and other long-lived assets;
•failure to comply with United States securities laws;
•foreign currency exchange rate fluctuations;
•difficulty enforcing civil liability against Spark Networks or members of its Administrative Board;
•failure to maintain an effective system of internal control over financial reporting;
•adverse tax consequences if Spark Networks is considered a passive foreign investment company;
Risks Relating to the Spark Networks ADSs
•limited trading volume for Spark Networks’ ADSs which can reduce liquidity and increase volatility;
•fluctuation in the price of Spark Networks’ ADSs
•differing rights as a holder of ADSs representing ordinary shares in a German company compared to rights a stockholder of a U.S. corporation;
•principal stockholders own a significant percentage of the company’s ordinary shares;
•right to distributions on the company’s ordinary shares as a holder of ADSs;
•holders of ADSs may be unable to claim tax credits or refunds to reduce German withholding tax on dividends; and
•holders of ADSs do not have the same voting rights as actual stockholders, and holders of ADSs have less access to information and less opportunity to exercise rights as a holder of ADSs instead of ordinary shares.
Risks Relating to Our Business
Our business depends on establishing and maintaining strong brands, and if we are not able to maintain and enhance our brands, we may be unable to expand or maintain our member and paying subscriber bases.
We believe that establishing and maintaining our brands is essential to our efforts to attract and expand our member and paying subscriber bases. We believe 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 our brands in response to competitive pressures, we may have to substantially increase our financial commitment to creating and maintaining our distinct brands. If visitors, members and paying subscribers to our products do not perceive our existing services to be of higher quality, or if we introduce new services or enter into new business ventures that are not favorably received by such parties, the value of our brands could be diluted, thereby decreasing the attractiveness of our websites and mobile applications to such parties. As a result, our results of operations may be adversely affected by decreased brand recognition or negative brand perception.
If our efforts to attract new members, convert members into paying subscribers and retain our paying subscribers are not successful, or if our users decrease their level of engagement with our products, our revenue and operating results will suffer.
Since we launched in 2008, we and our predecessor companies have had nearly 87 million users register with our 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, 2020, we had an average of approximately 927,951 paying members across all of our platforms. Our future growth depends on our ability to attract new members that fit within our target audience, convert members into paying subscribers, retain our paying subscribers and maintain or grow user engagement of our products. This in turn depends on our ability to deliver a relevant, high-quality online personals experience to these members and our ability to remain attractive to our existing and potential paying customers. As a result, we must continue to invest significant resources in order to enhance our existing products and services and introduce new high-quality products and services that people will use. If we are unable to predict user preferences or industry changes, or if we are unable to modify our products and services on a timely basis, we may lose existing members and paying subscribers and may fail to attract new members and paying subscribers. For example, one of our strategies is to target single people with high socio-economic status who are looking for a serious and long-term relationship. If our user preferences change, or the market for this niche otherwise decreases, or this strategy is otherwise unsuccessful, we could lose users, including paying subscribers, and our market share and revenue could decrease. Our revenue and expenses will also be adversely affected if our innovations are not responsive to the needs of our members and paying subscribers or are not brought to market in an effective or timely manner.
Our revenue could be adversely affected if subscriptions cannot be automatically renewed.
We generally provide our premium memberships pursuant to 1-month, 3-month, 6-month and 12-month subscriptions, which are generally automatically renewed unless canceled by the subscriber. In each of the years ended December 31, 2020 and 2019, subscription revenue accounted for over 97% of our total revenue. Although we have historically experienced a high percentage of subscribers that choose an auto-renewal payment option, a significant portion of our members may choose not to
do so in the future or we 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. We have taken steps to increase renewal rates by, for example, improving the auto-renewal success, but there can be no assurance that these efforts will remain successful in maintaining, and even increasing renewal rates in the future.
The EU has introduced the EU Consumer Rights Directive (the “Directive”), enforced in EU member states since June 2014, that restricts the use of auto-renewals, and we have 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 we 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 our 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, the EU has introduced the Payment Services Directive which applies more stringent rules for payments and credit card processing in the EU. The effect of this regulation could require users to take additional steps when paying online. This may have an adverse effect on the authorization levels of our users.
Although we expect 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.
Our ability 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 consolidate our technology platforms. Even if we are 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:
•the diversion of management attention to integration matters;
•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;
•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;
•difficulties in attracting and retaining key personnel;
•challenges in retaining existing customers and obtaining new customers;
•difficulties in achieving anticipated cost savings, synergies, business opportunities, financing plans and growth prospects;
•difficulties in managing the expanded operations of a significantly larger and more complex company;
•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
•other potential adverse consequences and unforeseen increased expenses or liabilities associated with the acquisition.
Some of these factors are outside of our control, and any one of them could result in lower revenues, higher costs and diversion of management time and energy, which could materially impact our business, financial condition and results of operations.
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 2020, we continued developing shared services to further drive the consolidation of our technology platforms with a particular emphasis on supporting the mobile applications that many of our members utilize to access our products. To mitigate a prolonged interruption in development, we focused the development of the platform consolidation in 2020 to modular technology services that we anticipate will provide us with global, highly flexible, shared technology for all of our global dating brands. These new services are expected to support future growth and to harmonize key processes. We believe that these new services will be essential to our 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 our ability to meet customer needs, or to operate our business without a material adverse effect on our financial condition.
We face significant competition for acquisition opportunities.
There is significant competition for acquisition targets in the markets within which we operate. Consequently, we may not be able to identify suitable acquisitions or may have difficulty finding attractive businesses for acquisition at reasonable prices. If we are unable to identify future acquisition opportunities, reach agreement with such third parties or obtain the financing necessary to make such acquisitions, we could lose scale relative to competitors who are able to make such acquisitions. This loss of relative scale in the industry could negatively impact our 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.
We may fail to adequately protect our intellectual property rights or may be accused of infringing the intellectual property rights of third parties.
We rely heavily upon our trademarks and related domain names and logos to market our brands and to build and maintain brand loyalty and recognition, as well as upon trade secrets.
In addition, we rely on a combination of laws, and contractual restrictions with employees, customers, suppliers, affiliates and others, to establish and protect our various intellectual property rights. For example, we have 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 we deem appropriate. Effective intellectual property protection may not be available or may not be sought in every country in which our products are made available, and contractual disputes may affect the use of certain intellectual property governed by private contract. Similarly, not every variation of a domain name may be available or be registered, even if available.
Despite these measures, our 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 our intellectual property without authorization. In addition, litigation may be necessary in the future to enforce our intellectual property rights, protect our trade secrets or to determine the validity and scope of proprietary rights claimed by others, including in respect of alleged trademark or patent infringement. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources.
For instance, we are currently in a dispute with a competitor related to our registered figurative trademark for EliteSingles and country specific related trademarks in BeneLux, Finland, Hungary, Ireland, Sweden, Poland, Denmark and the UK. Although we believe that we will ultimately prevail and intend to prosecute and defend our interest vigorously, if we were to lose these disputes, we 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.
The occurrence of any of these events could result in the erosion of our brands and limit our ability to market our brands using our various domain names, as well as impede our ability to effectively compete against competitors with similar technologies, any of which could adversely affect our business, financial condition and results of operations.
If we fail to keep pace with rapid technological change, our competitive position will suffer.
We operate in a market characterized by rapidly changing technologies, evolving industry standards, frequent new product and service announcements, enhancements and changing customer demands. Accordingly, our performance depends on our 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. Our industry has been subject to constant innovation and competition. When one competitor introduces new features perceived as attractive to users, other competitors replicate such new features. Over the last few years, such new feature introductions in the industry have included instant messaging, message boards, e-cards, personality profiles, the delivery of content through cell phones and linking of profiles to social media accounts. There have also been subsequent enhancements on new features such as the ability to send videos and photos through instant messaging or customize user experience based on machine learning and artificial intelligence. Integration of new technologies into systems involves numerous technical challenges, substantial amounts of capital and personnel resources, and often takes many months to complete. We intend to continue to devote efforts and funds toward the development of additional technologies and services so that we can both innovate and stay competitive in the competitive landscape in which we operate. For example, in 2020, we introduced a number of new features such as search optimization to provide better matches to our users, and we anticipate the introduction of additional features in 2021 and beyond. We may not be able to effectively integrate new technologies into our websites and mobile applications on a timely basis or at all, which may degrade the responsiveness and speed of our websites and mobile applications. Such technologies, even if integrated, may not function as expected.
We need to maintain or increase our number of paying subscribers to maintain or increase our current level of revenue.
The vast majority of our revenue is generated by users that pay 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. We cannot assure that we will be able to grow or even maintain the current size of our subscriber base. If we do not constantly attract new paying subscribers at a faster rate than subscription terminations, we will not be able to maintain or increase our current level of revenue.
Our growth and profitability rely, in part, on our ability to attract and retain users through cost-effective marketing efforts. Any failure in these efforts could adversely affect our business, financial condition and results of operations.
Our costs to acquire paying subscribers are dependent, in part, upon our ability to purchase advertising at a reasonable cost. Our advertising costs vary over time depending upon a number of factors, many of which are beyond our control. Historically, we have used online and offline advertising as the primary means of marketing our services. During 2020, cost of revenue, exclusive of depreciation and amortization, substantially increased compared to the prior year as a result of the addition of the first full year of Zoosk integration following the Spark Networks / Zoosk Merger in July 2019.
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 our businesses, we must identify and devote more of our overall marketing expenditures to newer advertising channels, such as mobile and online video platforms, as well as targeted campaigns in which we communicate directly with potential, former and current users via new virtual means. Positive user experiences can provide gratuitous promotional opportunities for us, as satisfied subscribers can encourage others to join; we can also capitalize on such success stories in our marketing. Many of our competitors have also engaged in live marketing efforts such as organized online social events for members, an area that we have 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 we will be able to continue to appropriately manage and fine-tune our marketing efforts in response to these and other trends in the advertising industry. Any failure to do so could adversely affect our business, financial condition and results of operations.
In addition, the cost of online and/or offline advertising has historically increased over time. If we are not able to reduce our other operating costs, increase our paying subscriber base or increase revenue per paying subscriber to offset increased marketing costs, our profitability will be adversely affected.
Our growth strategy includes acquisitions that entail significant execution, integration and operational risks.
We pursue a growth strategy based in part on acquisitions, with the objective of creating a combined company that we believe can achieve increased cost savings and operating efficiencies through economies of scale, especially in the integration of
administrative services. We will seek to make additional acquisitions in the future to increase our scale and profitability. For instance, on July 1, 2019, we consummated the acquisition of Zoosk, Inc. ("Zoosk"), pursuant to which Zoosk became a wholly owned subsidiary of Spark Networks. 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, we consummated the acquisition of Samadhi, owner of the Attractive World platform, and on November 2, 2017, we 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. We expose ourselves to operational and financial risks in connection with historical and future acquisitions if we are unable to:
•properly value prospective acquisitions, especially those with limited operating histories;
•successfully integrate the operations, as well as the accounting, financial controls, management information, technology, human resources and other administrative systems of acquired businesses with our existing operations and systems;
•successfully identify and realize potential synergies among acquired and existing businesses;
•retain or hire senior management and other key personnel at acquired businesses; and
•successfully manage acquisition-related strain on our management, operations and financial resources and those of the various brands in our portfolio.
Furthermore, we may not be successful in addressing other challenges encountered in connection with our acquisitions. The anticipated benefits of one or more of our 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 of these events could have an adverse effect on our business, financial condition and results of operations. While we have 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.
Communicating with our users is critical to our success, and any erosion in our ability to communicate with our users could adversely affect our business, financial condition and results of operations.
To be successful, we must communicate with our 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, we must ensure that our methodology for communication with our subscribers and other users evolves in step with the communication habits of our consumers. For instance, most of our 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 our business, financial condition and results of operations.
Our success depends, in part, on the integrity of our systems and infrastructure and on our ability to enhance, expand and adapt these systems and infrastructure in a timely and cost-effective manner.
In order for us to succeed, our systems and infrastructure must perform well on a consistent basis. From time to time, we may experience system interruptions that make some or all of our systems or data unavailable and prevent our products from functioning properly for our users; any such interruption could arise for any number of reasons, including human errors. Further, our systems and infrastructure are vulnerable to damage from fire, power loss, hardware and operating software errors, telecommunications failures and similar events. While we have backup systems in place for certain aspects of our operations, our systems and infrastructure are not fully redundant, disaster recovery planning is not sufficient for all eventualities and our property and business interruption insurance coverage may not be adequate to compensate us fully for any losses that we may suffer. Any interruptions or outages, regardless of the cause, could negatively impact our users’ experiences with our products, tarnish our brands’ reputation and decrease demand for our products, any or all of which could adversely affect our 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.
We also continually work to expand and enhance the efficiency and scalability of our technology and network systems to improve the experience of our users, accommodate substantial increases in the volume of traffic to our various dating products, ensure acceptable page load times or general accessibility for our 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 our users’ experience with our various products and thereby negatively impact the demand for our products, and could increase our costs, either of which could adversely affect our business, financial condition and results of operations.
Our services are highly technical and may contain undetected bugs or errors, which could manifest in ways that could seriously harm our reputation and our business.
Our services are highly technical and complex, and any services we 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 our services, including through diminished performance, security vulnerabilities, malfunctions, or even permanently disabled services. We have a practice of rapidly updating our services, but some errors in our services may be discovered only after our service are used by users, and may in some cases be detected only under certain circumstances or after extended use. Any such defects discovered in our services after commercial release could result in a loss of sales and users, which could seriously harm our business. Any errors, bugs, or vulnerabilities discovered in our code after release could damage our reputation, drive away users, lower revenue, and expose us to damages claims, any of which could seriously harm our business.
We have been subject to cybersecurity incidents in the past and anticipate being the target of future attacks. Any actual or perceived security or privacy breach affecting us or our third-party service providers could interrupt our operations, harm our brand, and adversely affect our reputation, brand, business, financial condition, and results of operations.
Our business involves the collection, storage, processing, and transmission of personal data, including credit card information. Additionally, we maintain sensitive and proprietary information relating to our business, such as our own proprietary information and personal data relating to our employees. An increasing number of organizations, including large online and off-line businesses, Internet companies, financial institutions, and government institutions, have disclosed breaches of their information security systems and other information security incidents, including cyberattacks, ransomware, computer viruses, worms, hacking, phishing, bot attacks or other destructive or disruptive software, distributed denial of service attacks, other attempts to misappropriate customer information, some of which have involved sophisticated and highly targeted attacks. We have previously experienced and expect to continue to experience these types of breaches, attacks and other incidents. See Note 10 to our "Consolidated Financial Statements".
Because techniques used to obtain unauthorized access to or to sabotage information systems change frequently and may not be known until launched against us, we or our service providers may be unable to anticipate or prevent these attacks, react in a timely manner, or implement adequate preventive measures, and we may face delays in our detection or remediation of, or other responses to, security breaches and other privacy- and security-related incidents. Unauthorized parties have in the past gained access, and may in the future gain access, to systems or facilities used in our business through various means, including gaining unauthorized access into our systems or facilities, attempting to fraudulently induce our employees, users or others into disclosing user names, passwords, payment card information, or other sensitive information, which may in turn be used to access our information technology, or IT, systems, or attempting to fraudulently induce our employees, or others into manipulating payment information, resulting in the fraudulent transfer of funds to bad actors. Unauthorized parties may also seek to disrupt or disable our or our service providers’ services through attacks such as ransomware attacks. In addition, we or our service providers may be unable to identify, or may be significantly delayed in identifying, cyberattacks and incidents due to the increasing use of techniques and tools that are designed to circumvent controls, to avoid detection, and to remove or obfuscate forensic artifacts.
In addition, users could have vulnerabilities on their own devices that are entirely unrelated to our systems but could mistakenly attribute their own vulnerabilities to us. Further, breaches experienced by other companies may also be leveraged against us. Certain efforts may be supported by significant financial and technological resources, making them even more difficult to detect, remediate, and otherwise respond to.
Although we and our service providers have systems and processes that are designed to protect, prevent data loss, and prevent other security breaches and security incidents, these security measures have not fully protected our systems in the past and cannot guarantee security in the future. The IT and infrastructure used in our business and in the products of third parties we use may be vulnerable to cyberattacks or security breaches, and unauthorized third parties may be able to access data, including personal data and other sensitive and proprietary data of users, our employees’ personal data, or our other sensitive and proprietary data, accessible through those systems. Employee error, malfeasance, or other errors in the storage, use, or
transmission of any of these types of data could result in an actual or perceived privacy or security breach or other security incident. Although we have policies restricting the access to the personal information we store, there is a risk that these policies may not be effective in all cases.
Any actual or perceived breach of privacy, or any actual or perceived security breach or other incidents, could interrupt our operations, result in our platform being unavailable, result in loss or improper access to, or acquisition or disclosure of, data, result in fraudulent transfer of funds, harm our reputation, brand, and competitive position, damage our relationships with third-party partners, or result in claims, regulatory investigations, and proceedings and significant legal, regulatory, and financial exposure, including ongoing monitoring by regulators, and any such incidents or any perception that our security measures are inadequate could adversely affect our business, financial condition, and results of operations. Any actual or perceived breach of privacy or security, or other security incident, impacting any entities with which we share or disclose data (including, for example, our third-party technology providers) could have similar effects. Further, any cyberattacks or actual or perceived security and privacy breaches and other incidents directed at, or suffered by, our competitors could reduce confidence in our industry as a whole and, as a result, reduce confidence in us. We also expect to incur significant costs in an effort to detect and prevent privacy and security breaches and other privacy- and security-related incidents, and we may face increased costs and requirements to expend substantial resources in the event of an actual or perceived privacy or security breach or other incident.
Additionally, defending against claims or litigation based on any security breach or incident, regardless of their merit, could be costly and divert management’s attention, including as a result of business changes that may be required in settling or resolving such claims or litigation. We cannot be certain that our insurance coverage will be adequate for data handling or data security costs or liabilities actually incurred, that insurance will continue to be available to us on commercially reasonable terms or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have an adverse effect on our reputation, brand, business, financial condition, and results of operations.
Similarly, online scammers and other similar groups may use our services and products to engage in illegal activities and it is likely that as more people use our services, these groups will increasingly seek to misuse our products. Although we invest resources to combat these activities, including by suspending or terminating accounts we believe violate our guidelines, we believe these groups will continue to seek ways to act inappropriately and illegally on our services. Combating these groups requires our engineering and customer service teams to divert significant time and focus from improving our services.
Further, the impact of cyber security events experienced by third parties with whom we do business (or upon whom we otherwise rely in connection with our day-to-day operations such as credit card processors) could have a similar effect on us. If breaches, scamming and other similar activities increase at third parties with whom we do business, our reputation, business and results of operations could be materially adversely affected.
We rely on a number of third-party providers and their failure or unwillingness to continue to perform could harm us.
We rely on third parties to provide important services and technologies, including third parties that manage and monitor our offsite data center, ISPs, search engine marketing providers and credit card processors, among others. In addition, we license technologies from third parties to facilitate our ability to provide our services. Any failure on our part to comply with the terms of these licenses could result in the loss of our rights to continue using the licensed technology, and we 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 our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. Except to the extent of the terms of our contracts with such third party providers, we exercise little or no control over them, which increases our vulnerability to problems with the services and technologies they provide and license to us. In addition, if any fees charged by third party providers were to substantially increase, we could incur significant additional losses.
We depend, in part, upon arrangements with third parties to drive traffic to our various websites and apps.
We engage in a variety of activities designed to attract traffic to our various websites and mobile applications and convert visitors into members and paying subscribers. How successful we are in these efforts depends, in part, upon our continued ability to enter into arrangements with third parties to drive traffic to our various websites and mobile applications and our oversight of such third parties to ensure that they are appropriately communicating with online users. Pursuant to these
arrangements, third parties generally promote our services on their websites and mobile applications or through email campaigns and we pay them based on a variety of metrics (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 our ability to communicate with our 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 we fail to replace this traffic and related revenue, or if we are 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, our business, financial condition and results of operations could be adversely affected.
Distribution and use of our 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 our dating products in any material way, it could adversely affect our business, financial condition and results of operations.
We market and distribute our dating products (including related mobile applications) through a variety of third-party publishers and distribution channels. Our ability to market our 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 we 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, our business, financial condition and results of operations could be adversely affected.
Additionally, our 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 our applications as well as to the pricing of our services, and to interpret their respective terms and conditions in ways that may limit, eliminate or otherwise interfere with our ability to distribute our 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, our business, financial condition and results of operations could be adversely affected.
As the distribution of our dating products through app stores increases, we will need to offset increasing app store fees.
As our user base continues to shift to mobile solutions, we increasingly rely on the Apple App Store and the Google Play Store to distribute our mobile applications and related in-app products. While our mobile applications are free to download from these stores, we offer our users the opportunity to purchase paid memberships through these applications. We determine 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 our applications from these stores, we pay Apple and Google, as applicable, a share of the revenue we receive from these transactions. As the distribution of our dating products through app stores increases, we 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 our business, financial condition and results of operations could be adversely affected.
Our success depends, in part, on our ability to access, collect and use personal data about our users and subscribers.
We depend on search engines, digital app stores and social media platforms, to market, distribute and monetize our products and services. Our subscribers and users engage with these platforms directly, and in the case of digital app stores, may be subject to requirements regarding the use of their payment systems for various transactions. As a result, these platforms may receive personal data about our users and subscribers that we would otherwise receive if we transacted with our users and subscribers directly. If these platforms limit or increasingly limit, eliminate or otherwise interfere with our ability to access, collect and use personal data about our users and subscribers that they have collected, our ability to identify and communicate with a meaningful portion of our user and subscriber bases may be adversely impacted. If so, our customer relationship management efforts, our ability to identify, target and reach new segments of our user and subscriber bases and the population generally, the efficiency of our paid marketing efforts and our ability to develop and implement safety features, policies and procedures for certain of our products and services could be adversely affected. We cannot assure you that search engines, digital app stores and social media platforms upon which we rely will not limit or increasingly limit, eliminate or otherwise interfere with our ability to access, collect and use personal data about our users and subscribers that they have collected. To the extent that any or all of them do so, our business, financial condition and results of operations could be adversely affected.
The varying and rapidly evolving regulatory framework on privacy and data protection across jurisdictions 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 our business.
There are numerous laws in the countries in which we operate 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 we do 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 intend to consider privacy legislation in 2021 and beyond. 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. In November 2020, California voters passed the California Privacy Rights and Enforcement Act of 2020 (“CPRA”). The CPRA further expands the CCPA with additional data privacy compliance requirements that may impact our business, and establishes a regulatory agency dedicated to enforcing those requirements. Additionally, the Federal Trade Commission and state regulators have increased their focus on privacy and data security practices at digital companies.
Additionally, we are subject to laws, rules, and regulations regarding cross-border transfers of personal data, including laws relating to transfer of personal data outside the European Economic Area (“EEA”). Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA to the United States and other jurisdictions; for example, on July 16, 2020, the CJEU invalidated the EU-US Privacy Shield Framework (“Privacy Shield”) under which personal data could be transferred from the EEA to US entities that had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it noted that reliance on them alone may not necessarily be sufficient in all circumstances; this has created uncertainty and increased the risk around our international operations. These recent developments may require us to review and amend the legal mechanisms by which we make, or in the future might make, and, or, receive, or in the future might receive, personal data transfers to the United States and other jurisdictions. The German data protection authorities, the European Data Protection Board, and other data protection authorities issue further guidance on personal data export mechanisms, including circumstances where the standard contractual clauses cannot be used, and/or start taking enforcement action, we could suffer additional costs, complaints and/or regulatory investigations or fines, and/or if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services, the geographical location or segregation of our relevant systems and operations, and could adversely affect our financial results.
While we believe that we comply 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 we will not be subject to claims that we have violated applicable laws or codes of conduct, that we will be able to successfully defend against such claims or that we will not be subject to significant fines and penalties in the event of non-compliance. Additionally, to the extent multiple local-level laws are introduced with inconsistent or conflicting standards and there is no national law to preempt such laws, compliance with such laws could be difficult to achieve and we could be subject to fines and penalties in the event of non-compliance.
Any failure or perceived failure by us (or the third parties with whom we have 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 us, including governmental enforcement actions, significant fines, litigation, claims of breach of contract and indemnity by third parties, and adverse publicity. When such events occur, our reputation may be harmed, we may lose current and potential users and the competitive positions of various brands could be diminished, any or all of which could adversely affect our business, financial condition and results of operations.
Lastly, compliance with the numerous laws in the countries in which we operate 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 our business, financial condition and results of operations could be adversely affected.
We are 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 our business, financial condition and results of operations.
We accept payment from our users primarily through credit card transactions and online payment service providers. While we use third parties to handle and process credit card transactions, we still face 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 our ability to process auto-renewals. In addition, breaches at third party processors could affect consumer confidence in us because consumers may not distinguish between us and the third party when informed of the breach. The occurrence of this or similar events could have a material adverse effect on our business, results of operations, and financial conditions.
Inappropriate actions by certain of our users could be attributed to us and damage our brands’ reputations, which in turn could adversely affect our business.
The reputation of our brands may be adversely affected by the actions of our users that are deemed to be hostile, offensive, defamatory, inappropriate or unlawful. While we monitor and review the appropriateness of the content accessible through our dating products and have adopted policies and technical solutions to address and prevent illegal, offensive or inappropriate use of our dating services, our users could nonetheless engage in activities that violate our policies or circumvent the solutions. These safeguards may not be sufficient to avoid harm to our reputation and brands, especially if such hostile, offensive or inappropriate use is well-publicized.
In addition, it is possible that a user of our services could be physically, financially, emotionally or otherwise harmed by an individual that such user met through the use of one of our services. While we check every new profile and monitor accounts for fraudulent activity, we are not certain that every harm posed by other individuals can be eliminated. If one or more of our users suffers or alleges to have suffered any such harm, we could experience negative publicity or legal action that could damage our reputation and our brands. Similar events affecting users of our competitors’ dating services could result in negative publicity for the dating industry, which could in turn negatively affect our business. Concerns about such harms and the use of dating services and social networking platforms for illegal conduct, such as romance scams and financial fraud, could produce future legislation or other governmental action that could require changes to our dating services, restrict or impose additional costs upon the conduct of our business generally, subject us to liability for user conduct or cause users to abandon our dating services.
We may be liable as a result of information retrieved from or transmitted over the internet.
We 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 our websites and mobile applications and the other sites or applications linked to us. These types of claims have been brought, sometimes successfully, against online services in the past. We could incur significant costs in investigating and defending such claims, even if we ultimately are not held liable. If any of these events occurs, our revenue could be materially adversely affected, or we could incur significant additional expense.
We operate in various international markets, including certain markets in which we have limited experience. As a result, we face additional risks in connection with certain of our international operations.
Our brands are available worldwide. Operating internationally exposes us 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 our dating services or lack of acceptance of them generally;
•foreign currency fluctuations;
•other potential adverse consequences and unforeseen increased expenses or liabilities associated with the Zoosk acquisition.
•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.
The occurrence of any or all of the events described above could adversely affect our international operations, which could in turn adversely affect our business, financial condition and results of operations.
The global COVID-19 outbreak has affected our business and operations.
The outbreak of the novel coronavirus and the COVID-19 disease that it causes has evolved into a global pandemic. In light of the continued uncertainty relating to COVID-19, we have taken certain precautionary measures intended to minimize the risk of the virus to our employees and the communities in which we operate, including temporarily closing certain of our offices and virtualizing, postponing, or canceling certain events and travel, which may negatively impact our business.
Furthermore, as a result of the COVID-19 pandemic, most of our employees and service providers are working remotely. It is possible that continued widespread remote work arrangements may have a negative impact on our operations, the execution of our business plans, the productivity and availability of key personnel and other employees necessary to conduct our business, and on third-party service providers who perform critical services for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions. If a natural disaster, power outage, connectivity issue, or other event occurs that impacts our employees’ ability to work remotely, it may be difficult or, in certain cases, impossible, for us to continue our business for a substantial period of time. The increase in remote working may also result in material consumer privacy, information technology security, and fraud risks.
In addition, governments at all levels continue to impose and advise restrictions on social gatherings in both public and private spaces. The continuation of these restrictions, along with an increased hesitancy by individuals to frequent public spaces, could reduce the demand for our services in the future.
Accordingly, it is not possible at this time to estimate the extent of the impact that COVID-19 will have on our business, as the pandemic continues to evolve and be highly uncertain.
Our 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 our business.
We are 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 our business, including, among others, broadband internet access, website accessibility, online commerce, advertising, user privacy, data protection, intermediary liability, protection of minors, consumer protection, sex-trafficking, taxation, export controls, economic sanctions and securities law compliance. The introduction of new products, expansion of our activities in certain jurisdictions, or other actions that we may take may subject us 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 we operate, and may be interpreted and applied inconsistently from state to state and country to country and inconsistently with our 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 we change or cease certain business practices, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
Proposed or new legislation and regulations could also adversely affect our business, including the adoption of any laws or regulations that adversely affect the popularity or growth in use of the internet or our 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 our business or our ability or the manner in which we provide our services, could require us to change certain aspects of our business and operations to ensure compliance, which could decrease demand for services, reduce revenues, increase costs and subject us to additional liabilities.
Legal, political and economic uncertainty surrounding the exit of the United Kingdom from the European Union, or Brexit, and the implementation of the trade and cooperation agreement between the United Kingdom and the European Union could have a material adverse effect on our business.
In June 2016, voters in the United Kingdom approved a referendum to withdraw the United Kingdom’s membership from the European Union, which is commonly referred to as “Brexit.” The United Kingdom’s withdrawal from the European Union occurred on January 31, 2020, but the United Kingdom remained in the European Union’s customs union and single market for a transition period that expired on December 31, 2020. On December 30, 2020, the United Kingdom and the European Union entered into a trade and cooperation agreement (the “Trade and Cooperation Agreement”), which was applied on a provisional basis from January 1, 2021. While the economic integration does not reach the level that existed during the time the United Kingdom was a member state of the European Union, the Trade and Cooperation Agreement sets out preferential arrangements in areas such as trade in goods and in services, digital trade and intellectual property. Negotiations between the United Kingdom and the European Union are expected to continue in relation to the relationship between the United Kingdom and the European Union in certain other areas which are not covered by the Trade and Cooperation Agreement. The long-term effects of Brexit will depend on the effects of the implementation and application of the Trade and Cooperation Agreement and any other relevant agreements between the United Kingdom and the European Union.
We have operations in the United Kingdom and the European Union and, as a result, we face risks associated with the potential uncertainty and disruptions that may follow Brexit and the implementation and application of the Trade and Cooperation Agreement, including with respect to volatility in exchange rates and interest rates, disruptions to the free movement of data, goods, services, people and capital between the United Kingdom and the European Union and potential material changes to the regulatory regime applicable to our operations in the United Kingdom. The uncertainty concerning the United Kingdom’s future legal, political and economic relationship with the European Union could adversely affect political, regulatory, economic or market conditions in the European Union, the United Kingdom and worldwide and could contribute to instability in global political institutions, regulatory agencies and financial markets. These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets and could significantly reduce global market liquidity and limit the ability of key market participants to operate in certain financial markets. In particular, it could also lead to a period of considerable uncertainty in relation to the United Kingdom financial and banking markets, as well as to the regulatory process in Europe. Asset valuations, currency exchange rates and credit ratings may also be subject to increased market volatility.
We may also face new regulatory costs and challenges as a result of Brexit that could have a material adverse effect on our operations. For example, as of January 1, 2021, the United Kingdom lost the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increased trade barriers that could make our doing business in areas that are subject to such global trade agreements more difficult. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which laws of the European Union to replace or replicate. There may continue to be economic uncertainty surrounding the consequences of Brexit that adversely impact customer confidence resulting in customers reducing their spending budgets on our services, which could materially adversely affect our business, financial condition and results of operations.
The ongoing instability and uncertainty surrounding Brexit and the implementation and application of the Trade and Cooperation Agreement, could require us to restructure our business operations in the United Kingdom and the European Union and could have an adverse impact on our business and employees in the United Kingdom and European Union.
We are subject to litigation and adverse outcomes in such litigation could have an adverse effect on our financial condition.
We are, 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 our business or operations. In addition, we might be subject to potential class action suits or other collective proceedings 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. We evaluate 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, we 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 our current assessments and estimates. Our 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 our business, financial condition and results of operations.
Our use of “open source” software could subject our proprietary software to general release, adversely affect our ability to sell our products and services and subject us to possible litigation.
We use open source software in connection with a portion of our proprietary software and expect to continue to use open source software in the future. Under certain circumstances, some open source licenses require users of the licensed code to provide the user’s own proprietary source code to third parties upon request, or prohibit users from charging a fee to third parties in connection with the use of the user’s proprietary code. While we try to insulate our proprietary code from the effects of such open source license provisions, we cannot guarantee that we will be successful, that all open source software is reviewed prior to use in our products, that our developers have not incorporated open source software into our products, or that they will not do so in the future. Accordingly, we may face claims from others challenging our use of open source software, claiming ownership of, or seeking to enforce the license terms applicable to such open source software, including by demanding release of the open source software, derivative works or our proprietary source code that was developed or distributed with such software. Such claims could also require us to purchase a commercial license or require us to devote additional research and development resources to change our software, any of which would have a negative effect on our business and results of operations. In addition, if the license terms for the open source code change, we may be forced to re-engineer our software or incur additional costs. Additionally, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts. There is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to market or provide our products.
Our business depends, in part, on the growth and maintenance of the internet, and our ability to provide services to our 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.
Our 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. We have no control over the third-party telecommunications, cable or other providers of access services to the internet that our members and paying subscribers rely upon. There have been instances where regional and national telecommunications outages have caused us to experience service interruptions during which our members and paying subscribers could not access our services. Any additional interruptions, delays or capacity problems experienced with any points of access between the internet and our members could adversely affect our ability to provide services reliably to our members and paying subscribers. The temporary or permanent loss of all, or a portion, of our services on the internet, the internet infrastructure generally, or our members’ and paying subscribers’ ability to access the internet could disrupt our business activities, harm our 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 our services. Any such new laws, regulations or amendments to existing regulations could disrupt or adversely affect the profitability of our business.
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, our relationship with any major credit card company would have a severe, negative impact on our business.
A significant portion of our customers purchase our 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
us to either increase the prices we charge for our products, or suffer a negative impact on our profitability, either of which could adversely affect our business, financial condition and results of operations.
In addition, we have potential liability for chargebacks associated with the transactions processed on our behalf. If a customer claims that a subscription to one of our products was purchased fraudulently, the subscription price is “charged back” to us or our bank, as applicable. If we or our sponsoring banks are unable to collect the chargeback from the persons processing transactions on our behalf, or, if the credit card processor refuses or is financially unable to reimburse for the chargeback, e bear the loss for the amount of the refund paid. We also have potential liability related to fines that are levied by the major credit card companies when chargeback expenses exceed certain thresholds.
We are 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, we or the card processor are liable for any loss arising from the transaction. Because all of our sales via credit card are card-not-present transactions, we are more vulnerable to credit card fraud.
Loss or material modification of our credit card acceptance privileges would have a material adverse effect on our business and operating results.
A significant percentage of our users pay for our services by credit card. The loss of credit card acceptance privileges would significantly limit our ability to renew paying subscribers or secure new paying subscribers.
Most of our 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 we fail to fully perform our 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. We might be obligated to pay all such amounts under our agreements under which we have obtained our credit card acceptance privileges. As a result of this risk, credit card companies may require us 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, our Zoosk brand is required to adopt and implement internal controls over the use, storage and security of card data to help prevent credit card fraud. We assess our compliance with the PCI DSS on a periodic basis and make necessary improvements to our internal controls. If we fail to comply with the rules and regulations adopted by the card networks, including the PCI DSS, we would be in breach of our contractual obligations to payment processors and merchant banks. Such failure to comply may subject us to fines, penalties, damages and civil liability and could eventually prevent us from processing or accepting credit cards. Further, there is no guarantee that, even if we comply with the rules and regulations adopted by the card networks, we will be able to maintain our compliance. We also cannot guarantee that such compliance will prevent illegal or improper use of our 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 we obtain credit card acceptance privileges would have a material adverse effect on our business, revenue and operating results.
Our ability to comply with the Senior Secured Facilities Agreement is subject to our future performance and other factors.
On July 1, 2019, in connection with the Spark Networks / Zoosk Merger, we entered into the Senior Secured Facilities Agreement (the "Senior Secured Facilities Agreement") that provides for a senior secured term loan facility in an aggregate amount equal to $120 million and a senior secured revolving facility in an aggregate amount equal to $5 million (the "Revolving Credit Facility"), which was amended on May 20, 2020 to extend the required delivery date of the audited financial statements and related year-end documentation for the fiscal year ending December 31, 2019, and which was further amended on December 2, 2020 to, among other things as set forth therein, reset the financial covenants and increase the term loan facility by $6 million (the "Term Loan Facility" and together with the Revolving Credit 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. Additional covenants, among other things, limit our and our subsidiaries' abilities to:
•incur additional indebtedness;
•create or incur additional liens;
•engage in certain fundamental changes, including mergers or consolidations;
•sell or transfer assets;
•pay dividends and distributions on our and our subsidiaries’ capital stock;
•make payments and prepayments of junior or unsecured indebtedness;
•make acquisitions, investments, loans, or advances;
•engage in certain transactions with affiliates; and
•enter into negative pledge clauses and clauses restricting subsidiary distributions.
Our 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 our control, and there can be no assurance that we will be able to maintain compliance with these covenants in the future. The breach of any of the debt covenants could result in an event of 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 our assets would be sufficient to repay the indebtedness in full. If any of these events were to occur, our ability to fund our operations could be seriously harmed.
If we experience a decline in cash flow due to any of the factors described in these “Risk Factors” or otherwise, we could have difficulty paying interest and the principal amount of our outstanding indebtedness. If we are unable to generate sufficient cash flow or otherwise obtain the funds necessary to make required payments under our Facilities, or if we fail to comply with the various requirements of our indebtedness, we could default under our Facilities. Any such default that is not cured or waived could result in an acceleration of indebtedness then outstanding under our Facilities, a requirement that we and our subsidiaries that have guaranteed our indebtedness pay the obligations in full, and would permit the lenders to exercise remedies with respect to all of the collateral that is securing our indebtedness, including substantially all of our and our subsidiary guarantors’ assets. We cannot be certain that our future operating results will be sufficient to ensure compliance with the covenants in Senior Secured Facilities or to remedy any defaults under such facilities.
Our substantial level of indebtedness could materially adversely affect our financial condition.
We have significant indebtedness that could materially adversely affect our business by:
•increasing our vulnerability to general adverse economic and industry conditions;
•requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, product development efforts, marketing expenditures, and other general corporate purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
•exposing us to the risk of increased interest rates as our borrowings are, and may in the future be, at variable interest rates.
The occurrence of any one of these events could have a material adverse effect on our business, results of operations, and financial condition, and ability to satisfy our obligations under our Senior Secured Facilities.
Our user metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may seriously harm and negatively affect our reputation and our business.
We regularly review metrics, including our ARPU and average paying subscribers metrics, to evaluate growth trends, measure our performance, and make strategic decisions. These metrics are calculated using internal company data gathered on an analytics platform that we developed and operate and have not been validated by an independent third party. While these
metrics are based on what we believe to be reasonable estimates of our user base for the applicable period of measurement, there are inherent challenges in measuring how our products are used across large populations globally. Our user metrics are also affected by technology on certain mobile devices that automatically runs in the background of our application when another phone function is used, and this activity can cause our system to miscount the user metrics associated with such account. The methodologies used to measure these metrics require significant judgment and are also susceptible to algorithm or other technical errors. In addition, we are continually seeking to improve our estimates of our user base, and such estimates may change due to improvements or changes in our methodology.
Errors or inaccuracies in our metrics or data could also result in incorrect business decisions and inefficiencies. For instance, if a significant understatement or overstatement of active users were to occur, we may expend resources to implement unnecessary business measures or fail to take required actions to attract a sufficient number of users to satisfy our growth strategies. We continually seek to address technical issues in our ability to record such data and improve our accuracy, but given the complexity of the systems involved and the rapidly changing nature of mobile devices and systems, we expect these issues to continue, particularly if we continue to expand in parts of the world where mobile data systems and connections are less stable. If partners or investors do not perceive our user, geographic, or other demographic metrics to be accurate representations of our user base, or if we discover material inaccuracies in our user, geographic, or other demographic metrics, our reputation may be materially adversely impacted.
Changes in how LIBOR is determined, or the potential replacement of LIBOR with an alternative reference rate, may adversely affect our interest expense.
Our 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. We cannot predict the impact of the potential phase out of LIBOR on the interest rate in our debt agreement, and whether the alternative reference rates in our debt agreement will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. We intend to monitor the developments with respect to the potential phasing out of LIBOR after 2021 and work with our lenders to ensure any transition away from LIBOR will have minimal impact on our financial condition, but can provide no assurances regarding the impact of the discontinuation of LIBOR on our financial condition or whether the discontinuation of LIBOR would have a material adverse effect on our 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 our competitors may enjoy better competitive positions in certain geographical regions or user demographics that we 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 our products, or to respond more quickly and/or cost-effectively than us 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.
We compete with traditional personals services, as well as newspapers, magazines and other traditional media companies that provide personals services. We also compete 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, Tinder and Hinge properties), Bumble (which operates the Bumble and Badoo brands) and ParshipMeet Group (which operates the eHarmony, Parship, ElitePartner and Meet brands). In addition, we face competition in free and freemium mobile applications such as Tinder, Bumble and Hinge or applications that compete in one of our niches such as Match Group's Upward as well as social networking sites like Facebook. Some of our competitors have longer operating histories, greater financial, technical, marketing and other resources and larger customer bases than we currently have. 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. Our competitors may develop products or services that are equal or superior to our products and services or that achieve greater market acceptance than our products and services. These activities could attract members and paying subscribers away from our websites and mobile
applications and reduce our 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, we currently compete with other companies that direct all or portions of their websites and mobile applications toward each of their respective targeted and actual subscribers. For example, we currently compete with generalist personals services platforms, some of which have substantially greater resources and brand recognition than we 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.
Further, 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 we are not able to compete effectively against our current or future competitors, whether or not such competitors operate traditional or non-traditional platforms, the size and level of engagement of our user base may decrease, which could have an adverse effect on our business, financial condition and results of operations.
We believe that our ability to compete depends upon many factors both within and beyond our 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 our products and services, including developments and enhancements to products and services relative to those offered by our competitors; and
•customer service and support efforts.
We have no present intention to pay dividends on our 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 our ADSs appreciates.
We have no present intention to pay dividends on our 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 our ADSs declines in the foreseeable future, you will incur a loss on your investment, without the likelihood that this loss will be offset in part or at all by potential future cash dividends.
You may experience dilution of your ownership interests because of the future issuance of additional ordinary shares, preferred stock or other securities that are convertible into or exercisable for such securities.
In the future, we may issue authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of direct or indirect holders of our ordinary shares, including Spark Networks ADSs. We may issue additional ordinary shares or other securities that are convertible into or exercisable for our 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 ordinary shares may create downward pressure on the trading price of our ADSs. We may need to raise additional capital in the near future to meet working capital needs, and there can be no assurance that we will not be required to issue additional ordinary shares in the future in conjunction with these capital raising efforts. While stockholder approval will be needed to issue additional 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.
Our future success will depend upon our continued ability to identify, hire, develop, motivate and retain highly skilled individuals.
The continued contributions of our senior management is especially critical to our success. In particular, the loss of Eric Eichmann, Gitte Bendzulla and/or Bert Althaus, our current managing directors, and Tobias Plaputta, the current Chief Technology Officer of Spark Networks, could materially and adversely affect us. For a discussion of our senior management, see Item 6.A. Our continued ability to compete effectively depends, in part, upon our ability to attract new employees. While we have established programs to provide incentives to retain existing employees, particularly our senior management, we cannot assure that we will be able to attract new employees or retain the services of our senior management or any other key
employees in the future. Effective succession planning is important to our future success. If we fail to ensure the effective transfer of senior management knowledge and smooth transitions involving senior management across our various businesses, our ability to execute short and long term strategic, financial and operating goals, as well as our business, financial condition and results of operations generally, could be adversely affected.
We have experienced significant turnover in our top executives, and our business could be adversely affected by these and other transitions in our senior management team or if any of the resulting vacancies cannot be filled with qualified replacements in a timely manner.
During 2019, we experienced significant turnover in our top executives, including the departures of our Chief Executive Officer, Chief Financial Officer and Chief Operating Officer and the replacement of these positions with new officers. During 2020, we saw the appointment of a new Chief Operating Officer.
Management transition is often difficult and inherently causes some loss of institutional knowledge, which could negatively affect our results of operations and financial condition. Our 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, we cannot guarantee that we will not face similar turnover in the future. Although we generally enter into employment agreements with our executives, our executive officers may terminate their employment relationship with us at any time, and we cannot ensure that we will be able to retain the services of any of them. Our senior management’s knowledge of our business and industry would be difficult to replace, and any further turnover could negatively affect our business, growth, financial conditions, results of operations and cash flows.
Changes in tax treatment of companies engaged in e-commerce could materially adversely affect the commercial use of our platforms and our 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 our business or levy additional or new sales, income or other taxes relating to our 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 us or our 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 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 physical presence. Furthermore, there is risk that some jurisdictions, where we are or will be subject to VAT, may increase their local VAT rates on e-commerce services in order to recover economic costs of the ongoing pandemic. 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 our access to capital and increase our cost of capital, which may significantly affect our 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, 2020, we had cash and cash equivalents of $19.3 million and expect to have positive operating cash flow, we may in the future be in need of liquidity to implement our growth strategy, including to raise capital to finance acquisitions. In such a scenario, we may be forced to curtail certain operations and may be unable to operate our business as we deem appropriate. Disruptions, uncertainty or volatility in the capital and credit markets, including as a result of the COVID-19 pandemic, may also limit our access to capital required to operate our business. Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. In addition, the terms of future debt agreements could include more restrictive
covenants, which could further restrict our business operations. Our 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.
We had $156.6 million of goodwill, $52.9 million of brands and trademarks and $6.1 million of other intangible assets as of December 31, 2020. We review 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 amount 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 our ADSs, a significant decline in performance of certain acquired companies relative to our original projections, an excess of our net book value over our market value, a significant decline in our operating results relative to our operating forecasts, a significant change in the manner of our use of acquired assets or the strategy for our overall business, a significant decrease in the fair value of an asset, a shift in technology demands and development, or a significant turnover in key management or other personnel.
The assessment for potential impairment of goodwill, intangible assets or other long-term assets requires management to make judgments on a number of significant estimates and assumptions, including projected cash flows, discount rates, projected long-term growth rates and terminal values. We may be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill, intangible assets or other long-term assets is identified and this could negatively impact our 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 our 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.
We operate in a number of countries throughout the world, including countries known to have a reputation for corruption. We are committed to doing business in accordance with applicable anti-corruption laws. We are subject, however, to the risk that our 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 our 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 our business.
As a United States reporting company, we incur significant legal, accounting and other expenses. Compliance with reporting and corporate governance obligations from which domestic issuers and emerging growth companies (“EGCs”) are not exempt may require members of our 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. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. In addition, if we fail 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 our reputation and cause the market price of our ADSs to decline.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies classified as "domestic filers" under the Exchange Act, particularly after we are no longer an “emerging growth company,” which could adversely affect our business, financial condition, and results of operations.
As of January 1, 2021, we are no longer considered a “foreign private issuer” under the Exchange Act and are therefore no longer exempt from certain rules under the Exchange Act. As such, and particularly after we cease to be an “emerging growth company,” we will incur greater legal, accounting, finance, and other expenses than we incurred as a foreign private issuer.
This change has increased and will continue to increase our legal, accounting, and financial compliance costs and has made, and will continue to make, some activities more time-consuming and costly. For example, now that we are no longer a foreign private issuer, the Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and results of operations and that we comply with certain requirements of the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, and other rules and regulations of the SEC. As a result of the complexity involved in complying with the rules and regulations, our management’s attention may be diverted from the day-to-day management of our business, which could harm our business, financial condition, and results of operations. Although we have already hired additional employees to assist us in complying with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our operating expenses. Additionally, due to these additional rules and regulations and oversight, we may not have the same flexibility we had as a foreign private issuer.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for domestic filers such as us, increasing legal and financial compliance costs, and making some activities more time-consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest substantial resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from business operations to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
As a result of the disclosure of information required of us, our business and financial condition will become more visible, which may result in an increased risk of threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business, financial condition, and results of operations could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, financial condition, and results of operations.
Foreign currency exchange rate fluctuations could adversely affect our results of operations.
We operate in various international markets, primarily in various jurisdictions within the EU, United States and other international locations, and as a result, is exposed to foreign exchange risk for the Euro, United States dollar ("USD"), Great British pound, Australian dollar and Canadian dollar, among others. We translate international revenue into USD-denominated operating results, so during periods of a strengthening USD, our non-USD revenue will be reduced when translated into USD. In addition, as foreign currency exchange rates fluctuate, the translation of international revenue into USD-denominated operating results affects the period-over-period comparability of such results. We face similar risks as a result of revenue earned in other currencies.
Fluctuating foreign exchange rates can also result in foreign currency exchange gains and losses. We do 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.
United States investors may have difficulty enforcing civil liabilities against us or members of our 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 us in the United States or to enforce judgments obtained in United States courts against them or us 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 our 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.
We previously identified and continue to identify material weaknesses in our internal control over financial reporting. If we fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, results of operations or cash flows, which may adversely affect investor confidence.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. We are required 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 our internal control over financial reporting identified by management. SOX 404 also generally requires an attestation from our independent registered public accounting firm on the effectiveness of internal control over financial reporting. However, for as long as we remain an EGC, we intend to take advantage of the exemption permitting us not to comply with the independent registered public accounting firm attestation requirement. At the time when we are no longer an EGC, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Remediation efforts may not enable us to avoid a material weakness in the future.
Compliance with SOX 404 requires the incurrence of substantial accounting expense and consumes significant management efforts. we may not be able to complete evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in internal control over financial reporting, it will be unable to assert that our internal control over financial reporting is effective.
We previously identified in prior periods and have continued to identify material weaknesses in our internal control over financial reporting. We are taking steps to remediate these material weaknesses. However, we cannot at this time estimate how long it will take to remediate the material weaknesses, and we may not ever be able to remediate the material weaknesses. For additional information regarding these material weaknesses, see Item 9A, Controls and Procedures.
In addition, we cannot assure that there will not be other material weaknesses in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report financial condition, results of operations or cash flows. If we are unable to conclude that internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in internal control over financial reporting, we could lose investor confidence in the accuracy and completeness of our financial reports, the market price of our ADSs could decline, and we 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.
United States investors could suffer adverse tax consequences if we are 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 our gross income is passive income, or at least 50% of the gross average quarterly value of our assets is attributable to assets that produce passive income or are held for the production of passive income, we would be characterized as a PFIC for United States federal income tax purposes. If we are characterized as a PFIC, United States holders of our ordinary shares or ADSs may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares or ADSs treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends paid by us to individuals who are United States holders, and having interest charges apply to distributions by us and the proceeds of sales of our ADSs or shares.
Risks Relating to the Spark Networks ADSs
There may be limited trading volume for our ADSs, which could reduce liquidity for the holders of our ADSs and may cause the price of our ADSs to be volatile, all of which may lead to losses by investors.
There may be limited trading volume for our ADSs on the NYSE American, such that trading does not reach the level that enables holders of our ADSs to freely sell their ADSs in substantial quantities on an ongoing basis and thereby readily achieve
liquidity for their investment. In addition, if there is limited trading volume, our ADSs may experience significant market price and volume fluctuations in the future, in response to factors such as announcements of developments related to us and our subsidiaries, announcements by our competitors, fluctuations in financial results and general conditions in the dating services industry.
Future sales of our ADSs or our ordinary shares or securities convertible or exchangeable for our ADSs or our ordinary shares, or the perception that such sales might occur, may cause the price of our ADSs to decline and may dilute your voting power and your ownership interest in us.
If existing stockholders or option holders sell, or indicate an intention to sell, substantial amounts of our ADSs (or our ordinary shares that can be deposited with our ADS Depositary in exchange for our ADSs) in the public market, the price of our ADSs could decline. The perception in the market that these sales may occur could also cause the price of our ADSs to decline.
The price of our 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 our ADSs, regardless of our actual operating performance. The market price and liquidity of the market for our ADSs may fluctuate and may be significantly affected by numerous factors, some of which are beyond our control.
These factors include:
•significant volatility in the market price and trading volume of securities of companies in the sector within which we operate, which is not necessarily related to the operating performance of these companies;
•the mix of services that we provide, during any period; delays between our 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 we spend to develop, acquire or license new services, technologies or businesses;
•changes in our expenditures to promote our services;
•success or failure of our research and development projects or our competitors;
•announcements of acquisitions by us or one of our competitors;
•the general tendency towards volatility in the market prices of shares of companies that rely on technology and innovation;
•changes in regulatory policies or tax guidelines;
•changes or perceived changes in earnings or variations in operating results;
•any shortfall in revenue or net income from levels expected by investors or securities analysts; and
•general economic trends and other factors.
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.
We are 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 our 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, we have provided summaries of relevant German corporation law and of our articles of association, which are available on our website.
Holders of our ADSs will not have the same voting rights as our stockholders, which may affect the value of our ADSs.
Holders of our ADSs will not be able to directly vote underlying our ordinary shares. Holders of our ADSs may instruct our ADS Depositary how to vote the ordinary shares underlying their ADSs. If we ask it to, our ADS Depositary will send out information about stockholder meetings and solicit voting instructions and will try to carry out voting instructions it receives. However, we are not required to instruct our ADS Depositary to take action with respect to stockholder meetings. If we do not do so, holders of our ADSs can still send voting instructions to our ADS Depositary, and our ADS Depositary may try to carry out those instructions, but it is not required to do so. However, holders of our ADSs may not become aware of stockholder meetings if our ADS Depositary does not send out information. Even if our ADS Depositary does solicit voting instructions, holders of our ADSs may not receive the information in time. Because of these factors, holders of our ADSs may not be able to effectively exercise voting rights that they would have if they held our ordinary shares directly.
Our principal stockholders and management own a significant percentage of our 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 our ordinary shares beneficially own a majority of our ordinary shares (including our ordinary shares represented by our ADSs). Currently, our principal stockholders (those stockholders owning at least 5% of our ordinary shares) and management hold approximately 41% (excluding any shares underlying options) of our ordinary shares (which may be held in the form of our 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 our 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 our ADSs that you may feel are in your best interest as a holder of our 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 ordinary shares, which might affect the prevailing market price for our ADSs.
You might not receive distributions on our ordinary shares represented by our ADSs or any value for them.
Under the terms of the Deposit Agreement, our ADS Depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares after deducting fees and expenses. You will receive these distributions in proportion to the number of our ordinary shares represented by your ADSs. However, in accordance with the limitations set forth in the Deposit Agreement, our 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 our ADSs.
Certain or all of the holders of our 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.
We do not anticipate paying dividends on our ADSs for the foreseeable future. As a German tax resident company, however, if we pay 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 our ADS holders due to applicable settlement mechanics or lack of information regarding our ADS holders, holders of our 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 their jurisdiction of residence. Further, the payment made to our ADS holders equal to the net dividend may, under the tax law applicable to our ADS holders, 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 ADS holders. Our 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 our ADSs. In addition, the ADR Tax Circular does not include details on how an ADR program should be designed. If our 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 our ADSs were not treated as a dividend for German tax purposes, our ADS holders 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 our ADSs may be effectively taxed twice.
You may have less access to information about us and less opportunity to exercise your rights as a security holder if you hold our ADSs instead of our ordinary shares.
The rights and terms of the our ADSs are designed to replicate, to the extent reasonably practicable, the rights attendant to our ordinary shares, for which there is no active trading market in the United States. However, because of aspects of German law, our Articles of Association and the terms of the Deposit Agreement under which our ADSs are issued, your rights as a holder of our 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 Deposit Agreement may be amended by us and our ADS Depositary, or may be terminated by us or our ADS Depositary, without your consent in a manner that could prejudice your rights; and
•the Deposit Agreement limits our obligations and liabilities and those of our ADS Depositary.
